Introduction

The indices tread water, once again, just below current all time highs waiting on earnings, the economy, the FOMC and Trump's inauguration. Outlook is mixed, depending on who's opinion you are reading, I still see expanding earnings growth and expanding economic growth leading the market. This week's action may be a little muted due to a light economic calendar and the Friday kickoff to earnings season. FYI, Alcoa no longer starts off the "official" season, its release date has been pushed back 2 weeks due to the recent split into two publicly traded companies.

International markets were mixed, hovering near the flat line with most closing with gains/losses in the range of 0.25% to 0.5%. In Asia, trading was affected by 3 things. First, Japanese markets were closed for holiday. Second, a lower forecast for iron ore. Third, evolving Trump/China rhetoric and in particular the battle over the One China policy playing out in social media and tabloid venues. European indices were sent skittering in the wake of comments from British PM May to the affect that the UK was in fact going to leave the EU.

Market Statistics

Futures trading indicated a flat to slightly negative open all morning. Trading was quiet, there was little in the way of real news, economic data or even market moving headlines to generate activity. The open was calm, the indices opened with losses in the range of -0.1% and moved sideways from there with choppy action. Tepid sideways trading persisted the entire day.

Economic Calendar

The Economy

No economic data today and very little this week. The reports that we do get will be dominated by Friday's lineup which includes retail sales for December, Michigan Sentiment, Empire Manufacturing and PPI. Tomorrow we'll get the JOLTs report; within that look for the number of job openings month to month and year to year along with the quits rate. The number of job openings is important, but more important is the state of employee confidence as displayed by the quits. Quits have been running steady at/near long term highs, a sign that workers are confident of finding new and/or better work.

The Moody's Survey of Business Confidence has spiked in the past 3 weeks, gaining another 0.3% in the last week to bring the 3 week total to +3.9. This is an 8 month high and a sign of rebounding confidence among global businesses. Mr. Zandi says that business has started 2017 off strong, led by improvements in assessment of current and future conditions.


Earnings season is about to get started in earnest. So far about 4% of the S&P 500 has reported, bringing the blended rate for 4th quarter earnings growth down another tenth to 3.0%. Of those who have reported 73% have beaten on the earnings end, consistent with the averages, but only 36% have beaten revenue estimates. The average is closer to 55%, the decline could be a sign of a number of thing during the period, some good some bad, but it is still too early to tell. On a positive note, full year 2016 earnings growth estimates have risen by a tenth to 0.2%.


Looking forward the outlook remains positive although estimates continue to fall in revisions. First quarter 2017 estimates for earnings growth have fallen to 11%, second quarter to 10.5%, but both are still strong. Full year 2017 is also strong, and steady, at 11.5%. Based on recent trends I would expect to see these numbers fall a bit before the end of the but there are changes at had. The FOMC is raising interests or one, for another Trumponomics. Both of these may induce some volatility in the numbers, possibly the beginning of a cycle of upward revisions. Now that we've exit the earnings recession and are looking forward toward growth upward revisions to earnings are the next bull market trigger I am looking for in this data.


The Dollar Index

The Dollar Index closed the day with some small losses following a mixed session. The index was first up a bit on last week's NFP report but then later fell to profit taking amid FOMC speculation to close with a loss near -0.20%. The index created a small black candle squeezed between resistance and the rising support of the short term 30 day moving average. The moving average has provided support three times in the last few months and is the established trend at this time. Both MACD and stochastic are bearish, if weakly so, and suggest that support will continue to be tested in the near term. A break below the moving average could be bearish but I'd be cautious about that until the FOMC meeting. Support is currently at/near today's close around the $102 level. A break below here could go as low as $100.49.

The trend is driven by strengthening economic data, the FOMC and Trumponomic outlook, all of which are highly questionable. It is these questions that have caused the current pull back from support, their answers will drive the market going forward. This week is light on all three, next week not so much. The economic calendar heats up for one thing, there is an ECB meeting for another and Trump is inaugurated to top it all off. Then, two weeks later, the FOMC meeting. At this time there is only a 2% chance of February rate hike. The ECB, they are not expected to do anything either, a change to their recently stated stated policy of tapering could roil the market further.


The Gold Index

The gold rebound continues. Spot gold jumped another 1% to trade at $1185 and a 6 week high. The rebound is driven by dollar weakness, an uncertain rate hike time line and a change in economic conditions and so may continue until we get firmer data, some action from Trump or the FOMC. Resistance is likely at $1200, a break above that could indicate a shift in sentiment toward gold.

The Gold Miners ETF GDX gained 1.25% but created a black bodied candle with visible lower shadow, the second day of listless action following the break above the 50% retracement line. Price action is consolidating above the 50% retracement line and the short term down trend line and may indicate a break in trend. The indicators are both bullish but there are some signs the rebound has, or is near to, running its course, namely a peak in the MACD and early signs of resistance in the %K. The ETF is currently sitting on support, near $22.50, with a possible move up to $24.50. If support is broken it would indicate a return to trend with downside target near $18.50.


The Oil Index

Oil prices fell nearly -4% today as concerns the OPEC deal isn't enough washed through the market. WTI fell more than -$2.00 to trade below $52 and set a 3 week low. Today's fear is driven by rising US output and Iranian exports which threaten to undo all that the OPEC deal hoped to achieve. I still favor the bear argument, supply and production are outpacing demand, so am expecting prices to remain volatile in the near term.

The Oil Index fell -1.21% to trade just above the short term moving average. The moving average is now support, just above 1,250, and may add lift to the index in the coming days and weeks. The indicators are bearish and suggest that support may be tested in the near term but are not strong enough to suggest that it will be broken. In the near term, oil prices are likely to drive volatility and possibly a test of support. Longer term, earnings growth outlook is supporting the sector and likely to drive it higher.


In The News, Story Stocks and Earnings

The earnings cycle will kick off on Friday with releases from JP Morgan, Wells Fargo and Bank of American which, as a sector, are expected to post the 2nd highest rate of growth this quarter, +13.8%. As a group these stocks also looked poised to rise as much as 15% to 25% in the near to short term, provided of course outlook does not change. The Financial sector SPDR XLF lost about a half percent in today's action but the losses are moot, it has been in a tight consolidation range for the past month of trading days. This range follows a strong up trend that is supported by earnings and economic outlook and could indicate continuation of that trend into the short term. The indicators are mixed but generally consistent with consolidation within an up trend, stochastic in particular having reversed and formed a weak bullish crossover and trend following entry. Support is near $23.25, upside targets are near $25 and $27 in the near to short term.


McDonald's announced that it was selling 80% of its China operations to a group of US and China based investors. The deal values the business at over $2 billion and is expected to close this summer. Benefits to McDonald's include lower costs while retaining ownership of the brand and a share of the profits. Shares of MCD fell -0.25% but held steady near last week's close and the short term moving average.


The Acuity Brands, maker of top lighting brands like Lithonia and Peerless, announced record first quarter results but fell well short of consensus. The good news is that sales, income, profits and diluted earnings all grew by double digits. The bad news is that margins declined due to weak sales volume and only modest activity in the quarter. The execs went on to say that they expect weak sales trends to linger into the first half of the year and may affect full year outlook, not good for investor confidence. Shares of the stock were hit hard by the news, falling more than -15% on high volume.


The Indices

Today's action was more sideways drift, more consolidation more waiting for earnings season, economic data, Trump and the FOMC. One however was able to drift up, and to set a new all time high while doing so. The NASDAQ Composite closed with a gain of 0.19% at 5531.82, a new all time closing high. The tech heavy index created a small spinning top candle while doing so and looks like it could test resistance again. Resistance is the all time intraday high set Friday, just a few points above today's close. The indicators are still mixed but appear to be rolling over into trend following entry signals; MACD is crossing the 0 line from below with today's action, a sign of shifting momentum, and stochastic is forming a weak bullish crossover while flattening out. If these signals confirm we can expect to see a continuation of the rally with upside target near 5,750.


The day's biggest loser was the Dow Jones Transportation Average which lost -0.89%. Despite the loss the transports did little more than bob along the 9,000 level for the 8th day in a row. This tight congestion band is the bottom of a one month consolidation range which has formed just below recently set all time highs. This consolidation has resulted in a retreat to support that is confirmed by the indicators. MACD remains bullish so support may be tested further, stochastic however is more bullish. Stochastic has already formed a weak bullish crossover and the first of two crossover signals that make up a strong trend following entry. When confirmed, if, we can expect to see the transports retest the recent highs and probably set new ones. If not, a break below current support would be bearish in the near term with downside target near 8,500.


The Dow Jones Industrial Average made the second largest decline today, -0.38%. The blue chips created a small spinning top candle within the one month consolidation range and does not look like it is going anywhere soon. The indicators are consistent with a test of support and consolidation within an up trend, stochastic showing overbought conditions have been relieved and set up for another rally. Resistance is 20,000, a break above this level would be bullish indeed, upside target 20,500 in the near term, 21,000 in the short. If resistance holds, or the break above 20K turns out to be whipsaw, downside targets for support are 19,500 and 19,000 in the near term.


The S&P 500 made the smallest decline, -0.35%, and created a small black bodied spinning top candle. Today's action is more sideways drift within the recent trading range, a range that does not look to be broken tomorrow or even this week. The indicators are mixed but generally consistent with consolidation within an uptrend. MACD remains bearish which suggest that support may still be tested, stochastic is showing a weak bullish crossover and early trend following signal which suggests that any test of support that may come is the next entry point for bullish trend following positions. Near term support target is the short term moving average and short term up trend line, a break below this would be bearish. A bounce would be bullish and trend following with upside target near 2,300 near term and 2,500 short term.


The indices continue to consolidate. The market continues to wait. Earnings, economic data, soon to be President Trump and the FOMC are all on the minds of traders. Will growth be as good as we expect, will the data continue to show recovery, will the new President do all the good things for the economy he has said and when will the FOMC raise rates again. The good news is that the indices have been able to hold at or near recently set highs while they consolidate. The market has been allowed to calm down after the post-election rally, overbought conditions have been alleviated and a base has been built. All we need now are confirmations of our expectations and the market should break out to the upside. I remain cautiously bullish.

Until then, remember the trend!

Thomas Hughes


 

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