U.S. markets showed strength to start Friday’s action as low level trade talks with China resumed in hopes of setting a bigger stage for negotiations in October.

However, comments from President Trump saying he’s not looking for a partial deal, he’s looking for a complete deal, and that China buying agriculture products would not be enough to get a trade deal done, halted momentum and push towards all-time highs.

To complicate matters, Chinese trade officials returned home earlier than expected while skipping a planned visit to farms in Montana.

The uncertainty spoiled the chance for a 4th-straight weekly win for the major indexes with volatility spiking above key resistance and giving a neutral reading heading into next week.

The Nasdaq was lower by 0.8% following the intraday pullback to 8,086.

Near-term and upper support at 8,100-8,050 was breached but held with a close below the latter and the 50-day moving average signaling additional weakness towards 8,000-7,950.

The Dow dropped 0.6% after testing a late day low of 26,926.

The close below upper support at 27,000-26,800 was the 1st in 8 sessions with a move below the latter getting 26,600 and the 50-day moving average in focus.

The S&P 500 fell 0.5% following the 2nd half fade to 2,984 while closing back below the 3,000 level for the 1st time in 4 sessions. Prior and upper support at 2,975 held with a move below 2,950 and the 50-day moving average signaling a possible near-term top.

The Russell 2000 dipped 0.1% after trading in a 16-point range and stalling at 1,570 midday.

Major support at 1,560 was breached for the 3rd-straight session and failed to hold on the backtest to 1,554 with risk towards 1,550-1,540 on continued weakness.

For the week, the Russell 2000 tanked 2% and the Dow was down 1%. T

he Nasdaq lost 0.7% and S&P 500 declined 0.5%.

Healthcare and Utilities led sector strength with gains 0.6% and 0.4%, respectively. Technology and Consumer Discretionary were the weakest sectors after falling 1.2%.

The best performing sectors for the week were Utilities (1.5%) followed by Real Estate (1.4%) and Healthcare (0.5%). Sector laggards included Consumer Discretionary (-2.5%), Industrials (-1.9%) and Financials/ Materials (-1.4%).

The early Q3 earnings season results have started coming in, but the reporting cycle doesn’t really heat up until mid-October with the results from the Financial sector. Overall, the muted earnings growth pace from the first half of the year will likely continue in Q3 as well.

Total Q3 earnings for the S&P 500 index are expected to be down -4.8% from the same period last year on 4.2% higher revenues. This would follow 0.5% growth in Q2 and a flat showing in Q1.

Driving the weak growth picture is tough comparisons to last year when earnings were boosted by the tax reform.

The growth challenge is expected to be a 2019 affair only, with tough comparisons to last year’s tax-cut driven record earnings the primary contributing factor and growth resuming next year and beyond.

Q3 earnings growth is expected to be negative for 12 of the 16 sectors, with double-digit declines for Energy (-24.6%), Basic Materials (-21.5%) and Technology (-11.1%).

Excluding the Technology sector, total Q3 earnings would be down -2.8%.

Sectors with positive earnings growth in Q3 include Business Services (7.3%), Transportation (6.1%), Utilities (3.6%) and Finance (1.7%). Q3 earnings for the index would be down -6.4% on an ex-Finance basis.

Estimates for Q3 came down as the quarter got underway, with the current -4.8% decline down from -1.3% in late-June. The magnitude of negative revisions to Q3 estimates is in-line with the comparable periods in other recent quarters.

For the small-cap S&P 600 index, total Q3 earnings are expected to be down -14.2% from the same period last year on 3.1% higher revenues. This would follow declines of -11.5% and -18.9% in 2019 Q2 and Q1, respectively.

Total 2019 earnings for the S&P 500 index are expected to be down -0.5% on 2.5% higher revenues, which would follow the 23.1% earnings growth on 9.3% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of 9.8% on 5.5% higher revenues.

The market appears to have accepted the deceleration in growth this year in the hope that growth resumes from next year onwards. The key issue will be if expectations for next year remain stable or start coming down as we move through the remainder of the year.

Wall Street analysts have not made any significant revisions to their estimates in response to the ongoing trade dispute, likely in the hope that the issue will eventually get resolved.

This, coupled with the ongoing economic weakness in Europe, China and elsewhere likely represent downside risks to the growth outlook.

Global Economy – European markets showed overall strength despite Irish Foreign Minister Coveney expressing doubt on a Brexit deal after saying there is still quite a wide gap between the British government and Ireland and what the EU will be able to support.

The Belgium20 rallied 0.9% and France’s CAC 40 climbed 0.6%. The Stoxx 600 advanced 0.3% and Germany’s DAX 30 nudged up 0.1%. UK’s FTSE 100 slipped 0.2%

Asian markets closed mostly higher despite disappointing economic news out of Japan and a tweet from China’s state media saying the country is not as anxious to reach a deal as the U.S. side thought.

South Korea’s Kospi rose 0.5% while Australia’s S&P/ASX 200, Japan’s Nikkei and China’s Shanghai edged up 0.2%. Hong Kong’s Hang Seng slipped 0.1%.

The People’s Bank of China’s 1-year loan prime rate was cut to 4.2%, as compared to 4.25% last month, while the 5-year loan prime rate was unchanged at 4.85%.

Japan inflation hit a 2-year low, with CPI rising 0.5% in August from a year earlier, and slowing from a 0.6% gain in July.

Baker-Hughes reported the weekly U.S. rig count was down 18 rigs to 868, with oil rigs declining 14 to 719, gas rigs off 5 to 148, and miscellaneous rigs up 1 to 1.

The U.S. Rig Count is down 185 rigs from last year’s count of 1,053, with oil rigs down 147, gas rigs down 38, and miscellaneous rigs unchanged at 1. The U.S. Offshore Rig Count was down 1 rig to 25 and up 5 rigs year-over-year.

Market Sentiment – Boston Fed Eric Rosengren explained his hawkish dissent after saying the stance of monetary policy is accommodative.

He said additional stimulus is not needed for an economy where labor markets ar already tight, and risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage.

Rosengren went on to add that while risks clearly exist related to trade and geopolitical concerns, lowering rates to address uncertainty is not costless.

He said so far the economy seems to have weathered the impact of trade disruptions and slowing in foreign growth. He also reiterated that while there are clearly risks to the outlook from trade and geopolitics, lowering rates to address uncertainty is not costless.

Fed Vice Chair Richard Clarida reiterated the economy is in a good place and he id]s not concerned about the diversity of opinions on the Fed, but says it is the strength of the Committee.

He wouldn’t give anything away though in terms of the policy course and said that the center of gravity on the Committee supported this week’s easing.

On the risks, Clarida said there has clearly been a slowing in the global economy, a slowing in global capital spending and manufacturing, and slowing in inflation.

Global growth expectations have been marked down, while trade and investment have been soft for awhile. He went on to say while the U.S. economy has been resilient, the Fed isn’t taking it for granted and doesn’t think the Fed tightened too much in 2018.

St. Louis Fed James Bullard explained his dissent in favor of a 50 basis point rate cut after writing he worried about the slowing in the economy over the near horizon, and noted many estimates of recession probabilities hive risen from low to moderate levels.

Moreover, he said the yield curve is inverted, and the Fed’s policy rate remains above government bond yields for nearly every country in the G-7.

Bullard also noted low inflation, with PCE measures some 40-60 basis points below the FOMC’s 2% target.

Given those factors, he believed a more aggressive cut would have provided insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks.

Dallas Fed Robert Kaplan said he backed the Fed’s rate cuts in September and July while concurring that it was best to take limited action now rather than wait.

Growth should be a little better than 2% this year, though he noted it has slowed a little as trade tensions dent factories but consumers have remained strong.

Kaplan would have come to a different policy conclusion, however, if he knew consumption would remain strong. He was concerned that if policymakers waited to see weakness in consumption, then they would have waited too long. He added he would not favor using negative rates.

The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 5-straight sessions following the intraday run to $141.98. Prior and lower resistance at $141.50-$142 was cleared and held with a close above the latter getting $143.50-$144 back in focus.

Near-term and rising support is at $141-$140.50 with backup help at $139.50-$139 and the 50-day moving average.

Market Analysis – The S&P 400 Mid Cap Index ($MID) fell for the 4th-straight session after trading to an late day low of 1,940. Near-term and upper support at 1,940-1,935 held.

A move below the latter would signal a near-term top and reopen risk towards 1,920-1,900 and the 50-day moving average.

Lowered resistance at 1,960-1,965.

A close above the latter would signal a slight return of momentum with more important hurdles at 1,970-1,975 and the monthly peak at 1,976.

RSI is an downtrend with support at 55-50. A close below the latter would be an ongoing bearish signal for additional weakness towards 45-40. Resistance is at 60-65.

The Financial Select Sector Spiders (XLF) have been in a 6-session trading range following Friday’s pullback to $28.06. Near-term support at $28 held with a close below this level reopening downside risk towards $27.75-$27.50 and the 50-day moving average.

Resistance is at $28.25-$28.50. Continued closes above $28.75 and the July peak of $28.72 would be more bullish signals for higher highs and a possible run towards $29-$29.25.

RSI in a downtrend with support 55. A close below this level opens up risk towards 50 and the monthly low. Resistance is at 60-65. A move above the latter would signal a return of strength with upside potential towards 70-75 and late April highs.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 58.25% on Friday, down 3.88%, with the session low reaching 57.28%.

Near-term and upper support at 57.5%-55% was breached but held. A close below the latter would be an ongoing bearish signal for weakness towards 52.5%-50%. Current resistance is at 60%-62.5%.

A close above the latter would be a slight bullish signal with strength towards 65%-67.50%. The monthly peak is at 67.96% and was reached in back-to-back sessions the prior week.

The percentage of S&P 500 stocks trading above the 200-day moving average closed at the session low of 70.43%, down 0.99%. Upper support at 70%-67.5% held.

A move below the latter would signal additional weakness towards 65%-62.5% and prior levels from earlier this month. Lowered resistance is at 72.5%-75% with the monthly peak at 75.44%.

We are holding the following positions:

CELG: +25% Allocation | $89.89 Protective Stop Loss | $110.20 Profit Objective
EXPE: +25% Allocation | $122.65 Protective Stop Loss | $147.03 Profit Objective
NXPI: +25% Allocation | $99.16 Protective Stop Loss | $120.48 Profit Objective
QCOM: +25% Allocation | $72.56 Protective Stop Loss | $87.40 Profit Objective

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

CELG – 17JAN $100 Strike Price CALL (Expires January 17, 2020)
EXPE 15NOV $135 Strike Price CALL (Expires November 15, 2019)
NXPI 15NOV $115 Strike Price CALL (Expires November 15, 2019)
QCOM – 20DEC $80 Strike Price CALL (Expires December 20, 2019)

All the best,
Roger Scott.