The indices have been in a trading range for four days, but are set for a soft open to conclude the week. The primary problem is an announcement by Broadcom (AVGO) that there has been a broad slowdown in demand due to geopolitical uncertainties primarily caused by the trade wars. In addition, there is economic slowing in China that is causing issues.
This announcement is creating pressure on the entire semiconductor sector. The Semiconductor ETF (SMH) is indicated 2.6% lower in the early going, which is flowing through to the Nasdaq 100 ETF (QQQ) , which is trading down 0.7% in the premarket.
In addition to the problem with semiconductors, industrial production in China came in below expectations and was the weakest in 17 years. Tariffs are obviously having an impact on the Chinese economy, yet there is no sign at this point that the battle is close to a resolution.
The market has had mixed reactions to soft economic news recently as the Fed has ratcheted up its dovishness. There have been some vague signs of slowing, but the market has been inclined to shrug it off as it celebrates even lower rates and cheaper money from the Fed.
The semiconductor news this morning is confirmation of why the Fed is moving so quickly to cut rates. The question for the market is whether a dovish Fed is going to continue to offset these struggles. The market reacts to dovishness from the Fed in a reflexive manner and doesn't seem to really question if a sputtering economy is such a great thing when interest rates are already low and the Fed is set to cut them even more.
The good news is that the indices have been in a trading range for a few days now and there is some generally good action in various areas. The negative narratives about the economy, trade wars and geopolitical issues are not gaining traction right now.
If the indices take out the recent lows around 2880 on the S&P 500 that will be a problem, but even with the bad news this morning the indices are still above that level.
This market doesn't seem to want to embrace the bad news this morning from the semiconductor sector, but we will have to wait to see if it gains traction as the day progresses.
The market is showing good relative strength as the bearish arguments pile up, but we will have to watch to see if Fed dovishness is going to be enough to produce a sustained uptrend.