U.S. markets were choppy throughout Friday’s session as Wall Street awaited President Trump’s speech regarding drug pricing. The plan called for the use of more generics, more competition, and for Medicare to negotiate better pricing with drug companies.
The volatility ahead of the news led to intraday losses before a rebound afterwards that helped push the major indexes towards their morning highs. The overall market closed mixed for the session but the weekly gains were the first in three weeks.
The Dow closed higher for the 7th-straight session after climbing 0.4% while reaching a peak of 24,868. The S&P 500 extended its win streak to 3-straight sessions after adding 0.2% while testing a high of 2,732. For the week, the S&P 500 soared 2.4% while the Dow rallied 2.3%.
The Russell 2000 was higher by 0.2% after testing a high of 1,609 for the second-straight session while extending its winning streak to six-straight.
The Nasdaq slipped 2 points, or 0.03%, after making a backtest to 7,372 before holding the 7,400 level into the closing bell. The small-caps were up 2.8% for the week while Tech jumped 2.7%.
Health Care showed the most sector strength after rallying 1.5% while Consumer Discretionary, Industrials, and Utilities rose 0.2%. Real Estate was the leading laggard after falling 0.5%.
Energy and Financials zoomed 3.9% and 3.6% to pace sector strength for the week. Industrials and Technology surged 3.4% and 3.3%. Utilities and Consumer Staples were the only sectors with weekly losses after giving back 2.2% and 0.3%, respectively.
Earnings growth for Q1 has been very strong, but that was no surprise for the market. More importantly, the growth picture for the current and coming quarters is effectively the same as before the start of this earnings season.
Results from 90% of the S&P 500 companies having reported thus far have total Q1 earnings up 24.5% from the same period last year on 9.3% higher revenues. Nearly 78% have beat EPS estimates and 75% have topped revenue estimates.
Looking at Q1 as a whole, total earnings are expected to be up 23.6% from the same period last year on 8.8% higher revenues, representing the highest quarterly earnings growth pace in 7 years.
Energy sector earnings are expected to be up 76% from the same period last year on 14.4% higher revenues. Excluding the Energy sector, total S&P 500 earnings growth drops from 23.6% to 21.9%.
For the small-cap S&P 600 index, we now have Q1 results from over 83% of the index’s total membership. Total earnings for these companies are up 23.8% on 10.3% higher revenues, with 64.7% topping EPS estimates and 72.5% beating revenue estimates.
In addition to earnings and revenue growth, revenue surprises are notably tracking above historical periods for the small caps. For the quarter as whole, total S&P 600 earnings are expected to be up 17.1% on 9.1% higher revenues.
For full-year 2018, total earnings for the S&P 500 index are expected to be higher by 19.2% on 5.7% higher revenues. For full-year 2019, earnings are expected to rise 9.4% on 4.5% higher revenues.
The implied EPS for the index, calculated using current 2018 P/E of 17.2X is $155.66. Using the same methodology, the index EPS works out to $170.26 for 2019 (P/E of 15.7X).
Global Economy – European markets settled mixed on Friday. UK’s FTSE 100 rose 0.3% while the Stoxx 600 Europe was up 0.1%. Germany’s DAX 30 dipped 0.2% and France’s CAC 40 slipped 0.1%. The Belgium20 was down a tenth-point.
Asian markets closed mostly higher as geopolitical concerns eased with President Trump and North Korean leader Kim Jong Un set to meet in Singapore on June 12th.
Japan’s Nikkei jumped 1.2% and Hong Kong’s Hang Seng was up 1%. South Korea’s Kospi advanced 0.6%. China’s Shanghai was lower by 0.4% while Australia’s S&P/ASX 200 fell just over 2 points, or 0.04%.
China April new yuan loans were 1.18 trillion yuan, stronger than expectations of 1.10 trillion yuan. April aggregate financing rose 1.56 trillion yuan, stronger than expectations of 1.35 trillion yuan.
The Import Price Index for April was up 0.3% from the prior month, below expectations for a rise of 0.5%.
Baker-Hughes Rig Count was up 13 rigs from last week to 1,045, with oil rigs up 10 to 844, gas rigs up 3 to 199, and miscellaneous rigs unchanged at 2.
Consumer Sentiment checked in at 98.8 versus forecasts for a print of 99.
Market Sentiment – St. Louis Fed James Bullard said rates are probably back at neutral while making the argument for staying on hold to help re-center inflation expectations.
He also worries that the FOMC risks inverting the curve if rates are increased further at this point. He also believes tax reform can boost growth with accelerating inflation.
Bullard reiterated there are risks to continued Fed rate hikes, saying additional tightening could invert the yield curve, and that would be a bearish signal on the economy.
He added the Fed has already been pre-emptive in raising rates.
He said the economy has a lot of potential to keep going although it does face constraint from slower growth in the labor market. He went on to say a strategic immigration policy could help the economy.
He also believes that higher oil prices could stimulate more U.S. production, which in turn could cap the escalation in oil prices.
The iShares 20+ Year Treasury Bond ETF (TLT) traded to a high of $119.36 while closing above its 50-day moving average.
Fresh resistance is at $119.50-$120 with continued closes above the latter being a bullish development. Rising support is at $119-$118.50.
RSI is back in an uptrend after clearing the 50 level with resistance at 60 and the early April high. Support is at 45-40.
Market Analysis – The Spider S&P 500 ETF (SPY) traded higher for the 5th time in 6 sessions after reaching an intraday top of $273.15. Fresh resistance at $273-$273.50 held with continued closes above the latter leading to $274-$275. Near-term support is at $272.50-$272.
RSI is in a nice uptrend and appears on track to test longer-term resistance at 70. Support is at the 60-55 area.
The Utilities Select Spider (XLU) closed in the green for a 2nd-straight session after trading up to $50.52. Near-term resistance is at $50.75-$51 with additional hurdles at $52 and the 200-day moving average.
Shaky support is at $50.25-$50 and the 50-day moving average. A close back below $49.50 would be a bearish development for lower lows.
RSI is trying to clear resistance at 50 and mid-April support with continued closes above this level signaling additional momentum. Current support is at 45-40.
The percentage of S&P 500 stocks trading above the 50-day moving average closed Friday at 60.79%. Continued closes above 63%-63.5% would be a bullish development for a possible push towards 70% and early December support levels.
A close back below 60%-55% would signal upcoming weakness.
The percentage of Nasdaq 100 stocks trading above the 200-day moving average is currently at 61.16%. Resistance is at 65% and the mid-April peak with a move above this level being a bullish signal.
Support is at 57.5% with a close below 55% being a slightly bearish development.
Existing Position Update
NVDA expired worthless. Solid risk to reward profit on the position with minimal slippage or drama.
Only open position that remains is TSLA.
I’m not expecting too much shift in sentiment over the near term.
We may liquidate position early if decay continues aggressively.