U.S. markets wrapped up a solid week on Friday as Q2 GDP came in slightly firmer than expected at 2.1%. Earnings also surprised to the upside, with several of the biggest names in Technology posting better-than-expected numbers.

Concerning the trade front, National Economic Council Director Kudlow said the economy is poised for a strong second half of 2019, but he also warned that investors should not expect any grand deal with China this week.

In any event, volatility settled back below key support with the major indexes posting gains for the 3rd time in 4 weeks.

The Russell 2000 rallied 1.1% after surging to a late day high of 1,581.

Prior and upper resistance at 1,565-1,580 was cleared but held with continued closes above the latter getting 1,585-1,600 back in play.

The Nasdaq also advanced 1.1% following the run to 8,339 ahead of the closing bell and fresh all-time high.

Fresh and lower resistance at 8,300-8,350 was cleared and held with additional,hurdles at 8,425-8,500 on continued closes above the latter.

The S&P 500 rose 0.7% after trading to an intraday and record high of 3,027.

Fresh and lower resistance at 3,025-3,050 was cleared and held on the 4th-straight close above the 3,000 level.

The Dow added 0.2% after trading in a 90-point range while reaching a peak of 27,192.

Near-term and lower resistance at 27,250-27,500 was challenged but held with the all-time high at 27,398.

For the week, the Nasdaq surged 2.3% and the Russell 2000 rallied 2%.

The S&P 500 jumped 1.7% while the Dow edged up 0.1%.

Communication Services led sector strength on Friday after zooming 2.9% while Consumer Staples and Financials were up of 0.7%.

Energy and Industrials were the only sector laggards after falling -0.5% and -0.2%.

The best performing sectors for the week included Communication Services (4.3%), Financials (2.7%), Technology (2.4%) and Industrials (1.4%). Utilities (-0.7%) and Energy (-0.5%) were the only weekly laggards.

With results from 44% of S&P 500 members already out, the market hasn’t seen any major negative surprises. This is a reassuring and generally favorable trend and one that could continue this week as we enter the second half of the Q2 reporting cycle.

Total earnings the 220 index members that have reported are up 4.7% from the same period last year on 5.2% higher revenues.

Earnings and revenue growth for the same cohort of companies had been 3% and 5.3% in the preceding earnings season, respectively. Earnings growth is tracking modestly above what we had seen in the March quarter and revenue growth is almost even.

For the 220 index members that have reported results already, 78.2% are beating EPS estimates and 57.3% are beating revenue estimates. The proportion of positive EPS and revenue surprises was 78.2% and 57.3% in the Q1 earnings season.

As far as the Technology sector, Q2 results from nearly 60% of the sector’s total market cap in the S&P 500 index have been reported.

Total earnings for these Tech companies are up 5.3% from the same period last year on 7.8% higher revenues, with 77.3% beating EPS estimates and 59.1% beating revenue estimates.

For Q2 as a whole, total earnings for the S&P 500 index are expected to be flat (0% growth) from the same period last year on 4.1% higher revenues, which would follow the -0.1% earnings decline on 4.4% higher revenues in 2019 Q1.

Global Economy – European markets closed higher after the ECB said it was also considering other measures to support the eurozone over the coming months, including resuming quantitative easing.

UK’s FTSE 100 was higher by 0.8% and France’s CAC 40 gained 0.6%. Germany’s DAX 30 rose 0.5% and the Stoxx 600 advanced 0.3%. The Belgium20 was up a point, or 0.02%.

Asian markets were mostly lower after Hong Kong posted its 8th-straight month of declining exports.

Hong Kong’s Hang Seng dropped 0.7% and Japan’s Nikkei fell 0.5%. Australia’s S&P/ASX 200 and South Korea’s Kospi gave back 0.4%. China’s Shanghai edged up 0.2%.

Hong Kong’s total exports in June sank 9% from a year earlier to HK$309.6 billion, the largest decline since February 2016. Total imports fell 7.5% to HK$364.8 billion, the 7th-straight monthly decline, and also the biggest drop since February 2016.

GDP growth slowed to a 2.1% pace in Q2, down from the 3.1% growth rate in Q1, but better than expectations of 1.9%. However, Q4 was revised down to a 1.1% pace versus 2.2%, which was the slowest pace since Q4 2015. Consumption posted a solid 4.3% rate versus 1.1% previously.

Business fixed investment slumped to a -0.8% rate versus 3.2%. Government spending rose 5% versus 2.9%, with Federal spending up 7.9%. Inventories subtracted -$44.3 billion versus the $23 billion addition in Q1.

Net exports subtracted -$34.7 billion versus the prior $39 billion positive contribution in Q1.

The headline chain price index rose to a 2.4% clip versus 1.1% previously while the core rate was up 1.8% versus 1.1%.

Baker-Hughes reported the U.S. Rig Count was down 8 rigs to 946, with oil rigs down 3 to 776, gas rigs down 5 to 169, and miscellaneous rigs unchanged at 1.

The U.S. Rig Count is down 102 rigs from last year’s count of 1,048, with oil rigs down 85, gas rigs down 17, and miscellaneous rigs unchanged. The U.S. Offshore Rig Count is down 1 rig to 25 and up 9 rigs year-over-year.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) zig-zagged for the 7th-straight session after rebounding to reach a peak of $131.78. Lower resistance at $131.50-$132 was cleared but held. A close above $132.50 would be a more bullish signal for additional strength.

Near-term support is at $131-$130.50 and the 50-day moving average. A close below $130-$129.50 would be a slightly bearish development.

RSI has been flatlining since mid-month with resistance at 55.

A close above this level would signal additional strength towards 60-65. Support is at 45-40 with the latter representing the monthly low.

Market Analysis – The Russell 2000 ETF (IWM) was up for the 3rd-time in 4 sessions after tapping a late day high of $157.41. Lower resistance at $157.50-$158 held. Continued closes above the latter and the monthly high of $158.03 would be a bullish signal for a run towards $159.50-$160.

Current support is at $156-$155.50. A move below $155 would be a slightly bearish signal with risk towards $154-$153.50.

RSI is in an uptrend with resistance at 60 and a level that has been holding throughout the month.

A strong move above this level could lead to additional strength towards 65-70.

Support is at 50-45 with the latter representing the late June low.

The Energy Select Sector Spider (XLE) was down for the 2nd-straight session after testing a low of $62.18. Near-term and upper support at $62.50-$62 was breached and failed to hold.

A close below the latter and the 50-day moving average held would be a bearish development with downside risk towards $61.50-$61.

Lowered resistance is at $63-$63.50.

A close above the latter and the 200-day moving average would be a bullish development for continued strength towards $64-$64.50.

RSI is in an downtrend with support at 45-40 and the latter representing the mid-June low. Resistance is at 50-55.

The percentage of S&P 500 stocks trading above the 200-day moving average closed Friday at 74.45%, with the session high at 74.65%. The index has traded between 70%-75% throughout the month with current resistance at 75%.

A close above this level and last week’s 52-week peak of 75.24% could lead towards a run at 77.5% and the December 2017 high. Current support is at 70%. A close below this level and breakdown out of the current range would be a slightly bearish development with risk towards 67.5%-65%.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 79.61%, with the session high at 80.58%. Lower resistance at 80%-82.5% was breached but held.

A move above the latter would signal additional strength towards following 85%-87.5% with the monthly peak at 88.34% and a level that has held exactly 3 times this month.

Support is at 77.5%-75% with last week’s low at 72.81%.

We are allocating the portfolio as follows:

Long 30% in XLF  closed on Friday at 28.64
Long 20% in XLU closed on Friday at 59.94
Short 25% in XLE closed on Friday at 62.43
Short 25% in XLV closed on Friday at 92.00

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

XLF – 20SEP $28 Strike Price CALL (Expires September 20, 2019)
XLU – 20SEP $61 Strike Price CALL (Expires September 20, 2019)
XLE20SEP $64 Strike Price PUT (Expires September 20, 2019)
XLV – 20SEP $93 Strike Price PUT (Expires September 20, 2019)

All the best,
Roger Scott.