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Friday, May 10, 2019

Market Action

U.S. markets closed higher on Friday to end 4-sessions of weakness in a volatile session dominated by headlines concerning the ongoing U.S. and China trade negotiations. The major indexes made lower lows for the week during the first half of action after President Trump indicated there was no need to rush in talks and that a trade deal with China was still possible.

The rebound off the lows midday came after Treasury Secretary Steven Mnuchin said China trade talks had ended but were constructive with Chinese Vice Premier Liu also saying the talks went fairly well. The S&P 500 and Nasdaq had their worst week of the year with the majority of the indexes holding their 50-day moving averages, excluding the blue-chips, which had its worst week simce March.

The Dow gained 0.4% on a 450-point turnaround off its 200-day moving average to reach an intraday peak of 26,019. Prior and lower resistance at 25,800-26,600 was cleared and held with a close above 26,250 and the 50-day moving average being a more bullish development for additional strength.

The S&P 500 was also higher by 0.4% after reaching a late day peak of 2,891. Near-term and lower resistance at 2,875-2,900 was cleared and held with more important hurdles at 2,925-2,950.

The Russell 2000 climbed 0.2% after testing a late session high of 1,575. Near-term and lower resistance at 1,575-1,590 was tapped but held with continued closes back above the 1,600 level being a more bullish signal.

The Nasdaq edged up 0.1% following the late day push just north of 7,949 and 190-point bounce off the low. Prior and lower resistance at 7,950-8,000 was challenged but held with a move above the latter signaling a possible near-term bottom.

For the week, the Nasdaq tumbled 3%, to snap a 6-week winning streak, while the Russell 2000 gave back 1.6%. The S&P 500 sank 2.2% and the Dow stumbled 2.1%.

Utilities and Materials rose 1.8% and 1.4%, respectively, to led sector strength while Consumer Staples and Real Estate jumped 1.2%. There were no sector laggards on Friday.

Technology was easily the worst performing sector for the week after tanking 3.4% followed by a 2.7% drop in the Materials and Industrials. The were no sectors that closed higher.

Earnings 

With results from 85% of S&P 500 and 78% of the small-cap S&P 600 members already out, the bulk of the 2019 Q1 earnings season is now winding down. The market's favorable reaction to otherwise mixed Q1 results suggests that many in the market feared a much weaker showing. In other words, lowered expectations helped actual results look better than they actually are. 

Total earnings for the 426 S&P 500 members, or 85.2% of the index's total membership, that have reported results are up 0.4% on 4.9% higher revenues, with 76.5% beating EPS estimates and 59.9% topping revenue estimates.

Total earnings for the Tech sector (73.1% of Tech companies in the S&P 500 have reported) are down -6.9% from the same period last year on 4% higher revenues, with 81.6% beating EPS estimates and 73.5% topping revenue estimates.

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

Looking at Q1 as a whole, total S&P 500 earnings are expected to decline -0.4% from the same period last year on 5% higher revenues and 60 basis points of compression in net margins.

If the market does get 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, we now have Q1 results from 469 index members. Total earnings for these 469 companies are down -14.3% from the same period last year on +3.2% higher revenues, with 61.0% beating EPS estimates and 55.2% beating revenue estimates.

Looking at Q1 as a whole for the small-cap index, total Q1 earnings are expected to be down -13.8% from the same period last year on 4.6% 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, which would follow 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 11% that year.

For 2019 Q2, total earnings for the S&P 500 index are expected to be down -1.2% on 4.6% 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.

Global Economy 

European markets closed mostly higher ahead of the weekend.

Germany's DAX 30 gained 0.7% while the Stoxx 600 Europe and the Belgium20 rose 0.3%. France's CAC 40 nudged up 0.2%. UK's FTSE 100 dipped 0.1%.

Asian markets were mostly higher despite no trade deal between the U.S. and China.

China's Shanghai surged 3.1% and Hong Kong's Hang Seng rose 0.8%. Australia's S&P/ASX 200 and South Korea's Kospi were up 0.3%. Japan's Nikkei was down 0.3%.

U.S. Economy

Consumer Price Index rose 0.3% and the core edged up 0.1%, both a little light of forecasts of 0.4% and 0.2%, respectively, and follows gains of 0.4% and 0.1% in March. On a 12-month basis, the headline accelerated to a 25 year-over-year clip versus 1.9%, while the ex-food and energy component was up 2.1% year-over-year from 2%. Energy prices led the headline strength, rising 2.9% after the prior 3.5% jump, and is 1.7% higher year-over-year. Gasoline was up 5.7% on the month with transportation costs 1.2% higher. Used car prices dropped 1.3% while new car prices were up 0.1%. Food prices slipped 0.1%, though housing gained 0.3%, as did medical care. Apparel prices declined another -0.8% from -1.9% previously. Real average hourly earnings decelerated to 1.2% year-over-year from 1.3%.

Baker-Hughes Rig Count reported the U.S. rig count was down 2 rigs to 988, with oil rigs dipping 2 to 805, gas rigs unchanged at 183, and miscellaneous rigs also flat at 0. The U.S. Rig Count is down 57 rigs from last year's count of 1,045, with oil rigs lower by 39, gas rigs down 16, and miscellaneous rigs off by 2. The U.S. Offshore Rig Count was unchanged at 20 and down 1 rig year-over-year.

The U.S. Treasury announced a $160.3 billion surplus in April, with the FY19 YTD deficit total at -$530.9 billion, worse than the -$385.5 billion from the same period last year. Receipts grew 4.9% year-over-year, or $25.1 billion. Net individual receipts grew 5.9% year-over-year and corporate receipts grew 6%.

Market Sentiment

New York Fed John Williams and Atlanta Fed Raphael Bostic both reiterated the economy is in a good place. Williams expects GDP growth of about 2.25% this year. Despite the strong economy, he is not seeing inflation pressures, and he added the Dallas trimmed mean inflation gauge (another measure of core prices) is neither trending up nor down. Williams suspects the recent slip in inflation could just be normal volatility. He said Fed policy is also positioned well and should prevent any imbalances.

Bostic said policymakers are in the same mindset regarding a patient approach on rates. He suggested the Fed might need a new policy calculus if the tariff hikes are prolonged and if inflation expectations become un-anchored. He does not see inflation decelerating away from the 2% goal, and added he still sees one more tightening this year, though is willing to be patient.

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The iShares 20+ Year Treasury Bond ETF (TLT) traded to a morning peak of $125.45 with resistance at $125-$125.50 holding for the 4th-straight session. 

The fade to $124.59 held support at $124-$123.50. A close below the latter opens up risk towards $123-$122.50 and the 50-day moving average.

RSI is flatlining with near-term resistance at 60. A move above this level could lead to a run towards 65-75 and late March highs. Support is at 55-50. A close below 45 would be a bearish development for lower lows.

Volatility Index

The S&P 500 Volatility Index ($VIX) reached a 1st-half high of 20.19 with lowered resistance at 19.50-20 holding. Although there is risk to 22.50-23 on move above the latter, the VIX has not close above 20 since early January, and continues to give great market clues.

The sudden reversal to 15.57 and close below the 200-day moving average and prior and upper support at 16.50-16 was a bullish signal heading into this week. Upside market momentum is unlikely until the VIX closes back below 14.50-14 and the 50-day moving average that is trending higher.

 Market Analysis

The Spiders Dow Jones Industrial Average ETF (DIA) tapped an intraday low of $255.04 with crucial and upper support from late March at $255-$254.50 holding. A close below the latter would be a renewed bearish signal with risk towards $252.50-$252 and the 200-day moving average.

Near-term resistance at $260-$260.50 was challenged but held on the surge to $260.54 ahead of the closing bell. Continued closes above the $262.50 level would confirm a possible short-term bottom.

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RSI is in a slight uptrend with resistance at 45-50 with a move above the latter signaling a return of momentum. Support is at 40-35 with a move below the latter signaling additional weakness.

Sector

The Spider S&P Retail ETF (XRT) was down for the 4th time in 5 sessions following the pullback to $43.33. Support from mid-March at $43.25-$43 held with a close below $43 being a continuing bearish development.

Near-term resistance at $44.50-$44.75. A close back above $45 and the 50-day moving average would be a more bullish signal.

RSI is in a downtrend with major support at 40 and a level that has been holding since early January. A close below 40 opens up risk towards 35-30. Resistance is at 45-50.

All the best,

Roger Scott
WealthPress