Introduction

The FOMC has indicated a December hike likely and the market quietly accepted the news. There was some mild intraday volatility but nothing to write home about, the market is treading water near its all time highs and the outlook is good. Today's economic data was positive and in support of expanding growth, reinforcing the idea of a December hike and the possibility GDP could expand above 3%.

International markets were quiet as well. In Asia eyes were on the BOJ which decided to hold rates steady and gave no indication of future policy action. Indices in the region were flat on the day with China closing with small losses and Japan with small gains. European indices were also flat but mostly in the green. Shares were supported by positive economic outlook and the possibility of a weaker euro.

Market Statistics

Futures trading was calm and quiet indicating little to no change at the open. There was a little movement with the release of data but not substantial, the open was however a little more active. Selling hit the market with the opening bell and drove the broad market down by about 8 points or -0.30%. This brought the SPX down to just below 2,500 where it created a neat little double bottom ad bounced back to near break even. It proceed to trend sideways near the high of the day until mid afternoon when prices dipped to test support, confirmed and bounce back to close near the middle of the days range.

Economic Calendar

The Economy

Jobless claims are already showing improvement following the two hurricanes. Initial claims fell -23,000 on top of a downward revision of -2,000 to hit 259,000. This level is still elevated but down substantially from a few weeks ago and well on the way to returning to more normalized levels. The four week moving average gained 6,000 to hit 268,750 and is at a +1 year high. Looking at the numbers I expect the average to begin falling next week. On a not adjusted basis claims rose by 0.006% versus an expected 8.8% and are up 3.2% over last year. Claims will likely remain elevated for another week or two but look like the surge won't last much longer than that, barring another storm of course.


Continuing claims rose by 44,000 and are now showing effect of hurricane related job loss. That being said the impact of 2nd week filers appears to be muted compared to that of initial claim filers indicative of employees getting back to work. The previous week's figure was revised down by -8,000, the four week moving average rose by 6,500 to hit 1.953. All in all this figure is showing an increase but not a very significant one, and one that will likely subside very soon.

The total number of claims has not yet been affected by the storm data, that will come next week. This week's data shows a continuation of near term and long term trends, falling by -114,202 and better than expected. This figure shows further improvement within the labor market, not much more to say about it than that.


The Philly Fed Manufacturing Business Outlook Survey shows a broadening of growth within the sector and region. And also an increase in pricing pressure. The activity index increased by 5 points to 23.8 while the future outlook index gained nearly 13 points to approach the all time high. The activity index has been positive for 14 months showing sustained expansion within the sector. The new orders index rose by 9, the shipments index by 8 and both the delivery and unfilled orders indices remained positive indicative of growing back log. Employment fell slightly but remains positive and expansionary.


The Index of Leading Indicators confirms growth and the possibility of expansion within the economy. The index rose by 0.4% in August and has been positive for 13 months. Economists at the Conference Board say the index is pointing to continued growth that may even have a moderate pick up. Tomorrow's data is Flash PMI for both the manufacturing and services sectors.


The Dollar Index

The Dollar Index gave up some of its gains in today's trade. While the dollar made advancements against the yen, hitting a two month high, it fell against the euro which is also expected to receive support from its central bank. The FOMC statement was bullish for the dollar but not really more than expected with the caveat that expected ECB action will continue to erode strength in the dollar. Looking back to yesterday's statement and press conference I thought it was scary when they said they don't know why inflation is running so low, sounds like they aren't really in control. Considering the data and in particular the indications of growth given by the Leading Indicators I'll not be surprised when we see inflation begin to spike. For now it looks like the DXY may remain within the near term range, near long term lows, between $91 and $92.50.


The Gold Index

The reaction in gold to the FOMC meeting was more decisive. Firming forward rate hike expectations sent the metal crashing to support at $1,300 and through it to trade near $1,290. Now that gold has broken support there is risk it will fall further with possible targets as low as $1,250 with nearer targets at $1,280 and $1,265. That being said there is still support from safe haven seekers and a chance the dollar will not be able to strengthen substantially.

The Gold Miners ETF GDX fell nearly -2% to hit support at the long term moving average. Today's action created a gap lower that was met by buyers and forming a green bodied candle. Support is now at the long term moving average, a break below which would be bearish. The indicators are bearish, pointing lower and gaining strength suggesting that support will at the least be tested further. A break below the moving average would have targets near $22.50, $22 and $21. A bounce from the moving average would confirm support but face resistance at $24 and $25. Longer term it looks like the ETF will remain range bound.


The Oil Index

Oil prices pulled back from yesterday's highs but remains above $50. The price is supported by hopes OPEC will give signs of extending the production cut tomorrow at their Vienna meeting, it is being weighed down by US and global production levels. US production is now reported to have regained pre-Harvey levels and there are no major disruptions in global supply. Without OPEC I see little reason for prices to move higher save a possible pick up in demand as economic expansion continues.

The XOI continues to move higher, supported by rising oil prices and forward earnings outlook. The index gained a half percent today and set a new 5 month high. I think I can safely say now that the sector has fully reversed. I don't know that it's time to add to positions right now, but future dips and tests of support will be buying opportunities. Next target for resistance is near 1,200, first target for support is near 1,160.


In The News, Story Stocks and Earnings

Google announced plans to expand on its smartphone business. The Internet behemoth is purchasing portions of HTC's business including employees and teams working on the Pixel smartphone. The deal is worth $1.1 billion and does not include an equity stake in HTC which will continue with its other operations pending a possible IPO(?). In the statement Google said it was investing for the long run. Shares of Google gained about 0.40% and confirmed support at the short term moving average. The stock is consolidating above long term support with indicators showing bullish crossovers and looks like it will move higher.


Micron reports after the bell tomorrow. The company is expected to post strong earnings driven by double digit growth in DRAM chips that is not expected to abate until 2019. Today the stock traded in a tight range just shy of the 3 year high. Price action is bullish over the short term and supported by the indicators. Nearer term it is in consolidation at recent highs with the possibility of extending the run higher. A beat on earnings with positive outlook could drive the move. Upside target would be near $42.


The VIX shed another half percent to close below 10. The index created a small doji candle testing resistance at the 10 level and confirming for the 2nd day in a row. The indicators are bearish, pointing lower and gaining strength suggesting the index will continue to fall. Downside target is near recent and long term lows in the vicinity of 8.90. This action is consistent with a calm market and bullish conditions if not a rise in the corresponding SPX.


The Indices

Today's action was largely to the downside but only marginally and not indicative of imminent doom. The indices are quietly churning at their highs, calmly processing yesterday's FOMC announcement and preparing for the onset of peak earnings season. The Dow Jones Transportation Average led with a small gain, about 0.15%, and set a new high. This is a new two month high and supported by the indicators so a move up to test the all time high looks likely. A break to new all time highs would be trend following and bullish.


The tech heavy NASDAQ Composite made the largest decline, about -0.50%, in a small test of support at the short term moving average. The indicators are bullish but rolling over, consistent with the near term top and suggestive that support will be tested and/or a consolidation range has been reached. Support is just below the 2,400 level near the the short term moving average, a break below there would be bearish in the near term with target near 6,250. A bounce would be bullish and trend following with upside target in new all time high territory.


The SPX closed with a loss of -0.30%. The broad market created a small red bodied candle just under the all time high and completely within yesterday's candle. The index appears to have crested a near term top and the indicators are in support. Near term support is at 2,500 for now. If it moves lower next support is likely to found at the short term moving average 2476, or -1%. A bounce from either level would be trend following and bullish.


The Dow Jones Industrial Average created a small bodied red candle closing at the low of the day and posting a loss of -0.23%. Today's action created a new all time high at the open that was met by light profit taking. The indicators remain bullish although they do show a little weakening in the near term. Without major resistance it is possible this index could continue to drift higher in the near term. If not, support is near 22,200.


The indices have broken to new highs and are now consolidating at those highs. The FOMC meeting confirmed forward economic outlook, as did today's data, and that outlook has been dimmed a bit in terms of long running inflation expectations. This adds up to economic growth, earnings growth, low inflation and ultimately low interest rates regardless of a hike or two. I am still firmly bullish for the long term. In the near term I am cautiously and selectively bullish, watching the rotation and waiting for earnings season.

Until then, remember the trend!

Thomas Hughes