Introduction

The Trump Tax Plan was unveiled today and the market liked it. It's still a little sketchy on some details but there are a lot more specifics than we've seen in the past. On the corporate side the tax rate would be lowered to 20%, a bit higher than the 15% target Trump set during the campaign but a much more reachable one. On the individual side the number of tax brackets will be reduced to 3 from 7 with a provision for a 4th higher bracket should the final negotiations require it. A number of tax credits will be removed but offset with a higher standard deduction and increased Child Tax Credit.

Asian markets were cautious following Janet Yellen's comments of yesterday and ahead of anticipated tax plan news today. Most indices made small moves, less than a half percent. The Nikkei fell -0.31% despite a sharp drop in the yen versus the dollar while indices in China moved higher. European markets were mostly higher in early trading and extended those gains a bit before the close. The DAX led with a gain of +0.41%, followed by a 0.40% gain in the FTSE.

Market Statistics

Futures trading was flat to mildly positive in the early hours and then strengthened a bit going into the open as leaked tax plan information made its way through the market. The SPX opened with a gain of 0.20% and then quickly extended that to 0.40%. The initial surge higher tapered off over the course of the morning giving up some but not all of the early gains. The middle part of the day saw the index trend sideways and slowly build a base from which to move higher. By 1PM it was up off the lows and by 2PM it had started to rally. By 2:30PM it was at the highs of the day and setting a new all time high.

Economic Calendar

The Economy

Pre-opening action was affected by Durable Goods orders. The headline 1.7% is about twice expectations and driven by transportation and core capital goods. The x-trans figure is 0.2%, in line with expectations, while the x-defense figure is 2.2% and the core figure is 0.9%. Core capital goods, at 0.9%, is well above expectations of 0.3%. Shipments gained 0.7%.

Pending Home Sales data was released at 10AM and is not good. Pending sales fell -2.6% versus expectations for a gain. Sales are unchanged from a year ago but forecast to fall below last years levels by the end of the year. The driving problem is a lack of new homes which itself is in turn driven by a lack of buildable land close to major metropolitan areas.

The Fed's triennial Survey of Consumer Finances shows the median income has risen $10,000 in the latest period, mean income grew $14,000. Surprisingly, families without a high school diploma saw the biggest increases in income.

The Dollar Index

The Dollar Index moved higher on today's news, extending gains made on yesterday's news. The combination of hawkish Fed and potential for tax-based economic stimulus has the index set up to reverse on strengthening rate hike outlook. According to the CME's Fed Watch Tool the chances of a December rate hike jumped more than 10% overnight to 83%. The question now is how hawkish are they really? And what will the PCE tell us on Friday? The DXY is gained about a half percent to test resistance at $93.50. The indicators are bullish and gaining strength so a further test should be expected. A move above this would be bullish but face additional resistance just above near $94 and a short term down trend line. If the PCE is weak and/or the index falls support target is near $91.50.


The Gold Index

Gold prices fell a full percent on stronger dollar, hawkish fed, tax plan hopes and receding geopolitical fear. Spot prices are now just below $1,290 with a possibility of moving lower in the near term. Economic data and positive news/response on taxes could add momentum into the short term. Next target for support is near $1,280, then $1,275 and $1,250. Two risks that I see are political and the ECB. If the ECB gets more hawkish they could undermine dollar strength. If Kim Jong Un gets missile happy again, or some other event, flight to safety could support prices.

The Gold Miners ETF GDX gapped lower to close with a loss near -1.5%. The ETF has fallen below the long term moving average and is in danger of moving lower. The indicators are consistent with potential support at this level but not yet confirming it. A move lower may find support near $22.50 depending on gold and the dollar. Short to long term the ETF is still trapped within its range.


The Oil Index

Oil prices were iffy today but managed to close with a gain. Early trading saw them bob along break even with a small push lower that was later met by weak buying. Buying was triggered by today's storage data which painted a mixed picture. Crude supplies fell by more than 1.8 million barrels while gasoline stockpiles rose by a million. WTI is trading above $52 once again with an eye on hitting $55.

The Oil Index gained another 0.32% in today's action and set another new high. The index has been moving steadily higher driven by forward earnings outlook, rising oil prices and improving forward outlook driven by rising prices. The index is supported by the indicators which are both bullish and strong. I assume this run will hit a peak soon, the market is up more than 12% in a month and ripe for correction. If and when it does will be the time to get serious about long term positions.


In The News, Story Stocks and Earnings

Micron reported after the bell yesterday and beat on revenue and earnings driven by strong demand and higher pricing. The company also raised forward guidance above consensus. Sales in all four broad segments were up more than 70% led by Computer&Networking at 128%. Shares of the stock moved sharply higher in the after hours session and continued the move today. The stock climbed more than 8% to close at a new 15 year high.


The semiconductor index also move higher. The index gained a little less than 2.4% in a bounce up from the short term moving average. The sector is driven by strong year on year sales and positive forward outlook that could push it higher into the short term. The indicators are a bit mixed but set up to fire a trend following signal should market support follow through on today's move. Upside target is the current 17 year high, a break above which would be bullish.


The VIX moved lower today but it looks like it may be at a near term bottom. The indicators have begun to move higher in confirmation of support but do not yet indicate a reversal. The index is below resistance levels at $10 and the short term moving average that may keep it contained. That being said the indicators are also set up to fire bearish signal that could be considered trend following.


The Indices

The NASDAQ Composite led today's move with a gain of 1.14% as bargain hunters scooped up FANG stocks and the semiconductors outperformed. The index created a medium sized green candle moving up from the short term moving average and approaching the current all time high. The move is trend following but not yet backed up by the indicators. The indicators are rolling into a trend following signal led by MACD and lagged by stochastic. Current target is the all time high, a break above that would be bullish with targets at 6,550 and 6,600 in the near to short term.


The Dow Jones Transportation Average made the 2nd largest move, 0.63%, and set another new all time high. Today's action created a medium sized green candle supported by the indicators. Both MACD and stochastic are bullish and pointing higher indicative of underlying market strength. Near term targets are near 9,900, short to long term target is closer to 10,600.


The broad market S&P 500 made the 3rd largest gain in today's trading, 0.47%. The index created a small green bodied candle that set a new all time intraday high but not a new all time closing high. The move is trend following but not yet supported by the indicators. Both MACD and stochastic have made bearish crossovers that are only showing the merest hint of reversing. That being said they are set up to fire trend following signals should the index break to new highs. A break to new highs would be bullish with upside target near 2,600 in the near term.


The Dow Jones Industrial Average is today's laggard with a gain of only 0.25%. The blue chips created a small hammer doji sitting on the long term up trend line and did not set a new all time high. The index remains in consolidation above support levels and just below current all time highs with weak indicators. Both MACD and stochastic are showing weakness consistent with a test of support but not full reversal. Support is the long term up trend line, a bounce from which would be bullish and trend following. A break to new all time would confirm with upside targets near 22,900.


The stealth market has done it again. It has quietly moved higher on current conditions and forward outlook to set new highs. This move is trend following in the near, short and long term with little in the way to stop it short of economic slowdown, which I don't see coming. I am bullish for the long and short term with an eye on the upcoming earnings season for additional catalysts.

Until then, remember the trend!

Thomas Hughes