Dow finished higher but tech outperforms on pullback in yields

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Services data on offer last Friday painted a healthier picture for the sector, opposite of what we saw with manufacturing last Wednesday. With ISM’s (Institute for Supply Management) reading still in expansionary territory and besting estimates at 55.1, its employment component defying expectations of decline with a 54 reading, new orders rising to 62.6.

As for S&P Global’s, its overall print wasn’t as rosy though in expansionary territory at 50.6 and it too beat expectations.

Bond market yields suffered a notable pullback last Friday helping tech outperform, but otherwise finished higher for the week for most of the curve, in real terms falling, and breakevens jumping.

Market pricing (Refinitiv) for future rate hikes out of the US Federal Reserve (Fed) remains fully committed to 25bp (basis point) with an ongoing minority into 50bp territory for their meeting later this month. It is the same story for a hike of similar magnitude in May, the heavy majority there will be another increase in June, and not far off a coin toss of a higher terminal range from the current expected 5.25-5%.

There was plenty of central bank speak to digest late last week. The Fed’s Logan on how the “financial system has become increasingly vulnerable to core market dysfunction…as the Treasury market’s size and complexity have grown” with any trouble making it appropriate for central bank intervention, and Bowman on minimizing that intervention and “amount of asset purchases to restore market functioning”.

Waller said that the recent data was challenging his view that they were “making progress in moderating economic activity and reducing inflation”.

And speaking of inflation, Barkin spoke of a higher 5.5-5.75% peak range if “inflation was, in fact, more persistent than a lot of people are forecasting”, Collins on “more work to do to bring inflation back down”, Daly on inflation reacceleration suggesting “that the disinflation momentum we need is far from certain” and in turn likelier that “further policy tightening, maintained for a longer time” needed, and Bostic wanting more clarity on inflation falling back to target but in favour of ‘slow and steady’ action.

As for the week ahead, out of the US early on it’ll mostly be about Fed Chairman Powell’s testimony tomorrow and the day after.

In terms of economic data, there are factory orders today, consumer credit that showed a notably smaller reading last time around on offer tomorrow, before attention shifts to the US labour market with ADP’s non-farm estimate and job openings on Wednesday.

Challenger’s job cuts and the weekly claims will be on Thursday (where last week the latter was lower than expected both initial and continuous), and leading up to the usually market-impacting Non-Farm Payrolls (NFP) on Friday.

The release last month for January showed a big increase though in large part due to revisions, and market participants are hoping for numbers that will more accurately reflect the current situation in turn estimates are for a smaller roughly 200K increase.

Dow Technical analysis, overview, strategies, and levels

The action last week was within its previous weekly 1st levels and meant a lack of a play for both conformist and contrarian, but the same couldn't be said for the daily time frame.

The big gains late last week shifted four technical indicators there from red to neutral, contrarian buy-breakouts winning out heavily even if there were initial small wins for conformist sell-after-reversals on Thursday.

In all, the technical overview on the weekly time frame remains consolidatory, but where it won’t take much to shift a few technical indicators to bullish should price gains persist.

IG client* and CoT** sentiment for the Dow

On the sentiment front, CoT speculators remain majority short but have dropped from 59% to 55% (longs up 2,897, shorts rising 1,325), while retail trader bias starts off majority short 58% from an exact opposite majority buy 58% at the start of last week.

Dow chart with retail and institutional sentiment

*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 from positions as of February 7th, inner circle as of January 31st.