Market Direction Mid Week: Trade Deal Delayed

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Market Direction: BULLISH alert issued 10/24/2019

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U.S. stocks closed mixed Wednesday, after seeing record highs in recent days, as markets weighed a report that an interim China-U.S. trade deal could be delayed until December and weakness in the energy sector underscored by disappointing corporate quarterly results.

How did major benchmarks perform?

The Dow Jones Industrial Average DJIA, +0.00%  lost less than a point to end at 27,492.50, while the S&P 500 index SPX, +0.07%  gained 2.16 points, or 0.07%, at 3,076.78. The Nasdaq Composite Index COMP, -0.29%  shed 24.05 points, 0.29%, closing at 8,410.63.

On Tuesday, the Dow DJIA, +0.00% rose 30.52 points, or 0.1%, at 27,492.63, surpassing its previous record, set on Monday. The Nasdaq COMP, -0.29%  edged 1.48 points higher to reach 8,434.68, a gain of less than 0.1%, also notching a second consecutive record close. The S&P 500 index SPX, +0.07%, meanwhile, edged 3.60 points lower, or 0.1% to end the day at 3,074.67.

The Dow’s year-to-date gain now stands at nearly 18% after rallying 3.3% in the past month. The S&P 500 is up more than 22% this year after surging 4% in the past month.

What’s drove the market?

Investors digested a report from Reuters that said a long-awaited interim trade deal between the U.S. and China could be delayed until December as discussions continue between the world’s two-largest trading partners about terms and a venue for a meeting.

From the U.S. side, there still was optimism that an agreement could be reached with China on the first segment of trade issues up for discussion.

“Negotiations are continuing and progress is being made on the text of the phase-one agreement. We will let you know when we have an announcement on a signing location,” said Judd Deere, White House spokesman.

Even so, stocks were struggling to find a catalyst to move beyond recent all-time highs.

“We’ve been rallying on the anticipation of a trade deal and the Reuters news report has caused a slight pullback,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group, in an interview.

“The market may take a breather from here,” Boockvar told MarketWatch, noting that market sentiment has gotten extremely bullish on the back of last week’s Federal Reserve interest rate cut and on optimism about the prospects for a coming trade truce. “If we don’t get a deal, that’s a different story,” he said.

A preliminary, or “Phase One” trade deal between China and the U.S. is still a hope, but some strategists worry that the market may be placing too much emphasis on a deal coming to fruition soon.

“The market has taken an overly optimistic view on the Phase One deal, nudged on by better US economic data of late,” wrote Stephen Innes, market strategist at AxiTrader. “So, with delay comes chance that risk-on sentiment has too long to ferment, stalls and then maybe reverses as the waiting game weighs,” he said.

Also on the trade front, Reuters reported that China’s state-owned agriculture conglomerate COFCO struck a deal to buy $100 million of pork next year from European producer Danish Crown, a potential blow to American hog supplies that fueled a near 4% drop in December lean hog futures LHZ19, +0.04%.  

With the U.S. corporate earnings reporting season winding down, FactSet data indicates that 75% of S&P 500 companies to report thus far have topped analysts’ expectations.

Energy exploration and production companies have been a clear area of weakness again this reporting season, said Diane Jaffee, a senior portfolio manager at TCW.

“A host of E&P companies have reported over the past couple of days and it’s been widely discouraging,” she told MarketWatch.

Shares of Diamondback Energy FANG, -14.44%  lost 14.44% Wednesday, its largest ever percentage fall according to Dow Jones Market data, after the shale operator reported a dip in profits due to lower oil and gas prices. Shares of Occidental Petroleum Corp. OXY, -5.49%  shed 5.49%.

Shares of Chesapeake Energy Crop. CHK, -29.15% plunged 29.15% to 91 cents after reporting disappointing third-quarter results on Tuesday.

Check out: Chesapeake Energy’s stock breaks the buck for the first time in 20 years

Chicago Fed President Charles Evan on Wednesday said the U.S. economy may not need additional interest rate cuts, noting that the economy appears “quite resilient,” in an interview with Yahoo Finance.

New York Federal Reserve Bank President John Williams was scheduled to speak at 6:30 p.m. ET at a global risk forum in New York.

How are others assets trading?

The yield of the 10-year U.S. Treasury note TMUBMUSD10Y, +0.02% fell to 1.814% Wednesday, from 1.865% late Tuesday when it registered its biggest one-day rise in five weeks.

December gold GCZ19, -0.07%  on Comex gained 0.6% after losing ground at a psychologically important level at $1,500 on Tuesday.

Oil slipped, with West Texas Intermediate crude for December delivery CLZ19, -0.02%  settling down fractionally at $56.35 a barrel, after settling 1.2% higher on Tuesday on the New York Mercantile Exchange. Supply rose sharply, a government agency said Wednesday.

The ICE U.S. dollar index DXY, +0.03%, a gauge of the greenback’s performance against six major rivals, fell 0.06% to 97.93, after gaining 0.4% a day ago.

In Asia overnight, the China CSI 300 000300, +0.40%  fell 0.45%, the Shanghai Composite SHCOMP, +0.24%  declined 0.4%. Hong Kong’s Hang Seng Index HSI, -0.24%  ended little-changed, while Japan’s NIKKEI 225 Index NIK, -0.04% edged up 0.2%. In Europe, the Stoxx Europe 600’s SXXP, +0.21% rose 0.2%.

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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 (10/24/2019)
Dow	up 754.83 points a 2.82% gain	11/5/19
Nasdaq	up 149.76 points a 3.32% gain	11/5/19
S&P 500	up 74.91 points a 2.49% gain	11/5/19

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