U.S. markets closed higher for the 2nd-straight week following a positive Friday and progressive trade talks with China along with a goldilocks jobs report.
President Trump said the two sides were making swift progress in trade talks, adding we should know over the next 4 weeks if an agreement can be reached.
Chinese Vice Premier Liu He also stated a new consensus has been reached by both parties over the text of a deal. The continued momentum has pushed the major indexes within 2%-3% of their all-times highs with volatility at its lowest levels of the year.
The Russell 2000 showed the most strength after rallying 0.9% while closing at its session high of 1,582. Major resistance at 1,575 and the 200-day moving average was cleared and held with momentum towards 1,600-1,625 on continued strength.
The index, however, remains just over 10% away from fresh all-time highs but is on the verge of coming out of correction territory.
The Nasdaq gained 0.6% following the run to 7,940 ahead of the closing bell. Fresh and lower resistance from mid-September at 7,900-7,950 was cleared and held with a move above the latter leading towards 8,100-8,150 and new lifetime highs.
The S&P 500 was up for the 7th-straight session after rising 0.5% while reaching an late day peak of 2,893.
Lower resistance at 2,900-2,925 was challenged but held with a move above the latter getting 2,950-2,975 and fresh all-time highs in play.
The Dow edged up 0.2% after testing a high of 26,487 shortly after the opening bell.
Upper resistance at 26,250-26,500 was cleared on the close above the former with upside potential towards 26,750-27,000 and new all-time highs on move above the latter.
For the week, the Russell 2000 soared 2.9% and the Nasdaq jumped 2.7%. The Dow and S&P were higher by 2.7% and 2.1%, respectively.
Energy led sector strength after advancing 1.8%.
Utilities and Real Estate were up 0.9% and 0.8%, respectively. Materials slipped 0.03% and was the only sector in the red.
For the week, Materials zoomed 4.2% while Financials surged 3.5%.
Communication Services and Consumer Discretionary rose 3.3% and 3.2%, respectively.
Consumer Staples was the only sector laggard after falling 0.9%.
First-quarter earnings season will heat up this week with a number of Financial companies reporting earnings on Friday. Earnings growth in 2019 Q1 is expected to turn negative and would be the first earnings decline since 2Q 2016.
Driving the Q1 earnings decline are margin pressures across all major sectors along with tough comparisons to last year’s numbers when margins got a one-time boost from the tax legislation coupled with the rise in payroll, materials and transportation expenses.
Total S&P 500 earnings are expected to decline 4% from the same period last year on 4.6% higher revenues. Earnings growth is expected to be negative for a number of sectors, with Technology and Energy as the biggest drags.
Technology sector earnings are expected to decline 10% from the same period last year on 3% higher revenues, with the semiconductor space as the biggest drag.
Excluding the Tech sector’s weak growth in Q1, total earnings for the rest of the index would be down by -2.1% from the year-earlier period.
Estimates for Q1 as well as full-year 2019 steadily came down over the last few months, with the magnitude of negative revisions one of the highest in recent years.
The has been nearly 2 dozen 1Q results thus far with 22 S&P 500 index members already out. Total earnings for these companies are down 10.9% on 4.3% higher revenues, with 72.7% beating EPS estimates and 50% topping revenue estimates.
For the small-cap S&P 600 index, total Q1 earnings are expected to be down 10.1% from the same period last year on 4.1% higher revenues.
For full-year 2019, total earnings for the S&P 500 index are expected to be up 2% on 3.5% higher revenues, which would follow the 23.4% earnings growth on 9.2% higher revenues in 2018.
Estimates for 2019 have been steadily coming down, with the current 2% growth rate down from 9.8% in early October 2018.
With earnings growth in the first two quarters of 2019 expected to be in negative territory, the talk of an earnings recession is being talked about on Wall Street.
The definition of a recession is two or more quarters of negative growth, typically GDP growth. While some of the chatter is likely overblown, there is cause for slight concern with full-year guidance likely being further adjusted by a number of high-profile companies.
Global Economy – European markets settled higher despite news that negotiations on a last-ditch Brexit deal had made no progress. EU leaders told Prime Minister Theresa May she had not convinced them that they should let Britain delay its departure next week.
UK’s FTSE 100 and the Belgium20 rose 0.6% while France’s CAC 40 and Germany’s DAX 30 climbed 0.2%. The Stoxx 600 Europe added 0.1%.
Asian markets were quiet with China’s Shanghai and Hong Kong’s Hang Seng closed for a holiday.
Japan’s Nikkei advanced 0.4% and South Korea’s Kospi nudged up 0.1%. Australia’s S&P/ASX 200 was down 0.8%.
Japanese Household Spending rose 1.7% in February, rising 1.7%, missing estimates for a 2.1% annual increase.
Nonfarm payrolls for March was at 196,000, topping expectations of 169,000, and follows a revised 33,000 February gain with January revised to 312,000.
The unemployment rate was steady at 3.8%. Average hourly earnings were up 0.1% from 0.4% previously while the growth rate slowed to 3.2% year-over-year from 3.4%.
The workweek improved to 34.5 from 34.4. The labor force dropped 224,000 after February’s 45,000 decline, while household employment was down 201,000 from 255,000.
Private payrolls increased 182,000 with a 170,000 gain in the service sector and 12,000 in the goods producing sector. Manufacturing jobs slip 6,000 while construction added 16,000 and government 14,000 higher.
The labor market participation rate dipped to 63% from 63.2%.
Baker-Hughes reported the U.S. rig count was up 19 rigs from last week to 1,025, with oil rigs up 15 to 831, gas rigs up 4 to 194, and miscellaneous rigs unchanged at 0.
The U.S. Rig Count is up 22 rigs from last year’s count of 1,003, with oil rigs up 23, gas rigs unchanged at 194, and miscellaneous rigs down 1. The U.S. Offshore Rig Count is down 1 rig to 22 and up 10 rigs year-over-year.
Consumer Credit came in at $15.2 billion for February versus forecasts for a print of $17 billion. Non-revolving credit was at $12.2 billion after the revised $15.1 billion gain previously.
Revolving credit was up to $3 billion versus $2.6 billion previously with February rising at a 4.5% year-over-year pace versus 5.3% in January.
Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 2nd-straight session after trading to an intraday high of $124.17. Current and lower resistance at $123.75-$124.25 was cleared and held.
Continued closes back above $125 would signal a possible near-term bottom and return of momentum.
Support is trying to move up to $123.75-$123.25 with risk towards $122-$121.50 and the 50-day moving average on a close below $123.
RSI is in a slight uptrend with resistance at 60.
A move above this level could signal additional strength towards 65-75 with the latter representing the March peak.
Support is at 50 and a level that has been holding since mid-March.
Market Analysis – The S&P 400 Mid Cap Index ($MID) traded to a fresh 2019 high of 1,949 on Friday with major resistance from February at 1,950 holding.
This level served as prior resistance in mid-May 2018 and as prior support in June, July and October of last year, as well. Continued closes above 1,950 could lead to additional strength towards 1,975-2,000 with the all-time peak at 2,053.
Current support is at 1940-1,920 with a move below the latter signaling additional weakness towards 1,900.
Mid-cap (and small-cap) stocks have been lagging behind the current rally but this might be changing following the 5th-straight close above the 200-day moving average.
The 50-day moving average is also on track to clear the 200-day to form a golden cross on continued strength.
RSI remains in an uptrend with resistance at 70.
A move above this level would signal additional strength towards 75-80 and February peaks. Support is at 60 with a close below this level signaling a possible near-term top and additional weakness towards 55-50.
The Spider Gold Shares (GLD) has been in a 7 session holding pattern following the drop below its 50-day moving average in late March. Friday’s low tapped $121.66 with near-term and upper support at $121.50-$121 holding.
A close below the latter would be a slightly bearish development with risk towards the $120 area and the prior December breakout above this level.
Current resistance is at $122.25-$122.75 followed by $123-$123.50.
RSI is back in a slight downtrend with strong support at 40 from March and a level that has been holding since last September.
A close below 40 would signal additional weakness towards 35-30 and August 2018 levels. Resistance is at 45-50.
The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed Friday at 75.72% with the session high reaching 76.69%.
This represents the highest level in over a year with January 2018 resistance at 77.5%-80%.
While these are signaling slightly overbought levels, the high that month reached 86.53%.
Support is at 72.5%-70%. A move below the latter would be a slightly bearish signal for additional weakness towards the 67.5%-65% area.
The percentage of S&P 500 stocks trading above the 50-day moving average settled at 82.77% with the session high reaching 83.16%.
Current resistance from mid-February is at 85%-87.5% with a move above the latter signaling additional strength towards 90%-92.5%. The February high reached 92.65%. Current support is at 80%-77.5%.
A move below the 75% level and last week’s low would be a slightly bearish development for further weakness.
Existing Position Update
Markets are moving higher but running out of momentum.
Expecting next few days to show minor downside pressure – which will help bear call spreads become profitable.
Going to wait till we get into profit zone on few before initiating more bear calls spreads.
Overall, sentiment remains bullish but slightly overbought – this should cause very mild pullback over next 72 trading hours.
Roger Scott.