Introduction

The May 1st calm was shattered when President Trump revived fears he would break up the big banks, and a buying opportunity was created. The news came in an interview with Boomberg in which the President reiterated his campaign pledge to enact a new Glass-Steagall type law and curbed today's trading, but did not cause a major meltdown. Traders are focused on this week's upcoming events more than Trump's rhetoric. The FOMC is due to release their latest policy decision Wednesday afternoon, the NFP will be released on Friday and in-between nearly a quarter of the S&P 500 will release earnings.

Asian indices were mixed but more positive than not as stocks struggle for direction ahead of the week's events. The Hong Kong and Korean markets were the notable losers although several markets were closed for May Day festivities. European indices were less buoyant, treading water near Friday's close on weak oil prices, earnings and expectations for events later this week.

Market Statistics

Futures trading indicated a positive open all morning, about 6 points for the SPX. The trade was fairly steady in early hours with only a ripple or two following today's economic data. The data was positive just not quite as positive as expected. The open was as expected, first trade on the SPX was about 5 points above last week's close although the market began to sell off within the first few minutes of trading. Selling persisted through the first 45 minutes of trading, taking the SPX down to its low of the morning just above break even. The market bottomed at this point and bounced back to set a new intra-day high which held until nearly 1PM, at which time Trump's comments to Bloomberg hit the airwaves.

Trump's comments sparked a quick sell-off which took the indices down to test support which, in the case of the SPX, was just above the early low. This proved to be a knee-jerk reaction and entry point for bullish traders who consequently sent the indices shooting back up to set new highs for the day and a new all-time high for the NASDAQ Composite. The daily high was hit at 2PM and the market trend sideways from there into the close of the day.

Economic Calendar

The Economy

We had a fairly busy day for a Monday in terms of economic data. Personal Income and Spending were released before the open, ISM Manufacturing PMI and Construction Spending were released at 10AM. Personal Income were both positive for the month of March but both missed consensus by a tenth, +0.2% on the income side and +0.1% on the spending end. Disposable Personal Income rose by 0.2% as well. Looking to inflation, PCE prices fell -0.2% on the month to month basis but are up 1.8% YOY.

Construction Spending fell by -0.2% March versus expectations of a gain. Consensus was in the range of +0.4% with high estimates near 0.6%. Despite the decline in March spending is still up 3.6% year over year. Residential building leads the charge, up 1.2% for the month and up 7.3% YOY

ISM Manufacturing PMI was released at 10AM and is the first macro-data of the 2nd quarter. The headline figure declined -2.4% to 54.8 but remains firmly expansionary. Within the report New Orders fell -7.5% to 57.5 showing strong but slowing growth, Production expanded 1% to 58.6% and Employment fell -6.9% from last months surprise 58.9 to 52.

Moody's Survey of Business Confidence jumped more than 1% to 34.5% and the highest level since November 2015. Mr. Zandi says confidence is rock solid and buoyant. Nearly half of respondents say that their number one concern is regulatory/legal while a fifth say availability and cost of labor are their number one problem.


With nearly 60% of the S&P 500 reporting the season is looking pretty good. Of those who have reported 77% have beaten earnings estimates while 68% have beaten revenue estimates, both numbers trending above their respective 5 year averages. The blended rate is moving higher jumping nearly 3% in the last week to 12.5% and the high end of my target range. To date 8 of the 11 sectors are beating expectations led by the industrials.


Looking forward outlook remains positive and expansionary but the numbers continue to shift. In the nearer term growth is expected to slack off from this quarter's strength to 8.1% in the 2nd quarter, hold steady into the third at 8.3% and then begin expanding again in the 4th quarter to 12.8%. In the longer term growth outlook remains strong and expansionary, full year 2017 estimate has risen above 10% in the last week and expected to expand to nearly 12% in 2018.


The Dollar Index

The Dollar Index held within a tight range for the 5th day in a row, trading around and closing above the $99 level. The index is at the bottom of its short-term trading range and wound up waiting on the FOMC. Current support is the 50% Retracement of the Sept-Jan bull market and dependent on forward outlook. Economic data has been coming in a tad on the soft side which has allowed rate hike speculation to cool off. The FOMC is still expected to raise rates twice this year, the 3rd hike is coming into question, so their outlook and this week's data will go a long way toward swaying the market. A dovish sounding Fed could easily allow the DXY to fall below support with downside targets at $97.75 and $96.25. A hawkish sounding Fed, or hotter than expected data, could cause a bounce with upside targets near $100 and $101 in the near to short-term. The CME Fedwatch Tool shows a 4% chance of hike at this meeting and a 70% chance of hike at the next.


The Gold Index

Gold prices began to correct last week as flight-to-safety inducing geopolitical fears began to ease. Fear is still present and providing some support but it is diminished. Today spot gold fell another -0.75% as fears continue to ebb, today's driver the deal to avoid US Government shut-down and soft economic data/FOMC outlook. Spot price fell below $1,260 today and looks like it will retest support at $1,250 at least. A break below there would be bearish with downside targets near $1,235 and $1,200.

The gold miners sank under the weight of falling gold prices, the miners ETF GDX posting a loss near -2.25%. The ETF is sitting on support and forming a consolidation at $21.75 that could lead to further downside. The indicators are both pointing lower suggesting that support will be tested again in the least. The caveat is that the FOMC meeting, the data or geopolitics could put a bid back into gold on sinking dollar value or flight-to-safety. A break below $21.75 would be bearish but may hit support as early as $21.15, a break below there would be more firmly bearish with downside target near $19.


The Oil Index

Oil prices fell more than -1% as US rig counts rise to a 2 year high and global production rises. WTI fell a little more $0.50 to trade below $49. Some weak data from China last week added to our own weak data helped to reduce demand outlook as well and add downward pressure. The only thing to save oil prices now are strong data later this week or a shiny brand new OPEC deal for whatever it may be worth. Without evidence to support prices downside target is $45 in the near to short-term.

The Oil Index fell about a quarter percent in response to oil's decline but remains above support. Support continues to be the top of the short-term trading range of 2016 in the range of 1,150 to 1,170. The index still looks like it wants to bottom but is being dragged down by prices. In the near-term prices will remain a burden but so long as the long-term earnings outlook remains positive I will maintain a bullish outlook, with oil prices on the way down I'm cautious in the near-term. A break below support would be bearish with potential to take the index down to 1,100 and the bottom of last year's range.


In The News, Story Stocks and Earnings

Dish Network reported before the bell, missing on the top line but beating on the bottom. The satellite TV provider reported EPS up 10% from last year on revenue that declined and missed expectations. The reason for the miss was declining subscriber numbers driven by greater than expected losses and less than expected new users. Shares of the stock fell more than -2%.


The banks took a dive on Trump's comments but quickly bounced back. The BKX Banking Index had been trading positive ahead of the event, quickly dropped down to test support at the previous days close and then bounced back to close with a gain of 1%. The candle formed is a small bodied green candle with visible upper and lower shadows with interpretation similar to a spinning top or weak doji. The candle does provide some confirmation of support at the short-term moving average which when combined with the other indicators appears to be setting up for a move higher. Both stochastic and MACD are bullish and consistent with strong support with possibility of higher prices. A bounce from here would be bullish but need to break resistance at the $95 level.


The VIX fell today and set a new low dating back to February of 2007. It also dipped briefly below $10, setting a low of $9.90. The index is indicative of historically low options prices relative to the S&P 500 and hints at buying opportunities in the market. The indicators are bearish and suggestive of lower prices with room to move lower. A move below $10 would be monumental and may attract an influx of new money to the market, if it didn't precipitate a correction on the assumption it-can't-get-any-better-than-this-so-get-out-while-you-can.


The Indices

The indices displayed a little volatility today, but only a little. Prices were first supported by optimism and proved resilient in the face of weaker than expected data, Trump comments and a big week of data and earnings on tap. The day's leader is the NASDAQ Composite with a gain of 0.73%. The tech heavy index set a new all-time closing and intraday high and looks like it could continue higher. The indicators are both moving higher with plenty of room to run. Upside target is 6,200.


The S&P 500 made the second largest gain, 0.18%. The broad market created a small white bodied candle within a small consolidation just shy of all-time highs. The indicators both confirm a move higher, reconfirmed today by stochastic when %K bounced up off the upper signal line, all we need now is a break out. A break to new highs would be bullish with upside target near of 2,475 in the near-term.


The Dow Jones Industrial Average comes in third today with a loss of -0.12%. The blue chips hovered around break-even all day and tried to move higher but were just not able to do it. Today's candle is small and black bodied, testing for support at the top of the gap formed last Tuesday. The indicators are bullish but showing near-term weakness consistent with near-term entry points within short to long-term up trends. If the index continues to drift lower support is just below along the long-term up trend-line. If the index decides to move higher upside target is the current all-time high and possibly higher.


The Dow Jones Transportation Average posted a loss of -0.30% after opening with a small gain. The index appears to be trapped inside short-term trading ranges and today's move a continuation of downward movement begun last week. The indicators are consistent with a range-bound asset and one moving lower within the range, neither showing strength or indicative of direction. If the index continues to move lower support is along the long-term 150 day moving average where strong bounces have produced what still may turn out to be double-bottom reversal. A move higher from here would confirm support at the short-term moving average and by extension the aforesaid double-bottom with upside targets at 9,300 and 9,600.


The indices look like they are in process of extending near, short and long-term trends. This time the rally appears to be led by the all-time high setting NASDAQ Composite and lagged by the under-performing transports. These trends are supported by economic and earnings outlook with only this week's events standing in the way. I doubt anything will happen to derail the long-term bull market but there is a chance for correction in the near to short-term if the economy appears to be cooling, or earnings outlook dims. Tomorrow is light on data but heavy on earnings, the next day heavy with both including the FOMC meeting. I remain firmly bullish for the long-term and cautious in the near, waiting for the Fed wave the flag signaling all-clear ahead.

Until then, remember the trend!

Thomas Hughes