U.S. markets showed strength throughout much of Friday’s action following reports White House and Chinese officials spoke over the phone, with Treasury Secretary Mnuchin suggesting face-to-face talks could follow.

However, the upside momentum faded late in the session as geopolitical tensions between the U.S. and Iran returned after an American Navy ship destroyed an Iranian drone.

The lower close capped a negative week for the major indexes with near-term support levels now in play following the late day fade from previous all-time highs.

Volatility spiked to elevated levels and into the closing bell with 2Q earnings ramping up significantly into this week and next.

The Nasdaq traded in a 101-point range after falling 0.7% while closing a couple points off its session low of 8,144. Current and upper support at 8,150-8,100 was breached and failed to hold with risk toward 8,050-8,000 on a move below the latter.

The S&P 500 gave back 0.6% despite tapping an intraday high of 3,006
but failing resistance at 3,000 for the 2nd-straight session. Upper support at 2,975-2,950 held on the session low with a close below the latter opening up risk towards 2,925-2,900 and the 50-day moving average.

The Russell 2000 was off 0.5% following the late day pullback to 1,547 and session low.

Near-term and upper support at 1,550-1,535 was breached and failed to hold with a close below the latter and the 50-day moving average signaling additional weakness towards 1,525-1,520 and the 200-day moving average.

The Dow was down 0.3% following the late day backtest to 27,145.

Prior and upper support from mid-month at 27,000-26,750 held with a close below the latter getting 26,500-26,250 and the 50-day moving average back in focus.

For the week, the S&P 500 and the Nasdaq dropped 1.2%. The Russell 2000 sank 1.6% and the Dow fell 0.7%.

Industrials and Energy led sector strength on Friday with gains of 0.6% and 0.5%, respectively. Real Estate and Utilities paced sector laggards after tanking -1.6% and -1.5%.

The only sectors that showed gains for the week were Consumer Staples (0.2%) and Materials (0.1%). Services (-3.2%), Energy (-2.6%) and Real Estate (-2.2%) were the weakest performing sectors last week.

The snapshot for 2Q earnings so far is lowered growth but slightly better than the preceding 1Q period. Positive surprises, particularly on the EPS side, are relatively more numerous at this stage but is likely a result of estimates being on the low side.

However, estimates had not fallen that much over the last three months, and more importantly, a number of major companies have guided lower for the current and coming quarters.

If the lowered guidance trend continues, there will likely a bigger drop in estimates for Q3 than the market experienced ahead of the start of the Q2 earnings season.

Total earnings for the 44 S&P 500 members that have reported Q2 results thus far are up 1.1% on 2.6% higher revenues, with 81.8% beating EPS estimates and 61.4% beating revenue estimates.

Earnings growth for these index members is unsurprisingly very weak, but it is nevertheless modestly better than what the market had seen in the preceding period. Positive surprises, particularly on the earnings front, are tracking above historical periods.

For the Finance sector, Q2 results from nearly 35% of the sector’s market cap in the index is in the books. Total earnings for the Finance companies that have reported are up 6% on 3.1% higher revenues, with 78.6% beating EPS estimates and 71.4% beating revenue estimates.

Looking at Q2 as a whole, total S&P 500 earnings are expected to be down -2.3% from the year-earlier period on 4% higher revenues. This would follow the -0.1% earnings decline on 4.4% higher revenues in Q1.

With a number of companies guiding lower, estimates for the current period (2019 Q3) are expected to come down. Q3 earnings are currently expected to be down -1.9% on 4.4% higher revenues.

For the small-cap S&P 600 index, we now have Q2 results from 17 index members. Total earnings for these 17 companies are down -14.8% from the same period last year on +2.9% higher revenues, with 58.8% beating EPS estimates and 52.9% beating revenue estimates.

Looking at the quarter as a whole for the small-cap index, total Q2 earnings are expected to be -9.4% below the year-earlier level on +3.2% higher revenues. T

his compares to -18.2% decline in Q1 earnings on +4.3% higher revenues.

For full-year 2019, total earnings for the S&P 500 index are expected to be up 0.5% on 2.3% higher revenues, which would follow the 23.3% earnings growth on 9.2% higher revenues in 2018.

Double-digit growth is expected to resume in 2020, with earnings expected to be up 10.5% that year.

Global Economy – European markets showed modest gains despite reports that Iran’s Revolutionary Guard seized a British oil tanker in the Strait of Hormuz.

The Belgium20 rallied 0.9% and Germany’s DAX 30 was higher by 0.3%. UK’s FTSE 100 added 0.2% and the Stoxx 600 edged up 0.1%. France’s CAC 40 was up nearly 2 points, or 0.03%.

Asian markets closed higher across the board following renewed signs of progress in the U.S./ China trade dispute.

Japan’s Nikkei surged 2% and South Korea’s Kospi soared 1.4%. Hong Kong’s Hang Seng jumped 1.1% while China’s Shanghai and Australia’s S&P/ASX 200 rose 0.8%.

Consumer Sentiment edged up 0.2 points to 98.4 in the preliminary July reading, below forecasts of 98.6. The current conditions index dipped to 111.1 versus June’s 111.9 while the expectations component rose to 90.1 from 89.3.

The 12-month inflation gauge slipped to 2.6% from 2.7% while the 5-year index jumped to a 2.6% clip from an all-time low reading of 2.3%

Baker-Hughes reported the U.S. rig count was down 4 rigs to 954, with oil rigs down 5 to 779, gas rigs up 2 to 174, and miscellaneous rigs down 1 to 1.

The U.S. Rig Count is down 92 rigs from last year’s count of 1,046, with oil rigs down 79, gas rigs down 13, and miscellaneous rigs unchanged at 1. The U.S. Offshore Rig Count was unchanged at 26 and up 9 rigs year-over-year.

The NY Fed lowered its GDP Nowcasts after projecting Q2 growth at a 1.41% pace, versus the prior 1.49% estimate.

Market Sentiment – St. Louis Fed James Bullard said he would happily accept the nomination to the Fed Chair, but it hasn’t been offered. He favors a 25 basis point rate cut, and believes the preemptive stimulus in an otherwise good economy should lift inflation.

Bullard added the Fed needs to ratify the signal that was sent in June but he doesn’t expect the Fed will be entering into an easing cycle.

The iShares 20+ Year Treasury Bond ETF (TLT) had its 2-session winning streak snapped following the intraday pullback to $131.51.

Upper support at $131.50-$131 held with a move below the latter opening up risk towards $130.50-$130 and the 50-day moving average that remains in a strong uptrend.

Resistance is at $132-$132.50.

A close above the latter would be a slightly bullish signal for a retest towards $133.50-$134 with the start of July and 52-week high at $134.29.

RSI is holding support at 50.

A close below this level would signal additional weakness towards 45-40 with the latter representing the monthly low. Resistance is at 55-60.

Market Analysis

The Russell 3000 Index ($RUA) closed in negative territory for the 4th time in 5 sessions despite testing an intraday top of 1,766. Prior and lower resistance at 1,760-1,775 was cleared but held with the mid-month and all-time peak at 1,773.

Continued closes above the 1,775 level would keep a possible run towards 1,800 in play.

Near-term and major support at 1,745-1,740 held on the tumble to 1,749 afterwards and session low.

A close below the latter would be a bearish development with risk towards 1,720-1,700 and the 50-day moving average.

RSI is back in a downtrend with support at 55-50.

A close below the latter would being a cautious signal for additional weakness towards 45-40 with the latter representing mid-May support. Resistance is at 60 with a close back above this level signaling a possible retest towards 65-70.

The Consumer Discretionary Select Spiders (XLY) extended its losing streak to 4-straight sessions after trading to an intraday low of $122.09. Upper support at $122-$121.50 held for the 2nd-straight session.

A close below the latter opens up risk towards the $120 level and prior support from the start of the month.

Current resistance is at $123-$123.50 with Friday’s 1st-half push reaching $123.52.

Continued closes above $124 and last Monday’s all-time high of $124.52 would be a renewed bullish signal with blue-sky territory towards $125-$127.50, depending on momentum.

RSI remains in a downtrend after failing support at 60. This opened up risk towards 55-50 and late June levels.

Current resistance is at 65-70.

The percentage of S&P 500 stocks trading above the 200-day moving average closed Friday at 71.05% with the session high reaching 73.05%. The index has been stuck between 70%-75% throughout the month with current and lower resistance at 72.5%-75% holding.

A close above 75% and this month’s 52-week peak of 74% could lead towards a run at 77.5% and the December 2017 high. Current support is at 70%. A close below this level and breakdown out of the current range would be a slightly bearish development with risk towards 67.5%-65%.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 78.64%, and the session low.

Upper support at 77.5%-75% held with this month’s double-bottom low at 74.75%.

A close below the 75%-74.75% area would be a bearish signal for additional weakness. Lowered resistance is at 80%-82.5% following back-to-back trips to 85.43% to close the week.

All the best,
Roger Scott
Head Trader
Market Geeks.