U.S. markets opened in positive territory on Friday as the Dow and S&P 500 both established fresh all-time highs.

However, Tech and the small-caps weakened shortly afterwards while spending the rest of the session underwater.

Some of the nervousness was compounded by index rebalancing as the S&P moved some internet and media stocks into the newly created Communication Services ETF.

The sector rebalancing occurred after Friday’s close but had an impact for the week as the major indexes finished mixed.

The Dow extended its winning streak to 4-straight sessions after rising 0.3% while trading to a fresh all-time high of 26,769.

New and lower resistance at 26,800-27,000 held and remains in play on continued closes above the 26,600 level.

The S&P 500 slipped a point, or 0.04% following its record run to 2,940.

Fresh and upper resistance at 2,950 held with a close below 2,925-2,920 being a cautious signal for possible further weakness.

For the week, The Dow and S&P 500 added 2.3% and 0.9%, respectively.

The Nasdaq made a 2nd-straight higher high after tapping 8,057 before fading 0.5% while closing below the 8,000 level.

Prior support at 7,900 and the 50-day moving average could come into play on a break below 7,950.

The Russell 2000 also fell 0.5% after tapping a high of 1,724 on the open.

The backtest to 1,710 keeps risk open for another backtest towards 1,700 and the 50-day moving average.

The Nasdaq slipped 0.3% for the week while the Russell 2000 was down 0.5%.

Energy and Utilities showed sector strength after advancing 0.6% and 0.4%.

Communications Services fell 0.6% to pace sector weakness while Consumer Discretionary and Financials fell 0.4%.

For the week, Materials surged 1.9% and Financials soared 1.8%.

Industrials and Energy were higher by 1.2% and 1.1%. Utilities and Real Estate sank 2.3% and 1.3%, respectively, with Technology rounding out the losers after falling 0.5%.

There is still a few weeks before Q3 earnings season really takes center stage, but the reporting cycle has gotten underway already, with results from 8 of the S&P 500 members out and another 8 companies reporting in the coming week.

All of these early reporters have fiscal quarters ending in August, but they get counted as part of the September-quarter tally.

It is hard to draw any firm conclusions from the results thus far, but total earnings for the 8 companies that have reported are up 38.7% from the same period last year on 12% higher revenues, with 87.5% beating EPS estimates and 50% beating revenue estimates.

Looking at total Q3 numbers, earnings are expected to be up 17.7% from the same period last year on 7.2% higher revenues.

This would follow 25.4% earnings growth in 2018 Q2 on 9.8% revenue growth, and the highest growth rates since 2010.

It is important to note, estimates for Q3 came down as the quarter unfolded, with the current 17.7% growth down from 19.6% at the end of June.

Global Economy – European markets closed higher on Friday despite disappointing economic news and continued Brexit chatter.

UK’s FTSE 100 soared 1.7% and Germany’s DAX 30 jumped 0.9%.

France’s CAC 40 rose 0.8% and the Stoxx 600 Europe climbed 0.4%. The Belgium20 edged up 0.2%.

German September Markit/BME manufacturing PMI fell 2.2 to 53.7, weaker than expectations for a dip of 0.2 to 55.7.

The Eurozone September Markit manufacturing PMI dropped 1.3 to 53.3, weaker than estimates of 54.5.

The Eurozone September Markit composite PMI slipped 0.3 to 54.2, missing forecasts of 54.5.

Prime Minister Theresa May warned Friday that Brexit talks had hit an impasse.

She has called on European leaders to present new proposals as negotiations between the two sides have turned increasingly acrimonious.

Asian markets were strong across the board on Friday while booking solid weekly gains.

China’s Shanghai zoomed 2.5% for a weekly return of 4.3%. Hong Kong’s Hang Seng surged 1.7% for a weekly gain of 2.5%. Japan’s Nikkei rallied 0.8% and was up 3.4% for the week.

South Korea’s Kospi was higher by 0.7% on Friday and 0.9% for the week. Australia’s S&P/ASX 200 gained 0.5% over the week after rising 0.4% on Friday.

Japan August national CPI rose 1.3% year-over-year, topping expectations of 1.1%. August national CPI ex-fresh food rose 0.9%, matching forecasts.

August national CPI ex-fresh food & energy rose 0.4%, matching estimates.

Markit’s manufacturing index rose 0.9 ticks to 55.6 in the preliminary print for September. However, the services index dropped 1.9 points to 52.9.

Baker-Hughes Rig Count reported that the U.S. rig count was down 2 rigs to 1,053, with oil rigs down 1 to 866, gas rigs unchanged at 186, and miscellaneous rigs down 1 to 1.

The U.S. Rig Count is up 118 rigs from last year’s count of 935, with oil rigs up 122, gas rigs down 4, and miscellaneous rigs unchanged at 1. The U.S.

Offshore Rig Count was unchanged at 20 rigs and is up 1 rig year-over-year.

Market Sentiment – The Fed will meet again next Tuesday and Wednesday. A 25 bp hike has been priced in for months.

The more importance story will be the dot plot and forward guidance, both of which are likely to support a continuation of gradual policy normalization.

With growth over 3% and inflation stats generally at the 2% target, Fed members should convey confidence in their policies and suggest they’ll remain intact for the foreseeable future.

This would mean keeping the dot plot median at 4 tightenings this year, and 3 in 2019.

Fed funds futures are showing about an 80% chance for a tightening at the December 18th-19th meeting. Implied rates are showing about a 50/50 probability there will also be another hike as soon as the March 19th-20th, 2019 FOMC meeting.

Fedspeak resumes after the FOMC meeting with Fed Chairman Jerome Powell scheduled to speak on the U.S. economy on Thursday. Dallas Fed Kaplan will also be making remarks.

Richmond Fed Barkin will talking on Friday and NY Fed Williams is also scheduled to speak.

The iShares 20+ Year Treasury Bond ETF (TLT) failed near-term resistance at $117.25 for a 2nd-straight session with the high reaching $117.28.

Near-term support is trying to move up to at $116.75-$116.50. A close below $116.25 would be a bearish development.

The 50-day moving average remains on track to fall below the 200-day moving average and form a death cross.

This is typically a bearish technical pattern for lower lows.

RSI is neutral with resistance at 35. A move bullish development would occur on continued closes back above the 40 level. Support is at 30 and the recent low.

Market Analysis – The Russell 2000 ETF (IWM) made a run to $171.82 shortly after the open with resistance at $171.50-$172 getting split. The late August peak reached $173.39 and would be back in play on continued closes above the latter.

We mentioned earlier this month the index had been in a tight range between $170-$172. This area was stretched down to $169 and the 50-day moving average last week.

Near-term support is at $170-$169.50. A close below $169 would would be a slightly bearish signal with risk to $166.50-$166 (and the 100-day moving average).

RSI has been dancing with the 50 level for the past few weeks. A move below 45 could lead to a continued backtest towards 40 and the late July lows.

Resistance is at 55-60 with a pop past the latter signaling additional strength.

The Consumer Discretionary Select Spiders (XLY) fell for the first time in 4 sessions despite tapping an all-time high of $118.08. Fresh resistance at $118-$118.50 held.

We mentioned last month there was blue-sky territory towards $118-$120 and these levels remain in play on continued closes back above $117.50.

The fade to $116.88 held new support at $116.75-$116.25.

A move below $116 would likely signal a short-term top with risk towards $115-$114 and the 50-day moving average.

RSI is back in a downtrend after failing resistance at 65.

Near-term support is at 55-50 with a move below the latter being a bearish development.

The percentage of S&P 500 stocks trading above the 50-day moving average closed Friday at 69.84% with the high tapping 71.03%. Resistance at 70%-72% was split and held.

A close above the latter would signal continued momentum towards the late August high north of the 75% level. This area also represented a top in mid-June.

Support is at 65%-64% with risk to the 61%-59% area and mid-August lows on a close below the latter.

The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed at 65.04% and the session peak on Friday.

Fresh resistance at 66% from the latter part of August was tested with a close above this level signaling continued momentum.

Key support is at 63% and a level that represents the low from the gap higher the previous session.

A move below this area would signal additional weakness in Tech and open up risk back to the 60% area.

Existing Position Update

Looking for corrective pressure from stocks next week and upside from the bond market.

Stocks are a bit overbought and semiconductors are starting to give out.

I’m expecting mild corrective pressure which should cause most positions to go into profit zone.

Bonds remain oversold and we should see more upside since price remains oversold in the very near term.

Next few sessions should be interesting.
Roger Scott