Introduction

Market sentiment slips as the Trump agenda takes it first major hit. It's not surprising that the House republicans weren't able to reach consensus on Obamacare reform, it is a little surprising the Great Negotiator was not able to pull a magic rabbit out of his hat in order to pull it off. The failure, or retreat from possible failure to be more precise, raises concern the Trump economy won't be as terrific as he's said it would be, a possibility the market face all along. Today's action was negative, the failure definitely caused a sell-off, but in the end really not too bad.

International indices got hit the hardest, most of them being closed long before the mid-day rebound in US stocks could sway sentiment. Asia fell but results were a bit mixed. The Nikkei fell nearly -1.75% but other indices in the region shed more modest amounts closer to -0.25%. European markets were more consistently lower, about -0.5% on average, as regional headlines dominate news. Germany's business index hit a nearly 6 year high, Angela Merkel's party won a regional election in Saarland and the BOE releases its stress test results (not much to speak of).

Market Statistics

Futures trading painted a bleak picture for the bulls, down nearly a full percent at the low of the morning. The trade was fairly steady going into the opening bell, down about -0.75%, with little in the way of real business or economic news to move the market. The open was a bit frantic, the indices opened with losses near -0.5% extended that to roughly -0.75% and then bounced. Intraday bottom was established by 9:42AM and for the next 3 hours the market moved higher. Around 1PM a top was hit resulting in sideways range-bound trading for the next hour or so. By end of day the indices were moving higher again, slightly, to the highs of the day where they remained until the close.

Economic Calendar

The Economy

No economic data today and very little this week. The few reports that are on the calendar are important though; Consumer Confidence, 3rd estimate 4th quarter GDP, jobless claims, personal income/spending and the PCE. Next week is a big data week, NFP ADP Challenger etc.

Moody's Survey of Business Confidence gained 0.3% to hit a new 10 month high of 34.1. The index has been steadily rising since last summer and looks like it is on the way higher. Mr. Zandi changed his tone in the summary this week, getting a little more positive. Global business sentiment is unwavering, consistent with bouyant financial markets. Regional differences remains, the US is still strongest.


The count down to earnings season is on and the market is focuses. No matter what happens with the economy or politics it is always earnings that drive future valuations. This time around we are looking at expanding growth with expanding growth outlook, the question now is the quality of the season in relation to those expectations. So far, 12 S&P 500 companies have reported with 9 beating EPS and 6 beating revenue estimates, both above average. The blended rate for earnings is now 9.1%, up a tenth from last week.


Looking forward growth is still expected, as is expanding growth and now we have some glimmers of rising estimates as well. The Q2 outlook rose a half percent to 8.9% since the last time it was mentioned in the weekly Factset report. The 3rd quarter estimated is a little weak at 8.2% but growth expands again going into the 4th quarter, 12.4%. On a full year basis, 2017 outlook gained a tenth to hit 9.9% and 2018 outlook held steady at 12%.


The Dollar Index

The Dollar Index took a big hit when the healthcare vote was canceled it calls into question tax reform, infrastructure spending and jobs creation (the Trump Agenda). The index opened today's session with a loss of -.25%, fell as much as -1.00% and closed with a loss near -0.5% after testing support at the $99 level. Today's action confirms resistance at the $100 and raises the possibility of full reversal. The index has created what could become a H&S reversal with down-sloping neckline crossing just below today's close. A move below $99 will be significant but will not signify reversal until confirmed. Long term outlook, even without Trumponomics, is for steady GDP, jobs and earnings growth into the next 2 years so downside potential is limited.


The Gold Index

Gold prices moved up to hit a one month high just shy of $1,260. This move is supported by falling dollar value and flight-to-safety with upside targets near $1,275 and $1,300 now that $1,250 has been surpassed. This move may however be temporary in nature, depending on next week's data and FOMC outlook.

The Gold Miners ETF GDX gained 2% on the move in gold prices but remains near the middle of its near-term range. The ETF appears to be winding up for a move, possibly higher, depending on the direction of gold prices. Today's action is the 8th day of trading just above $23 in what appears to be a flag pattern supported by bullish indicators. MACD is bullish and rising to a second peak while stochastic gives a follow-on buy signal high in the upper signal zone, both consistent with higher prices. The key now is resistance, near $23.50, a break above which would be bullish and confirm the move. Upside target is $25.50 in the near to short-term. Support on a pull-back is $22.50 and $21.


The Oil Index

Oil prices slid again today. Rising US rig counts, high levels of US storage, high global capacity, tepid demand and an ineffective OPEC add up to one thing; lower prices. OPEC may try to extend the production cut, that may support prices, but the long-term outlook for oil right now is for supply to meet demand, at least. Downside target is $45 with a chance of going lower.

The Oil Index fell nearly a full percent to test support at $1,150. The index is sitting on what could be solid support, if not next target is not far below. This support dates back to the trading range of 2016, a range that persisted for at least 8 months and based on pre-OPEC deal fundamentals. Looking forward I remain bullish on the sector based on earnings growth projections. The risk is that current projections are going to fall based on new, lower, oil prices. The question is how much they will fall and if forward EPS outlook remains positive. In terms of current quarter expectations, no changes due to high average prices for oil and products in the 1st quarter. If the index falls through $1,150 next target is $1,100 and then $1,075.


In The News, Story Stocks and Earnings

Egg producer Calmaine reported earnings this morning. Results were dismal but better than expected, driven entirely by the price boom/bust cycle related to last year's avian flu epidemic. Revenue fell nearly -32% on a -28% decline in shell egg prices and the after-effects of the epidemic. The build-up of new egg producing flocks has led to a younger, more productive population creating oversupply in a low-demand environment. Forward outlook is stable, the hen population is expected to moderate and there is some strength in the specialty egg market. Shares of the stock opened at a 2 year low on the news but recovered the losses and more, on high volume, by the end of the day.


Open-source software, Linux and cloud provider Redhat reported after the bell. The company reported a 17% increase in subscription revenue and a 40% increase in all-other revenues making the 60th consecutive quarter of growth. The company gave mixed forward guidance, first quarter below full year above consensus, and drove shares down by a full percent in after-hours trading.


The VIX opened with a significant gain, near 20%, but sold off throughout the day. The index shows a spike in fear but one that has quickly subsided. The indicators are consistent with a top within a trading range and suggest a move back to recent lows is possible.


The Indices

Index action was mixed, all opened with losses but only two closed that way. The loss leader was the Dow Jones Industrial Average with a decline near -0.25%. The blue chips created a small doji candle setting a new one month low and indicative of support at the 25,000 level. The indicators are strongly bearish and I say strongly because MACD is making a +1 year extreme peak and on the rise, suggesting at least a retest of current lows if prices bounce from here, or new lows if they don't. A break below 25,000 could go as low 20,000 before hitting next support target.


The S&P 500 closed with nearly no loss, -0.01%, but created a small white bodied candle in doing so. Today's price action set a new one month low but also gives indication support is at this level. The indicators are both bearish but also both rolling over, consistent with support and trend following. The caveat is that both are still bearish so support could easily be tested again. A break below support, near 2,325, would be bearish near-term with downside target near 2,300 or 2,250.


The Dow Jones Transportation Average closes with a gain near 0.07%. The transports created a medium sized white bodied candle with long lower shadow, indicative of support at this level. The indicators are bearish so support may be tested further but mitigated by two things. One, stochastic is oversold within a greater up-trend and both indicators are rolling over in indication of support within that same up-trend. A break below support, near 8,900, would be bearish near-term with downside target near 8,500 and 8,000.


The NASDAQ Composite posted the largest gain, slightly more than 0.20%. The tech heavy index created a medium sized white bodied candle after opening at a one month low, confirming support at current levels. The indicators are bearish but rolling over in-line with the near, short and long term trend, also consistent with support. A break below support would be bearish near term with downside targets near 5,650 and 5,500. A bounce would be trend following with the all-time high as resistance.


The indices are correcting following the post-election and post-inauguration rallies. The failed healthcare vote may give that correction legs but based on today's action I'd say not. The market spooked, there was some selling but cooler calmer heads prevailed. For one thing, the healthcare vote is only one of many items on Trumps agenda and likely not forgotten and two, outlook for growth is still good and at no time has ever included the potential affects of the Trump economy.

When it comes to growth we're still on track and if, I say if, anything on Trump's list gets accomplished it will be icing on the cake. Since earnings are what drives the market long term I predict this correction will coincide with the onset of earnings, and bottom as we move into another cycle of growth. I am bullish long term, waiting for the next great entry, but neutral/bearish in the near-term waiting while we wait on data and the onset of earnings season.

Until then, remember the trend!

Thomas Hughes