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US Markets 07-Jan-2020: Markets ignoring fundamentals as well as Iran threat

Updated: Jan 8

Key points for the week:

  • The US market posted new all time high on the very first trading day of the year

  • The threat of war from Iran following assignation of Iranian General in Iraq caused the market to gap down significantly, only to have a massive rally by close as if the market ignored the threat of war against Iran

  • The weaker than expected ISM Manufacturing PMI on 3rd Jan appears very much ignored

  • The oil market went rallying on Monday over the fears of Iran war, but given the price is now in a significant supply area, the market will need much more demand to take the price higher

The US equities market is very much in bullish mindset, and is ignoring any kind of negativity for now. On 2nd Jan, all the equity indices opened close to prior all time high and rallied further.

DAILY PRICE CHART SPY (S&P 500 ETF)

After US claimed responsibility for assassination of the Iranian general, and market opened about 1% lower on 3rd, owing to the fear of Iranian retaliation. While the market rallied on that day to end the Friday on a positive note, threat of nuclear attack from Iran over the weekend caused the market to open lower again on Monday 6th Jan. Yet, the market rallied for entire day on Monday closing the market near high of the day.



All the three indices – S&P 500 (SPY), Nasdaq 100 (QQQ) and Dow Jones Industrial (DIA) – are in an upward channel since beginning of October and are showing similar price action.

DAILY PRICE CHART NASDAQ 100 (QQQ)

DAILY PRICE CHART DOW JONES INDUSTRIAL AVERAGE (DJIA)

The price action suggests that on Monday the markets came close to the lower of the channel from where they resumed rallies.While we do not expect any significant move up to hit the top of the channel, a break below the lower of the channel would be first signal of weakness. Until we see that break with volume, we remain bullish.


SOME KEY FUNDAMENTALS AND ECONOMIC DATA RELEASES

Among the Iranian news, one important fundamental received less attention was the PMI numbers released on Friday by Institute of Supply Management (ISM Industrial PMI). This index is based on surveyed purchasing managers in manufacturing industry. The result was worse than anticipated, but the more concerning fact is that it was worst one to be published since the recession of 2008-09. This indicator is considered a leading indicator if economic health, and hence such a high number is of some concern. While just one indicator need not make us worry, we should remember that this is a leading indicator, and more such warning signs would signal weakness in future.


On another note – following the US vs Iran political action over the weekend, the US crude oil futures rallied high fron 61.2 to 64.7 until Monday, only to reach a significant supply area from the past. Should the oil rally further, we need to see significant buying, i.e. significant more tension in the middle east. As of now, looking at the oil price action, it appears to be easing and pulling back.

DAILY PRICE CHART LIGHT CRUDE OIL FUTURE

Outlook Ahead

The market is expected to keep up with the bullish momentum and will certainly look to break higher again. Later this week we are expecting fundamental numbers including Unemployment Rate and Non Farm Employment. Unless the numbers throws significant negative surprise we see the market to remain positive, for now.