Introduction

Monday morning traders buy the dip as geopolitical tensions ease and Japanese GDP grows faster than expected. On the Korean Front Secretary of State Rex Tillerson and Secretary of Defense James Mattis have indicated the US is still pursuing diplomatic solutions, on the economic front Japanese GDP came in at an annualized 4.5% and above the 1.5% forecast by economists. The move looks good, now let's see if there will be any follow through.

Market Statistics

International indices were mostly higher although Japan oddly enough fell by -1%. The fall is likely due to market reopening after a holiday week last week. Chinese index rose by a full percent despite weaker than expected factory output, up 6.4%, fixed asset investment, up 8.3%, and retail sales, up 10.2%. European indices rose by roughly 1% on the news. There was little in the way of headlines out of the region this morning but that will change beginning tomorrow. The EU economic calendar is full this week including EU and German GDP and inflation data.

Futures trading was positive all morning, lifted by easing fear of war with North Korea. The SPX was indicted to open with a gain near 0.5% and that held into the open. The open was a bit hectic, the indices opened with significant gains and immediately began moving higher. The SPX hit intraday high just after 11AM, just over 1.00%, and commenced sideways trading from there. At 1:15 the indices were still trading in a very tight range near the early high and beginning to look as if they may decline. Decline never happened, the mid day range persisted into the close leaving the indices near the highs of the day.

Economic Calendar

The Economy

There was no economic data today and not a lot this week but what there is is fairly substantial. Topping the list is the Wednesday release of FOMC Minutes but also included is housing starts/building permits, Leading Indicators and several reads on regional manufacturing/business activity.

Moody's Survey of Business Confidence gained 1.6% in the last week. The index is now sitting at a 1 month high of 32.0%. Mr. Zandi says the survey reveals that global business is still upbeat and growing at a pace above potential. He makes note that only about 10% of responses are negative while 40% are positive. The one caveat is that sentiment remains well below the all time highs set in 2015.


With a little more than 91% of the S&P having reported for the 2nd quarter earnings growth stands at 10.2%. After last quarter this is the 2nd highest rate of quarterly growth since Q4 2011. The blended rate rose by a tenth in the last week and may rise a bit more over the next two. Of those reporting 73% have beaten earnings estimates while 69% have beaten revenue estimates, both figures above average. This week we can expect reports from 18 S&P 500 companies and 3 Dow components.


Despite this quarters strength in earnings growth forward outlook continues to erode bringing the full year blended rate down to 9.4% from last week's high 10.1%. This is not the lowest level it has been but it is close. On a quarter to quarter basis 3rd quarter growth estimates shrank to 5.2% from 5.6% while 4th quarter estimates fell to 11.2% from 11.4%. Full year 2018 estimates stand pat at 11.10%.


The Dollar Index

The Dollar Index held steady in today's session, posting a marginal gain of 0.03%. The index created a small doji candle just above potential support and may be setting up for a bounce higher. The indicators are pointing lower in the near term but divergence with the recent low suggest support levels are near.

This week may prove pivotal for the index and the EUR/USD. Between the EU data and the FOMC minutes chances for the euro and/or the dollar to strengthen/weaken are very great, a move in one could undermine moves in another. A bounce from the current level would be bullish but face resistance near $94. First target for support is at the current low near $93.60.


The Gold Index

Gold prices fell back from last week's high on reduced safe haven inflows but the fall was not great. Spot gold fell a little more than a half percent intraday to trade near $1285. Prices are underpinned by dollar weakness and low expectations for interest rate hikes over the next 9 months. This may change with the minutes, or with EU data, and should the dollar fall below current support levels gold is likely to rise back test resistance again. A further drop could find support near $1,280 or $1,270, resistance is just above $1,290.

The Gold Miners ETF GDX continues to trade within near and short term trading ranges and below the down sloping resistance line. Today's candle helps confirms resistance at the trend line but also support at the short term moving average. The indicators are bullish and suggesting some strength as prices are pushed higher by the short term moving average. A move up and above the down sloping resistance line would be bullish with upside targets near $24 and $25.


The Oil Index

Oil prices fell more than -2.5% in today's action as US production and global demand woes persist. The China data for one was taken as a sign of tepid demand growth although I will point out again that while it missed expectations all data points showed respectable increases. Regardless, WTI shed $1.25 to trade near $47.50 and looks like is heading lower to test for support levels. $47.50 is a possible level of support but $45 looks more likely.

The Oil Index fell through the 1,120 support level and looks like it is heading down to test for stronger support. Today's move is driven by the near term decline in oil prices and likely to find support near the recent low in the range of 1,080 to 1,100. Without news to support it oil prices are likely to continue falling in the near term. Longer term I remain bullish due to forward earnings growth outlook, the next test to long term and/or strong support is the next opportunity for the index to confirm that outlook with a bottom.


In The News, Story Stocks and Earnings

This week will be another big one for earnings, this time it will be the retail sector in the spotlight. If last week's results are any indication I think we can expect to see declining revenue and declining earnings for many in the sector, especially if they don't have adequate web presence. The stand outs are Wal Mart, Home Depot and Target all due out later in the week. The XRT Retail Sector SPDR gained in today's session but sellers dominated action. The ETF opened with a small gain and then sold off throughout the day created a red bodied candle moving lower from resistance. The indicators are bearish and pointing lower with a downside target near $38.75 in the near term.


Sysco, the nations largest purveyor to restaurants of all variety, announced earnings this morning and delivered lukewarm results. The company beat on the top and bottom lines with revenue growth of 5.5% YOY but internals left a lot to be desired. The US portion of business, which is more than 75% of revenue, declined more than 3% YOY despite a rise in comp sales. Offsetting US weakness was an 80.5% increase in International sales, about 25% of business, but not enough to inspire bullish behavior. Shares of the stock opened with a gain near 0.5% to sell off and close with a loss near -0.5% after testing lows near -1.5%.


The VIX fell more than -20% today as fear leaves the market. The SPX swift rise coupled with risk-off sentiment helped the fear index shed 3 handles to trade just above 12.50. The indicators remain bullish but show signs of topping and downward movement in the near term. Down side target is near 11.50 and the long term moving average with a chance of moving lower. The risk is that North Korea will flare up again and drive fear back up to test resistance.


The Indices

The indices were indicated to rise and rise they did. Today's move was led by the Dow Jones Transportation Average which gained more than 1.60% by the close. The index created a medium sized green candle moving up from the long term moving average, confirming support and trend along the way. The move closed above resistance at 9,300 and looks like it will continue higher in the near term. The indicators confirm this move with a strong trend following buy signal that could lead the index higher over the next several months. First upside target is resistance at 9,500, after that is the current all time high.


The NASDAQ Composite posted the 2nd largest gain at just over 1.30%. Today's candle is a small green one formed with a 0.5% gap up so basically a medium sized candle. It is moving up from the short term moving average confirming support and trend. The indicators are rolling over into what could be a trend following buy signal but has not yet confirmed; stochastic is making a weak crossover but MACD remains bearish. A move up would face resistance at the current all time high.


The S&P 500 comes in 3rd today with a gain just shy of 1%. Today's candle is medium and green, moving up to, crossing and closing above the short term moving average. The move is bullish and confirms trend although the indicators remain weak. MACD at least is peaking in confirmation of the bounce, stochastic is still moving lower suggesting the bounce may not be all that strong. Regardless, the move is trend following with target at the current all time high. Should the index resume the near term down slide support target is just above 2,400.


The Dow Jones Industrials closed with the smallest gains but gains it made, 0.61%. The blue chips created a small bodied green candle moving up from Friday's close and near term support above the short term moving average. Today's move is bullish and trend following but the indicators do not confirm. Both MACD and stochastic are pointing lower suggesting today's move is not all that it appears to be. A move up may find resistance at the all time high, a move lower may find support at the short term moving average.


Today's action was bullish, trend following and obvious dip buying. The caveat is that the North Korea situation is still there, we're approaching the end of the earnings season and next quarters growth outlook is tepid compared with this quarters final result. Additionally, this week is earnings from the retail sector and the expectations aren't that great not to mention all the data coming out of the EU. It's also OPEX which could, especially in light of last week's sell off, add additional volatility. I remain bullish in the long term, economic and earnings fundamentals demand it, but near to short term there is some risk so I am cautious.

Until then, remember the trend!

Thomas Hughes