U.S. markets opened in rally mode following better-than-expected job numbers while holding momentum throughout the session and pushing fresh all-time highs. Comments from White House adviser Larry Kudlow who said trade talks with China were making progress also helped sentiment.

Kudlow added the U.S. still aims to sign an initial deal this month, although the phase one agreement remained unfinished and some issues would be pushed to a second phase. Trading volume was heavy and volatility closed at its lowest level since late July, both ongoing bullish signals for the market.

The Russell 2000 rallied 1.7% while closing on the session high north of 1,589. Lowe resistance from late July at 1,585-1,600 was cleared and held with a close above the latter getting 1,610-1,625 and the early May 52-week peak at 1,618 in play.

The Nasdaq gained 1.1% after closing at a fresh all-time high of 8,386. Prior and upper resistance from July at 8,300-8,350 was cleared and held with fresh hurdles now at 8,450-8,500.

The Dow was also up 1.1% after closing on its late day peak of 27,347. Upper resistance from early September at 27,000-27,200 was cleared and held with a close above the all-time high from July at 27,398 signaling additional strength towards 27,500-27,750.

The S&P 500 soared 1% while closing at a new all-time high of 3,066 ahead of the closing bell. Lower resistance at 3,050-3,075 was cleared and held with upside potential towards 3,100-3,125 now in focus.

For the week, the Russell 2000 zoomed 2% and the Nasdaq jumped 1.7%. The S&P 500 rallied 1.5% and the Dow galloped 1.4% higher.

Energy and Industrials were the strongest sectors on Friday after surging 2.3% and 2.2%, respectively. Real Estate and Utilities and were the weakest sectors after falling 0.3%, respectively.

For the week, the best performing sectors were Healthcare (3.1%), Technology and Industrials (2.1%), and Financials (1.7%). Real Estate (-0.7%), Energy (-0.4%), and Utilities (-0.1%) were the only sectors that closed lower.

With results from more than 70% of S&P 500 members already out, we have a representative enough sample to judge the Q3 earnings season. The market has generally been appreciative of the the results, with the median index member up almost 3x as much in response to its Q3 earnings report relative to the preceding period.

For the 357 S&P 500 members that have reported results, 74.5% are beating EPS estimates and 59.7% are beating revenue estimates. Total earnings (or aggregate net income) for these companies are down -1.9% from the same period last year on 3.6% higher revenues.

Looking at Q3 as a whole, combining the actual results from the 357 index members with estimates for the still-to-come companies, total earnings is expected to be down -2.5% from the same period last year on 4.1% higher revenues.

Over last 12 quarters, the low EPS beats percentage for these 357 index members was 65.3% (2018 Q4) and the high was 81.8% (2018 Q2), with an average EPS beats percentage of 75.5%.

The EPS beats percentage in Q3 started out very high, but currently remains towards the high end of this 12-quarter range.

On the revenues side, the beats percentage for this group of 357 index members has been as low as 47.3% (2015 Q3) and as high as 75.9% (2018 Q1) over the preceding 12-quarter period. As is the case with the EPS beats percentage, the Q3 revenue beats percentage remains within this historical range.

In other words, S&P 500 members are beating EPS and revenue estimates at a rate that is about in-line with historical trends.

Nonfarm payrolls for October increased 128,00 versus forecasts for 95,000, with September’s numbers revised to a 180,000 gain and to 219,000 for August.

The unemployment rate inched up to 3.6% from 3.5% previously. Average hourly earnings were up 0.2% versus the prior unchanged reading and were steady at 3% year-over-year.

Hours worked were steady at 34.4. The labor force surged another 325,000, with household employment up 241,000 after similarly strong prior gains.

The labor force participation rate edged up to 63.3% from 63.2%, the best since June 2013.

Private payrolls increased 131,000 versus the prior 167,000 gain, with goods producing jobs falling -26,000, manufacturing dropping -36,000, and auto workers declining -41,600.

Private service sector jobs increased 157,000 versus the prior 160,000 reading. The government shed -3,000, including a -17,000 drop in Federal employment, largely on the release of census workers with -20,000 being released.

PMI Manufacturing Index for October edged up 0.2 ticks to 51.3 following the 0.8 point rise to 51.1 in September. New orders increased to 52.3 from 51.5 in September, the highest since April and the 5th-straight month of expansion. The report indicated there were tentative signs of renewed vigor that are appearing in the U.S. manufacturing sector.

ISM Manufacturing Index rose 0.5 points in October to 48.3, after dropping 1.3 points to 47.8 in September, while missing expectation for a print of 49.3.

It’s the 3rd-consecutive sub-50 print, which hasn’t been seen since late 2015. The employment component rose to 47.7 from 46.3. New orders improved to 49.1 from 47.3 while new export orders climbed to 50.4 from 41. Prices paid slumped to 45.5 from 49.7.

Construction Spending rose 0.5% in September, topping expectations of 0.2% while August was revised lower to -0.3% from a 0.1% gain.

Residential spending rose 0.6% from 0.8%, but is still lower on a 12-month basis at -3.5% year-over-year. Nonresidential spending bounced 0.5% from -1.1% and posted a -0.9% year-over-year rate.

Private construction spending edged up 0.2% from -0.3% while public outlays jumped 1.5% from -0.4%.

Baker Hughes reported the U.S. rig count was down 8 rigs to 822, with oil rigs dipping 5 to 691, gas rigs sliding 3 to 130, and miscellaneous rigs unchanged at 1.

The U.S. Rig Count is down 245 rigs from last year’s count of 1,067, with oil rigs down 183, gas rigs off 63, and miscellaneous rigs up 1 to 1. The U.S. Offshore Rig Count is up 1 to 22 and up 4 rigs year-over-year.

Market Sentiment – Federal Reserve Vice Chairman Richard Clarida said the jobs report was very solid and reiterated Fed Chair Powell’s call from earlier in the week that the economy and monetary policy are in a good place.

He said risks have been tilted to the downside this year, and still are somewhat, but rate cuts will give significant support to the economy. He is looking for cumulative evidence that the Fed is missing on its goals and that the Fed doesn’t see a crack in the consumer.

Fed VC of supervision Randal Quarles assured negative interest rates have not been on the table in the U.S. in answering questions following a speech on Friday.

He added he would avoid criticizing the policy of other central banks in a public forum. He went on to say negative rates will have different effects depending on expectations of how long such would be in place.

Quarles sees systemic risks from excess leverage as relatively moderate because of the large increase in capital which swamps other factors. On the rate cuts this year, Quarles also reiterated the mantra that the Fed has left the economy in a good place and the current stance is likely to remain appropriate as long as incoming information are consistent with the outlook for moderate growth, a strong labor market, and inflation near the 2% target.

Dallas Fed Robert Kaplan believes policy is at an appropriate level in comments he made while speaking at Rice University. He said growth is decelerating and monetary policy should be accommodative during such times.

Capex has dropped dramatically and a big part of the deceleration is due to trade uncertainty.

Kaplan also said the slowdown in global growth is also depressing the energy industry, a major part of the economies in his Dallas District. He noted the high level of corporate debt and worries that could amplify any downturn.

The iShares 20+ Year Treasury Bond ETF (TLT) had its 3-session winning streak snapped following the pullback to $139.79. Current and upper support at $140-$139.50 was breached but held.

A close below the latter would be a slightly bearish signal for a further pullback towards $138.50-$138.

Resistance remains at $141.50-$142 and the 50-day moving average.

A close above the $142 level would be a renewed bullish signal with strength towards $143.50-$144.

RSI is in a slight downtrend with support at 50. A move below this level would signal additional weakness towards 45-40. Resistance is at 55.

Market Analysis – The S&P 400 Mid Cap Index ($MID) snapped a 2-session slide after trading to an intraday high of 1,983. Near-term and lower resistance from earlier in the week and late July at 1,970-1,990 was cleared and held.

Continued closes above the latter and the July peak at 1,991 would be a bullish signal for a blue-sky breakout towards 2,000-2,020.

Current support is at 1,960-1,940 with a close below the latter signaling a near-term top. The 50-day and 200-day moving averages remain in nice uptrends.

RSI is back in an uptrend with resistance at 65 and a level that has been holding since late July. A strong move above 65 would signal additional strength towards 70-75 and highs from February.

Support is at 60 with downside risk towards 55-50 on a close below this level.

The Energy Select Sector Spider (XLE) was up for the 1st time in 3 sessions after surging to an intraday high of $59.38. Near-term and lower resistance at $59.50-$60 was challenged but held.

A close above the latter would be a more bullish signal for a retest towards $61-$61.50 and the 200-day moving average.

Current but shaky support is at $59-$58.50 and the 50-day moving average.

A close below the latter would signal a false breakout with backtest potential towards the $58-$57.50 area.

RSI is back in an uptrend with resistance at 55.

A close above this level would be a slightly bullish signal for additional strength towards 60-65 and early September highs with the peak at 70. Support is at 50-45.

The percentage of S&P 500 stocks trading above the 200-day moving average closed at 69.50% on Friday, up 4.16%, with the intraday high reaching 71.68%.

Key resistance at 70% held. A close above this level would be a bullish development with upside potential towards 72.5%-75% and mid-September highs. Support is at 67.5%-65%. A move below the latter would signal additional weakness towards 62.5%-60%.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 71.84%, up 6.80% with the peak reaching 73.78%. Current resistance at 72.5%-75% was cleared but held.

A close above the latter would be an ongoing bullish signal with strength towards 77.5%-80% and late June highs.

Near-term support is at 70%-67.5%. A close below the latter would be an slightly bearish signal for additional weakness towards 65%-62.5%.

Volatility Index – The S&P 500 Volatility Index ($VIX) sank to an intraday low of 12.26 while closing below major support at the 12.50 level for the first time in 69 sessions, or July 26th.

There is a chance for further weakness towards 11.50-11 on continued closes below 12.50. The July 25th intraday low tapped 11.69 with the mid-April low at 11.03.

If the aforementioned levels are cleared and held, there is a chance the VIX pushes 10 – and August 2018 lows – on a continued market rally, or euphoria.

Lower resistance at 13-13.50 with the latter holding for 6-straight sessions. A close above the 13.50 would be a cautious signal with risk towards 14.50-15.

RSI has been in a recent range between 35-40. A close above the latter would signal additional strength towards 45-50. A move below 35 and the July low would be a ongoing bullish signal for the market with weakness towards the 30 level but signaling oversold conditions in the VIX.

We are allocating the portfolio as follows:

50% in ZIV closed on Friday at 69.08
50% in EDV closed on Friday at 137.95

All the best,
Roger Scott.