Introduction

A resilient market sets new all time highs. Even so, trading was overshadowed by last nights events in Las Vegas.

Market action was broad. Advancers led decliners nearly 2 to 1 with 253 NYSE listed stocks making new highs versus less than 20 making new lows. Action was supported by today's economic data although there are new signs of inflation within the manufacturing PMI data.

Asian indices were mostly higher as news from Japan shows business confidence in the country has improved. The Tankan Survey, administered by the BOJ, shows that confidence among the largest manufacturers has risen over the past three months sending the Nikkei up by 0.22%. Indices in China and elsewhere were closed for a holiday. European indices cheered the news from Asia and were later buoyed by US bullishness although news at home and abroad put a damper on gains. A referendum on independence in the Spanish region of Catalonia was met by government crackdown on what they said was an illegal vote.

Market Statistics

Futures trading was positive all morning despite the news from Spain and Las Vegas. The indices were set to open with small gains going into the release of data and firmed a bit afterward. PMI, both Markitt and official, shows expansion in manufacturing with the red flag of rising input prices. The open was as expected, the SPX began the day with a gain of 2 points and then began to move higher from there. The first 45 minutes of trading saw steady buying which drove the broad market, blue chips and techs to new all time highs. The middle part of the day saw the indices trade within narrow ranges just below the newly set highs. By late afternoon the indices were testing the early highs where they remained into the close of trading.

Economic Calendar

The Economy

Economic data starts off with Markitt's final read on manufacturing PMI. According to them US PMI gained 0.3% in the last month to hit 53.1 showing further improvement within the economy. This gain is driven by increases in production, new orders and employment. On the employment front this month's read is a 9 month high, on the inflation front this month's read shows the fastest pace of input price growth in 5 years.


The ISM Manufacturing Index was released at 10AM and echoes data within the Markitt PMI. The ISM Index rose to 60.8%, well ahead of the expected 58.1% and at a +10 year high. Within the report new orders, backlogs and employment all grew and are driven by increased demand. The one red flag is rising prices, the prices paid index gained 9 points to hit 71.5%.

Construction spending was also released at 10AM and rose by 0.5%. This is slightly ahead of the 0.4% expected by economists and up 2.5% over this time last year. Gains were made primarily in resisdential construction, up 0.5% for the month and 11.3% over the past year. Non-residential construction spending is also up 0.5% this month but down more than -3% over last year.

Moody's Survey of Business Confidence fell -1.2% to hit 29.6%. This is the lowest level since late November last year. Mr. Zandi says the index shows no signs of wavering and that sentiment is strong and stable although I beg to differ. The definition in Websters says "to sway to and fro" and it looks to me like there is some swaying in the data. It has been a little erratic over the past year, appears to have peaked and is now sitting at levels not seen since just after the 2016 elections. Regardless, the index is still showing high levels of confidence relative to historical trends and consistent with economic expansion.


Third quarter earnings continue to trickle in. We've now seen 16 of the 500 S&P 500 reports and of those 13 have beaten revenue estimates and 13 have beaten earnings estimates. The blended rate of earnings growth is 4.2%, unchanged from last week. We are still expecting to see 8 of the 11 sectors post growth, led by energy, although estimates for 9 of the 11 are lower now than they were at the start of the quarter.


Full year 2017 estimates have held steady over the last week at 9.6% but forward outlook has firmed. Fourth quarter 2017 and first quarter 2018 estimates both increased by a tenth to 11.2% and 10.4% while second quarter estimate rose by 0.2% to 10.3%. Full year 2018 also gained a tenth to hit 11.1%. This is the third week of gains for 2018 earnings outlook.


The Dollar Index

The Dollar Index gained about a half percent on today's news. The rise in manufacturer's input prices is a warning sign to FOMC doves that the economy is expanding and maybe the Fed did indeed get inflation wrong. The CME's Fed Watch Tool strengthened on the news, showing a near 80% chance for rate hike by December. Today's move in the dollar tested resistance at $93.50 and looks like it could break through. This would be bullish in the near term with potentially long term implications should the Fed ramp up the tightening time line. A break above the down trend line near $94 would be more bullish with the possibility of full reversal in the dollar.


The Gold Index

Gold prices fell to a new low on dollar strength, the Trump Tax Plan and firming FOMC outlook. The spot price shed a little more than -0.50% to trade below $1,280 near $1,277. Now that gold had fallen below the $1,280 mark it could easily fall further. There are few catalysts on the calendar for the metal this week save the NFP which I think will support the dollar more so than gold. First target for support is near $1,275, a break below that level could take gold down to $1,250.

The Gold Miners ETF fell at the open but regained the loss and close with a small gain. Even so the ETF met resistance at the long term moving average and looks set to trend lower within its range. The indicators are both bearish and pointing lower in support of lower prices with first target just above $22.50 near the top of my down trend line. This line has provided resistance 4 times over the past year as the ETF trends within its range and will likely produce support on the way down. A break below the line and/or $22.50 would be bearish with target near the bottom of the range at $18.50.


The Oil Index

Oil prices fell more than -2% on signs of rising production. An increase in US rig counts coupled with news OPEC production rose last month sent prices down to test support near $50. Near term, prices are supported by hopes OPEC will extend the production cut along a small increase in demand expectation. This may keep prices above $50. The caveat is that higher prices will bring more supply onto the market and cap gains so it looks like oil will remain range bound whatever it does next. A drop below $50 would be bearish with the chance of moving down to $45, a bounce would be bullish with a chance of moving up to test $55.

The Oil Index fell in early trading, gapping down at the open, but there appears to be support just above 1,250. The index moved up from the open after a quick dip lower and created a long green bodied candle closing near recently set highs. Price action has been bullish over the past few weeks as oil prices have been on the rise, today's dip in prices offered up an entry point the market seemed to like. The indicators remain bullish although there is some sign of near term weakness consistent with a test of support within an uptrend. Near term support is just above 1,250, a break below there would be bearish with a possible target near the short term moving average. A bounce from this level would be bullish and in line with the near term trend with first target for resistance near 1,220. A break above that level may confirm continuation with target near 1,300 and a 1 year high.


In The News, Story Stocks and Earnings

Shares of gun companies rose on today's news but the move looks limited. American Outdoor Brands, formerly Smith & Wesson, gained close to 6% intraday but met resistance and formed a red candle. Today's action appears to confirm resistance at the short term moving average and top of a recently opened window. The indicators are bullish but have already begun to roll over in confirmation of resistance so a move higher doesn't look very likely. A break above today's high would be bullish but face additional resistance near $17.25. A fall from this level would be bearish and trend following with target near $13.25.


Ruger made a similar move. The stock jumped on the Las Vegas news as traders expect to see a rise in gun sales in response to fears of gun-right crack downs. Today's candle has formed a small doji confirming resistance at the midpoint of a recently opened window and the long term moving average. The indicators are a bit mixed in that they have ticked higher in response to today's move but also consistent with resistance at today's highs. Resistance is near $55 and the long term moving average, a break above which would be bullish. Support is near $50 and the short term moving average.


The VIX held relatively steady in today's trade with hardly a move in either direction. The index created a small red bodied candle to the side of Friday's candle and touching the low set then. The indicators persist in bearishness although momentum has subsided to near zero, perhaps in anticipation of upcoming earnings. Stochastic looks more bearish, firing a fairly strong bearish crossover low in the range and at the lower signal line. A move lower would be nice for us bulls but necessary for rally. At current levels the index is consistent with bull market conditions and new all time highs in the SPX. Resistance is near 10.50 and the short term moving average, a break above there would be bullish for fear in the near term.


The Indices

The indices proved resilient in the face of national crisis. Even the Dow Jones Transportation Average, which had been down more than -0.75% in early trading, was able to close with barely a loss. The index created a small doji candle testing near term support and may have entered into a pre-earnings season consolidation. The indicators remain bullish and consistent with an index in uptrend. Support is just below today's low near 9,800 with resistance just above today's high near 9,900. A move higher would be trend following with near term target in the range of 10,100, a move lower may find support near 9,600 and the short term moving average.


The Dow Jones Industrial Average gained nearly 0.70% to close at the high of the day and at a new all time high. The blue chips created a medium sized green bodied candle moving up from a trend line bounce and supported by the indicators. The indicators are a bit mixed but consistent with a move higher in line with the prevailing trend. Stochastic is the one area weakness having fired only a weak trend following signal (%D is still pointing lower). Upside target is near 23,000 near term.


The S&P 500 posted the 2nd largest gain, 0.34%, and closed at the highs of the day. The index created a small green bodied candle moving up to new all time highs in line with the prevailing trend. The indicators are both bullish having fired trend following bullish crossovers with the caveat the signal is still a bit weak. That being said there is little to stand in its way short of geopolitical news, Trump Agenda developments and economic data. Upside target is near 2,580 near term.


The NASDAQ Composite brings up the rear with a gain of 0.31% but is showing the most bullish signals. The indicators are in support of today's new high firing strong trend following bullish crossovers. Upside target is near 6,800 near to short term.


The markets are moving higher and nothing seems able to stop them. The good news is that these moves are supported by trends, current data and expectations which leads me to think there is room for the rally to run. I am bullish for the near, short and long term with an eye on earnings season. Better than expected earnings are virtually guaranteed, low estimates ensure that, it will be the guidance that truly moves the market. If the forward guidance remains stable the bull market should be fine. If the forward outlook improves we could see news highs persist into the end of the year.

Until then, remember the trend!

Thomas Hughes