Market Update: Friday, August 14, 2020

U.S. markets traded in tight ranges on Friday before settling mostly lower after Congress failed to agree on the next round of coronavirus aid before taking a few weeks off. A bevy of economic news also weighed on sentiment as did the delay of the review of the phase 1 trade deal between the U.S. and China.

The meeting was initially slated for the weekend but was delayed due to scheduling issues with no new date being set. Despite the choppiness, the S&P 500 and the Nasdaq closed higher for the 4th-straight week while the Dow and Russell 2000 were up for the 3rd-straight week.

The Dow nudged up 0.1% despite testing a morning low of 27,759. Near-term and upper support at 27,850-27,750 was breached but held for the 3rd-straight session. A move below the latter would indicate a further pullback towards 27,600-27,500.

The Nasdaq had its 2-session winning streak snapped after slipping 0.2% with the intraday low tapping 10,972. Current and upper support at 11,000-10,900 was clipped but held. A close below the latter would suggest additional weakness towards 10,850-10,750.

The Russell 2000 was off 0.1% following the opening fade to 1,567. Upper support at 1,575-1,560 was breached but stuck for the 2nd-straight session. A drop below the latter reopens further weakness towards 1,550-1,535. Below is a chart of the IWM.

The S&P 500 dipped a half-point, or 0.02%, with the afternoon low reaching 3,361. Key and upper support at 3,375-3,350 failed to hold with a move below the latter would signaling a further backtest towards 3,325-3,300.

For the week, the Dow jumped 1.8% and the S&P 500 rose 0.6%. The Russell 2000 also added 0.6% while the Nasdaq edged up 8 points, or nearły 0.1%.

Energy was the strongest sector after rising 1% while Financials and Industrials were up 0.4%. Utilities and Healthcare paced sector weakness after giving back 0.9% and 0.2%. respectively.

Over the past 5 sessions, Industrials (3.2%); Energy (2.7%) and Consumer Discretionary (2.3%) were the strongest sectors. Utilities and Real Estate (-1.8%), and Communication Services (-0.2%) were the only sector laggards.

The Q2 earnings season is rapidly coming to a close with results from over 450 S&P 500 members, or nearły 92%, of the index’s total membership reporting their numbers. Earnings are down -35.4% on -11.3% lower revenues with 79.6% beating EPS estimates and 62.6% topping revenue estimates.

For the Technology sector, Q2 results from 87.4% of the sector’s market capitalization are in the books. Total earnings for these Tech companies are down -3.4% on 3.9% higher revenues, with 90.9% beating EPS estimates and 80% besting revenue estimates.

Looking at Q2 as a whole, total S&P 500 earnings are expected to be down -34.6% from the same period last year on -9.9% lower revenues, with most sectors expected to experience earnings declines and four sectors expected to lose money (declines in excess of -100%).

The 3 sectors that are expected to lose money in Q2 are Energy (-153% earnings decline), Transportation (-145.7%), Autos (-123.5%), and Consumer Discretionary (-101.6%).

The 2 sectors expected to have positive earnings growth in Q2 are Utilities (7.5%) and Medical (3.5%).

For 2020 Q3, total S&P 500 earnings are expected to decline -23.8% on -3.7% lower revenues. This is an improvement from the -26.5% earnings decline expected at the start of July.

For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -21.3% on -5% lower revenues. This is down from close to 8% growth expected at the start of the year, but better than the -24.1% decline a few weeks ago. For reference, S&P 500 earnings declined -19.1% in 2008 and -3.4% in 2009, though that was admittedly a different type of downturn.

European markets closed lower to end the week after Britain imposed a new 14-day quarantine period on all arrivals from France. The Netherlands, Malta and Monaco were also added to the quarantine list, which already featured Spain and Belgium.

UK’s FTSE 100 and France’s CAC 40 dropped 1.6%. The Stoxx 600 was down 1.2% while the Belgium20 and Germany’s DAX 30 were lower by 0.7%.

Asian markets were mixed on disappointing economic news.

China’s Shanghai gained 1.2% and Australia’s S&P/ASX 200 added 0.6%. Japan’s Nikkei nudged up 0.2%. South Korea’s Kospi lost 1.2% and Hong Kong’s Hang Seng dipped 0.2%.

Australia’s unemployment rate rose to a 22-year high of 7.5% in July.

China retail sales fell 1.1% in July, the 7th-straight down month, compared with the same month a year ago and missing predictions for a small increase in consumer spending.

China industrial output grew 4.8% in July from a year earlier, the same as in June, but less than forecasts for a 5.1% increase.

Retail Sales increased 1.2% for July and were up 1.9% excluding autos. The former is a little weaker than expectations of 1.5%, while the latter was a tad stronger by 0.1%. Those follow upwardly revised June surges of 8.4% and 8.3% respectively. Sales excluding autos, gas, and building materials surged 1.9% versus the prior 8.5% jump. Vehicle sales declined -1.2% after rising 9.1% in June. Gas station sales were up another 6.2% following June’s 14.8% increase while clothing sales climbed 5.7% after June’s 98.8% surge. Electronics shot up 22.9% from 3.6%. Furniture sales were flat after a 37.4% gain. Building materials declined -2.9% from the prior 0.8% increase while food/beverage sales edged up 0.2% from -1.5%. Eating, drinking sales increased 5% following June’s 26.7% gain and sporting good sales dropped -5% after rising 27.6%.

Industrial Production rose 3% in July, matching expectations, and follows June’s 5.7% increase. Capacity utilization rose to 70.6% after improving to 68.5% in June. Manufacturing production was up 3.4% from 7.4%, with vehicle production climbing 28.3% from June’s 118.3% pop. Excluding vehicles/parts, production was up 1.6% versus 3.7%. Machinery production increased 1.4% from 4.6% while computer and electronics production edged up 0.7% from 4.8%. Utilities were climbed 3.3% from 2 and mining bounced back 0.8% from -0.3%.

Q2 Nonfarm Productivity surged at a 7.3% rate, rebounding from the -0.3% contraction in Q1. Unit labor costs surged 12.2% last quarter following a 9.8% Q1 gain while output contracted -43% from -6.1%. Employee hours plunged -43% from -6.1% previously. Real compensation climbed 24.8% after 8.1% in Q1 while the price deflator was down -3.6% from 0.8%.

Business Inventories declined -1.1% in June from -2.3% in May. Forecasts were for a fall of -1.2% and represented the 6th-straight decline in inventories. Sales climbed another 8.4% after rising 8.5% in May. The strength in sales saw the inventory-sales ratio drop back to 1.37 from 1.53.

Consumer Sentiment nudged up 0.3 to 72.8 in the preliminary August reading, topping expectations for a reading of 71.9, after slipping 5.6 points to 72.5 in July. Weakness was in the current conditions index which slipped to 82.5 from 82.8. The expectations index was up to 66.5 from 65.9. The 12-month inflation gauge for August was steady at 3% for a 3rd-straight month and the 5-year index rose to 2.7% from July’s 2.6%.

Baker-Hughes reported the U.S. rig count was down 3 at 244 with oil rigs lower by 4 to 172, gas rigs up 1 to 70, and miscellaneous rigs unchanged at 2. The U.S. Rig Count is down 691 rigs from last year’s count of 935, with oil rigs dropping 598, gas rigs declining 95, and miscellaneous rigs unchanged at 2. The U.S. Offshore Rig Count was up 1 to 13 and down 14 year-over-year.

Dallas Fed Robert Kaplan said he is willing to let inflation run moderately above the 2% target, on the order of 2.25% and 2.3275%. He said the muted pace of inflation before the pandemic hit has opened the door for a little hotter pace but he cautioned he is not making a commitment as to what the FOMC was going to do. He added post-pandemic conditions are also likely to be different to which the Fed will have to adapt its policies.

Kaplan is projecting a 20% annualized Q3 GDP clip, with a 6%-7% pace in Q4 with the economy likely contracting -4.5% in 2020. He is concerned about the rising debt burden and budget deficits, and would prefer to spend the money on masks, contact tracing, and improved health protocols and not spend trillions in benefits.

The iShares 20+ Year Treasury Bond ETF (TLT) extended its losing streak to 6-straight sessions after trading to a late day low of $163.16. Current and upper support from early July at $163.50-$163 failed to hold. A move below the latter would be an ongoing bearish signal with further weakness towards $162.50-$162.

Resistance remains at $164.50-$165 and the 50-day moving average.

RSI is in a downtrend but is showing signs of bottoming with upper support at 35-30 holding and the latter representing the early June low. Resistance is at 40.

The S&P 500 Volatility Index ($VIX) fell for the 3rd-straight session and for the 10th time over the past 11 despite tapping an opening high of 23.55. Current and lower resistance at 23.50-24 was breached but held. A close above the 25 level would be a slightly bearish development with upside potential towards 27.50-28 and the 200-day and 50-day moving averages.

Current and upper support at 21.50-21 was breached but held for the 2nd-straight session following the fade to 21.79 afterwards. A close below the 20 level would signal continued strength for the market with additional pullback potential towards 17.50-17 and levels from late February.

RSI is trying to level out with longer-term support at 35 holding. Resistance is at 40-45.

The S&P 400 Mid Cap Index ($MID) traded in an 18-point range with the session low at 1,941. Current and upper support at 1,950-1,925 failed to hold. A close below the latter would suggest additional weakness towards 1,900-1,875.

Resistance is at 1,975-2,000. A close above the latter would be a renewed bullish signal with retest potential towards 2,025-2,050 and levels from late February. A golden cross has officially formed with the 50-day moving average clearing the 200-day moving average. This is typically a bullish signal for higher highs.

RSI is back in a slight downtrend after failing key resistance at 70. A close above the latter would signaling additional strength towards 75 and the early June peak. Support is at 65-60.

The Spider Gold Shares (GLD) fell for the 5th time in 6 sessions after testing an intraday low of $181.49. Fresh support at $181.50-$181 was tripped but held. A close below the $179.50 level and last week’s low at $179.43 would be an ongoing bearish signal with additional pullback potential towards $177.50-$176.

Resistance is at $183.50-$184. A close above the $185 level would be a bullish signal with upside gap and retest potential towards $187.50-$190.

RSI is shaky with support at 50-45. A close below the latter and the early June low would signal possible weakness towards 35-30 and levels from mid-March. Resistance is at 60-65.

The percentage of Nasdaq 100 stocks trading above the 50-day moving

closed at 69.93% on Friday, down 1.94%. Upper support at 70%-67.5% was was breached and failed to hold. A close below the latter would signal a retest towards 65%-62.5%. Resistance is at 72.5%-75%.

The percentage of S&P 500 stocks trading above the 200-day moving average settled at 59.48%, unchanged. Current and lower resistance at 60%-62.5% was breached but held. A close above the latter would signal additional strength towards 65%-67.5% and levels from mid-February. Support is at 57.5%-55%.