U.S. stock markets closed mixed on Friday to wrap up a volatile, holiday-shortened week with the bears getting their 2nd-straight win. The Nasdaq’s losses capped off its steepest weekly loss since March to push the index back into correction territory and over 10% lower from the August all-time high of 12,074.
The small-caps tested a lower low while closing back below a crucial level of support. Meanwhile, volatility settled lower to give the bulls a slight advantage heading into the new week.
The Russell 2000 fell 0.7% following the close back below 1,500 and the 50-day moving average with the session low hitting 1,484. Prior and upper support from early August at 1,490-1,475 was breached but held. A drop below the latter would indicate further weakness towards 1,465-1,450 and the 200-day moving average. Below is a chart of the IWM.
The Nasdaq was down for the 2nd-straight session and for the 5th time in 6 affter giving back 0.6% with the intraday low reaching 10,728. Prior and upper support from mid-August at 10,800-10,700 was breached but held on the 2nd-straight close below the 50-day moving average. A move below the latter would suggest a further backtest towards 10,600-10,500.
The Dow rebounded 0.5% after trading to an intraday high of 27,828. Near-term and lower resistance at 27,750-28,000 was cleared but held. A close above the latter would suggest a retest towards 28,000-28,250.
The S&P 500 edged up 2 points, or 0.05%, while trading to a session high of 3,368. Current and lower resistance at 3,350-3,375 was tripped but held. A move above the latter would indicate additional upside towards 3,400-3,425.
For the week, the Nasdaq plummeted 4.1% while the S&P 500 sank 2.5%. The Dow dropped 1.7% and the Russell 2000 was down 1.3%.
Industrials and Materials were sector leaders after jumping 1.4% and 1.3%, respectively. Technology was the weakest sector after falling 0.8% while Real Estate and Communication Services were off 0.3% to round out the losers.
The Q2 earnings season has come to a close with the next major earnings cycle coming the 2nd week of October. Looking ahead, Q3 total S&P 500 earnings are expected to drop -23.7% from the same period last year on -3.3% lower revenues. This would follow the -32.5% decline in Q2 when economic and business activities were hammered as a result of the coronavirus lockdowns.
The good news is the earnings outlook has been steadily improving since the start of Q3, as business have resumed. The Q3 numbers are expected to be below the year-earlier level for most sectors, with Construction (4.3%) and Medical (0.1%) the only sectors expected to have positive earnings growth. Sectors with the biggest declines include Transportation (-128%), Energy (-97%), Consumer Discretionary (-89%), Conglomerates (-50%), Aerospace (-47%), and Autos (-36%).
For the Finance sector, Q3 earnings are expected to be down -25.6% on -1.8% lower revenues, and would follow the sector’s -45.2% earnings slide on -1.6% lower revenues. Tech sector earnings are expected to be down -4.7% on 3.8% higher revenues.
European markets were mixed as the economic threat from growing prospects of a no Brexit deal weighing on sentiment.
UK’s FTSE 100 rose 0.5% and France’s CAC 40 edged up 0.2%. The Stoxx 600 added 0.1%. The Belgium20 and Germany’s DAX 30 dipped 0.1%.
UK’s GDP expanded by 6.6% in July, the 3rd month in a row that the economy has improved. All sectors of the economy expanded, led by construction which grew by 17.6% in July. Services rose by 6.1%, manufacturing output jumped by 6.3%, and agriculture expanded by 1.1%.
Asian markets closed mostly higher to end the week.
China’s Shanghai and Hong Kong’s Hang Seng rose 0.8%. Japan’s Nikkei gained 0.7% and South Korea’s Kospi was up less than a point, or 0.01%. Australia’s S&P/ASX 200 fell 0.8%.
Consumer Price Index increased 0.4% in August, stronger than expectations of 0.3%, after gains of 0.6% for both in July. The 12-month headline pace accelerated to a 1.3% year-over-year from 1%, with the core rate at 1.7% year-over-year from 1.6%. Energy prices were up 0.9% after rising 2.5% in July while Transportation costs climbed 1.3% following a gain of 2.9. Apparel prices rose 0.6% while housing prices edged up 0.2%. Food prices bounced 0.1% after falling -0.4% in July. Food/beverage prices were 0.1% as well, from -0.4%. Medical care costs were up another 0.1% from 0.4%. Education prices rose 0.1% from 1.1%. Tobacco costs increased 0.4% from 0.8%. Real average hourly earnings were unchanged on the month following the -0.4% slip in July.
Quarterly Services Survey figures that track activity for the service sector revealed a revised -9.3% Q2 year-over-year drop. For the larger components, analysts saw a -1.7% year-over-year decline, and a -8% pullback for the healthcare and social assistance component.
Baker-Hughes reported the U.S. rig count was down 2 from last week to 254 with oil rigs slipping 1 to 180, gas rigs lower by 1 to 71, and miscellaneous rigs unchanged at 3. The U.S. Rig Count is down 632 rigs from last year’s count of 886, with oil rigs off 553, gas rigs down 82, and miscellaneous rigs up 3 to 3. The U.S. Offshore Rig Count was unchanged at 15.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 2nd-straight session with the intraday high reaching $164.57. Lower resistance at $164.50-$165 was topped but held. A close above the latter would signal a retest towards $165.50-$166 and the 50-day moving average.
Current support is at $164-$163.50 followed by $162-$161.50.
RSI is in a steady uptrend with current resistance at 50 holding. A move above this level would signal additional strength towards 65-70 with the latter representing the late July/early August high. Support is at 45-40.
The S&P 500 Volatility Index ($VIX) flip-flopped for the 5th-straight session after tapping a low of 26.51. Prior and upper support from the start of the month at 27-26.50 was recovered. A close below 25.50-25 and the 50-day moving average would be an ongoing bullish signal for additional market strength.
Lowered resistance is at 28.50-29 and the 200-day moving average. A move above the 30 level would be another warning signal for upcoming market weakness.
The Spiders Dow Jones Industrial Average ETF (DIA) rebounded after reaching an intraday peak of $278.82. Prior and lower resistance from mid-August at $278.50-$279 was tripped but held. Continued closes above the $280 level would indicate additional upside towards the $282-$282.50 area.
Current support is at $275-$274.50 with backup help at $273-$272.50 and the 50-day moving average.
RSI has flatlined with key resistance at 50 holding. Continued closes above this level would signal a run toward 55-60 and the later representing the July peak. Support is at 45-40 with the latter holding since early April.
The Consumer Discretionary Select Spiders (XLY) tested a morning high of $147.49. Near-term and lower resistance at $147-$147.50 was breached but held. A move above the latter would suggest a retest towards $149.50-$150.
Current support is at $145.50-$145. A close below the latter would reopen downside risk towards $143.50-$143 with the monthly low at $143.62.
RSI has been holding crucial support at 50. A close below this level would suggest additional weakness towards 45-40 and levels from early April. Resistance is at 55-60.
Shares of Peloton Interactive (PTON, $84.04, down $3.71) were active with volume of 84 million after the company announced numbers that topped expectations. Earnings came in at 27 cents a share versus 10 cents, while revenue topped $607 million with forecasts north of $582 million.
Besides selling equipment, the company’s Connected Fitness Subscriptions represent reoccurring revenue that will tremendously grow its bottom line. Peloton estimates subscriptions will zoom past 1.3 million in Q1, for growth of 135% at the midpoint. They currently have over 3 million subscribers.
The churn rate is expected to be under 0.75% and an incredible number that indicating subscribers won’t be cancelling anytime soon. The company has $1.8 billion in cash to fund new projects.
Despite all of the good news, shares fell 4% after failing current resistance at the $100 level. The 50-day moving average (blue line) remains in a solid uptrend but could come into play on additional weakness.
The 4th-straight higher high and lower low on the VIX looks bullish for the market but the 25 level could hold into 4Q earnings season. This will be when stocks make their next round of massive moves as companies come in below or above Wall Street analysts earnings forecasts.
There will be a few companies reporting earnings from companies with different fiscal quarters over the next 3 weeks that will impact a few sectors. Lennar (LEN), Cracker Barrel Old Country Store (CBRL), Adobe (ADBE), FedEx (FDX) will announce numbers on Monday and Tuesday.
In the meantime, it is important so see how volatility reacts during a slow upcoming week and ongoing political theater. The best cause scenario for the bulls will be if they can build a base at current levels with trading ranges developing into month end.
Overbought/ Oversold Levels
The percentage of Nasdaq 100 stocks trading above the 200-day moving closed at 75.72% on Friday, down 0.97%. Near-term and upper support at 75%-77.5% held. A move below the latter would indicate a retest towards 75%-72.5% and levels from late June. Resistance is at 77.5%-80%.
The percentage of S&P 500 stocks trading above the 50-day moving average settled at 53.26%, up 0.79%. Current and lower resistance at 52.50%-55% was reclaimed. A close above the latter would be a bullish signal for a retest towards 57.5%-60%. Support is at 50%-47.5%.