Introduction

The indices set new all time highs, this time confirmed by the Dow Jones Transportation Average. There just isn't any other way to say it than that. This time the new highs came on Monday, driven by a surge in retail trading, as geo-political tensions ease. Today's trading was aided by a noticeable lack of news; there were no earnings reports of note, no economic data, no Tweets and no controversial executive orders to sway sentiment. The big event was Trump's meeting with the Canadian Prime Minister and Janet Yellen's testimony before congress, scheduled for later this week.

International markets were lifted by warming relations between the US and China and reaffirmed friendship with Japan. Markets around the region were able to make gains in the range of 0.5% despite the North Korean missile test. Both China and Japan were buoyed by economic data. In Japan, 4th quarter GDP came in at a rate of 1%, the fourth straight quarter of growth, while in China trade data suggests a pick up in exports and manufacturing that was forecast by PMI earlier in the month. European indices were not immune to the positive vibe. Indices in this region gained roughly 1% on average despite a downward revision to 2017 Eurozone GDP. The European Commission lowered its GDP forecast by a tenth of a percent due to economic headwinds including Brexit, Trump economic policy and political uncertainty in France and Germany.

Market Statistics

Futures trading indicated a positive open for the US indices all morning. The indication was not strong but began the day with the SPX about +3 and slowly, steadily gaining ground into the open. The open saw a quick surge, the SPX gapped up about 5 points to open at a new all time high, and then quickly added another 5. At 9:45 there was a brief pull back to test for support followed by a bounce that sent the indices drifting higher into the early afternoon. By 2PM the index was up more than 0.6% but gains were capped there. Profit taking set in at that point and slowly chipped away at the days gains leaving the index up 0.52% at the close.

Economic Calendar

The Economy

No economic data other than Moody's Survey of Business Confidence. Tomorrow and Wednesday we'll get PPI and CPI. Also on Wednesday is Retail Sales and Empire Manufacturing. Thursday is jobless claims, housing starts/permits and Philly Fed. Friday wraps the week with Leading Indicators.

Moody's Survey of Business Confidence jumped 1.5% to hit 33.1. This is just off the recently set 9 month high. Mr. Zandi remains upbeat in his summary, stating that global business sentiment is steadfast and strong and that business owners are positive in their outlook for current and future conditions.


Earnings season is more than 2/3 over. To date, 71% of the S&P 500 has reported and the results are generally good. 67% of those reporting have beaten EPS estimates, slightly below average but consistent with trends, while 52% have beaten revenue estimates, in line with averages. The blended rate of earnings continues to rise, gaining another 0.4% in the last week to hit 5%. Based on the averages we can expect this to continue rising into the end of the season, topping out in the range of 6% to 8%. On a sector by sector basis 8 of the 11 sectors are outperforming expectations which has led to an increase in full year earnings growth as well, up 0.3% in the last week to 0.5% Another 54 companies are expected to report this week.


Looking forward expanding growth remains in the forecast although those estimates are falling. Full year 2017 earnings growth estimate has now fallen to 10.3% for the S&P 500, down from nearly 14% late last year but still robust and double digit. The first half is expected to see growth in the range of 9.5%, 9.9% in the 1st quarter and 9.1% in the 2nd, with that expanding to over 10.5% in the 2nd half. In terms of outlook tax policy is the #1 thing on the minds of CEO's, mentioned in 85% of earnings statements/conference calls to date, followed by trade policy at 63%.


The Dollar Index

The Dollar Index continues to rebound from recent lows as sentiment firms and the market begins to accept the idea of a March rate hike. The CME's FedWatch tool is still showing only an 18% chance of March hike but the chatter has begun, economic data and Fedspeak over the next few weeks will help or hinder that outlook, further out June is showing a 70% chance. The Dollar Index gained a little more than 0.15%, not a big move, and created a small white bodied candle with visible shadows. The lower shadow is longer and shows a test of support at the heavily contested $100.50 level. Today's action extended a move above support at $100.50 and the short term moving average, confirmed the indicators. Both MACD and stochastic are showing bullish entry signals, in line with the short term trend, and suggest higher prices ahead. Upside target is near $102.50.


The Gold Index

Gold prices remain under pressure as the dollar strengthens. Spot prices fell more than -1.5% intraday, closing with a loss near -0.75%, and set a new one week low below $1,230. Prices hit resistance when the dollar hit bottom, last week, on Trump's announced tax reform plan. The details are still not known but we can still expect to see them in the next couple of weeks, probably timed perfectly to help the administration in some way. Until then, data and FedSpeak could weigh on prices and push them down to support. Support target is near $1,200, a break below that would be bearish.

The Gold Miners fell in today's session but not significantly. The Gold Miners ETF GDX lost nearly -1% and created a small doji candle pulling back from resistance. Resistance is at $25.50 and confirmed by both indicators. Both MACD and stochastic are showing divergences in the short term and weakness in the near term that suggests lower prices are on the way. A fall from this level may find support at $23.50, a break below there could go to $21.50.


The Oil Index

Oil prices fell more than -1.75% but remain within the near term range. Today's move was driven by concerns of overproduction as rising rig counts overshadow OPEC's estimated 90% production cut compliance. Last Friday Baker Hughes reported that rig counts rose globally. US rig count gained 12 to hit 741 and is up 200 from this time last year. Canadian rig count gained 9 to hit 352, up 130 YOY, and global rig count grew by 4. The global count is down -112 YOY, possibly due to OPEC's cut, mostly due to supply disruptions, but not enough to offset ramping North American production. With this development in mind it looks like oil prices could test support at $50, maybe lower. $45 is the magic number when it comes to shale oil and rising/declining rig counts.

The energy sector took a hit on lower oil prices but it wasn't too bad, the Oil Index itself falling only -0.35%. The index created a small spinning top candle just below resistance at the short term moving average but looks like a test of resistance is likely. Both indicators are consistent with a bullish entry, in line with the short term trend. Stochastic is looking the most promising, forming a double bottom at the lower signal line and now indicating a buy. Resistance is in the range of 1,235 to 1,250, a break above here would be bullish. The risk right now is oil prices and their impact on forward earnings. So long as forward outlook is positive, as it is, I'd expect to see the sector move higher in the short to long term.


In The News, Story Stocks and Earnings

Restaurant Brands, owner of iconic names like Burger King, reported full year earnings before the bell and then made headlines again later in the day. The company beat top and bottom line expectations driven by an increase in store counts and a rise in comp sales. Comps rose more than 2% across brands, store counts more than 4.5%. This news sent the stock soaring in pre-market action, caused it to gap up at the open and move higher. Later in the day news that a bid for chicken franchise Popeye's helped to keep it up and close with gains near 4.5%.


Cognizant Technology reported before the bell and matched EPS, revenue and guidance estimates. Revenue is up a little more than 7% YOY, 0.3% sequentially, with GAAP EPS flat. Adjusted EPS is up nearly 10%, excluding acquisition costs and currency impact. Shares of the stock trade flat on the day, just shy of a 5 month high.


The VIX rose in today's session but does not appear as if it will spike. The index gained a little more than 4% at the open, gapping up, but sold off throughout the day to close near the low of the session. Today's candle is just below the short term moving average which has been providing resistance and the indicators confirm it. Both MACD and stochastic are consistent with a test of resistance within a downtrend are rolling over in line with a trend following sell. Downside potential is limited, historic lows are just below today's closing level, but it doesn't matter. At these levels the index is indicating a period of calm within the market and the likelihood of higher equity prices.


The Indices

The market rallied today and right out of the gate. All the indices, including the Dow Jones Transportation Average, set new all time highs. The transports have been lagging but have now confirmed the rally, almost, by setting a new all time closing high but not a new all time intraday high. Today's move is a medium sized white candle, the fourth of four moving up from the short term moving average, capped at resistance. Resistance is the current all time intraday closing high, about 30 points above today's close, near 9,500. The indicators are showing a weak buy, trend following but weak because stochastic %D is still flat while rolling over, suggesting that resistance will tested. A break above resistance would be bullish and trend following with upside targets near 9,750 and 10,000.


The Dow Jones Industrial Average made the 2nd largest move today, 0.70%, and set a new all time intraday and closing high. Today's candle is medium sized, the third of 3 moving up since last weeks test of 20,000, and confirmed by the indicators. Both MACD and stochastic are confirming with trend following signals and both have plenty of room to move higher. Upside target is 20,500 in the near term but could go as high as 21,000 in the short to long.


The NASDAQ Composite and S&P 500 made identical moves of 0.52%, the tech heavy index opening at my near term target of 5,750 and moving up from there. This index is in obvious and protracted uptrend and confirmed by the indicators. Both MACD and stochastic are showing trend following buy signals and are on the rise. Stochastic is overbought in the very near term but otherwise there is still room to move higher, MACD has plenty of room to move higher. The caveat is that both indicators are also showing divergences that do not necessarily indicate reversal but suggest some caution is due as the index moves higher. Upside target is now 6,000 in the near to short term.


The S&P 500 created a small white bodied candle with visible upper shadow. The index is moving higher but the upper shadow indicates some resistance to higher prices, likely profit taking at this point. Today's action set a new all time closing high and is confirmed by the indicators. Both MACD and stochastic are firing trend following entries, both are on the rise and both have lots of room to move higher. Upside target is 2,350 in the near term, 2,500 in the short.


Trump's rhetoric; it's cooled down, fall-out from the immigration ban has largely blown over, foreign relations are warming and the outlook is just as positive as it was before. This means that GDP growth is on tap, earnings growth is on tap and both are still expected to receive a boost from infrastructure spending, tax reform and deregulation. This means that next years S&P 500 earnings outlook/estimates are likely to be low, possibly very low, and that is driving the market. It is possible we're in a buy-the-rumor-sell-the-reality but until the reality is here, or outlook dims, it's the buying part that is the operative portion of that adage right now. I'm still cautious because I hate to get burned by the market but I am bullish, optimistic and looking forward to the next few months.

Until then, remember the trend!

Thomas Hughes