Introduction

The Santa Rally may still be on, but not today. Today the indices retreat from yesterday's close to continue consolidating at all-time highs for the 10th day in a row; price action today was not bullish, price action over the past 2 weeks is looking more like continuation every day.

The day started quietly, global indices holding more flat than not in thin holiday trading. Asian indices closed mix, one up and one down, although moves were less than a tenth of a percent in most cases. The one standout was the Hang Send which lost a little more than -0.80%. In Europe action was much the same although yesterday's news from the Italian banking sector added a bit of volatility. The good news, at least in the short term, is that the Italian government is set to bail out ailing bank Monte dei Paschi di Sienna.

Market Statistics

Futures trading was muted, action light as volumes begin to dry up ahead of the holiday. A raft of economic data, a bit weak in most cases, was not able to move the needle during the pre-opening session. Action at the opening was mildly bearish. The indices opened with small losses, dipped a bit lower, and then proceeded to trend sideways for the first half of the day, bouncing off the early low just after 12 noon. Afternoon trading saw the indices move within the early range, closing off of the lows and just below current all time highs.

Economic Calendar

The Economy

Lots of data today starting off with the final revision of 3rd quarter GDP. GDP was revised higher, more than expected, to 3.5%. This is the fastest level of growth for the US since the 3rd quarter of 2014. Some economists have already begun to say it is a peak and that the growth spurt is already petering out. This may be true in the near term, 4th quarter and/or 1st quarter GDP may not be as strong but the outlook for next year is on the rise. The Conference Board upped their 2017 target by 30 basis points simply based on positive outlook tied to Trumponomics.


Initial claims for unemployment gained 15,000 this week, well ahead of expectations, to hit 275,000. This is the highest level of first time claims in nearly 8 months but more likely due to seasonal volatility in the market rather than a change in labor fundamentals. The four week moving average of claims rose by 6,000 to 263,750. Last week's data was not revised, this is the 94th week of claims below 300,000. On a not adjusted basis claims rose by 3.4% versus an expected decline of -4.6%. Despite the miss not adjusted claims are down -1.2% over last year and remain consistent with ongoing labor market improvement.


Continuing claims for unemployment rose by 15,000, on top of an upward revision of 3,000, to hit 2.036 million. The 4 week moving average of claims fell, counter to this weeks gain continuing claims, to hit 2.037 million. Despite the mixed numbers, continuing claims remains near the long term low and consistent with ongoing labor market health and improvement.

The total number of claims fell, as expected, by 78,930 to hit 2.038 million. On a year over year basis total claims are down -9.6%. These declines are in line with seasonal trends and long term improvement with the labor market. All in all, this week's labor data is consistent with both seasonal hiring/firing trends as well as long term labor market recovery. Looking forward we can expect to see initial, continuing and total claims all spike to seasonal highs in the next few weeks, peaking in early to mid January, and then fall off into the spring time hiring season.


Durable Goods orders fell -4.6% in November, slightly more than expected. The drop reverses the 4.8% gain seen in October, all October data points having been revised higher. The November decline is also the first drop in orders in the last 5. Within the report data shows that shipments increased by 0.1%, unfilled orders fell by -0.2% and inventories rose by 0.1%. Ex-transportation durable orders rose 0.5%, transportation itself falling more than -13%. Ex-defense durables rose 6.6%. Picking this apart, it looks as the core portion of the economy saw an increase in orders while autos/transportation and defense spending both fell. While a bit weak, this report does have a silver lining. The transportation figures are seasonal and Trump is going to increase defense spending so there is a good chance we'll see the durables figures rise in the coming year, so long as the core economy remains healthy.

The Conference Board's Index Of Leading Indicators was unchanged in November. This follows a 0.1% gain in October and a 0.2% gain in September. The Coincident Index rose by 0.1%, the Lagging Index rose by 0.3%, both consistent with positive momentum in the underlying economy. Conference Board economists say that the readings are consistent with an expending economy and one that will continue to grow into the first half of 2017, although an acceleration of growth is expected at this time.


Personal Income was basically flat in November, rising less than 0.1%. Disposable Personal Income fell by less than -0.1%. The PCE came in at 0.2%, showing modest growth in spending. On a year over year basis PCE prices are running at a rate 1.4% above last year, 1.6% ex-food & energy, well below the Fed's target rate for inflation but the 5th month of rise and up a full half percent over the last 5 months. Inflation is still tame but if it begins to front run the FOMC we could see them get more aggressive with interest rate hikes.

The Dollar Index

The Dollar Index held it's ground today. The data dump did little to boost dollar bullishness but also did little to dampen it. Near term, economic growth may have slackened, longer term growth is still in the cards and by many accounts likely to be stronger than current estimates. The question is just how strong and we won't know that until the data comes out. Until then the dollar is still in uptrend and supported by economic outlook and FOMC expectations. Today the index created a small doji hammer, reconfirming near term support at the $102.50 level. The indicators are mixed, MACD is showing a peak in momentum that could turn into divergence while stochastic is indicating strength with a crossing of the upper signal line. Together these signals are consistent with consolidation that could lead to a continuation of near term trends. A drop below near term support could take the index down to stronger support, near $101 or $100.50, a break to new highs could carry the index on up to my target of $105.


The Oil Index

Oil prices moved higher today but did not make new highs. The price was supported by today's data which, along with the OPEC price fixing deal, helped to improve supply/demand outlook into next year. WTI settled with a gain near 1%, just shy of $53, and may remain at these levels into the indefinite future. Also supporting prices is the onset of cold weather, a development which should lead to increased consumption of fuel oils, kerosene and natural gas.

The Oil Index made small gains in today's session, 0.34%, but the candle is the 5th small bodied candle in a row at this level. Price action over the past 2 to 3 weeks has been consistent with consolidation at/near new highs with support in the range of 1,275 to 1,280. The indicators are both bearish in the near term, consistent with consolidation and/or a peaking market, while bullish in the short to long term. Both indicators are convergent with the current long term high which suggests that the market is strong and that prices will move higher from here, or at least retest current highs if a sell-off were to take place. Long term outlook for the sector, robust earnings growth in 2016 and that I think will lead to a cycle of dividend increases that together will drive this sector higher. My upside target is 1,350 near to short term, 1,450 to 1,500 short to long term.


The Gold Index

Gold prices wavered a bit but held steady near $1,130 while the dollar tested it's support in today's session. Gold is under the pressure of a rising dollar and while inflation remains tame is not attracting much support. I am bearish on gold until something changes including but not limited to a rise in inflation, a change in central bank policy from the ECB, BOJ, both or a combination of all three. Downside target is $1,100 with a possibility of moving down to a full retracement of the 2016 bull market in gold.

The Gold Miners ETF GDX is echoing the moves of the underlying commodity. The ETF held flat in today's session, the 6th day at this level and below the 61.8% retracement level, with a definite bearish bias. The indicators are bearish and suggesting a continuation of the 5 month down trend. Next target is near $16.50 and the 78.6% retracement level with a chance of full retracement to $12.25. Resistance is at $20 should the ETF make move higher.


In The News, Story Stocks and Earnings

Conagra reported earnings before the bell and they were good. The company, which has been in the process of divesting weaker brands, was able to beat top and bottom line expectations, expand margins, and grow EPS over the same quarter last year even without the inclusion of brands sold over the past 12 months. At the same time the company was able to reaffirm guidance to a range around the consensus. Shares of the stock jumped 3.3%, creating a tall white bodied candle with shaven top, to close at a new all time high.


Rite Aid reported earnings before the bell and missed on the top and bottom lines. The company, which is being acquired by the Walgreen's Boots Alliance, saw EBITDA fall more than 33% to $274 million. The main reason cited for the decline is a difficult operating environment due to the extended duration of the merger process. The company says performance was solid despite the headwinds. Investors did not agree, shares of the stock fell more than -1% in the pre-opening session.


Cintas reported earnings after the bell and surprisingly did not meet expectations. The caveat is that expectations were quite high and results were strong with top line growth of 6.4% over last year, 5.7% organic. Along with growth comes an improvement of gross margins of nearly a full percent, EPS nearly 10% to $1.13 including a $0.02 impairment charge related to a recent acquisition. The only thing bad about the report is that EPS and revenue did not grow quite as much as expected, which in the end is providing a cheaper entry to a solid growth name and dividend payer. Shares fell more than -3% on the news to trade near potential support of $115.


The Indices

The indices continue to churn at levels just below current all time highs. Today's action is consistent with holiday trading, low volumes and meandering price action, and yet also fits into a pattern of consolidation within the current rally that suggests continuation is on the way. All indices closed with a loss today, the Dow Jones Transportation Average is the leader with a decline near 0.80%. The transports created a small bodied black candle and set a new 3 week low, if barely. Even with the new low today's close is above 9,148 and the bottom of the long white candle which formed with the break to new all time highs. With that in mind action over the past few weeks looks like a flag pattern in formation, a sign of continuing near term trends. The indicators are still bearish so further testing of support, near 9,150, could happen. A break below support would be bearish, next target near 9,000. A move higher would confirm the flag pattern, with upside target near 10,000 in the near to short term.


The NASDAQ Composite made the next largest decline, about -0.50%, and created a small to medium sized black candle. Today's action is well within the range set over the past few weeks, just below the current all time high. The indicators are consistent with a peak within an uptrend and may be signaling a pull back to stronger support or deeper correction through divergence, MACD, and bearish crossover, stochastic. Current support is near 5,400, a break below here would be bearish in the near term. Resistance is the all time high, a break above here would be bullish in the near term and a continuation of short term trends.


The S&P 500 made the third largest decline, about -0.30%, and created a small spinning top candle. Today's action was neutral and the 10th day of consolidation above 2,250, the longer the index stays above this level the better. Price action is forming a small flag pattern, a sign of continuation, although the indicators have yet to roll over. At this time the indicators are consistent with a peak within an uptrend and suggest that support will be tested. Support is 2,250, a break below here would be bearish in the near term with a target near the short term 30 day moving average. A move higher would be bullish and a continuation of the near term trend with upside target of 2,300 near term and 2,500 near to short term.


The Dow Jones Industrial Average posted the smallest loss in the session, only -0.12%. Today's candle is a small white bodied candle, within the 3 week consolidation range, with upper shadow capped by the current all time high. Price action indicates near term support near 19,700 and resistance just shy of the elusive 20,000 level with indicators consistent with a strong rally, but one that is running out of steam. Current indications are consistent with a pull back to support, a break below 19,700 would be bearish in the near term, a move up to 20,000 and beyond bullish.


The indicators are in consolidation and winding up for their next move. The signs are not definitive but are certainly biased toward the bullish case, all we need now is for the move to occur. Tomorrow, with the onset of the holiday and the three day weekend, we may see near term support get tested and maybe even broken. The real moves won't come until next week, and more likely the week after that when the new year starts, so any weaknesses that occur now or over the holiday week are likely buying times for investors looking to get long for 2017. I'm bullish in the near and long term, still a bit cautious for the short, and getting more and more exited for 2017. The way things are looking for next year, earnings growth and economic growth, I just don't see any reason to sell and every reason to expect a continuation of the long term secular bull market. The risk of course is that there is a reason to sell, and I just don't see it.

Until then, remember the trend!

Thomas Hughes


 

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