U.S. markets closed higher on Friday, halting weekly skids as European Central Bank (ECB) President Mario Draghi and Federal Reserve Chair, Janet Yellen, spoke about the economy. Yellen said the economy was stabilizing but made no specific remarks about monetary policy during her speech.

Draghi said recoveries taking place in global economies are firming with Europe and Japan in earlier stages than other countries. The Dow and S&P 500 snapped two-week losing skids while the Nasdaq and Russell 2000 ended four-straight weeks of losses.

All sectors finished in the green on Friday, excluding Tech, which finished slightly lower.

With 2Q earnings season winding down, the bulk of large-cap stocks reporting reporting is down to only 9 S&P 500 index members. However, there is a number of small-cap S&P 600 index companies yet to report results with 131 on deck in the coming weeks.

There are 67 companies reporting results this week, including 7 S&P 500 members and 17 S&P 600 members.

The earnings focus lately has been on the Retail sector where only 3 companies in the S&P 500 are still to report results. Total Q2 earnings for the Retail sector in the S&P 500 index are up 0.3% from the same period last year on 4.6% higher revenues, with 76% beating EPS estimates and 81% beating revenue estimates.

Total earnings for the 491 S&P 500 companies that have reported are up 11.2% from the same period last year on 5.6% higher revenues, with 74% beating EPS estimates and 68% topping revenue estimates.

At the start of the quarter, the expectation was for earnings growth of 7.9%, which came down as the quarter unfolded, reaching as low as 5.6% just ahead of the start of the reporting season.

The Q2 earnings growth tally is on track to reach a new all-time quarterly record, surpassing the 2016 Q4 level.

Global Economy – European markets gave back slight gains to close lower despite stronger-than-expected German corporate confidence. Investors seemed disappointed by Yellen’s update and moved to the sidelines ahead of Mario Draghi’s comments.

The Belgium20 fell 0.3% while France’s CAC 40 index was down 0.2%. The FTSE 100, the Stoxx Europe 600, and the DAX 30 dipped 0.1%.

The German August IFO business climate index fell to 115.7 versus expectations for a reading of 115.7.

The final reading on German Gross Domestic Product confirmed the economy grew 2.1% in the second quarter.

Consumer confidence in France slipped a point to 103 for August, matching forecasts.

Asian markets were mostly higher despite deflation concerns in Japan.

China’s Shanghai index surged 1.8% and Hong Kong’s Hang Seng Index jumped 1.2%. Japan’s Nikkei added 0.5% while South Korea’s Kospi index climbed 0.1%. Australia’s S&P/ASX 200 slipped 0.03%.

Japan’s July consumer-price index rose 0.5% in July from a year earlier, in line with expectations. This represented the fastest pace of increase in over 2 years, but still well below the Bank of Japan’s 2% target.

U.S. durable goods orders dropped 6.8% in July, which was worse than expectations for a tumble of 5.7%. Excluding transportation, orders were up 0.5%, which beat estimates for an increase of 0.4%. 

Market Sentiment – Fed Chair Janet Yellen’s prepared remarks included few comments on policy, saying only that substantial progress has been made on maximum employment and price stability. She fully defended regulatory reforms but worried about risks of excessive optimism and leverage.

She added market-based measure may not reflect true risks, and mentioned the mid-2000’s certainly did not, to suggest the observed improvements should not be overemphasized. Yellen seemed hopeful that if the lessons, albeit painful, of the past are kept in mind, that the financial system and the economy would experience fewer crises and recover from any futures crisis more quickly.

ECB President, Mario Draghi’s said the global recovery is improving and firming up, but warned about demographic challenges to growth. He said the cyclical recovery we are now seeing globally will ultimately converge downwards to those slower growth rates.

This would make it harder to work through the debt and demographic challenges facing many advanced economies, he added. Draghi also said significant monetary accommodation is still needed and that inflation is not yet converging to the central bank’s target.

The iShares 20+ Year Treasury Bond ETF (TLT) traded in positive territory throughout the session while peaking at $127.45. Lower resistance at $127.50-$128 held with continued closes above the latter a bullish development. Support is at $126.50-$126 with backup help at $125 and an upward trending 50-day moving average.

 

Market Analysis- The Spider S&P 600 Small-Cap ETF (SLY) shows May support at $118 getting stretched the prior Friday and last Monday following intraday lows of $117.39 and $117.23, respectively.

The closing prices for both sessions were at $117.82 and $117.86. Another move below $117.50-$117.25 would be a bearish development. Friday’s close back above $119 gets fresh resistance at $120-$120.50 and the 200-day moving average in play.

The index is coming off oversold RSI levels near 30 and is back in a slight uptrend that could lead to 50 on continued strength.

 

The Dow Jones Transportation Average ($TRAN) is also showed stretched support after last week’s tumble towards 9,000. Late May and summer support at 9,100 was breached but was recovered on Friday’s close. Resistance is at 9,200-9,225 and the 200-day moving average followed by 9,300.

A move above this level would be slightly bullish but would face additional hurdles at 9,375-9,400 and a downward sloping 50-day moving average.

 

The percentage of S&P 500 stocks trading above the 50-day moving average fell below the 40% level last Monday to 37% intraday. This area represents the mid-April and mid-May lows and was recovered by the closing bell while holding throughout the rest of last week.

Friday’s close was just above 45%. There is a good chance this number can reach 50%-55% over the near-term on continued strength. The latter will represent major resistance, if reached, as the 55% level had held from late May into early August.

All the best,
Roger Scott