Cross-Currents Are Keeping Traders In Check For Now (Technically Speaking For 9/30)

The ADP jobs report was strong (emphasis added):

Private sector employment increased by 749,000 jobs from August to September according to the September ADP National Employment Report.

Also from the report:

The best news is that growth is spread over a number of industries.

And, it’s the strongest total in the last three months:

This bodes well for Friday’s jobs report.

Chinese manufacturing is back (emphasis added):

The headline seasonally adjusted Purchasing Managers’ Index – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – edged down from 53.1 in August to 53.0 in September, to signal a further solid improvement in the health of the sector. Operating conditions have now strengthened in each of the past five months. Notably, the latest reading rounded off the best quarterly performance since Q4 2010.

Chinese manufacturers recorded a sharp and accelerated increase in total new work during September, with a number of firms commenting that a further recovery in client demand had boosted sales. Furthermore, the rate of new order growth was the steepest recorded since the start of 2011. Stronger external demand also helped to lift sales, with new export business expanding at the quickest pace since August 2017. Manufacturers registered a softer, but still marked, rise in production during September.

The best news is the rise in new export orders, which have been weak throughout the Asian region since the Spring. Hopefully, other Asian economies will report similar growth in their respective exports orders later this week.

Also remember that Chinese growth (fueled by massive fiscal spending on infrastructure) helped to pull the global economy out of the Great Recession.

UK GDP fell a record 19.8% in 2Q20 (emphasis added):

  • UK gross domestic product is estimated to have contracted by 19.8% in Quarter 2 (Apr to June) 2020, revised from the initial estimate of a 20.4% fall.

  • Compared with the same quarter a year ago, the UK economy fell by a revised 21.5%.

But the problems started before the lockdowns:Data runs north-south

Household consumption (second numerical column from the left) only grew in one quarter in 2019 and contracted modestly in two. Gross fixed capital formation (third numerical column from the left) contracted in two quarters each in 2019 and 2018. As a result, GDP growth was below 1% in five of the eight quarters of 2018-2019. Leading into the lockdowns, the UK was already heading towards a recession. The pandemic was the perfect instrumentality.

Let’s take a look at today’s performance tables:

Today, it was all about large-caps. The Dow and OEF shared the top spot, followed by the SPY and QQQ. While small and mid-caps were positive, micro-caps were down. The best news for the bulls is that the long-end of the treasury curve sold off a touch.The top of the sector table is split between defensive and aggressive sectors. Health care’s move is understandable. However, I’m a bit perplexed as to why financials are the second-best performer. Technology was a middling performer while communication services was up fractionally.

This morning when I logged in, I made a few notes that both the QQQ and SPY were looking pretty good. Let’s start with the SPY: In September, prices have formed a downward sloping pennant pattern. The decline has been very disciplined. Volume has declined during the month. During the last three trading sessions, price broke through resistance and have traded sideways. Momentum is very close to giving a buy signal. The SPY has the same pattern.

To get an idea for how this week has traded so far, let’s turn to the IWM, starting with today’s chart:Today, the IWM (along with the rest of the indexes) gapped higher at the open. Prices traded sideways until we learned that the fiscal package might not be as close to a done deal as we thought. That sent prices down for the rest of the session.

This week, after gapping higher on Monday morning, prices have traded in a very narrow range.

Right now, there are two competing news narratives. On the plus side is the employment situation. Today’s ADP report could be a harbinger of another encouraging jobs report from the BLS. Ideally, that will lead to higher prices. But we’re also starting to hear about mass layoffs. Disney announced one earlier this week. The airline industry has said that October could be very rough as well. A large number of bad numbers would obviously be bearish.

The best news for traders is that it appears the consolidation is over. However, we just don’t know which way the wind is blowing yet.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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