U.S. markets showed some strength shortly after a lower open on Friday following news the trade front with the EU, Mexico and Canada is easing with the U.S. set to remove steel and aluminum tariffs on Canada and Mexico.

However, weakness returned late in the session following reports of stalling trade negotiations with China with the major indexes making lower lows into the close.

The end result was a down for week for the market with volatility once again spiking towards key resistance levels.

The technical outlook for the major indexes remain bullish but the upcoming week will be an important test if there is a return of weakness.

The Russell 2000 dropped 1.4% after tapping a low of 1,524 ahead of the closing bell.

Near-term and upper support at 1,535-1,520 was breached but held with a close below the latter and last week’s low signaling additional weakness towards the 1,500 level.

The Nasdaq fell 1% following the late day pullback to 7,810 and close back below the 50-day moving average.

Upper support at 7,800-7,750 held with risk towards 7,700-7,650 on a move below the latter.

The S&P 500 was lower by 0.6% after trading to an opening low of 2,854 while also closing back below its 50-day moving average.

Crucial support at 2,850 held with a move below this level getting 2,825-2,800 back in play.

The Dow gave back 0.4% after trading to an intraday low of 25,657.

Current and upper support at 25,650-25,400 was breached but held with a close below the latter and the 200-day moving average being a bearish development.

For the week, the Russell 2000 tanked 2.5% and the Nasdaq sank 1.3%. The S&P 500 declined 0.8% while the Dow was down 0.7%.

Utilities were the only sector that showed strength after rising 0.5%.

Industrials and Energy paced sector laggards after sliding 1.1% and 1%, respectively. Consumer Discretionary and Technology fell 0.8%

The best performing sectors for the week included Real Estate (1.5%), Utilities (1.4%), Energy (1.5%) and Consumer Staples (0.8%). Financials (-2.2%) were easily the worst performing sector followed by Industrials (-1.9%) and Consumer Discretionary (-1.2%).

The Q1 earnings season is rapidly coming to a close with results from 90% of S&P 500 and 89% of the small-cap S&P 600 members already out.

The Retail sector is the only sector at this stage that has a sizable number of results still to come.

Total earnings for the 454 S&P 500 members that have reported results are up 0.5% on 5% higher revenues, with 76.9% beating EPS estimates and 59% topping revenue estimates.

Total Q1 earnings for the Retail sector (53.3% of sector companies in the S&P 500 index have reported) are up 24.8% on 14.3% higher revenues, with 80% topping EPS estimates and 50% beating revenue estimates.

Total earnings for the Tech sector (79.1% of Tech companies in the S&P 500 have reported) are down -6.6% from the same period last year on 3.8% higher revenues, with 81.1% beating EPS estimates and 69.8% besting revenue estimates.

Total earnings for the Finance sector (all results are in) were up 2.7% on 8.2% higher revenues, with 78.4% topping EPS estimates and 61.9% clearing revenue estimates.

Looking at Q1 as a whole, total S&P 500 earnings are expected to decline -0.1% from the same period last year on 5.1% higher revenues and 60 basis points of compression in net margins.

If there is an earnings decline in Q1, it will be the first year-over-year decline since 2016 Q2. Driving the Q1 earnings decline is margin pressures across all major sectors even as revenues continue to grow.

For the small-cap S&P 600 index, Q1 results from 536 companies are down -18.3% from the same period last year on 3.1% higher revenues, with 57.1% besting EPS estimates and 56.3% beating revenue estimates.

Looking at Q1 as a whole for the small-cap index, total Q1 earnings are expected to be down -19.4% from the same period last year on 4.8% higher revenues.

For full-year 2019, total earnings for the S&P 500 index are expected to be up 2.2% on 3.2% higher revenues, drastically lower than the 23.3% earnings growth on 9.3% higher revenues in 2018.

Double-digit growth is expected to resume in 2020, with earnings expected to be up 10.9%.

For 2019 Q2, total earnings for the S&P 500 index are expected to be down -1.5% on 4.5% higher revenues. Estimates for Q2 as well as full-year 2019 have come down, with the current 2.2% growth rate for full-year 2019 down from 9.8% in early October 2018.

The price reaction over a 4-day period beginning two days before a company reported results through the two days after punished earnings misses more than it has rewarded beats.

The numbers showed that companies in the S&P 500 that reported negative earnings surprises saw a 3.5% fall, on average, over the four-day period. That compares with a 5-year average of a 2.5% drop over the same time frame.

Companies that topped earnings forecasts for the 1st quarter saw a 0.7% price rise over the four-day window, compared with the 1% gain seen on average over the past 5 years.

Global Economy – European markets finished lower following reports that talks have gone as far as they can go with the Labour Party set to oppose Prime Minister Theresa May’s Brexit proposal.

The Belgium20 dropped 0.9% and Germany’s DAX 30 was off 0.6%. The Stoxx 600 Europe was lower by 0.4% and France’s CAC 40 dipped 0.2%. UK’s FTSE 100 slipped 0.1%.

Asian markets were mixed after Chinese Commerce Ministry Gao Feng said that the U.S. is exhibiting bullying behavior with its latest moves on the trade front, noting it is regrettable that the U.S. side unilaterally escalated trade disputes, which resulted in severe negotiating setbacks.

China’s Shanghai plummeted 2.5% while Hong Kong’s Hang Seng stumbled 1.2%. South Korea’s Kospi declined 0.6%.

Japan’s Nikkei rallied 0.9% and Australia’s S&P/ASX 200 rose 0.6%.

Consumer Sentiment Index checked in at 102.4 in the preliminary May reading versus forecasts of 97.5, and the highest reading since January 2004.

The May print follows a 1.2 point drop to 97.2 in April. Nearly all of the improvement was in the expectations component, which jumped to 96 from 87.4.

The current conditions index edged up to 112.4 versus 112.3. The 12-month inflation gauge climbed to a 2.8% rate versus 2.5% last month. The 5-year index rose to a 2.6% clip from 2.3%, also the highest since January.

Quarterly Services Survey Report revealed a 5.6% Q1 year-over-year gain in the aggregate selected services measure.

For the larger components, there was a 7.1% year-over-year surge in the finance and insurance component, but a lean 4.5% year-over-year rise for the healthcare and social assistance component.

E-Commerce Retails Sales were up 3.6% for the quarter.

Leading Indicators for April were up 0.2% to 112.1 versus expectations for a rise of 0.3% for the month. Seven of the 10 components made positive contributions, led by stock prices and the leading credit index.

Two components contributed negatively, led by the 0.08% drop in new ISM orders, while the workweek was unchanged.

Baker-Hughes reported the U.S. rig count was down 1 rig to 987, with oil rigs down 3 to 802, gas rigs up 2 to 185, and miscellaneous rigs unchanged at 0.

The U.S. Rig Count is down 59 rigs from last year’s count of 1,046, with oil rigs down 42, gas rigs off 15, and miscellaneous rigs declining by 2. The U.S. Offshore Rig Count is up 2 rigs to 22 and up 3 rigs year-over-year.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) held positive territory for much of the session with the high reaching $126.30. Current and lower resistance at $126-$126.50 held by a penny with the 52-week high at $126.69.

Support is at $125.50-$125 with a move below $124.50 signaling additional weakness towards $124-$123.50 and the 50-day moving average that remains in a strong uptrend.

RSI is somewhat neutral with resistance at 65 and the monthly peak. A close above this level would be a bullish signal for a possible push towards 70-75 and late March highs.

Support is at 60 with risk towards 55-50 on a move below this level.

Market Analysis – The Russell 3000 Index ($RUA) had its 3-session winning streak snapped following the pullback to 1,682 into the closing bell. Upper support at 1,680-1,665 held on the close back below the 50-day moving average.

A move below the latter opens up risk towards 1,650-1,635 and the 200-day moving average.

Resistance is at 1,690-1,705 with last week’s peak reaching 1,704.

Continued closes above the 1,700 level keeps upside potential towards 1,710-1,725 in play.

RSI is in a slight downtrend with support at 45-40.

A move below the latter reopens risk towards 35-30 with the latter representing the monthly bottom.

Resistance is at 50 with a move back above this level signaling a return of strength and a possible run towards 55-60.

The Financial Select Sector Spiders (XLF) are trying to build a base of support above the 50-day moving average with Friday’s low tapping $26.75.

A close below this level could lead to another backtest towards $26.50-$26.25 and the 200-day moving average.

Near-term and current resistance is at $27-$27.25.

Continued closes above the $27.50 level would be a more bullish signal for a retest towards the $27.75-$28 area.

RSI is in a slight downtrend with support at 45-40 and the latter representing the month low. A move below 40 would be a bearish signal with risk towards 35 and the March low.

Resistance is at 50 and prior support from earlier this month. A move above 55 would signal a return of momentum.

The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed Friday at 63.10% and session low. Near-term and upper support at 62.5%-60% held.

A move below the latter and last week’s low of 61.16% would being a bearish development for additional weakness towards the 57.5%-55% area and late March lows.

Resistance is at 65%-67.5% with Friday’s and last Thursday’s peak reaching 66.99%. A close above the latter would be a slightly bullish signal for additional strength towards 67.5%-70%.

The percentage of S&P 500 stocks trading above the 50-day moving average settled at 47.32% with the session low reaching 45.34%. Current support at 45%-42.5% held.

A move below the latter opens up additional weakness towards the 40%-37.5% area.

Near-term resistance is at 50%-52.5% with a move above the latter signaling additional strength towards 55%-57.5%.

All the best,
Roger Scott.