Markets are trading higher and making new highs except NYSE index. There is divergence in US and other world markets. US markets are charting new highs while other world markets are trying to find support off the lows made in August and break out of down trend. When that happens will indicate ‘trade war’ is getting resolved. Until this dichotomy is resolved, we must be on guard. Internals have improved and bullish short term. Leaders are exhibiting positive action.
Recap of last week:
Strong economic data underpinned the market action. Friday’s Durable Goods Order is yet another example showing the strength in the economy. Core Capital Goods number (which analysts prefer to look at), increased by 1.4%, well above last month’s 0.6% increase and views for 0.5%. Computers & electronics, as well as machinery were singled out as strong contributors. It also cited a strong build in durable inventories and acknowledged the surge in orders and the increase in shipments which will add to the GDP. Solid Report!
Fed Chairman Jerome Powell praised the economy in a speech at the Jackson Hole Economic Symposium, where he said, “Over the course of a long recovery, the U.S. economy has strengthened substantially… With solid household and business confidence, healthy levels of job creation, rising incomes, and fiscal stimulus arriving, there is good reason to expect that this strong performance will continue.”
Unfortunately, there were no breakthroughs on trade talks with China. But the administration had already warned that it was highly unlikely there would be at this one. So, no big surprise.
Trade talks with Mexico are almost done deal. This seems to be clear driver for markets this week. Next focus will be on CANADA, EURO & CHINA. If these are successful, trade war will be behind us and markets may show plurality with broad leadership.
This week’s major events:
1. First time Jobless claims report is coming Thursday. Economists are expecting 214,000
2. Q2 GDP numbers revised to 4.2% from 4.0%. Corporate after-tax profit numbers were 6.7% vs 2.7% earlier reading. These have been the real drivers for markets.
3. Chicago Purchasing Managers Index (PMI) number comes out on Friday morning. Don’t expect any surprises there.
Dollar: As the trade war fears abate, dollar will weaken. This should help many emerging markets to find renewed life. This can create ideal environment for next leg up in equity markets.
With backdrop improved, one should add positions to portfolio from strong groups.
Meanwhile, keep an eye on sentiment indicators to alert us for top developing.
Strongest groups are 1) Retail 2) Medical-software 3) Medical- products 4) Medical-Hospitals 5) Enterprise-Software
Weakest groups are 1) Steel 2) Machinery 3) Building (residential, Commercial) 4) Solar – energy 5) Chemical