U.S. markets were weak on Friday’s open following more uncertainty over trade developments with China.

President Trump said the U.S. is not ready to strike a trade deal with China and that the U.S. government will no longer have any dealings with a major Chinese telecom company.

The ongoing dispute led to another volatile session with the major indexes hitting session lows midday.

The slight rebound afterwards pushed the blue-chip into positive territory during the final hour of trading but the lower closes across the board gave the bears the weekly win.

The Russell 2000 sank 1.3% after tapping a first half low of 1,509 while closing back below its 200-day moving average.

Prior and upper support at 1,510-1,500 was breached and held with a close below the latter signaling a retest towards 1,480-1,470.

The Nasdaq gave back 1% following the midday backtest to 7,910 and close back below the 8,000 level and the 50-day moving average.

Shaky and upper support at 7,900-7,850 held with risk towards 7,800-7,750 on a move below the latter.

The S&P 500 was down 0.7% after trading to an intraday low of 2,914 and also closing back below its 50-day moving average.

Near-term and upper support at 2,900-2,875 held with a close below the latter reopening risk towards 2,850-2,825.

The Dow declined 0.3% following the pullback to 26,097.

Upper support at 26,250-26,000 was breached but held with a close below the latter signaling a possible retest towards 25,750-25,500 the 200-day moving average.

For the week, the Russell 2000 was lower by 1.3% and the Dow was down 0.8%. The Nasdaq fell 0.6% and the S&P 500 was off 0.5%.

Healthcare and Utilities were the only sectors that showed strength on Friday after edging up 0.1%. Technology, Communication Services, and Energy led sector weakness after falling -1.1%.

The best performing sectors for the week were Real Estate (2.6%), Utilities (1.1%), and Consumer Staples (0.7%). Energy (-2.5%) and Financials (-1.3%) were the leading laggards, followed by Technology (-1.2%) and Communication Services (-0.7%).

The overall theme from the Q2 earnings season has been good; not great, but not bad either.

This was not surprising versus very tough comparisons for the quarter, as well as the remainder of this year, as earnings growth was essentially flat in Q1 and appears that way in Q2 as well.

Total earnings for the 90% of the S&P 500 companies that have reported are up 0.7% from the same period last year on 5.1% higher revenues. Earnings and revenue growth for the same companies had been 0.1% and 4.6% in the preceding 1Q earnings period, respectively.

For the other 10% of the S&P 500 companies set to announce, expectations are for 0% growth on 4.6% revenue growth.

For the S&P 500 members that have reported results already, 75.6% are beating EPS estimates and 57.4% are above revenue estimates. For the same companies, the proportion of positive EPS and revenue surprises was at 77.4% and 61%, respectively, for Q1.

For Q2 as a whole, total earnings for the S&P 500 index are expected to be flat from the same period last year on 4.6% higher revenues, which would follow the -0.1% earnings decline on 4.2% higher revenues in Q1.

Estimates for Q3 are coming down more than the comparable period for the preceding 2 quarters, but about in-line with historical trends. The current -4.1% decline is down from -3.4% last week and -1% in mid-June.

Global Economy – European markets closed lower as political turmoil in Italy escalated with one of the country’s deputy prime ministers calling for snap elections and declaring that the coalition government is unworkable.

This sent Italy’s banking sector into a tailspin amid the rising instability.

Germany’s DAX 30 dropped 1.3% while the Belgium20 and France’s CAC 40 gave back 1.1%. The Stoxx 600 stumbled 0.8% and UK’s FTSE 100 fell 0.4%.

Asian markets settled on both sides of the ledger following mixed economic news out of China and Japan.

Hong Kong’s Hang Seng and China’s Shanghai were down 0.7%. South Korea’s Kospi rallied 0.9% and Japan’s Nikkei rose 0.4%. Australia’s S&P/ASX 200 edged up 0.3%.

Japan’s economy grew at an annualized rate of 1.8% in the 2Q period, easily topping forecasts for 0.4% growth.

China’s consumer price index for July rose 2.8%, its fastest year-on-year pace since February 2018. Specifically, China July food prices jumped 9.1% from a year ago, with pork prices rising 27% while fresh fruit prices rose 39%.

PPI rose 0.2% in July to match expectations, with the core rate sliding 0.1%, and no revisions to June’s respective gains of 0.1% and 0.3%.

On a 12-month basis, PPI was steady at a 1.7% year-over-year rate, also matching forecasts, with the core rate slowing to 2.1% versus 2.3% previously.

Goods prices rebounded 0.4% on the month after falling 0.4% in June, with energy climbing 2.3% follow the prior -3.1% decline. Food prices were up 0.2% versus 0.6% while service sector prices declined -0.1% from 0.4%.

Baker-Hughes reported the U.S. rig count was down 8 rigs from last week to 934, with oil rigs falling 6 to 764, gas rigs declining 2 to 169, and miscellaneous rigs unchanged at 1.

The U.S. Rig Count is down 123 rigs from last year’s count of 1,057, with oil rigs off 105, gas rigs down 17, and miscellaneous rigs lower by 1 to 1.

The U.S. Offshore Rig Count is up 1 rig to 25 and up 5 rigs year-over-year.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) had its 10-session winning streak snapped following the pullback to $139.87.

Upper support at $140-$139.50 was breached but held with backup help at $138.50-$138. A close below the latter would signal a near-term top with risk to $136.50-$136.

Near-term and lower resistance at $140.50-$141 held with a close above the latter getting $142-$142.50 back in play.

RSI appears to be slightly rolling over and has been struggling with May and lower resistance at 80-85 while signaling overbought levels.

Support is at 75-70 with a more below the latter signaling additional weakness.

Market Analysis – The Spider Small-Cap 600 ETF (SLY) had its 3-session winning streak snapped on the pullback to $65.94.

Well defined and upper support at $66-$65.75 was breached but held on the close back below the 50-day moving average.

A close below these levels and the 200-day moving average would be a bearish signal for additional weakness towards $65-$64.50.

Lowered resistance is at $66.50-$67. Continued closes above the latter would be a bullish signal for a run towards $67.50-$68.

RSI is back in a slight downtrend after failing resistance at 50.

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

The Spider Gold Shares (GLD) is trading at 6-year highs despite the backtest to $141.26 on Friday. Near-term and upper support at $141.25-$141 held.

A close below the latter would be a slightly bearish development with a gap to fill down to $138.50-$138 following the breakout above the latter last week.

Current and fresh resistance is at $142-$142.50. A move above the latter would be an ongoing bullish signal for a surge towards $143-$145, depending on momentum.

RSI has been hovering above key support at 70. A close below this level opens up weakness towards 65-60 with the latter representing the monthly low. Resistance is at 75 with a move above this level getting 80-85 and June peaks in play.

The percentage of S&P 500 stocks trading above the 200-day moving average closed at 59.72%, with the session low reaching 57.82%.
Upper support at 60%-57.5% was breached and failed to hold. A close below the latter would be a renewed bearish signal with risk towards the 55%-50% area and last Monday’s low tapping 51.08%.

Resistance is at 60%-62.5%. A move above the latter would signal additional strength towards 65%-67.5% and the latter representing prior support from the start of the month.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 42.71%, with the session low reaching 39.8%.

Upper support at 42.5%-40% held. A close below the latter would be a bearish signal for additional weakness towards 35%-30% with last Monday’s low reaching 21.35% on heightened volatility. Lowered resistance is at 47.5%-50%.

We are holding the following positions:

CELG: +25% Allocation | $86.22 Protective Stop Loss | $104.12 Profit Objective
LRCX: +25% Allocation | $182.56 Protective Stop Loss | $216.62 Profit Objective
MSFT: +25% Allocation | $127.80 Protective Stop Loss | $147.66 Profit Objective
NXPI: +25% Allocation | $92.76 Protective Stop Loss | $108.56 Profit Objective

Option Traders – the following (regular monthly) options meet our criteria:

CELG – 18OCT $95 Strike Price CALL (Expires October 18, 2019)
LRCX – 20SEP $210 Strike Price CALL (Expires September 20, 2019)
MSFT – 20SEP $140 Strike Price CALL (Expires September 20, 2019)
NXPI – 18OCT $105 Strike Price CALL (Expires October 18, 2019)

All the best,
Roger Scott.