Introduction

The bulls took a rest day today but were still able to set new intraday and closing highs for all major indices. In terms of today's news, decent labor data and the latest policy statement from the ECB. The EU central bank and Mario Draghi have had their say, the FOMC is next at bat with a dollar set up to be knocked out of the park. The ECB? They extended the duration of their asset purchase program, increasing QE, but capped it with plans to taper beginning April and ending December 2017.

International markets were mixed, driven both by euphoria over the rally in US indices (that's what I call follow through) as well as local news. In Asia markets were mixed though largely higher, led by the Nikkei's 1.45%. The move left the index near the 1 year high despite a downgrade for GDP over the next two years. Chinese indices were more flat than not, if positive, despite an improvement in, and better than expected, trade data that gives evidence there is some pick up in global demand. European indices were first flat, then down sharply, then back up on the realization that 1) QE was extended and 2) the taper means that the ECB expects the EU to exit economic distress over the next year. Mario Draghi, at the press conference and in support of this sentiment, said that inflation is expected to rise in 2017 and 2018.

Market Statistics

Futures trading was a bit choppy throughout the morning but held near break-even and within a very tight range. Economic data gave a little lift, the ECB policy release a little drag and then the Draghi press conference a little lift leaving the trade very near the 0.00% line as the opening bell was sounding. Action on the SPX was flat and choppy the first half of the day, the index bobbed up and down over the break even line until after noon. At that time there was a small surge, up to new all time highs, that was met with a bit of selling. The index fell back to just above break even, about 2:30PM, bounced and began to move sideways within the daily range, where it remained until the close of the day.

Economic Calendar

The Economy

Very little economic data today or tomorrow, quite a lot next week. Today's bit is the weekly jobless claims, initial claims falling by a slightly largely than expected 10,000 to hit 258,000. This is the 92nd week of claims below 300K. The four week moving average of claims rose by 1,000 to hit 252,000. On a not adjusted basis claims rose by a whopping 41.3% (seasonally expected) versus the expected 46.6% On a year over year basis not adjusted claims are -8.2% lower than last year, which is the salient detail of this data point. In terms of labor markets and labor trends, the data remains consistent with long term labor market improvement and trending near the long term lows.


Continuing claims fell by a fairly large amount, -79,000, to hit 2.005 million from last weeks revised figure. Last week's figure was revised upward by 3,000. The four week moving average of continuing claims fell by -9,500 to hit 2.028 million. Both the headline continuing claims and moving average have returned to long term historically low levels and are consistent with improvement within the labor market.

The total number of Americans claiming unemployment fell by -117,950, a number that at first surprised me, to hit 1.785 million. This drop is unusually large, but expected based on past seasonal trends. Based on those same trends we can expect to see the number rebound by nearly 500,000 next week. Despite the rise the total claims remains below last years figures, down -7.7% this week, and consistent with long term labor market recovery.


Tomorrow on the economic calendar, Michigan Sentiment and Wholesale Inventories. Next week: The FOMC on Wednesday along with Retail Sales and PPI. Thursday is CPI, Philly Fed, Empire Manufacturing and jobless claims. Friday is Housing Starts and Building Permits.

The Dollar Index

The dollar, it had a bit of a wild ride today too but the underlying fundamentals remain skewed in it's favor; the ECB is still loose and will be for another 13 months, the FOMC is tightening and will be over the next 13 months. The question now is how hawkish will the Fed be? Will they tighten in line with expectations or do more? Will they surprise with something else? Will they indicate when the next hike will possibly come and will that be sooner or later than expected? All questions that could send the dollar shooting up to retest recent highs if the answers favor a stronger dollar. Today's action, a quick dip down to test support at $100 and confirm, then bounce back to a 1 week high above the previous long term high and resistance level of $100.49. Next upside target is $102 with a chance of going higher.


The Oil Index

Oil prices are on shaky ground, as is the OPEC deal, the very ground that oil prices are standing on. The deal has yet to be fully ratified, another meeting takes place this weekend to hammer out more details, but nonetheless fails to reduce output to levels that will effectively rebalance the market. At the same time non-OPEC members such as Russia are also required to agree to cuts and total OPEC production reached a new all-time high, both casting a shadow of doubt on an already dubious deal. I remain skeptical. WTI hovered around $50, closing with a gain near 2% at $50.84.

The oil sector continues to move higher, I think regardless of an OPEC deal. Earnings outlook for the sector is good, great, even outrageously fantastic (full year 2017 earnings growth projection is +340%) and based on oil at or near current prices. Even if oil prices hover in the $45 range earnings growth will be huge. The Oil Index gained a little more than 0.5% in today's action to tickle one year high. The indicators are bullish and on the rise, beginning to show some strength. A break above 1265 would be bullish.


The Gold Index

Gold prices fell on a stronger dollar, after a bit of a choppy morning, to trade near $1172. The metal remains under pressure and is likely to fall back to retest recent lows given dollar outlook. Support targets are near $1150 and $1160, a break below $1150 being bearish and likely to lead to even lower prices. The only thing going for gold now is the possibility of an increase in physical demand now that prices are lower, and the onset of serious inflation and gold as a hedge.

The gold miners continue to consolidated near their recent lows. The Gold Miners ETF GDX falling about -0.25% in today's action. The ETF is consolidating within a narrow range, creating a bit of a pennant pattern within a down trend, while it winds its way over to the short term moving average. The moving average has provided resistance and sparked downward movement at least 6 times over the past 4 months and likely to do so again. The fact that the moving average is now coincident with the 50% retracement line is only another nail in the coffin. Support is near $20, a break below here could go as low as $16.50 in the near term.


In The News, Story Stocks and Earnings

Sears reported earnings in the wee hours of the morning, beating on the top and bottom lines. That being said, the bottom line was net loss for shareholders but a significantly smaller loss than last year. Another thing to take note of, revenues are shrinking due to both a reduction in the number of Kmart and Sears stores as well as a -7.4% decline in same store sales across the group. What I can say about Sears is that when I went in there a few weeks ago just about the whole place was at least 50% off, I bought a nice new jacket. Shares of the stock climbed nearly 5% on the news.


Costco reported after the closing bell yesterday, did not quite meet analyst expectations for revenue but was still able to please the market. The wholesale club reported a 3% increase in revenue and a 13.5% increase in profit. Today's action saw prices gap up, shoot higher during the session, and hit resistance to create a wicked looking pinbar. The indicators are bullish if a bit mixed and the stock is trading just below resistance of $160.


Hovnanian Enterprises reported earnings before the bell. Revenue and profit both rose from the same quarter last year, fiscal 4th, but full year earnings and revenue fell short. The fourth quarter however saw a 16% increase in revenues, driven by housing trends, that is expected to continue into next year. Shares of the stock jumped 2% in the pre-market, traded just shy of a new intraday 15 month high, and then sold off on profit taking to close with a loss. Despite the sell off the indicators bullish and showing strength, there may be a pull-back in prices from here but I would expect to see them at least retest the current high.


The Indices

The indices took a bit of a breather today but were still able to move higher and set new all time highes across the board. Starting with the SPX, which made the smallest gain, the index moved up by 0.22% to set a new all time high. Today's move is leftover momentum from yesterday's rally and a good sign for us bulls. The indicators are bullish and confirm the move to new highs, if they are divergent at this time. The divergence is not confirmed yet and even if it were, based on the extreme nature of the preceding MACD peak we can expect to see up to 4 successive peaks (three more including the current peak) before the move is fully exhausted. Upside target is near 2,300.


The Dow Jones Industrial Average made the next largest gain, 0.33%, creating a small bodied white candle. The index is drifting higher on momentum, following yesterday's push higher, and likely to keep rising. The indicators are both confirming the move and strength within an ongoing up trend. This move could continue into the near to short term before becoming exhausted with Dow 20,000 well within reach.


The NASDAQ Composite made the 2nd largest gain in today's session, just shy of 0.45%. The tech heavy index created a small bodied white candle and set a new all time high. The indicators are a bit weaker on this chart but nonetheless consistent with a trend following bounce and move higher. Divergences present are a red flag and bear watching but, for now, are unconfirmed. Next upside target is near 5,500.


The Dow Jones Transportation Average made the largest gain, just over 0.5%, and put the transports back in the lead with another new all time high. The index ability to creep higher for a 2nd day following the break-out to the first new highs in almost 2 years is a good sign. The indicators are bullish and confirm the break-out as well, although there are also unconfirmed divergences here. Upside targets are 9,500 in the near term and 10,000 and 10,500 in the short to long terms.


The continuation of the long term secular bull market that had been building on positive earnings growth outlook, unleashed by post-election relief and supported by economic trends is still underway. The indices are making new highs, the transports are participating, earnings growth is back, economic outlook is good and the only negatives are concerns that the Trump economy won't be as good as we think. That could be true but remember this; outlook was positive before Trump won the election and has only improved since, even if the Trump economy isn't as good as we think right now it will still be better than what we were expecting before. I am bullish, still cautious, but bullish with an eye on Dow 20,000. The next big catalyst will be next Wednesday when the FOMC releases their policy statement, I can't wait.

Until then, remember the trend!

Thomas Hughes


 

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