Introduction

The FOMC meets this week, odds for a rate hike are running near 100%, the only thing now is to see if they do what we think they will; and the market is waiting. Today's action was primarily driven by Trump; his one China policy comments, China's response and a Tweet about the F-35 program only the latest. The S&P 500 and Dow Jones Industrial Average both set new intraday highs, the Dow at least was able to hold them. Other indices saw small pull backs, nothing major, ahead of the two day FOMC meeting and much anticipated 2nd rate hike, coincidentally 1 year after the first since the historic Global Financial Crisis (if they do it).

Global indices were a bit mixed today. In Asia Japanese stocks moved up to leave the Nikkei at a new 1 year high while new regulations in China caused indices there to sell off by roughly -2%. The Chinese national insurance regulator says it will curb "barbaric stock purchases" by the countries insurance carriers. European indices were also mixed but flat on the day as traders wait on the FOMC. As of last look the CME's FedWatch Tool is still showing a 95% chance of rate hike at this meeting. The question now is, how high will they raise rates, what else might they do and what will they say about the timing of the next rate hike?

Market Statistics

Futures trading indicated a flat market all day today. The trade was flattish, bobbing along just above break even, and held that into the opening bell. There was no economic data released today and no earnings report of note in the early hours to move the market. Trading at the open was a little wild, the indices first moved a hair lower to touch support, then bounced higher to hit new all time highs for the SPX and DJI and then fell back to the early low, and then a little lower, to trade sideways for the rest of the afternoon.

Economic Calendar

The Economy

No data today but several important bits of the puzzle will be delivered this week. Most important is the two day Fed meeting which begins tomorrow. The FOMC is expected to raise rates by 25 basis points and possibly give an indication of when the next will come. There has been no change to their rhetoric, that the pace will be gradual, but if that means it will be another year before the next hike we don't know it yet. The CME's FedWatch tool shows a roughly 50% chance for the third post-Financial Crisis rate hike by next summer. Also on tap this week; Retail Sales, CPI, PPI, Business Inventory, Industrial Production, Philly Fed, Empire Manufacturing and Housing Starts/Building Permits.

Moody's Survey Of Business Confidence fell -1.1% in the last week to hit 28.5. this is the lowest level in just over a month but still off the summer bottoms. Mr. Zandi says that sentiment is less upbeat than it was but is still positive and shows an economy expanding at its potential. Current and future outlook have both diminished a bit but are positive.


The third quarter earnings cycle has come to a close, the final rate of earnings growth is 3.1%, snapping the 6 quarter earnings recession. Looking forward, 3 companies have reported for the 4th quarter and 5 are due to report this week. Of those who have reported 2 have beaten on earnings expectations and 1 has beaten revenue expectations. The blended rate for the 4th quarter is now 3.0%. If the trends run true this quarter the final rate of earnings growth will be in the range of 7% to 8%. Full year 2016 outlook is holding steady at 0.1% but likely to rise by the end of the 4th quarter season.


Looking to next year outlook remains positive. Full year 2017 earnings growth is expected to come in around 11.4%, likely higher, with 11.3% in the 1st quarter and 10.5% growth in the 2nd.


The Dollar Index

The Dollar Index pulled back a bit today, retreating from just below the current long term high. The index fell about -0.60% to trade near the middle of the November/December range as the market awaits the Fed. The expectation for a rate hike is huge, if they don't deliver or don't sound hawkish enough it could send the index plunging. First target for support in such a situation is near 100.50, maybe as low as 100, a break below this level would be bearish and could take the index down to 98.65 or lower. However, the prevailing expectation is not only for the hike, but also for more hikes in the future which is overall bullish for the dollar. Resistance is near 102, a break above this level would be bullish and could take the index up to $103.50 or higher.


The Oil Index

Oil prices got another OPEC induced boost today as Russia and the Non-OPEC OPEC bloc came on board the historic, and largely ineffective, deal to support prices. Russia's agreement is a bit smaller than what was originally proposed and with the 1.2 million BPD cut by OPEC itself doesn't even hit the 2 million BPD mark. In any event, I expect this news to support prices in the near term but leave them vulnerable to correction in the short to long. Negative factors overshadowing the deal: oversupply still reigns, demand growth is still tepid, US rig counts are rising and we have to trust that those in agreement with the deal will actually cut production.

The Oil Index jumped nearly 3% at the open, gapping up to a near 18 month high, only to sell off throughout the day. Despite the selling the index was able to close with a gain, near 0.35%, but the candle signal looks pretty ominous, at least for the short term. The candle is long and black and comes at a possible peak/top of a rally driven more by talk and hope than anything else. The index may continue to rise, and probably will based on earnings growth outlook for next year, but in the short term it looks like there will be some profit taking, consolidation and maybe correction before more new highs are set. Resistance is just shy of 1,300, first target for support is 1,250.


The Gold Index

Gold prices were flat if a bit choppy, trading around the $1160 level. Spot prices are down on FOMC outlook and dollar value and could go lower. At this time the risk is that the FOMC won't deliver and the dollar will fall. Support for gold is in the $1150 to $1160 range, a break below here would be bearish. Resistance may be found at $1175 but more likely at $1200.

The gold miners rose in today's session but I think it more a lack of sellers than a presence of buyers. The Gold Miners ETF GDX gained nearly 0.75% at the close, creating a small doji candle in the lower half of the previous days black candle. The ETF is still in consolidation, trading sideways within a range bound by support near $20 and resistance near $22. The indicators remain mixed and consistent with a range bound asset. Where the ETF goes next is entirely dependent on the FOMC, the dollar and gold prices; a break to the upside may find resistance at $25, a break to the downside may find support near $16.50.


In The News, Story Stocks and Earnings

Today's Trump Tweet victim is Lockheed Martin, maker of the ill fated and over budget F-35 program. In today's Tweet Trump says the program is way over budget, out of control and it, along with other costs, will be trimmed come January. The news shook the stock, as well as the entire defense complex, but is likely setting up buying opportunities as Trump is also on track to increase defense spending overall. Shares fell -2.5% in the premarket, doubled the loss during the open session, recovered half of the total loss and closed with a small white bodied doji candle, hammer-like, which found support, not coincidentally, at the $250 level and the top of a gap opened a month ago. The stock is now trading about -7% off of the recently set all time high.


Chipotle Mexican Grill got a boost today when it announced that there would no longer be two CEO's. Monty Moran will step down as CEO and from the board, retiring completely from the company in 2017, and will be replaced by co-CEO Steve Ells. Ells will stay on as chairman of the board. The move is expected to help remove unnecessary "complexity" from company operations, both in the E suite and in the stores, and facilitate recovery following the e-coli outbreak earlier this year. Shares of the stock responded well to the news, gaining 3.5%.


The VIX gained 7.25% today but remains low relative to the past month, the short and the long term. The index is hovering 12.50 and below the moving average, consistent with periods of upward trend, but may be bottoming. The indicators are both diverging from recent lows and the stochastic is firing a weak buy. The caveat is that this set-up could also precede another push to test support, it just depends on which way sentiment turns. The indices are set up for a pull-back, with the FOMC this week I wouldn't be surprise to see it happen, and this could result in a test of the short term moving average for the the VIX, near 13.50, with a chance for a move up to 15.


The Indices

The indices are set up for a test of support, pull-back and possible correction. Today led by the Dow Jones Transportation Index. The transports fell -0.90%, creating a smallish black bodied candle sitting on the previous and recently broken all time high. This action is not unexpected following a break out, the question now is will support hold at this level or will the test be deeper. The indicators are divergent from the current high, consistent with a test, but give no indication of how deep it may be. The upshot is that the indicators are also consistent with a strong uptrend so any pull back that does occur is a buying opportunity, more likely than not. Support is at current levels, near 9320, a move below here could go as low as 9,000, about 3.5%, before hitting the next target for solid support.


The tech heavy NASDAQ Composite made the next largest decline today, about -0.60%. The index created a small black candle sitting on support at the previous all time high (the one set last week). The indicators are showing some wicked divergence here and suggest that we will see some more testing of support, if not a move lower. A break below current levels would have a target near 5,300 or 5,250, about -2.7%, with a possible move down to 5,100, about -5%.


The S&P 500 made the third largest decline, about -0.11%, and created a small spinning top doji. The index created a new all time intra-day high today, 2264.03, and looks poised to do one of two things; extend the rally or pull back to test support. First target for support is near 2,225 and a long term up trend line, the next is the recently broken previous all time high. The indicator are a bit weak but over all bullish, there are however divergences present which support the idea a pull back to is on the way.


The Dow Jones Industrial Average managed to eke out a gain today and close with a new all time high, 19,796.43. The index created a small white bodied spinning top, at the all time high, and appears to be drifting higher on unspent momentum. The indicators are both bullish if weakening over time and on the rise, suggesting that there is some room left to run. The caveat is that there are divergences present that suggest the rally is losing strength and susceptible to correction. Targets for support should the index begin to correct are 19,000, -4%, and 18,500, -6.5%.


The indices are trading at or near all time highs after a rally lasting a little more than 1 month. It is no surprise to see them poised for consolidation/correction and also no surprise to see them this way ahead of the FOMC meeting. Where they go from here, in the near term, will be heavily dependent on the FOMC meeting and policy statement. Where they go in the longer term is more dependent on the economic outlook, positive, and the earnings growth outlook, also positive and expanding over the next 5 quarters. If there is a pull back to support I think there is a high likelihood it will be the entry point for a long term index position I have been waiting oh so long for, fingers crossed.

Until then, remember the trend!

Thomas Hughes


 

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