Stock Market Rally Continues Despite Rising Risk

Strong second quarter earnings reports helped offset weakness in last month's jobs report and China's retaliatory tariffs. Non-farm payrolls came in at just 157,000 in July, which was less than the 195,000 consensus forecast. China also responded to President Trump's $200 billion in new tariffs on Chinese products with $60 billion in tariffs on U.S. products – which is actually an escalation on a relative basis since China buys less from the U.S. than the U.S. buys from China.

Second quarter earnings have been very strong, with about 80% of S&P 500 companies reporting positive earnings surprises and nearly three-quarters reporting positive sales surprises. However, President Trump's trade war could take a toll starting next quarter, with about three times as many companies issuing negative earnings guidance versus positive earnings guidance. This is particularly problematic since stock valuations, as measured by P/E ratios, stand at 16.5x, above both the five- and 10-year averages, according to FactSet's Earnings Insights.

Next week, traders will be keeping a close eye on several key economic indicators, including jobless claims on Aug. 9 and the consumer price index on Aug. 10. The market will also be keeping an eye out for President Trump's response to the new Chinese tariffs, which could mark a further escalation in what's quickly becoming a costly trade war for the two largest economies in the world. (See also: Trump Trade War Is a Buying Opportunity: Fundstrat.)

Broad Market Rallies Higher

Technical chart showing the performance of the SPDR S&P 500 ETF (SPY)

The SPDR S&P 500 ETF (SPY) moved sharply higher last week toward its all-time high of $286.63 after rebounding from trendline and pivot point support at around $278.31. Traders should watch for a retest of the all-time highs and upper trendline resistance at around $286.00, or a move lower to retest the pivot point and trendline support levels toward the middle of its price channel. The relative strength index (RSI) is slightly overbought at 63.49, and the moving average convergence divergence (MACD) could see a bearish crossover, but the indicators aren't at enough of an extreme to offer a reliable prediction. (For more, see: Where to Find Bargain Stocks in the S&P 500.)

Industrials Struggle with Tariffs

Technical chart showing the performance of the SPDR Dow Jones Industrial Average ETF (DIA)

The SPDR Dow Jones Industrial Average ETF (DIA) moved lower last week, although it posted an impressive recovery late in the week. Traders should watch for key trendline support levels at around $253.00 to hold next week, which could form the basis for a move to test prior highs and R1 resistance at around $259.79. If the index breaks down, traders will be watching for a move to the pivot point and 50-day moving average at around $250.00. The RSI is slightly overbought at 62.74, and the MACD appears close to a bearish crossover.

Apple Pushes Tech Stocks Higher

Technical chart showing the performance of the PowerShares QQQ Trust (QQQ)

The Invesco QQQ Trust (QQQ) rallied throughout last week thanks to strong earnings from Apple Inc. (AAPL) and other companies. Traders will be watching for an ongoing move higher to retest highs and upper resistance levels at around $183.00. A breakout from these levels could lead to a move to R2 resistance at around $189.61. A breakdown from current levels could lead to a move down to lower trendline and pivot point support at around $175.00. The MACD appears neutral at 57.62, but the MACD remains bearish. (See also: Nasdaq Could Fall 15% or More: Morgan Stanley.)

Small Caps Put Rally on Hold

Technical chart showing the performance of the iShares Russell 2000 Index ETF (IWM)

The iShares Russell 2000 Index ETF (IWM) moved marginally higher last week and remains one of the top performing indexes in recent quarters. Traders should watch for a move higher to retest prior highs, trendline resistance and R1 resistance at around $170.00 or a move lower to test trendline, pivot point and 50-day moving average support at around $166.00. Looking at technical indicators, the RSI appears neutral at 49.69, but the MACD remains in a long-term bearish downtrend.

Charts courtesy of The author holds no position in the stock(s) mentioned except through passively managed index funds.

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