U.S. markets were weak throughout Friday’s session as Wall Street worried over the rise of the yield in the 10-year Treasury note, currently at 2.96%, and representing the highest levels since 2014.

Although the major indexes extended their weekly win streak to two-straight, the close below key support levels was a slightly bearish development heading into the peak of 1Q earnings season.

The Dow extended its losing streak to three-straight sessions after giving back 0.8% while trading to an intraday low of 24,375. The S&P 500 fell 0.9% after trading down to 2,660 to end the week with back-to-back losses.

For the week, the S&P 500 was up 0.5% while the Dow gained 0.4%. However, both indexes closed below their 50-day moving averages on Friday after challenging their 100-day moving averages midweek.

The Nasdaq sank 1.3% after trading to an intraday low of 7,123 while closing back below its 50-day average but holding its 100-day moving average.

The Russell 2000 dropped 0.6% following the backtest to 1,561 but is slightly more than 1% above its 50/100-day moving averages which remain in solid uptrends.

The Russell 2000 rallied 1% for the week while the Nasdaq added 0.6%.

Financials were the only sector that closed in positive territory after rising 0.1%. Consumer Staples and Technology paced sector laggards after givingt, back 1.7% and 1.4%, respectively.

For the week, Energy jumped 2.7% to lead sector strength while Industrials were higher by 2.2%. Consumer Staples plummeted 4% and Real Estate declined 1.1%. Technology slipped 0.2% to bring up the rear.

The Q1 earnings season has gotten off to a strong start, with both the growth pace as well as the number of positive surprises. The Finance sector companies are heavily represented in the current results, with the Tech sector taking the spotlight in the coming week.

Total earnings for the 73 S&P 500 companies that have reported results thru Thursday’s close are up 25.8% from the same period last year on 10.6% higher revenues. Overall, 82.2% have topped EPS estimates with 71.2% beating revenue forecasts.

Total Q1 earnings for the Tech sector are expected to be up 20.9% from the same period last year on 11.4% higher revenues. This would follow 24.2% earnings growth for the sector on 11.1% revenue growth in the preceding quarter.

With expectations super high, it is possible that actual results may not live up to expectations. This could weigh on the Tech sector’s stock market performance.

However, the more likely scenario is the sector’s results will come in better than expected, helping push estimates for the coming quarters higher. If so, the current momentum could hold, setting up another run at record highs, possibly into May, and a month Wall Street likes to go away.

Global Economy – European markets were mixed on Friday after Bank of England Governor Mark Carney threw into doubt the possibility of a rate hike in May. UK’s FTSE 100 gained 0.5%, France’s CAC 40 was up 0.4%, and the Belgium20 was higher by 0.2%.

Germany’s DAX 30 declined 0.2% and the Stoxx 600 Europe was off a tenth-point, or 0.03%.

German March PPI rose 0.1% month-over-month and 1.9% year-over-year, both below expectations of 0.2% and 2% respectively.

Asian markets closed lower across the board to snap a broader two-session winning streak. China’s Shanghai stumbled 1.5% while Hong Kong’s Hang Seng tumbled 0.9%.

South Korea’s Kospi fell 0.4% while Australia’s S&P/ASX 200 dipped 0.2%. Japan’s Nikkei slipped 0.1%.

Japan March national CPI rose 1.1% year-over-year, matching expectations. March national CPI ex-fresh food rose 0.9%, while March national CPI ex-fresh food & energy rose 0.5% year-over-year, both also matching forecasts.

Baker Hughes reported that the U.S. rig count was up 5 rigs from last week to 1,013, with oil rigs up 5 to 820, gas rigs unchanged at 192, and miscellaneous rigs unchanged at 1.

U.S. Rig Count is up 156 rigs from last year’s count of 857, with oil rigs up 132, gas rigs up 25, and miscellaneous rigs down 1 to 1. The U.S. Offshore Rig Count is up 2 rigs to 18 and down 2 rigs from last year’s count of 20.

Market Sentiment – Cleveland Fed President Loretta Mester said she doesn’t expect inflation to pick up sharply even as unemployment is likely to fall below 4% this year and remain there through 2019.

She argues against a steep path for interest rates and that gradual rate hikes will be appropriate this year and next year.

Chicago Fed Charles Evans said some cyclical pick-up in inflation would be welcome as it would help solidify expectations symmetrically around the Fed’s 2% objective. He added, it was necessary for the Fed achieving their inflation target on a sustainable basis.

Minneapolis Fed Neel Kashkari said he is surprised the 10-year rate hasn’t risen more on the back of the tax cut, big spending bills, and the Fed’s balance sheet normalization.

He is more concerned about the flatter yield curve than the higher rate, and wonders whether the narrowing is a signal that the Fed is not far from neutral. He’s not as worried that the curve is signaling recession, but does think it’s signaling caution.

Kashkari noted wages and prices are finally, albeit slowly, moving higher, with the latter approaching the Fed’s target and that raises the question about where is neutral.

He thinks the Fed could be closer to neural (a 2% funds rate) than others believe. In terms of trade and tariffs, he noted his business contacts are concerned and some are already raising prices in case tariffs are levied but added it’s uncertain how it will all play out. Regarding market valuations, he said just because stock prices are high doesn’t mean a downturn will lead to a financial crisis.

He closed by saying iff investors suffer losses, so be it as it’s part of free markets and it won’t drive Fed policy, though the Fed does want to avoid a financial crises.

Fed Governor Brainard said she is pleased to see synchronized growth occurring around the world, with the recovery gaining traction in the U.S. and especially in other countries. She warned though about remaining vigilant as there are risks. One is the sizeable injection of fiscal stimulus, which is unusual for this point in the cycle, and the Fed will monitor to see if imbalances are starting to develop. She said trade is also a material uncertainty.

Brainard went on to say that the inflation outlook is starting to move more in line with expectations in terms of the impact of stronger growth.

But after many years below target, inflation is starting to move up to the FOMC’s goal, and she didn’t sound alarmed at that prospect. She added asset valuations are looking a little stretched versus historical norms, though borrowing is quite moderate.

In closing, Brainard said she will be focused on income data where she expects still solid growth with full employment. That outlook should keep the Fed on a gradual normalization course.

As for commodity prices, she believes the rising trend is more reflective of strengthening global demand.

The iShares 20+ Year Treasury Bond ETF (TLT) fell for a third-straight session after tapping a low of $118.43 while closing back below its 50-day moving average.

Fresh support is at $118.50-$118 with a close below the latter likely leading to further weakness to $117-$116. Lowered resistance is at $119-$119.50.

RSI is in a downtrend with February support at 30 back in play. Resistance is at 40-45.

Market Analysis – The Russell 3000 Index ($RUA) extended its losing streak to two-straight following Friday’s backtest to 1,579 and close back below the 50-day moving average.

Support is at 1,575-1,570 with a move below 1,560 signaling a short-term top. Resistance is at 1,595-1,600 with continued closes above the latter and the 100-day moving average (at 1,599) being a bullish signal.

RSI is trying to hold support at 50 with risk to 40 with on a close back below this level. Resistance is at 55-60 with continued closes above the latter signaling a possible return of momentum.

The Materials Select Sector (XLB) traded lower for a second-straight session after bottoming at $58.75. Support at $58.75-$58.50 and the 50-day moving average held with a close below the latter being a slightly bearish signal.

Near-term resistance is at $59.50-$59.75 and the 100-day moving average (at $59.77).

RSI appears to be headed towards support at 50 and prior resistance from earlier this month. There is risk to 40 on a close below this level. Resistance is at 60 with continued closes back above this level being a bullish development.

The percentage of S&P 500 stocks trading above the 50-day moving average closed Friday at 45.63% down from an opening of high of 53.57%. Support is at 40% with a close below this level being a bearish signal. Lowered resistance is at 50%-55%.

The percentage of Nasdaq 100 stocks trading above the 200-day moving average is currently at 56.31%. Support is at 50% with a close below this level being a slightly bearish development.

Resistance is at 60-65% with the latter representing last week’s peak.

All the best,
Roger Scott.