Introduction

Global markets moved higher in anticipation of this month's FOMC meeting. There is little to no expectation for a rate hike but considerable expectation the committee will signal the beginning of balance sheet reduction. Looking at the CME's Fed Watch Tool there is a bigger chance of a rate reduction than a hike, about 1.5%. There is also some expectation for comments on forward rate hike timing, the state of the economy and/or longer term outlook for inflation. Needless to say there is a great chance for moves in the dollar and equities markets.

International markets moved higher in the Monday session. Gains were not big but were broad across regions and sectors. In Asia the mainland Chinese Hang Seng index led with a gain near 1.25% while in Europe gains were in the range of 0.3% to 0.6%.

Market Statistics

Futures trading indicated a positive open all morning although bullish optimism moderated into the opening bell. There were no noteworthy earnings releases or economic reports to affect early trading. The open was a bit on the busy side. The indices opened with small gains and then extended those to near 0.35% within the first 30 minutes of trading. This peak turned out to be intraday high for the broad market which spent the remainder of the day trending sideways at that high. Which by the way is a new all time high.

Economic Calendar

The Economy

While there were no economic reports in the early hours there was one release after the open of trading. The NAHB Home Builder Sentiment Index came in at 64 for the preliminary September reading, down -0.3% from last month's revised 67. This reading is at the low end of the 12 month range. Within the report the current index came in at 70 and the future outlook index at 73 while the traffic of buyers index came in at a miserable 47.


Moody's Survey of Business Confidence came in at 30.7 this week, up 0.2% from last week. Mr. Zandi describes this as “snapped back...” but I don't really see that. Regardless, the reading remains strong and steady for the year. Sentiment in the US is the strongest as it has been while that in South American is weakest and consistent with an economy that is barely growing.


Earnings estimates for the 3rd quarter continue to decline. Third quarter earnings growth for the S&P 500 is now expected to be 4.5%, down -0.4% from last week. Eight of the 11 S&P sectors are expected to show earnings growth, led by Energy, while 10 of those 11 sectors have had their outlooks reduced since the beginning of the quarter. In terms of price to earnings the forward P/E continues to rise, is at a long term high and well above the 3 and 5 year averages.


Looking out to the longer term growth is still in the forecast but it too is getting downgraded. Fourth quarter 2017 is projected at 11.2% with full year 2017 at 9.6%. Full year 2018 is still expected to see double digit growth but now only 10.9%. The first and second quarter of 2018 are only expected to post growth in the range of 10.2% which means we can expect to see growth expand into the end of the year.


There is a bit of economic data this week aside from the Fed. Topping the list is a bundle of housing data including starts, permits and existing home sales. Thursday is the Philly Fed Manufacturing Business Outlook Survey and Leading Indicators, then on Friday Markitt's Flash PMI for manufacturing and services.

The Dollar Index

The Dollar Index held steady in today's trade, gaining about 0.20% in a move creating a small green candle. Today's action is sideways from Friday and within the near term consolidation range, just above long term support. The index is trading near long terms on a decline in forward FOMC outlook that may have hit bottom. With the committee expected to indicate the onset of balance sheet reduction and/or give hints to inflation/rate hike outlook anything short of dovishness is likely to put a bid into the dollar. A bounce from this level would be bullish but may only indicate the beginning of sideways trading within a range. First target for resistance is near $92.70 and then $93.50. Support is near $91.00 and the long term low, a break below which would be trend following and bearish.


The Gold Index

Gold prices fell a little more than -1.0% on rising dollar and lack of geopolitical catalyst. Spot price is now hovering around $1,310 with eyes on the Fed. If the meeting is net dovish and the dollar falls gold could easily rise to retest recent highs. If the meeting is net hawkish then a break below $1,300 comes into play.

The Gold Miners ETF GDX fell about -1.75% in response to the weakness in gold prices. The ETF created a small gap lower, opening at the short term moving average and falling from there. The move appears to be bearish with the caveat gold prices could swing the other way very easily. The indicators are moving lower following bearish crossovers and consistent with lower prices. Longer term the ETF is in a trading range and likely moving lower to retest support within that range. First target was the short term moving average but that has already been exceeded, next target is the long term moving average near the $23 level.


The Oil Index

Oil prices were a little volatile today. The price of WTI flirted with $50 in early trading then fell about -1% only to claw its way back to break even and above $50 by settlement time. The move is driven by demand buying in the post-storm clean-up period along with last week's fall in rig counts and some hope of OPEC extending the production cap. There may still be resistance at $50 but it looks like prices are going to test it in the least. A firm move above $50 will be bullish with upside target near $55.

The Oil Index gained a little more than 0.30% and broke out to a new 4 month high. The index is moving higher in tandem with rising oil prices and supported long term by forward earnings growth outlook. Today's move is highly encouraging for the energy bulls but does not yet signal full correction. A firm move higher with a retest of support, or a test of support and firm break of resistance, would do the trick. Until then I am bullish but still very cautious.


In The News, Story Stocks and Earnings

Banking stocks were among today's leaders. Increasing yield in the 10 year treasury and a steepening of the yield curve bode well for profitability. The SPDR Banking ETF KBE and Financial Sector ETF XLF were both up more than 1% in today's session, led by the banks. The KBE is moving up off the short term moving average and looks like it will easily test the current all time high near $25.50. Today's move confirms continuation of the move begun 2 Friday's ago with the bounce from the long term moving average. Near term projection is equal to the distance between the two moving averages, $0.70, or $25.40. The indicators are both moving higher after trend following bullish crossovers and support such a move.


Caterpillar was upgraded to a buy this morning by UBS. The analysts say the earnings upcycle will continue to drive cash and returns for investors. They also say the current cash position is under appreciated. Shares of the stock gapped up by 2% and set a new all time high.


The VIX fell another -0.5% to set a one month low below my 10.25 support target. The fear index appears to be subsiding to recent lows consistent with the S&P 500's rise to new highs. The indicators are consistent with a move lower, downside targets are 9.50 and 8.80.


The Indices

Today's action was mostly bullish and resulted in new all time highs for most major indices. One exception is the Dow Jones Transportation Average which lost -0.33% and created a medium sized red candle. The transports appear to be consolidating above a new support level so today's move is not too concerning. The indicators are consistent with this showing some near term weakness and should be watched. Near term support is near 9,500, a drop below which could go as low as the short term moving average at 9,360. A move higher would be bullish and trend following with upside target near the current all time high.


The days biggest gainer is the Dow Jones Industrial Average with a gain near 0.25%. The blue chips created a small green bodied candle and set another new all time high. The index is continuing a trend following bounce and looks like it will go higher. The indicators continue to rise in support of this move with stochastic showing strength with a bullish cross of the upper signal line. Upside target is in the range of 22,500 to 22,600 in the near term.


The S&P 500 made the 2nd largest gain, 0.17%, and created a small doji candle. The index is moving higher following a trend following bounce of the short term moving average and looks like it could go higher. The indicators are bullish in support of this move with only a slight down tick in stochastic %K to indicate any kind of weakness. Upside target is 2,550.


The NASDAQ Composite made the smallest gain, just under 0.10%. The tech heavy index created a small to medium sized doji candle setting a new all time intraday high but not a closing high. The indicators are bullish and in support of a break to new highs with the caveat that MACD momentum is showing a bit of weakening. A fall from this level may find near term support at 6,400 or just below that near the short term moving average. A move higher would be trend following and bullish with targets near 6,700.


The charts continue to look bullish and price action continues to confirm. The caution for today is that action is still light and the FOMC meeting is this week. That being said I remain bullish for the near and long term. The FOMC may induce volatility with their statement or their actions but the bottomline remains this; economic and earnings trends are positive and the outlook for both is positive so there is little reason to fear major correction or reversal at this time. A dip, particularly going into earnings season, would be another buying opportunity in my opinion. Until then I remain bullish for the near and long term.

Until then, remember the trend!

Thomas Hughes