U.S. markets closed lower on Friday despite another strong jobs report as the news worried Wall Street that a possible rate cut later this month might not happen.
While the overall action was slightly bearish, the major indexes closed well off the lows into the close with near-term support levels easily holding on the morning pullback.
The small-caps actually showed 2nd-half strength that led to a mixed close with volatility heightened after trading in a much wider range.
The lighter holiday volume likely had an impact on the VIX with this week’s Fed speak and the start of 2Q earnings season providing further clues on a pending breakdown, or breakout, for the index.
The S&P 500 was lower by 0.2% following the pullback to 2,969 shortly after the opening bell, snapping a 5-session winning streak.
Near-term and upper support at 2,975-2,950 was breached but held with a close below the latter signaling additional weakness.
The Dow fell for the first time in 5 sessions after also giving back 0.2% while testing a first half low of 26,733.
Near-term and upper support at 26,750-26,500 was tripped but easily held with a move below the latter likely leading to a further backtest towards 26,250-26,000 and the 50-day moving average.
The Nasdaq had its 6-session winning streak halted after slipping 0.1% while trading to a morning low of 8,093.
Fresh and upper support at 8,100-8,050 was breached but held with a close below the 8,000 level signaling a possible near-term top.
The Russell 2000 closed in positive territory for the 2nd-straight session after adding 0.2% while closing on its session peak of 1,575.
Current and lower resistance at 1,575-1,590 was cleared and held with a move above the latter getting 1,600-1,620 in focus.
For the week, the Nasdaq jumped 2% while the Russell 2000 was up 0.6%. The S&P 500 soared 1.7% and the Dow rallied 1.2%.
Financials paced sector strength after rising 0.4% while Energy, Consumer Discretionary, and Communication Services edged up 0.1% to round out the winners. Healthcare and Real Estate led sector laggards after falling 0.7% and 0.6%, respectively.
The best performing sectors over the past week have been Real Estate (4.3%) and Financials (4.1%).
The only laggard has been Energy (-0.7%).
The earnings growth picture for 2Q is not expected to change much from the flat growth reading in the first quarter.
This trend of flat to negative growth is expected to persist through the September quarter, with current consensus estimates looking for positive growth resuming in the last quarter of the year.
For Q2, total earnings for the S&P 500 index is expected to decline -2.9% from the same period last year on 4.3% higher revenues, with a number of the major sectors expecting to have negative earnings growth, including Tech at -10.7%.
Technology is the biggest earnings contributor in the S&P 500 index, bringing in 22.6% of the index’s total earnings.
Excluding the Tech sector’s double-digit drag, total earnings growth for the remainder of the index would be down only -0.6%.
While this week’s earnings are highlighted with a number of sectors, the action will likely be muted until next week and when the Financial sector starts to report.
A good showing from this group could provide new leadership for the market but other sectors will likely cap near-term market gains if expectations aren’t met and outlooks are lowered.
Global Economy – European markets closed lower on heightened geopolitical concerns after British Royal Marines seized a large Iranian oil tanker for trying to take oil to Syria in violation of EU sanctions.
The Stoxx 600 added 0.4% and UK’s FTSE 100 dropped 0.7%. France’s CAC 40 and Germany’s DAX 30 fell 0.5% while the Belgium20 was higher by 0.4%.
Asian markets were mostly higher despite ongoing trade rhetoric after China warned that the U.S. has to lift all tariffs placed on Chinese goods if there is to be a trade deal.
Australia’s S&P/ASX 200 rose 0.5% while China’s Shanghai and Japan’s Nikkei climbed 0.2%. South Korea’s Kospi nudged up 0.1%.
Hong Kong’s Hang Seng slipped 0.1%.
Nonfarm payrolls jumped 224,000 in June, stronger than expectations for a print of 165,000. May’s gain was revised down to 72,000 from 75,000, and April’s was adjusted to 216,000 from 224,000.
The unemployment rate ticked up to 3.7% versus the previous 49-year low of 3.6%. Average hourly earnings rose 0.2% versus a revised 0.3% gain, from 0.2%.
The labor force surged 335,000 from 176,000, with household employment 247,000 higher versus the 113,000 gain in May. The labor force participation rate rose to 62.9% versus 62.8%.
Private payrolls increased 191,000 (ADP reported 102,000), with a 37,000 gain in the goods producing sector. Manufacturing jobs rose 17,000, while construction was up 21,000.
The service sector added 154,000 workers while government employment increased 33,000.
Baker Hughes reported the U.S. rig count was down 4 rigs to 963, with oil rigs down 5 to 788, gas rigs up 1 to 174, and miscellaneous rigs unchanged at 1.
Market Sentiment – The Fed’s Monetary Policy Report repeated the economy remains solid and the labor market has continued to strengthen, while inflation has been running below the longer run 2% target.
It also included the usual buzz words, that the stance of policy is appropriate, and indicated that the increased uncertainties abut the global and domestic outlook had caused it to shift from a patient stance to act as appropriate.
Much of this will be repeated in Fed Chairman’s Jerome Powell’s congressional testimony this week, with the focus on how he sees the events since the June FOMC to gauge his thinking into the end of July policy meeting.
With the June jobs report, the U.S. and China trade truce back on track, along with less geopolitical angst that dominated headlines into the G20, Powell may suggest less need for the much anticipated easing.
The iShares 20+ Year Treasury Bond ETF (TLT) has its 2-session wining streak come to an end after plunging to a low of $131.67. Prior and upper support at $132-$131.50 was breached but held.
A close below the latter opens up risk toward $130.50-$130.
Lowered resistance is at $133-$133.50.
RSI is back in a downtrend with support at 55-50. A close below the latter and support from late April/ early May would be a bearish signal for additional weakness towards the 45 level.
Resistance is at 60 and prior support throughout the back half of June.
Market Analysis – The Invesco QQQ Trust (QQQ) fell for the 1st time in 7 sessions following the morning pullback to $189.39. Near-term and upper support at $189.50-$189 held.
A move below the latter would be a slightly bearish signal for a further backtest towards $188-$187.50.
Current resistance is at $191.50-$192.
Continued closes above the latter and the last week’s all-time high of $191.44 would signal continued momentum with upside potential towards $193.50-$195.
RSI has leveled out after failing resistance at 70 and the high from early May.
Continued closes above this level would signal additional strength towards 75-80 and April peaks.
Support is at 65-60 with a close below 55 being a warning signal for additional weakness.
The Utilities Select Spider (XLU) had its 2-session winning streak snapped after testing an intraday low of $59.75. Near-term and upper support at $60-$59.50 was breached but held.
A move below the latter opens up risk towards $59-$58.50 and the 50-day moving average.
Resistance is at $60.75-$61.25.
A close above the latter and the June all-time peak at $61.38 would be renewed bullish signals with blue-sky territory towards $62-$62.50 over the near-term.
RSI is flatlining with support at 55-50. A move back below the latter would signal additional weakness towards 45-40 and May lows. Resistance is at 65-70 with the latter holding since late May.
The percentage of S&P 500 stocks trading above the 200-day moving average closed Friday at 73.7%, down 0.2%, with the session low reaching 71.71%.
Current support at 72.50%-70% was split but held. A close below the latter would be a slightly bearish development with risk towards 67.5%-65%.
Resistance is at 75% with last week’s fresh 52-week peak reaching 74% but still signaling overbought levels. A close above 75% could lead towards a short-term run at 77.5% and the December 2017 high.
The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 85.43%, down 0.97%, with the intraday low reaching 79.61%.
Lower support at 82.5%-80% was breached but held. There is a gap lower to fill down to the 77.5%-75% area on a close below 80% as overbought levels are also in play.
Last week’s peak reached 88.34% with February and upper resistance 87.5%-90% holding. The 93.20% level was tapped twice in February before backtests to the 80% level shortly afterwards.
Existing Position Update
Not much action with the current cluster due to lack of directional bias in the broader market.
Positive job report is undermining FED’s position to aggressively lower rates.
Makes U.S. economy increasingly vulnerable to China.
Expect higher fear level, since markets ALREADY priced in a potential rate hike that may not take place.
Increasingly defensive positioning is key right now.
We are allocating the portfolio as follows:
Long 35% in XLB closed on Friday at 58.86
Long 20% in XLK closed on Friday at 79.92
Long 20% in XLY closed on Friday at 121.61
Short 25% in XLE closed on Tuesday at 63.04
For maximum liquidity, we will liquidate (SELL TO CLOSE Options contracts) and initiate any new positions (BUY TO OPEN Options contracts) within the last 20 minutes of the trading session. We will update you after the close in the Members Area Daily Update.
Option Traders… the following regular MONTHLY options meet our criteria:
XLB – 20SEP $59 Strike Price CALL (Expires September 20, 2019)
XLK – 20SEP $80 Strike Price CALL (Expires September 20, 2019)
XLY – 20SEP $120 Strike Price CALL (Expires September 20, 2019)
XLE – 20SEP $64 Strike Price PUT (Expires September 20, 2019)
All the best,
Roger Scott.