U.S. markets closed mixed on Friday as the blue-chips and S&P 500 rebounded into positive territory after being down for much of the day to extend their winning streak to 3-straight sessions.

Tech and the small-caps, however, closed lower as Wall Street remained focused on developments related to the U.S.-China trade conflict as well as the outlook for the global economy.

The weekly gains ended a string of 4-straight down weeks for the major indexes but the August losses were the first monthly pullback since May. Near-term resistance and support levels held with volatility rising, giving a neutral reading ahead of the 3-day holiday weekend and the start of September.

The Dow added 0.2% after trading in a 220-point range and tapping a 1st half high of 26,514. Prior and lower support at 26,400-26,600 was reclaimed with a close above the latter and the 50-day moving average being a bullish signal for a run towards 26,750-27,000.

The S&P 500 nudged up 0.1% following opening run to 2,940 and 2nd-straight close above the 2,900 level. Current and lower resistance at 2,925-2,950 was cleared held with a close above the latter and the 50-day moving average getting 2,975-3,000 back in play.

The Russell 2000 slipped -0.1% despite testing an opening high of 1,504 but failing to hold lower resistance at 1,500-1,515.

The pullback to 1,488 afterwards held upper support at 1,490-1,475 with risk towards 1,465-1,450 on a move back below the latter.

The Nasdaq also dipped -0.1% after failing to hold the 8,000 level on the morning pop to 8,017.

The intraday fade to 7,914 held near-term and upper support at 7,900-7,850 with a close below 7,800 being a renewed bearish development.

For the week, the Dow was up 3% while the S&P 500 rose 2.8%.

The Nasdaq was higher by 2.7% and the Russell 2000 advanced 2.3%. For August, the Russell 2000 sank -5.3% and the Nasdaq tumbled -2.6%. The S&P 500 fell -1.8% while the Dow dropped -1.7%.

Materials and Industrials paced sector leaders after rising 0.7% and 0.4%, respectively. Consumer Discretionary declined 0.6% to lead sector weakness.

The best performing sectors for the week were Communication Services and Utilities (0.7%) followed by Consumer Discretionary (0.5%) and Industrials (0.4%).

Energy (-0.7%) was the leading sector laggard with Healthcare (-0.4%) and Technology (-0.3%) rounding out the losers. For August, Real Estate surged 5.4% while Energy plunged -7.6%.

The Q2 earnings season is just about complete with results from 95% of S&P 500 companies having reported.

Total earnings for the 477 S&P 500 companies that have reported Q2 numbers are up 0.5% on 4.7% higher revenues, with 75.9% beating EPS estimates and 57.4% topping revenue estimates.

Q2 results have largely met expectations, with earnings growth on the weak side and positive EPS beats about in-line with historical trends. Revenue growth has been a lot better compared to earnings, but fewer companies are beating top-line estimates.

For the Retail sector, Q2 results from 78.9% of the retailers in the index have reported. Total earnings for these companies are up 3.6% on 8.3% higher revenues, with 66.7% topping EPS estimates but only 46.7% beating revenue estimates.

As for the Technology sector, Q2 results from 94.2% of the sector’s market cap in the index have announced. Total earnings for these Tech companies are down -6.3% on 4.5% higher revenues, with 83.3% beating EPS estimates and 70% topping revenue estimates.

For the Finance sector (all results are in), total earnings were up 4.4% on 8.2% higher revenues, with 77.6% topping EPS estimates and 67.3% beating revenue estimates.

The most notable part of Finance’s outperformance has been the favorable momentum on the revenue front.

Estimates for the current Q3 period have been steadily coming down, with total earnings for the period now expected to be down -4.3% on 4.3% higher revenues.

For the small-cap S&P 600 index, we now have Q2 results from 551 index members or 91.7% of the index’s total membership.

Total earnings for these 551 companies are down -10.1% from the same period last year on 2.2% higher revenues, with 60.8% beating EPS estimates and 58.8% beating revenue estimates.

Earnings growth for the small-cap index is even weaker when looked at on an ex-Finance basis.

The Finance sector, which accounts for almost one-third of the S&P 600 index total market capitalization, had 15.9% higher earnings in Q2 on 4.6% growth in revenues. Excluding Finance, Q2 earnings growth drops to a decline of -20.4% (-10.1% as a whole).

Looking at the quarter as a whole for the small-cap index, total Q2 earnings are expected to be -12.2% below the year-earlier level on 3.5% higher revenues. Excluding the Finance sector, Q2 earnings decline would be -21.4%.

For full-year 2019, total earnings for the S&P 500 index are now in negative territory, down -0.4% on 2.6% higher revenues.

This would follow the 23.1% earnings growth on 9.2% higher revenues in 2018.

Strong growth is expected to resume in 2020, with earnings expected to be up 10.2% that year.

Global Economy – European markets closed higher ahead of accelerated Brexit talks with UK Prime Minister Boris Johnson hoping that the threat of a no-deal Brexit will force added concessions from the EU.

Meanwhile, UK opposition Labour party leader Jeremy Corbyn said he would trigger an emergency debate in parliament next week, in a bid to stop Johnson taking Britain out of the European Union without a withdrawal deal on October 31st.

The Belgium20 soared 1.3% and Germany’s DAX 30 was higher by 0.9%.

France’s CAC 40 and the Stoxx 600 rose 0.6% while UK’s FTSE 100 climbed 0.3%.

France’s August CPI came in at 1.2% year-on-year, slightly softer than in July, but matching forecasts.

Asian markets settled mostly higher as traders prepared for the 13th-straight week of protests in Hong Kong.

South Korea’s Kospi zoomed 1.8% and Australia’s S&P/ASX 200 rallied 1.5%.
Japan’s Nikkei jumped 1.2% and Hong Kong’s Hang Seng was up 0.1%.

China’s Shanghai gave back 0.2%.

The Bank of Korea left its benchmark interest rate unchanged on Friday, a decision that was in-line with expectations, after cutting the base rate for the first time in 3 years back in July.

Personal Income rose 0.1% in July, with consumption up 0.6%, with expectations at 0.2% and 0.5%, respectively, and follows June’s print of 0.5% and 0.3%.

Compensation was 0.2% higher versus 0.5% previously, while wages and salaries edged up 0.2% as well, from 0.5%. Disposable income was up 0.3% from 0.4%.

The savings rate slipped to 7.7% from 8%. The PCE chain price index increased 0.2% from 0.1%, with the core rate up 0.2%, the same as in June. On a 12-month basis, the headline price index accelerated slightly to 1.4% year-over-year versus 1.3%, while the core rates was steady at 1.6%.

Chicago PMI was up 6 points to 50.4 in August, better than forecasts of 47.5, and follows the 5.3 drop to 44.4 in July. The 3-month moving average slipped to 48.2 from 49.4.

Consumer Sentiment fell 8.6 points to 89.8 in the final August reading, versus expectations for a print of 92.3, but both well below July’s reading of 98.4.

Much of the weakness was in the expectations component which declined to 79.9 versus July’s 90.5, and matching January for the lowest since October 2016.

The final current conditions index slid to 105.3 versus 110.7 in July. The 12-month inflation gauge edged up to 2.7% from 2.6% last month. The 5-year index also accelerated slightly to 2.6% from 2.5%.

Baker-Hughes reported the U.S. rig count was down 12 rigs from last week to 904, with oil rigs off 12 to 742, gas rigs unchanged at 162, and miscellaneous rigs also unchanged at zero.

The U.S. Rig Count is down 144 rigs from last year’s count of 1,048, with oil rigs down 120, gas rigs down 22, and miscellaneous rigs down two to zero. The U.S. Offshore Rig Count was unchanged at 28 and is up 10 rigs year-over-year.

Farm Prices for July Farm were down -2.9%.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) settled slightly higher after trading to an intraday high of $147.48. Lower resistance at $147.50-$148 was challenged but held with last week’s all-time high at $148.90.

Current support remains at $146.50-$146. A close below the latter would be a slightly bearish signal with risk towards $145-$144.50.

RSI has been flatlining with resistance at 70.

A move above this level would signal additional strength and a retest towards 75-80. Support is at 65 and the monthly low with a move below this level reopening weakness towards 60-55.

Market Analysis – The Spider Small-Cap 600 ETF (SLY) had its 2-session winning streak snapped following the intraday pullback to $65.01. Shaky support at $65-held with a move below this level likely getting $64.50-$64 back in play.

Resistance is at $66-$66.50 and the 200/50-day moving averages. Continued closes above these levels would be a bullish development for a possible run towards $67-$67.50.

RSI is trying to clear resistance at 50 and a level that held throughout August.

A move above this level would signal additional strength towards 55-60 with the latter representing the July high. Support is at 45-40.

The Technology Select Sector Spiders (XLK) closed lower for the first time in 3 session after tapping an intraday low of $78.96.

Major support at $79.50-$79 and the 50-day moving average was stretched but held.

A close below the latter would be a renewed bearish development with further risk towards $78-$77.50.

Near-term resistance is at $80-$80.50.

Continued closes $81 would be a more bullish development for additional strength and signal a possible near-term bottom. The higher lows throughout the month looks like a bullish development.

An overall symmetrical triangle is also forming and is signaling a major move could be coming for XLK in September.

RSI is holding support at 50. A move below this level would signal additional weakness towards 45-40. Resistance at 55-60 with a close above the latter getting 65-70 and July highs in play.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 46.60% on Friday, unchanged, with the session high reaching 50.48%.

Near-term and lower resistance at 50%-52.5% was cleared but held. A close above the latter would be bullish signal for strength towards 55%-60% and the latter representing prior support from early August.

Current support is at 45%-42.5%.

The percentage of S&P 500 stocks trading above the 200-day moving average closed at 57.02%, up 0.59%, with the session peak reaching 58.21%. Lower resistance is at 57.5%-60% was tripped but held.

A close above the latter would signal additional strength towards 62.5%-65%. Support is at 55%-52.5%.

We are allocating the portfolio as follows:

Long 20% in XLK closed on Friday at 79.53
Long 30% in XLP closed on Friday at 60.72
Long 30% in XLU closed on Friday at 62.58
Short 20% in XLE closed on Friday at 57.48

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

XLK – 20DEC $80 Strike Price CALL (Expires December 20, 2019)
XLP – 20DEC $60 Strike Price CALL (Expires December 20, 2019)
XLU – 20DEC $61 Strike Price CALL (Expires December 20, 2019)
XLE – 18OCT $56 Strike Price PUT (Expires October 18, 2019)

All the best,
Roger Scott.