U.S. markets showed continued weakness on Friday following the breakdown in trade talks with China and possible countermeasures if the U.S. was committed to putting more tariffs on Chinese goods.

The overall pullback wrapped up the worst week of the year for the major indexes with mid-June support levels back in focus.

Volatility also spiked to its highest level since early May but held a major level of resistance to give the bulls some optimism coming into a new week.

The Nasdaq plummeted 1.3% following the morning pullback to 7,953 but was able to hold the 8,000 level into the closing bell.

Late June and upper support at 8,000-7,950 and the 50-day moving average was breached but held with risk towards 7,900 on a move below the latter.

The Russell 2000 was hit with a 1.1% loss after tapping an intraday low of 1,522 while closing back below its 50-day moving average.

Prior and upper support at 1,535-1,520 was breached and failed to hold with a close below the latter and the 200-day moving average getting the 1,500 level in play.

The S&P 500 gave back 0.7% after falling to a low of 2,914 shortly after the open but was able to hold its 50-day moving average into the close.

Mid-June and upper support at 2,925-2,900 was breached but held with a close below the latter getting 2,875-2,850 in the mix.

The Dow was lower by 0.4% following the first half backtest to 26,249 and held its 50-day moving average by 10-points to start the new week.

Upper support at 26,250-26,000 was breached but held and an area that represents prior breakout levels from mid-June.

For the week, the Nasdaq dropped 3.9% and the Russell 2000 fell 3%. The S&P 500 sank 3.1% while the Dow declined 2.6%.

Real Estate and Consumer Staples showed sector strength after rising 0.8% and 0.02%, respectively.

Technology and Energy led sector weakness after falling 1.6% and 1.4%, respectively.

The best performing and only sectors higher for the week were Real Estate (2%) and Utilities (0.3%). C

onsumer Discretionary (-4.4%) and Technology (-4.3) were the leading laggards, followed by Financials (-3.8%) and Industrials (-3.4%).

The market is entering the final phase of Q2 earnings for the S&P 500 index, with results from more than three quarters of the index’s members already out.

Results for the 388 index members that have reported are up 0.8% from the same period last year on 4.3% higher revenues.

Earnings and revenue growth for the same companies had been -0.3% and 4.5% in the preceding earnings season, respectively.

In other words, earnings growth is tracking modestly above what analysts had seen in the March quarter and revenue growth is almost even.

Of the 388 index members that have reported results already, 76.8% are beating EPS estimates and 57.7% are topping revenue estimates.

For the same companies, the proportion of positive EPS and revenue surprises was at 77.1% and 61.3% in the Q1 earnings season.

As for certain sectors, Consumer Staples have posted surprisingly stronger results, with Q2 results from 67.7% of the sector companies in the S&P 500 index.

Total earnings for these companies are up 7.1% from the same period last year on 7.3% higher revenues, with 71.4% beating EPS estimates and 61.9% beating revenue estimates.

For the Tech sector, Q2 results from 84.6% of the sector’s total market cap in the S&P 500 index have been released.

Total earnings for these Tech companies are down -5.6% from the same period last year on 5.6% higher revenues, with 79.5% beating EPS estimates and 63.6% beating revenue estimates.

One of the big reasons for the Tech sector’s weak growth is the cyclical downturn in the semiconductor space that alone accounts for roughly a 1/6th of the sector’s total earnings.

For the Semiconductor space, Q2 earnings are down -28.8% on -12.4% lower revenues.

For Q2 as a whole for the chip space, combining the actual results that have come out with estimates for the still-to-come companies, total Q2 earnings are on track to be down -28.4% on -12.1% lower revenues, a growth trajectory that is not expected to improve in the second half of the year either.

For Q2 as a whole, total earnings for the S&P 500 index are expected to be down -0.1% from the same period last year on 4.5% higher revenues, which would follow the -0.1% earnings decline on 4.4% higher revenues in 2019 Q1.

Global Economy – European markets were hammered following the breakdown in trade developments between the U.S. and China.

France’s CAC 40 tanked 3.6% while the Belgium20 and Germany’s DAX 30 sank 3.1%. The Stoxx 600 tumbled 2.5% while UK’s FTSE 100 dropped 2.3%.

Asian markets were lower across the board after U.S. President Donald Trump said that the U.S. would be slapping 10% tariffs on another $300 billion worth of Chinese goods at the start of September.

Hong Kong’s Hang Seng stumbled 2.4% and Japan’s Nikkei gave back 2.1%. China’s Shanghai declined 1.4% while South Korea’s Kospi fell 1%. Australia’s S&P/ASX 200 was off 0.3%.

China’s foreign ministry said the country does not want a trade war with the U.S. but is unafraid of fighting one.

Non-farm payrolls increased 164,000 in July, topping forecasts of 156,000, and follows June’s 193,000 gain. The 3-month average checked in at 140,000 with the unemployment rate steady at 3.7%, versus expectations of 3.6%.

Average hourly earnings increased 0.3%, the same as in June, and is up 3.2% year-over-year versus 3.1% previously. The workweek fell to 34.3 from 34.4.

The labor force jumped another 370,000 versus the prior 335,000 gain, with household employment up 283,000 versus June’s 247,000.

The labor force participation rate rose to 63% from 62.9%. Private payrolls increased 148,000, with the goods producing sector adding 15,000; construction rose 4,000 while manufacturing was was up 16,000.

The service sector added 133,000 and government jobs rose 16,000.

The International Trade deficit narrowed -0.3% to -$55.2 billion in June, following the revised 8% widening to -$55.3 billion in May.

Exports declined -2.1%, reversing the prior 2.1% May rebound, while imports slid -1.7% after bouncing 3.3% previously.

The real goods balance narrowed slightly to -$86.1 billion versus -$86.3 billion with exports declining -1.9% following the 3.3% prior gain, and imports dropping -1.3% versus 4%.

The trade balance with China was at -$30 billion versus -$30.2 billion and it was at -$2.9 billion with Canada versus -$3.1 billion.

Consumer Sentiment for July edged up to 98.4 in the final reading, after slipping 1.8 points in June, and matching forecasts.

The current conditions index dipped to 110.7 from June’s 111.9 print. The expectations index improved to 90.5 versus 89.3 in June.

The 12-month inflation gauge slipped to 2.6% from 2.7% previously. The 5-year expectations reading rose to 2.5% from 2.3%.

Factory Orders rose 0.6% in June, a tad below expectations for a gain of 0.8%, following the -1.3% drop in May. The 2.0% pop in advance durable orders was nudged down to 1.9%.

Transportation orders climbed 3.7% after falling -7.5% previously. Excluding transportation, orders were up 0.1% following a flat print previously.

However, non-defense capital goods orders excluding aircraft jumped 1.5% from the prior 0.2% gain. Shipments increased 0.4% from 0.1%.

Non-defense capital goods shipments excluding aircraft were up 0.3% from 0.4%. Inventories rose 0.2%, the same as in April and May.

The inventory-shipment ratio dipped to 1.37 from 1.38.

Baker-Hughes reported the U.S. rig count was down 4 rigs to 942, with oil rigs down 6 to 770, gas rigs up 2 to 171, and miscellaneous rigs unchanged at 1.

The U.S. Rig Count is down 102 rigs from last year’s count of 1,044, with oil rigs down 89, gas rigs down 12, and miscellaneous rigs down 1 to 1. The U.S. Offshore Rig Count is down 1 rig to 24 and up 7 rigs year-over-year.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 6-straight sessions after zooming to a fresh all-time high of $136.51 on the close.

Blue-sky and lower resistance at $136.50-$137 was cleared and held with momentum towards $137.50-$138 on continued strength.

Near-term and rising support is at $135.50-$135.

A close below $133.50-$133 would signal a possible near-term top.

RSI remains in an uptrend with late May resistance at 75-80 and the latter signaling overbought levels.

Current support is at 70 with a close below this level likely signaling additional weakness towards 65-60.

Market Analysis – The Spider S&P 500 ETF (SPY) extended its losing streak to 5-straight sessions after trading to an intraday low of $290.90.

Prior and upper support from late June at $290.50-$290 held. A close below the latter and the 50-day moving average reopens risk towards $287.50-$287 and prior support from early June.

Lowered resistance is at $293.50-$294.

A close above the $295 level would signal some relief from the recent selling pressure with continued closes back above $297.50 being a more bullish development.

RSI remains in a nasty downtrend with support at 40 holding into the closing bell.

A move below this level could lead to additional weakness towards 35-30 with the latter representing the May low. Resistance is at 45-50.

The Financial Select Sector Spiders (XLF) was also lower for the 5th-straight session following the intraday pullback to $27.23.

Upper support at $27.50-$27.25 and the 50-day moving average was breached but held. A close below the latter could lead to further weakness towards $27-$26.75 with the latter representing early and mid-June support.

Near-term resistance at $27.75 and prior support throughout July. Continued closes above $28 would signal the recent selling pressure has abated.

RSI remains in a downtrend with support 40. A close below this level opens up risk towards 35-30 and late May lows. Resistance is at 45-50.

A move above the latter would signal a return of strength with upside potential towards 55-60.

The percentage of S&P 500 stocks trading above the 200-day moving average closed Friday at 64.95%, with the session low reaching 62.97%.
Upper support at 65%-62.5% was breached and failed to hold. A close below the latter would be an ongoing bearish development with risk towards the 60% area and mid-June support.

Resistance is at 67.5%-70% with the latter representing support throughout July.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 49.51%, with the session low reaching 44.66%.

This low was triggered twice in late June with prior and upper support at 47.5%-45% holding.

A close below the latter would be a bearish signal for additional weakness towards the 42.5%-40% area and late May levels. Lowered resistance is at 50%-52.5%.

All the best,
Roger Scott.