U.S. markets ended the week, month, and the first-quarter on a strong note amid reports that the U.S. and China trade talks are progressing into the finer details of a written agreement.
Treasury yields stabilized and also edged higher to reflect the bullish tone following the ominous plunge and inversion that shook investor confidence.
Meanwhile, volatility continues to ease and is approaching major support while showing signs of testing fresh 2019 lows.
The Dow jumped 0.8% following the late session push to 25,949. Near-term and upper resistance at 25,750-26,000 held with a close above the latter getting 26,250-26,500 and fresh 2019 highs in play.
The blue-chips notched a 1.5% weekly gain, but edged up just 0.1% in March, while surging 11.2% in the first-quarter.
The Nasdaq was also up 0.8% after trading to a second half high of 7,733. Fresh and lower resistance at 7,750-7,800 held with a move above the latter signaling additional strength towards 7,850 and the 2019 peak.
Tech logged a 1.1% weekly rise, and was up 2.6% for the month, while advancing 16.5% for the first three months of the year.
The S&P 500 rose 0.7% following the late day test to 2,836. Current and lower resistance at 2,825-2,850 was cleared and held with a move above the latter and the 2019 high at 2,852 signaling additional momentum.
The index was up 1.2% for the week, with a 1.8% monthly rise, and a first-quarter advance of 13.1%.
The Russell 2000 climbed 0.3% after tapping a morning high of 1,546.
Lower resistance at 1,535-1,550 held into the closing bell with a move above the latter getting 1,560-1,575 back in the mix.
The small-caps jumped 2.2% for the week but sank 2.3% in March, to trim its quarterly advance to 14.2%.
Healthcare and Industrials led sector strength after rallying 1.2% and 1.1%, respectively. Technology and Materials were were higher by 1% and 0.9%.
Energy and Real Estate were the only sector laggards after falling 0.15% and 0.03%, respectively.
For the week, Industrials and Materials soared 2.9% and 2.2%. Utilities and Communications Services were the only laggards after giving back 0.6% and 0.4%.
For the first-quarter, Technology zoomed 20.5% while Industrials and Real Estate surged 17.7% and 17.1%. Financials and Healthcare lagged but still soared 9% and 7.6%, as there were no sector losers for the quarter.
The start Q1 earnings season is underway, as the reporting cycle has actually gotten underway already, with results from 20 S&P 500 members already out.
With earnings growth expectations for the first quarter of 2019 already in negative territory and estimates for 2019 Q2 moving in that direction as well, there is growing talk of an impending earnings recession.
However, the main reason for this is that the negative growth in the first half of the year is solely based on very tough comparisons.
Total earnings for the S&P 500 index are expected to be down -3.8% from the same period last year on 4.6% higher revenues.
If actual 2019 Q1 earnings growth turns out to be negative, it will be the first earnings decline since the second quarter of 2016.
Q1 earnings growth is expected to be negative for a number of sectors, with double-digit earnings declines for 5, including Energy and Technology.
For the Technology sector, Q1 earnings are expected to be down -10% from the same period last year on 3% higher revenues.
For the Finance sector, total earnings are expected to be up only 0.8% on 6.5% higher revenues.
For the 20 S&P 500 members that have reported Q1 results already, total earnings are down -11% from the same period last year on 4.2% higher revenues, with 75% beating EPS estimates and 50% topping revenue estimates.
While it is premature to draw any firm conclusions from the small sampling of Q1 results, it is nevertheless a weak start for Q1.
Global Economy – European markets closed higher on Friday despite a third rejection of Brexit as British Prime Minister Theresa May lost another crucial vote in the U.K. Parliament.
The Belgium20 surged 1.6% and France’s CAC 40 soared 1%. Germany’s DAX 30 advanced 0.9% while UK’s FTSE 100 and the Stoxx 600 Europe rose 0.6%.
The U.K. economy grew by an annual average of 1.4% in 2018, the weakest expansion since 2012.
Asian markets also settled markets closed higher on Friday, on reported progress in trade negotiations between Washington and Beijing.
China’s Shanghai rallied 3.2% and Hong Kong’s Hang Seng rose 1%. Japan’s Nikkei was up 0.8% and South Korea’s Kospi was higher by 0.6%. Australia’s S&P/ASX 200 nudged up 0.1%.
Personal Income rebounded 0.2% in February, just below forecasts for a rise of 0.3%, after dipping 0.1% in January. Spending increased 0.1% in January after 0.6% in December.
The January savings rate slipped to 7.5% from December’s 7.7%.
The January PCE chain price index fell to -0.1% versus 0.1%, with the core at 0.1% from 0.2%. On a 12-month basis, the headline price index eased to 1.4% year-over-year from 1.8%. while the ex-food and energy gauge was 1.8% year-over-year from 2%.
Chicago PMI for March fell 6 ticks to 58.7, worse than expectatioms for a print of 60.3.
The 3-month moving average dipped to 60 from 61.7.
New Home Sales rose nearly 5% to 667,000 in February, topping forecasts of 615,000. Sales rose in 3 of the 4 regions, with just the West holding unchanged.
The months’ supply fell to 6.1, however, from 6.5, with inventories slipping to 340,000 from 342,000. The median sales price rose 3.8% to $315,300 after falling 5.9% to $303,900.
The 12-month rate contracted at a 3.6% year-over-year from -7.8%.
Consumer Sentiment for March checked in at at 98.4 versus forecasts of 97.8, and the best since October.
The current conditions index increased to 113.3 from February’s 108.5 reading while the future index was 88.8 from 84.4.
The 12-month inflation gauge slowed to 2.5% from 2.6%. The 5-year index was 2.5%, up from February’s 2.3%.
Baker-Hughes Rig Count reported that the U.S. rig count was down 10 rigs from last week to 1,006, with oil rigs down 8 to 816, gas rigs down 2 to 190, and miscellaneous rigs unchanged at 0.
The U.S. Rig Count is up 13 rigs from last year’s count of 993, with oil rigs up 19, gas rigs down 4, and miscellaneous rigs down 2.
The U.S. Offshore Rig Count is up 3 rigs to 23 and up 11 rigs year-over-year.
Atlanta Fed’s Q1 GDPNow estimate edged up to 1.7% from 1.5%, and is now above the Blue Chip consensus.
Market Sentiment – Minneapolis Fed Neel Kashkari said his base case is for continued economic growth. He is paying attention to the curve inversion, noting it’s an important signal and it helps provide information on the neutral rate.
He said he doesn’t want to overreact to it, however, and doesn’t think the Fed needs to move to a contractionary policy stance, but that analysts might have to.
There’s a lot of uncertainty around this, he added. The curve is saying, however, that investors are expecting slower growth in coming years, and the Fed should take that seriously.
Dallas Fed Robert Kaplan sees falling global yields as an expression of market skepticism on future economic growth, even though the yield curve inversion needs to be of some magnitude and duration to be meaningful.
He expects growth to run at 1.75%-2%, though the bond market is implying slower than that.
Kaplan views current monetary policy as mildly accommodative, but within neutral territory and doesn’t see inflation running away.
He said he is not ready to prejudge the Fed’s next policy move. He views trade issue resolution as key to help Europe, while U.S. consumers are in pretty good shape, and consumption should rebound in Q2 after some “noisy” Q1 GDP after the shutdown.
Kaplan did warn that the high level of U.S. corporate debt could become and amplifier, exacerbating the economic slowdown.
Fed Vice Chairman Randal Quarles said rate increases are likely needed at some point given optimistic outlook, but it’s prudent to wait for now given recent weak data, though disappointing retail and jobs number inconsistent with underlying strength.
Quarles believes recent productivity improvements may persist and point to strong growth, while financial risks are currently within a normal range.
He sees current inflation levels as roughly consistent with the 2% inflation goal.
The iShares 20+ Year Treasury Bond ETF (TLT) fell for the first time in 3 sessions following the pullback to $125.64. Fresh support at $126-$125.50 held with a move back below $124 being a bearish development.
This level represents the low from the prior double-top breakout above $123 in mid-March.
Current resistance is at $126.50-$127. Continued closes above the latter keeps a possible run towards $128-$130 in play.
RSI is back in a slight downtrend with support at 70.
A close below this level would signal additional weakness towards 65-60.
Resistance is at 75-80 with the latter representing overbought levels and a December double-top.
Market Analysis – The Spider Small-Cap 600 ETF (SLY) settled slightly lower despite testing a morning high of $67.19. Near-term and lower resistance at $67-$67.50 and the 50-day moving average was challenged but held.
Continued closes above the latter would be a bullish development for a possible push towards $69-$69.50 and the 200-day moving average.
Current support is at $66-$65.50 with backup help at $65-$64.50.
A close below the latter and the March low of $64.63 would be a bearish development.
RSI is flatlining with near-term resistance at 50.
Continued closes above this level would signal additional strength towards 55-60. Support is at 45-40.
iShares MSCI Emerging Markets (EEM) rose for the 4th time in 5 sessions after reaching a peak to $43 while easily clearing and holding its the 50-day moving average in the process.
Fresh and lower resistance at $43-$43.25 was tripped but held with a close above $43.50 signaling additional strength for a possible push towards $44- $44.25 and fresh 2019 highs.
Current support at $42.75-$42.50. A close below the latter would be a slightly bearish signal with risk towards $42.
RSI is in an uptrend with resistance at 55-60.
A move above the latter would be a bullish signal for additional strength. Support is at 50-45 with a move below the latter opening risk towards 40 and the early March low.
The percentage of S&P 500 stocks trading above the 50-day moving average settled at 69.70% with the session high reaching 70.89%.
Current resistance at 70%-72.50% with a move above the latter signaling additional strength towards 75%-80%. Current support is at 65%-62.50%. A move below the 60% level would be a bearish development.
The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed Friday at 63.10% and the session high.
Near-term resistance is at 65%-67.5%. A move above 70% would be a more bullish development and signal a return of momentum.
Support is at 62.5%-60% held. A move below the latter would be a slightly bearish signal for additional weakness towards 57.5%-55%.
All the best,
Roger Scott.