U.S. markets were mixed on Friday after trading in a narrow range with the Dow and Russell 2000 closing slightly higher. The Nasdaq showed more weakness than the S&P 500 but all of the major indexes closed the week lower. The 1% pullback, on average, ended a two-week market rally but the technical damage was mostly limited. Excluding the Russell 2000, the major indexes held their 50-day moving averages that are still in rising uptrends.
The Financial sector showed the most strength on Friday, rising 0.9%, with XLF holding its 200-day moving average for the second-straight session. Utilities, Healthcare, and the Industrial sectors also showed strength. Energy led the laggards, with XLE falling over 1%.
The numbers for Q2 earnings season are just about complete with less than a handful of major companies left to go before it’s official. So far, total earnings for the quarter are up 11.6% on 6.1% higher revenues. This marks the second quarter in a row of double-digit earnings growth for the S&P 500 index but was down from earnings being up 13.5% in Q1.
Estimates for Q3 have come down since the quarter got underway, but the magnitude of negative revisions nevertheless compares favorably to other recent periods. Simply put, Q3 estimates have come down, but the extent of the decline has been modest relative to other recent comparable periods.
Total Q3 earnings for the S&P 500 index are expected to be up 4.2% from the same period last year on 5.6% higher revenues. For full-year 2017, total earnings for the S&P 500 index are expected to be up 8.1% on 5% higher revenues. Looking further out, index earnings are expected to be up 11% in 2018 and 8.8% in 2019.
Global Economy – European markets showed slight gains and losses on Friday as investors awaited more details of the hurricane and possible damages. The Belgium20 gained 0.4% and the Stoxx Europe 600 advanced 0.2%. The DAX 30 added 0.1% while France’s CAC 40 index slipped a point, or 0.02%. The FTSE 100 fell 0.3%.
U.K. manufacturing grew by 0.5% on the month in July, the first monthly increase this year, and topping expectations for 0.3% expansion. Compared with the same month last year, manufacturing grew by 1.9%, also above forecast.
French industrial production was up 0.5% in July but below forecasts for a 0.7% rise.
Germany imports surged 2.2% in July while exports increased 0.2%. Germany’s adjusted trade surplus fell to 19.5 billion euro in July, falling shy of the forecast of 21 billion euro.
Asian markets traded mostly lower on nervousness over another possible missile test by North Korea this weekend. Japan’s Nikkei dropped 0.6% while Hong Kong’s Hang Seng Index climbed 0.5%. Australia’s S&P/ASX 200 declined 0.3% and South Korea’s Kospi dipped 0.1%. China’s Shanghai index was down less than a tenth-point, or 0%.
China’s exports rose 5.5% in August, falling shy of expectations for growth of 6%. Imports were stronger than expected with an increase of 13.3% versus a forecast for a 10% gain.
Japan’s economy grew at a slower pace than initially estimated in the April-June quarter, as the nation’s gross domestic product grew at an annualized pace of 2.5% from the previous three months.
US wholesale inventories rose 0.6% in July versus expectations of 0.4%, with sales falling 0.1%.
July Consumer Credit jumped $18.5 billion versus a forecast of $16 billion for the month.
Market Sentiment – NY Fed Bill Dudley said was surprised by the drop in inflation, but expected the bond portfolio run-off to begin as expected. He advocated further gradual rate hikes, though he made no mention of another one this year. As far as Irma, he said historically the short-term impact of hurricanes are negative but over the longer-term they add to economic activity.
On changes in the FOMC members, he noted that though people change, the Fed has a mandate, which isn’t changing. He also said it is a Committee which makes policy decisions, not just one or two people.
The iShares 20+ Year Treasury Bond ETF (TLT) traded in the red throughout Friday’s action with low reaching $128.57. A new base of support is trying to form at $128.50-$128 with a move below the latter signaling a near-term top. Resistance is at $129.50-$130.
The 50-day moving average is starting to curl higher and remains in a longer-term uptrend. However, RSI is pushing 64 and is near the upper end of overbought levels.
Market Analysis- Spider S&P 500 ETF (SPY) has traded in a tight range of $247.50-$246.25 over the past three sessions following the beginning of the month pullback just above $248. A move below lower support at $246.25-$246 will likely lead to a further backtest to $245.50-$245 and the 50-day moving average.
Continued closes above upper resistance at $247.50-$247.75 would be a bullish development for another run past $248 and possible all-time highs.
Gold traded to a 52-week high of $1,362.40 an ounce on Friday and has been in a strong uptrend following the triple-top breakout above the $1,300 level in late August.
Current momentum and a rush to safety could carry Gold towards $1,375-$1,400 and longer-term resistance. A base of support has formed in the $1,340-$1,335 area and will try to hold on a pullback.
The percentage of S&P 500 stocks trading above the 50-day moving average is currently at 53% with Friday’s range reaching a high of 55% and a low of 50%. These levels have been holding for six sessions but were stretched to 45% on the low side and 56% on the upside.
A move above 57%-60% should lead to continued market strength while a move below 45% could lead signal additional selling pressure.
All the best,
Roger Scott