U.S. markets showed strength for the 2nd-straight session following a jobs report that was not as weak as feared.
Optimistic comments from President Trump regarding upcoming U.S.-China trade talks added to the jobs report momentum which tempered rising worries of a deeper slowing in economic growth, if not recession by 2020.
Fed speak throughout the day supported expectations for another quarter-point rate cut at the end of the month FOMC meeting and also fueled enthusiasm for stocks.
Despite the solid gains on Friday, the major indexes were mixed for the week with the VIX closing below a key level of support.
The Dow rallied 1.4% after trading to a late day peak of 26,590.
Near-term and lower resistance at 26,400-26,600 and the 50-day moving average was cleared and held with a close above the 26,800 level being a more bullish development.
The S&P 500 was also up 1.4% following the run to 2,953 ahead of the closing bell. Prior and lower resistance at 2,950-2,975 and the 50-day moving average was recovered with a close above the latter getting 3,000 back in play.
The Nasdaq jumped 1.4%, as well, after tapping a session high of 7,986.
Prior and lower resistance at 8,000-8,050 and the 50-day moving average was challenged but held with continued closes above the 8,100 level being a more bullish signal for higher highs.
The Russell 2000 rose 1% after closing at 1,500 and session peak.
Prior and lower resistance at 1,500-1,520 was cleared and held by a quarter-point with more important hurdles at 1,525 and the 50/200-day moving averages as they formed a death cross on Friday.
For the week, the Dow lost 0.9% and the S&P 500 was lower by 0.3%, with both indexes down for the 3rd-straight week.
The Russell 2000 sank 1.3% to extending its losing streak to 3-straight, as well, while the Nasdaq gained 0.5% to snap a 2-week losing streak.
Financials and Technology and Real Estate were sector standouts after rising 1.9% and 1.7%, respectively, while Consumer Staples and Healthcare advanced 1.6%. There were no sector laggards for the 2nd-straight session.
The worst performing sectors for the week were Energy (-4.4%), Industrials (-3.9%) and Financials (-3.6%).
There was no sector strength for the overall week.
The start of Q3 earnings season is underway We have with results from 18 S&P 500 members already in, with the reporting cycle heating up in mid-October with the bank results.
The muted earnings growth pace of the first half of the year is expected to continue in Q3 as well.
The expectation is that the overall earnings growth picture emerging from the Q3 earnings season will not be much different from what we saw in the first two quarters of the year.
Total Q3 earnings for the S&P 500 index are expected to be down -4.7% from the same period last year on 4.3% higher revenues. This would follow 0.4% growth in Q2 and a flat showing in Q1.
Driving this weak growth picture is tough comparisons to last year when earnings were boosted by the tax reform.
Q3 earnings growth is expected to be negative for a number of sectors, with double-digit declines for the Energy (-24.8%), Basic Materials (-21.9%) and Technology (-11%).
Excluding the Technology sector, total Q3 earnings would be down -2.7%.
Sectors with expected positive earnings growth in Q3 include Business Services (7%), Transportation (6%), Utilities (3.4%) and Finance (1.3%). Q3 earnings for the index would be down -6.2% on an ex-Finance basis.
Estimates for Q3 came down as the quarter got underway, with the current -4.7% 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 -17.7% from the same period last year on 2.9% higher revenues. This would follow declines of -12.7% and -18.2% in 2019 Q2 and Q1, respectively.
Total 2019 earnings for the S&P 500 index are expected to be down -0.5% on 2.7% higher revenues, which would follow the 23.2% earnings growth on 9.3% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of 9.8% on 5.4% higher revenues.
Global Economy – European markets were higher after Bank of England Monetary Policy Committee member Michael Saunders said it is quite plausible that the central banks’ next move is a rate cut.
UK’s FTSE 100 rose 1.1% and the Belgium20 climbed 1%. France’s CAC 40 gained 0.9% while the Stoxx 600 and Germany’s DAX 30 were higher by 0.7%.
Eurozone economic sentiment checked in at 101.7 in September, down from 103.1 in August. Meanwhile, consumer confidence in September improved slightly to -6.5 from -7.1 in August, while business climate measures declined to -0.22 in September from 0.12 in August.
The European Commission’s industrial confidence survey slumped to -8.8 in September from -5.8 in August.
Asian markets settled mixed after Hong Kong city leader Carrie Lam announced a ban on face masks amid the ongoing protests.
Australia’s S&P/ASX 200 added 0.4% and Japan’s Nikkei climbed 0.3%.
Hong Kong’s Hang Seng sank 1.1% and South Korea’s Kospi fell 0.6%. China’s Shanghai remained closed for a holiday.
Nonfarm payrolls increased 136,000 in September, below forecasts of 150,000, and follows the 168,000 revised gain in August. The unemployment rate fell to 3.5%, the lowest since 1969 versus expectations for a print of 3.7%.
Household employment increased another 391,000 after the prior 590,000 climb, with the labor force up 117,000 from 571,000.
Average hourly earnings were unchanged following the 0.4% gain previously, and at a 2.9% year-over-year pace versus 3.2%.
The workweek was steady at 34.4 while the labor force participation rate was unchanged at 62.2%. Private payrolls increased 114,000, with goods sector up 5,000 and construction 7,000 higher.
Manufacturing slipped 2,000. The service sector added 109,000 and Government jobs rose 22,000.
August trade deficit widened 1.6% to -$54.9 billion after narrowing 2.7% to -$54.0 billion in July. Exports edged up 0.2% versus the 0.6% gain previously.
Imports rebounded 0.5% versus the prior -0.1% dip. The real goods trade balance was -$85.7 billion versus -$85.4 billion, with real goods exports climbing 1.1% versus 0.4% and real imports increasing 0.8% from from -0.1%.
The trade deficit with China narrowed to -$31.8 billion from -$32.8 billion, while the balance with Canada was -$1.4 billion from -$3.4 billion.
Baker Hughes reported the U.S. rig count was down 5 rigs to 855, with oil rigs off 3 to 710, gas rigs declining 2 to 144, and miscellaneous rigs unchanged at 1.
The U.S. Rig Count is down 197 rigs from last year’s count of 1,052, with oil rigs lower by 151, gas rigs down 45, and miscellaneous rigs sliding 1 rig to 1. The U.S. Offshore Rig Count is unchanged at 24 and up 1 rig year-over-year.
Market Sentiment – Fed Chair Jay Powell reiterate the economy is in a good place, and added it is the Fed’s job to keep it there as long as possible. He did not discuss policy or the economy but he did acknowledge there are risks and longer term challenges.
He said inflation is running close to, though a bit below the 2% objective, while adding low inflation and low rates give the Fed little room to ease in a downturn.
Boston Fed Eric Rosengren said analysts ate seeing the kind of job growth one would expect at this point of the cycle.
He said he is open minded on policy currently, and he’s not going to pre-judge the rate decision.
On the economy, he thinks it will be around potential at 1.7% over the second half of the year. He added manufacturing globally is being impacted by trade, with the bigger question being whether there is spillover to sectors not directly affected, including consumption.
Rosengren went on to say the Fed should do something different, no matter the source, if it appeared they were going to miss on either growth or inflation.
He said the Fed will monitor the economy and judge whether it’s on a stable course or if it were softening. He remains worried about financial stability concerns over lower rates at time of a low unemployment rate and high stock prices.
Atlantic Fed Raphael Bostic said there are reasons to be optimistic, but there are still lots of uncertainties. He said he is concerned that the latest tariffs on China could hit the consumer but he is not forecasting a recession in the near term and remains optimistic on the economy.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 7th-straight session after trading to a high of $146.03. Lower resistance from mid-August at $146-$146.50 was breached but held by a penny.
A close above the latter would be an ongoing bullish signal for a retest towards $147.50-$148 and fresh all-time highs.
Rising support is at $145-$144.50 with a close below the $144 level signaling a possible near-term top.
RSI remains in an uptrend with resistance at 65-70.
A close above the latter would signal additional strength towards 75-80 and August highs. Support is at 60 with downside risk to 55-50 on a move below this level.
Market Analysis – The Russell 3000 Index ($RUA) showed continued strength after surging to a closing high of 1,728. Prior and lower resistance from early September at 1,725-1,740 and the 50-day moving average was recovered.
Continued closes above the latter would be an ongoing bullish signal with upside potential towards 1,750-1,765.
Near-term but shaky support is at 1,715-1,700. A close below the 1,690 level would likely lead to another retest of 1,675 and the 200-day moving average.
RSI is in an uptrend with resistance at 50.
Continued closes above this level would signal additional strength towards 55-60 with the latter representing the September high.
Support is at 45-40 with a move below the latter reopening weakness towards 35-30 and early August lows.
The Spiders S&P Homebuilders ETF (XHB) extended its winning streak to 2-straight sessions after reaching a peak of $43.61 ahead of the closing bell.
Prior and lower resistance from mid-September at $43.50-$44 was cleared and held. Continued closes above the latter would be a bullish signal for a run at $44.25-$44.75 with the recent 52-week high at $44.48 and the latter representing the all-time high from February 2006.
Current support is at $43-$42.50.
A close below the latter would signal a false breakout with additional weakness towards $42 and the 50-day moving average.
RSI is back in an uptrend with resistance at 60. Continued closes above this level would signal additional strength towards 65-70 and late September highs.
Support is at 55-50 with a move below the latter signaling additional weakness towards 45-40 and mid-August levels.
The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 51.45% on Friday, up 16.50%, and the session high. Near-term and lower resistance at 50%-52.5% was cleared and held.
A close above the latter would be an ongoing bullish signal for strength towards 55%-57.5%.
Current support is at 47.5%-45%. A close below the latter would be a slightly bearish signal with weakness towards 42.5%-40%.
The percentage of S&P 500 stocks trading above the 200-day moving average closed at 62.37%, up 3.56%, and the session peak. Lower resistance from early September at 60%-62.5% was cleared and held.
A close above the latter would signal additional strength towards 65%-67.5%.
Rising support is at 57.5%-55%. A move below the latter would be a bearish development and would signal additional weakness towards 52.5%-50% and prior support levels from August.
We are allocating the portfolio as follows:
30% in DG closed on Friday at 160.97
30% in HAS closed on Friday at 118.24
30% in WDC closed on Friday at 58.57
10% in TMF closed on Friday at 32.71
Option Traders – the following (regular monthly) options meet our criteria:
30% in DG – 20DEC $165 Strike Price CALL (Expires December 20, 2019)
30% in HAS – 17JAN $125 Strike Price CALL (Expires January 17, 2020)
30% in WDC – 17JAN $65 Strike Price CALL (Expires January 17, 2020)
10% in TMF – 21FEB $32 Strike Price CALL (Expires February 21, 2020)
All the best,