Introduction

A resilient market holds near recently set all time highs as a wave of geopolitical concerns wrestle with earnings outlook. While geopolitics are a concern and something to keep close eye on it is earnings that drive long term market trends. Based on current evidence those trends are intact. Today's action is more of a pause ahead of earnings than anything else; tensions with North Korea aren't new, neither is political unrest in Europe so I don't expect much downside related to either.

Asian markets were buoyant as trading resumed following a week long holiday in China and South Korea. Weaker than expect PMI in China did little to dampen spirits, it was positive but came in at a 21 month low. South Korea led with a gain near 1.0% followed by smaller moves in mainland China and Japanese indices. European stocks were less buoyant but mostly positive following a resurgence in the Catalan independence movement. Results from the ECB's stress tests went largely unreported in light of other news but were positive. The central bank says that most EU banks are well prepared to handle interest rate risks.

Market Statistics

Futures trading was positive all morning. The trade indicated an open for the SPX about 4 points higher than last week's close and that held relatively steady most of the early session. There was no economic data to affect trading this morning and little in the way of business news. The broad market began the day as expected but unlike expectations it began to sell off within the first ten minutes of trading. Selling was intense for about 20 minutes and took the indices down to near break even or just below as in the case of the SPX. Support was found at these levels resulting in sideways trading within narrow ranges for the better part of the day.

Economic Calendar

The Economy

There was no economic data today and there is very little this week. There are however 3 things to watch out for. The first is the FOMC minutes released on Wednesday afternoon, the second is PPI on Thursday and the final is CPI on Friday. Considering the signs of inflation that have turned up in the PMI data there is a chance we could see the same this week. If so FOMC rate hike expectations are likely to strengthen, as is the dollar.

Moody's Survey of Business Confidence jumped 2.5% to hit 32.1% and a 5 week high. Mr. Zandi says the survey indicates global business is strong and stable with the duality of positive present and future conditions expectations. The spike in confidence is nice to see following the recent down tick but it is still below the most recent high and showing signs of near term down trend. A continued move higher will be nice to see.


Earnings reports have been trickling in up to now, this week marks the start of peak season with reports from Citigroup, Bank of American, JP Morgan and Wells Fargo. To date 5% of the S&P 500 has reported earnings with an above average 87% beating on earnings and 78% beating on revenue. The blended rate of earnings growth fell to 2.8% this week, a new low, driven by massive downgrades in the insurers and reinsurers related to hurricane losses. AIG became the latest to announce losses due to catastrophe in a release after the close.

With the new revisions there are now only 7 sectors expecting to post gains. Factoring in earnings trends and the rate at which the average S&P company has beaten expectations over the past few years we can expect to see the final rate of earnings growth increase over the next few weeks and top out in the range of 7%.


Looking forward the next 5 quarters are still expected to see robust growth. The 4th quarter of 2017 is holding steady at 11.1% while the first quarter of 2018 has been revised higher to 11.5%. The 2nd quarter of 2018 also held steady but at a higher 10.5%. Full year 2017 is expected to come in at 9.2% earnings growth followed by 11.4% for all of 2018.


The Dollar Index

The Dollar Index drifted lower on today's news but remains elevated in relation to the recently set long term lows. Today's action is above a potentially strong support level confirmed by the short term moving average. The caveat is that price action is falling along the short term down trend line and set up for a trend following move lower. The indicators are bullish at this time, indicating potential for continued rally, with eyes on this week's FOMC minutes and inflation data as possible catalysts. A confirmation of support would be bullish and confirm reversal of down trend. A fall from this level would be bearish with target at the current low.


The Gold Index

Gold prices rebound from last week's lows on safe haven inflow and a slightly weaker dollar. This move is likely to be near term unless it is able to cross above resistances at $1,285 and $1,300. Support from safe haven seekers is fickle and likely to evaporate which leaves fundamentals to do the driving. In this case we are expecting to see FOMC minutes and PPI/CPI data in favor of interest rate hikes, a stronger dollar and weaker gold. The CME's Fed Watch Tool is still showing a near 90% chance of hike in December, hot inflation data could put this closer to 100%. A fall from $1,285 would be bearish near term, a break below last week's low could go as low as $1,265 or $1,250.

The gold miners got a lift form gold's rise but nothing substantial. The Gold Miners ETF GDX gained 0.60% to create a small green bodied candle. The candle is sitting just above the short term moving average and may move higher although there is resistance just above today's level. The indicators are mixed but generally consistent with a bullish swing within a trading range, MACD is the laggard and yet to confirm. A break above resistance would be bullish but face resistance near $25.00. A fall would be bearish with support targets at $23.25, $23.00 and $22.50.


The Oil Index

Oil prices rebound today on last week's decline in US rig counts and continued expectation OPEC will extend the production cap. Today's move was bolstered by comments from OPEC's secretary general to the effect that more nations may join the production cap, possibly as early as the November meeting. With gained nearly a full percent on the news and could move higher should this rumor persist. Today's action left it just shy of the $50 mark which is likely resistance. On the flip-side production shut down by the Hurricanes is on track to resume operation soon.

The Oil Index made some small gains today but it does look like the near term up trend has paused. The index gained about 0.25% in a move that created a spinning top near the middle of the trading established by last Monday's open at support levels. The indicators have rolled over in confirmation of support and are firing bearish signals. This suggests a test of support and/or consolidation in the least and a possible reversal at worst. Considering that the near term up trend is driven by earnings outlook and not just rising oil prices leads me to think the index is in consolidation and not reversal. Support is currently near 1,205, a break below there would be bearish near term. A consolidation at current levels, bounce from support and/or break to new highs would be bullish and trend following with upside target near 1,300.


In The News, Story Stocks and Earnings

Wal-Mart made the news this morning when it announced a 30 second return policy for online shoppers. Purchases made online can be returned to the store using a QR code generated by an app. The move is in response to shoppers frustrations with online/mailorder returns and a jab at Amazon. The policy is expected to be expanded to in-store purchases next year. Shares of the stock jumped more than 2.6% on the news and are approaching a 2 month high.


General Electric announced more changes to its line-up this morning, following a string of departures announced late last week. Today's news concerns Robert Lane, a board member leaving for health reasons. Trian founding partner Ed Gardner will replace him. Garnder says he's dissapointed with GE's performance but has faith in the long term prospects. JP Morgan analysts say the departures are a clear negative for the stock. Shares fell -3.75% to trade at a 2 year low.


The VIX moved higher today and may be indicating a spike in fear is on the way. The index gained a little over 8% to create a smallish bodied green candle supported by bullish indicators. Both MACD and stochastic are firing bullish crossovers suggesting a move higher is possible. A break above the 10.25 level would be bullish for fear and bearish for the SPX but most likely in only a near term kind of way. Today's move may be due to earnings season as well, traders may be taking a step back and putting on protection ahead of this weeks reports. Good reports from the banks will be a big bonus for the market and likely push the SPX to new highs, the VIX to test its lows.


The Indices

The indices moved lower but losses were minimal. The day's leader is the Dow Jones Transportation Average with a decline near -0.20%. The transports created a small red bodied candle drifting lower from last week's peak to test support at last week's low. The indicators are bullish but consistent with a peak and/or consolidation so I would expect weak action over the next few days at least. Support may exist at today's close, near last week's low, but 9,800 or just below looks a little more likely to me. A break below that level would be bearish in the near term with target near the long term moving average. A consolidation and bounce from this level would be bullish and trend following.


The broad market S&P 500 made the next largest decline, roughly -0.18%. The index created a small bodied red candle moving down from the all time high and reminiscent of a tower top reversal. That being said volume was very weak and does not lend credence to the idea of reversal at this time. This is more likely a near term signal consistent with consolidation and/or correction within an uptrend. The indicators remain bullish and strong, indicative of continuation, with only the barest indication of weakness. Near term support may be near today's close at 2,540, a break below there may move down to 2,520 or 2,500. A consolidation and/or bounce from current levels would be bullish and trend following.


The NASDAQ Composite made the third largest decline today, about -0.15%. The tech heavy index opened with a small gain and set a new all time intraday high only to fall throughout the day to close near the low. The candle is small and red but not overly strong and, at least for now, consistent with consolidation at current levels. The indicators are bullish but consistent with a peak or consolidation within an uptrend. If the index does move down from here first target for support is just beneath today's close near 6,550, a break below that could move down to the short term moving average near 6,450. A consolidation and bounce from current levels would be bullish and trend following.


The Dow Jones Industrial Average posted the smallest loss today, less than -0.10%, but also set a new all time intraday high. The blue chips created a small red candle to the side of Friday's candle and just a hair below the current all time closing high. The indicators remain bullish but consistent with a top, peak and/or consolidation within an uptrend.The index may move lower to test near term support but at this time a bigger move does not look likely. First target is 22,650 and then 22,350 and the long term uptrend line. A consolidation and/or bounce from current levels would be bullish and trend following.


The market has paused and it is to be expected. It has been running up on earnings expectations and, now that earnings season is at hand, it is time to wait and see if those expectations are correct. If so the rally is very likely to continue onward and upward from here. If not, for whatever reason, a pullback may be on the way. I remain firmly bullish for the long term but have become cautious for near and short term positions, tightening stops in preparation for potential volatility later this week.

Until then, remember the trend!

Thomas Hughes