U.S. markets closed lower on Friday after recovering steep losses midday while managing to close the week higher. The Dow has its best week of the year after surging 2.9% but giving back 0.2% to snap a 5-session win streak.

The S&P 500 also slipped 0.2% while adding 1.5% for the week, its biggest weekly gain since September.

The Nasdaq stumbled 0.4% to extend its weekly loss to 0.6% while closing below the 6,900 level for the 3rd-straight session. The Russell 2000 fell 0.5% but jumped 1.2% for the week and is just 1% below last Thursday’s all-time high.

Energy was the sector standout after rising 0.8% while Consumer Staples added 0.3%. Industrials got whacked with the sector falling 1.2% followed by Materials which declined 0.8%.

For the week, sector leaders included Financials, Consumer Discretionary and Industrials with gains of 2%, 1.9% and 1.8%, respectively. Technology took it on the chin after sinking 1.2% with Real Estate the only other sector to finish in the red following a drop of 0.5%.

Over the past month, all sectors are in the green with Consumer Discretionary and Consumer Staples leading the way after surging 4.1%. Real Estate was a close second after rallying 4%.

The Q3 earnings season is mostly complete, with results from 494 of the S&P 500 members already in the books.

Total earnings are up 6.5% from the same period last year on 5.8% higher revenues, with 72.5% topping EPS estimates and 67.2% beating revenue forecasts.

Excluding the Finance sector, Q3 earnings growth improves to 10.3% from 6.3%. The Energy sector has the opposite effect, with Q3 earnings growth declining to 4.3% on an ex-Energy basis.

For full-year 2017, total earnings for the S&P 500 index are expected to be up 7.6% on 5% higher revenues, which would follow 0.7% earnings growth on 2.2% higher revenues in 2016. Index earnings are expected to be up 11.6% in 2018 and 9.5% in 2019.

Earnings growth turned positive in Q3 for the small-cap S&P 600 index, with total earnings for the index expected to be up 5.2% from the same period last year on 5.8% higher revenues. This follows persistent earnings declines for the small-cap index as growth was negative in 3 of the last 4 quarters.

Looking ahead, total Q4 earnings are expected to be up 8.6% from the same period last year on 6.6% higher revenues.

Global Economy- European markets extended their losses for the second-straight session to end the week lower. Germany’s DAX 30 tanked 1.3% and France’s CAC 40 sank 1%. The indexes ended with weekly losses of 1.5% and 1.4%, respectively.

UK’s FTSE 100 gave back 0.4% and fell 1.5% for the week. The Stoxx Europe 600 dropped 0.7% on Friday while the Belgium20 declined 0.5%.

The Eurozone November Markit manufacturing PMI was revised upward to a 17-1/2 year high of 60.1 from 60.

The UK November Markit manufacturing PMI rose 1.6 to a 3-3/4 year high of 58.2, stronger than expectations of for a gain of 0.2 to 56.5.

Asian markets settled mixed following a volatile session. Japan’s Nikkei climbed 0.4% and Australia’s S&P/ASX 200 advanced 0.3%. China’s Shanghai was up less than a point, or 0.02%. Hong Kong’s Hang Seng dropped 0.4% while South Korea’s Kospi slipped less than a point, or 0.04%.

China November Caixin (manufacturing PMI fell 0.2 to a 5-month low of 50.8, weaker than expectations for a dip of 0.1 to 50.9.

Japan Q3 capital spending rose 4.2% year-over-year, stronger than expectations for a rise of 3.2%.

Q3 capital spending ex-software rose 4.3% year-over-year, stronger than expectations of 3.1%.

The Japan October jobless rate was unchanged at 2.8%, matching expectations. The October job-to-applicant ratio rose 0.03 to 1.55, stronger than expectations for no change.

South Korea’s exports increased 9.6% from a year earlier to $49.67 billion in November while imports rose 12.3% to $41.83 billion. The trade surplus widened to $7.84 billion in November from a revised $7.14 billion in October, missing forecasts for $8.25 billion.

U.S. Markit’s manufacturing PMI fell 0.7 points to 53.9 in the final print for November versus expectations of 54.5.

The ISM manufacturing index dipped 0.5 points to 58.2 in November from 58.7 in October. Expectations were for a print of 58.4. The employment component was little changed at 59.7 from 59.8.

New orders rose to 64 from 63.4 while new export orders slid to 56 from 56.5. Prices paid fell to 65.5 from 68.5.

Construction spending jumped 1.4% in October, marking a third straight monthly increase. Expectations were for a gain of 0.5% for the month.

Baker Hughes reported the rig count was up 6 rigs from last week to 929, with oil rigs up 2 to 749, gas rigs up 4 to 180, and miscellaneous rigs unchanged.

Market Sentiment- St. Louis Fed James Bullard warned of material risk of yield curve inversion next year if the Fed continues to hike rates, which would be a naturally bearish signal for the economy, he stated.

He views it as unlikely that long-term rates will increase to match or exceed the Fed’s expected pace of policy tightening and, given weak inflation, he sees no more need to continue raising short term rates.

He doesn’t view the yield curve signal as inflallible, but says that it should be taken seriously by policymakers and investors.

Dallas Fed Robert Kaplan favors taking the next step on rates in the near future. He said he favors reducing the Fed balance sheet well below $3 trillion, for starters, while he has a lot of confidence that Governor Powell will do a superb job as Fed Chair.

Fedspeak will relax next week as the blackout period for policy-related remarks starts on Tuesday and a week ahead of the FOMC meeting on December 12th-13th.

Minneapolis Fed Kashkari is scheduled to speak ahead of the quite period.

The iShares 20+ Year Treasury Bond ETF (TLT) showed strength following a two-session pullback after jumping 1.4% and reaching an intraday peak of $127.69.

Fresh resistance is at $127-$127.50 with a move above the latter being a continued bullish development. Support is at $125.50-$125.

 

Market Analysis- The Spiders S&P MidCap 400 ETF (MDY) retraced seven sessions of gains after trading to a low of $337.71 on Friday with fresh support at $337.75 holding.

A close below this level likely gets $335-$332.50 and the 50-day moving average in play. The close above $345 keeps near-term resistance at $347.50 and Thursday’s all-time high of $347.36 in the mix.

RSI recently peaked near the 80 area and October resistance. A move below 70-65 would signal additional upcoming weakness.

 

The Materials Select Sector (XLB) pulled back of its prior session 52-week and all-time high of $59.97 with Friday’s low tapping $58.62. Mid-November support at $58.50-$58.25 held with a move below the latter being a slightly bearish development.

Fresh resistance remains at $59.50-$60. However, RSI is in a downtrend with support at 50 on additional weakness.

 

The percentage of S&P 500 stocks trading above the 50-day moving average peaked at 77.77% on Thursday and Friday before falling to an intraday low of 68.05% ahead of the weekend.

This area also held in October with Friday’s close holding the 77% level. Continued closes above 75% might be bullish for a run towards 80%-82% and early January highs to confirm a possible market top.

Another drop below 70%-68% would signal near-term highs are in with risk towards the 65% level.

The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed above the 65% level after peaking above resistance at 67.5%-68% midweek.

Friday’s low reached 62.61% with a move below support at 62.50% being a bearish development.

All the best,
Roger Scott