Introduction

A rebound in tech, the start of Brexit negotiations and results of French parliamentary elections lift stocks to new highs. In France election results show Macron's party with a healthy majority while in Brussels representatives of the EU and the UK sat down to begin the long negotiating process for Brexit, both events helping to alleviate a bit of politically induced fear. Here at home a push by the White House to bring the governments aging technological infrastructure up to modern standards helped invigorate a rebound in tech stocks led by Amazon and its new foray into our refrigerators.

Asian indices were largely higher with gains in the range of 0.5% to 1.0%. Data in Japan and China helped to support the market, showing an increase in exports for one and rising home prices in the other. In Japan May exports grew at the fastest pace in more than 2 years, in China home prices grew at a scalding 10.4% although the number is not as high as expected. European indices also closed in the green despite 2 separate incidents of terror related violence. The DAX led with a gain just over 1.05% followed by 0.9% for the FTSE and 0.8% for the CAC.

Market Statistics

Futures trading was positive all morning. Not only was their a bit of positive/fear-reducing news there was an absence of negative and fear-inducing news. Indices were indicated to open with gains in the range of 0.35% for most of the morning with that number strengthening going into the open. The SPX opened with a gain of 0.35% and quickly doubled that over the first hour of trading. The morning high was hit at 10:30AM and held until mid-afternoon. At that time a test of the high was rejected but not until after setting a new all-time intraday high. Afternoon trading saw the indices pull back a bit before making another run up to set and close at new highs.

Economic Calendar

The Economy

No economic data today and very little over the next two weeks. This week the big news will be housing related, existing and new homes sales. Next week the calendar will be dominated by Personal Income & Spending and PCE, both to be delivered on Friday.

Moody's Survey of Business Confidence fell -0.6% this week but remains high relative to historic levels. In his commentary Mr. Zandi uses some of the strongest language I've seen in this report. He says that global business sentiment is unshakable, strong and stable, the global economy is firmly expanding above potential.


The 2nd quarter earnings season has technically begun but does not really get underway for another few weeks. That being said there have been 2 S&P 500 companies to report so far and of those 2, 1 beat earnings estimates and 1 beat revenue estimates. The blended rate of earnings growth came in at 6.5% this week, down a tenth from the previous week, but expected to begin rising as more companies report. If the long running averages hold true the final rate of growth could be in the range of 10.5% by the end of the cycle. This week there are 8 scheduled reports.


Forward outlook remains positive and stable. On the long end 2018 estimates were revised higher by a tenth. Next quarter growth should expand to 7.5% with a chance of finishing near 12%, and then the next quarter should see a spike in growth that could go as high as 16%.


The Dollar Index

The Dollar Index gained a little more than 0.40% in a move up from the $97 support level. The index appears to be reversing, at least trying to, but is capped at the short-term moving average. Today's candle is long, white and supported by the indicators which are both on the rise following their respective bullish crossovers. This move is driven by diverging central bank policy; the FOMC is still on track for tightening while no other major player is close. How high it can go will now depend on the data here and abroad. A move above the moving average will be bullish with upside targets near $98 and then $99 in the near-term.


The Gold Index

Gold prices fell to a one month low as the dollar firms. Spot gold fell roughly -0.75% to $1247, breaking below the $1250 support target. With the dollar looking bullish and fear-premium leaving the market it looks like gold will go lower. Downside targets for support are now $1235 and $1220.

The Gold Miners ETF GDX closed with a loss of -0.58%. The ETF made a small gap down to open at the lower support target near $22, move up from there and then move lower to close at the open. Today's candle is a small doji sitting on support but not indicative of support. With gold prices under pressure the ETF is now in danger of moving below that support level support to test the bottom of the short-term trading range near $21. A break below there would be more substantially bearish.


The Oil Index

Oil prices fell a little more than -1.20% to hit an 8 month low as oversupply concerns overshadow the market. The bottom line is this; storage, production and capacity outweigh demand and will do so until demand picks up or we start running out of oil. This means that oil prices are likely to remain under pressure in the near to short-term with downside targets near $40.

The Oil Index fell about -0.20% today and continues to exhibit signs of bottoming although no bottom is yet confirmed. The index created a small red bodied candle moving down from Friday's close and wedged between the down-sloping short-term moving average and support at 1,120. The indicators confirm support through divergence and bullish crossover so I am not expecting much more downside at this time. Support is near 1,120, a break below there would be bearish with targets near 1,100 and then 1,080. I remain bullish for the long-term due to forward earnings growth outlook, near-term I remain wary and watchful for a bottom I think is close to hand.


In The News, Story Stocks and Earnings

Amazon popped on the Whole Foods news but profit takers are the story of the day. The stock gapped up at the open on the prospect Amazon would be able to disrupt the entire grocery industry and move above $1000 intraday. That was the signal profit takers had been waiting for, selling began in earnest, and sent the stock back below $1000 seeking support. It's doubtful Amazon will go into full reversal but it does look like it has hit resistance for now. Downside targets for support are $975, $950 and $900.


Today's leading sector was technology with a gain greater than 1%. The XLK Technology SPDR gained 1.35% in a move that regained the upper side of the short-term moving average. Today's candle is green but small, still below significant resistance levels and not supported by the indicators. The indicators are pointing lower at this time, in support of lower prices, and only show the faintest signs of support. The ETF could continue to bounce higher but would face resistance at the $56.25 level and then at the current high. A fall from the current level would be bearish in the near-term with support target near $54.


The VIX moved lower today to retest the 10 level once again. The index created a small red bodied candle with visible lower shadow indicative of weak support. The indicators are both consistent with bear market conditions in the long-term and rolling over in the near, consistent with it's fall from the 12.00 resistance level but not yet indicative of lower prices. Further downside may be limited, the index is just off long-term lows, but it looks like it will remain at or near current low levels into the near-term. So long as this persists we can expect to see the major equity indices remain at, near or setting new highs.


The Indices

The indices moved higher today in a move that was almost strong. The day's leader was the NASDAQ Composite with a gain of 1.42%. The tech heavy index moved up to test resistance at last Wednesday's high,near 6,240, but was not able to rise above resistance. The index appears to be in a near-term consolidation that may not be over. A move above resistance at the 6,240 level would be bullish but face resistance at the current all-time high. The indicators are bearish with stochastic moving lower which suggests lower prices. Support may be at the recent low near 6,107, if that level is broken a move down to the long-term trend line near 6,000 is likely.


The S&P 500 finished with a gain of 0.83% and created a medium sized green bodied candle after making a small gap up at the open. The index is moving higher in line with the prevailing trend and set a new all-time closing and intraday high. The indicators are mixed in that they are set-up for a trend following signal but remain bearish at this time, and pointing lower. This has created a divergence from the new high that shows underlying weakness in the rally that will need to be corrected for prices to remain at this level. Upside target remains 2,480 in the near-term.


The Dow Jones Industrial Average comes in third today with a gain of 0.67%. The blue chips created a medium sized green bodied candle moving up to set a new all-time high and is supported by the indicators. Both stochastic and MACD are bullish and ticking higher in support of higher prices, the caveat is that both are also divergent from that high in the short-term. Upside target is in the range of 21,600 to 22,000 in the near-term.


The Dow Jones Transportation Average comes in last today with a gain of only 0.66%. The transports were able to set a new three month high today confirmed by the indicators although price action was not strong. MACD is more firmly bullish although both indicators are consistent with a near-term swing to the up side. Target is the current all-time high, near 9,650.


The indices are moving higher, the underlying trends are up, and you can't argue with that. What I can do is be wary of the newest highs because the indices are beginning to look extended and a bit frothy. Sector rotation has gripped the market and I do not think it is over. That being said I remain bullish for the long-term, just more cautious than ever in the short-term as the indices creep their way higher. Correction and/or consolidation may or may not come, what will come are stronger and better signals than the ones I'm seeing now. When that happens, perhaps in tandem with the earnings cycle, I'll be ready to pull the trigger on new index positions.

Until then, remember the trend!

Thomas Hughes


 

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