US Market Roundup: Bearish Sentiment Weighs Despite Better Economic Numbers

US Stocks climbed for a 3rd consecutive day. As spectacular as that sounds, the reality isn’t that great, with S&P 500 gaining 0.12%, and Dow 30 by 0.04% – barely crossing the line. Furthermore, yesterday’s price action does not reflect strong bullish sentiment; prices moved up higher during the first 1-2 hours of trade, but was sent back down in the same amount of time, with prices basically languishing lower without doing anything much for the rest of the session. Perhaps some may point to the fact that bulls did manage to hold themselves above the closing levels of Wednesday, indicating that bullish support is still strong. But that feels like a “glass half-full, glass half-empty” argument, as one could easily point to the fact that early gains were loss equally early as a sign that sentiment is bearish.

Looking at the economic calendar, we have a mixture of good and bad news. First off we have ADP employment change that came in slightly weaker than expected, 176K vs 180K with previous month’s figure revised lower to 198K. Shortly after we had Initial Jobless Claims and Continuing Claims which came in better than expected. Q2 Non-Farm Productivity (Final) came in at 2.3%, higher than the initial estimates of 1.6%, while labor costs stayed constant, a good sign for businesses. All the aforementioned news were released prior to the opening of US stock exchange, and with the higher opening gap, we can easily conclude that market has chosen to disregard the ADP disappointment, and instead focused on all the other better job related numbers.

We had further bullish winds blowing after market opened, with US Factory Orders coming in better than expected at -2.4% vs -3.4%. US Service sector also grew more than expected, with August printing at 58.6 vs 55, making it 2 for 2 for the ISM monthly surveys. Hence we have the explanation of why prices traded higher during the 1st 1-2 hours yesterday in our hands, but this also affirms that the glass is perhaps more empty than full where bullish sentiment is concerned, as there wasn’t any more news releases during the rest of the day, suggesting that the decline that followed was a push by pure bearish sentiments.

S&P 500 Hourly Chart

It seems that the bearish sentiment is actually building up, with S&P 500 Futures prices breaking below yesterday’s swing low and the entire trading range of 5th September to hit the 1,650 support. There isn’t a strong compelling reason for this sudden break during Asian hours, newswires are silent, while Asian stocks marginally higher: Hang Seng +0.12%, STI +0.19%, Kospi +0.17% barring Nikkei 225 which has shed around 1% at the time of writing.

Bearish sentiment wise, the only reasonable explanation for the bearish sentiment would be that stock traders are getting cold feet over the ever increasing likelihood of a QE tapering action with all the healthy economic numbers. However, even that does not explain the sharp fall that we are seeing right now. Hence, there is very little reason to believe that bears will be able to break the 1,650 support right now. Perhaps NFP numbers tonight may be able to stoke bearish flames but right now we could be seeing price perhaps rebounding back up towards the tighter consolidation zone between 1,652 – 1,656.

Stochastic readings agree with this outlook as well, with readings entering Oversold region, adding strength to the support level. A bull cycle signal is not formed yet, but may be there when price trades above 1,652.

Dow 30 Hourly Chart

Dow 30 looks more bearish than S&P 500, but the broad analysis of sentiment/fundamentals applies equally here. Technical wise, price is trading in a tight consolidation seen on 3rd September between 14,885 – 14,910. Considering that Dow has been more bearish than S&P 500, if we see Dow trading above 14,910, the likelihood of S&P 500 pushing towards 1,656 increases. Similarly, if S&P breaks 1,650, the probability of Dow 30 hitting stronger support around 14,850 or perhaps even touching the ascending trendline becomes higher.

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