U.S. markets finished the week strong with the Dow and S&P 500 hitting fresh all-time highs into the closing bell. In fact, it was the best week of the year for the blue-chips after gaining just over 2%. The Nasdaq also set an intraday lifetime high with the Russell 2000 showing the most strength on Friday.
Most sectors finished in the green with Industrials showing the most strength. Consumer Discretionary and Health Care were the only laggards with both falling 0.3%. For the week, the best performing sectors were Energy, Health Care, and the Financials.
The worst performing sectors were Consumer Cyclicals and the Utilities.
The Q3 earnings season doesn’t start for a few more weeks, but the earnings season will officially be underway before that as companies with fiscal quarters ending in August start reporting results next week.
Total Q3 earnings for the S&P 500 index are expected to be up 3.3% from the same period last year on 5.1% higher revenues. This would follow double-digit earnings growth in each of the preceding two quarters.
The Q3 earnings growth drops to 1.5% (from 3.3%) when the strong Energy sector growth is excluded. The Construction and Conglomerates are the other sectors, in addition to Energy, with expected double-digit earnings growth in Q3. Growth is expected to be strong for the Technology sector, as well, with Tech earnings expected to be up 8.6% from the same period last year on 6.4% higher revenues.
For full-year 2017, total earnings for the S&P 500 index are expected to be up 7.5% on 4.6% higher revenues, which would follow 0.7% earnings growth on 2.1% higher revenues in 2016. Index earnings are expected to be up 11% in 2018 and 8.9% in 2019.
Global Economy – European markets pulled back on Friday following another terrorist attack in London. The FTSE 100 sank 1.1% and the Belgium20 fell 0.6%. The Stoxx Europe 600 was down 0.3% while France’s CAC 40 index and the DAX 30 gave back by 0.2%.
ECB Executive Board member Sabine Lautenschlaeger said it was time to take a decision now on scaling back Germany’s bond purchases at the beginning of next year. She went on to say that there is little doubt that buoyant growth and monetary accommodation would take Germany back to an inflation rate which is in line with their goal.
Elsewhere, The Bank of England policy maker, Gertjan Vlieghe, seen as least likely to back a rise in interest rates has changed his view and now thinks a hike may be needed soon. In a speech to economists, he said the U.K. economy was running through its spare capacity quicker than he had expected, while household spending was stronger.
Based on his previous comments, Mr. Vlieghe had been regarded as the member of the nine-strong Monetary Policy Committee most inclined to oppose a rise in the key rate from a record low of 0.25%.
Eurozone wages rose at the fastest pace in more than two years during the three months to June. Eurostat said wages were 2% higher in the three months, the fastest rise since the first quarter of 2015 and up from 1.3% in the previous three-month period. The ECB’s recently forecast that wage growth would rise to 2% next year and 2.3% in 2019 from 1.5% in 2017, although they still see inflation running below target in the final year.
Asian markets traded mixed following North Korea’s firing of another missile launch over Japan, but equities there rose slightly even as the yen strengthened. Japan’s Nikkei gained 0.5% while South Korea’s Kospi jumped 0.4%. Hong Kong’s Hang Seng Index advanced 0.1%. Australia’s S&P/ASX 200 sank 0.8% and China’s Shanghai index dropped 0.5%.
U.S. industrial production fell 0.9% with capacity utilization at 76.1% in August. The numbers were weaker than expected, but the Fed said Hurricane Harvey reduced IP by about 0.75%.
Retail sales fell 0.2% in August, versus expectations for a rise of 0.1%. Excluding cars, sales rose 0.2%, which was less than the 0.5% forecast.
The Empire State manufacturing survey headline reading fell slightly in September to 24.4 from a 3-year high of 25.2 in August. Expectations were for a reading of 19.
The University of Michigan consumer-sentiment index dropped to 95.3 in its preliminary September reading, down from the final August reading of 96.
Market Sentiment – Atlanta Fed’s Q3 GDPNow estimate was slashed to 2.2% from 3% previously (4% initial estimate), as hurricane season begins to undo some of the promising rebound in U.S. growth.
Fed Policy Outlook: Expectations for a December Fed hike have risen and are currently near 47%. This is up from around 25% back in mid-August. Analysts continue to forecast one more 25 basis-point increase this year, which is also the Action Economic Survey median estimate.
The iShares 20+ Year Treasury Bond ETF (TLT) showed some weakness after the open with the low tapping $126.54. Support at $126.50-$126.25 held with a move below the latter leading to a further backtest to $126-$125.50 and the 50-day moving average. Short-term resistance remains at $127-$127.25.
ETF flows overall for the week were comparable to the prior week, with creations substantially outpacing redemptions at over two to one. For the top ten creations, the iShares 20+ Year Treasury Bond ETF (TLT) led the way at over 21.9% of inflows.
Market Analysis- The Russell 2000 ETF (IWM) made higher highs and high lows following last Monday’s breakout above the 50-day moving average. Friday’s peak reached $142.47 with near-term resistance at $142.50-$143 holding.
A move above the latter gets $144-$144.25 and the all-time high in play. Rising support is at $141.50-$141 with a move below $140 and 50-day moving average being a bearish development.
The Russell 2000 has failed to make a new life high which makes it the relative laggard for the time being. However, last week’s strength looked bullish and the close above 1,430 gets the all-time high at 1,452 in play as the next major resistance hurdle.
The Energy Select Sector Spider (XLE) has been in a strong uptrend throughout September after bottoming at $61 in August. Friday’s slight gain was the 11th in the past 12 sessions with the high reaching $65.87. Prior resistance at $66-$66.25 from late July and mid-June held on back-to-back sessions to end the week.
Continued closes above $66.25-$66.50 should lead to a run towards $68-$68.50 and the 200-day moving average. Current support is at $65.50-$65 with a move below the latter signaling a further backtest towards $64-$63.75 and the 50-day moving average.
It would also represent a triple-top breakdown. Current RSI could be peaking just above 70 as this level held last December when XLE was pushing $77 and 52-week peaks.
The percentage of Nasdaq 100 stocks trading above the 50-day moving average is currently at 61%. This level reached 69% at the beginning of the month. A move above 70% would be bullish but a market peak could be reached when this level hits 75%.
The area held in April, May and July. A move back below 55% could signal upcoming market weakness.
The percentage of S&P 500 stocks trading above the 200-day moving average is currently at 66%. Last week’s breakout above 65% was slightly bullish and a level that needs to hold to show continued market strength.
A move above 67.50% would signal a broader based rally that could led to 70% of S&P 500 stocks trading above the 200-day moving average.
Existing / New Position Update
Waiting for pullback at this time. Percentage of stocks above the 50 day line is increasing and that means momentum levels are rising to overbought levels.
Expect pullback and more setups next few days.
All the best,
Roger Scott