Introduction

Only 4 trading days left until Christmas. If there is going to a Santa Claus extension to the Trump Rally it's going to happened this week. Today's action was bullish and a positive sign but not quite enough to label as "rally". Even so, the Dow remains poised to hit 20,000 and could easily do so with only the slightest bit of good news.

International indices were mostly flat in today's session. In Asia this means the indices closed mostly in the red, if with minimal losses. In Europe the opposite as German business sentiment hits its highest level in over 2 years. In both regions trading was quiet.

Market Statistics

Futures trading was a bit muted this morning. The indices were indicated to open with small gains and there was little movement in that all morning. Trading at the open was quiet as well, the indices opened with small gains, made a quick dip to test Friday's closing prices, and then moved higher, if only by a small margin. The SPX hit an intraday high before noon, about +0.50%, and that high held for the day. After that the index pulled back from the high, remaining in positive territory, and trending sideways into the end of the day. Considering events in Turkey and Germany it's a bit of a wonder that the market was able to close higher at all.

Economic Calendar

The Economy

No economic data today but there is quite a bit this week. Due to the holiday, no closures this week, many of the reports will be delivered on Thursday. On the list; Existing Home Sales, 3rd quarter GDP revisions, jobless claims, Durable Goods, Leading Indicators, Personal Income and Spending, Michigan Sentiment and New Home Sales. There is a closure next week, Monday the 26th, so keep that in mind during the week.

Moody's Survey Of Business Confidence rebound by 1.3% in the last week, rising from a 2 week low. According to the survey global business sentiment is holding steady after bottoming out earlier this year. Mr. Zandi says sentiment is firm and shows a global economy expanding at the high end of its potential. Present and future conditions have softened but hiring and investment remain steady.


There have been 5 earnings reports for the 4th quarter so far this cycle. Of those 4 beat on the earnings side, 2 on the revenue. Since the start of the 4th quarter 8 of the 11 S&P sectors have been revised lower while at the same time the 12 month forward looking EPS continues to rise, moving above $130 in the past week. The blended rate of earnings growth has risen because of this, gaining 0.2% to hit 3.2%, the first increase in expectations in 10 weeks. Based on the historical data we can expect to see this figure continue to rise into the end of the cycle, possibly as high as 8%. Touching base with the energy sector, the single leading cause for all-index earnings decline over the past year, 4th quarter growth is expected to be flat at -0.01%, the first quarter the sector has not seen high double digit declines in earnings in more than 4 quarters.


Full year 2016 earnings growth outlook remains firm at 0.1% but is also likely to rise by the end of the cycle. Positive earnings growth is also expected to continue into next year and those expectations have expanded in the past week from 11.4% to 11.5%. First quarter 2017 growth is expected to rise to 11.2%, slightly lower than last week's estimate, while the 2nd quarter was revised higher to 10.6%. Third and fourth quarter estimates remain above 12%.


The Dollar Index

The Dollar Index made gains today after a morning spent testing near term support. The index rose 0.25% and set a new closing, but not intra-day, high. The indicators are bullish and confirm the move, suggesting that higher prices are on the way. This move is supported by economic trends, FOMC expectations and continued to QE from central banks like the ECB and BOJ. Upside targets remain at $105, targets for support are $102.50 and $100.50 should the index decide to pull back. Risks at this time include surprise comments from FOMC members, weak economic data, a toning down of FOMC outlook for 2017 and/or strength in overseas economies.


The Oil Index

Oil prices closed with a gain today, after a see-saw day as traders try to make sense of supply/demand outlook, the OPEC deal and early signs that the deal is being adhered to. WTI settled up about a half percent, just over $52 a barrel. Prices may hover at or near this level in the near to short term while we wait to see what really happens with supply, and market imbalance is corrected. Until then I remain skeptical but certainly open to a change in fundamentals. Even without a further advance in prices, current prices are enough to support outlook for earnings growth in the energy sector.

The Oil Index lost a half percent in today's session but remains within a near term consolidation pattern. The index has been trending higher in the near term on OPEC hopes and rising oil prices but recently reached a peak. The indicators are mixed, bullish but consistent with a peak and possible test of support, as is oil price outlook but it may not matter. Earnings outlook for the sector is robust for 2017, up nearly 350% after being down roughly -75% in 2016, and could easily keep investors interested and this index moving higher. The near term consolidation in which the index is now moving may become a flag pattern with upside target near 1,500.


The Gold Index

Gold prices held firm near $1140 but remain near long term lows. Prices were lifted by early weakness in the dollar but those gains were capped. Longer term outlook remains bearish, the FOMC is on a path of tightening and dollar strengthening, so I am not expecting to see any major rebounds in this metal anytime soon.

The gold miners remain under pressure as well. The miners ETF GDX gained about a half percent in today's session but is just holding steady near the recent low and below the 61.8% retracement level. The indicators remains bearish and point to lower prices, downside target remains near $16.50. Firm resistance is likely to be found near $20 should the ETF, or gold prices, decide to move higher.


In The News, Story Stocks and Earnings

Disney was one of today's top gainers. It's movie, Star Wars Rogue One, performed much better than expected bringing in more than $155 million in weekend box office sales. The stock rallied nearly 2% intraday but was capped by resistance. The success of Rogue One is great and cements the future of the Star Wars franchise but there are other issues to consider, including ESPN. Resistance is the 1 year high and does not look like it will be broken at this time. However, if it is, upside target is near $110. Support target, near term, is near $102.50.


Cintas was added to the NASDAQ 100 this morning. Cintas also reports earnings this week and should show another quarter of solid organic and acquisition growth. The company is the nations largest and #1 distributor of rental uniforms, safety and safety products for employers and employees with a long history of growth. Year to year earnings growth has been in the double digits since the current recovery began and on track for the same this year. On top of that the company has been in a multi year cycle of dividend increases, delivered annually, and continued this year. The company's strength lay in organic growth, supported by labor trends, that is super charged by the acquisition of new territory and business opportunities such as last years addition of ZEE Medical. The stock has been hovering at all time highs for about 2 weeks, since the announced inclusion, and could pop on earnings.


The VIX fell more than -3.0% today and is fast approaching the recent and long term low. The index shows a decline in fear, or at least the prices of options, and looks set to hit the low in the next day or so. The indicators are bearish and firing a sell signals, suggesting lower prices are the way, indicative of rally in the underlying S&P 500.


The Indices

The indices moved higher today but not strongly and no new all time highs. Today's leader was the Dow Jones Transportation Average which gained 0.72%. The index has retreat to the previous all time high and possibly at a support level. The index has, over the past 2 weeks of trading days, begun to form a classic flag pattern that bears watching. The indicators are consistent with a peak within an up trend and test of support so this pattern may not be fully formed, support target is currently 9,150, a break below here may find support at 9,000 or 8,500.


The NASDAQ Composite made the 2nd largest gain today, 0.37%. Despite the gain the index did little more than trend directly sideways for the 5th day in a row, and close just shy of the current all time high. The index is in a near term consolidation/congestion zone that could easily become support or resistance once price begins to move away from this level. The indicators are mixed in the near term but generally bullish although there is divergence in the short term that suggest some weakness in the market. A break to the upside would be bullish, target 5,750, a break to the downside would be bearish, target 5,450 or 5,350 in the near term.


The Dow Jones Industrial Average made the 3rd largest gain, 0.21%. The blue chips created a small white bodied candle with visible upper shadow, indicative of some resistance to higher prices, but price action is nothing more than another day, the 5th, of sideways action at the current all time high. Today's action leaves the index within 125 points of 20,000 with mixed indicators. The reading is bullish but like with the other indices divergences in the short term and mixed signals in the near suggest that support may be tested at current levels with the chance for a deeper pullback or correction. The caveat is that the current movement, the Trump Rally, was strong to begin with and may continue higher in the near to short term before momentum is fully exhausted. Near term support is just below today's open, near 19,750, a break below here would be bearish in the near to short term with downside targets near 19,500 and 19,250.


The S&P 500 made the smallest gain in today's session, only 0.20%. The broad market created a small white bodied candle, the 5th consecutive at this level, and looks like it is forming a flag continuation pattern. The caveat is that indicators, like with the other indices, are consistent with consolidation/pull back which leaves the door open for a deeper pull back to support than what we have currently seen is possible. If the index does continue the rally upside targets are 2,300, 2,350 and 2,500.


Today's action was simply another day of consolidation at the current all time highs while the market decides what it wants to do. The price patterns are highly suggestive of continuation, the indicators are beginning to come in line with that assessment, all we need now is the break out to confirm. This week could easily see it happen, there is little in the way of major market moving economic events or data on the calendar and earnings reporting will be light. I'm bullish in the near term, bullish in the long term, still cautious in the short term but ready to add another little speculative position in preparation for what could be nice little Santa Rally into the end of the year.

Until then, remember the trend!

Thomas Hughes


 

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