U.S. markets ended lower on Friday’s slight pullback, but overall, had a good week on the run to fresh all-time highs. Lost in the shuffle was the Russell 2000 setting an all-time peak shortly after the open.

Although the Dow lagged for the week, the major indexes are trying to establish a new base of support above prior resistance. Near-term volatility on the VIX tapped a historic low while medium-term volatility on the ZIV remains elevated.

Earnings Outlook-Nearly 200 companies on the S&P 500 are expected to report earnings in the coming week. Earnings for the S&P 500 are tracking at an estimated 7.2% growth for the second quarter with about 20% of companies having already reported.

However, this figure is a little distorted given that energy earnings are expected to rise more than 300% from the year-ago quarter. Moreover, only the Tech sector and the Financial sector are expected to post double-digit profit growth above 10%.

Seven out of 11 sectors are expected to turn in year-over-year growth in the low single digits, or worse.

Global Economy –European markets had their worst session in three weeks on Friday as the euro continued to gain strength. The Stoxx Europe 600 fell 1% as the Industrial, Tech and Oil sectors pulled back on lower crude oil prices.

The U.K.’s FTSE 100 slipped 0.5%. France’s CAC 40 index dropped 1.6% while the DAX 30 index tumbled 1.7%. Spain’s IBEX 35 sank 1.3% and Italy’s FTSE MIB declined 1.1%.

Asian markets ended mixed as Hong Kong’s Hang Seng Index finished lower by 0.1%. Energy stocks weighed on Japan’s Nikkei Stock Average as it ended 0.2% lower. Meanwhile, South Korea’s Kospi continued its run at record highs, closing up 0.3%.

U.S. Economy-Baker Hughes reported that the U.S. rig count is down 2 rigs from last week to 950, with oil rigs down 1 to 764 and gas rigs down 1 to 186.

Market Sentiment –The Federal Reserve’s two-day Federal Open Market Committee meeting, begins on Tuesday and finishes up on Wednesday.

The most important comments Wall Street will be listening for will likely center around unraveling the Fed’s $4.5 trillion balance sheet and if the Fed may start to favor that as a tightening measure over rate hikes.

Two Federal Open Market Committee members who voted for an interest-rate hike in June have said they won’t vote to lift rates any further until they’re convinced inflation is moving toward the central bank’s 2% target.

The iShares 20+ Year Treasury Bond ETF (TLT) traded higher for the sixth-straight session with Friday’s peak reaching $126.03.

Fresh resistance at $126-$126.50 was breached with continued momentum leading to a possible push towards $128. Support is trying to move up to $125.50-$125 with backup help at $124.25-$124 and the 50-day moving average.

 

Market Analysis-The Russell 2000 dropped 6 points, or 0.45%, to close at 1,435 on Friday. The small-caps opened a point higher at 1,443 and spiked to an all-time high of 1,452 within the opening minutes.

Continued momentum could carry the index towards 1,460-1,475 but the fade to 1,433 afterwards was slightly bearish. The 1,435 level held into the close with crucial support at 1,425-1,420.

A move below the latter would be a red light for a possible backtest to 1,400-1,390 and the 50/100-day moving averages.

 

The iShares Russell 2000 ETF (IWM) traded to $143.33 but failed to clear Thursday’s all-time peak at $143.52. Overhead resistance is at $143.50-$144 followed by $145.

The low of $142.25 into the close held upper support at $142.25-$142. A move below $141.75 will likely lead to a continued backtest to $140-$139.25 and the 50-day moving average.

 

The Volatility Index (VIX) has closed below the 10 level for the 7th-straight sessions and went out at its second-lowest finish ever on Friday at 9.36.

It marked the lowest close since the index ended at 9.31 in December 1993. The VIX tapped its lowest reading in history at 9.30, intraday. 

 

The Basic Materials has been the strongest sector over the past month with a 6.4% gain. The Transportation sector is a close second at 6.3% with the laggards being Consumer Staples and Retail that are flat.

All other 13 sector are showing gains over the past month and signaled a broader based rally.

The iShares U.S. Basic Materials ETF (IYM) held prior support at $88 and the 50-day moving average throughout June and recently set a 52-week peak north of $93.

A new base is trying to form in the $92-$91.50 area with a move below $91 a slightly bearish development. Near-term resistance is at $92.75-$93.

 

The number of Nasdaq 100 stocks trading above the 50-day moving average fell 7.5% on Friday and back below the 70% level. This number reached 74.76% in the previous two trading sessions and may have represented a near-term double-top.

It is also important to note the 74%-75% level has held since late March, and again in late May and early June. The 65% level is crucial support going forward with a move below this level likely signaling a short-term market top.

 

All the best,
Roger Scott