Introduction

Hurricane now Tropical Storm Irma is doing her best, clean up time starts tomorrow. If you are reading this it means I didn't lose power, yet. Asheville, NC is not directly in the line of fire but definitely close enough to experience strong winds and heavy rains.

Today's trading was dominated by news coming out of Florida and Georgia as market watchers try to handicap the damages and their effect on the economy. JP Morgan says Irma is a top 5 costly storm, Moody's says the combined costs of Harvey and Irma will top $200 billion. Oh, and the S&P 500 closed at a new all time high.

In Remembrance of September 11

International markets were also able to move higher. Asian indices moved higher on a stronger dollar and slightly relaxed trading rules for the yuan. The PBC says it is planning on removing requirements for foreign-exchange risk reserves freeing up capital for the system. In Europe indices moved higher on a weaker dollar and no flare-ups on the Korean peninsula as well as support from US market action. Indices in both Asia and Europe gained more than 1%.

Market Statistics

Futures trading was positive all morning as relief over Hurricane Irma began to creep into the market. Yes, there is a lot of damage but its a lot better than it could have been, considering the size, strength and affected area. There was no economic data this morning and no earnings reports to affect sentiment so trading was steady going into the open. At the open the indices posted gains in the range of 0.5% and extended that to more than 1% by early afternoon.

Economic Calendar

The Economy

No data today and not a whole lot this week although a few key releases are scheduled. The most important are probably the PPI and CPI. Both are expected to rise a modest amount, 0.2% and 0.3%, but not enough to alter the FOMC outlook. After that retail sales on Friday may move the market if it provides a substantial surprise.

Moody's weekly Survey of Business Confidence fell a surprising -2.3% to 30.5. This is just off the lowest reads of the year and a bit of a surprise. Mr. Zandi comments that one-off declines like this have happened other times this year with sentiment recovering in the following weeks. He also notes that declines are mostly outside the US and that business is, in general, upbeat. Looking at the chart, to my eye there is a definite down trend in near term sentiment that needs to be watched. A continued decline could signal trouble.


The earnings cycle is about to get started again although we are at least a month away from the next “season”. Based on the latest reports earnings outlook for the 3rd quarter has fallen to a new low while forward and full year outlook have improved. The S&P 500 is now expected to post earnings growth of 4.9% for the third quarter. This is down from near 7.5% at the start of the quarter. Eight of the 11 S&P sectors are expected to show growth although 9 of the 11 have been revised lower over the past month. If the season unfolds according to trend we can expect to see the final rate come in closer to 10%.


Looking forward 4th quarter estimates have risen to 10.4% which helped lift full year outlook to growth of 5.6%. Looking out to next year expectations remain robust with double digit growth expected all year. First quarter estimates is near 10.5%, second quarter near 10.25%.


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The Dollar Index

The dollar got a lift on a double dose of good news, albeit sentiment driven and likely short term in effect. On the one hand North Korea did not fire anymore missiles this weekend and on the other damage from Irma is much less than feared. This combination helped lift the dollar versus the Euro and Yen, resulting in a 0.45% gain in the Dollar Index. The index created a medium sized green candle and may continue higher in the near. The risk is that the index is in a marked down trend and facing not one but two reads on inflation that could further weaken rate hike expectations. The index faces resistance at $92 and $92.50 that could turn into bearish entry points.


The Gold Index

The price of gold fell in tandem with the dollar's rise, shedding more than -1.20% by settlement time. Today's move is a fall from resistance at $1,250 but resistance is likely tested again. Sentiment has a lot to do with the decline and will likely (could easily) shift again in the coming days. For one thing North Korean didn't just give up their missile testing fun, they'll be back. For another the PPI/CPI is not expected to support the dollar which will in turn help support gold.

The Gold Miners ETF GDX fell -2.5% on the fall in gold, roughly halving the distance between Friday's close and the short term moving average. The ETF appears to have peaked near the top of the long term trading range with a chance of moving lower. Today's action is supported by the indicators which are consistent with the top of the range. A move down to the short term moving average, near $23.75, would equal a -10% correction in the ETF following a near 20% increase. The risk is that CPI and PPI data could alter this outlook, also that North Korea will launch another missile.


The Oil Index

Oil prices rose more than 1.20% in today's session as clean up from the two hurricanes gets underway and OPEC begins talking up prices again. The latest news is that three top OPEC producers are talking about extending the production caps. Whether or not they go through with it, it is likely this talk will help support the market. Up to and until an extension happens or WTI is trading at resistance levels. WTI is now trading at $48 with resistance target near $50. Longer term fundamentals remain skewed toward the supply side.

The Oil Index gained a little more than 0.75% to create a medium sized green candle. This candle is moving up from support levels above the short term moving average and supported by the indicators. The index appears to be consolidating above resistance turned support with an eye on testing resistance at the long term moving average. A break above this level, near 1,140, would be bullish and possibly indicate the reversal I've been anticipation is in process. Next target for resistance is near 1,160, support is 1,120 near term.


In The News, Story Stocks and Earnings

Insurers across the property and casualty space rose in response to Irma's passing. The major catalyst was a downgrade of damage estimates from $200 billion to only $50 billion by a major disaster modeling firm. According to their statement the damage could be far less even than $50 billion. Universal Insurance has the largest exposure to Florida and posted the largest gain in today's trading, more than 16%. The move did not close the gap formed last week with Irma's approach.


Home Depot and Lowes gave up some of their pre-Irma gains but are still up on expected revenue gains driven by the storm and Hurricane Harvey. Home Depot shed about -1% in a move that confirms near term support as well as long term resistance. Long term resistance is at the all time high, near term support is just below that near $158. The indicators are bullish and showing some strength so I would expect to see the stock test the all time high again, at least.


The VIX fell more than -10% to approach potential support at the $10 level. Today's candle is medium and red with a visible lower shadow suggesting that there is some support present at or near $10. The indicators are mixed at best and indicative of directionless trading and range bound markets. A move to $10 looks likely, beyond that is dependent on news. Considering it is still several weeks before earnings or the next round of macro data, and that there is an FOMC meeting between now and then, the VIX may remain elevated in the near term.


The Indices

Today's trading is brought to you by the number 1, as in the market moved higher by 1%. Action was light in volume but broad in nature with advancers outnumbering decliners by roughly 4 to 1. The days leader is the Dow Jones Industrial Average with a gain near 1.15%. The blue chips created a medium sized green bodied candle moving up off the short term moving average and crossing above the long term up trend line. The indicators are still a bit mixed but consistent with support at this level and in the early stages of a strong trend following signal. MACD is making a zero line crossover today, stochastic is set up to confirm but has yet to do so. Upside target is in new all time high territory, near 22,250 and 22,500.


The NASDAQ Composite made the 2nd largest gain, 1.13%, and came within spitting distance of a new all time high. The tech heavy index created a medium size green candle moving up from support near the short term moving average and looks like it will test the all time high. The indicators are a little mixed but set up and rolling into a trend following signal. The risk at this time is resistance at the all time high. A break above that level would be bullish with upside target near 6,600 in the near term.


The S&P 500 closed with the largest gain today, 1.08%, and set a new all time closing high. The indicators are mixed but like with the Dow and NASDAQ set up for a strong trend following entry signal. Today's resistance is the current all time intraday high, a break above which would be bullish.


The Dow Jones Transportation Average closed with a gain of 1.06%. The transports created a medium sized green candle extending the break above resistance and bounce from the short term moving average. The indicators are both bullish and moving higher, and both showing some strength; MACD is on the rise and hitting a new peak today, stochastic is moving higher and crossing above the upper signal line. There may be resistance at 9,500, a break above there would be bullish at the current all time high.


When I was organizing my thoughts to write tonight's conclusion I had one that ran like this. I'm a market watcher, I've been watching the market a long time, I watch for a very specific signal and that signal is here. . . If I'm not bullish now what am I doing?

This is what I am seeing in the charts. The indices suffered a small correction in the past month that resulted in a test of support. This support is, in most cases, a combination of short and long term moving averages and trend lines that combine to form strong and what could be called key support. The indices have consolidated along those support levels and begun to move higher. The indicators have confirmed these moves with not one, but multiple trend following entry signal and are now setting up to confirm again. I could be wrong but it would be more wrong not to follow the signal as I see it. I am bullish.

Until then, remember the trend!

Thomas Hughes