Dow futures pointing slightly higher following strong gains last Friday

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Late last week economic data showed preliminary manufacturing and services PMIs (Purchasing Managers Index) mostly disappointed. With the expansionary above-50 readings waning and not far off contracting territory for plenty, a theme that was no exception for the US with 52.4 and 51.6 respectively.

Other data out of the US included more items out of the housing sector that showed new home sales improve and best estimates (for a change) at 696K. Unemployment claims were slightly above estimates at 229K, a current account deficit for the first quarter widening to a record -$291bn, and the revised consumer sentiment out of UoM failed to rise from record low territory registered in its preliminary reading with a drop instead from 50.2 to 50. And crucially, inflation expectations dropped from 3.3% to 3.1% for the 5-10 years and from 5.4% to 5.3% for the 12-month).

The stock market was in for notable gains on Friday that aided in ensuring a positive strong finish for key indices. Over in the bond market, yields finished out the week lower across the curve with Friday’s rise failing to offset losses earlier in the week, and in real terms still safely in positive territory. Breakeven inflation rates are notably lower, and expectations of market pricing for the US Federal Reserve’s 75bp rate hike in July are the majority but not fully priced in while leaning towards a smaller 50bp increase for September and 25bp hikes for the remaining meetings of this year. Central bank spoke late last week and included Chairman Powell on the Fed’s commitment to fighting inflation “unconditional”.

As for the week ahead, those looking for impacting data are going to have to work in reverse, given how important pricing data is in the current phase. There will be plenty of manufacturing data released this week with the Dallas Fed tonight, Richmond Fed tomorrow, and Chicago Fed on Thursday, before getting the usually more impacting ISM readings on Friday, with expectations it too will be expansionary but dropping from its prior readings.

While there are items like durables, trade, and wholesale inventories, Chairman Powell states it’s really about Thursday’s pricing data with PCE (Personal Consumption Expenditures) Price Index to see whether the Fed’s preferred measure of inflation is showing any signs of slowing. Estimates are for its core to rise 4.7% y/y from 4.9% in its April reading, and 0.4% m/m from 0.3%.

Dow Technical analysis, overview, strategies, and levels

Its previous weekly 1st Resistance level might have initially held last Wednesday aiding weekly conformist sell-after-reversal strategies, but the moves thereafter gave contrarian buy-breakouts the clear win. Thursday's Resistance levels couldn't contain the gains that occurred on Friday (that would have gone past daily levels for that session as well), in the process tilting the technical boxes on the shorter-term time frame where it's 'bear average' on what has been a clear issue getting a clean trend move lower.
All its components save for Verizon and UnitedHealth finished Friday's session in the green, major gains for Salesforce with Goldman and Boeing not far off. As for earnings amongst its components, Nike is up next expected to release its figures today.

IG client* and CoT** sentiment for the Dow

Dow chart with retail and institutional sentiment

As for sentiment, retail trader bias has shifted from what was a heavy buy of 74% at the start of last week to begin this week with a slight sell of 51% with price gains the clear catalyst for longs closing out and shorts initiating.

CoT speculators have raised their sell bias from heavy to the extremes at 78% due to longs dropping 2,092 lots outdoing a 500 lot reduction in shorts, and the remaining key US indices have shifted to majority short in the S&P 500 (59%), remain there for the Russell 2000 (78%), while still majority buy Nasdaq (61%).

*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the previous trading day.
**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.