U.S. markets showed strength on Friday’s open following a tame employment report but quickly gave back their gains while ending the session with heavy losses.
The reversal came following a report that the Fed is considering a wait and see approach after the rate hike at the December meeting.
Continued trade rhetoric and a shuffle in White House personal also caused some nervousness as the major indexes posted their steepest losses since March.
The Nasdaq tanked 3.1% after failing resistance at 7,200 for the 2nd-straight session.
Lower support at 7,000-6,950 was breached but held with a close below the latter getting 6,850-6,800 and November lows back in play.
The Russell 2000 fell 2% on the backtest to 1,440. Prior and upper February support at 1,450-1,440 failed to hold with a close below the latter getting 1,425-1,420 in play.
The Nasdaq was down 4.9% for the week and the Russell 2000 plummeted 5.8%.
The S&P 500 sank 2.3% following the pullback to 2,623. Upper support at 2,625-2,600 held but an official death cross has formed with the 50-day moving average closing below the 200-day moving average.
The Dow dropped 2.2% after testing an intraday low of 24,284 and failing its 200-day moving average on the open. Crucial support at 24,300-24,250 held for the 2nd-straight session with the index back in negative territory for the year.
For the week, the the S&P 500 gave back 4.6% and the Dow declined 4.5%.
Utilities rose 0.4% and was the only sector that showed strength.
Technology and Consumer Discretionary were down 3.5% and 3%, to lead sector laggards.
For the week, Utilities and Real Estate were up 1.6% and 0.3%. Financials were hammered with a loss of 6.9% while Industrials were hit for 6.2%.
The Q4 earnings season will not take the spotlight at least until the middle of January, but the reporting season has officially gotten underway already, with three companies already reporting.
Total Q4 earnings are expected to be up 12.7% from the same period last year on 5.8% higher revenues, which would follow the 25.6% earnings growth on 8.4% higher revenues in 2018 Q3.
Earnings growth is expected to be in double digits for a number of sectors, with Energy (+83.5% growth), Finance (+22.7%), Construction (+27%) and Transportation (+23.5%) with the strongest growth.
Tech sector earnings are expected to decelerate meaningfully in Q4, up 6.9%, after back-to-back quarters of very strong growth.
Global Economy – European markets recovered some ground Friday, after slumping to a two-year low in the previous session.
UK’s FTSE 100 rallied 1.1% and France’s CAC 40 rose 0.7%. The Stoxx 600 Europe and the Belgium20 added 0.6%. Germany’s DAX 30 gave back 0.2%.
Eurozone Q3 GDP was revised downward to 1.6% year-over-year from the previously reported 1.7%.
German October industrial production slipped 0.5%, missing forecasts of 0.3%.
Asian markets closed mostly higher. Japan’s Nikkei gained 0.8% while South Korea’s Kospi and Australia’s S&P/ASX 200 advanced 0.4%.
China’s Shanghai edged up less than a point, or 0.03%. Hong Kong’s Hang Seng declined 0.4%.
Japan October labor cash earnings rose 1.5% year-over-year, topping expectations of 1%. October real cash earnings dipped 0.1%, versus forecasts for a fall of 0.3%.
Nonfarm payrolls increased 155,000 in November, below forecasts for a print of 190,000. The unemployment rate was steady at 3.7% for a third straight month, matching expectations.
Earnings edged up 0.2% compared to the 0.1% October gain.
The workweek dipped to 34.4 from 34.5. The labor force was rose 133,000 after surging 711,000 previously, with household employment up 233,000 versus the prior 600,000 increase. The labor force participation rate was flat at 62.9%.
Private payrolls were up 161,000, with the goods producing sector adding 29,000; construction was 5,000 higher, with manufacturing up 27,000. Service sector employment increased 132,000.
Government shed 6,000 workers.
Consumer Sentiment was flat at 97.5 in the preliminary December print, topping forecasts of 97.4. The strength came in the current conditions index which increased to 115.2 from 112.3.
That gain was offset by a drop in the expectations index to 86.1 from 88.1. The 12-month inflation index gauge slowed to 2.7% from 2.8%.
The 5-year index decelerated to 2.4% from 2.6%.
Wholesale inventories rose 0.8% with sales falling 0.2% in October. The 0.4% gain in September inventories was revised higher to 0.7%, while the 0.2% sales gain was bumped down to 0.1%.
Inventories were stronger than forecast, while sales underperformed estimates. The inventory-sales ratio edged up to 1.28 from September’s 1.27.
Atlanta Fed’s Q4 GDPNow estimate was cut to 2.4% from 2.7% previously.
October Consumer Credit checked in at $25.4 billion, well above estimates of $15.3 billion for the month. Nonrevolving credit climbed $16.2 billion versus the prior $11.9 billion gain.
Revolving credit rebounded $9.2 billion after dropping $300,000 previously.
Baker-Hughes reported that the U.S. rig count was down 1 rig from last week to 1,075, with oil rigs down 10 to 877 and gas rigs up 9 to 198.
The U.S. Rig Count is up 144 rigs from last year’s count of 931, with oil rigs up 126 and gas rigs up 18. The U.S. Offshore Rig Count is unchanged at 23 rigs and up 3 rigs year-over-year.
Market Sentiment – Fed Governor Lael Brainard said gradual rate hikes appropriate in the near-term and she expects solid growth next year, though some tailwinds are fading.
Among risks to growth she cited softening in overseas economies, Brexit risks and trade uncertainty, along with recent tightening of U.S. financial conditions and fading fiscal stimulus in 2020.
Brainard expects trend inflation to remain around target, while the gradual rate hike path will increasingly depend upon the evolving U.S. outlook.
St. Louis Fed James Bullard reiterated his steady call for Fed policy as subdued inflation expectations in the financial markets are among the reasons to pause.
He noted that revisions to common monetary policy rules show the Fed funds rate already above neutral.
Bullard went on to say delaying a December hike to January due to the narrowed yield curve should be considered, since there’s no purpose in the Fed inverting the yield curve to preempt inflation.
He sees interest rates at a good place and U.S. policy at a crossroads.
Bullard said narrowing of the yield curve is a signal from the markets that the Fed has gone too far and now is a little bit hawkish on where it needs to be to control inflation.
He also hopes the U.S. can get a trade deal with China on the same time frame as it did with Canada and Mexico.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 6th-straight session after reaching a peak of $118.53. Lower resistance at $118.50-$119 held with a move above the latter opening up a possible run at $120-$121 and August highs.
Support remains at $117.50-$117 and the 200-day moving average. A close below the latter would signal a near-term top.
RSI is in an uptrend but is signaling overbought levels with 2-year resistance at 80. Support is at 70 with a close below this level signaling additional weakness.
Market Analysis – The Invesco QQQ Trust (QQQ) fell for the 2nd time in 3 sessions following the backtest to $160.86.
Support is at $160.50-$160 held with a move below the latter signaling additional weakness towards $158-$157.50 and November lows.
Lowered resistance is at $162-$162.50. A death cross has formed with the 50-day moving average closing below the 200-day moving average.
This is typically a bearish signal for lower lows down the road.
RSI is in a downtrend with support at 40. A move below this level would signal additional weakness towards 35-30. Resistance is at 45-50.
The Spiders S&P Homebuilders ETF (XHB) traded to a high of $35.11 before closing in the red. Resistance at $35-$35.25 and the 50-day moving average held with continued closes above the latter being a slightly bullish signal.
Support is at $34-$33.75 with a move below the latter signaling additional weakness.
RSI is approaching support at 40 with a close below this level signaling additional weakness.
Resistance is at 45-50.
The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed Friday at 34.95% with the low reaching 33.98%.
Fresh support is at 30%-27.50% with the latter representing October and November lows.
Lowered resistance is at 37.50%-40% with a move above the latter signaling additional strength.
The percentage of S&P 500 stocks trading above the 50-day moving average settled at 26.04% with the session low tapping 25.04%.
Mid-November support is at 25%-22.50% with a move below the latter signaling risk towards 20%. Fresh resistance is at 27.50%-30%.
Existing Position Update
Volatility is back.
Expecting few more positions and have plenty of time on current ones.
Keep your eye on the 200 day moving average and global economy next few sessions.
Roger Scott