U.S. markets showed strength throughout Friday as trade talks between the U.S. and China are signaling a possible deal is near. In a letter to U.S.

President Donald Trump, China’s Xi Jinping said that both parties will redouble their efforts to meet halfway on trade.

Trump said that perhaps they will work out the final points, or perhaps not, as the market backed off its midday highs.

However, a final hour rally pushed the major indexes towards fresh 2019 peaks with the overall market extending its winning streak to 9-straight weeks.

The Dow climbed 0.7% after closing 21 points off the session high of 26,052.

The close above the 26,00 level was the first of the year with fresh resistance now at 26,250-26,500.

The S&P 500 rose 0.6% following the late day run to 2,794.

New and lower resistance from early November at 2,800-2,825 held with a close above the former being a continuing bullish signal.

For the week, the Dow advanced 0.6% and the S&P gained 0.7%.

The Russell 2000 rallied 0.9% after testing a high of 1,590 into the closing bell. Fresh and lower resistance at 1,590-1,600 and the 200-day moving average was cleared and held with additional hurdles at 1,615-1,625 on continued momentum.

The Nasdaq was also up 0.9% following the late session push and close at 7,527.

Major and lower resistance from early November at 7,500-7,550 and the 200-day moving average was cleared and held to set up a possible run towards 7,625-7,700.

The small-caps rocketed 1.4% higher for the week while Tech was up 0.7%.

Technology led sector strength after surging 1.3%. Communication Services and Healthcare jumped 0.9%. Consumer Staples and Financials were the only sector laggards after giving back 0.5% and 0.2%.

For the week, Industrials and Materials surged 3.6% and 3.3%, respectively, while Financials added 3%. Communication Services was the only sector laggard after declining 0.7%.

The Q4 earnings season is rapidly winding down results from 435 S&P 500 members.

Total earnings for these companies are up 12.6% from the same period last year on 5.9% higher revenues.

Looking at Q4 as a whole, combining the results that have come out with estimates for the still to come companies, total Q4 earnings growth is expected to reach 13.5% on 6.8% higher revenue growth.

This represents almost half of the growth pace of the prior three quarters of the year.

Partly driving this decline in earnings growth in Q4, as well as the current and coming quarters, are the economic slowdowns in China, Europe and other major economies.

A number of bellwether companies and others have also cited these factors in their earnings releases. Another major reason is tough comparisons as the quarterly results in 2018 were all-time records, and a big part of which was driven by the tax-cut legislation.

Estimates have been steadily coming down this year, with earnings growth for 2019 Q1, and the current period, now in negative territory with Q2 estimates barely tracking in positive territory.

Some analysts believe the market is in an earnings recession. However, while growth is no doubt decelerating, it is still positive and largely consistent with this stage of the economic and earnings cycle.

Global Economy – European markets were mostly higher as economic news showed Germany barely avoided a recession in the final quarter of last year, propped up by a pickup in government spending and booming construction.

France’s CAC 40 was higher by 0.4% and Germany’s DAX 30 rose 0.3%. The Stoxx 600 and Europe UK’s FTSE 100 added 0.2%. The Belgium20 fell 0.4%.

Germany’s GDP showed stagnation in the fourth quarter, with an annualized growth rate of 0.1%. In the prior three months through September, the economy contracted by 0.8%.

Germany’s business-climate index fell to 98.5 in February, from 99.3 in January, and missing estimates for a print of 99.

Asian markets settled mostly higher ahead of Chinese Vice Premier Liu He’s scheduled meeting with President Trump as an outline to commitments in principle have started to come together.

China’s Shanghai surged 1.9% while Hong Kong’s Hang Seng rose 0.7% and Australia’s S&P/ASX 200 gained 0.5%.

South Korea’s Kospi edged up 0.1% while Japan’s Nikkei slipped 0.2%.

Baker Hughes reported the U.S. rig count was down 4 rigs from last week to 1,047 rigs, with oil rigs down 4 to 853 and gas rigs unchanged at 194.

The U.S. Rig Count is up 69 rigs from last year’s count of 978, with oil rigs up 54 and gas rigs up 15. The U.S. Offshore Rig Count is down 2 rigs to 19 and up 2 rigs year-over-year.

Market Sentiment – The Fed’s Monetary Policy Report was released ahead of Chairman Jerome Powell’s testimony this upcoming Tuesday. It largely reiterated the outlook from the January FOMC meeting regarding interest rate and balance sheet policies.

The report saw a solid pace of growth and inflation near the 2% objective through the second half of 2018.

The FOMC adopted a patient approach since the January FOMC meeting as it determines what future adjustments to the federal funds rate may be appropriate.

The report noted the labor market has continued to strengthen and consumer price inflation moved down to an estimated 1.7% in December, while consumer spending weakened toward year-end and housing market activity declined.

The Fed said domestic financial conditions have become less supportive of economic growth since July, though the U.S. financial system remains substantially more resilient than in the decade preceding the financial crisis. The report also notes that foreign economic growth stepped down significantly last year from the brisk pace in 2017, while financial conditions abroad tightened.

There were several Fed policymakers at the monetary policy forum with Atlanta Fed Raphael Bostic saying policy is at the crossroads and on the end of an entire arc.

He said the policy path for the next 12-18 months isn’t as clear as it was in the past, with several factors clouding the outlook, including trade, along with the slowing growth in China and Europe.

New York Fed John Williams said the Phillips Curve is alive and well and added analysts must not be complacent about inflation expectations becoming unmoored, whether at too high or too low a level.

He said the Phillips Curve needs to be taken seriously, and he is not willing to let go of one of the long-standing tenants of economics, as some others policymakers have.

Williams went on to say there have been worrying signs of a deterioration of measure of longer-run inflation expectations in recent years, and he, along with the rest of the FOMC, remains worried that the persistent undershoot on the inflation target risks undermining the 2% anchor.

San Francisco Fed Mary Daly said the Fed should aim to hit the 2% inflation target on average, noting inflation expectations matter more now than they have in the past.

She’s not so inclined to believe in the Phillips Curve, noting she doesn’t anticipate a jump in inflation if some specific jobless rate is hit. She also said wage growth isn’t moving in an alarming way.

Fed Vice Chairman Randal Quarles confirmed the FOMC’s decision to maintain an ample reserve balance. On the size, he is in the middle, preferring a sizable quantity of reserves large enough to buffer against most shocks to reserve supply.

In terms of ending the roll-off sometime later in the year, he also noted the Fed has discussed roughly fixing the level over time, though the composition of liabilities could change.

Quarles went on to say over time, there would be a gradual increase in non-reserve liabilities which would displace reserves, and that plan would substantially reduce the pace of the decline in reserves.

He also said that in the longer run, once analysts reach the Fed’s preferred level of reserves, the balance sheet would have to resume growth to match continued increases in demand for nonreserve liabilities.

Quarles also favors a return of the balance sheet to Treasuries only, allowing MBS holdings to drop to zero. He suggested shortening the duration of holdings could increase the Fed’s ability to impact long-term rates.

However, he also suggested that having the composition roughly match the maturity composition of outstanding Treasury securities would minimize market distortions from the Fed’s holdings.

St. Louis Fed James Bullard said he doesn’t want to be shrinking the balance sheet and cutting rates at the same time, having the two policy tools working in cross purposes.

He said there has been only a minor impact from the balance sheet unwind and the main effect from asset purchases was more of a signal that interest rates would remain near zero for longer.

He wants to look at other tools, along with QE, to help improve future forward guidance.

And finally, Philly Fed Patrick Harker says the Fed needs to be cautious with the unwind. He said a slow and steady approach will reduce uncertainty and that he’s advocating an end to the run down this year.

The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 2-session slide after trading to a high of $121.94.

Prior and lower resistance at $122-$122.50 held with a move above the latter signaling additional strength.

Near-term support is at $121-$120.50 and the 50-day moving average. A close below the $120 level would be bearish development for lower lows.

RSI is back in a slight uptrend with resistance at 55-60 and the latter representing mid-month and late January hurdles. A move above the latter would signal additional strength.

Support is at 50 and a level that has been holding since mid-November.

Market Analysis – The Russell 3000 Index ($RUA) closed higher for the 4th time in 5 sessions following the intraday push to 1,655 and fresh 2019 peak. Mid-October and lower resistance at 1,650-1,660 was cleared and held into the closing bell.

Continued closes above the latter would be a bullish development for a run towards 1,675-1,685 and early October support levels.

Current support is at 1,645-1,635. A close below 1,625 and the 200-day moving average would be a bearish development and signal a possible near-term top.

RSI is in a slight uptrend after clearing resistance from August and earlier this month at 70. Continued closes above this level would be a bullish signal for a move towards 75-80 and January 2018 highs.

Support is at 65-60 with a move below the latter signaling additional weakness.

The Spider S&P Retail ETF (XRT) showed weakness for much of the session before rebounding in the final hour on the run to $45.17. Near-term and lower resistance at $45-$45.50 was cleared and held with continued closes above $46 signaling a return of momentum.

Current support is at $44.50-$44. A close below the latter opens up risk towards $43.50-$43 and the 50-day moving average.

RSI is in a slight uptrend with resistance at 60-65 and the latter representing this month’s top. A move above 65 would signal additional strength towards 70 and August highs.

Support is at 55-50 with a move below the latter being a bearish development.

The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed Friday at 57.28% and the session high. Lower resistance at 57.50%-60% held.

A move above the latter would be a bullish development and signal additional strength towards 62.50%-65% with the early month high at 66.99%.

August resistance levels are in the 70%-72.5% range. Support is at 55%-52.50%. A move below the 50% level and monthly low of 49.51% would be a bearish signal for additional weakness.

The percentage of S&P 500 stocks trading above the 50-day moving average settled at 91.46% with the session high at 91.66%. Lower March and April 2016 resistance at 92.50%-95% held.

Overbought levels are still in play with current support at 90%-85%. A move below the latter would be a bearish signal for additional weakness towards the 82.50%-80% area.

All the best,
Roger Scott.