U.S. markets showed continued weakness throughout Friday’s session while setting fresh 2018 lows before surging into positive territory ahead of the closing bell.

The whipsaw action in the final hour of trading wrapped up a volatile week with heavy weekly losses not seen in two years.

The Dow jumped 1.4% to after testing a low of 23,360 while closing back above the 24,000 level. The S&P 500 soared 1.5% to reclaim the 2,600 level after tumbling to an intraday low of 2,532 and breaching its 200-day moving average.

For the week, both indexes fell 5.2% to post their worst losses since January 2016.

The Nasdaq was higher by 1.4% after trading down to 6,630 and within 1% of its 200-day moving average. The rebound past 6,900 and close just below this level was slightly bullish but the lower highs and lower lows throughout the week remain a bearish signal.

The Russell 2000 gained 1% after tapping an intraday low of 1,436 and September support. The index fell below its 200-day moving average for the first time since August before holding this level into the closing bell.

The Nasdaq finished the week 5.1% lower, representing its worst week since early February of 2016, while the small-caps gave back 4.5%.

Technology was up 2.5% while Real Estate and Utilities added 2.4% and 2.1%, respectively. Energy was the only sector laggard after slipping 0.2%.

For the week, Financials and Technology sank 9.5% while Industrials and Health Care dropped 8.3% and 8.2%. Utilities were down 2.7% and was the least damaged as there were no sectors that closed higher for the week.

Total Q4 results from just over 60% of the S&P 500 members combined have account for just over 78% of the index’s total market capitalization.

Total earnings for these companies are up 15% from the same period last year on 9.2% higher revenues, with 79.8% topping EPS estimates and 77% beating revenue expectations.

Taking into account Q4 earnings as a whole, combining the actual results from the members that have reported and the rest to come, total earnings are expected to be up 13.9% from the same period last year on 8.2% higher revenues.

This would represent the highest quarterly growth in nearly 5 years and would surpass the 13.5% growth in 2017 Q1.

The overall picture for Q4 earnings is that momentum is broad-based, with 7 of the 10 S&P sectors having double-digit earnings growth, including Energy, Technology, Basic Materials, Industrials and others.

Global Economy – European markets showed continued weakness while pushing one-year lows to close out the week. The Stoxx Europe 600 tumbled 1.5% while Germany’s DAX 30 lost 1.3%.

France’s CAC 40 gave back 1.2% and UK’s FTSE 100 was lower by 1.1%. The Belgium20 slipped 0.9%.

UK December industrial production fell 1.3% month-over-month, weaker than expectations for a decline of 0.9%.

UK December manufacturing production rose 0.3% month-over-month, matching expectations.

Asian markets settled with steep losses and were led by China’s Shanghai after the index sank 4% to an 8-1/2 month low. Hong Kong’s Hang Seng tanked 3.1% and Japan’s Nikkei sank 2.3%.

South Korea’s Kospi declined 1.8% while Australia’s S&P/ASX 200 gave back 0.9%.

China January CPI rose 1.5% while January PPI jumped 4.3% year-over-year, matching expectations.

December Wholesale Trade Inventories were up 0.4% versus expectations for a rise of 0.2% for the month. Wholesale Sales were up 1.2%, topping forecasts of 0.6%.

NY Fed Q1 GDP NowCast estimate rose to 3.35% from 3.22% previously, while the Atlanta Fed’s Q1 GDPNow estimate remained at 4% for the second-straight week.

Baker-Hughes Rig Count reported the U.S. rig count was up 29 rigs from last week to 975, with oil rigs up 26 to 791, gas rigs up 3 to 184, and miscellaneous rigs unchanged. The U.S. Rig Count was up 234 rigs from last year’s count of 741, with oil rigs up 200, gas rigs up 35, and miscellaneous rigs down 1 to 0. The U.S. Offshore Rig Count was unchanged at 16 rigs and down 5 rigs year-over-year.

Market Sentiment – Kansas City Fed, Esther George, said it’s important to continue hiking rates gradually, especially with fiscal stimulus on board.

She still believes 3 tightenings are reasonable estimates for this year and next. She said higher wages are a welcome development, referring to the recent increase in earnings.

She also commented on Bitcoin, saying it is a speculative instrument, and won’t be mainstream anytime soon.

The iShares 20+ Year Treasury Bond ETF (TLT) fell for the fourth-straight session with Friday’s low tapping $117.79 and upper support at $117.50-$117 holding.

A move below the latter gets the 52-week low of $116.49 in the mix. Resistance remains at $119-$119.50.

RSI remans in sightly oversold territory with further risk to 25-20 and November 2016 support levels on continued weakness. Resistance is at 30.

Market Analysis – The Russell 3000 Index ($RUA) fell just south of 1,500 and its 200-day moving average before holding both levels into the closing bell. This area also represents the late September breakout above 1,500 and will try to hold on another backtest.

Near-term resistance is at 1,550-1,560 with continued closes back above the latter signaling a possible short-term bottom.

RSI is trying to hold November 2016 support at 30 with a close back below this level being a warning sign for lower lows. Resistance is at 35-40.

The Materials Select Sector (XLB) traded down to $56.62 with September support at $56.50-$56 and the 200-day moving average holding. A close below the latter would be a continued bearish development.

Lowered resistance is at $58.75-$59 following the late day bounce to $58.87. XLB is roughly 10% off its January high just north of $64.

RSI is at 2-year lows with resistance at 40. Support is at 30-25.

The percentage of S&P 500 stocks trading above the 200-day moving is currently just above the 57% level with Friday’s low reaching 47.3%. October and June 2016 support at 50% held with a close below this level being a continued bearish development.

Resistance is at 60% and an area that represented August and early September support.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average closed Friday at the 25% level after testing an intraday low of 10.57% and June 2016 levels.

There could be a flush out to the 2%-4% area on a move below 10 and continued Tech weakness. Resistance at 30%-35% and prior August 2017 support levels.

Existing Position Update

NFLX remained below strike price due to uncertainty in the overall market. I’m expecting more upside if Monday we break Friday’s high price in the major indices.

TSLA reached short term support and bounce hard to the upside. I’m expecting the stock to have strong correlation to the overall market in light of the increased volatility.

SPY bounced off the 200 day moving average and if price breaks to the upside we may be testing the 50 day line to the upside before the week ends.

All the best,
Roger Scott