U.S. markets finished lower on Friday as weakness in the blue-chips and disappointing comments from Fed officials weighed on the major indexes.
Developments from overseas concerning Brexit and soft economic news out of China also hindered momentum.
The overall market pullback overshadowed better-than-expected earnings ahead of the open and comes ahead of a flurry of results over the next couple of weeks and the height of 3Q earnings.
Near-term support levels held with volatility spiking before holding a key level of resistance.
The Dow dropped 1% after trading in the red throughout the session while while closing on the session low of 26,770.
Near-term and upper support at 26,750-26,500 was breached but held with a close below the latter and the 50-day moving average leading to a possible retest towards 26,250-26,000 and the 200-day moving average.
The Nasdaq sank 0.8% following the midday pullback to 8,045. Upper support at 8,100-8,050 failed to hold with a close below the latter getting 8,000-7,950 and the 50-day moving average back in play.
The S&P 500 traded exactly to the 3,000 level shortly after the open before before falling 0.4% and testing an intraday low of 2,976.
Near-term and upper support at 2,975-2,950 held with a close below the latter and the 50-day moving average opening up risk towards 2,925-2,900.
The Russell 2000 was lower by 0.4% after tapping an afternoon low of 1,525.
Current and upper support at 1,530-1,515 and the 200-day moving average was breached but held with a move below the latter and the 50-day moving average back signaling another retest towards the 1,500 level.
For the week, the Russell 2000 surged 1.6%. The S&P 500 added 0.5% and the Nasdaq was up 0.4%. The Dow dipped 0.2%.
Real Estate was the strongest sector after soaring 1% while Utilities and Financials advanced 0.3%. Communication Services and Technology were the weakest sectors after sinking 1.2% and 1%, respectively.
For the week, the best performing sectors were Communication Services (3.5%), Healthcare (3.3%), and Industrials (3%).
Utilities (-0.9%) and Consumer Staples (-0.5%) were the only sectors that closed lower.
The Q3 earnings season is off and running with results from nearly 15% of S&P 500 members already out. Overall, Q3 results are average to decent, with some below average on flat growth.
Ahead of the start of the Q3 earnings season, estimates for the period had come down, though the magnitude of negative revisions was about in-line with other recent periods.
Beyond lowered Q3 estimates, Wall Street analysts were worried over the notable uptick in negative guidance for Q4 and beyond, following renewed signs of deceleration in the U.S and global economy.
Actual results from the 15% of the S&P 500 members that have reported Q3 results thus far, total earnings are down 3% from the same period last year on 3.2% higher revenues, with 83.8% beating EPS estimates and 59.5% topping revenue estimates.
As far as the Finance sector, Q3 results from 46.7% of the sector’s market cap in the S&P 500 index have been reported. Total earnings are down 1.6% from the same period last year on 3.2% higher revenues, with 85.2% ahead of EPS estimates and 70.4% beating revenue estimates.
Looking at Q3 as a whole, combining the actual results from the 74 index members that have reported with estimates for the still-to-come companies, total earnings is expected to be down 4% from the same period last year on 4.1% higher revenues.
Global Economy – European markets showed weakness ahead of the weekend vote on the Brexit deal. On Saturday, UK’s Parliament approved an amendment 322 to 306, that has basically forced PM Boris Johnson to ask for a Brexit delay.
France’s CAC 40 fell 0.7% while Belgium20 was lower by 0.5%. UK’s FTSE 100 was off 0.4% and the Stoxx 600 lost 0.3%. Germany’s DAX 30 gave back 0.2%.
Asian markets settled mostly lower after disappointing GDP numbers out of China highlighted the downside risks from global trade tensions for the global economy.
China’s Shanghai sank 1.3% and South Korea’s Kospi nudged down 0.8%. Australia’s S&P/ASX 200 and Hong Kong’s Hang Seng fell 0.5%. Japan’s Nikkei added 0.2%.
China’s 3Q GDP growth came in at 6%, a bit lower than expectations of a 6.1% year-over-year gain. However, industrial production was firmer than expected in September with growth of 5.8% versus 5.6% and retail sales in-line with the forecasts after rising 7.8%.
Leading Indicators Economic Index dipped 0.1% to 111.9 in September following a 0.2% decline in August to 112. Four of the ten components posted negative contributions, led by the -0.17% decline in ISM New Orders, with building permits -0.08% lower, and small drops in the interest rate spread and consumer expectations. Five components contributed positively, paced by a 0.11% increase in stock prices. The workweek was unchanged.
Baker-Hughes reported the U.S. rig count was down 5 rigs from the prior week to 851, with oil rigs up 1 to 713, gas rigs down 6 to 137, and miscellaneous rigs unchanged at 1.
The U.S. Rig Count is down 216 rigs from last year’s count of 1,067, with oil rigs down 160, gas rigs down 57, and miscellaneous rigs up 1 to 1. The U.S. Offshore Rig Count is down 2 to 22 and up 2 rigs year-over-year.
Market Sentiment – Fed Vice Chairman Richard Clarida reiterated the economy is in a good place, and the baseline outlook is favorable, though there are evident risks.
He also reiterated the Fed will act as appropriate and will proceed on a meeting-by-meeting basis, and added that policy is not on a preset course.
As to risks, he said there is the weakening in global growth, disinflationary pressure, and declines in business fixed investment, and a downturn in manufacturing.
Kansas City Esther George said her outlook does not call for another rate cut.
She noted the slowing in growth due to labor market shortages and the fading impact of fiscal stimulus, and she expects growth will approach a trend rate just under 2%.
She added consumer spending remains strong and worried that further rate cuts could have financial stability risks.
Dallas Fed Kaplan said he’s concerned about global growth, and that he strongly supported the two quarter point cuts in July and September.
He is watching to see if weakness in manufacturing and investment is seeping into the broader economy but noted waiting to see weakness in consumer spending before easing rates would be a mistake.
Kaplan attributed a lot of the slowing in global growth to trade uncertainties and expects U.S. GDP at about a 2% clip this year and 1.75% next year.
Minneapolis Fed Neel Kashkari signaled he continues to support further U.S. interest rate cuts after saying monetary policy should be somewhat accommodative given the risks to the economic outlook.
He said while U.S. household spending has remained strong, job growth has slowed, and ongoing U.S.-China trade tensions and uncertainty around Britain’s impending exit from the EU continue to cloud the outlook.
The iShares 20+ Year Treasury Bond ETF (TLT) finished flat despite trading to an intraday high of $140.23. Resistance at $140.50-$141 held for the 4th-straight session with more important hurdles at $142.50-$143 and the 50-day moving average.
Near-term support remains at $139.50-$139. A close below the latter would be a slightly bearish development with additional weakness towards $138.50-$138.
RSI has flatlined and is holding support at 40. A move below this level would signal weakness towards 35-30 and early September lows. Resistance is at 45-50.
Market Analysis – The Wilshire 5000 Composite Index ($WLSH) has been in a mini 4-session trading range following Friday’s pullback to 30,312.
Near-term and upper support at 30,300-30,200 was challenged but held. A close below the latter would signal additional weakness towards 30,100-30,000 and the 50-day moving average.
Resistance is at 30,600- 30,700. Continued closes above the latter would be a bullish development and signal a breakout of the current trading range with fresh upside targets at 30,800-31,000.
RSI has been holding support at the 50 level with a move below this level reopening weakness towards 45-40. Resistance is at 55-60 with the latter representing the September high.
The Technology Select Sector Spiders (XLK) extended its losing streak to 3-straight sessions testing a low of $80.38. Upper support at $80.50-$80 was breached but held.
A close below the latter and the 50-day moving average would signal additional risk towards $79-$78.50.
Lowered resistance is at $81-$81.50.
Continued closes above $82 would be a more bullish development for additional strength towards $82.50-$83 with the all-time peak at $82.78.
RSI is in a downtrend with support at 50.
A move below this level would signal additional weakness towards 45-40 and the latter representing the monthly low. Resistance at 55-60 with a close above the latter and the month peak getting 65-70 and July highs in play.
The percentage of S&P 500 stocks trading above the 200-day moving average closed at at 66.66%, up 1.91%, with the intraday high reaching 67.32%.
Lower resistance at 67.5%-70% held with the beginning of the month peak at 69.84%.
A close above the 70% would be a bullish development with potential momentum towards 72.5%-75% and September highs. Support is at 65%-62.5%. A move below the latter would signal additional weakness towards 60%-57.5%.
The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 57.28% on Friday, down 7.66%.
Near-term and upper support at 57.5%-55% was breached and failed to hold. 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 renewed bullish signal with strength towards 65%-67.5% with last week’s and monthly peak at 70.87%.
We are allocating the portfolio as follows:
30% in ATVI closed on Friday at 54.54
30% in CVS closed on Friday at 66.16
30% in NVDA closed on Friday at 190.49
10% in TMF closed on Friday at 28.48
Option Traders – the following (regular monthly) options meet our criteria:
30% in ATVI – 17JAN $57.5 Strike Price CALL (Expires January 17, 2020)
30% in CVS – 17JAN $65 Strike Price CALL (Expires January 17, 2020)
30% in NVDA – 20DEC $200 Strike Price CALL (Expires December 20, 2019)
10% in TMF – 21FEB $30 Strike Price CALL (Expires February 21, 2020)
All the best,