Introduction

The broad market quietly set new all time highs, waiting for the State of the Union Address scheduled for Tuesday. Today's action was light, volume was low and direction was mostly sideways. Just like last week, when the indices were down at near term support levels buyers stepped in to drive prices back up.

Today's action received some support from President Trump. He spoke to the National Governor's Association about his budget plan to be released in a few weeks. He says it is a safety and security plan, and one focused on infrastructure and defense spending.

International markets were also in wait-and-see mode. Asian indices fell hardest, shedding about a half percent on average. The Nikkei led with a drop of -0.90%, others in the region fared a little better. European indices were more mixed, opening with small gains and then falling back to hover near break-even the remainder of the day.

Market Statistics

Futures trading indicated a flat to slightly negative open for most of the morning. Action was choppy throughout the pre-open session with some upward movement going into the opening bell. The open was negative, the S&P 500 posting an initial loss of just over -2 points, and downward pressure persisted the first 15 minutes of trading. By 9:45AM intraday bottom had been hit and was not touched again. That being said, action was muted all day. Once bottom had been hit the indices drift upward to break-even and, in some cases, into new all-time high territory. The next few hours saw the market drift sideways, bobbing over and under break-even levels until late afternoon. Late day trading saw the indices move up to the highs of the day, where they held until the close of trading.

Economic Calendar

The Economy

Today's economic calendar includes the Durable Goods report and Pending Homes Sales. Durable Goods was reported before the bell and was as expected, up 1.8%. Stripping out transportation durable orders is down -0.2%, ex-defense is up 1.5%. On a year over year basis headline durables orders are down -0.8%. Transportation equipment was the strongest segment, up 6%.

Pending Homes sales came in at -2.8%, well below the expected +1.0% predicted by economists and a 12 month low. The reason for the decline are historic low levels of inventory and rising prices, prices rising due to supply/demand imbalance. On a year over year basis pending sales are up 0.4%. Sales are expected to remain sluggish with upward pressure to prices so long as inventory remains low. What I think we can expect to see now, and there is some evidence of it, is renewed activity among the home-builders.

Moody's Survey Of Business Confidence fell -0.6% to 33.1. The index is hovering just below a multi-month high and indicative of stabilizing sentiment. Mr. Zandi says that global businesses remain upbeat and performing at the high end of expectations. The North America is strongest, South America weakest with Europe and Asia both cautious.


Just over 92% of the S&P 500 has reported earnings this cycle, of those 66% have beaten EPS estimates and 52% have beaten revenue estimates. The averages are on the low side of trend, suggesting that companies are having a harder time beating estimates. This could be because 1) companies are doing worse than low-ball estimates expect or 2) estimates this season are a little more aggressive than they have been. Based on the evidence I think it is a combination of the two, those doing poorly are doing worse than expected and those doing well are not quite doing as much better-than-expected as trends suggest. To date, the blended rate is only 4.9%, trends suggested it would go as high as 7% or 8% by end of season but that does not look likely now.


Looking forward expanding growth is still in the forecast. Full year 2016 growth is hovering at 0.4% and will likely remain there. Looking out to 2017 full year growth is expected in the range of 10% and that goes up for 2018 to 11.8%. First quarter 2017 is projected at 9.3%, down -0.3% from last week, while 2nd quarter expectation is holding steady 9.0%.


The Dollar Index

The Dollar Index held steady in today's session as the market awaits a busy couple of weeks. To stat with there is the State of the Union Address tomorrow night, any talk of tax plans, spending, job creation etc could easily support the dollar. After that this week is fairly heavy with data, next week even more so, and then after that the FOMC meeting. In terms of rate hike, expectation is on the rise. The March meeting is now showing a 33% chance of at least a quarter point hike with May at 54% and June over 70%.

This week, in terms of data, the most important piece may be the Fed's Beige Book scheduled for Wednesday afternoon. Today the index posted a small gain after testing support at the $100.50 level. Support is confirmed by price action, the short term moving average and the indicators although it may be tested again. A break below support is bearish near term with downside target near $99.50 and then $98.65. A bounce would be trend following with upside target near $103.00.


The Gold Index

Gold prices held fairly steady in today's session, first up about a half percent and then down about a quarter percent. Today's action is in response to the dollar and supported by economic/political uncertainty stemming from the Trump administration. That being said I see the dollar moving higher and gold moving lower.

The gold miners did not rise, or even hold steady, in today's session. The Gold Miner's ETF GDX fell nearly -4.5%, diverging from gold prices and perhaps foreshadowing a fall in the underlying metal. Today's action breaks support at $23.50 with downside target near $21.50. The risk now is that gold won't fall, if so the sell-off in the miners could be overblown and may snap-back with quickness.


The Oil Index

Oil prices closed with small gains after an early surge of 1%. The move up was driven by hopes of supply/demand rebalance and rising prices but was quashed by reports of stockpile builds out of the Cushing supply hub. Oil prices remain range bound in the near term and winding up for what could be a big move. The only question now is if production will continue to outpace demand.

The Oil Index gained nearly a full percent in today's session, rising up from Friday's test of support. Support is the 1,200 level, the top of last years nearly 8 month trading range, and confirmed by the indicators. A drop below this level would be bearish with a near term target near 1,175 or 1,150. Longer term outlook is bullish, earnings growth is expected, so I am bullish on the sector. A move up from 1,200 would be trend following, a break above 1,250 would be bullish with upside targets near 1,300 in the near term.


In The News, Story Stocks and Earnings

Tenet Health Care reported earnings after the closing bell and did not meet expectations. The hospital operator posted growth across all segments but earnings were impaired due to restructuring and legal expenses. Shares of the stock fell more than -10% on the news.


Priceline reported after the closing bell and blew past estimates. EPS of $14.20 beat estimates by more than a dollar and sent shares soaring in after hours trading, revenue was also well above estimates. Next quarter guidance was weak, in the range of $8.50 compared to consensus of $10.72, but did not hinder trading. Shares of the stock gained more than 3.5% after the release.


The VIX rose modestly today, gaining a little less than 6%. The candle is a small one, nothing alarming, but it is the 8th close above the short term moving average. Today's action is still below resistance at 12.50 but that may be tested or broken. The indicators are consistent with range bound trading but also bullish suggesting a test of resistance could come. A break above 12.50 would be bearish for the market in the near term. Until then the index remains very low and indicative of relative market calm.


The Indices

Today's action was much like Friday, only a little less active. The early part of the session saw the indices retreat to near term support, mid-day that support was turned into a base and late day that base led to new all time highs (in some cases). Leading the charge, but not setting a new all time high, was the Dow Jones Transportation Average with a gain of 0.56%. The transports created a medium sized white bodied candle extending a bounce from support and the short term moving average. Today's action is trend following but nit quite confirmed by the indicators. Both MACD and stochastic are in process of rolling into trend following signals but have yet to complete the move, MACD looking set to do so tomorrow provide action is to the upside. A continuation of this move has an upside target at the current all time high with the possibility of new all time highs. Support is near 9,250, a break below there is bearish in the near term.


The NASDAQ Composite made the next strongest move today, 0.28%, extending a bounce from near term support. The index did not set a new all time high but is only a few points from doing so. The indicators remain consistent with a peak within an uptrend and divergent in the longer term, suggesting more consolidation or correction is possible. Near term support is near 5,750 and the short term moving average should the index pull back more than it has, a move higher is trend following with upside targets near 6,000.


The S&P 500 made the third largest gain today, 0.10%, and set a new all time closing and intraday high. Today's candle is a small white bodied candle with visible lower shadow testing near term support near 2,36. The move extends the current leg of the rally and breaks the index out of the near term trading range set last week. The indicators are bullish but also consistent with a peak or slowing trend so caution is due. Upside target remains 2,400 in the near term with 2,500 in the short. A break below the bottom of last weeks range would be bearish near term with downside target near 2,325.


The Dow Jones Industrial Average posted the smallest gain today, only 0.08%, but was able to set new all-time and intraday closing highs. The index created a small white bodied spinning top and may be cresting a peak. The indicators are both bullish and consistent with a slowing trend or peak within a bull market but do not guarantee correction or pull back. Near term support is near 20,650, a break below here would be bearish with first target for additional support near 20,500. Until then the trends are up in the near, short and long term with upside target of 21,000 in the near term.


If last week can be considered a "dip" that was bought, today can too. The indices moved lower at the open in a half-hearted attempt at selling only to meet near term support, move higher and set a new all time high. The trend is definitely up and while not a stampede, there is a steady flow of money into the market. Until we get a reason for this to stop I expect we'll keep seeing new highs.

Looking forward there are some hurdles to get over but I think they are merely bricks in the "wall of worry". The first is the State of the Union Address;Trump could do a lot to sway investor sentiment, it just depends on what he chooses to talk about. After that it will be the data as always, until the FOMC meeting, and that is on track for growth. Tomorrow look out for the 2nd estimate of 4th quarter GDP, it is expected to be revised higher, as well as auto sales, Chicago PMI and consumer confidence. I remain bullish but cautious.

Until then, remember the trend!

Thomas Hughes