Technically Speaking: Charts Lining Up For Bulls

 | Nov 05, 2019 12:50AM ET

Technically Speaking For November 4

Summary

  • The latest ISM report shows a continues contraction in US manufacturing.

  • Global manufacturing has been decreasing for six months.

  • The charts are lining up in the bulls' favor.

    • The latest ISM report on US Manufacturing shows the third month of contraction. 12 out of 18 industries are contracting. Production, employment, and new orders are all down. More concerning are the anecdotal comments (emphasis added):

  • "Customer demand is down, and we are expecting a very soft fourth quarter, without much relief in sight for Q1."

  • “The chemical manufacturing industry is depressed; demand across many markets globally is down, and pricing is as a result.” (Chemical Products)

  • “Automotive sales continue to decrease ..."

  • “Economy is showing slight signs of weakening. The same business headwinds on trade, tariffs, and currency uncertainty are making the environment challenging.” (Food, Beverage & Tobacco Products)

  • “Been hearing from lots of my suppliers that their business is down and [they are] looking for more work in the metal processing [and] machining areas. We remain very busy.” (Fabricated Metal Products)

  • “Production demand is softening; some [of it is] due to seasonality, [but] much [is] due to customer order rate declining and dealer inventory stabilizing.” (Machinery)

  • “Trade cost pressures continue to be a headwind in our business.” (Paper Products)

  • “Automotive related manufacturing is definitely slowing in the U.S. ..."

  • “Our business levels have softened over the last three to five months, in the U.S. market [and] globally."

    • These comments show the slowdown is broadening and getting worse. This has negative ramifications for industrials (XLB ).

    It's not just US manufacturing that's getting hit with a slowdown; it's the global manufacturing sector (emphasis added):

    The global manufacturing sector contracted for the sixth successive month in October, according to the latest global PMI™ surveys. The J.P.Morgan Global Manufacturing PMI – a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – posted 49.8 in October, remaining below the neutral mark of 50.0. That said, a third successive rise in the PMI provided a further sign that the downturn may have bottomed out in July.

    In the latest report, production was slightly positive but employment, new orders, and new export orders were negative. Here's a chart of the headline number:

    JP Morgan Global Manufacturing PMI
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    The number declined steadily from the end of 2017. Even if the number gets above 50, it's unlikely that we'll see a major push higher given the current economic backdrop.

    Federal Reserve President Clarida explains how the global slowdown could be transmitted to the US:

  • Perhaps the most direct link between economic conditions abroad and in the United States is foreign demand for U.S. exports.

  • The pace of economic growth in our major trading partners affects the demand for U.S. exports not only directly, but also indirectly by influencing the value of the dollar (a higher dollar lowers US exports).

  • Global financial markets also link the United States to the global economy, and developments abroad can spill over into domestic financial conditions, with material effects on domestic activity. This is particularly evident during episodes of global financial stress, in which “risk-off” shifts in sentiment can depress U.S. equity prices and widen domestic credit spreads even as flight-to-safety flows push down U.S. Treasuries

    • Let's look at today's performance tables:

    The bullish trend in stock performance continues through Monday. Transports had a very strong day, gaining over 2%. After that, the performance drops off a bit. But the second and third best performers were micro and mid-caps, indicating an increased risk appetite. Large-caps were up modestly. At the other end of the spectrum is the long end of the Treasury market, which sold off again.

    Today's sector performance was bullish as well. At the bottom of the table are the defensive sectors: healthcare, real estate, staples, and utilities. At the other end is energy -- which has chronically under-performed for a year. Industrials, financials, and basic materials round out the table.

    Let's turn to the charts, starting with the Treasury market.

    After selling off at the beginning of October, both the IEF and TLT have traded in the lower half of their respective trading ranges. The longer-term trend line (in pink) has been trending lower since October 10.

    Meanwhile, the equity markets have been trending higher for the last week.

    The IWM is in a solid uptrend, with a major trend line (connecting lows from October 8 and 31) and a minor trend line (connecting lowers from October 14 and 30). The 200-minute EMA started to trend higher in mid-October.

    The SPY is also in a solid, month-long trend upwards.

    And we've got some solid moves in the industry sectors as well.

    Most importantly, technology -- by far the largest component of the SPY and QQQ -- broke through resistance in the lower 80s and is headed higher.

    Industrials have printed two solid days higher to break through resistance. Friday's move higher and through resistance had a very strong volume day.

    Finally, healthcare is moving solidly higher as well.

    Overall, the charts are lining up for the bulls. The indexes are making strong moves higher and some of the more bullish sectors are supporting that move. Best of all, this is happening at the beginning of the week, so we could have more good news to follow.

    Original Post

    Written By: Hale Stewart

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