U.S. markets closed mostly higher on Friday despite mixed results from the Financial sector as 2Q earnings season officially got underway.

The gains market the 6th positive session in the past 7 following the July 4th holiday, and is suggesting the market is shaking off much of the uncertainty surrounding trade policy.

The small-caps remain a slight concern after failing to participate in the rally in 3 of the past 4 sessions.

However, the Russell 2000, did trade to a fresh all-time high earlier in the week. Volatility is approaching multi-month lows and continues to signal higher highs for the market.

The Dow advanced 0.4% after trading to an intraday high of 25,043 while holding positive territory throughout the session. Resistance from mid-June at 25,000 was cleared with fresh resistance at 25,250-25,350 on continued strength.


The S&P 500 climbed 0.1% following the run to 2,804. Resistance at 2,800 was cleared and held for the first time since the start of February. Continued closes above this level keeps 2,825-2,850 in play with January’s all-time peak north of 2,872.

For the week, the Dow rallied 2.3% and the S&P 500 soared 1.5%.

The Nasdaq was up 2 points, or 0.03%, after pushing a fresh all-time high of 7,843. Fresh support at 7,800 held on the morning weakness and pullback to 7,803.

There could be a 200+ point swing this month, depending on Tech earnings, with reward toward the 8,000 level, or risk to 7,600-7,550 and the 50-day moving average.

The Russell 2000 tested a high of 1,697 shortly after the open before fading 0.2%.

Resistance remains at 1,700 with continued closes above this level being a bullish development. A move below 1,680-1,675 would be a slightly bearish signal for lower lows.

The Nasdaq zoomed 1.8% while the Russell 2000 gave back 0.4%.

Consumer Staples gained 0.7% to lead sector strength while Energy and Industrials rose 0.5%.

Financials and Real Estate paced sector laggards after falling 0.5% and 0.3%, respectively.

Industrials jumped 2.2% for the week while Technology and Consumer Discretionary surged 2.1% to lead sector strength.

Utilities and Real Estate fell 1.2% and 0.8% for the week and were the only sector laggards.

Total earnings for the 22 S&P 500 members that have reported fiscal May-quarter results are up 29% on 12.5% higher revenues.

For the S&P 500 index as a whole, total Q2 earnings are expected to be up 19.1% from the same period last year on 8.2% higher revenues.

Q2 estimates for the Energy, Construction, Basic Materials and Tech sectors went up since the quarter got underway, while estimates for the Consumer Discretionary, Consumer Staples, Autos, Finance, and Conglomerate sectors have gone down.

Tech sector earnings are expected to be up 23.8% on 10.7% higher revenues, and would follow 31.1% earnings growth on 13.1% revenue growth in Q1.

Finance sector earnings are expected to be up 18.5% from the same period last year on +3.6% higher revenues.

Other major sectors with strong expected growth in Q2 include Energy (139.7% earnings growth), Basic Materials (53.6%), Industrial Products (24.5%) and Retail (18.4%).

The Autos and Conglomerates sectors are the only ones expected to have lower Q2 earnings compared to the year-earlier level.

For the small-cap S&P 600 index, total Q2 earnings are expected to be up 27% on 8.2% higher revenues, which would follow 24.2% earnings growth on 8.6% revenue growth in 2018 Q1.

For full-year 2018, total earnings for the S&P 500 index are expected to be up 20.3% on 6.2% higher revenues. For full-years 2019 and 2020, total earnings are expected to be up 9.8% and 9.6%, respectively.

Revenues for the index are expected to be increase by 4.7% in 2019, and 4.5% in 2020.

The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.6X is $156.51.

Using the same methodology, the index ‘EPS’ works out to $171.78 for 2019 (P/E of 16X) and $188.34 for 2020 (P/E of 14.6X).

Global Economy – European markets despite President Donald Trump saying U.K. Prime Minister Theresa May’s plan for a so-called soft Brexit would damage the likelihood of a trade deal between Britain and the United Staes.

Germany’s DAX 30 and France’s CAC 40 rose 0.4% while the Stoxx 600 Europe was up 0.2%. UK’s FTSE 100 and the Belgium20 added 0.1%.

Asian markets were mostly higher on Friday. Japan’s Nikkei led the way after surging 1.9% while closing above its 200-day moving average as the yen hit a fresh six-month low.

Meanwhile, South Korea’s Kospi jumped 1.1%. Hong Kong’s Hang Seng climbed 0.2% and Australia’s S&P/ASX 200 was up a tenth-point. China’s Shanghai slipped 0.2%.

China June new yuan loans checked in at 1.84 trillion yuan, stronger than forecasts of 1.535 trillion yuan. June aggregate financing rose 1.18 trillion yuan, weaker than expectations of 1.40 trillion yuan.

The China June trade balance was in surplus by $41.61 billion, wider than expectations of $27.72 billion. June exports rose 11.3% year-over-year, stronger than expectations of 9.5%.

June imports rose 14.1% year-over-year, weaker than estimates of 21.3%.

June Import and Export Prices were mixed, with a weaker than expected 0.4% import price decline and a stronger than expected 0.3% increase in export prices.

The University of Michigan Consumer Sentiment survey was weaker than expected, falling 1.1 points to a 6-month low of 97.1 in the preliminary print for July.

Baker-Hughes reported the U.S. rig count was up 2 rigs from last week to 1,054, with oil rigs unchanged at 863, gas rigs up 2 to 189, and miscellaneous rigs unchanged at 2.

The U.S. Rig Count is up 102 rigs from last year’s count of 952, with oil rigs up 98, gas rigs up 2, and miscellaneous rigs up 2. The U.S. Offshore Rig Count was unchanged at 19 and down 2 rigs year-over-year.

Market Sentiment – Dallas Fed Robert Kaplan expects one more rate hike this year and could be convinced of the need for a fourth hike, depending on the outlook. He said he is getting a little nervous about the longer-term trade effects on CAPEX, FX and geopolitics.

In fact, he says he has been calling out the risks of the trade spat in meetings with lawmakers and government officials, as the intensification of trade tariffs would downgrade 2018-19 U.S. economic forecasts.

The iShares 20+ Year Treasury Bond ETF (TLT) held positive territory throughout the session while trading to a high of $122.87. Upper resistance at $122.50-$123 held.

Continued closes above the latter would be a bullish development for a run towards $123.50-$124 and late January hurdles. Rising support is at $122.50-$122.

RSI is back in a slight uptrend with July and late May resistance at 70.

A move above this level would signal continued strength. Support is at 60 with risk to 55-50 on a close below this level.

Market Analysis – The PowerShares QQQ (QQQ) was up for the 6th time in 7 sessions after trading to an all-time high of $179.90.

Blue-sky resistance at $180 held with continued closes above this level getting $182-$182.50 in play.

We mentioned the breakout of a tight 2-week trading trading range from earlier this month would be a bullish development. The backtest and hold of the 50-day moving average were also key.

Rising support is at $178-$177.50 with continued closes below the latter signaling a short-term top with further risk towards $175.

RSI is pushing June resistance at 70 with continued closes above this level being a slightly bullish signal but representing overbought levels.

Support is at 65-60 with a move below the latter suggesting additional weakness.

The Spiders S&P Homebuilders ETF (XHB) have been choppy over the past 5 sessions with Friday’s peak reaching $40.89. Near-term resistance is at $41-$41.50 and the 200-day moving average.

Continued closes above $41.90 and the June 12-13th double top would signal renewed strength and a possible breakout.

Support is at $40.50-$40 and the 50-day moving average. A close below the latter would be a bearish development for lower lows.

RSI is approaching resistance 60 from earlier this month. A move above this level would be a bullish signal for a run towards 65-70 with the latter representing the early June high. Support is at 55-50.

The percentage of S&P 500 stocks trading above the 50-day moving average closed Friday at 65.67% with the session high tapping 66.46%. Current resistance is at 67.50%-70% with the latter representing the early week peak.

The mid-June highs reached the 75% level. Support is at 60% with a close below this level signaling additional weakness.

The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed at 66.99% and Friday’s high.

June resistance remains at 67.50% with the July 14th peak at 67.96%.

Continued closes above the 68% area gets 70%-72.5%and early March highs in play. Support is at 65%-62.5% with a move below 60% being a bearish development.

Existing Position Update

NFLX remains within range. We may take profit on the spread before expiration if decay continues at the current rate.

Expecting strong decline and decay in long bond which should cause our position to trade lower.

Discretionary stocks are making new highs and bank stocks are trading below the 50 day line, which tells me there’s more downside ahead for long bond.

I’m looking at a few bear call spreads – since the market is a bit overdone – I should have a few positions early in the week.

Stay tuned.

Roger Scott