Introduction

The third quarter got started with a whimper, with expanding earnings growth on tap it could go out with a roar. The season gets started in just over a week, between then and now a host of macro-data and an important meeting between President Trump and the leader of China, Xi Jinping. Today Trump met with the President of Egypt and pledged ongoing friendship between our two nations.

International markets were equally cautious. Asian indices were mostly higher but gains were muted on concern over the North Korea situation. Trump's talk points to some form of intervention, with or without help, and all of Asia is watching. This week's meeting with Xi Jinping is important as it cold indicate the direction of US/China relations over the next few years. European indices closed in the red although losses were minimal. Soft data and geopolitical uncertainty had traders cautious, the bombing in Russia sent them to the sidelines and the indices into negative territory.

Market Statistics

Futures trading indicated a flat to positive open all morning. There were no earnings reports of note but there was a bit of economic data which helped support prices. The open was positive but a bit soft, the indices made gains but less than 0.01% and those did not last. By 10AM the broader market was heading lower, hitting a bottom just after lunch time about -0.75% for the SPX and DJI. The bottom held and there was a bounce that eventually took the indices back to break even, or thereabouts, by late afternoon. Price action was cautious in light of the week's big events but the market was by no means running scared.

Economic Calendar

The Economy

There was a little more data today than we get on a typical Monday, a total of 3 reports not counting earnings data and Moody's Survey of Business Confidence. First up is auto sales which were reported throughout the early morning with the official rate released later in the day.The actual pace of sales came in at 16.62 million, well below the 17.2 million expected by analysts.

Ford was the only manufacturer to see results better than expected but still a decline of -7.3% from the previous month. GM was the worst, posting a sales increase of only 1.6% versus an expected 9.6% and providing weak industry guidance for the month and the quarter. Tesla fared best, rising to a new all-time on the pace of new deliveries.

Construction Spending and ISM were both released at 10AM. Construction spending was bit light but still positive with monthly growth of 0.8% and YOY growth of 3.0%. The residential numbers are little stronger, 1.8% for the month and 6.2% for the YOY period. Non-residential is unchanged for the month and up 1.0% YOY.

ISM Manufacturing PMI came in at 57.2%, down a half percent from last month but another month of solid growth. New Orders and Production both slowed a bit but remain steady and in expansionary territory. Employment gained 4.7% to hit 58.9% while inventories fell below 50% into contractionary territory. While generally good, the bright spot is definitely the employment numbers which have hit a new long term high. I started tracking a new data point, the employment component of the ISM both manufacturing and services, both of which have been trending higher since at least the fall of last year.


Moody's Survey of Business Confidence fell 0.6% to 33.5%. This is the first decline in over a month and the lowest level since late February. Despite this the index remains relatively high and is consistent with an expanding economy. Mr. Zandi says that global business confidence is steady and strong with buoyant sentiment. Near term outlook has softened somewhat but long-term out to the end of the year remains positive.


First quarter earnings season is getting off to a slow start but so far the results are good. There have been 17 releases so far and so far nearly 70% have beaten earnings estimates. The blended rate for the season is 9.1%, unchanged from last week, and will be the fastest pace of growth since Q4 2011. Based on the averages and the current rate of earnings beats it is likely we'll see the blended rate rise over the next 6 weeks with an upside target of 12%.


Full year 2017 earnings growth estimates remain strong but have fallen slightly in the last week. The full year estimate is no 9.8%, down a tenth, but likely to rise as we progress through the year. Looking forward earnings growth is in the cards for at least the next 8 quarters, with that growth expanding as we progress into the end of this year and the next. We now have 2 of 3 positive factors I like to see, earnings growth and expanding earnings growth. When the 3rd comes into play, rising expections, the market could see upside moment accelerate.


The Dollar Index

The Dollar Index held steady in today's session, posting a gain near 0.15% and trading near the 2 week high. The index is moving sideways within a short-term trading range and looks like it is moving higher within that range. Both indicators are bullish, stochastic confirmed today by a MACD crossover, with upside targets near $102.50. This week could see the index make this move as we get the FOMC Minutes on Wednesday and then the labor data on Friday. A break above this range is possible but would require more-hawkish than expected Minutes and/or stronger than expected data.


The Gold Index

Gold prices also held steady today but remain below recent resistance. Dollar strength and the possibility of dollar strength are holding prices back while geopolitical uncertainty have been providing support. Based on my view of the data, the FOMC and the dollar it looks to me like gold could be topping with downside target of $1,200 in the near term.

The gold miners held steady along with gold, trading within near-term consolidation ranges. The Gold Miners ETF GDX posted a gain just over 1%, a relatively small move for this ETF, and is near the center of a near-term congestion band and short-term trading range. The ETF appears to be wound up with a short to long-term range, driven by FOMC outlook, economic data and geopolitics, and poised to make a move. The indicators are bullish but consistent with a trading range and not suggestive of higher prices at this time. A break to the upside, above $23.60, would be bullish with upside target near $25.20. A break to the downside, which looks more likely to me, has an initial target of $22 with a chance of moving lower.


The Oil Index

Oil prices held steady for most of the day but fell nearly a full percent in late afternoon. The move was driven by news Libyan production was bouncing back quicker than expected which, combined with rising US rig counts and record storage levels, add to the ongoing supply glut. OPEC may be able to keep prices near $50 on production-cut talk but beyond that upside is limited.

The Oil Index fell a little more than -0.60% on weak oil prices. Despite the fall the index remains above support and consistent with a possible bottom. The index is supported by positive forward earnings outlook, just over 300% growth expected for all of 2017, and likely to rise in spite of weakness in oil prices. The indicators are consistent with a bottom at current levels and possible reversal. A move higher would face resistance at 1,200, a break above this would be bullish with upside target near 1,300. Support is just below current levels, consistent with the top of the long-term trading range set last year.


In The News, Story Stocks and Earnings

Ford got hit hard today on a combination of news. First up is a couple of recalls affecting up to a million vehicles including some newer model trucks. This news combined with weak sales to send share prices down to $11.25 and near the 4 year low. The silver lining is that forward guidance has already been lowered by this company, auto sales trends are supported by increasing consumer confidence and labor markets, and the dividend is now over 5%.


Panera Bread Company saw shares rise on reports the company was exploring a sale to an interested party. The news had shares up by about 1.5% during the first half of the day and then right around lunch time surged another 10% on comments to the effect it was Starbucks who was interested. No word yet from either company confirming the identity of the acquirer.


The VIX made some small gains in today's session but nothing significant. The index created a very small doji like spinning top near the long term low and the middle of a short to long-term congestion zone near that low. The indicators are consistent with a trading range so no indication of rising fear at this time.


The Indices

The indices began the day in positive territory and then slowly succumbed to selling. Selling led to an intraday bottom and subsequent bounce the erased early losses and left them poised to move higher. The move was led by the Dow Jones Industrial Average which closed with a loss of less than -0.10%. The blue chips created a small spinning top doji hanging at the short-term moving average and just above last week's support level. The indicators are consistent with support at this level and set up for a trend following buy signal but it is not yet confirmed. A break to the upside would be bullish with upside target at the all-time high, a break below near-term support at 20,500 would be bearish with a downside target of 20,000.


The Dow Jones Transportation average posted the largest decline, near -0.35%, creating a small black bodied candle. The index is hanging just below the short-term moving average but does not appear set to fall much further, if at all. The indicators have rolled into a trend following buy signal, confirmed today by MACD, with upside targets at 9,250 and 9,500 providing a move above the short-term moving average is successfaul. Support targets should the index continue to fall are near 9,000 and then 8,850.


The S&P 500 fell about -0.20% and created a small hammer-like candle with long lower shadow. Today's action tested support at a long-term up trend line and that support is confirmed the short-term moving average and the indicators. The indicators, MACD and stochastic, are rolling into what could be a trend following buy signal if confirmed. It looks like the index is bouncing from the long-term trend line although it may be tested for support again. Upside target on confirmation is 2,400, a break below the trend line would be bearish near-term with a target of 2,300.


The NASDAQ Composite posted a decline near -0.25% and created a small black bodied candle just below the all-time high. The index is trending sideways within a near-term range, at the all-time high, with an upside bias. The indicators are consistent with consolidation within an uptrend and set up to produce a trend following buy signal should it continue higher. A move higher would set new all-time highs for the tech heavy index and be bullish for the market in general, upside target near 6,200. A failure to break to new highs would be bearish near-term and likely result in a continuation of the near-term trading range.


The market is waiting, waiting and watching. Waiting on the data of which there is a lot this week, waiting on Trump and the possibility of China trade war, and waiting on earnings and the prospect of expanding growth.

While all three are important for day to day action, only one is earnings and that is what drives the market long term. So long as earnings growth remains in the forecast, and that growth is accelerating, the market should move higher. Based on the outlook that could mean 2 years or more of continued, steady up trend.

I'm cautiously bullish this week, looking to Friday's NFP report as possible catalyst, and more firmly bullish for the short to long-term as we move into earnings season. Final though, a positive message coming from the Trump/Jinping meeting could also be a catalyst for rally. It would alleviate a lot of geopolitical tension and pave the way for enhanced global GDP growth.

Until then, remember the trend!

Thomas Hughes