Markets Struggle to Extend Rally

Market Moves

Much of the heightened market volatility of the past several weeks and months has been due to changes and developments in U.S-China trade negotiations and tit-for-tat tariff retaliations. This situation is unlikely to end any time soon, at least until the results of the October trade meeting between the two countries are known. In the meantime, expect more choppy price action as investors continue to express indecision coupled with apprehension about trade, global economic slowing, and the potential for recession.

The chart of the benchmark S&P 500 stock index shows this week’s attempt to regain all-time highs. Although investor optimism has indeed increased this past week, and record highs are only a stone’s throw away (less than 2% away in the case of the S&P 500), headwinds confronting a continuation of the longstanding bullish trend remain.

This past Thursday saw the the S&P 500 gap up above both a key resistance line around 2,955 and its 50-day moving average. Though this was a significant bullish breakout, the technical bias going forward will depend on whether the index will be able to maintain this breakout in the coming weeks. This is questionable given major upcoming risk events including U.S.-China trade developments and the next key Federal Reserve meeting on Sept. 18. Currently, markets are expecting around a 91% probability of another quarter-point rate cut at that meeting. Any deviation from expectations could result in a significant market move.

To the upside, any breakout above the 3,028 record high on the S&P 500 would likely result in further bullish momentum and a continuation of the longstanding uptrend.

Gold Prices Pull Back … For Now

As might be expected, the past two days have seen a pullback in the price of gold as stocks have rallied and concerns about the U.S.-China trade war have eased. The chart of the SPDR Gold Shares (GLD), which is physically backed by gold, shows the clear and steep uptrend that has continued to reach new long-term highs. While the current pullback is somewhat sharp, major risk events on the horizon along with expectations of lower interest rates from the Fed will likely result in a rebound and uptrend continuation for gold. Key downside support for GLD is currently around the $141.00 level, which could serve as a barrier to further losses.

Treasury Yield Curve Still Close to Inverted

Much of the fear about the economy and the eventual onset of a recession in the past couple of weeks has been due to a simple indicator that is considered a reliable signal of a future recession. An inverted yield curve occurs when the yield on a short-term bond rises above the yield on a long-term bond. The most closely watched part of the yield curve is the 10-year/2-year Treasury curve.

Recently, the 2-year yield rose above the 10-year, prompting economists and investors to issue dire warnings of an upcoming recession. Currently, this yield curve inversion is no longer the case, but the yields remain very close. If another inversion occurs, expect to see resumed market volatility.

The Bottom Line

Friday’s market price action showed that stocks are struggling to continue the relief rally that began mid-week of this past week. Strong economic headwinds remain, and the path of least resistance is not necessarily to the upside. The week ahead will likely continue to be characterized by investors’ concerns over trade negotiations, economic indicators, and interest rates.

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