U.S. markets closed higher on Friday as optimism over trade relations with China returned after President Trump said a trade agreement between the two sides is potentially very close.

The back-and-forth rhetoric came after China had said earlier that it sought to work out an initial deal with the U.S. following reports that an agreement could be delayed into 2020.

The gains weren’t enough to offset weekly losses for the major indexes as multi-week winning streaks came to an end. However, the weekly pullback was a healthy sign of a much needed consolidation period as slightly overbought levels remain in play.

The Dow was up 0.4% after testing an intraday high of 27,898. Prior and lower resistance at 27,800-28,000 was cleared and held with continued closes above the latter and the all-time high at 28,090 leading to blue-sky territory towards 28,250-28,500.

The Russell 2000 traded in a 10-point range while advancing 0.3% with the morning high reaching 1,591.

Near-term and lower resistance at 1,585-1,600 was recovered with a close above the latter getting 1,615-1,625 and the 52-week peak from May at 1,618 in play.

The S&P 500 nudged up 0.2% after trading in a 13-point range while trading up to 3,112. Key resistance at 3,125 easily held with a close above this level and the all-time high of 3,127 getting 3,150-3,175 in focus.

The Nasdaq also added 0.2% following opening pop to 8,535.

Near-term and lower resistance at 8,550-8,600 was challenged but held with a close above the latter and last Tuesday’s all-time high of 8,589 signaling strength towards 8,650-8,700.

For the week, the Russell 2000 dropped 0.6% while the Dow was down 0.5% to end a 4-week winning streak. The Nasdaq and S&P 500 fell 0.3% to snap 7-week and 6-week winning streaks, respectively.

Financials and Consumer Discretionary were the strongest sectors on Friday after advancing 0.7%. Real Estate and Energy were down 0.6% and 0.3%, respectively, and were the weakest sectors.

For the week, the best performing sectors were Healthcare (2.6%), Communication Services (0.9%) and Energy (0.7%). Materials (-2%), Consumer Discretionary (-1.4%) and Industrials (-0.6%) were the leading sector laggards.

The 3Q earnings season is rapidly coming to a close with results from 477 of the S&P 500 members, or 95% of the index’s total membership, in the books.

Total earnings are down -1.2% from the same period last year on 4.3% higher revenues, with 73% beating EPS estimates and 57.7% topping revenue estimates.

Looking at Q3 as a whole, combining the actual results from the 477 index members with estimates for the still-to-come companies, total earnings is expected to be down -1.7% from the same period last year on 4.2% higher revenues.

The Retail sector as a whole was the latest group to report with Q3 results from 32 of the 38 retailers in the S&P 500 index.

Total earnings for these companies are up 1.2% on 9.5% higher revenues, with 65.6% topping EPS estimates and 53.1% beating revenue estimates.

Global Economy – European markets closed higher across the board despite slightly disappointing economic news.

UK’s FTSE 100 rallied 1.2% and the Stoxx 600 rose 0.4%. France’s CAC 40 and Germany’s DAX 30 added 0.2% while the Belgium20 edged up 0.1%.

German 3Q GDP expanded by 0.1% on the back of a 1% increase in exports.

IHS Markit’s flash eurozone PMI in November slid to 50.3 from 50.6 in October.

U.K. Flash PMI showed a contraction in both services and manufacturing in November. Manufacturing came in at 48.3 compared to 49.6 in October, while services dropped to a 3-year low of 48.6.

Asian markets were mostly higher despite U.S.-China trade confusion and the upcoming district council elections on Sunday.

Australia’s S&P/ASX 200 gained 0.6% and Hong Kong’s Hang Seng was higher by 0.5%. South Korea’s Kospi and Japan’s Nikkei climbed 0.3%. China’s Shanghai declined 0.6%.

PMI Composite Flash rose 0.9 points to 52.2 in November after rising 0.2 ticks to 51.3 in October. The employment component rose to 52.3 from 51.3 previously and is the best since March with new orders also improving to the highest since April.

The services index rebounded 1 point to 51.6 following the -0.3 point dip to 50.6 in October.

The composite also bounced 1 point to 51.9 after slipping -0.1 ticks to 50.9 in October. The employment component rose to 50.6 from October’s 48.1, the highest since July, and reverses the contraction trend.

The data continues to reveal the sharp contrast between the U.S. economy, especially manufacturing, and the rest of the world.

Consumer Sentiment rose 1.3 points to 96.8 in the final print, after the 2.3 point increase to 95.5 in October. Strength was in the expectations component which rose 3.1 ticks to 87.3 after edging up 0.8 ticks to 84.2 in October.

The final current conditions index fell 1.6 points to 111.6 after jumping 4.7 points to 113.2 in October. The 12-month inflation gauge was steady at 2.5% while the 5-year index rose to 2.5% from October’s 2.3%.

Kansas City Fed Manufacturing Index checked in at -3.

Baker-Hughes reported the U.S. rig count was down 3 rigs to 803, with oil rigs down 3 to 671, gas rigs unchanged at 129, and miscellaneous rigs also unchanged at 3.

The U.S. Rig Count is down 276 rigs from last year’s count of 1,079, with oil rigs down 214, gas rigs down 65, and miscellaneous rigs up 3 to 3. The U.S. Offshore Rig Count is unchanged at 22 and down 3 rigs year-over-year.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 4th time in 5 sessions after trading to an intraday high of $140.28. Current and lower resistance at $140-$140.50 was cleared and held on the close back above the 50-day moving average.

Continued closes above the latter would be a bullish signal for a run towards $141.50-$142.

Near-term support is at $139.50-$139. A close below $139 would be a slightly bearish signal with downside risk towards $138-$137.50.

RSI has flatlined with resistance at 60-65 and the later representing the October high. Support is at 50-45.

Market Analysis – The Spider Small-Cap 600 ETF (SLY) snapped a 2-session slide after trading to a high of $69.21. Current and lower resistance at $69-$69.50 was cleared and held.

A close above the $70 level would signal a return of momentum with upside potentials towards $70.50-$71 and this month’s 52-week high of $70.78.

Near-term support is at $68.50-$68 with the latter representing key support from mid-October and early September.

A close below $68 and the 50-day moving average would be bearish development with downside risk towards $67.50-$67 and the 200-day moving average.

RSI is in a slight uptrend after recovering the 50 level with resistance at 55-60.

Support is at 45-40 on a close back below 50 with the latter representing the October low.

The Spiders S&P Homebuilders ETF (XHB) seesawed for the 7th-straight
session after peaking at $45.31 intraday.

Near-term and lower resistance at $45.25-$45.50 was cleared but held by a penny. Continued closes above the latter would be a slightly bullish signal for retest towards the $46 area.

Current support is at $45-$44.75. A close below the latter would signal additional weakness towards $44.50-$44 and the 50-day moving average.

RSI is holding key support from early October at 50. Another move below this level would signal possible weakness towards 45-40 with the latter representing the early August low. Resistance is at 55-60 on continued closes above the 50 level.

The percentage of S&P 500 stocks trading above the 200-day moving average closed at 72.31% on Friday, up 2.93%, with the intraday high reaching 72.76%. Lower resistance at 72.50%-75% was tripped but held.

A close above the latter and the monthly peak at 75.54% would be a bullish development with potential momentum towards 77.5%-80% and December 2017 overbought level. Support is at 70%-67.5%.

A move below the latter and the monthly low at 68.78% would signal additional weakness towards 67.5%-65%.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 66.13%, up 1.72%, with the high tap 67.39%. Current and lower resistance at 65%-67.5% was cleared and held.

A close above the latter would be a renewed bullish signal with strength towards 70%-72.5% and the monthly peak at 73.46%.

Near-term support is at 62.5%-60%. A close below the latter would be a bearish signal for additional weakness towards 57.5%-55%.

We are allocating the portfolio as follows:

Long 25% in XLP closed on Friday at 61.30

Long 25% in XLU closed on Friday at 63.00

Long 25% in XLI closed on Friday at 81.67

Short 25% in XLE closed on Friday at 59.83

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

XLP – 17JAN $60 Strike Price CALL

XLU – 17JAN $62 Strike Price CALL

XLI – 17JAN $82 Strike Price CALL

XLE – 17JAN $59 Strike Price PUT

All the best,
Roger Scott.