U.S. markets were slightly weak to start Friday’s action following a couple of high profile earnings misses and slightly disappointing economic news. However, the major indexes got a lift following signs the U.S. and China are close to finishing some sections of the phase one trade accord.

Treasury Secretary Steve Mnuchin and U.S. Trade Representative Robert Lighthizer held a phone call with Chinese Vice Premier Liu He, with reports progress was made on specific issues.

Discussions will go on continuously at the deputy level, and the three will have another call in the near future.

The rally helped push the major indexes towards key resistance levels with the S&P 500 coming within spitting distance of its all-time intraday high. More importantly, volatility fell below another key level of support and is signaling a continued rally over the near-term.

The Nasdaq jumped 0.7% following the intraday push to 8,249. Key resistance at 8,250 was challenged but held with a close above this level being a bullish development for a push towards 8,300-8,350 with the all-time high at 8,339.

The Russell 2000 rose 0.6% following the morning trip to 1,562. Lower resistance at 1,560-1,575 was breached but held by just over a point with a close above the latter getting 1,585-1,600 back in focus.

The Dow also gained 0.6% after tapping an intraday high of 27,015. Key resistance at 27,000 was cleared but held with a close above this level getting 27,200-27,400 and the July all-time high of 27,398 back in play.

The S&P 500 was up 0.4% after tapping an intraday peak of 3,027 and coming within a half-point of its all-time high just south of 3,028. Major resistance and the all-time closing high of 3,025 held by a couple points with a close above this level leading to a run towards 3,050-3,075.

For the week, the Nasdaq zoomed 1.9% and the Russell 2000 surged 1.7%. The S&P 500 soared 1.2% and the Dow was higher by 0.7%.

Technology and Materials paced sector strength on Friday after rising 1.2% and 1.1%, respectively. Real Estate and Utilities showed the most sector weakness after falling 1.2% and 1%, respectively.

For the week, the best performing sectors were Energy (3%), Financials and Utilities (1.9%). Sector laggards included Communication Services (-1.9%), Consumer Discretionary (-1%) and Healthcare (-0.2%).

The 3Q earnings season is approaching the halfway point with results from almost 40% of S&P 500 members already out, and enough numbers to judge.

The market has generally been appreciative of the results, with the median index member up almost 4x as much from the preceding 2Q period.

Nearly 200 S&P 500 companies have reported results with 78.4% beating EPS estimates and 61.8% topping revenue estimates. Total earnings (aggregate net income) for these companies are down -0.3% from the same period last year on 4.5% higher revenues.

Over the last 12 quarters, the low EPS beats percentage for the same companies was 66.3% (2018 Q4) and the high was 82.4% in 2018 Q2, with an average EPS beats percentage of 76.5%.

The EPS beats percentage in Q3 started out very high, but currently remains within the 12-quarter range.

On the revenues side, the beats percentage for this group has been as low as 46.7% (2015 Q3) and as high as 77.4% (2017 Q4) over the preceding 12-quarter period. As is the case with the EPS beats percentage, the Q3 revenue beats percentage remains within this historical range.

Long story short, the S&P 500 members are beating EPS and revenue estimates at a rate that is about in-line with historical trends.

Looking at Q3 as a whole, combining the actual results from the S&P 500 companies that have reported with estimates for the still-to-come companies, total earnings is expected to be down -3.3% from the same period last year on 4.1% higher revenues.

Global Economy – European markets were mixed after the EU delayed a decision on the Brexit extension request until early next week.

France’s CAC 40 rallied 0.7% while the Stoxx 600 and Germany’s DAX 30 were up 0.2%. The Belgium20 sank 1% and UK’s FTSE 100 dipped 0.1%.

Asian markets settled mostly higher on trade optimism.

Australia’s S&P/ASX 200 advanced 0.7% and China’s Shanghai gained 0.5%. Japan’s Nikkei added 0.2% and South Korea’s Kospi nudged up 0.1%. Hong Kong’s Hang Seng fell 0.5%.

Consumer Sentiment for October checked in at 95.5 versus forecasts for a print of 96 in the final reading. The current conditions measure climbed to 113.2 from 108.5 in September.

Expectations rose modestly, to 84.2 from 83.4. The 12-month inflation measure slid to 2.5%, from 2.8% in September. The 5-10 year inflation index fell to 2.3%, from 2.4% in September.

Baker-Hughes Rig Count reported the U.S. rig count was down 21 rigs to 830, with oil rigs declining 17 to 696, gas rigs off 4 to 133, and miscellaneous rigs unchanged at 1.

The U.S. Rig Count is down 238 rigs from last year’s count of 1,068, with oil rigs down 179, gas rigs lower by 60, and miscellaneous rigs up 1 to 1. The U.S. Offshore Rig Count is down 1 to 21 and up 2 rigs year-over-year.

Market Sentiment – Fedspeak was light last week ahead of the FOMC meetings on Tuesday and Wednesday with a 25 basis point rate cut likely a done deal.

The futures are priced for such action, and there hasn’t been any significant push back from key policymakers to suggest otherwise.

The Fed is likely to indicate this is another insurance move as the various factors that underpinned the July and September reductions are still in place.

This would include uncertainties over trade with China, Brexit, softer growth abroad with concerns of a spillover to the U.S., and low inflation.

Wall Street expects the policy statement will reiterate that the Fed will act as appropriate, which will leave the door open for a December rate cut, as well.

However, some suit-and-ties believe that after next week’s likely cut, the Fed will stand back and monitor conditions for a while. The market will be focused on how Chair Powell communicates the Fed’s stance.

There is also chatter the Fed could address the conditions in the money markets while announcing it is going to implement a permanent repo facility.

The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 2nd-straight session following the pullback to $138.31. Upper support at $138.50-$138 was breached but held.

A close below the latter would signal additional weakness towards $137-$136.50.

Current and lowered resistance is at $139-$139.50 with the 50-day moving average above the $130 level showing signs of rolling over.

RSI is in a slight downtrend with support at 35.

A move below this level and the September low would signal additional weakness towards the 25 level and early October 2018 lows. Resistance is at 40-45.

Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) is trying to break out of a 10-session trading range with the Friday’s peak reaching $270.12. Current resistance at $270-$270.50 was cleared but held.

A close above the latter would signal renewed momentum towards $272.50-$273. More importantly, the prior Friday’s intraday swing reached a high of $275 with the close just 2 pennies off the session low of $267.64.

Near-term support is at $268-$267.50.

A close below the latter would be a bearish development and signal a possible backtest towards $266-$265.50 and the 50-day moving average.

RSI is in a slight uptrend with resistance at 60 and the monthly peak. A close above this level would signal additional strength towards 65-70 and the June/ July highs. Support is at 55-50.

A move below the latter would be a bearish signal for a retest towards 45-40.

The Consumer Discretionary Select Spiders (XLY) extended its losing streak to 4-straight sessions following the pullback to $119.44. Prior and lower support from late September at $120-$119.50 was stretched but held.

A close below the $120 level and the 50-day moving average would signal additional weakness towards $118-$117.50.

Current resistance is at $121.50-$122. Continued closes above the latter would be a slightly bullish signal selling pressure has possibly abated with more important hurdles at $122.50-$123.

RSI is trying to level out with support at 50. A close below this level reopens risk towards 45-40 with the latter serving as the monthly low. Resistance is at 55-60 with the latter holding since mid-September and this month’s peak.

The percentage of S&P 500 stocks trading above the 200-day moving average closed at 69.30% on Friday, up 0.06%, with the intraday high reaching 70.03%.

Key resistance at the 70% level held for the 4th-straight session with the monthly peak at 70.03% holding in 3 of the past 4. A close above the 70% level would be a bullish development with potential momentum towards 72.5%-75% and mid-September highs.

Support is at 67.5%-65%. A move below the latter would signal additional weakness towards 62.5%-60%.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 59.22%, down 0.97%.

Near-term and upper support at 60%-57.5% was breached and failed to hold. A close below the latter would be an slightly bearish signal for additional weakness towards 55%-52.5%.

Current resistance is at 60%-62.5%. A close above the latter would be a renewed bullish signal with strength towards 65%-67.5% and the monthly peak at 70.87%.

We are allocating the portfolio as follows:

Long 30% in XLF closed on Friday at 28.64
Long 20% in XLK closed on Friday at 82.92
Long 30% in XLU closed on Friday at 64.16
Short 20% in XLE closed on Friday at 59.52

Option Traders… the following regular MONTHLY options meet our criteria:

XLF – 20DEC $28 Strike Price CALL (Expires December 20, 2019)
XLK20DEC $82 Strike Price CALL (Expires December 20, 2019)
XLU17JAN $63 Strike Price CALL (Expires January 17, 2020)
XLE17JAN $58 Strike Price PUT (Expires December 20, 2019)

All the best,

Roger Scott.