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Friday, February 8, 2019 

Market Action

U.S. markets avoided their first 3-session losing streak of the year, for the most part, after rallying into the closing bell to finish slightly higher on Friday. Much of the nervousness was attributed to trade talk concerns as the White House confirmed that Presidents Trump and Xi will not meet before the March 1st deadline for tariff action.

If the U.S. and Chinese negotiators can’t come to a new agreement, the U.S. is expected to raise import taxes from 10% to 25% for $200 billion in Chinese goods. Despite the concerns, the Dow and Nasdaq were able to extended their winning streak to 7-straight weeks.

The Nasdaq edged up 0.1% following the late day run to 7,299. Lower resistance from earlier this month at 7,300-7,350 held with a move above the latter getting 7,400-7,450 and the 200-day moving average back in play.

The Russell 2000 climbed 0.1% despite falling below 1,500 but a level that held for the 2nd-straight session. Prior resistance at 1,510-1,520 remains in focus with continued closes above 1,525 signaling a return to higher highs.

For the week, Tech was up 0.5% while the small-caps rose 0.3%.

The S&P 500 also added 0.1% after rebounding 27 points off the intraday low to reach a late session high of 2,708. Resistance remains at 2,725-2,750 and the 200-day moving average with a move above the latter signaling additional momentum.

The Dow was unable to snap a 2-session slide after testing and intraday low of 24,883. Fresh and upper support at 25,000-24,800 and the 200-day moving average held for the 2nd-straight session.

The blue-chips were higher by 0.2% for the week while the S&P 500 nudged up 0.1%.

Communication Services and Technology showed the most sector strength on Friday after rising 0.7% and 0.6%, respectively. Financials and Energy led sector weakness after sliding 0.5%.

For the week, Technology and Industrials advanced 2% and 1.7% while Communication Services sank 1.5%.

Earnings

The results emerging from the Q4 earnings have not been impressive, but it isn’t as bad either as analysts had feared ahead of the start of this earnings season. Wall Street knew the period of very strong growth would decline but analysts are likely surprised by the steady negative revisions to earnings estimates for the current and coming quarters.

This has left growth expectations for the first half of 2019 barely in positive territory. The current and negative revisions can be blamed on uncertainty about global economic growth, along with a host of companies in different industries citing weakness in China, Europe and elsewhere as the driver of weak guidance.

As a result, total earnings for the 332 S&P 500 companies that have reported are up 13.4% from the same period last year on 7.2% higher revenues. Earnings and revenue growth for the same companies had been 24.3% and 9.7% in the preceding earnings season, respectively.

For the most part, companies seem to be struggling to beat earnings per share estimates. Of the 332 index members that have reported results thus far, 67.2% are beating EPS estimates and only 62% are topping revenue estimates. For the same companies, the proportion of positive EPS and revenue surprises was 78.6% and 60.8% in the Q3 earnings season.

The proportion of these 332 index members beating both EPS and revenue estimates is 46.7%, which compares to 50.9% for the same group of companies in the preceding reporting cycle and 12-quarter average of 53.9%.

The revenue beats percentage is on the weak side relative to historical periods, and the lag on the EPS beats percentage side is particularly noteworthy. In fact, the Q4 EPS beats percentage is the lowest in more than 3 years.

For Q4 as a whole, combining the actual results from the 332 index members that have reported with estimates for the still-to-come 168 companies, total earnings for the S&P 500 index are expected to be up 13.7% from the same period last year on 6.2% higher revenues. This would would follow the 25.7% earnings growth on 8.5% higher revenues from Q3 2018.

Earnings growth is expected to be in double digits for a number of sectors, with Energy (100.3%), Finance (16.1%), Construction (21.8%) and Transportation (29.3%) as the strongest growth. Tech sector earnings are track to decelerate meaningfully in Q4, up just 7.7%, after back-to-back quarters of very strong growth.

Four sectors are expected to have lower earnings in Q4 relative to the year-earlier period, namely Conglomerates (7.4% decline), Autos (-9.8%), Utilities (-7.8%) and Basic Materials (-0.7%).

Global Economy 

European markets ended the week lower after the EU agreed to resume Brexit negotiations in an attempt to break the political deadlock. However, EU leaders once again rejected Prime Minister Theresa May’s request to reopen the previously completed withdrawal agreement.

The Belgium20 sank 1.5% and Germany's DAX 30 dropped 1.1%. The Stoxx 600 Europe was off 0.6% and France’s CAC 40 was lower by 0.5%. UK's FTSE 100 dipped 0.3%.

German exports were up 1.5% in December while imports rose 1.2%. This widened Germany's trade surplus to 19.4 billion euros from November's 18.9 billion euros. Expectations were for a 0.4% rise in exports and a 0.5% gain in imports.

Asian markets settled lower with China's Shanghai and South Korea’s Kospi remaining closed for Lunar New Year.

Japan’s Nikkei plummeted 2% while Australia’s S&P/ASX 200 declined 0.3%. Hong Kong's Hang Seng reopened from the shortened week but slipped 0.2%.

U.S. Economy

Baker-Hughes reported the U.S. rig count was up 4 rigs from last week to 1,049 rigs, with oil rigs up 7 to 854 and gas rigs down 3 to 195. The U.S. Rig Count is up 74 rigs from last year's count of 975, with oil rigs up 63 and gas rigs up 11. The U.S. Offshore Rig Count was unchanged at 19 rigs and up 3 rigs year-over-year.

Market Sentiment

The iShares 20+ Year Treasury Bond ETF (TLT) closed higher for the 4th-straight session after reaching a peak of $122.47. Fresh and lower resistance at $122.50-$123 held. A close above the latter would be a bullish signal for a possible push towards $123.50-$124 and new highs for 2019.

Rising support is at $121.50-$121 followed by $120-$119.50 and the 50-day moving average.

RSI is in an uptrend after clearing January resistance at 60. Continued closes above this level keeps 65-70 in play. Current support is at 60 with risk towards 55-50 on a move back below this level.

Volatility Index

The S&P 500 Volatility Index ($VIX) closed lower for the 7th time in 8 sessions despite tapping an intraday high reaching 17.63. Upper resistance at 17-17.50 was once again stretched on the lower low with the 200-day moving average holding for the 2nd-straight session. A close above 17.50 opens up risk towards 19.50-20.

Prior and upper support at 15.50-15 held on the fade to 15.62 into the closing bell. Continued closes below 14.50 would be a bullish development for the market with a shot a 12.50-11.50, depending on momentum. These levels represent the late September and early October lows and where the market could possibly peak over the near-term.

RSI is flatlining with current support at 35. The latter represents multi-year support and oversold levels. However, a move below 35 would signal weakness towards 30 and March 2016 support. Resistance is at 40-45 with a move above the latter being a bearish signal for the market.

Market Analysis

The Spider S&P 500 ETF (SPY) snapped a 2-session slide despite the first half pullback to $267.83. Support at $268-$267.50 held with a move below the latter opening up risk towards $266-$265.

Near-term resistance at $270.50-$271 held on the bounce to $270.58 into the close with additional hurdles at $271.50-$272 and the 200-day moving average.

RSI is holding support at 60. A move below this level would signal additional weakness towards 55-50. Resistance is at 65-70 with a close above the latter signaling a possible return of upside momentum towards 75-80 and January 2018 peaks.

Sector

The Technology Select Sector Spiders (XLK) was up for the 5th time in 6 sessions despite the opening backtest to $66.95. Upper support at $67-$66.50 was breached but held for the 2nd-straight session. A close below $66 would be a slightly bearish development and signal a possible near-term top.

Lower resistance at $68-$68.50 was nearly breached but held on the second half rebound to $67.99. Continued closes above $69 and the 200-day moving average would be a more bullish signal for a run towards $70-$71 and early November peaks.

RSI is trying to hold late Janaury support at 60 with a close below this level signaling weakness towards 55-50. Near-term resistance is at 65 with a move above this level getting 70 and late August 2018 highs in play. Continued closes above this level could lead to a run towards 75-80 and January 2018 peaks.

All the best,

Roger Scott
WealthPress