Market Direction Mid Week Update©

Market Direction: BULLISH alert issued 2/15/2018

DOW a record close for the 15th time this year...

The Dow Jones Industrial Average on Wednesday finished at a record for the 15th time this year as investors were cheered by healthy economic data. But the market pared earlier gains, with major indexes closing off intraday highs as bond yields jumped, which could dampen appetite for stocks.

How did major benchmarks fare?

The Dow Jones Industrial Average DJIA, +0.20% rose 54.45 points, or 0.2%, to 26,828.39 after hitting an all-time high of 26,951.81.

The S&P 500 SPX, +0.07% climbed 2.08 points to 2,925.51 and the Nasdaq Composite Index COMP, +0.32%  advanced 25.54 points, or 0.3%, to 8,025.09.

Read: A disconnect between the Dow and the broader market could spell trouble for stocks

What drove the market?

The 10-year Treasury note TMUBMUSD10Y, +0.07%  yield jumped 11 basis points to 3.166% and the 30-year bond yield TMUBMUSD30Y, +0.19%  vaulted 12 basis points to 3.327%, the largest one-day rise since the day after President Donald Trump’s election in November 2016. Investors dumped bonds as economic indicators point to continued strength in the economy, which in turn could lead to more demand for debt.

Private-sector employment soared in September, as employers added 230,000 jobs, more than had been expected, according to Automatic Data Processing Inc. The report is the first of three readings on the labor market that will be released this week. Thursday will see the latest data on jobless claims, while Friday has the closely watched September jobs report.

Separately, the final reading on the services sector from IHS Markit fell to 53.5 in September from 54.8, while the Institute for Supply Management’s reading on the nonmanufacturing sector came in at 61.6, above expectations for a reading of 58 and one of the highest readings in the history of the index.

Wall Street got an early lift after a report in Italian daily newspaper Corriere della Sera that the government may yield ground in a budget standoff with the EU, which could lessen the odds of a clash between the country and the bloc.

According to the report, Italy’s budget deficit target will be set at 2.4% of GDP in 2019, but decline to 2.2% in 2020 and 2.0% in 2021. Italian officials had previously clashed with Brussels over the budget deficit target, which exceeded EU rules and stoked fears of another crisis in the region.

While U.S. stocks have mostly shrugged off political uncertainties around the globe, a resolution in Italy would mean one less potential risk to watch out for.

Chicago Fed President Charles Evans, who reiterated his upbeat outlook for the economy, said the Federal Reserve would likely need to set monetary policy that prevent the economy from overheating.

On Tuesday, Fed Chairman Jerome Powell reiterated that he did not see signs that inflation could spike despite the low unemployment rate.

What were analysts saying?

“Risk appetite has picked up recently in part because of stronger economic data and also because of progress made on trade between the U.S. and its neighboring countries, Mexico and Canada. The removal of uncertainty around trade is lifting longer-term bond yields as the prospects for growth remain intact while the Fed has yet to signal a faster pace of rate hikes,” said Charlie Ripley, senior investment strategist at Allianz Investment Management, in a note.

“The impressive report shows investors how strong the U.S. economy is performing,” said David Madden, market analyst at CMC Markets.

Madden was referring to the ISM report, and added that the ADP figure “underlines there is still slack in the U.S. labor market. Traders will be looking ahead to the nonfarm payrolls report on Friday, and they will be paying close attention to the earnings component of the update, as that could be the clue to what the Federal Reserve are going to do next in terms of interest rate decisions.”

What were other markets doing?

Asian stocks traded near break-even levels, recovering from early losses. Major European indexes rose, supported by optimism over Italy.

Crude-oil prices CLK9, +1.24% rose to a four-year high while gold GCM9, -0.52%  settled lower. The U.S. Dollar Index DXY, +0.06%  was slightly higher and the euro fell after an earlier lift from Italy.
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The all-time highs since our initial recommendation to go LONG this market. Here is how the markets have performed:

Stock Market Direction Recommendation (2/15/2018)
Dow	up 1,751.44 points a 6.95% gain	10/3/18
Nasdaq	up 876.87 points a 12.08% gain	8/30/18
S&P 500	up 209.71 points a 7.68% gain	9/21/18

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