U.S. markets struggled on Friday’s open after the U.S. imposed new tariffs on Chinese goods.
China responded by criticizing the U.S. for starting the largest trade war in history and violating the WTO rules.
The major indexes saw their lows a short time after the open before drifting higher in the second hour of trading and holding positive territory into the closing bell.
Volatility settled below major support levels and is suggesting the trade-war jitters are fading now that they are finally here.
The Nasdaq zoomed triple-digits, or 1.3% after making a run to 7,695. The breakout of an 8-day trading range was a bullish development with continued closes above 7,700 getting fresh all-time highs north of 7,800 in play.
The Russell 2000 extended its win streak to 4-straight sessions after rallying 0.9% and testing an intraday peak of 1,695.
The index is within a stone’s throw of its all-time high at 1,708 with breakout potential to 1,750-1,765 on continued momentum.
Tech jumped 2.4% for the week while the small-caps surged 3.2%.
The S&P 500 rose 0.9% after trading to a high of 2,764 and clearing major resistance at 2,750. It was the first close above this level since June 22nd with additional hurdles at 2,775-2,780.
The Dow traded higher for the 5th time in 6 sessions after rising 0.4% while testing an intraday high of 24,520.
The index still faces major resistance at 24,625 and a 50-day moving average that is showing signs of curling higher.
For the week, the S&P 500 was up 1.5% and the Dow added 0.8%.
Communication Services led sector strength for a second-straight session with a 1.6% pop while Health Care advanced 1.4%. Technology was higher by 1.2%.
There were no sector laggards for a second-straight session.
Second-quarter earnings season has been in progress with the bulk of major companies starting to report in the upcoming week and throughout July.
Estimates for 2Q have moved up modestly since the quarter got underway, in contrast to the very strong positive revisions trend ahead of the start of Q1 earnings season.
Earnings growth in 1Q reached its highest level in more than 7 years at 24.6% on 8.7% revenue gains.
As far as 2Q thus far, total earnings for the 20 S&P 500 members that have reported fiscal May-quarter results are up 32.3% on 13.6% higher revenues.
For the S&P 500 index as a whole, total Q2 earnings are expected to be up 19% from the same period last year on 8.1% 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 went down.
Specifically, 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 due out over the next few weeks and are expected to be up 18.5% from the same period last year on 3.8% higher revenues.
Other major sectors with strong expected growth in Q2 include Energy (138.2% earnings growth), Basic Materials (54%), Industrial Products (24.5%) and Retail (18.3%).
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 26.4% on 8.1% higher revenues, which would follow 24.4% earnings growth on 8.4% revenue growth in Q1.
For full-year 2018, total earnings for the S&P 500 index are expected to be up 20.2% on 6.1% higher revenues.
For full-years 2019 and 2020, total earnings are expected to be up 9.8% and 9.7%, respectively. Revenues for the index are expected to be increase by 4.6% in 2019, and 2020.
The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.6X is $156.50.
Using the same methodology, the index ‘EPS’ works out to $171.77 for 2019 (P/E of 16X) and $188.44 for 2020 (P/E of 14.6X).
Global Economy- European markets closed Friday with modest gains, erasing earlier losses that came as the U.S. and China kicked off a trade war by implementing promised import tariffs.
The Belgium20 advanced 0.6% and Germany’s DAX 30 climbed 0.3%. The Stoxx 600 Europe, UK’s FTSE 100 and France’s CAC 40 were all up 0.2%.
German May industrial production rose 2.6%, better than forecasts of 0.3%.
Asian markets finished higher, but still mostly logged big losses for the week, as the much-anticipated trade war between the U.S. and China is officially underway.
Japan’s Nikkei jumped 1.1% and Australia’s S&P/ASX 200 soared 0.9%.
South Korea’s Kospi rallied 0.7% while China’s Shanghai and Hong Kong’s Hang Seng rose 0.5%.
Japan May labor cash earnings rose 2.1% year-over-year, topping expectations of 0.9%.
Japan May household spending fell 3.9% year-over-year, weaker than expectations for a decline of of 1.5%.
Nonfarm payrolls increased 213,000 in June, with the unemployment rate rising to 4%. Expectations were for a print of 190,000 with the unemployment rate remaining flat at 3.8%.
There were also firm gains of 0.2% for both hours-worked and hourly earnings, with another 2.7% year-over-year wage rise reported.
The International Trade in Goods deficit narrowed to $43.1 billion May, versus forecasts of a $43.7 billion deficit.
Baker-Hughes reported the U.S. rig count was up 5 rigs from last week to 1,052, with oil rigs up 5 to 863, gas rigs unchanged at 187, and miscellaneous rigs unchanged at 2.
The U.S. Rig Count is up 100 rigs from last year’s count of 952, with oil rigs up 100, gas rigs down 2, and miscellaneous unchanged.
The U.S. Offshore Rig Count is unchanged at 19 and down 2 rigs year-over-year.
Atlanta Fed’s Q2 GDPNow estimate was cut to 3.8%, down from 4.1% previously and closer to the Blue Chip consensus.
The nowcasts for 2Q real consumer spending growth and 2Q real gross private domestic investment growth dropped from 2.9% and 7.1%, respectively, to 2.7% and 6%, respectively.
Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 3-straight after trading to a high of $122.92.
Upper resistance from mid-January at $122.50-$123 held and was split on the close. Rising support is at $122.50-$122 with a close below the latter signaling a short-term top.
RSI remains in a nice uptrend and is on track to clear resistance at 70.
Continued closes above this level could lead to a push towards multi-year resistance at 75-80 and would indicate overbought levels.
Market Analysis – The Russell 2000 ETF (IWM) is back at all-time highs after extending its win streak to 4-straight sessions and reaching a peak of $168.44.
There is blue-sky territory towards $170-$171.50 on continued strength and closes above $168.50.
Rising support is at $166.50-$166 with a close below $165 signaling a short-term top.
RSI has been in a strong uptrend with near-term resistance at 70 in play.
Continued closes above this level could lead to another run at the 75 area and January/ June highs. Support is at 60.
Bitcoin Investment Trust (GBTC) is trying to regain and hold support at the $10 level following the recent 52-week lows north of $8. A close back below $10 could lead to a retest of $9.50-$9.
Near-term resistance is at $10.50-$11 with a close above the latter being a continued but slightly bullish development.
RSI is approaching resistance at 50 with continued closes above this level signaling additional strength. Support is at 40 with a close below this level suggesting another pullback towards 35-30.
The percentage of S&P 500 stocks trading above the 50-day moving average closed Friday at 59% with the session high tapping 59.8%.
Current resistance is at 60%-65% with a move above the latter likely leading to 70-75% and mid-June peaks. Support is at 57.5%-55%.
The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed at 62.13%, with Friday’s peak reaching 63.10%.
June resistance is at 65%-67.50% with the July 14th peak at 67.96%. Support is at 60%-57.5% with a move below 55% signaling additional weakness.
Existing Position Update
Both AMZN and NFLX showed similar type of trading action on Friday.
Closing near the upper end of trading range with strong upside.
I’m expecting more upside next few sessions, which will reduce the premium we took in even further.
I’m also planning on turning NFLX into an iron condor on Monday if I can get another 5 to 7 dollar gain to the upside before the stock pulls back once again.
Stay tuned and keep eye on your phone and email alerts – especially if NFLX is trading higher Monday first half of day.
All the best,
Roger Scott