Sunday, September 24, 2017

Weekly Stock Market Outlook 9/25/2017

U.S. markets rebounded off their lows on Friday to finish mostly higher aside from the Dow which traded lower for the second-straight session. The blue-chips and the S&P 500 ended the week with slight gains while the Nasdaq gave back 0.3%.  The Russell 2000 quietly made a run at its all-time high of 1,452 from July and fell shy by just over a half-point after gaining 0.5%. For the week, the small-caps were up 1.3%.  Sector action for the week was mixed with Energy, Industrials and Consumer Discretionary leading on the upside. Losing sectors included Utilities, Real Estate, Basic Materials and Consumer Staples.  The rotation out of safety, such as the Utilities (and gold), and into the small-caps could continue if market momentum stays strong.

Global Economy - European markets gained on signs the European economy continues to expand at a better-than-expected pace. UK's FTSE 100 jumped 0.7% while France's CAC 40 advanced 0.3%. The Stoxx Europe 600 gained 0.1%. Belgium20 fell 0.3% and Germany's DAX 30 slid 0.1%.

The Purchasing Managers Index (PMI) for the eurozone hit 56.7, topping expectations for a drop to 55.6. The manufacturing component rose to 58.2 and the services component checked-in at 55.6, both also topping expectations.  Germany's September Markit/BME manufacturing PMI unexpectedly rose 1.3 to 60.6, stronger than expectations of a -0.3 dip to 59.

German voters go to the polls this Sunday where Chancellor Merkel is expected to secure a fourth term, although she may not win an outright majority.

Asian markets were down, with stocks in Japan reversing early gains following fresh threats from North Korea, while China's markets declined on a credit-rating downgrade. Hong Kong's Hang Seng Index sank 0.9% and South Korea's Kospi tumbled 0.7%. Japan's Nikkei declined 0.3% and China's Shanghai index slipped 0.2%.

Bucking the trend was Australia's S&P/ASX 200 after climbing 0.9%.

Standard & Poor downgraded China's sovereign credit rating due to risks associated with its increasing debt. The downgrade had been widely anticipated, and brings its rating in line with Moody's, which downgraded China in May, and Fitch, which made its cut back in 2013.

The U.S. Markit's flash manufacturing PMI for September edged up 0.2 points to 53, matching expectations. The services PMI fell to 55.1 and below the 55.8 that was forecast.  September Atlanta Fed Business Inflation Expectations were up 1.9% for the year.

Market Sentiment- Fedspeak returned on Friday following from the blackout period ahead of last Wednesday's FOMC minutes.

San Francisco's Fed John Williams talked about balance sheet normalization, targeting a 2.5% Fed funds rate as the new normal with one more hike this year and three more next year. Williams said the Fed was very close to its mandate targets and that the economy is in very strong shape with the markets understanding what the Fed is trying to do.

Kansas City Fed Esther George said the full employment mandate appears to have been met going by the most recent Fed projections, while the weak inflation reading does not appear related to the economy.  She expects job growth to weaken but to remain at levels needed to absorb new workers and to keep unemployment levels low. However, she's concerned that loose financial conditions cannot be perceived until they become a problem.  George went on to add consumers are in a good position to keep spending and said the balance sheet plan was well telegraphed to the public and markets, saying she's gratified that the announcement did not cause a strong market reaction.
As far as the economy, she said it's a good sign that the balance sheet reduction can begin, while quantitative easing (QE) is kept in a box and used for emergencies only. She views gradual interest rate moves as appropriate, but said the Fed needs to keep the momentum on rates underway.

Dallas Fed Robert Kaplan is open minded about one more hike this year in December, but he said he has not made a decision. He said structural headwinds, including technology could hold inflation down.  He also sees a shortage of construction workers around Houston though he anticipates a snap-back in growth from Harvey.

Risk from China remains a danger zone in terms of rising debt levels there. He also said the oil industry is in a fragile equilibrium at around $50 barrel.

The iShares 20+ Year Treasury Bond ETF (TLT) held positive territory throughout Friday's session while trading up to $126.73.  Resistance at $126.25-$126.50 was cleared but levels that failed to hold into the closing bell.  Support is trying to move up to $126 with $125.75-$125.50 and the 50-day moving average serving as backup.

Market Analysis- The Russell 2000 ETF (IWM) made a run to $144.67 and a fresh all-time peak with continued closes above $144 being a bullish development.  This area served as prior resistance on the July highs and will try to hold as near-term support with IWM reaching $146-$147.50 on continued momentum.  A move back below $143-$142.50 would be a slightly bearish development and would likely signal a short-term double-top.

For the week, the largest single fund inflow was to the iShares Russell 2000 which was over 20% on ETF fund inflows.

The iShares Transportation Average (IYT) has been volatile this month but is approaching fresh 52-week peaks with Friday's push to $175.20.  A move above $175.75-$176 could lead to a continued breakout towards the $180 level. Shaky support is at $174-$173.50.  A move below $173-$172.50 would be a bearish development for continued weakness and would also signal a near-term double-top.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average is currently at 56%.
Last Thursday's low reached 50% and represents the late August breakout above this level that led to a quick run to 75%.  The is risk to the 45%-40% area on continued Tech weakness and mid-August support levels. A move back above 60% could signal a return of market strength.

Courtesy of:  Market Geeks

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