U.S. markets surged in the final hour of trading on Friday to finish the week in positive territory.

It was the second-straight week of gains for the major indexes following the 10% overall correction from earlier this month with nearly half of the losses recovered.

The Dow jumped 1.4% after testing a high of 25,313 while closing above the 25,000 level for the first time in four sessions.

The S&P 500 soared 1.6% after reaching an intraday peak of 2,747 while closing a half-point off its high. For the week, the Dow was up 0.4% while the S&P 500 added 0.6%.

The Nasdaq zoomed 1.8% after making a run to 7,337 into the closing bell while clearing the 7,300 level for the first time since the start of the month.

The Russell 2000 rallied 1.3% making another run at its 50-day moving average. The index fell shy of holding this level for a 5th-straight session by a tenth-point after closing at 1,549.

For the week, the Nasdaq advanced 1.4% while the Russell 2000 climbed 0.4%.

Utilities led sector strength after rising 2.6% while Energy and Technology were higher by 2.2% and 2.1%. There were no sectors laggards on Friday.

For the week, all sectors finished in the red with Consumer Staples taking the hardest hit after falling 2.8%. Energy and Utilities were down 1.4% and 1.2%.

Global Economy – European markets traded in a tight range and were mixed on soft economic data. France’s CAC 40, the Stoxx Europe 600 and Germany’s DAX 30 were up 0.2%. The Belgium20 slipped 0.2% and UK’s FTSE 100 declined 0.1%.

The Eurozone January CPI was left unrevised at 1.3% year-over-year and the January core CPI was left unrevised at 1% year-over-year.

The German Q4 GDP was left unrevised at 0.6% quarter-over-quarter and 2.9% year-over-year.

Asian markets rebounded on Friday to recover midweek losses and extend gains for a second-straight week.

South Korea’s Kospi jumped 1.5% while Hong Kong’s Hang Seng advanced 1%. Australia’s S&P/ASX 200 rose 0.8% and Japan’s Nikkei gained 0.7%. China’s Shanghai was up 0.6%.

The Japan January national CPI rose 1.4% year-over-year, stronger than expectations of 1.3% and the biggest increase in 2-3/4 years.

The January national CPI ex-fresh food rose 0.9% year-over-year, stronger than expectations of 0.8%. The January national CPI ex-fresh food & energy rose 0.4% year-over-year, stronger than expectations of 0.3% and the biggest increase in 17 months.

Baker-Hughes reported that the U.S. rig count was up 3 rigs from last week at 978, with oil rigs up 1 to 799, gas rigs up 2 at 179, and miscellaneous rigs unchanged.

Market Sentiment – The Fed’s MPR didn’t offer anything new in its summary, and read much like the FOMC minutes. The report said activity increased at a solid pace over the second half of 2017 and that the labor market continued to strengthen.

It also reiterated 12-month inflation has remained below target and added that despite the tight labor market, wage growth has been moderate, in part held down by low productivity growth.

The Fed also indicated that resource slack and commodity prices along with movements in the U.S. dollar appear to explain inflation’s behavior fairly well.

There was nothing in the report to suggest the FOMC will stray from its gradualist normalization approach for now, leaving a March rate hike on tap, and likely more tightening down the road.

The report will be the basis for Fed Chairman Jerome Powell’s congressional testimony on Tuesday as it was moved up a day from Wednesday’s originally planned testimony.

Cleveland Fed President, Loretta Mester, sees the expansion firmly in place along with strong labor markets and expects inflation to rise to 2% on a sustained basis over the next couple of years.

She views the success of the current inflation-targeting regime as a high bar for changing the framework, which may be reassessed starting later this year. She said the review would be useful even if the Fed maintains the status quo.

Boston Fed President, Eric Rosengren, said low real rates are likely for some time and analysts will likely need QE again some time in the future.

New York Fed Dudley added that the bond portfolio run-down was essentially on auto pilot and has not disrupted markets, but agreed with Rosengren that bond purchases remain a viable tool if rates return to zero.

Both were speaking in a panel discussion on the Fed’s balance sheet.

The iShares 20+ Year Treasury Bond ETF (TLT) continued its rebound off its midweek low after testing a high of $118.31.

Near-term resistance is at $118.50-$119 with a move above the latter being a continued bullish signal. Short-term support has moved up to $117.75-$117.50 with risk to $116.50-$116 on a close below the latter.

RSI is trying to hold support at 40 with continued closes above this level keeping a run at 50 in play. October and February support is at 30 if 40 fails next week.

Market Analysis – The Spider S&P 500 ETF (SPY) soared 1.6% after closing on Friday’s high of $274.71 while settling back above its 50-day moving average.

Fresh resistance is at $275-$275.50 with continued closes above the latter getting $277-$277.50 in play. Rising support is at $272.50-$272.

RSI cleared near-term resistance at 50 with continued closes above this level keeping 60 in the mix. Support is at 40 if 50 fails to hold.

The Health Care Select Sector Spider (XLV) also rallied 1.6% after reaching a peak of $85.36 to clear and hold its 50-day moving average.

Fresh resistance is at $85.50-$86 with a close above the latter being a very bullish signal for a run towards $87.50-$88.

Support is at $84.25-$84 with a close below the latter signaling additional weakness.

RSI is trying to hold mid-month resistance at 50 and a level that served as December support. Continued closes above 50 would be a bullish signal for a run at 60, possibly 70, depending on strength.

The percentage of S&P 500 stocks trading above the 200-day moving is currently at 68.51% and Friday’s high. Resistance is at 70%-71% and mid-month highs with continued closes above this level could leading to a quick run towards 75%.

This level served as previous support throughout December. A close back below the 65% level would be a slightly bearish development.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average is currently at 60.57%.

A mini-trading range between 50%-60% was in place throughout last week with Friday’s close above the latter being a slightly bullish development with near-term resistance at 62.5%-65%.

Support is at 55%-50% with a close back below 60%.
Existing Position Update

AAPL breaking out higher. Few more points to the upside and we will turn the position into an iron condor.

Because short term volatility levels are declining, we should expect more institutional cash to flow into the markets.

Moreover, because stocks are trading above the 50 day line, we will naturally see more short covering, which should further increase sentiment that we are seeing in the bulls.

SPY remains stable and without excess volatility, we should continue to see price remain above the 50 day line to the upside.

Expect two more positions this week, especially if the market remains stable.

Roger Scott