Bullish Economic Releases But Treasury Yields Continued To Decline

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Commenting on today’s trading Gorilla Trades strategist Ken Berman said:

While today’s bounce helped to cool the nerves on Wall Street, stocks are still vulnerable, even as the positive economic releases boosted the long-term outlook.  Although equities gained ground today, caution is still warranted as safe-havens, such as Treasuries and gold remained very strong, with the 30-year yield hitting another record low, meaning that a lot of investors are still focused on the mounting global risks.

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Bulls desperately needed a breather following one of the worst days of the year for stocks, but today’s session was far from being comforting, at least from a short-term perspective. Most of the key risk-on sectors trod water, although financials and services gained ground, but the defensive utilities sector was the strongest. That, together with the strength of the major safe-haven assets mean that although the long-term outlook is bright for equities, the trade tensions, weak global growth, and the protests in Hong Kong are still weighing on investor sentiment.

The divide between the stable U.S. economy and the struggling European and Asian countries seem to be even getting wider, and today even the weaker manufacturing sector sent promising signals. The Philly Fed Index and the Empire State Manufacturing Index are both considered forward-looking indicators of activity, and the fact that they both remain in positive territory means the recessionary fears are likely exaggerated. With the consumer economy still expanding at a healthy pace, and today’s retail sales report supports that claim, the worrying trends in the Treasury market are most likely caused by global factors rather than a looming recession.

Today’s economic releases were clearly bullish, but Treasury yields continued to decline, and in part, that was caused by the European Central Bank (ECB). The promise of a significant easing package by the Central Bank pushed bond yields lower in the U.S. and across the globe, as it increases the odds of further rate cuts by the Federal Reserve. Now, the markets are pricing in at least two more easing steps by the Fed this year, but should the ECB shock the market in September, the Fed’s benchmark rate could get close to its historic low again.

The housing market will be in the center of attention in terms of economic releases tomorrow, and following last month’s worse-than-expected numbers, bulls are hoping for a rebound in the sector. Building permits and housing starts will both be out before the opening bell, and analysts expect a small bounce in both measures, and especially building permits will be closely watched as the indicator hit its lowest level since 2017 last month. The first reading of the Michigan consumer sentiment number will also be released tomorrow, and the forecasts call for a small dip to 97.2 in the measure.

Technical Corner

On Tuesday, even the short-term trend indicators were on the verge of turning positive again, but yesterday’s sell-off confirmed that the pullback is not over, even though the bullish long-term trend is still safe.  The major indices are slightly above their rising 200-day moving averages of 7,572 for the Nasdaq, 2,797 for the S&P 500, and 25,579 for the Dow, but due to yesterday’s rout, the benchmarks are are stuck below their rising 50-day moving averages of 2,944 for the S&P 500, 8,031 for the Nasdaq, and 26,601 for the Dow.

Despite a brief period of relative strength this month, small-caps continue to be worryingly weak, and today, the Russell 2000 hit its lowest level since January. The index dipped below its low form May, and technicals suggest that small-caps could be in for more trouble. The Russell is well below both its 50- and 200-day moving averages while also being below its low form last week, even though the large-cap benchmarks are still above their respective lows. Until investors continue to prefer safe-havens such as Treasuries, the riskier small-caps could remain under pressure.

The major indices stabilized and the Dow and the S&P 500 finished slightly in the green following yesterday’s broad sell-off, even though the Nasdaq lagged behind the other benchmarks throughout the day.  The Dow was up 100 or 0.4%, to 25,579, the Nasdaq lost 7, or 0.1%, to 7,767, while the S&P 500 rose 7, or 0.3%, to 2,848. Decliners outnumbered advancing issues by an almost 3-to-2 ratio on the NYSE, where volume was slightly below average.

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