Introduction

The markets continue to consolidate within near term trading ranges, waiting on the start of the New Year. What will the New Year bring? By all accounts growth in earnings and the economy, how much growth is the question weighing on everyone's mind. Next week's raft of monthly macro-data may help answer important questions. Regardless, GDP and earnings growth expectations for next year are positive, expansionary and bullish for equities.

Trading action was light around the world as post-holiday trading volumes persist. Asian indices were mixed following the US sell-off, led by the Nikkei and a loss of -1.30%. European indices did not fare much better, closing with minimal losses and basically flat for the day.

The news of the day turned out to be political in nature. President Obama evicted more than 2 dozen Russian diplomats and shut down 2 of their compounds in retaliation for the election tampering and hacking attacks. Russia has responded saying the move is illegal and will be countered. For those of us who can remember the Cold War years, here we go again.

Market Statistics

Futures trading was light in the early electronic session, indicating a flat to mildly positive open all morning. There was little in the way of economic data and nothing in the way of earnings or business news to move the market. The open was calm, the indices began the day in positive territory, just above the bottoms of near term trading ranges, and were able to make some gains within the first half hour of trading. Gains were small, about 0.15% for the SPX, and did not last. By 11AM most indices had fallen into negative territory where they remained for the better part of the day.

Economic Calendar

The Economy

Jobless claims data was as expected, consistent with seasonal trends and long term labor market health. Initial claims came in at 265,000, up 10,000 from last week's not revised data, while the 4 week moving average of claims fell -750 to 263,000. This is the 95th week of claims under 300,000, the longest streak since 1970. On a not adjusted basis claims rose 7.9 versus an expected gain of 12% and are down -1.8% year over year. There has been some volatility in the numbers lately but based on the historical data remain consistent with seasonal trends. Increases in initial claims should peak out in early January and then fall off into the spring and summer. The state with the largest increase in claims is Ohio with +2,625, the state with the largest decrease in claims is Pennsylvania with -1,521.


Continuing claims increased by 63,000, on top of a +3,000 revision to last week's data, to hit 2.102 million. The 4 week moving average of continuing claims rose 4,500 to hit 2.042 million. This is the highest level of continuing claims in 4 months but within seasonal expectations and still near the long term low. Despite the gains over the past few weeks continuing claims remain consistent with labor market health. Continuing claims should peak in the next few weeks and then subside going into the spring and summer.

The total number of Americans claiming unemployment benefits jumped 102,430, in line with expectations, to hit 2.140 million. The jump in claims is well within seasonal expectations and remains consistent with long term labor market improvements. We can expect to see total claims hit its peak in the next 2 to 3 weeks, near 2.75 million, and then fall off into the spring and summer. Next week we'll get the latest round of ADP, Challenger and NFP. The only thing on tap tomorrow, economically, is the Chicago PMI.


The Dollar Index

The Dollar Index fell in today's action. The index lost a little more than -0.5% on an absence of news but remains within the near term trading range. Despite today's loss the dollar remains within a near term consolidation range just below long term highs. It is supported by economic trends, FOMC outlook and expected economic strength that has put upward pressure on FOMC expectations. In the near term the indicators are consistent with a test of support within an uptrend but are also showing divergences that indicate a deeper correction is possible. Near term support is just below today's closing price at the $102.50 level, a break below that level would be bearish and could take the index down to the short term moving average, near $102.00, or to the next target at the recently broken previous long term high near $100.50. A move higher, in line with the prevailing trend, may find resistance at the $103 level, a break above this would be bullish.


The Oil Index

Oil prices wavered near the recently set high as US crude stockpiles unexpectedly build. The build, +600,000 barrels, comes in the face of the expected OPEC production cuts that has WTI and Brent trading near 18 month highs. If, and it is a big if, OPEC actually follows through on production cuts, enough to actually affect the supply/demand imbalance, prices could continue higher. The risk is that bullish outlook relies on OPEC, it's members (who don't like each other) and the non-members who have also agreed to cuts. If, and I think this is a more likely scenario, production does not decline noticeably in January oil prices could see a big correction.


The Oil Index continues to consolidate within the near term trading range, just below recently set long term highs. The index has been supported on the recent rise in oil prices and, more importantly, the forward earnings growth outlook for 2017. The energy sector, in aggregate, is expected to post year over year earnings growth of 343%, reversing this years earnings decline of -75%. This, regardless of oil prices (provided they don't tank), is the likely driver of the sector in the near to short term. The index gained about 0.05% today but price action has been nearly flat over the past 9 trading sessions. The indicators are consistent with a consolidation/test of support within an uptrend and setting up for another leg higher. The current MACD peak is convergent with the latest high suggesting strength in the market and more new highs on the way. Resistance is at 1,300, a break above this level would be bullish.


The Gold Index

Gold rebound in today's session, up nearly 1.5%, to close above $1,150 for the first time in two weeks. The gains were driven by today's dollar weakness and did not snap the short term down trend in gold. Long term outlook for the dollar is bullish, today's action has not altered that, and that is bearish for gold plain and simple. Today's move in gold barely retraces the 6 month bear market and faces tough resistance at the $1,200 level, if it is able to sustain the move above $1,150. Next weeks data is a big risk for the dollar and gold; strong data and signs of inflation could put pressure on the Fed to hike more often, or more aggressively, than the market now expects and that could send the dollar higher and gold lower.

The gold miners got a lift from gold prices but not enough to break the short term down trend. The Gold Miners ETF GDX gained nearly 7.5% in a move that appears to have strength but likely to be short lived. The ETF is moving up toward resistance and a retest of the 50% retracement level at a point that coincides with the short term down trend line, near $22.00, and resistance is likely to be strong. This will be the 4th time this trend line has been tested since the August market reversal/September confirmation and a likely point of entry for bearish positions. The indicators are bullish in the near term, moving higher, but remain consistent with bear market conditions in the short to long term. Upside target for resistance is $22.00 in the very near term with a possible retest of recent lows near $18.50 in the near to short term. Longer term, provided the dollar continues to rise, a full retracement to $12.25 remains a possibility.


In The News, Story Stocks and Earnings

Disney. Star Wars Rogue 1. I saw it and I liked it and what I noticed, aside from how much richer the Star Wars universe is, is that the theater was still full even weeks after the opening. My point is that this movie is a winner, far beyond expectations, and has firmly cemented the future of Star Wars and Disney. All they need to do now is fix ESPN and avoid new pitfalls. Shares of the stock held steady in today's session, just above yesterday's close, and within a recent consolidation range. Prices are holding just below the one year high of $106.75 which is the current resistance target. A break above this level would be bullish


Amazon was awarded a patent today for a flying warehouse. That's right. A Jetson's-like flying fulfillment center that would hover in high altitude, be serviced by shuttle flights for crews and product, and send drones out on delivery as order come in. The design included with the patent application use a blimp to support a large warehouse structure, so far no news about plans to build it. Other innovations Mr. Bezos has in store for us are drone delivery, the first was completed this month, and personally tailored shopping experiences powered by AI. Shares of the stock fell -1.20% in today's session but are flat over the past 3 weeks, near the middle of the post-earnings trading range.


The Indices

Trading was basically flat for the day. The indices opened with small gains, gave them up and in exchange for small losses, held those most of the day and then climbed back to near break-even by the close. No move was large, the day's top loser shedding only -0.12% at the close. The tech heavy NASDAQ Composite created a small spinning top doji and set a new two week low. Despite the new low today's close is above the previous all time high, a critical support target that is confirmed at this time by the short term moving average. The indicators are consistent with a test so support, near 5,400, within an up trend and do yet indicate more. A break below 5,400 would be bearish in the near term, a bounce from this level bullish and trend following.


The Dow Jones Industrial Average posted the next largest decline, -0.07%, and created a similar doji spinning top. This candle is at the bottom of a near term consolidation range, a range that has formed following a strong rally and may indicate continuation. The indicators are consistent with a test of support within an up trend with targets at 19,800 and 19,500. A break below 19,800 would be bearish in the near term only, a break below 19,500 could be more serious.


The Dow Jones Transportation lost only -0.04%, reclaiming nearly all of the intraday losses before the closing bell. The index created a small doji candle after trading in a range of only 1%. The candle is sitting on short term support at the 30 day moving average with bearish indicators. The index has corrected after a strong rally and is now at a critical juncture. If the rally is to continue in the near to short term support at the moving average needs to hold. Based on the MACD peaks and specifically the strong peak associated with the onset of the Trump Rally, market participation was fairly strong leading up to these levels and suggests support will hold and a retest of the recent high is likely.


The S&P 500 brings up the rear in today's lineup with a loss of -0.03%. The broad market index created a small doji spinning top and set a new 3 week low. Despite setting a new low the index remains above support and near the all time high. Divergences in the indicators suggested a pull back to support could happen, now that it is it does not appear to be very strong, at least not yet. First target for support is just below today's close at an up trend line that is confirmed by the short term moving average. The indicators are consistent with a test of support within an up trend and so far reveal one that is very weak. Should support fail, near 2,230, a move down to the previous all time high near 2,200 is likely.


The markets have been consolidating near all time highs with indications of potential correction. Now it looks like that correction is happening and it doesn't look like it is very strong. The thing to remember is that this is the holiday week, the final week of the year, volumes are low, market participation is thin and anything that happens now is just as like to be a whipsaw as a real move. Next week is when the rubber hits the road in terms of the the Trump Rally. There may be selling at the start of the year, I can understand if folks want to start the year with profits, and it may lead to more than just a dip despite an expected quarter of positive earnings growth.

If near term support fails we could see as much as a 3 to 5% correction before strong support along long term up trend lines and moving averages are reached. Short to long term however, the outlook remains bullish; earnings growth is back and expanding with positive forward outlook. Risk at this time lay in next weeks data bundle. Too hot and the market could get bent on FOMC expectations, too cold expectations for the 1st and 2nd quarter could take a hit. This makes me a bull long term, hoping for the big dip, cautious in the near term waiting to see what happens next.

Until then, remember the trend!

Thomas Hughes


 

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