Technically Speaking For September 5

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Includes: IEF, IWM, QQQ, SPY
by: Hale Stewart
Summary

The latest Beige Book was mostly positive, although there were a series of softer descriptions.

The ISM Service Index was strong, allaying some concern about a slowdown.

The markets had a strong day.

The Fed released the latest iteration of the Beige Book yesterday, which contained the following description of the US economy (emphasis added):

On balance, reports from Federal Reserve Districts suggested that the economy expanded at a modest pace through the end of August. Although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook. Reports on consumer spending were mixed, although auto sales for most Districts grew at a modest pace. Tourism activity since the previous report remained solid in most reporting Districts. On balance, transportation activity softened, which some reporting Districts attributed to slowing global demand and heightened trade tensions. Home sales remained constrained in the majority of Districts due primarily to low inventory levels, and new home construction activity remained flat. Commercial real estate construction and sales activity were steady, while the pace of leasing increased slightly over the prior period. Overall manufacturing activity was down slightly from the previous report. Among reporting Districts, agricultural conditions remained weak as a result of unfavorable weather conditions, low commodity prices, and trade-related uncertainties. Lending volumes grew modestly across several Districts. Reports on activity in the nonfinancial services sector were positive, with reporting Districts noting similar or improved activity from the last report.

While the overall tenor is positive, there are some soft spots. Consumer spending was "mixed;" transportation activity "softened;" home sales were "constrained;" manufacturing activity was "down slightly" (it has since contracted modestly). Although none of these descriptions alone would be enough to raise concerns, there is significant breadth in the comments to indicate a modest softening.

The US and China are scheduled to resume trade negotiations next month. Don't hold your breath for results:

The United States and China will hold trade talks in Washington early next month, officials from both countries said on Thursday, but new tariffs will make it difficult to find a way to end their economic clash.

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Already, pessimism had been growing on both sides of the Pacific Ocean about the possibility of a trade deal before the United States presidential elections next year. The mounting tariffs have rattled global markets and set off fears over world economic growth.

Instead of acting like a developing economy, China is using this conflict to prove it is an equal actor on the world stage. Assuming that is a correct assessment, this could be a very long process.

Unlike the manufacturing barometer released a few days ago, the ISM Service Index showed increased activity in this much larger economic sector:

There was a marked improvement in production and new orders. I jokingly think to myself that while tariffs have sent the manufacturing sector into contraction, they've led to an increase in service sector orders as businesses try to find ways to deal with the increased trade tensions.

Let's turn to today's performance table: This was the kind of day the bulls have been looking for. The markets rallied strongly. Most importantly, the smaller-cap indexes (the IWC and IWM) led the way higher, indicating an uptick in traders' risk appetite. As a technical bonus, the Treasury market finally sold off a bit.

Yesterday, I noted that the markets were lining up for a technical rebound, based on the daily charts. Today's price action on the 30-day charts confirms that the markets are generally moving in the right direction.

Let's start with the Treasury market:

Both the IEF (top chart) and the TLT (bottom chart) broke short-term support today. This plays into the daily theme I noted yesterday. And both the SPY (top chart) and the QQQ (bottom chart) broke through key resistance levels.

But all is not technically perfect. The IWM broke through the descending line connecting its recent series of lower highs. But prices haven't broken through resistance from highs set at the beginning of August. The 30-day chart for IWC and IJH have the same problem. In order for this rally to gain more technical significance, we'd need to see these charts move through recent highs.

Today's advance was premised on a resumption of US-China trade talks. Considering the rocky relationship between these two countries, it's more than possible that this situation reverses course between now and the formal start of discussions.

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.