U.S. markets showed overall strength for the 6th-straight session on Friday following a slew of economic news that was mostly positive. The gains come ahead of the last trading day of the month on Monday with the 3 major indexes up 8%, on average, for August. The small-caps are up over 6% for the month but still down the same amount for the year.
The Dow recovered positive territory for the year with the S&P notching its 6th-straight record close and the Nasdaq recording its 40th record close for 2020. Meanwhile, volatility simmered after closing lower and holding key resistance for the 2nd-straight session while giving a neutral reading heading into the new week.
The Russell 2000 rallied 0.9% while settling on the session peak of 1,573. Current and lower resistance at 1,570-1,585 was cleared and held. A move above the latter would suggest a retest towards 1,600-1,615. Below is a chart of the IWM.
The S&P 500 was up for the 7th-straight session after advancing 0.7% and trading to a lifetime high of 3,509. Current and lower resistance at 3,500-3,525 was breached and held. A close above the latter would indicate additional momentum towards 3,550-3,575.
The Dow extended its winning streak to 3-straight sessions after rising 0.6% with the afternoon peak reaching 28,733. Prior and lower resistance from late January at 28,500-28,750 was recovered. A close above the latter would signal further strength towards 29,000-29,250 with the all-time high from February at 29,568.
The Nasdaq also rose 0.6% with the intraday high reaching 11,708. Near-term and lower resistance at 11,650-11,750 was cleared for the 3rd-straight session and held. A close above the latter and Thursday’s all-time high at 11,730 would signal additional momentum towards the 11,900-12,000 area.
For the week, the Nasdaq was surged 3.4% and the S&P 500 soared 3.3%. The Dow gained 2.6% and the Russell 2000 added 1.7%.
Energy and Materials were sector standouts with gains of 1.8% and 1.2%, respectively. There were no sector laggards.
Over the past 5 sessions, Technology (+4.8%) and Communication Services (+3.9%) were the strongest sectors. Utilities (-0.7%) were the only sector laggard.
The 2Q earnings season continues to wind down with 97% of the S&P 500 companies announcing numbers. Total earnings for the 484 S&P 500 members that have reported Q2 results already are down -32.3% on -9.5% lower revenues, with 80.4% topping EPS estimates and 64% beating revenue estimates.
This represents the lowest earnings growth pace since the last earnings downturn following the 2008 recession, but the proportion of these companies beating consensus estimates, particularly EPS estimates, is tracking above historical trends.
For 2020 Q3, total S&P 500 earnings are expected to decline -23.9% on -3.2% 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% on -4.9% lower revenues. As with Q3 estimates, full-year estimates have been going up since early July. 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.
Growth is expected to resume next year, thanks to easy comparisons, but the dollar level of earnings in 2021 will still be below the 2019 level. While full-year 2021 earnings for the S&P 500 index are currently expected to be up 25.1% from the 2020 level, the absolute dollar amount of 2021 earnings estimates remain below the 2019 level.
For the small-cap S&P 600 index, Q2 earnings from 559 index members have been reported. Total earnings for these small-cap companies are down -56.5% from the same period last year on -16.7% lower revenues, with 70.8% topping EPS estimates and 65.5% beating revenue estimates.
The proportion of S&P 600 members beating Q2 EPS and revenue estimates is significantly above historical levels, suggesting that estimates for the small-cap companies were even lower than their large-cap peers.
European markets closed mostly lower as a rise in the euro and weakness in the dollar weighed on sentiment. The strength in the euro is being viewed as a headwind for multinational European companies as it makes their products less competitive abroad.
UK’s FTSE 100 was lower by 0.6% while the Stoxx 600 and Germany’s DAX 30 fell 0.5%. France’s CAC 40 declined 0.3%. The Belgium20 gained 0.3%.
Asian markets were mixed following a report saying that Japanese Prime Minister Abe will be resigning due to health reasons.
China’s Shanghai soared 1.6% and Hong Kong’s Hang Seng was up 0.6%. South Korea’s Kospi climbed 0.4%. Japan’s Nikkei tumbled 1.4% and Australia’s S&P/ASX 200 lost 0.9%.
Chicago PMI dipped 0.7 points to 51.2 to in August versus forecasts of 51.8, after surging 15.3 points to 51.9 in July. The 3-month moving average rose to 46.6 from 40.3. While the headline slippage was a little disappointing, the index remained in expansionary territory (above 50) for the 2nd-straight month after 12 months in contraction.
Advance goods trade deficit deepened to -$79.3 billion in July, and the biggest since December 2018, after narrowing to -$71 billion in June. Exports climbed 11.8% to $115 billion after bouncing 14.3% to $102.9 billion previously, while imports also rose 11.8% to $194.3 billion following the 5.1% jump in June to $173.8 billion. Advance wholesale inventories dipped -0.1% in July to $633.7 billion following the -1.3% slide to $634.4 billion in June, while retail inventories rebounded 1.2% to $594.7 billion after June’s -2.7% drop to $587.8 billion.
Personal Income rose 0.4% in July, while spending climbed 1.9%. The -1.1% slip in income in June was revised to -1% while spending was bumped up to 6.2% from 5.6%. Compensation increased 1.3% in July versus June’s 2.2% gain, while wages and salaries were up 1.4% from 2.1%. Disposable income edged up 0.2% after the previous -1.3% drop. The savings rate dipped to 17.8% from 19.2%. The PCE chain price index showed a slowing to 0.3% from 0.5%. The core rate was steady at 0.3% versus 0.2% in June. The 12-month clip rose to a 1% year-over-year pace from 0.9%, and the core rate was up at a 1.3% year-over-year clip from 1.1% preciously.
Consumer Sentiment for August bounced to 74.1 versus expectations of 72.8 and the preliminary reading. Most of the strength was in the expectations index which climbed to 68.5 from 65.9 in July. The current conditions index edged up to 82.9 versus July’s 82.8. The 12-month inflation gauge rose to 3.1% versus 3% in July. The 5-year index edged up to 2.7% from 2.6% in July, and ties for the highest reading going back to early 2016.
Baker-Hughes reported the U.S. rig count was unchanged at 254 with oil rigs down 3 to 180, gas rigs up 3 to 72, and miscellaneous rigs unchanged at 2. The U.S. Rig Count is down 650 rigs from last year’s count of 904, with oil rigs down 562, gas rigs down 90, and miscellaneous rigs unchanged at 2. The U.S. Offshore Rig Count was unchanged at 13 and down 13 year-over-year.
Dallas Fed Robert Kaplan acknowledged it may take a while to get to the 2% target after saying the policy articulation is part of an affirmation of a more muted inflation period. He doesn’t view this as a radical change in policy and left moderation and some time deliberately undefined whole adding price stability is still part of the dual mandate.
If and when the Fed gets to full employment, Kaplan said he would tolerate a little bit, maybe 2.25% of inflation. Concerns over a spike in inflation or price stability have not been lost, he added. He said the Fed needs to be cognizant of excess that could build with the Fed’s policies, and he’s particularly concerned with debt build-up. He would prefer to wait and monitor the path of the virus before making any changes to forward guidance.
On the economy, Kaplan believes it is rebounding, though not as much as if the virus were under more control. He looks for the unemployment rate to end the year around 8% and expects Q3 GDP growth at 20%+ annualized. He’s attuned to possible changes in inflation dynamics, and he doesn’t want to preempt a drop in the unemployment rate back to the 3% area by acting on rising price pressures. He said he would be wiling to take a little more risk on inflation to support employment.
Cleveland Fed Loretta Mester supported the FOMC’s shift to an average inflation targeting strategy while adding it’s appropriate to overshoot 2% to make up for the underperformance. However, she doesn’t believe it’s time to change forward guidance after saying everyone expects and has got the message from the Fed that interest rates will remain low for quite some time but whether analysts are going to change that at upcoming meetings is really going to depend on what’s going on in the economy. She said she can imagine that the time for doing that might be geared to when analysts have gotten a little bit further along with terms of it looking like the recovery is on a sustainable path.
The iShares 20+ Year Treasury Bond ETF (TLT) extended its losing streak to 5-straight sessions following the afternoon fade to $160.64. Prior and upper support from mid-June at $161-$160.50 was breached but held. A close below the $160 level would be an ongoing bearish signal with additional weakness towards $159-$158.50.
Lowered resistance is at $161.50-$162 followed by $163-$163.50.
RSI remains in a downtrend with key support and the early June low at 30 holding. A close below this level would signal a continued backtest towards 25 and the low from October 2018. Resistance is at 35-40.
The S&P 500 Volatility Index ($VIX) fell for the first time in 3 sessions after trading to a 2nd half low of 22.64. Current and upper support at 23-22.50 was reclaimed. There are additional recovery levels at 22-21.50 followed by 20.50-20.
Resistance is at 25.50-26 and the 50-day moving average followed by 27.50-28 and the 200-day moving average.
RSI is back in a slight downtrend with upper support at 45-40 holding. Resistance is at 50-55 and the latter holding since mid-June.
The Spiders Dow Jones Industrial Average ETF (DIA) was up for the 3rd-straight session and for the 6th time in 7 after reaching an intraday peak of $287.45. Lower resistance from mid-January at $287-$287.50 was tripped but held. A move above the latter would indicate additional momentum towards $288.50-$289.
Current and rising support is at $285-$284.50 with backup help at $282.50-$282.
RSI remains in an uptrend with key resistance and the early June high at 75 getting cleared and holding. Continued closes above this level would signal a run toward 80 and overbought territory from November 2019. Support is at 70-65.
The Materials Select Sector (XLB) was up for the 2nd time in 3 sessions with the late day and all-time high reaching $64.03. Uncharted territory and lower resistance at $64-$64.50 was cleared but held. A close above the latter would be an ongoing bullish signal for a run towards $65.50-$66.
Rising support is at $63.50-$63 followed by $62-$61.50.
RSI is back in an uptrend with key resistance and the July high at 70 holding. A close above this level would suggest additional strength towards 75 and the early June peak. Support is at 65-60.
The percentage of Nasdaq 100 stocks trading above the 50-day moving closed at 80.58% on Friday, up 0.97%. Near-term and lower resistance at 80%-82.5% was cleared and held. A move above the latter would indicate a retest towards 87.5%-90% and overbought levels from late June/ early July. Support is at 77.5%-75%.
The percentage of S&P 500 stocks trading above the 200-day moving average settled at 62.05%, up 0.99%. Current and lower resistance at 62.50%-65% was challenged but held. A close above 63.50% and the monthly high would be a bullish signal for a run towards 67.5%-70%. This area represents the gap lower from late February. Support is at 60%-57.5%.