U.S. markets were slammed on Monday as renewed trade concerns caused a fresh wave of panic selling.

The White House said it is crafting legislation to limit Chinese investment in U.S. technology companies more broadly, along with blocking tech exports.

The rhetoric has heightened the trade debate as volatility spiked to its loftiest level since mid-April.

With the rest of the week light on economic and earnings news, the trade war remains a major headwind.

The Dow tanked 1.3% after trading to a low 24,084 while closing below its 200-day moving average.

The S&P 500 sank 1.x% following the backtest to 2,698 with major support at 2,700 and the 50-day moving average holding.

The Dow is now in negative territory for the month while the S&P 500 needs to hold 2,705 to avoid the same fate.

The Nasdaq tumbled 2.1% after testing a low of 7,477 but was able to hold the 7,500 level and prior late May resistance. The Russell 2000 stumbled 1.7% on the pullback to 1,649 with major support at 1,640 now in play.

Both indexes are still up for the month with Tech needing to hold 7,442 while the small-caps having to hold 1,633.

Utilities surged 1.7% while Consumer Staples added 0.5% and were the only sectors that closed in positive territory.

Consumer Discretionary and Technology were down 2.2% and 2.1% respectively, to pace laggards.

Communication Services (XLC), a new sector added to the S&P 500 that has only been trading for 5 sessions, also fell 2.1%.

Earnings growth for Q1 reached its highest level in more than 7 years at 24.3% on 7.2% revenue gains. With 1Q numbers in the books, 2Q earnings season just around the corner, here is a preview of expectations.

Total Q2 earnings for the S&P 500 index are expected to be up 18.3% from the same period last year on 8% higher revenues.

Q2 estimates have moved up modestly since the quarter got underway, but the aggregate positive revision was primarily because of the Energy sector.

Excluding the Energy sector, estimates for the quarter would be modestly down in the last 10 weeks.

Estimates went up for the Energy, Technology and Retail sectors and went down for the Consumer Discretionary, Consumer Staples, Autos, and Finance sectors.

Tech sector earnings are expected to be up 22.7% on 10.5% higher revenues, which would follow 31.1% earnings growth on 13.1% revenue growth in Q1.

The Finance sector earnings are expected to be up 18.2% from the same period last year on 3.4% higher revenues.

For the small-cap S&P 600 index, total Q2 earnings are expected to be up 30.5% on 10.7% higher revenues, which would follow 20.5% earnings growth on 7.6% revenue growth in Q1 2018.

For full-year 2018, total earnings for the S&P 500 index are expected to be up 19.9% on 6.1% higher revenues. For full-years 2019 and 2020, earnings are expected to be up 9.8% and 9.6%, respectively.

Revenues for the index are expected to be increase by 4.6% in 2019, and 4.4% in 2020.

The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.6X is $156.86.

Using the same methodology, the index ‘EPS’ works out to $172.26 for 2019 (P/E of 16X) and $188.82 for 2020 (P/E of 14.6X).

Global Economy – European markets were slammed after President Trump called for America’s trade partners to remove trade barriers and tariffs, or face the consequences.

Germany’s DAX 30 plummeted 2.5% and UK’s FTSE 100 dropped 2.2%.

The Stoxx 600 Europe fell 2% and France’s CAC 40 gave back 1.9%. The Belgium20 declined 1.4%.

ECB Chief Economist Praet said the ECB expressed at its latest meeting an anticipation that net asset purchases would end at the end of the year.

He said the ECB didn’t say they were now deciding to stop the program in December.

Praet also said that interest rates will remain at current levels as long as necessary to ensure that inflation developments remain in line with current expectations of a sustained adjustment path.

The German Jun IFO business climate fell 0.5 to 101.08, matching expectations.

Asian markets were mostly lower as traders brushed aside the latest cut to banks’ reserve-requirement ratio by the People’s Bank of China, as the move was anticipated.

Economists were even expecting a reduction larger than the half-point cut that will become effective next week.

Hong Kong’s Hang Seng was off 1.3% and China’s Shanghai was down 1%.

Japan’s Nikkei declined 0.8% and Australia’s S&P/ASX 200 dipped 0.2%.
South Korea’s Kospi was up less than a point, or 0.03%.

Chicago Fed National Activity Index fell 0.52 ticks to -0.15 in May after rising 0.16 points to 0.42 in April and below estimates for a print of 0.37.

The 3-month June moving average dropped to 0.18 from 0.48 in April compared to 0.23 in March.

May New Home Sales checked in at 689,000, well above forecasts of 665,000.

Strength was seen in the South, while declines were posted in the West and Northwest, with the Midwest unchanged. The median sales price fell 1.7% to $313,000.

On a 12-month basis, the median price is down 3.3% year-over-year.

Dallas Fed Manufacturing Survey came in at 36.5, topping forecasts for a print of 27.

Market Sentiment – Fedspeak will be back in focus this week with Dallas Fed Kaplan and Atlanta Fed Bostic making appearances on Tuesday.

Fed VC Quarles will likely make comments on Wednesday along with Boston Fed Rosengren. St. Louis Fed Bullard will take part on Thursday in a discussion on the U.S. economy and monetary policy.

The iShares 20+ Year Treasury Bond ETF (TLT) traded to a high of $121.11 to clear lower resistance at $120.50-$121.

Additional hurdles are at $121.25 and the 200-day moving average with a move above the latter signaling additional strength. Rising support is at $120.25-$119.75.

Market Analysis – The Spider S&P 500 ETF (SPY) fell for the 5th-time in 7 sessions following the backtest to $269.10.

May support at $270.50-$270 and the 50-day moving average held with a close below $269 signaling additional weakness.

We mentioned the rounding top formation from earlier this month that represented a short-term bearish signal and why we were slightly cautious on SPY.

Lowered resistance is at $272-$272.50 with this pattern remaining in play until $275 is cleared.

RSI has been in a nasty downtrend with current support at 40.

There is risk to 35-30 and February/ March lows on a close below this level. Near-term resistance at 45-50.

The Technology Select Sector Spiders (XLK) extended its losing streak to 3-straight sessions on the pullback to $68.72.

Lower support at $69.25-$69 and the 50-day moving average held with a close below the latter being a bearish development.

The prior trading range between $69-$70 that lasted throughout much of May is back in play with lowered resistance at $70-$70.50.

RSI has been in a major downtrend throughout the month with current support at 40.

A move below this level would be a bearish signal for continued weakness towards 35-30 and 2018 lows.

Existing Position Update

Used today’s corrective pressure to close out our third winning trade.

PYPL was closed out at $.50.

I’m looking at several bull put spreads at this time, since markets are expected to rally over the near term.

Expect the stocks to show upside before end of month.

Roger Scott