Market Remarks: Week Ahead – Sep 24, 2018

What To Expect at Next Week’s Fed Meeting

Fig. 1

This coming week the Federal Reserve is going to conduct the Federal Open Market Committee (FOMC) meeting, its sixth of the year, over a two-day period, followed by a press conference at 2:00 PM on Wednesday September 26th. This will be the third meeting of the year with a press-conference. The other two – in March and June – resulted in Fed-Funds Rate hike of  25 basis points. The odds are very good that Fed will again raise rates next week. That will bring the Fed Funds rate to 2.0%-2.25% range.

Despite having raised rates from <0.25% in December 2015 to <2.00% in June 2018  – a sequence of seven rate hikes in 30 months –  the real Fed Funds rate is still negative (see Fig. 1). With another 25 basis point hike, the usual that the Fed considers in a normal rate-hike cycle – the Fed Funds rate will near breakeven level but it will still not turn positive, which effectively means that the accommodative monetary environment will continue.

In its June 13, 2018 Summary Of Economic Projections, the Fed expected the Fed Funds rate to be 2,4% by the end of 2018, 3.1% by the end of 2019 and 3.4% by the end of 2020. In other words Fed expects two more rate hikes in 2018, three in 2019 and one in 2020. Off course these are projections and they usually change but, nevertheless, the market is already discounting two rate hikes in 2018 as the futures markets indicate a 90% chance of a rate hike in December 2018. However, futures market is less certain about three hikes in 2019, although it the one in March 2019 is more probable.

To maintain a healthy economy the sweet spot for Fed Funds rate is between 2 and 5 percent. Tim Duy of Fed Watch, who pegs the median policy maker estimate of the neutral rate to be 2.9% within a range from 2.25% to 3.5%, says that the Fed’s monetary tightening process should be dependent upon the economic conditions.

Rosengren is correct. There is far too much uncertainty about the path of the economy to assume the Fed will pause when policy rates reach estimates of neutral, particularly the lower estimates. Hence, be cautious of reading too much into claims by central bankers that they expect a pause after three or four more rate hikes. That pause is very conditional on the state of the economy after those increases.

Duy is of the opinion that at the moment Fed doesn’t have reasons to initiate a sustained police pause,

Talk of a pause is currently more about hope than reality. Incoming data remains far too strong for the Fed to contemplate an end to rate increases. Job growth continues at a rate the Fed believes will eventually be consistent with an overheated economy. And there is no reason to expect pressure on the labor market to alleviate anytime soon. Initial unemployment claims continue to trend downward while the number of job openings reached record high in July.

On the other hand are Brad DeLong and Narayans Kocherlakota. Prof. DeLong thinks that it more likely than not he the Fed will be back at the zero lower bound in three years. Prof. Kocherlakota sees recession as the most important risk for U.S. economy in the next two years.

…In the Fed’s view, a low unemployment rate spurs inflation by pushing up wages. But there’s a lot of uncertainty about the magnitude of this effect. If it’s stronger than expected (a steep Phillips curve), then the central bank’s planned interest-rate increases will fail to keep inflation in check. If it’s weak (a flat curve), it doesn’t matter much anyway. So in this case, the Fed is better off erring on the side of action, raising rates faster in the hope of hitting its inflation target. Yet the staff paper downplayed and Powell ignored what I see as the most important risk: that the U.S. economy could face a recession in the next couple years. As then-chair Janet Yellen’s speech at Jackson Hole two years ago revealed, the Fed lacks tools to deal with such a contingency. The best way to prepare is to ensure that the economy is as strong as possible when the downturn hits. And that requires keeping interest rates lower than the Fed is currently planning to do…

We are more in the second camp – DeLong & Kocherlakota – than the first – Duy, Rosengren and Givernor Lael Brainard – and one indicator that we are keeping an eye on is the yield-curve or the 10-Year & 2-Year Treasury spread.

Yield Spread Nearing Zero

Fig. 2

The yield on U.S. 2-Year Treasury Note closed at 2.800% on Friday, a +0.018% increase for the week. The 10-Year Treasury Note closed at 3.064% and gained +0.066% for the week. The spread between them increased from 0.216% to 0.264%, however the trend, since the beginning of 2014, is down for the spread. Historically, when it turns negative then the economy usually gets into recession. In January 2017 we wrote, “Few months before the onset of any recession in the U.S.A – at least since 1980 – the spread between the 10-Year Treasury Constant Maturity and the 2-Year Treasury Constant Maturity has fallen below zero. The economy, on an average, took 15.6 months to dip into recession after the first reading of below zero of this indicator.”

As the spread is still above zero, we do not think that the U.S. will be going into recession anytime soon. However, since Fed Funds rate have a greater impact on shorter term rates and the Fed is getting more hawkish, it behooves us to keep an eye on this spread as a warning sign. Many FOMC members have indicated that though they consider yield-curve turning negative an important point it alone would not change their stance regarding the rate hike for next few cycle.

What’s on Tap – Key Economic Reports

The key economic report due next week include:

Tuesday September 25 – Conference Board Consumer Confidence. The market is expecting a reading of 132.2 versus previous month’s reading of 133.4. This is still a very healthy reading and the up trend since 2009 is maintained.

Wednesday September 26 -New Home Sales – the annualized number of New Homes sold in August is estimated to be 630K versus 627K in July

Thursday September 27.

  • The Final GDP reading is expected to come at 4.2% increase in the Q2 of 2018 from Q1. The last reading on June 28 – for Q1 – was 2.0% compared with the market’s estimate of 2.2%. According to Calculated Risk Blog, Merrill Lynch is estimating 4.4% growth for Q2 and 3.7% for Q3. Where Atlanta Fed’s GDPNow model is estimating Q3 growth of 4.4% and NY Fed’s Nowcasting estimate for Q3 is 2.3%
  • Durable Goods Orders are estimated to have increased by 1.9% in August versus -1.7% in July. The estimate for Core Durable Goods for August is an increase of 0.4% compared to and increase of 0.1% in July

Friday September 28

  • PCE Price Index, Personal Spending and Personal Income: These are critical reports that will show a mixed picture for inflationary pressures. Core PCE is expected to rise by 0.1% in August as compared to 0.2% rise in July, which indicate that the inflation is till contained. Personal Spending growth is also going to be lower in August (0.3%) than in July  (0.4%). Personal Income is estimated to have a bigger growth in August  (0.%) than in July  (0.3%)
    • Chicago PMI reading is expected to be 62.3 in August compared to 63.6 in July
    • Revised UoM Consume Sentiment is expected to be 100.5 versus 100.8 in the previous month

 

SEC to End Five-Cent Spreads on Small-Company Stocks

Back in May 2015, the Securities and Exchange Commission (SEC) approved a two-year pilot program to test wider spreads on smaller stocks. The purpose of the program was to determine whether wider spreads  will attract more market makers and make trading better for small stocks. Many national exchanges and the Financial Regulatory Authority (FINRA) had requested it.

The SEC has announced that the pilot program will be terminated next week. This move is appreciated by the market as the program did not achieve what it set out to do.

Unfortunately, the results of the pilot were disappointing, according to the Wall Street Journal: trading volumes for the impacted stocks haven’t increased. One year into the program, a study from the Centre for Economic Policy Research found that stocks impacted by the program actually experienced a reduction in liquidity and no meaningful change in liquidity risk.

Many retail brokers also complained that their client lost money because of the program.

Morning Notes – Friday September 21, 2018

Directional Bias For The Day:

  • S&P Futures are higher to little changed; declining since 4:00 AM high of 2945.50
  • Odds are for an up day; watch for break below 2934.25 for change of fortune
  • No key economic data due:

Markets Around The World

  • Markets in the East closed mostly higher – Mumbai was down
  • European markets are higher
  • Currencies:
    Up Down
    • Dollar index
    • USD/JPY
    • USD/CAD
    • USD/INR
    • EUR/USD
    • GBP/USD
    • USD/CHF
    • AUD/USD
    • NZD/USD
  • Commodities:
    Up Down
    • Silver
    • Copper
    • Platinum
    • Palladium
    • Sugar
    • Coffee
    • Cocoa
    • Crude Oil (unch.)
    • NatGas
    • Gold
    • Cotton
  • Bonds
    • 10-yrs yield is at 3.076%, up from September 20 close of 3.064%;
    • 30-years is at 3.211%, up from 3.197%
    • 2-years yield is at 2.821%, up from 2.812%
    • The 10-Year-&-2-Year spread is at 0.256, up from 0.266

Key Levels:

  • Critical support levels for S&P 500 are 2929.11, 2919.73 and 2907.98
  • Critical resistance levels for S&P 500 are 2934.80, 2937.12 and 2943.50
  • Key levels for eMini futures: break above 2945.50, the high of 4:00 AM and break below 2934.25, the low of 12:30 PM on September 20

Pre-Open

  • On Thursday, at 4:00 PM, S&P future (December contract) closed at 2936.75 and the index closed at 2930.75 – a spread of about +6.00 points; futures closed at 2939.50 for the day; the fair value is -2.75
  • Pre-NYSE session open, futures price action is mixed – at 8:15 AM, S&P 500 futures were down -1.00; Dow up by +12.00; and NASDAQ down by -2.75

Directional Bias Before Open

  • Weekly: Uptrend
  • Daily: Uptrend
  • 120-Min: Up
  • 30-Min: Up
  • 15-Min: Up-Side
  • 6-Min: Up-Side

The trend and patterns on various time frames for S&P 500 are:

Monthly
  • Confirmed Uptrend
  • December 2017 closed higher; index has been higher for the nine straight months; it has only one down month, March 2017, since October 2016
  • Uptrend resumption since Feb 08, 2016 after a pull back of -15.2%
Weekly:
  • The week ending on September 14 was a green candle with almost no upper shadow and small lower shadow; closed above previous week’s high
  • Last week’s pivot point=2893.35, R1=2919.93 R2=2934.87; S1=2878.41, S2=2851.83; S1/S2 pivot levels were breached;
  • An up week following a down week; fourth in last five weeks and eight in last ten weeks
  • Broke above an ascending triangle but retraced back to its upper limit; 100% extension target is near 3070.00 level
  • Broke above a down sloping flag on April 24 2017;
    • flag-low was 2322.25 during 27-Mar-17 week; shorter flag-pole length is 317.19 and longer flag-pole length is 590.88;
    • 100% extension target of shorter flag-pole near 2639.44 and the 161.8% extension target near 2835.46 are achieved; the 261.8% extension target is near 3013.72
    • 61.8% extension target of longer flag-pole near 2687.41 is achieved; the 100% extension target is near 2913.13
  • Broke above a down-sloping flag on November 14, 2016;
    • the flag low was 2083.79 during 31-Oct-16 week; the shorter flag-pole length is 202.13 and the longer flag-pole length is 383.71;
    • 261.8% extension target of shorter flag-pole near 2612.97 is achieved
    • the 161.8% extension target of longer flag-pole near 2704.63 is achieved; the 261.8% extension target is near 3088.34
  • Last swing low, 2322.25, was the low on March 27, 2017; Last swing high, 2872.87, was during the week of January 22, 2-018; the low since the last swing high is 2532.69 during the week if February 5, 2018
  • Above 10-week EMA; above 39-week SMA and above 89-week SMA
  • Uptrend
Daily
  • A green candle that gapped up at the open and did not close the gap; small upper shadow and no lower shadow; all time intra-day and closing highs
  • %K above %D; above 90
  • Above 20-day EMA, above 50-day EMA, 100-day SMA and 200-day SMA
  • Uptrend
2-Hour (e-mini future)
  • Moving higher since 8:00 AM on September 11 in steps;
  • Broke above a horizontal channel – more like a cup-with-handle pattern – at 6:00 AM on September 20; the height of channel is 49.50 points and the 61.8% extension target near 2948.00 was approached during Asian session; the 100% extension target is near 2967.00
  • RSI-9 near 75 after reaching a high of 90 at 2:00 AM
  • Above 20-bar EMA, which is above EMA10 of EMA50
  • Bias: Up
30-Minute (e-mini future)
  • Moving higher after breaking above a sideways – from 11:00 AM on September 18 – at 7:00 AM on September 20;
  • Stochastic 15 made a bearish divergence at 3:30 AM
  • RSI-9 is near 58 after reaching78 at 3:30 AM and making a bearish divergence
  • At/above 20-bar EMA, which is above 20-bar EMA
  • Bias: Up
15-Minute (e-mini future)
  • Bollinger Band (20, 2.0) is trending higher
  • The band narrowed from 8:45 PM to 2:30 AM; expanding since with price first moving along upper band till 4:15 Am and then dropping to the lower band by 5:45 AM
  • RSI dropped below 65 at 3:15 PM on September 0; moved between 50 and 65 till 5:15 AM and then dropped below 50;  still above 40
  • The Stochastic (9, 1, 3): %K crossed below %D at 4:15 AM from above 90 after making a bearish divergence; crisscrossing %D below 20;below %D at 7:00 AM
  • Bias: Up-Side

Previous Session

Major U.S. indices closed higher on Thursday September 20 in higher, mostly, volume. Russell 2000 traded in lower volume. S&P 500, Dow Jones Industrial Average and Wilshire 5000 Total Market Index made all time highs. They, along with NASDAQ Composite and NYSE Composite, also gapped at the open and did not close the gap.

  • S&P 500 Sectors
Up Down
  1. Consumer Discretionary
  2. Consumer Staples
  3. Energy
  4. Materials
  5. Industrials
  6. Finance
  7. Technology
  8. Utility
  9. Heath Care
  10. Real Estate
  11. Telecom

 

Morning Notes – Thursday September 20, 2018

Directional Bias For The Day:

  • S&P Futures are higher; broke above a cup-with-handle pattern on 30-minutte charts at 7:00 AM
  • Odds are for an up day; watch for break below 2916.25 for change of fortune
  • Key economic data due:
    • Philly Fed Manufacturing Index (22.9 vs. 17.5 est.) at 8:30 AM

Markets Around The World

  • Markets in the East closed mostly higher – Shanghai and Sydney closed down; Mumbai was closed
  • European markets are higher
  • Currencies:
    Up Down
    • EUR/USD
    • GBP/USD
    • AUD/USD
    • NZD/USD
    • USD/INR
    • Dollar index
    • USD/JPY
    • USD/CHF
    • USD/CAD
  • Commodities:
    Up Down
    • Crude Oil (unch.)
    • NatGas
    • Gold
    • Silver
    • Platinum
    • Palladium
    • Sugar
    • Coffee
    • Cocoa
    • Copper
    • Cotton
  • Bonds
    • 10-yrs yield is at 3.088%, up from September 19 close of 3.068%;
    • 30-years is at 3.238%, up from 3.210%
    • 2-years yield is at 2.820%, up from 2.803%
    • The 10-Year-&-2-Year spread is at 0.144, down from 0.148

Key Levels:

  • Critical support levels for S&P 500 are 2903.82, 2895.44 and 2886.16
  • Critical resistance levels for S&P 500 are 2912.36, 2916.50 and 2920.81
  • Key levels for eMini futures: break above 2927.00, the high of 8:00 AM and break below 2916.25, the low of 6:00 AM

Pre-Open

  • On Wednesday, at 4:00 PM, S&P future (December contract) closed at 2914.25 and the index closed at 2907.95 – a spread of about +6.25 points; futures closed at 2915.00 for the day; the fair value is -0.75
  • Pre-NYSE session open, futures price action is to the upside – at 8:15 AM, S&P 500 futures were up +9.75; Dow by +138.00; and NASDAQ by +37.75

Directional Bias Before Open

  • Weekly: Uptrend
  • Daily: Uptrend
  • 120-Min: Side
  • 30-Min: Side-Up
  • 15-Min: Side-Up
  • 6-Min: Up

The trend and patterns on various time frames for S&P 500 are:

Monthly
  • Confirmed Uptrend
  • December 2017 closed higher; index has been higher for the nine straight months; it has only one down month, March 2017, since October 2016
  • Uptrend resumption since Feb 08, 2016 after a pull back of -15.2%
Weekly:
  • The week ending on September 14 was a green candle with almost no upper shadow and small lower shadow; closed above previous week’s high
  • Last week’s pivot point=2893.35, R1=2919.93 R2=2934.87; S1=2878.41, S2=2851.83; S1/S2 pivot levels were breached;
  • An up week following a down week; fourth in last five weeks and eight in last ten weeks
  • Broke above an ascending triangle but retraced back to its upper limit; 100% extension target is near 3070.00 level
  • Broke above a down sloping flag on April 24 2017;
    • flag-low was 2322.25 during 27-Mar-17 week; shorter flag-pole length is 317.19 and longer flag-pole length is 590.88;
    • 100% extension target of shorter flag-pole near 2639.44 and the 161.8% extension target near 2835.46 are achieved; the 261.8% extension target is near 3013.72
    • 61.8% extension target of longer flag-pole near 2687.41 is achieved; the 100% extension target is near 2913.13
  • Broke above a down-sloping flag on November 14, 2016;
    • the flag low was 2083.79 during 31-Oct-16 week; the shorter flag-pole length is 202.13 and the longer flag-pole length is 383.71;
    • 261.8% extension target of shorter flag-pole near 2612.97 is achieved
    • the 161.8% extension target of longer flag-pole near 2704.63 is achieved; the 261.8% extension target is near 3088.34
  • Last swing low, 2322.25, was the low on March 27, 2017; Last swing high, 2872.87, was during the week of January 22, 2-018; the low since the last swing high is 2532.69 during the week if February 5, 2018
  • Above 10-week EMA; above 39-week SMA and above 89-week SMA
  • Uptrend
Daily
  • A small doji candle with small upper shadow and smaller lower shadow that opened and closed just above previous day’s close within its upper shadow;
  • %K above %D after dropping to 55.86 from 93.94
  • Above 20-day EMA, above 50-day EMA, 100-day SMA and 200-day SMA
  • Uptrend
2-Hour (e-mini future)
  • Moving mostly sideways since 12:00 PM on September 18 near highs
  • RSI-9 declining from a high of 70.63 to 50.66
  • At/above 20-bar EMA, which is above EMA10 of EMA50
  • Bias: Side
30-Minute (e-mini future)
  • Moving mostly sideways since 11:00 Am on September 18
  • Below a downtrend line from a high of 2914.00 at 2:00 PM on September 18
  • RSI-9 is above 40 since 10:00 PM on September 17 with occasional forays above 65
  • Above 20-bar EMA, which is above 20-bar EMA
  • Bias: Side-Up
15-Minute (e-mini future)
  • Bollinger Band (20, 2.0) is moving sideways since 2:30 PM on September 18
  • The band was narrow from 8:45 PM to 5:00 AM; expanding since with price moving along upper band
  • RSI mostly above 40 since 9:45 Pm on September 17
  • The Stochastic (9, 1, 3): %K crossed above %D at 6:30 AM from 50
  • Bias: Side-Up

Previous Session

Major U.S. indices closed mixed on Wednesday September 19 in mixed volume. S&P 500, Dow Jones Industrial Average, NYSE Composite and Wilshire 5000 Total Market Index closed higher. NASDAQ Composite, Russell 2000 and Dow Jones Transportation Average closed down. DJIA and Russell 2000 traded in higher volume.

  • S&P 500 Sectors
Up Down
  1. Consumer Discretionary
  2. Energy
  3. Materials
  4. Finance
  1. Consumer Staples
  2. Industrials
  3. Technology
  4. Utility
  5. Heath Care
  6. Real Estate
  7. Telecom

 

Housing Activities Softened In August 2018

August Housing Starts Better Than Estimated

Fig. 1

The Housing Starts for August, at a seasonally adjusted annual rate, came at 1, 282,000 units, which is +9.2% above July’s revised rate of 1,174,00 units and better than what the market was expecting, which was 1.24 Million units.

The single family units starts increased by +1.9% in August and the housing starts for buildings with 5+ units increased by +27.3% from July rate. This that townhouses, condominiums and rental apartments buildings are starting at a higher rate than single-family houses.

The  Apartment List Rent Report, on the other hand, notes a sluggish growth in the rent increase. Its national rent index leveled off in August after increasing by a total of 1.5 percent from February through July. It also notes,

Year-over-year growth currently stands at 1.0 percent at the national level, which is well below the 3.1 percent rate we saw this time last year as well as the 2.6 percent rate from August 2016. Rent growth is also pacing well behind the overall rate of inflation, which stands at 2.9 percent as of the latest data release, and is similarly lagging growth in average hourly earnings which have increased by 2.7 percent over the past twelve months. 

Fewer Building Permits Issued Than Expected

Fig. 2

The seasonally adjusted rate of building permits issued in August was 1,229,000 units, which is -5.7% below July’s revised rate of ,303,000 units, and also lower than the market estimates of 1.31 million units.

The single-family unit authorizations decreased by -5.7% from July and the authorization for 5+ units buildings declined by -8.0% from July.

iShares Home Construction ETF Is 19% Down From High

Fig. 3

The iShares Home Construction ETF, ITB, tracks the housing starts and building permits quite well, with approximately a 3-month lead time (See Fig. 1 and Fig. 2). It made an all time high of 46.56 during the week of January 22, 2018 (see Fig. 3). Since then, however, it has declined by -19.00%.

At the moment it is precariously placed. It has retraced 38.2% of the gain from February 2016 lows and is forming a rounding bottom. A break below 36.68 would increase the probability of it declining to 61.8% Fibonacci level near 31.08, which is also near a support level of 33.01, the low reached in August 2017.

Some Members of ITB Are Dragging it Down

Fig. 4

Fig. 5

NVR Inc. (see Fig. 4) and Pulte Group Inc. (see Fig 5) re third and fourth biggest components of ITB. They have also broken below February 2018 lows.

In mid-July,  NVR Inc., $NVR broke below a symmetrical triangle that almost looks like an ascending triangle (see Fig. 4). It also made an ABCD pattern. It provides two targets. A 100% extension of the symmetrical triangle is near 2350 level and the 100% extension target of the ABCD pattern is near 2200. The current price is near 2650, which gives a potential decline of 11%-to-13% for NVR.

Pulte Group Inc, $PHM, broke below a symmetrical triangle or a failed triple-bottom pattern. The 100% extension target of the symmetrical triangle is near 20.47 and a 61.% extension target is near 23.25, which are 24% and 13% below the current price of $PHM near 26.86.

Some Are Trying To Stop The Decline

Fig. 6

Fig. 7

The top two components of $ITB, D.R. Horton Inc. and Lennar Corp., are trying to hold the fort for the ETF. Though both are also showing weaknesses, they are at significant support levels.

D.R. Horton Inc., $DHI, declined from January 2018 high of 53.32 to a February 2018 low of 41.34 before bouncing up to 47.00 in early April (see Fig. 6). It then declined to 38.58 by late July and then bounced up to 46.91, near the April high, by mid-August. At present it is near 42.60 or the midway between these two extremes.

Lennar Corp., $LEN, made a low of 49.52 in September 2017 before rising to all time high in January 2018 (see Fig. 7). It then declined to 48.71, near the September 2017 low, by June 2018 in a zigzag path. The bounce from those lows hasn’t broken above the June 2017 highs of 55.75, which acted as a resistance level. The price is near 51.63, or near the midway between the two extremes.

The fate of $ITB depends upon how these two groups fare. If $DHI and $LEN hold their recent lows and break above recent resistance levels they will give a boost to $ITB. It might also make $PHM and $NVR rise in sympathy. On the other hand if $PHM and $NVR continue their decline then they cause more weakness in $DHI and $LEN.