Introduction

An idea was floated that tax reform would be phased in and the market wasn't happy about it. Soon after White House Press Secretary Sarah Huckabee Sanders came out with statements to the effect a phase-in wasn't going to happen. Regardless, we are expecting to hear more specific details sometime this week. We're also expecting to hear Trumps pick for Fed Chair on Thursday, as well as policy statements from the BOJ, FOMC and BOE.

International markets were mixed at best. In Asia Japan, Korea and Australia all moved higher while indices in China fell on consolidation within the market. The Nikkei closed up 0.1%, the Shang Hai composite fell -0.77%. European indices closed mixed as well as traders eye earnings and a big week for central bank meetings. Fortunately for them they also closed before the tax talk hit the market. Moves were small regardless of direction with none closing up or down more than 0.40%.

Market Statistics

Futures trading was weak all morning but did not indicate a major sell off. At most the SPX was indicated to open down about -6 points for the better part of the morning but moderated that to about -3 points by the open. The open was not too exciting, the SPX began the day down by roughly -3 points and quickly began moving higher. By 10:45 the index was flirting with break even but soon after that the tax reform news hit the market and drove them lower. The sell off was sharp and steep but found bottom by 12:15PM. The rest of the day saw the indices bounce from mid day lows and trend sideways within a narrow range.

Economic Calendar

The Economy

Personal Income and Spending data was released before the bell and came in fairly strong. Income is up 0.4% with spending up 1.0%. Income is in line with expectations while spending beat by a tenth. The really important data is the PCE which rose a mild 0.1% on the month and remains well below the FOMC's 2.0% target at +1.3% YOY.


Moody's Survey of Business Confidence regained 0.4% to hit 27.8% in this week's print. Despite the gain the index remains near lows not seen since before last year's elections. Despite this Mr. Zandi says the survey indicates a global economy growing at the high end of its potential. He adds that the recent hurricanes may have something to do with the recent fall in confidence but I don't see that in any other data, specifically the labor data. Quick reminder, this week is the first of the month again which means ADP, Challenger, NFP, Unemployment and Average Hourly Earnings data will be coming out over the next 4 days.


With 55% of the S&P reporting earnings for the 3rd quarter things are starting to look a little better. The blended rate rose 3% to 4.7% and a 2 month high. There are still only 6 sectors showing growth although the rate of earnings beat is well above average at 76%. Of those who have reported there are only 29 issuing negative guidance which is below average.


Looking forward the estimates have shifted a bit but remains positive and robust with double digit earnings growth expected for the next 5 quarters at least. Next quarter fell to 10.7% while full year 2017 edged up a tenth to 9.3%. Next year the first and second quarter are both still expected to show growth near 10.5% while full year expectations fell a tenth to 11.4%.


The Dollar Index

The dollar fell a bit in today's trade but held steady near Friday's close with a loss of roughly -0.20%. The index remains above resistance-turned-support at the $94 level and setting up to move higher. Last week's break above $94 was bullish and an early confirmation of a head and shoulders reversal. A move down to retest $94 with an accompanying bounce would be a stronger confirmation. This could come over the next few days as the BOJ and FOMC meetings come and pass. The BOJ is not likely to strengthen the yen, the FOMC is not expected to weaken the dollar. If the reversal is confirmed with a bounce from support upside target is near $97 in the near to short term.


The Gold Index

Gold prices also held steady and near Friday's close, edging up 0.4% on a slightly weaker dollar. In light of my DXY analysis I can't help but be bearish on gold, that being said it does look like the metal is bouncing from support. Support appears to be near $1,265 and the one month low. A further move higher may confirm this bounce if it is supported by central bank action, a break below would be bearish with target near $1,250 and below.

The Gold Miners ETF GDX moved higher on gold's strength, adding 0.84% in today's action. However, the ETF remains below support-turned-resistance with mixed indications. The moving averages and stochastic suggest that there may be support at current levels, near $22.50, while MACD suggests that bearish momentum is getting stronger. A bounce from here would be bullish within the range with upside target near $23.25 and the long term moving average, a move down would be bearish with targets along my down trend line and near $22.00.


The Oil Index

Oil prices moved higher today as a raft of what-if's propped up the market. The biggest what-if is what if OPEC really does extend and expand the production cap. Others include what-if supply is disrupted in Iraq, Libya, Nigeria, Venezuela or some other place where oil is produced and geo-political turmoil dominate daily life. Today's move saw the oil price gain nearly a half percent to close at an 8 month high and above $54. Near term outlook is bullish simply on the fact that expectations are likely to drive the market until the OPEC meeting, upside target is near $55.50.

The Oil Index 0.64% in today's action, extending Friday's bounce from the short term moving average and break the index out of the near term consolidation range. This is a bullish continuation signal within the current up trend and supported by earnings outlook. The energy sector is, to date, leading the market with 3rd quarter earnings growth and with forward outlook for earnings growth. Current target is equal in magnitude to the first leg of rally which puts it near 1,330.


In The News, Story Stocks and Earnings

Sprint and T-Mobile, along with most others in the telecom space, fell hard on news the proposed merger was going to be called off. This news was reported by Nikkei. Later in the day reports came out that the news was erroneous but no official word has been given. Details are sketchy for now but it seems as if there are some issues over governance and pricing. T-Mobile fell a little more than -5% to hit a short term support level while Sprint fell nearly -10% and hit a new 1 year low.


Mondelez reported after the bell beating on the top and bottom lines. The company reports that organic revenue is up 2.8% worldwide with particular strength in the Latin America segment. Revenue from the power brands rose more than 5.5%. Shares of the stock jumped more than 3.5% to bounce back from a new 52 week low set just today.


The VIX gained about 15% in today's action, moving back above the $10 level but also exhibiting signs of resistance to higher prices. Regardless, the fear index remains near long term lows and trending within a range at those lows, consistent with bull market conditions. The indicators are a bit mixed which leads me to believe there may be a bit more volatility to the volatility index, possibly related to the FOMC meeting, earnings, this week's data or more likely a combination of all three.


The Indices

Action across the indices was a bit mixed if to the downside. They all tanked on the tax reform rumors but not all the losses were large. Today's leader was the Dow Jones Transportation Average. The transports fell -1.29% creating a medium sized red bodied candle sitting on the short term moving average. Price action is a little iffy but does not yet break trend or indicate reversal. Action over the past couple of weeks is forming a consolidation pattern and, so long as support holds at the previous all time high, setting the index up for a trend following bounce. The indicators are both bearish so caution is due but again, so long as support holds this is setting up for trend following crossovers. A break below 9,800 would be bearish with target near the long term moving average. A bounce would be bullish and trend following.


The Dow Jones Industrial Average posted the 2nd largest decline, -0.36%. The blue chips created a small red bodied candle and the 5th in a row of candles forming a potentially bullish flag pattern. The indicators are a bit weak but remain bullish and consistent with consolidation within a strong trend. A move up from this level would be bullish and confirm the current trend, upside target is very near to 24,000 in the near to short term. A fall from this level would be bearish in the near term and could take the index down to 23,000.


The S&P 500 made the next smallest decline, -0.31%. The broad market created a small red bodied candle to the side of Friday's candle and within a consolidation which began a week or so ago. The indicators remain mixed but show some sign of support at this level and are consistent with consolidation within an up trend. A move higher, especially with a break to new all time highs, would be bullish and trend following with target at 2,600. A fall from this level would be bearish in the near term and may take it down to first support target of 2,550.


The NASDAQ Composite posted the smallest loss and may even have closed with a gain if not for today's D.C. based rumors. The index created a small doji candle near the top of Friday's candle and set a new all time intraday high. Price action is bullish although today's candle shows a bit of indecision, indecision that could soon pass should this week's earnings reports resemble the run of reports we received last week. The indicators are still weak but both showing bullish crossovers in line with the prevailing trend. A fall from this level may find support near 6,600. A move higher would be bullish and trend following.


The markets are in up trend regardless of today's declines. Today's declines are nothing more than knee-jerk reaction to rumor and, in light of the trend, a likely entry point for new short term positions for those who may have missed out last week, or simply wanted to add to current positions. This week may prove to kill the rally but I don't think it will, not unless earnings fall far short of expectations, which they are not likely to do. I remain bullish.

Until then, remember the trend!

Thomas Hughes