Small-caps and the traditional safe-havens lagged the broader market

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

While today’s advance was much less convincing than yesterday’s broad really, despite the positive catalysts, the major indices are now clearly eyeing their all-time highs. Investors already shifted their attention to next week’s Fed meeting following today’s ECB event, and since the trade negotiations seem to be on track, we might have to get used to today’s choppy price action, even as the large-cap benchmarks are now only a tad below their record highs.

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The major indices continued yesterday’s rally in heavy trading thanks to the renewed trade optimism and the European Central Bank’s (ECB) monetary easing package, and the Dow closed higher for the seventh day in a row. The Dow was up 45 or 0.2%, to 27,182, the Nasdaq gained 25, or 0.3%, to 8,194, while the S&P 500 rose by 9, or 0.3%, to 3,010. Advancing issues outnumbered decliners by a 3-to-2 ratio on the NYSE, where volume was well above average.

Equity futures ticked higher overnight thanks to a tweet by President Trump regarding a 15-day delay of the planned increase of tariffs on Chinese goods. Volatility really picked up across asset classes in pre-market trading, due to the ECB’s announcements, but stocks traded in relatively narrow ranges throughout the day. Financials, consumer-related issues, services, and tech stocks all performed above the market average, while the traditional safe-haven sectors lagged the broader market, confirming the global risk-on shift.

Treasuries had a predictably wild session, due to ECB President Mario Draghi's last monetary meeting, but despite an early dip in yields, the trend of the recent days continued. Rates hit multi-week highs across the yield curve, but equities remained stable in the face of the declining rate cut odds. The ECB cut its deposit rate by 0.1% and re-launched its quantitative easing (QE) program, but since expectations were sky-high ahead of the monetary meeting, the European common currency actually finished higher, despite the easing steps.

The tariff-delay gave another boost to Asian and European assets, and even though the fresh round of monetary easing could hurt the already struggling European banking sector, the positive effects of the shift seem to outweigh the risks. Investors pulled hundreds of billions of dollars from Treasuries this week alone, thanks to the easing of the trade tensions and the better-than-expected economic numbers, but most players remain cautious due to the turbulent summer. This ‘wall of worry’ is essential for a sustained rally in risk assets, and barring another twist in the trade war saga, the broad advance could continue for several weeks.

The consumer sector will remain at the center of attention tomorrow, with regards to economic releases, and after tomorrow's higher-than-expected core Consumer Price Index (CPI) another positive retail sales surprise is in the cards. Both the core and the headline measures are expected to edge higher, by 0.1% and 0.2% respectively, but since consumer confidence remains at near-record levels, a larger increase wouldn't be surprising. Business inventories, import prices, and the Michigan consumer sentiment number will also be out tomorrow, so traders could be in for another busy session.

Technical Corner

The technical picture further improved thanks to the broad rally on Wall Street, and the stage looks set for a decisive breakout to new all-time highs in the major indices following a tumultuous summer for stocks. The benchmarks are all well above their now rising 200-day moving averages of 7,644 for the Nasdaq, 2,817 for the S&P 500, and 25,697 for the Dow, and they also remain above their 50-day moving averages of 2,950 for the S&P 500, 8,059 for the Nasdaq, and 26,598 for the Dow.

While today, small-caps lagged the broader market after three wildly bullish sessions, market internals improved significantly this week thanks to Russell 2000’s relative strength. The most reliable breadth measures are all showing bullish readings, and almost two-thirds of the stocks are now trading above their 200-day moving averages, which is the highest ratio in almost a year. While there is still room for improvements ‘under-the-hood’, in July, when the major indices hit new all-time highs, many more stocks lagged the broader market, and this week’s trends bode well for the last quarter of the year. Stay tuned!

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