Introduction

An expected and market soothing win by France's Macron failed to move the market. At least appreciably, there was some volatility across asset classes but it left stocks relatively unchanged at the end of the day. Now that's over the market can reaffix its attention on earnings, economic data and the FOMC. This week is a bit light on market-moving data save for CPI and PPI but there is another ~9% of the S&P 500 reporting earnings to keep us busy.

International markets were equally unmoved by the Macron win, all that is except Japan. The Nikkei gained a little more than 2.3% to hit a new multiyear high while others in the Asian theater hovered closer to break-even. European indices were more muted, hovering near break-even but most posting small losses.

Market Statistics

Futures trading was flat to slightly negative for most of the morning and suffered some weakness going into the open of today's session. The SPX opened the day with a gain of roughly 0.03%, held that for about 5 minutes and then moved quickly below break-even to trade near -0.3%. The next hour was choppy but relatively steady until just before 11AM when the market moved down to set a new low by 11:30, about -0.2%. This low turned out to be the intra-day bottom, the market began moving higher within minutes of hitting it and spent the next 2 hours trading up to and then along the break-even line where it stayed until the close of the session.

Economic Calendar

The Economy

No economic data today and not a lot this week but what we will get is fairly important. Tomorrow is JOLTs and Wholesale Inventory, Wednesday Import/Export Prices. Thursday gets a little hotter with weekly jobless claims and PPI, Friday rounds out the week with CPI, Retail Sales, Business Inventories Michigan Sentiment. The big numbers of the week will of course be the PPI and CPI, hot numbers here will seal the deal in terms of market expectations for a June interest rate hike. Retail sales will also be important and for at least 2 reasons. The first is for signs of life within the tepid retail space, the second is for signs that the consumer is coming back to life.

Moody's Survey Of Business Sentiment fell -0.6% in the last week but remains high relative to historic and near-term levels. The index came in at 33.9%, just off the recent high and trending near 18 month highs. Mr. Zandi says the numbers indicate global business sentiment is strong and stable, led by the US. The number one concern for businesses globally is regulation/legal while labor/labor cost comes in second.


First quarter 2017 earnings season is coming in hot and well above expectations. The blended rate of earnings growth for the S&P 500 with 83% of the index reporting is 13.5%. This marks the fourth weekly increase in the blended rate since the reporting season began. Of those who have reported 75% have beaten earnings estimates and 66% have beaten revenue estimates, both above average.


Looking forward earnings growth remains positive but the outlook is not as rosy as it has been. Growth expectations for the 2nd , 3rd and 4th quarters have fallen noticeably over the past few weeks but not enough to drag down full year 2017 expectations. Full year 2017 outlook has in fact risen to 10.0%, +0.4% in the last week. On a quarter to quarter basis growth will fall to 7.2% and 7.7% in the 2nd and 3rd quarters with that expanding to 12.5% in the 4th. Full year 2018 estimates have also fallen losing -0.2% to hit 11.8% in the last week.

The caveat with earnings outlook is two-fold. Based on recent trends we can expect to see estimates continue to fall as we approach the onset of each reporting season, we can also expect the final rate of growth to be higher at the end of the season than it is at the start. The question now is what the expected rate of growth will be at the start of each quarter, and just how much better than expected the quarter may end up. Regardless, earnings outlook is positive into the long-term and supportive of bull market conditions.


The Dollar Index

The Dollar Index fell in early trading as the euro gained strength on Macron's win. The strength did not last however as profit-taking and sell-the-reality took hold of the market. The Dollar Index reversed those early losses by midday gaining nearly 0.5% and closing above the $99 level. The $99 level has been support over the past two weeks and looks like it will continue to provide support into the near-term. Speculation has now turned to the ECB meeting June when the bank is expected to do something (?) hawkish, possibly reduce bond purchases again. Balancing that out is this week's economic data, CPI and PPI are already trending at or above the 2% YOY, numbers equal-to or greater-than would be rate-hike positive in my view. A break below $99 would be bearish near-term, the indicators are mixed. Both MACD and stochastic are bearish showing evidence of support and an over extension of bearish sentiment.


The Gold Index

Gold prices were choppy in today's trading and closed the day relatively unchanged. Spot price hit a new low in today's trading, just above $1221, and is sitting on a support target. Today's candle is suggestive of support but not definitive, another test is likely and could come Thursday/Friday with the CPI/PPI if not sooner.

The Gold Miners ETF GDX held steady in today's action as well, but below resistance target. The ETF has fallen to and made a small bounce from a four month low but now below my resistance line at $21.76. This line is coincident with the December break of a short-term down trend line and the bottom of the near-term trading range. The indicators are mixed and suggest that there may be support at this level, if so I'll need to see a break of the $21.76 line. A failure to break, perhaps due to dollar strength/FOMC outlook, will be bearish with downside target near $20 and then $18.50.


The Oil Index

Oil prices were also choppy in today's session. Rising US production and rig counts, high storage, rising global output and global capacity are all weighing on prices while OPEC is trying to talk them back up. The new news is that the production cut they enacted will continue into 2018. If so it will be another near-term solution with little impact on fundamentals. WTI closed with a gain near 0.50% after trading in a range around break-even.

The Oil Index gained a little more than 0.55% in an extension of support bounce begun last Thursday. The index is moving up from within a range of support after hitting the mid-point of that range near $1,225. This range is coincident with the range in which oil was trading last year before the current production cut and so a fitting place for it to bounce from now. The indicators continue to diverge from the new low and suggest support with the chance of bottoming and reversal. I remain bullish on the sector based on long-term earnings outlook, an OPEC extension could be the catalyst to get the trade moving.


In The News, Story Stocks and Earnings

Sysco, the nations largest restaurant purveyor, reported earnings this morning before the bell. The company reported EPS of $0.51, missing by a penny, on a 12.7% increase in revenue. Profit increased more than 18% regardless the miss. The company saw strong case growth in existing markets as well as expansion into new territory driving the results. Shares of the stock fell more than -1% on the news but found support at $54. This stock was on the move even before earnings were released and looks like it will go higher.


Coach made the news this morning with the announced purchase of rival Kate Spade. The deal is worth $2.4 billion and is a premium of nearly 28% to share price at the time the deal was first speculated. The news drove shares of Coach up by nearly 5% to close with a gain near 2.5%, shares of Kate Spade gained nearly 10%.


The VIX fell despite today's lackluster market session. The fear index fell a little more than -7.25% to hit a new low of 9.80. The index is now trading below the 10 mark and looks like it may attempt to test all-time low just above 9. At these levels the S&P 500 is indicated higher, and options are cheaper than ever.


The Indices

The indices were choppy today but managed to eek out gains in most cases. The one to buck the trend is the Dow Jones Transportation average. The index fell a little more than -1% while the other indices were more or less unchanged. Today's candle is a medium sized red candle breaking below the short-term moving average. This move is suggestive of near-term weakness, weakness that is echoed by the indicators. Both stochastic and MACD are pointing lower in the near-term, consistent with the break below the moving average, but also both suggestive of support at or near current levels. If the index continues to move lower downside target is the 150 day moving average near 8,920. This moving average has provided support several times in the recent past and likely to do so again.


The other indices all closed positive, 2 at new all-time highs, although gains were marginal at best. The S&P 500 gained just enough to be positive, .003%, but enough to set a new all-time closing high and match the current all-time intra-day high. Today's candle is small and doji-like, does not suggest strength and yet is supported by the indicators. Today's action is a continuation, if a small one, of a trend-line bounce begun last week and confirmed by both indicators. A move higher is trend following with upside target near 2,480.


The NASDAQ Composite and Dow Jones Industrial Average both closed with gains of 0.03%, the tech heavy NASDAQ setting a new all-time high. The index created a small doji candle in the process and is in a near-term consolidation that is beginning to look like a potential flag pattern. The indicators are both bullish and set up to reconfirm near-term bullishness with a bullish stochastic crossover and uptick in momentum. A definitive move up and out of this pattern would be bullish and trend-following with upside target near 6,400.


The Dow Jones Industrial Average also made a small doji candle but did not set a new high. The index is hovering just below the current all-time high and looks like it could go higher. It is trying to bounce up and off of a long-term trend line. The indicators support this move and stochastic at least is showing some strength with not one but two bullish crossovers. The first crossover is the %D line crossing the upper signal line, the second is %K crossing above %D. A move up from here would be bullish and trend-following with upside target near 21,600.


Today's action was, for the most part, completely directionless. The transports are firing a warning sign, assuming they will continue to fall and lead the market lower, but the other indices all appear to want to move higher. This week is another big one for earnings and filled with retailers so another chance to extend the gains should results in the sector come in better than expected. Based on earnings this season and the outlook I am leaning toward moving higher but remain cautious in that outlook without a definitive break to the upside. With the season coming to a close, and growth expected to slow for the next two quarters, there is a chance the market could enter a trading range and sector rotation. I remain bullish in the long-term, keeping a close eye on near and short-term positions, waiting for the next good long-term signal.

Until then, remember the trend!

Thomas Hughes