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The U.S. equity market got support earlier in the week as there was speculation that the People’s Bank of China (PBoC) was considering additional stimulus and cuts to the reserve requirement ratio (RRR) as China’s trade data came in on Tuesday worse than expected. According to the China General Administration of Customs who compiled the trade data, imports fell 14.3% in August compared to last year, while exports were down 6.1% over the same period. Overall China trade in August was down 9.7%, compared to the previous year.
China's foreign trade activity has gone from bad to worse in recent months as growth of exports has softened with the U.S. recovery not strong enough to offset weakness from Europe and Japan. The trade surplus expanded nearly 40% from July to $60.24 billion, just below the record $60.62 billion in February.
The weakness of the S&P 500 index on Wednesday could have been attributed to the U.S. Job Openings and Labor Turnover Survey (JOLTS) report released by the Department of Labor, saying that the number of job openings rose to a record high 5.75 million on the last business day of July, up 430,000 from the 5.25 million in June, beating economists’ forecast of 5.3 million job openings.
The quits rate, which measures workers who voluntarily resign, held steady at 1.9% for the fourth straight month as workers aren’t quitting their old job for a new one despite that job openings are at a record level. The Federal Reserve likes this report because it helps confirm the trend in jobs.
The University of Michigan said Friday that its consumer sentiment index fell to 85.7 early this month, the lowest since September last year, from a reading of 91.9 in August. Weak sentiment came as no surprise with the stock market volatility amid worries over China's slowing economy and the interest rate hike by the Federal Reserve. The slump in consumer sentiment may also explain why workers aren’t quitting their old job for a new one despite a tightening labor market.
Separately, Goldman Sachs said on Friday morning in London that the firm cut their price target for WTI crude to as low as U.S. $38 a barrel, and said the risk that oil could fall to $20 a barrel is rising. Goldman’s call came after Saudi Arabia said late Thursday that they see no need to hold an OPEC summit if such discussions would fail to produce concrete action toward defending oil prices.
The traders got it all wrong regarding crude oil production and the OPEC summit, when they ran up the crude price 3.67% on Thursday. Despite the volatility in the crude oil market, the WTI crude spot price registered at $44.78 a barrel at the close on Friday, down 2.16% for the week.
As of September 8, there are 175,720 short positions of S&P 500 Consolidated Futures, traded on the Chicago Mercantile Exchange (CME) by leveraged funds, an increase of 6,676 short positions from the previous week. This is compared to about 82,770 long positions, down 7,638 from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday.
The net short positions by hedge funds has again increased by 14,314 contracts from the previous week, worth about $7 billion, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index. During the previous week ending September 1, the net short positions by hedge funds had also increased by 27,363 contracts. As a contrarian indicator, it could be bullish when hedge funds are piling into short positions.
The S&P 500 closed at 1,961.05 on Friday, up 2.07% for the week. The U.S. 10-Year Treasury Note yield surged to 2.2% while the U.S. dollar was weak as the U.S. dollar index closed down 1.09% for the week. The best performing S&P 500 sectors for the week were Information Technology and Healthcare, which surged 2.96% and 2.8%, respectively. The worst performing S&P 500 sector for the week was Energy, which was down 0.55%.
From our short-term technical viewpoint, the S&P 500 is moving in a symmetrical triangle in the range between 1,991 and 1,867 as the market can’t decide whether the Federal Reserve will begin hiking interest rates at the September 16-17 FOMC meeting, and whether China’s economy is having a severe slowdown or if it will be a hard landing. The sentiment was toward bullish, as the S&P 500 was up and stayed in the upper part of the symmetrical triangle for most of the week.
If the S&P 500 continues its upward movement, the breakout point is about 1,970. There are several supports between the 1,930 and 1,940 levels. Of course, these support levels will disappear quickly if there is a flash crash.
As three major moving averages, 50-, 100- and 200-day SMA, are turning downward and become major head resistances, there will be some selling pressures as the S&P 500 approaches these moving averages. The sharp decline in the S&P 500 index in late August also triggered a death cross, as the 50-day SMA fell below the 200-day SMA.
The headline risk for next week is the FOMC meeting on September 16-17. The World Bank came out during week and warned the Federal Reserve that they are risking "panic and turmoil" in the emerging markets if they raise interest rates on September 17.
At the G20 meeting in Istanbul, IMF Chief Christine Lagarde gave a third warning to the Federal Reserve not to rush its decision to raise interest rates. We doubt that anyone in the Federal Reserve will listen. Ms. Lagarde should also remind the Federal Reserve that they should have listened to the markets in 2008, before the U.S. economy fell into the deep financial crisis.
As the old German saying goes, “Wer nicht hören will, muss fühlen”, translated “If you don't want to listen, find out the hard way”.
S&P 500 Summary: –4.75% YTD as of 09/11/15
Barclay Hedge Fund Index: +0.64% YTD
Outperforming Sectors: Consumer discretionary +4.29% YTD, Healthcare +2.82% YTD, Information technology –2.44% YTD and Consumer staples –3.82% YTD.
Underperforming Sectors: Telecommunication services –4.82% YTD, Financials –6.92% YTD, Industrials –9.03% YTD, Materials –12.32% YTD, Utilities –12.83% YTD and Energy –21.42%
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