Introduction

The market rebound from last week's geopolitical driven mini-meltdown with earnings season on tap. Geopolitical hot-spots continue to flare and pose a risk to near-term market action but today at least did not overpower the bulls. Market action was light in the post-holiday session as we enter the peak of earnings season. There were few reports today but that changes tomorrow and will get more intense over the next 3 to 4 weeks.

Asian indices were mixed as usual but affected by North Korea. The Japanese market was flat as traders keep an out for threat of missile attack, Chinese markets were down despite better than expected GDP and Industrial Output data. Chinese 1st quarter GDP rose to an annual pace of 6.9% in the 1st quarter, Industrial Output rose 7.6% to a +1year high, both sign of rebound in the world's largest developing market. European markets were closed for the Easter holiday.

Market Statistics

Futures trading was flat for most of the morning although it did show a little strength going into the open. There was little data or earnings reported before the bell, and no new political developments at home or abroad, so trading was light. The indices were indicated to open with a gain near 0.2%, initial gains were closer to half that but the difference was quickly made up. The S&P 500 put on about 7 points in the 1st minute of trading and then slowly extended that to near 14 points by lunchtime. The 2,342 level emerged as resistance, capping gains till mid-afternoon, but it did not look strong. Mid-afternoon the market broke through that resistance and extended the rally to the highs of the day, where it remained until the close of trading.

Comments from Steve Mnuchin helped lift stocks in late day trading. He says that tax reform may not happen as quick as first anticipated and that border adjustment may not be needed to reach the $1 trillion gap in the Trump tax plan.

Economic Calendar

The Economy

One report today, The Empire State Manufacturing Survey. The survey declined sharply but remains positive and indicative of expansion, just moderated expansion. The index fell -11 points to 5.2 from last months surprisingly strong reading of 16.2. Within the report New Orders declined to 7.0, also showing slowing growth, while shipments and labor indicators both rose. Shipments rose to a high 13.7 while hiring rose 5 points to 13.5 and a 2 year high. The caveat is that the workweek index shrank to 8.8, expansionary but less expansionary than before. Forward outlook remains strong, gaining 3 points to hit 39.5.


Moody's Survey of Business Confidence fell -1.2% to 32.8, the lowest level in 2 months. Mr. Zandi says global business confidence remains strong despite the geopolitical shocks we've seen, based on the numbers I'd have to say it looks like it may be wavering a bit. Forward outlook remains strong, especially in the US, with notably strong responses to questions about hiring and investment. Looking back over the longer term, confidence remains high relative to recent lows but well off the highs of 2015.


Earnings season is underway and will only gain momentum from here. So far it looks OK, not stellar, but no more than what that market was expecting. To date about 6% of the S&P 500 has reported with 76% of those beating earnings estimates and 56% beating on the revenue end, both consistent with recent trends. The blended rate for earnings is now 9.2%, up a tenth in the last week, and will be the highest since Q4 2011. Of the 11 sectors, 3 are beating expectations led by the financials and materials sectors.


Looking forward estimates remain expansionary although the numbers continue to shift. In the short term growth remains but expansion slows, longer term growth returns to expansion. Second quarter outlook has ticked higher by a tenth to 8.7%, 3rd quarter outlook has held steady at 8.2% and fourth quarter outlook has risen to 12.6%. Full year 2017 remains strong at 9.7%, expanding to 12% in 2018.


The Dollar Index

The Dollar Index fell about a half percent to test support at the $100 level and bounced from there. The index closed with a loss of near 0.25% following the bounce and may test support again. This level is near the lower end of the short-term trading range and has been tested several times before. The indicators are consistent with this, and a possible move down to test stronger support at the $99 level. Near-term, geopolitical fears and flight-to-safety are hurting the dollar. Longer-term these fears are likely to subside and leave the index ready to rally as underlying fundamentals return to the forefront. A break below $100 could go as low as $99, a bounce would face first resistance at $101.


The Gold Index

Gold prices have hit a new 5 month high on flight-to-safety. The spot price traded above $1,295 in the early part of the session but gave up all of today's gains by the close of the session. Even so spot price remains high, just shy of $1,290, and poised to go higher on any hint of escalating tensions. Technical target for resistance is $1,300 but may not mean much in the face of safety-seeking.

The gold miners tried to advance in today's trading but could not hold the gains. The Gold Miners ETF GDX edged higher at the open only to fall throughout the day, closing with a loss near -0.75% and near the low of the day. The miners are supported by rising gold prices but that support is tenuous. The indicators are consistent with a rising market near-term, upside target for resistance is $25.50. Longer-term economic trends and FOMC outlook support a stronger dollar so upside potential could be limited to the top of the 6 month range, near $26.


The Oil Index

Oil prices fell more than -1% on easing tensions but the price is still above $52.50. Today's action was also driven by shifting fundamentals as US rig counts continue to rise, Chinese economic data suggests demand may be stronger than anticipated and OPEC mulls extending the production cut. We may not see oil prices rise much from here but we are likely not to see them fall much either, not until one or another factor takes dominance.

The Oil Index fell in early trading to test support at 1,175 and the bottom of Friday's long black candle. The ETF appears to be in process of bottoming with potential for short to long-term earnings driven rally. The indicators are consistent with a move to test support following a bounce but have not yet fired the longer-term signal. Support may be tested further, a break below 1,175 would be bearish near-term with downside target near 1,150. A bounce from here would be bullish with first target for resistance at 1,200 and then 1,225.


In The News, Story Stocks and Earnings

Netflix reported earnings after the bell and did not quite meet expectations. The company was able to match revenue estimates and slightly beat EPS estimates but subscriber numbers fell short. Both US and International subscriber growth came in below estimates, driving a sharp sell-off later met by bargain hunters. Shares of the stock initially fell by more than -1% on the news and then later bounced back to set a new all-time high.


United Airlines reported better than expected results after the bell as well, and was able to raise forward guidance. The beleaguered airline reported flat passenger revenue growth but forecasts at least +1% in the coming quarter. Company CEO says last week's passenger issue is a watershed moment for the company, which is dedicated to being top in customer service. Shares of the stock rose marginally on the news.


The VIX fell more than -8.00%. The index created a long black candle, engulfing the 2 previous candles and falling below the 15 level. This action is not definitive but has the look of a peak in fear, near-term at least, and suggests it could subside over the next few days. The indicators are bullish but not showing much strength and consistent with a peak. A fall from here could take it down to 12.50 or lower.


The Indices

The indices were buoyant all day, getting extra lift in the late hours of the session. The Dow Jones Transportation Average led with a gain of 1.31%. The index created a long white candle, confirming support, and appears to be confirming a bottom in the range of 8,900. The indicators do not confirm at this time, stochastic for one suggesting a further test of support could come. A break below 8,900 would be bearish in the near-term with target near 8,750. A continuation of the bounce would be trend-following with first upside target near 9,200.


The Dow Jones Industrial Average made the second spot with a gain of 0.90%. The blue chips created a medium sized white bodied candle rising up from support at 20,500. This level has been tested several times over the past 6 weeks and looks like it could be the jumping off point for another rally. The indicators are consistent with a test of support at this level but have not confirmed with the strong signal. A continuation of today's bounce would be trend-following with upside target near 21,000 in the near term. A break below 20,500 would be bearish in the near-term at least, with downside target near 20,000.


The NASDAQ Composite comes in third today with a gain of 0.89%. The tech heavy index created a medium sized white bodied candle capped at the short-term moving average. It has been in consolidation over the past 6 weeks and is now trading near the middle of that range, just below the all-time high. Today's action may indicate support at the 5,800 level and if so a possible confirmation of short and long-term trends. The indicators are so far consistent with support at this level but have not confirmed and suggest that it may be tested again. A break below 5,800 would be bearish with downside target near 5,750, a bounce would be bullish and trend following with upside target near the current all-time high and higher.


The S&P 500 brings up the rear in today's session with a gain of only 0.86%. The broad market created a medium sized white bodied candle capped at the short-term moving average. Today's action may confirm support at or just below current levels but has yet to be confirmed itself. The indicators are set up to confirm, poised to make a second and higher low following a bottom, but have not. A move above the short-term moving average would be bullish and help confirm the bottom A failure to move above the short-term moving average would be bearish in the near-term at least, with downside target near 2,300.


The market is geared up and ready for earnings. Geopolitical fears have helped it get wound up while waiting but it looks, at least for now, as if a short-term consolidation has formed with a chance of extending the rally. The signs are all there, all we now is the signal.

This week is important because it is the first full week of earnings season, the week more than a token number of names will report, and will set the tone for the next 6 weeks. There could be some volatility during the week but I expect by Friday we'll have a good idea which way the wind is blowing. Between then and now there are nearly 200 earnings reports and a handful of economic reports including housing starts, building permits and the Fed's Beige Book. I am cautiously bullish in the near-term, wary of headlines, and more firmly bullish in the long.

Until then, remember the trend!

Thomas Hughes