Trade The Journey

Trade The Journey

New Highs?

Good Afternoon, Traders! I trust everyone is enjoying their weekend and gearing up for the upcoming trading week. Indices continue to chart new all-time highs as the rally persists, yet signs of potential cracks in the bullish outlook are beginning to emerge. One should never attempt to stand in the way of a moving train,  it’s generally unwise for traders to predict a market peak prematurely.

Observing the charts, a divergence appears to be forming; as indices hit new highs, the RSI indicators fail to reflect these trends. Take, for instance, the S&P 500 hitting a record peak without the RSI indicating overbought conditions—a similar observation applies to the Nasdaq. The Russell has been trading sideways but seems to be inching closer to its resistance level within this trend. Meanwhile, the Dow has been hovering around its peak without significant movement in recent weeks.

The VIX showed an uptick, finishing the week at 14.74 and maintaining a steady range between 15.75 and 14.32 over several weeks. It flirted with the upper limit but ultimately receded. Following the release of the employment report in the morning, the VIX began to ascend, a topic we’ll delve into further. Notably, Friday’s open interest in VIX options exceeded the 30-day average significantly. The past three, six, and twelve months saw realized VIX levels below 13, illustrating the market’s past volatility expectations.

Projections suggest a rise in the VIX over the next quarter to year. This week, attention was divided between Fed Governor Bowman’s remarks on the economy and banking regulations and Chairman Powell’s congressional testimonies. While Powell’s statements were largely anticipated to echo the Federal Reserve’s standing narrative, he outlined potential rate cuts contingent on inflation trending reliably towards the 2% target.

He also discussed upcoming proposals for banking capital and liquidity regulations. Additionally, the impact of ongoing remote work on commercial real estate, particularly office spaces, was highlighted as a significant concern. Reflecting on Janet Yellen’s comments, the occurrence of failures, especially within smaller regional banks, is inevitable. Powell also noted the digital dollar’s journey is far from completion. Last week observed a reversal in bond yields, with a decline across various maturities prompted by cooling inflation and a slowdown in service sector growth as indicated by the ISM services index.

The two-year yield concluded the week at 4.48%, moving towards a pivot low of 4.142%. The ten-year yield finished at 4.09%, retreating from a recent peak of 4.3% and indicating a pullback to the support level at 3.87%. The thirty-year yield dialed back to 4.26% from its short-term resistance at 4.494%, marking a modest retraction compared to shorter maturities.

Following the dip in yields, the dollar notably fell beneath its 200 and 50 SMA markers, now positioned at $102.741. This downturn has buoyed metals, propelling Gold to a historic peak of $2203. After fluctuating around its 50 SMA, Gold has embarked on a steep upward trajectory. Meanwhile, Copper experienced a rise but concluded the week at $3.891 amid significant headwinds facing China’s economy.

Stagnant in its movement, Crude Oil has persisted in a lateral trend, wrapping up the week around the $77 mark. Despite OPEC maintaining its initial production reduction, the cut remains discretionary, allowing for varied production levels. Over recent weeks, Crude has consistently skirted the 200 SMA.

Globally, economic narratives vary. Japan has seen an ascending trend since October 2022, with firms ramping up capital expenditure for the eleventh consecutive quarter, driven by investment in information and communication technology, business machinery, and leasing services. Despite a rise in foreign investment in bonds and stocks in March, household spending sharply fell last month.

The ECB’s decision to hold interest rates steady underscores its ongoing reliance on data for future policy actions. Employment data revealed sustained improvement for the eleventh month in a row, evidencing a robust labor market in the eurozone. Yet, the economy displays sluggish growth, as evidenced by a 0.1% GDP contraction.

China’s leadership has maintained a 5% growth target, though confidence in achieving this benchmark remains tepid. Consumer spending is down, despite falling inflation, and the real estate sector continues to struggle, prompting residents to increase savings. China’s growth prospects are constrained, with state-owned banks burdened by debt. Recently, China directed twelve local governments to postpone infrastructure projects, affecting regions that contribute to nearly 20% of its GDP and a quarter of its infrastructure spending, per a CNN report.

February saw a 0.7% inflation increase over the previous year following a downward trend for several months. The month-over-month CPI increase stood at 1%, while the February PPI dropped 2.7% year-over-year amid widespread price reductions. Adjustments in interest rates and monetary interventions have scarcely propelled economic expansion.

Below is a link to an article that highlights why China’s economy has yet to recover:

U.S. Economic Indicators:

The January report on factory orders indicated a significant drop in new orders for durable manufactured goods, decreasing by 6.1%. When transportation is excluded, new orders saw a reduction of 0.3%. There was a 0.9% decrease in shipments, marking a second consecutive month of decline. Manufacturing sectors with backlogs of orders experienced an 8.2% decrease. Communications equipment orders declined by 8.4%, reversing gains from the previous two months. There was a notable increase in new orders and shipments for computers and related products, whereas total inventories saw a significant reduction from the previous month.

Orders for computers and electronic products experienced growth as well. New orders for capital goods experienced a notable decrease, continuing the trend from the previous month. Shipments saw a decline for the second month in a row, while backlogs of capital goods orders grew for the third consecutive month, albeit at a slower pace. Total inventories increased, though slightly less than in the prior month.

The February ISM Services report highlighted a continued expansion in the service sector, albeit at a reduced rate. The PMI for services dropped by 0.8% to 52.6%, marginally above the year-long average of 52.4%. Business activity increased by 1.4% to 57.2%, with reports of rising orders and sales. Responses indicated stable conditions, with some noting increased business activity. New orders saw a modest increase, with most respondents indicating steady order levels and a few reporting a rise. The Arts, entertainment, & recreation sector was the exception, noting a decline in new orders.

Employment activity dipped into contraction, with a slowdown in hiring and loss of employees through attrition. Supplier delivery performance improved from January, and inventories have not expanded since November of the previous year, with February seeing a further reduction as adjustments to demand continue. Inventory sentiment remains positive but has decreased from January, with some respondents considering inventory levels too high. The backlog of orders index decreased by 1.1% to 50.3% amid ongoing declines in overseas orders due to the crisis in the Red Sea. Prices saw a 5.4% reduction from January to 58.6%. New orders for exports and imports both fell.

Most industries reported growth, except for real estate, rental & leasing, and arts, entertainment & recreation, which saw a decrease. Respondents generally reported stable business conditions, with inflation, labor, and economic outlook posing challenges for certain sectors.

Regarding employment, the January JOLTS report showed job openings decreasing to 8.9 million, slightly below the previous month and forecasts. Openings rose in nondurable goods manufacturing but declined in private educational services. Quits, layoffs, and discharges remained largely unchanged, with quits increasing in the information sector.

The February ADP employment report indicated that private sector employment grew by 140,000 jobs. The goods-producing sector contributed 30,000 jobs, including 28,000 in construction. The service sector added 110,000 jobs, primarily in leisure/hospitality, financial services, and trade/transportation/utilities. Job growth was mainly in medium (69,000) and large (61,000) establishments. Pay growth for job changers marked its first increase since November 2022, while annual pay growth for job stayers continued to decelerate.

The February employment report surpassed expectations, adding 275,000 jobs, marginally above projections. The unemployment rate increased to 3.9%, with a significant rise in permanent job losses, hinting at growing structural unemployment challenges. Labor force participation remained steady at 62.5%.

Significant job growth occurred in sectors such as health care, government, food services and drinking establishments, social assistance, and transportation and warehousing. The construction sector notably added 23,000 jobs, surpassing the average. Retail trade employment remained stable. There was a slight increase in the average workweek, with average hourly earnings rising by 0.1%. The manufacturing sector’s average workweek stayed consistent, with a slight uptick in overtime.

Initial unemployment claims for the previous week matched predictions at 217,000, while ongoing claims climbed to 1.906 million. The four-week moving average for initial claims saw a minor decrease, aligning with recent trends.

The fourth quarter productivity report witnessed a 3.2% productivity increase in the U.S., driven by a 3.5% output rise and a 0.3% increase in work hours. Year-over-year, productivity improved by 2.6%, with a 1.3% annual productivity growth from 2022 to 2023. Unit labor costs edged up by 0.4%, reflecting a 3.6% rise in hourly compensation.

In manufacturing, productivity went up by 1.3% despite a 2.0% output drop and a significant 3.3% decrease in hours worked, marking a record since the second quarter of 2020. Durable manufacturing saw a 1.0% productivity decrease, whereas nondurable manufacturing experienced a 3.8% increase. The sector’s overall productivity rose by 0.5% year-over-year. Manufacturing unit labor costs increased by 5.3%, with a notable 6.7% rise in hourly compensation, leading to a 6.1% annual increase in unit labor costs, driven by modest productivity growth and significant hourly compensation increases. Real hourly compensation also significantly grew by 3.3% annually.

January 2024’s U.S. wholesale trade data showed a slight decrease in sales and inventories from December 2023. Merchant wholesalers reported a 1.7% sales drop from December and a 1.5% year-over-year decline. Inventories dipped by 0.3% from the previous month and 2.5% from the previous year, indicating a cautious start to the year in wholesale trade, reflecting adjustments possibly due to market demands and economic shifts. The inventory-to-sales ratio was 1.36, slightly improving from January 2023’s 1.38.

The MBA’s weekly report indicated a 9.7% rise in mortgage applications. The refinance index increased by 8%, and the purchase index by 11%. The average rate for a 30-year conforming loan decreased slightly to 7.02%, while the 30-year jumbo loan rate rose to 7.21%. Mortgage credit availability saw improvement but remained constrained as lenders continued to tighten standards.

Technical Story:

Cash flow management in Review:

The past week has been smooth, with my expenditures becoming more controlled and no unforeseen emergencies popping up. I’ve incorporated Rocket Money into my financial toolkit to better oversee my expenses and stay ahead of impending bill payments. Even though my spending has escalated in tandem with my income, I’ve managed to maintain savings and steadily reduce my credit card debt. Impressively, my credit score saw a boost of fifteen points this past month, thanks to settling one of my credit accounts. I’m keen on keeping up this positive trend moving forward.

Grade: C+

Reason: Some improvement


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