US Market Roundup – Stronger ISM but Weakness in Stocks seen

US Stocks enjoyed a good first start in July, with S&P 500 gaining 0.54% and Dow 30 climbing a more modest 0.44%. Without looking at price movements yesterday, one would be easily misled into thinking that the gains was brought about by the stronger ISM Manufacturing data, which came in at 50.9, 0.4 points higher than the anticipated 50.5 and a huge improvement from previous month’s 49.0. Having a more than 50.0 print also suggest that sentiment is overall bullish, which is a good indication towards better inflation and employment conditions – hence it is not surprising that stock market rallied higher, giving S&P and Dow the gains of the day.

Or not.

Stock prices did climb up higher after the ISM numbers were released, however price did not manage to hold onto the gains, but instead trade steadily lower. The day high was made after the news was released, and both indexes closed below the opening levels. So why did prices managed to post gains? The only reason both indexes remained in the black was due to the opening gap that was brought about by strong optimism in Nikkei 225 earlier on. This bullish risk appetite similarly spilled over to the European markets, and it is important to note that European indexes closed much closer to the day highs as compared to US, which suggest that US stock indexes are not as healthy/bullish as we think they are. The reason for current weakness has been addressed previously, which suggest that bad news actually drives US stocks higher as speculators would rather bet on bad news as these would shackle Bernanke’s hands from executing his QE tapering timeline. The corollary would mean that better news would actually drive prices lower, and certainly it did this time round, with prices closing below pre-ISM numbers levels.

S&P 500 Hourly Chart

From a technical perspective, Futures prices are remaining nicely supported above 1,510 . Yesterday’s rally was important as it solidified current bullish trend as price did break away from the rising trendline on Thurs/Friday. The rally and 1,510 support allow bulls to remain in the game, and we could potentially see acceleration higher should 1,515 -1,520 resistance band broken. Stochastic readings have flattened and are pointing marginally higher despite not entering the Oversold region. Generally this does not constitute a good bullish cycle signal, but in this case, looking at the previous stoch trough which just occurred yesterday, there is no divergence between Price Action and Stoch Action, and hence a bull cycle that starts above the Oversold region would not be exactly surprising. Furthermore, a bull trough was formed on 26th around similar stoch levels, which helps to lend weight to current bullish scenario.

Dow 30 Hourly Chart

Dow 30 is not enjoying the same bullishness as S&P 500, with price breaking below 15,000 psychological level and is currently trading just under the rising Channel and within the 14,850 – 15,000 consolidation zone. Stochastic indicator favors the bull side for the same reasons as S&P 500, but expect current bull cycle (if in play) to face more resistances on the way up compared to S&P 500. Nonetheless, should price manage to break the 15,060 ceiling, we could potentially see acceleration back towards Channel Top and potentially allow Dow 30 to catch up with S&P 500 if the latter proved to be more bullish earlier on.

On the USD front, the inverse relationship between Greenback and US stocks continue to be in play – USD faltered versus all major currency except for Yen yesterday. Traders should continue to keep watch on this correlation as we approach NFP Friday.

More Links:
GBP/USD – Steady as British Manufacturing PMI Rises
USD/CAD – US Dollar Remains Strong in Thin Holiday Trading
AUD/USD – Aussie Edges Higher as Chinese Manufacturing Data Meets Expectations

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.