Introduction

Market drift continues on the eve of Donald Trump's inauguration. Meanwhile, earnings, economic data and central bank activity help drive volatility.

The latest shot in the currency-war-that-wasn't was fired by the ECB just this morning. The bank held rates steady and stood pat on its tapering timeline but comments made by Mario Draghi leave the door open for renewed stimulus saying a "very substantial degree" of policy stimulus was still needed. At the press conference Mr. Draghi made further comments to the effect that there weren't signs yet of long term sustained increases in inflation and that downside risk remains. The news caused some volatility in the market, sending the euro first up on the statement and then down on the comments. The next major central bank meetings are in two weeks when the FOMC and BOJ meet simultaneously.

Asian indices were mixed and mostly flat although the Nikkei was able to post a gain of nearly 1%. There was little news from the region aside from a market anxiously waiting to see what happens when Trump is inaugurated tomorrow. European indices were much the same, in the early portion of the day, and then ECB made their announcement and volatility stepped in. At that time the indices moved higher, hit resistance, moved lower and closed near to flat for the day.

Market Statistics

Futures trading was quiet most of the early morning. The ECB news, the press conference, earnings and a round of economic data did not move it. The open was quiet as well, the indices opened near flat to yesterday's close and held near that level all day. The SPX began with a small gain, a few points, but by 10:30AM was near the low of the day, just below break even. The rest of the day was no different, the indices trending sideways within the early range into late afternoon. Downward pressure intensified just after 2PM, pushing the indices to new lows. The SPX bottomed just before 2:30PM at which time it began to drift back up but not enough to recover the day's losses.

Economic Calendar

The Economy

Lots of data today starting with the weekly jobless claims. Initial claims fell a surprising -15,000 to hit 234,000, just a hair above the long term 46 year low. Last week's figure was revised higher by 2,000. The 4 week moving average of claims fell -10,250 to hit 246,750 and a new 46 year low. On a not adjusted basis claims -16% in the last week and are down -8.6% over last year. The spread between last year and this year has narrowed from last week's remarkable -18.4% but remains stout at -8.6%. Based on these numbers it looks like the labor market is making further progress in its 8 year recovery.


The continuing claims figures also fell this week, -47,000 to hit 2.046 million. The four week moving average of claims also fell, -1,750, to hit 2.090 million. Continuing claims remains elevated from its long term lows but looks like it is heading back to retest them, if the initial claims figures are any kind of indication it is likely to happen in the next couple of weeks.


Building permits and housing starts data was released at 8:30AM alongside the claims data. Permits fell -0.2% from the previous month but are up 0.7% over December of last year. Full year 2016 building permits are up 0.4%. In December permits for single family homes led with an increase of 4.7% and is the silver lining to this data, showing a pick up in residential construction. Housing starts data was much better, jumping 11.3% to reverse the previous month's declines. The December data is up 5.7% from the previous year and full year 2016 starts are up 4.9% over 2015. completions are also up in 2016, nearly 9.75% over 2015.

The Philadelphia Federal Reserves Manufacturing Business Outlook Survey was also released this morning. The diffusion index jumped 3.9 points, ahead of expectations, to hit 23.6 and a new high dating back to 2014. The 6 month forward outlook also jumped this month to a new high. Within the report new orders remains positive and gained 11 points, shipments fell 1 point but remains positive, deliveries, unfilled orders were positive for the third month and employment/hours worked but expanded as well.


The Dollar Index

The Dollar Index got a double shot of good news today, if you are bullish on the dollar. First the ECB/Draghi comments pulled the rug out from under the euro, second the data supports rising interest rates. This, along with Yellen's comments yesterday, seem to point to at least 2 if not 3 rate hikes this year, maybe more if inflation picks up any more. The index jumped nearly a full percent on the news, closing with a gain near 0.4% creating a medium sized black bodied candle with long upper shadow.The indicators are consistent with a pull back to support, support is at the recently broken multi-year high of $100.50, and now set up for a shift in momentum. Stochastic is already forming a weak bullish crossover, in line with the prevailing trend, which could lead the index higher although there is some resistance ahead. Today's gains were capped by the short term moving average, near $101.50, a break above which would be bullish with targets near 103.50.


The Gold Index

Gold prices came under pressure today as the dollar and rate hike outlook gained strength. Spot gold fell a little more than -1% to trade just below $1,200. The metal is hitting resistance, coincident with a revival in bullish dollar outlook, and may continue to fall in the near term. The next two weeks are a bit light on data so it will be FOMC outlook and ultimately the FOMC meeting that drives this trade. The risk, or potential catalyst, is tomorrow's inauguration and whatever it is that soon-to-be President Trump has to say about policy and the economy between now and then.

The Gold Miners ETF GDX fell nearly -1% today as well, creating a small spinning top candle. The ETF is falling back from the resistance of the 150 day moving average and continues to show signs of topping. The indicators are consistent with a relief rally within a down trend and have begun to signal a trend following sell. MACD is still in bull territory but falling back quickly from its peak, stochastic has peaked and rolled over at the upper signal line with a bearish crossover and both suggestive that support will be tested at least. Support is the short term moving average, near $22.00 and the 50% retracement level, a break below here would be bearish.


The Oil Index

Oil prices continue to churn above the $50 market. Today WTI gained a little more than 0.5% to trade above $51.25 on remarks from the IEA that the energy market was tightening. In the report they say it still far to soon to be sure but there were signs of tightening even before the OPEC deal was agreed upon. The risk is that US production is also on the rise which is expected to offset or match supply cuts attributable to OPEC. I expect volatility to continue at or near current levels until more definitive evidence is presented.

The Oil Index fell despite the rise in oil prices, shedding a little more than -0.70%. The index created a small black bodied candle testing support at the short term moving average and may continue test that support into the near term. MACD momentum is not strong but it is holding steady in bear territory while stochastic continues to move lower. Support is at 1,250 in the near term, a break below here may find additional support at 1,235. The long term outlook for earnings growth in the sector remains strongly bullish so any pullbacks are likely entry points for bullish positions.


In The News, Story Stocks and Earnings

CSX Corporation jumped after a report that it was being targeted by activist investors. The former head of Canadian Pacific is expected to partner with investors to acquire CSX. This, along with signs among the rail carriers that demand was picking up, helped to send the stock up more than 20% to trade at a new all time high.


Netflix also hit a new all time high in today's session. The company reported earnings yesterday and wowed the market with results, in particular subscriber growth. Shares jumped in the pre-market session and extended those gains intraday although sellers stepped in before the close to create a black bodied candle. All the same NFLX closed with a gain of more than 4% and likely to go higher in the short to long term.


American Express reported after the bell, beating expectations for revenue but falling short on the earnings end. Full year guidance was reaffirmed in-line with consensus. Shares of the stock moved higher immediately after the release but gave up the gains and a little more before it was all said and done.

IBM reported after the bell and beat expectations. Results are driven by a 35% increase in cloud revenue that led to an increase in full year 2017 guidance. Shares of the stock responded well to the news, hitting a new all time high in the after market session.


The Indices

The action today was mixed. The indices began the day in positive territory for the most part but a lack of interest, or simply a market in wait, allowed them to drift down to support. Even at the low of the day the indices were above support and within their recent ranges so in the end nothing more than more churn as we wait for the next catalyst. Today's move was led by the Dow Jones Transportation Average which was the only index to close with a gain, near to 0.30%. Despite the gain today's candle is black, moving down from resistance after gapping higher at the open. Resistance is the recently broken all time high but does not appear to be too strong at this time. The indicators are mixed but consistent with a retest of the recent highs if not new highs. MACD is retreating from a bearish peak and consistent with a trend following swing in momentum, stochastic has already fired the weak trend following signal and is set up to confirm with a stronger. A break above resistance would be bullish. A drop from here could be bearish but would find support at the bottom of the near term range, near 9,000.


The Dow Jones Industrial Average was today's loss leader with a decline of -0.49%. The blue chips created a small bodied black candle testing support along the bottom end of the near term trading range. This support is confirmed by the short term moving average, near 19,730, and may be tested further. The indicators are a bit mixed, both pointing lower in the near term but consistent with support within an uptrend. A break below support would be bearish in the near term with targets near 19,500 and 19,000. A confirmation of support at this level would be bullish and trend following with targets of 20,000 and higher.


The SPX made the second largest decline today, -0.36%. The broad market index created a small black bodied candle, above the mid point of the near term trading range, testing support at the long term up trend line. Support at this level, 2,260, is confirmed by the short term moving average and gaining strength every day. The indicators are mixed, both pointing lower in the near term but consistent with a support at this level in the short term and a rising market in the long. A break below support would be bearish in the near to short term with targets near 2,240 and 2,200. A confirmation of support at this level would be trend following and bullish with upside targets near 2,300 in the near term.


The NASDAQ Composite made the smallest decline today, -0.28%. The tech heavy index made a small bodied black candle and may have hit a near term peak. The indicators are bullish and consistent with the underlying trend but showing near term weakness, consistent with a test of support. Support is likely along the short term moving average, near 5,500, but deeper correction is a possibility. Long term outlook for earnings growth remains positive so any correction that may unfold is a likely entry point for bullish positions.


The markets have been winding up, getting ready to make their next move, and that move may begin tomorrow. Trump's inauguration, coincidentally the same day as OPEX, is a likely catalyst that, depending on how you view the market, could unleash the next leg of the long term secular rally or cause the next correction. It just depends on how you look at it; is the market looking to sell the reality of Trump and Trumponomics or not? In either event the long term outlook for earnings growth is positive, economic trends are expansionary and Trump is going to boost the economy so I am bullish and looking to buy on the dip, if it comes, or the break to new highs, when it comes.

Until then, remember the trend!

Thomas Hughes