Introduction

It's FOMC week yet again and the market is holding its breath. Today's action was yet another day drifting sideways, just below the newly set all-time high and just above near term support levels. While this week promises lots of potential market-moving events today was devoid of any; the Q4 earnings cycle is coming to a close, the Q1 cycle has yet to begin, there were no economic data releases and very little in the way of business activity.

International markets painted a positive picture. Asian indices were mostly up and led by the Heng Seng's 1.11% advance. The Nikkei was a laggard with a gain closer to 0.11%, hurt by poor machinery orders. The big news in that region was the ousting of Korean president Park of possibility of political reform in South Korea. European indices were also able to edge higher, gaining about 0.25% on average. Sentiment there is positive but cautious as traders eye the possibility Theresa May will invoke Article 50 (possibly as early as tonight/tomorrow), political unease in Belgium and France and the outcome of the FOMC meeting.

Market Statistics

Futures trading indicated a mildly negative open for the first half of the early electronic session and then flip-flopped to mildly positive for the second. The open was weakly bullish but buying topped out on the S&P 500 within the first 5 minutes of trading. Sellers took over from there but all they were able to do was keep prices within a tight range for the rest of the day. The S&P bottomed out with a loss of -4 points (-0.01%) and remained above that and below break-even until mid-afternoon when the SPX moved into the green.

Economic Calendar

The Economy

Nothing on the economic calendar for today but the next few days promises to be action packed. The PPI is released tomorrow morning, CPI Wednesday and then the FOMC meeting/announcement Wednesday afternoon. Also Wednesday morning is Retail Sales, Empire Manufacturing, Business Inventories and the NAHB Housing Index followed by a fully packed Thursday and Friday as well, so lots of reason for caution in today's trading. And that doesn't count Brexit/Article 50, elections in Europe and Trump's first budget which may come out this week too.

Moody's Survey of Business Sentiment rose 0.2% to 33.8 and the highest level since May of 2016. Mr. Zandi says global sentiment remains strong and stable with the usual regional variations. North America is strongest, South America weakest with Europe and Asia both positive but cautious. Looking to the past 6 months we can see that sentiment has been steadily rising with periodic spikes in optimism. To my technician's eye it looks as if sentiment may be building up to a break-out and if so will be a bullish signal.


More than 99% of the S&P 500 has reported earnings for the Q4 which basically brings the season and the year to a close. The results are good, not quite as good as I thought they would turn out but expansionary and a nice lead-in to the new year. The fourth quarter is pegged at 4.9% with little chance of movement from the last 2 or 3 companies to report. Full year 2016 comes in at 0.4%, much better than the 0.1% we started the reporting season with. Looking forward to next quarter, Q1 2017, outlook remains good although it has been falling in recent weeks.


Looking forward quarterly growth is expected to continue expanding into the end of the year, and into next year. Full year 2017 estimates remain healthy at 9.8% with that expanding to 12% in 2018. Full year 2017 estimates have been coming down with Q1 and Q2 estimates but full year 2018 estimates are on the rise, up 0.2% in the last 2 weeks.


The Dollar Index

The Dollar Index held steady today as traders await the FOMC meeting. The index closed with a gain near 0.1% after testing support at the short term moving average and the $101.00 level. The index has been creeping up in the near term on rising expectations of an FOMC rate hike but resistance is growing at the $102.50 area. The indicators are rolling over into a possible bear signal, consistent with resistance, but more consistent with range bound trading when looking back to the past 6 to 12 weeks. The question now is which way it will break and that will come down to the FOMC. A simple interest rate hike may not be enough to do it now, expectations are running greater than 95% for the March meeting and greater than 90% out for the next three meetings with a more than 50/50 shot at another hike to boot. A hike and hawkish commentary or changes to the statement may however renew the Trump trade and send the dollar back to test long-term highs.


The Gold Index

Gold prices also held steady in today's session. Spot gold hovered near $1,203, just above short term support levels, with dollar outlook pushing it lower and geopolitical issues fueling near-term flight-to-safety. A bounce from $1,200 would be bullish, first target for resistance near $1,230. A break below $1,200 would be bearish with downside target near $1,150 and all dependent on the FOMC meeting.

The gold miners moved slightly higher but not much and price action is not promising. The Gold Miners ETF GDX gained a full percent but created a small spinning top doji following a relief rally within a near-term down-trend. The relief rally may go on if gold prices are able to hold above $1,200 but upside target is the short-term moving average near $23.00. If not a test of support near $21.00 is possible with a break-through signaling further downside. The indicators are rolling over from a bearish low, consistent with a bounce support, but not suggestive of full correction at this time.


The Oil Index

Oil prices were flat today, WTI falling less than -0.1% at settlement, but look poised to move lower. The OPEC deal just wasn't enough to offset rising US rig counts, record US production and tepid demand. US rig counts jumped 12 last week, up 288 YOY, adding production capacity to an already ample supply, and show no signs yet of slowing. Until they do I expect to see downside pressure continue, providing of course that OPEC or Russia don't try to talk prices back up. Downside target for oil is $45 in the near to short-term.

The Oil Index looks set to continue a correction driven by falling oil prices. The index posted a margial gain in today's session but looks poised to move down to the 1,120 level. This would take the index back to a firm, long-term, support level built up over many months leading into the OPEC-deal driven rally. My long-term outlook for the sector remains bullish, earnings growth is still expected, but the near-term looks bearish. The risk now is that prices will move lower, and stay lower, ending hopes for the explosive earnings growth that is expected to-date.


In The News, Story Stocks and Earnings

Intel made news in the early hours when it announced the purchase of Mobileye. Mobileye is a chip-maker focused on the self-driving car industry, its purchase is a move by Intel to get into and stay ahead of that market. The deal values Mobileye at up to $16 billion, shares of that stock jumped more than 28% on the news. Shares of Intel fell a little more than -2% to trade just above near-term support.


Citrix Systems jumped nearly 7% this afternoon on news it was in talks with Goldman Sachs about a possible sale. The company is a leading provider of application and management software and services. Potential buyers are not yet known but will likely include top names.


The VIX continues to trade sideways and near long-term lows. Today's action saw gains at the open that were erased by the close. The indicators remain consistent with range-bound trading with a bias to the downside.


The Indices

Today's action in the indices was calm and quiet. For the most the indices moved sideways, two closed with gains while two closed with losses. The laggard is the Dow Jones Transportation Average which posted a loss of -0.41%. The index created a small black bodied candle below the moving average but closing above the 9,250 support line. The index looks set to move lower in the near term but as yet is still above support. The indicators are bearish and pointing lower, consistent with a test of support, but also showing early signs of reversing. A break below 9,250 is bearish near-term with downside target near 9,000. A bounce from 9,250 would be bullish with upside target near 9,600.


The Dow Jones Industrial Average also closed with a loss but only -0.10%. The blue chips created a small black bodied spinning top candle, just above near term support. Near term support is near 20,800. The indicators are moving lower suggesting support will be tested again with a possible move down or sideways to the short term moving average. A bounce from current levels would be bullish and trend following with upside target at the current all-time high.


The S&P 500 made the smallest gain in today's session, 0.04%. The broad market created a very small and doji-like spinning top candle extending the bounce from near term support begun last Thursday. The indicators are consistent with a test of support and showing sign of bouncing from support but little more at this time. Short and long-term outlook remains bullish out to 2018, near term is more questionable. A move lower, breaking below 2,355, would be bearish with downside target near 2,325. A bounce from this level would be bullish and trend following with upside target at the all-time high.


The NASDAQ Composite made the largest gain, 0.24%, and looks the most bullish. The index created a small white bodied candle moving up from a support bounce within an uptrend. The indicators remain bearish but are rolling over, consistent with such a bounce. Near term target is the current all-time high, only a few points above today's close, with the possibility of new all-time highs to follow.


The market is at a juncture. The next FOMC policy announcement is only 2 days away and it is largely expected to be a quarter point increase. The question is, will the rate hike cause the market to rally or will it cause the market to continue correcting? In the past, last year, a rate hike was a reason for fear, today that is not the case. Then, rate hikes were the demon to end easy-money policy and crush the bull market. Today they are a sign of economic health and the need for normalization. The rate hike and statements may cause a knee-jerk sell-off and they may not, if they do it will likely be the next great entry for long-term bullish positions. If it doesn't the rally will continue from here. I'm bullish, cautious ahead of the Fed, waiting for the next bullish signal.

Until then, remember the trend!

Thomas Hughes