U.S. markets were hammered on Friday as a closely watched measure of the yield curve, the 3-year and 10-year, inverted for the first time since 2007.

Mixed economic news also helped refuel recession worries with the major indexes showing red from the open.

The selling pressure stabilized by midday until another wave of selling pressure resumed in the final hour of action.

Volatility spiked over 20% while closing between major levels of resistance with the major indexes giving up their gains for the week.

The Russell 2000 plummeted 3.6% following the pullback to 1,505 and session low on the close back below the 50-day moving average.

Early February and upper support at 1,500-1,490 held with risk to 1,485-1,475 on a move below the latter.

The Nasdaq tanked 2.5% after trading to a low of 7,642 on the close.

Near-term support at 7,650-7,600 was breached and failed to hold with a move below the latter signaling additional weakness towards 7,500-7,450 and the 200-day moving average.

The S&P 500 sank 1.9% following the backtest to 2,800 and session low.

Mid-month and upper support at 2,800-2,775 held with a close below the latter likely leading to a continued backtest towards 2,750 and the 200-day moving average.

The Dow dropped 1.8% following late day fade to 25,501 and close a point above this level.

Current and upper support at 25,500-25,2500 was held with risk towards 25,250-25,000 and the 50/200-day moving averages on continued weakness.

For the week, the Russell tumbled 3.2% and Dow fell 1.3%.

The S&P 500 lost 0.8% and the Nasdaq was down 0.6%.

Utilities were the only sector to show strength after adding 0.7%.

Materials tumbled 3% to lead sector weakness.

Financials and Energy gave back 2.8% and 2.7%, respectively.

For the week, Real Estate and Consumer Discretionary were higher by 1% while Consumer Staples gained 0.7%. Financials and Materials stumbled 2% and 1.9%, respectively, while Healthcare and Industrials gave back 1.5% and 1.4%.

Although the “official” start to 1Q earnings is still a few weeks away, some companies have already released numbers.

Total earnings for the 11 S&P 500 members that have reported results are down -15.1% from the same period last year on 4.1% higher revenues, with 81.8% beating EPS estimates and 54.5% topping revenue estimates.

It is premature to draw any firm conclusions from the small sample of Q1 results.

However, it is noteworthy weak showing relative to other recent periods and a soft start to this earnings season.

Overall, total earnings for the S&P 500 index are expected to be down -3.3% from the same period last year on 5% higher revenues.

This would follow 14.4% earnings growth in 2018 Q4 and a quarterly growth pace that was roughly double the Q4 pace in the first three quarters of the year.

Global Economy – European markets were crushed on weaker-than economic news and a conditional extension of the Brexit deadline until May 22nd.

France’s CAC 40 and UK’s FTSE 100 dropped 2% while the Belgium20 sank 1.8%.

Germany’s DAX 30 fell 1.6% and the Stoxx 600 Europe was lower by 1.2%.

Eurozone IHS Markit’s flash PMI fell to 51.3 in March from 51.9 previously, below expectations for a reading of 52.

The IHS Markit Germany Manufacturing PMI plunged to 44.7 in March from 47.6 in the previous month and well below expectations of 48.

This represented the steepest pace of contraction in the manufacturing sector since August 2012.

The IHS Markit France Manufacturing PMI dropped to 49.8 in March, below expectations for a print of 51.5.

Asian markets showed modest gains ahead of the upcoming trade talks between top U.S. negotiators and China with President Trump vowing to keep tariffs on while awaiting compliance.

Australia’s S&P/ASX 200 rose 0.5% while Japan’s Nikkei, South Korea’s Kospi, China’s Shanghai and Hong Kong’s Hang Seng all edged up 0.1%.

March Markit manufacturing PMI fell 0.5 ticks to 52.5, missing forecasts of 53.4, the lowest print since June 2017. Output dropped to 51.6, the weakest since June 2016.

Additionally, output prices declined to the lowest since December 2017.

The March flash services index fell 1.2 points to 54.8, and below estimates of 55.2. Business expectations tumbled to 61 from 65.2 previously. The composite index also declined 1.2 points to 54.3.

Wholesale inventories rose 1.2% in January, with sales up 0.5%, easily topping forecasts for a rise of 0.1%. Inventories were up 7.7% year-over-year, with sales 2.7% higher. The inventory-sales ratio increased to 1.34 from 1.33.

Existing Home Sales surged 11.8% to 5,510,000 in February, topping expectations for a print of 5,100,000.

All the strength was in single family sales, which climbed 13.3% to 4,940,000 while condo/coop sales were flat at 570,000.

The months’ supply of homes fell to 3.5 from 3.9 and median sales price edged up to $249,500 versus $249,300. The NAR said the lowest mortgage rates in a year spurred demand.

Baker Hughes reported the U.S. rig count was down 10 rigs from last week to 1,016, with oil rigs dropping 9 to 824 and gas rigs off 1 to 192.

The U.S. Rig Count is up 21 rigs from last year’s count of 995, with oil rigs up 20, gas rigs up 2, and miscellaneous rigs down 1 to 0. The U.S. Offshore Rig Count is down 2 rigs to 20 and up 7 rigs year-over-year.

The Philly Fed’s Survey of Professional Forecasters showed a weaker outlook on the economy over the next few quarters than it did four months ago in the prior survey. Real GDP was projected at an annual rate of 1.5% this quarter and 2.4% in Q2.

Those compare to prior estimates of 2.4% and 2.7%, respectively. There was also a slightly weaker outlook on unemployment, which is now seen at 3.9% for Q1, versus 3.9% previously, while the remaining three quarters for 2019 are projected at 3.7% versus 3.6% previously.

Headline inflation rates were also projected, with CPI at 1.1% for Q1 versus 2.4%, although the core rate is seen at 2.4%, up from 2.3%. Core PCE is currently seen at 2% for Q1 versus 2.1%.

The U.S. Treasury reported a -$234 billion budget deficit for February, the largest monthly red ink amount on record.

Receipts rose 7.5% year-over-year, while spending was up 8.2%. For the fiscal year to date, the deficit hit -$544.2 billion.

For the fiscal year-to-date, receipts were down -0.6% year-over-year, while spending was up 8.7%.

Atlanta Fed’s Q1 GDPNow estimate was boosted to 1.2% from 0.4% previously, while edging closer to the Blue Chip consensus of 1.5%.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 3-straight sessions after zooming to an intraday high of $125.28. October 2016 resistance from early January at $125-$125.50 was split but held.

Continued closes above the latter would be a bullish setup for a possible run towards $124-$125 with the current 52-week peak at $123.86.

Current support is at $124.50-$124 with a close below the latter signaling a near-term peak.

RSI is approaching early December resistance at 70.

A move above this area would signal additional strength towards 75-80 with latter signaling overbought conditions and prior peak levels from 2-3 months ago.

Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) fell for the 3rd time in 4 sessions after testing a low of $254.87.

Upper support from earlier in the month at $255-$254.50 held. A close below the latter could lead to a continued backtest towards $252.50-$252 and the 50-day moving average.

Lowered resistance is at $256-$256.50.

Continued closes back above $260 would be a more bullish development and signal another possible near-term bottom.

RSI is in a downtrend with support at 45-40 with the latter representing the early January low. Resistance is at 50-55.

Communication Services (XLC) had its 3-session winning streak snapped following the pullback to $46.83. Near-term and upper support at $47-$46.50 was breached and failed to hold into the closing bell.

A move below the latter and the 200-day moving average would signaling additional weakness towards $46-$45.50 and the 50-day moving average.

Near-term resistance is at $47-$47.50. A close back above the latter would be a bullish signal for a possible push towards $48-$48.50 and early October hurdles.

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

A close below the latter and late January support would be a bearish signal for lower lows. Resistance is at 60.

The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed Friday at 63.10% and the session low.

Upper support at 62.5%-60% held with a move below the latter being a slightly bearish signal for additional weakness towards 57.5%-55%.

The latter has served as longer-term support since mid-February. Near-term resistance is at 65%-67.5%. A move above 70% would be a slightly bullish development and signal a return of momentum.

The percentage of S&P 500 stocks trading above the 50-day moving average settled at 60.79% with the session low reaching 60.39%.

Crucial and major support from late January at 60% held with a move below this level signaling additional weakness and a further backtest towards the 55%-50% area. Near-term resistance is at 62.5%-65%.

All the best,
Roger Scott.