Introduction

Texas and the heartland of American energy infrastructure are underwater in the wake of Hurricane Harvey. The estimates are already coming in, damage is expected to be in the billions. Analysts are now trying to puzzle out the long-ranging effects of the damage and subsequent recovery effort. Markets held fairly steady as the news rolled in, later in the week action may pick up with the releases of ADP and NFP unemployment reports, personal income data and the PCE inflation figure.

International markets were mixed as traders eyed the storm and the euro. The storm is expected to upset economics in the near term, how long is still TBD. The euro got a boost from last week's double dose of speeches from Mario Draghi and Janet Yellen; the two between them have reestablished the euro's uptrend against the dollar. On the FOMC front forward outlook has softened from hawkish extremes seen earlier in the year, on the ECB front forward outlook has strengthened to the point tightening is expected some time in the near future. Asian indics were more flat than not although the Shanghai composite gained nearly a full percent. European indices closed decidedly lower although losses were minimal.

Market Statistics

Action was very light today. The indices held within a very narrow range at and just below break even although bias was to the downside. The indices opened with small gains and then slowly ratcheted lower throughout the day. Bottom was hit just after 12:30 but the bounce was not large. Afternoon trading saw the indices move sideways near the low of the day and hold those levels until just before the close. A late day rally recouped some but not all of the day's losses leaving the indices near break even.

Economic Calendar

The Economy

Not much data today, just the latest trade balance figures. According to the BEA the June trade deficit edged down more than -5.5% to $43.6 billion. This is due to a decrease in the goods deficit and an increase in the services surplus. On a year over year basis the deficit is up more than 10.5%.

Moody's Survey of Business Confidence fell -0.1% giving up the gains it made last week. The index is now sitting at 32.0 and near the 2 month high. Mr. Zandi says business confidence is strong and unwavering as it has been since the elections last year. The US and Asia are strongest, South America is weakest.


Nearly 100% of the S&P 500 has reported earnings. The final rate of earnings growth stands pat at 10.2%. Looking forward the 3rd quarter is expected to see growth in the range of 5%, the 4th in the range of 11%. If the averages hold up and the final rates of growth for each of the next 2 quarters rises @4% between now and the end of the respective reporting seasons we can expect to see growth in the range of 9% to 10% for the 3rd quarter and 14% to 15% for the 4th. The caveat is the forward outlook has been deteriorating, the 3rd quarter projection should not fall too much further but the 4th quarter projection could fall as much as 20% to 40% by the end of the 3rd quarter reporting season, if trend remains intact.


Next year is still expected to be strong with growth in the range of 11% to 12%. This outlook may decline as we enter the period as has been the trend over the past couple of years. Regardless, outlook if positive and expecting robust growth throughout 2018.


The Dollar Index

The Dollar Index fell a little more than -0.50% in today's session, extending the loss it posted on Friday. The index has broken below support in line with the prevailing trend and looks like it is heading lower. The move is being driven by a rebalancing of central bank outlook; the FOMC outlook is hawkish but less hawkish than before while the ECB outlook is reversing from dovish to hawkish, bringing the two back into convergence. Support may be found near $92 and the 15 month low, a break below that will be bearish.


The Gold Index

Gold prices have shot higher, breaking through the $1300 level and resistance at $1305. The move is driven by a weakening dollar and supported by last week's central banker comments. Gold is now trading just below the 12 month high near $1318 and looking bullish. There may be resistance at $1318/$1320 so caution is still warranted, a break above this level could take the metal up to test long term highs near $1375. Risk is of course the possibility of strengthening US data which would bring rate hikes back to the forefront.

The Gold Miners ETF has responded in kind. The ETF gained more than 3.2% in today's action creating a medium sized green candle. The move has broken potential resistance at $24 and looks like it will continue higher. The indicators are bullish and pointing higher in support of higher prices with the caveat they remain within a well established long term trading range. Next target is near $24.70 and the 38.2% retracement level, if that is broken prices may move up to $26 and to the top of the trading range.


The Oil Index

Oil prices fell nearly -3% as Hurricane Harvey shuts down a large portion of US drilling and refining capacity. While bearish in the near term the storm could help alleviate some of the over supply issue. The rest of the country is still using gas, diesel and oil products even if Texas isn't making any. When refineries come back on line there will be demand to rebuild stores of distilled products.

The Oil Index fell fell a little more than -0.35% creating a small red candle. Today's move confirms resistance at the long term moving average but not in a major way, not yet at least. The indicators are pointing higher and suggest that resistance will be tested again, perhaps with a move up to touch the moving average near 1112.75. If resistance holds and the index moves lower in line with the prevailing trend support target is near 1,080. A break above the moving average would be bullish but face resistance just above near 1,120.


In The News, Story Stocks and Earnings

Amazon was in the news today, imagine that. The company closed on its deal to purchase Whole Foods Market and is already making moves to integrate the business into the greater Amazon ecosystem. They are already lowering prices and have begun to display the Echo device in Whole Foods stores. Morgan Stanley reiterated its overweight rating with a price target of $1,150 commenting on the companies ability to operate at razor thin margins and its power to extend those benefits to Whole Foods. Shares of AMZN gained marginally on the news, sitting just above long term support.


Shares of Kroger held firm in today's session although many in the food/grocery space did not. Sprouts Farmers Market was about the worst, falling nearly -10% on the news. The chain is one of the fastest growing in the all-natural segment and has been posting double digit quarterly growth for at least 3 years. Today's move brings prices below $20 and approaching the all time low.


The VIX moved higher in today's session but the gain was minimal and the candle is red. Today's move started with a gap higher and then sold off during the day to break support at 11.50. The candle is medium sized and confirms resistance at the short and long term moving averages. The indicators are bearish and moving lower indicative of lower prices. Now that support is broken, or appears to be breaking, next downside target is near 10. A move lower would be consistent with rally but may not mean new all time highs are on the way.


The Indices

The indices held steady in today's action, volumes were low and ranges were small for the most part. Today's leader was the NASDAQ Composite with a gain of 0.27%. The index created a small doji candle sitting just beneath the long term moving average and appears to be setting up for a trend following move higher. The indicators are still mixed but set up for such an occurrence. Stochastic is strongest in its show of support and is firing a strong trend following signal, MACD is rolling over and may confirm this move in a day or two. A break above the moving average will be bullish with upside target at the current all time high. A failure to break above resistance could result in a move down to the long term up trend line near 6,200.


The Dow Jones Transportation Average posted the 2nd largest gain, 0.25%. The transports created a small doji candle just below the long term moving average and are giving a mixed signal. Price action suggests support at this level, and support along the long term uptrend line. The indicators are mixed but suggest support is at this level through unconfirmed divergence. A bounce from the trend line near 9,100 would confirm the long term up trend, a break below it could take the index down to next support at 8,750.


The S&P 500 made the smallest gain, a mere 0.04%, but closed in the green nonetheless. The index did however create a small red-bodied doji-like candle just beneath the short term moving average, the result of gapping up at the open and then selling off intraday. Today's move is promising in that it shows resilience in the market but alarming in that it is halted by resistance. The indicators are mixed but rolling into a trend following signal, stochastic has already confirmed with a strong bullish crossover it's MACD that is lagging. A break above the moving average would be bullish and trend following with upside target near the current all time high. A fall from the moving average would be bearish near term with targets near 2440 and 2380.


The Dow Jones Industrial Average posted the only loss in today's session, -0.02%. The blue chips created a small red bodied doji like candle just beneath the resistance of a long term up trend line and the short term moving average. Today's move is the 4th day in a row of trading at such levels and beginning to look like consolidation within a near term down trend. The indicators are mixed so no clear indication is given but they are generally consistent with early stages of a trend following signal. That being said, the signal is unconfirmed and momentum is still bearish, an extension of near term downward movement is not out of the question. A fall from the moving average would be bearish with downside target near 21,100.


The market remains mixed. Today's action is, like I said, promising in that the market showed some resilience but also alarming in that prices are consistently below important moving averages and key resistance levels. I remain firmly bullish for the long term but the near term is still very questionable, I am cautiously bearish. There are lots of reasons for the market to rise long term, earnings + economics are 2, but very few in the near term. We're between earnings cycles, outlook is diminished, oil prices are under pressure and now there is a shadow of economic doubt related to the hurricane. And now, even more pressing, is news that North Korea fired another missile thumbing its nose to the West.

Until then, remember the trend!

Thomas Hughes