U.S. markets opened higher on Friday but were weak for a 2nd-straight session as 10-year Treasury yields moved to their highest level since 2011 to put the brakes on the early gains.

A fresh round of tough trade talk from White House economic adviser, Larry Kudlow, also caused some nervousness.

Kudlow mentioned there is maybe a discussion about a Trump, XI, G-20 meeting while saying Chinese so-called friends have done lots of mischief.

The downside momentum lasted into the second half of action before a slight rebound into the close with the major indexes extending their losses for the week.

The Nasdaq tumbled 1.2% following the pullback to 7,715. Late July and upper support at 7,700-7,650 held with a close below the latter likely leading to a retest of 7,600.

The Russell 2000 plummeted 0.9% after testing a low of 1,618. May support at 1,620-1,610 and the 200-day moving average held with a close below the latter being a continued bearish signal.

The Nasdaq was off 3.2% for the week while the Russell 2000 declined 4%.

The Dow stumbled 0.7% following the backtest to 26,301. Mid-September support at 26,300-26,250 held with a close below the latter likely leading to further weakness towards 26,000-25,800.

The S&P 500 slumped 0.6% after tapping a session low of 2,869.

Early September support at 2,875-2,865 and the 50-day moving average held with a close below 2,850 signaling additional weakness.

For the week, the Dow was down just 11 points while the S&P 500 fell 1%.

Utilities zoomed 1.5% while Real Estate climbed 0.03% and were the only sectors that showed strength.

Technology and Communication Services sank 1.3% and 1% to pace sector laggards.

For the week, Utilities were up 1.8% while Energy advanced 1.6%. Consumer Discretionary was hammered for 3.6% loss and Communication Services fell 1.8%.

The start of Q3 earnings season gets underway this week, but the reporting cycle has gotten underway already, with results from 21 S&P 500 members out.

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

Total earnings for these 21 index members are up 23.4% from the same period last year on 9.3% higher revenues, with 85.7% beating EPS estimates and 71.4% topping revenue estimates.

Overall Q3 earnings are expected to be up 17.8% from the same period last year on 7.1% higher revenues.

Global Economy – European markets showed continued weakness on Friday over rising U.S. bond yields and global market weakness, as it posted a second consecutive weekly decline.

UK’s FTSE 100 dropped 1.4% and Germany’s DAX 30 dipped 1.1%. France’s CAC 40 sank 1% and the Stoxx 600 Europe was down 0.9%.

The Belgium20 was off 0.8%.

German August factory orders rose 2%, topping expectations of 0.8%.

German August PPI rose 0.3% month-over-month and 3.1% year-over-year, stronger than estimates of 0.2% and 2.9%, respectively.

Asian markets settled mostly lower on concerns of further escalation in the U.S.-China trade war following news China infiltrated U.S. companies with spyware installed on equipment manufactured.

Japan’s Nikkei gave back 0.8% while South Korea’s Kospi and Hong Kong’s Hang Seng slipped 0.3% and 0.2%, respectively. Australia’s S&P/ASX 200 rose 0.2%.

China’s Shanghai remained closed for a weeklong holiday.

Japan August household spending rose 2.8% year-over-year, topping forecasts of 0.1%.

Japan August labor cash earnings was up 0.9% year-over-year, weaker than expectations of 1.3%. August real cash earnings unexpectedly fell 0.6%, below estimates of no change.

The Japan August leading index CI rose 0.5 to 104.4, above forecasts of 104.2.

The August coincident index rose 1.4 to 117.5, stronger than estimates for a print of 117.4.

Nonfarm Payrolls increased 134,000 in September, which was well below expectations of 180,000, with the interpretation of the data complicated by the impact of Hurricane Florence.

The unemployment rate dropped to 3.7% from a prior reading of 3.9% and earnings were up 0.3% month-on-month.

The International Trade in Goods deficit widened 6.4% to $53.2 billion in August, which was close to expectations of $53.7 billion.

The Atlanta Fed’s model inched up to 4.08% from 4.07%, and is up from the 3.63% after the September 28 income and consumption reports.

The New York Fed’s estimate was trimmed to 2.27% from 2.47% in the prior week, and shows a 2.8% pace for Q4. The St Louis Fed checked in at a 4.47% rate, versus 4.4% previously.

Consumer Credit climbed to $20.1 billion in August, stronger than forecasts of $15 billion, and above the $16.6 billion July increase.

Strength remained in non-revolving credit, which rose $15.2 billion, the same as in July. Revolving credit increased $4.8 billion versus the prior $1.4 billion gain.

Baker-Hughes reported the U.S. rig count was down 2 rigs from last week to 1,052, with oil rigs down 2 to 861, gas rigs unchanged at 189, and miscellaneous rigs unchanged at 2.

The U.S. Rig Count is up 116 rigs from last year’s count of 936, with oil rigs up 113, gas rigs up 2, and miscellaneous rigs up 1. The U.S. Offshore Rig Count is up 3 rigs to 23 and down 1 rig year-over-year.

Market Sentiment – Dallas Fed Robert Kaplan said the FOMC should to be raising rates and that he is comfortable with a fourth hike this year, as well as two more in 2019.

He elaborated, saying he can see three more moves by next June. He stated it is never definitively known why the yield curve is steepening and he is watching for signs that excesses are building up.

Kaplan said it was important that a NAFTA deal gets done, though trade talks with China are a different kettle of fish versus the USMCA.

The economic outlook could be very different, he added.

New York Fed John Williams said the 3.7% unemployment rate doesn’t scare him and he expects continued strong jobs numbers.

He sees GDP growth at or above 3% this year and 2.5% next year, with inflation around 2%.

Gradual rate hikes are the right course if the economy remains on track, he stated, adding the dot plot estimates do not signal a tight policy stance.

Williams also said he is not worried about rising inflationary pressures as inflation is well anchored and it won’t bother him if it rises a few tenths above the 2% goal.

The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 5th time in 6 sessions after tapping another fresh multi-year low of $112.62.

Fresh support $112-$111.50 and March 2017 support levels are now in play on continued weakness. Lowered resistance is at $113.50-$114.

RSI remains in a nasty downtrend with multi-year support at 20-18 on continued weakness.

These levels represent the October 2016 lows. Resistance is at 30.

Market Analysis – The Spider S&P 500 ETF (SPY) had been in a tight trading range between $290-$292.50 since late September or 10 trading sessions before the two-day and end of the week debacle. Friday’s low tapped $286.22

Near-term support is at $286.50-$286 and the 50-day moving average held.

A close below $285 would be a possible warning signal for a continued backtest towards $282.50-$280.

Near-term resistance at $288.50-$289. A close above $290 would be a more bullish development.

RSI is in a downtrend with near-term support at 45-40.

A move below the latter would be a continued bearish signal.

Resistance is at 50 with a move above this level being a slightly bullish development a possible short-term bottom is in place.

The Industrials Select Sector Spider (XLI) is trying to establish a new trading range between $78.75-$80 following a strong run throughout September and slight pullback to end the month.

Near-term support is at $78.75-$78.50 held on Friday’s pullback to $78.52. A close below $78 signaling another short-term top and a level that represented early March resistance.

Resistance is at $79.50-$79.75. Continued closes above $80-$80.50 and the mid-September peak at $80.47would be a bullish signal for a run towards $81-$81.50.

The January and all-time high is just south of $81.

The 50-day moving average remains in a solid uptrend after clearing the 200-day moving average last month.

We mentioned the golden cross that formed was typically a bullish technical pattern for higher highs.

However, until there are continued closes above $81 and a run towards higher highs afterwards, a double-top from the January all-time high and last month’s peak is still in play.

RSI is trying to hold support at 55.

A move below this level would signal additional weakness towards the 50 area and August lows. Resistance is at 60-65.

The percentage of S&P 500 stocks trading above the 50-day moving average closed Friday at 47.52% with the low tapping 44.95%.

Late June support at 45% was breached with a close below this level leading towards 40%-35% and April support levels. Resistance at 50%-55%.

The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed at 57.28% with the session low reaching 56.31 for the 2nd-straight session.

Mid-September support is at 55% with a move below this area signaling additional weakness towards 50% and late June lows.

Resistance is at 59%-60% with a close above the 62.5% level being a more bullish development.

All the best,
Roger Scott