U.S. markets were in rally mode from the start of Friday’s open and maintained momentum throughout the session in hopes of a good outcome in the trade talks between U.S. and Chinese representatives.

Tweets from President Trump confirmed that the U.S. had reached what is being called a phase 1 deal with China that will be put into writing and signed.

The deal covers intellectual property, financial services and $40-$50 billion in agricultural goods purchase.

Additionally, Treasury Steve Mnuchin confirmed that the tariff hike that was threatened for next week will not go forward now that a deal has been reached.

The gains help snapped a 3-week losing streak for the overall market with the major indexes now in positive territory for the month, aside from the small-caps.

The Russell 2000 rallied 1.8% following the intraday push to 1,525 and close back above the 1,500 level.

Prior and lower resistance at 1,515-1,530 and the 50-day moving average was tripped but held with a close above the latter and the 200-day moving average being an ongoing bullish signal.

The Nasdaq zoomed 1.3% after testing an afternoon high of 8,115 and easily closing back above its 50-day moving average. Prior and lower resistance at 8,100-8,150 was breached but held with a move above the latter getting 8,200-8,250 in play.

The September highs tapped 8,243 and 8,237 and were a week apart.

The Dow surged 1.2% after trading to a 2nd half high of 27,013. Current and lower resistance at 26,800-27,000 was cleared and held with a close above the latter signaling additional strength towards 27,250-27,500 and the July all-time peak at 27,398.

The S&P 500 soared 1.1% following the intraday day push to 2,993. Lower resistance from early September at 2,975-3,000 was cleared but held with a close above the latter getting 3,025-3,050 and fresh all-time highs back in focus.

For the week, the S&P 500 and the Nasdaq added 0.9% while the Dow rose 0.6%. The Russell 2000 gained 0.7% and needs to clear 1,523 to turn green for the month.

Materials and Industrial were the strongest sectors after jumping 1.9% while Technology and Energy rose 1.4%. Utilities and Real Estate were the weakest sectors after giving back 0.4% and 0.3%, respectively.

For the week, the best performing sectors were Materials (1.9%), Industrials (1.6%), Technology (1.3%) and Consumer Discretionary (1.2%). Utilities (-1.3%) and Consumer Staples (-0.9%) were the weakest.

The start of the 3Q earnings season is underway with the Finance sector highlighting the upcoming week’s lineup of earnings reports. Total Q3 earnings for the Finance sector are expected to be up 1.2% on 6.5% higher revenues.

Earnings growth is expected to be negative for a number of sectors with Energy (-26.7%), Materials (-22.6%) and Technology (-11.1%) sectors getting hit the hardest.

Excluding the Technology sector, total Q3 earnings would be down -3.3%.

Sectors with positive earnings growth in Q3 include Business Services (6.9%), Transportation (5.5%), Utilities (3.5%), Construction (1.1%) and Finance (0.2%). Q3 earnings for the index would be down -6.5% on an ex-Finance basis.

Overall, the muted earnings growth pace of the first half of the year is expected to continue in Q3 as well, though current expectations have year-over-year earnings growth rate for the quarter at a -5.1% decline on 4.2% higher revenues

Early Q3 results from the 15% of the S&P 500 members that have already reported are down -12.7% from the same period last year on 3.5% higher revenues, with 87% beating EPS estimates and 60.9% topping revenue estimates.

For Q3 as a whole, total earnings for the index are expected to decline -5% from the same period last year on 4.2% higher revenues. There are a number of sectors that are expected to have lower earnings compared to the year-earlier period, including the Tech sector.

For the small-cap S&P 600 index, total Q3 earnings are expected to be down -18.3% from the same period last year on 3% higher revenues. This would follow declines of -12.7% and -18.3% in 2019 Q2 and Q1, respectively.

Total 2019 earnings for the S&P 500 index are expected to be down -0.6% on 2.5% higher revenues, which would follow the 23.1% earnings growth on 9.2% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of 9.7% 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 for the remainder of the year.

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.

Aside from that, the ongoing economic weakness in Europe, China and elsewhere could represent downside risks to the growth outlook.

Consumer Sentiment for October rose 2.8 points to 96, better than expectations for a print of 92, after falling 3.4 ticks to 93.2 in September.

Most of the strength was in the current conditions index which climbed to 113.4 from 108.5. The expectations index improved to 84.8 from 83.4. The 12-month inflation index slowed to 2.5% from 2.8%, the weakest since April. The 5-year index also slipped to 2.2% from 2.4%.

Baker-Hughes Rig reported the U.S. rig count was up 1 rig to 856, with oil rigs higher by 2 to 712, gas rigs down 1 to 143, and miscellaneous rigs unchanged at 1.

The U.S. Rig Count is down 207 rigs from last year’s count of 1,063, with oil rigs off 157, gas rigs down 50, and miscellaneous rigs unchanged at 1. The U.S. Offshore Rig Count was unchanged at 24 and up 1 rig year-over-year.

Market Sentiment – Minneapolis Fed Neel Kashkari said he would probably support an October rate cut if that was the Committee’s decision. He doesn’t believe the Fed should be tapping the brakes on the economy, and added that forward guidance has been hawkish.

Kashkari said wage growth has been tepid, and he doesn’t see evidence that analysts are at max employment. He said there may be more slack in the job market than the Fed believes and that he is becoming concerned that the labor market is showing signs of softening.

Boston Fed Eric Rosengren said policymakers can be patient and continue to evaluate incoming data before taking additional action.

He went on to say while risks to the global and the U.S. economies remain, and noted risks of easing too aggressively as it encourages a yield grab by investors. His forecasts on the economy are for moderate growth that do not entail additional rate cuts.

As a side note, the Fed announced it will begin to purchase Treasury bills starting Tuesday (Monday is a holiday in the Treasury market) to help with reserve management operations.

The purchases will extend into Q2 of 2020. The Fed also announced that it will continue to conduct overnight repos at least through January, to mitigate risks of pressures in the money markets.

The iShares 20+ Year Treasury Bond ETF (TLT) extended its losing streak to 3-straight sessions following the pullback to $139.71. Prior and upper support from mid-September at $140-$139.50 was breached but held.

A close below the latter reopens downside risk towards the $138-$136 area.

Lowered resistance is at $141.50-$142 with additional hurdles at $142.50-$143 and the 50-day moving average

RSI is in a downtrend with support at 40. A close below this level would signal additional weakness towards 35-30 and the mid-September low. Resistance is at 45-50.

Market Analysis – The Russell 2000 ETF (IWM) extended its winning streak to 3-straight sessions after tapping an intraday high of $151.96. Lower resistance from early September at $151.50-$152 was cleared but held.

The latter represents key support from late September with a close above $152 getting $153.50-$154 back in play.

Current and rising support is at $149.50-$149. A close below the latter would signal a false breakout with backtest potential towards $147-$146.50.

RSI is in a nice uptrend with resistance at 50.

A move above this level would signal additional strength towards 55-60 and mid-September highs. Support is at 45-40 with the latter representing the monthly low.

The Utilities Select Spider (XLU) settled lower for the 4th time in 5 sessions following the intraday pullback to $63.70. Upper support at $63.50-$63 held. A close below the latter would be an ongoing bearish signal with downside risk towards $62.50-$62 and the 50-day moving average.

Lowered resistance at $64-$64.50. A close back above the latter would signal a return of strength for a retest towards $65 and fresh all-time highs.

RSI is in a slight downtrend with support at 50.

A move below this level would signal additional weakness towards 45-40 with the latter representing the early August low. Resistance is at 55-60.

The percentage of S&P 500 stocks trading above the 200-day moving average closed at 62.57% on Friday, up 4.56%, with the session peak reaching 64.75%.

Lower resistance from late September at 62.5%-65% was cleared and held. A close above the latter would signal additional strength towards 67.5%-70% and prior support to start the month.

Current support is at 62.5%-60%. A move below the latter would signal caution and additional weakness towards 57.5%-55% with the prior session high reached 54.36%.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 63.10%, up 12.62%, and the intraday high hitting 67.96%.

Mid-September and lower resistance at 65%-67.5% was cleared but held. The 67.96% peak was also reached in back-to-back sessions in mid-September.

A move above this level would be an ongoing bullish signal for strength towards 70%-72.5%. Current support is at 62.5%-60%. A close below the latter would be a slightly bearish signal with weakness towards 55.5%-52.5%.

Volatility Index – The S&P 500 Volatility Index ($VIX) fell 11% after sinking to an intraday low of 15.11. Fresh and upper support at 15.50-15 was breached but held on the close back below the 50/200-day moving averages.

Continued closes below the 15 level would be an ongoing bullish signal with additional weakness towards the 14-13.50 area and September lows.

Lowered resistance is at 16-16.50 followed by 17.50 and the 50-day moving average. Any move above the aforementioned levels over the near-term would be a cautious signal.

RSI is in a downtrend and is on track to test September support at 40.

A move below this level could lead to a retest towards the 35-30 area and the July low sandwiched in between. Resistance is at 50 and prior support from earlier this month.

We are allocating the portfolio as follows:

60% in ZIV closed on Friday at 65.61
40% in EDV closed on Friday at 137.90

All the best,
Roger Scott.