Introduction

The indices pulled back from Friday's close on geopolitical inspired caution. Trump, trade wars and immigration bans were not the only issues making headlines today, scandal with one of the French presidential candidates has raised the specter of political instability within the EU once again and helped depress today's trading. The bad news is another Monday without a retail-investor driven flood of new money, the good news is that positive fundamentals and forward earnings outlook is unchanged.

Asian indices were able to close higher in the Monday session. The Japanese index rose by roughly 0.35%, supported by earnings outlook and in particular that of Toyota. The worlds 2nd largest auto manufacturer raised its full year guidance on a weaker yen and cost-cutting efforts. European indices were positive early in their day, lifted by earnings, but fell later in the day as concern over the French election, Italian banks and Donald Trump gripped the market.

Market Statistics

There was little new news in the early hours of the morning, just more speculation over events already in motion. US economic data was absent, a 5.2% surge in German factory orders went largely unnoticed. Early futures trading indicated a mildly negative to flat open, trading was a bit choppy, and that held all morning. The SPX was indicated to open with a loss of -5 points and that is what happened. Despite the down open support kicked in fairly quickly, within the first 2 minutes of trading, and kept the indices from falling any further, at least not until later in the day. After a few hours of directionless sideways action the indices were back testing the early low. It was broken just after 12 noon but additional losses were also minimal, the SPX topping out at -9 points. Intraday bottom was hit just before 2PM. From then on the market made a slow steady progression to the upside, recovering about half of the early loss by the time the closing bell sounded.

Economic Calendar

The Economy

There was no official economic data today and there will be very little this week which means the market will be even more susceptible to news and news driven activity than usual. Early in the week the only significant bit is the JOLTs report, I don't expect much move on this number unless some really big changes are revealed. Later in the week news will be dominated by jobless claims on Thursday and then Wholesale Inventory and Michigan Sentiment on Friday.

Moody's Survey Of Business Sentiment is holding steady. The index gained 0.3% this week to hit 31.4, down from the post-election peak but well off the long term lows set last summer. Mr. Zandi says that global business is confident and upbeat about present conditions and future outlook. According to respondents sales remain soft but investment and the availability of financing are strong. So long as things don't change there is a chance we could see these figures begin to pick up going into the spring and early summer.


Earnings continue to roll in with the usual mixed results. To date, a little more than 55% of the S&P 500 has reported for the season and trends are holding up. A little more than 65% of those reporting have beaten EPS estimates, close to 52% have beaten revenue estimates and the blended rate of growth is creeping up, gaining another 0.3% this week to hit 4.6%. Based on the trends we can expect the blended rate of earnings growth to continue rising into the end of the quarter, possibly as high as 7.5% to 8%. On a sector basis 9 of the 11 sectors are beating estimates. This week we can expect to hear from a total of 84 more S&P companies.


Forward outlook remains positive but estimates fell in the last week after rising in the previous week. Full year 2016 estimate shed the tenth it gained and is now back to 0.2%, likely to rise again before the season is said and done. Full year 2017 estimates fell a full half percent to 11.1% but are still quite strong compared to this year. On a quarter to quarter basis growth is expected to expand to 10.8% in the 1st quarter, moderate to 9.6% in the 2nd and then expand again to over 11% in the 3rd and 4th.


The Dollar Index

The Dollar Index tried to rebound but does not look like it will be able to, not in the near term. The index is falling under the pressure of rising global currencies while FOMC support has seemingly disappeared. Today's action, while testing resistance, appears to be part of consolidation below resistance and within a near term down trend that is likely to continue in the face of FOMC uncertainty and the possibility, however unlikely, of the ECB or BOJ getting hawkish. Resistance is now the $100.50 level, downside targets are near $98.65 and $97.65 in the near term. Longer term the fundamentals remain skewed toward dollar strength; US economic conditions and FOMC outlook is still dollar strong, BOJ or ECB policy change wishful thinking at best.


The Gold Index

Gold prices continue to move upward but the move lacks strength. Considering the amount of uncertainty in the market and forward outlook it is possible the gains are due to a lack of sellers rather than to an abundance of buyers. Today's move took spot prices up by more than 1.20% to trade at a near 3 month high, just above $1235. The move is driven by flight-to-safety and dollar weakness, either of which could reverse with a single positive development in sentiment. Longer term outlook remains weak, the US economy is expected to strengthen even if the dollar does not. Next target for resistance is $1,250.

The Gold Miners ETF GDX moved higher today as well. The move added more than 2.75% to Friday's 2.5 month high and is approaching next resistance at $25.63. The indicators are bullish in the near term, and showing bullish crossovers, but both MACD and stochastic are showing divergences that indicate serious weakness in the underlying market. How high the sector goes in the near term is hard to day, flight-to-safety inflows could be refueled tweet by tweet, when the bottom falls out the move lower could be huge.


The Oil Index

Oil prices fell more than -1.5% today as rising US rig counts and production, and high levels of storage, more than offset the OPEC production cuts. WTI fell more than $0.75 to trade just above $53, near the middle of the near term range. Despite today's drop the tug-of-war continues between supply and demand, bullish or bearish, and this may go on into the near term. So long as prices remain above $45 expect US producers to keep pumping, and keep ramping production, until they fall or OPEC does something else.

The Oil Sector was one of the market leaders today, falling nearly a full percent. The Oil Index fell -0.96% on uncertain oil prices and poor earnings from the big producers although full year/forward outlook remains quite good. Forward outlook for full year 2017 earnings growth has fallen from a high above 350% to only 294%, hindered by oil price uncertainty, but still a much needed step in the right direction. Today's action is consolidation beneath the short term moving average and resistance at 1,250. A drop below the near term range, 1220 to 1250, would be bearish with downside target near 1,200 or 1,150. If such a move did develop it would be a likely buy-the-dip opportunity for long term bullish positions.


In The News, Story Stocks and Earnings

Earnings are still going to be front and center this week, nearly 17% of the S&P 500 is reporting which will put the total above 70% and high enough to have some confidence in to-date results as an indication of which way the wind is blowing. The mornings news was dominated by Hasbro, among others, which beat on both the top and bottom lines, raised guidance and upped the dividend. Results beat estimates soundly, adjusted EPS of $1.64 beat consensus $1.27 by 30%, with growth in all segments and led by the US. Growth in North American was 15% alone, management said they saw no difference in holiday sales from years past and are expected to remain at least steady into the coming year. Shares responded favorably to the news, rising nearly 15% in pre-market trading to open, and close, at a new all time high.


Sysco, not Cisco, the nations largest purveyor to restaurants of all variety reported earnings before the bell. The company delivered better than expected profit on revenue that only matched estimates. Revenue grew by 10.6%, earnings by 4%, both meeting expectations. Adjusted earnings beat by 8% and helped propel the stock higher in premarket action. Shares gapped up at the open to trade just below the short term moving average, where resistance set in, and fell throughout the day on heavy volume to close with a loss greater than -2.50%.


Tyson Foods, one of the nations largest processed food producers, announced some stellar results before the bell too. The company reported its best 1st quarter in company history and the best quarter in company history, beating estimates and growing EPS by 38% year over year. Results are driven by growth in all segments compounded by an increase in margins and led to an increase in full year guidance. Guidance is now a range of $4.90 to $5.05, a 12% increase over the prior year and above consensus estimates. Shares of the stock jumped on the news and gapped up at the open. The move put share prices just high enough to close a much larger gap opened shortly after the last earnings release, and triggered massive selling in the stock.


The Indices

The indices didn't move higher, but they didn't really sell off either. Today's action was more of the same cautious rotation out of lesser earning stock into greater, more of the same slow upwardly biased sidewinding we've seen for the last three months. Price action was led by the broad market S&P 500 which closed with a loss of -0.21%. Where the other indicators were at least able to create white bodied candles, come moving into positive territory intraday, the SPX did neither. The broad market created a very small spining top doji with a close just below the open. This candle is sitting just beneath resistance at the all time high and just above the short term moving average and rising support along the long term moving average with indicators that are yet again signaling a trend following entry. All we need now is a break to new high, and some nice follow through. A break to new all times is bullish with upside targets near 2,350 and 2,500, a fall below the short term moving average would be bearish with downside targets near 2,250 to 2,200.


The Dow Jones Transportation Average made the next largest decline, -0.11%, creating a doji candle. Today's candle is more than a spinning top but not enough to be really decisive and a sign of continued market struggle. Action was centered on the 9,321 level, a previous all time high and near term resistance. Support is the short term moving average. The indicators are a bit mixed, consistent with sideways range bound trading, and not much help at this time. A move up would hit resistance at the current all time high, near 9,500, a move lower would find short term support at 9,000.


The Dow Jones Industrial Average posted the third largest decline, falling -0.09% after a small push into positive territory. Today's move created a small spinning top candle, sitting above support, that touched resistance exactly at the current all time high. Support is the rising short term moving average, confirmed by both MACD and stochastic, both of which are consistent with a trend following entry. Stochastic is already firing a strong signal, MACD is on the cusp of confirming yet again, with upside target near 25,000.


The NASDAQ Composite made the smallest decline in today's session, only -0.06%. The tech heavy index created a very small spinning top doji just beneath the all time high. The index is a bit elevated from support targets along the short term moving average but the indicators suggest upward drift could continue. Momentum is not strong but it is still bullish and stochastic is showing a weak buy signal above the upper signal line, consistent with an upwardly drifting market. Upside target is near 5,750, 5,500 if a pull back begins.


The market is not sure what to do. On the one hand is political risk on all fronts. On the other are fundamentals. Political risk could alter the fundamentals, that's why it's risk, but the fundamentals are yet to be altered, and right now they are bullish. Economic growth is expected with or without Trump and so is earnings growth. Until that changes these near term corrections and down days driven on fear are buy-on-the-dip opportunities because once the fear evaporates the fundamentals will shine bright once again. I'm bullish, cautious as ever because there is still near term risk, but waiting and watching for those trend following opportunities.

Until then, remember the trend!

Thomas Hughes