By James Chen, CMT

Friday, September 06, 2019

1. Stocks Flat as Rally Pauses

2. Gold Prices Pull Back ... For Now

3. Treasury Yield Curve Still Close to Inverted

Market Moves

Stocks ended Friday mixed and up only slightly after the morning's U.S. jobs report revealed that 130,000 jobs were created in August, short of prior consensus expectations for around 150,000. This points at further potential weakness in the economy, a significant worry for investors. Friday's pause in the breakout stock surge this week occurs after two consecutive days in which the S&P 500 rallied more than 1% each day. This week's sharp rally was driven in large part by the increased potential for a long-awaited resolution to the U.S.-China trade war. Both countries announced mid-week that new trade negotiations are slated for October.

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 anytime 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. Though 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 September 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

Movement in the price of gold for the past three months or so have truly captured investors' attention as the precious metal has appreciated sharply during that time, to the tune of nearly 20% as of Friday. Much of this rise has been due to recent fears about trade and a slowing global economy. As gold is considered the most prominent "safe-haven" asset, investors tend to flock to the metal when things start to get dicey. Also, a lower interest rate environment contributes to accelerated buying of non-interest-bearing gold.

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 GLD gold ETF, 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.

Read more:

Blue Chips Fuel Record $150 Billion Bond Rush as Trade Outlook Brightens

Can the S&P 500 Hit New Highs?

Why 'Big Short' Investor Says Passive Funds Are Next Subprime Crisis

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 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.