The geopolitical tensions took a toll on consumer goods

Commenting on today’s trading in which geopolitical tensions with Iran dominated, Gorilla Trades strategist Ken Berman said:

Most participants remained cautious despite yesterday’s bounce, as it’s still unclear how the standoff between the U.S. and Iran could affect financial markets. Volatility remained relatively low today, but investors remained nervous in the wake of last week’s airstrike, and we continued to see heightened demand for alternative assets such as gold and Bitcoin, despite the favorable economic releases.

Geopolitical tensions spooking consumers?

The major indices all finished lower following a choppy and mixed session, as even though tech stocks were strong throughout the day, the lingering geopolitical fears weighed on the broader market. The Dow was down 120, or 0.4%, to 28,583, the Nasdaq lost 3, or 0.03%, to 9,069, while the S&P 500 fell by 8, or 0.3%, to 3,238. Decliners outnumbered advancing issues by a 3-to-2 ratio on the NYSE, where volume was slightly below average.

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Almost all of the key sectors lost ground today, but not even the weakest financials suffered major losses. Although the relatively strong Nasdaq finished the day in the red, semiconductors continued to shine, reflecting the positive change in the outlook for the global economy. The geopolitical tensions took their toll on consumer goods, even though, but the fact that the defensive healthcare and utilities sectors underperformed is a positive sign for bulls. 

Small-caps also continue to show relative weakness amid the global risk-off shift, but despite the pullback in the Russell 2000, we haven’t seen the kind of panic that would point to strong selling pressure among the riskier issues. The key breadth measures remain stable, after ending 2019 on a very bullish note, and while a deeper correction is in the cards in the wake of the spectacular year-end rally, there is no sign of trouble ‘under-the-hood’ just yet. 

Economic reports in focus

Although analysts expected an uptick in the ISM manufacturing PMI, the actual reading of 55.0 surpassed even the optimistic forecasts. Taking yesterday’s bullish Markit services PMI into account, it’s hard to deny the improving outlook for the crucial sector. While the weakness in manufacturing continues, the Dollar Index (DXY) already hit a new one-week high today, even as Treasury yields barely increased. Should geopolitical tensions further ease, yields could experience a strong rally, since the current economic trends make a rate hike more likely than another easing move by the Fed.

Friday’s government jobs report could provide the next major catalyst for Treasuries, but tomorrow’s ADP payrolls number might already lead to fireworks during the morning session. Following last month’s sizable miss that contradicted the official non-farm payrolls release, analysts expect a reading of 160,000, which would be the measure’s strongest showing since September. Besides the labor market indicator, German factory orders and the weekly U.S. crude oil inventories will be out, so the energy sector could be in for another volatile day.

Technical Corner.  From a broader perspective, Friday’s scary sell-off looks nothing more than a small blip in the ongoing bull market, and technicals continue to be bullish across the board, with the key trend indicators all confirming the advance. The major indices are well above their rising 200-day moving averages of 8,138 for the Nasdaq, 2,976 for the S&P 500, and 26,784 for the Dow and the benchmarks are also north of their steeply rising 50-day moving averages of 3,139 for the S&P 500, 8,648 for the Nasdaq, and 27,952 for the Dow.

According to the bond market and several bearish analysts, Elon Musk’s crown jewel, Tesla (TSLA) was having real financial troubles last year, but technicals tell a different story. While the stock suffered a deep correction as the company burned through its cash reserves, bulls successfully defended the key support zone near the $200 per share level. Following a quick recovery, the stock hit a new all-time high in December, and it remained bullish in the first days of 2020 despite the geopolitical tensions. With its short interest still at 19%, bears could continue to fuel the breakout, but things can get highly volatile as the short squeeze unfolds. Stay tuned!