Oh Canada!

Oh Canada!  Stocks rallied yesterday but closed mixed on news of a late weekend trade accord with Canada.  The new trade deal, which is touted as being the new NAFTA is called the USMCA and it includes the US, Mexico, and Canada like its predecessor.  The news gave a bull rush to the Dow Jones and the S&P500, although the NASDAQ and the Russell 2000 did not share the enthusiasm.  Let’s dig a little deeper.  As would be expected, the Dow fared best because it has become the trade-fear benchmark index due to its being perceived as being the most influenced by international trade.  The Dow opened well in the green and flirted with its all time high before losing ground later in the session in response to some Presidential comments.  The S&P 500 followed a similar path to the Dow Jones and it was helped along by energy stocks and GE.  GE rallied on the news that it would be replacing its CEO as it struggles to regain its footing as an industrial leader.  Energy because, well you know, but you might check out West Texas Intermediate Crude on chart 11 in my attached daily chartbook… enough said.  Now on to the tech heavy NASDAQ 100, which has been the go-to when trade fears are high, was passed up by yesterday’s bulls, despite an early session flirtation with its all time high.  The weakness in tech was accentuated by more news of Facebook’s security breech.  It is also important to note, that investor sentiment has shifted somewhat away from growth and into more defensive sectors and the NASDAQ is the superlative for growth.  Please refer to Growth Versus Defensive indicator on chart 16 of my attached daily chartbook, which shows a sideways to negative short term trend in favor of defensive stocks.  Finally, things went from bad to worse for the small cap Russell 2000 index which traded off in what appeared to be somewhat of a panic trade.  The index has been losing altitude since rocketing to an all time high in late August.  Many traders attribute the fall to rising interest rates.  The logic is that smaller companies rely more heavily on commercial finance which is influenced by the very short term that are rates being raised by the Federal Reserve.  This may be a factor, but on a more practical level, money has been rotating out of the small caps into the larger cap industrials in the the S&P and Dow as trade fears have been pushed aside in recent weeks.  Additionally, the index broke through some key support levels and trend lines in recent trade which culminated in yesterday’s close below a key Fibonacci retracement line at 1676.  With its short and mid term momentum in the negative and having broken below a key support level, the index is now in neutral territory.  The R2K will get some support at 1663 and 1652 which will be critical to keep the index from going into risk-off territory (see chart 7 in my attached daily chartbook).  The dollar remains strong because of renewed trade optimism and rising treasury yields.  Treasury yields continue to trade on the high side of their range where they are within striking distance of their 3.12% recent high.  Though they traded as high as 3.09% yesterday, ten year yields to maturity have since receded and will start today’s session at 3.06%.  The move in treasuries is a result of overnight treasury buying in response to some weakness in the EU caused by renewed friction in Italy.  The 2/10 yield curve steepened a bit with yesterday’s yield rally, it too has receded and will start today’s session right around its 1 month mean at 24 basis points.

Today, we have no economic releases but we do have lots of Fed-speak to take in.  Chairman Jerome Powell will speak as will 2 other Fed governors and investors will continue to gather more information about future rate hikes.  Don’t expect much in the way of new information from Powell as he is known to stay on message.  There is still an 80% probability of a 25 basis point rate hike in December and many will look for further proof in today’s speeches.  Additionally, traders will continue to parse through the new USMCA trade agreement today as many analysts are beginning to opine that the agreement offers only cosmetic changes to NAFTA.  This can cause some weakness today in addition to aforementioned fears emerging from Italy.  So with yesterday’s positive feeling having passed, today will be reality day… which of course means it can go either way.

daily chartbook 2018-10-02