Is A Bullish Reversal In Play For Emerging Markets?

Thursday, November 1, 2018, 11:35 AM, EST

  • NASDAQ Composite+0.94%Dow+0.76%S&P 500+0.71%Russell 2000+1.51%
  • NASDAQ Advancers:1674Decliners:613
  • Fitbit+25%Stratasys+24%DowDuPoint+6.9%Wayfair-14.7%

Market Movers

  • ISM Manufacturing for October missed at 57.7
  • Q3 Nonfarm Productivity +2.2%, slightly ahead of estimates and Q2 revised 0.1% higher
  • Q3 Unit Labor Costs +1.2%, better than expected and a reversal from Q2's -1%
  • Initial Jobless Claims 214k, about as expected and essentially unchanged
  • Asian and European markets mostly higher

Steve's Commentary

The markets opened in the green once again today with gains more modest (normal) than yesterday. There was some early profit-taking in Technology and Communications that took those sectors slightly lower, but that trade seems about done and. The R2K index is outperforming the other majors, and that is usually a good indication of investor sentiment.

The Materials sector leads with a 2.6% advance on results from DowDuPont, and Energy is up 1.1% even though crude oil is down for a 4th day on reports of higher output from Russia. The dollar index retreats 0.8% after touching 15-month high yesterday, gold gets a 1.5% bounce after falling for three days, and the Chinese yuan is 0.7% lower after holding at 22-month highs in recent days. First hour volumes are down 4.4% from yesterday.

Yesterday's market opened higher and stayed higher although it drifted off the highs in the final 45-minutes. Not only did the SPX close higher on two consecutive sessions for the first time since mid-September, it was the SPX's biggest two day gain since February. In hindsight those two days in February effectively signaled that the rout that began late January was coming to an end.

The markets remained somewhat choppy through mid-May before beginning a calm steady rise to new highs. Will that happen again this time around? Probably not but ask me in about a year. Despite the gains it was a rather quiet session and those of us on the Desk commented that its seemed like a holiday week, perhaps everyone was focused on trick or treating.

Volumes by the way hit 9.8 billion shares across the market, the highest this week, so not quiet in that aspect. Technology and the new Communications sectors gained over 2% each and resumed their role in leading the markets higher.

The day's economic data is mixed. October ISM Manufacturing missed consensus with a 57.7 reading, the lowest in six months and down from 59.8 in September. While readings above 50.0 reflect economic expansion, today's data indicates a cooling in the manufacturing sector and could be taken as an indication that the impact of the trade war is beginning to show itself. Production, backlogs, new orders, and exports all declined while prices paid rose.

In a separate release, third quarter Nonfarm Productivity had the best consecutive quarterly gains in three years with overall productively holding steady at 1.3%. Unit Labor Cost rose more than expected after falling in the second quarter, and compensation per hour rose 3.5% versus 1.9% in Q2. Weekly unemployment claims held steady near decade lows. Thus here again the data presents a competing narrative - economic slowing in the ISM sentiment gauges while the other measures suggest its steady as she goes.

Sector Recap

Click the image for larger view

Brian's Technical Take

Emerging Markets - A bullish reversal is emerging …

The US dollar index (DXY) ended October with a "bullish breakout" above its prior 52-week made in August, a level we highlighted in Monday's Mid-day Market Recap. As is so often the case with general price action, the breakout was unable to last more than a session with the DXY down 0.8% today for its biggest one day decline in four months. The DXY has been up six of the last seven months including +2.1% in October. It remains to be seen whether today's reversal is a short term pullback before a resumption of the prior trend, or if a more meaningful top is being made.

This week's price action certainly looks very "toppy" with the DXY's weekly candlestick currently forming a textbook "gravestone doji" pattern. The location of the pattern across the prior 52-week high made in August makes this all the more interesting. With another 1.5 sessions left in this week's activity, and all next week for confirmation, it is way too early to declare an intermediate term top on hand.

However this week's high establishes a clearly defined risk level to measure risk, and there are a number of inversely correlated asserts that would welcome a pause in the dollar's strength.

The strong dollar has been a thorn in the side for many emerging market economies. The emerging market ETF, EEM, bottomed on Monday of this week for a decline of 28% from its January high. The EEM has rallied in each of the last three session for a gain of more than 6.5% off Monday's lows. While it remains in a well-established downtrend, there are signs the recent relief rally could have some legs to it.

This week's low and strong upside reversal cut across a major support zone at $38 - $38.50 which previously acted as both resistance and support on many occasions since early 2015. It touched this well-established support zone with a weekly RSI already at the oversold 30 level which reflects the strong selling throughout 2018, but also indicates seller exhaustion at a level where bulls have previously stepped up.

A bullish divergence exists on the daily period RSI which bottomed back on October 11th, much like many US indices. A 50% Fibonacci Retracement of the 2018 downtrend projects a move +12% to $44.80, while a more modest 38.2% retracement has a target +7.8% to $43.10. If the DXY cooperates by stabilizing here or even seeing a deeper correction throughout Q4, the rally in EEM and other inversely correlated assets could be meaningful in terms of year end performance and alpha.

Click the image for larger view

Nasdaq's Market Intelligence Desk (MID) Team includes:

Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).

Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.