The market set new all time highs on the cusp of peak earnings season. This week we can expect to see reports from roughly a third of the S&P 500 and Dow Jones Industrials. Along with this onslaught are a number of important domestic and international data points as well as a few central bank policy meetings. Today's action was also supported in part by hopes for more positive news regarding Trump's tax plan.

Asian markets were mixed as usual. Japanese stocks moved higher on election results driving the Nikkei up by more than 1.1%. Prime Minister Shinzo Abe's coalition government won reelection by a landslide ensuring Abenomics will continue. Chinese markets were flat to down led by the Heng Seng's decline of -0.64%. European markets were mostly higher but gains were held to a minimum on earnings and political uncertainty.

Market Statistics

Futures trading was positive for most of the morning and indicating a higher open for the markets. The SPX was indicated with a gain of about 3 points and this held fairly steady into the opening bell. The index opened with a gain of almost exactly 3 points but began falling within seconds of the bell. The index moved steadily if marginally lower throughout the day and closed near the lows of the session.

Economic Calendar

The Economy

The Chicago National Activity Index, an index of 85 broad gauges of the economy, rose 0.54 to hit 0.17 in the last month. This reverses the previous month's reading of -0.37 and indicates an economy expanding in line with trend. The gains were mostly in production related indicators although there were improvements in all 4 broad categories of indicators. The 3 month average reading is just below 0.00 but remains in consistent with an economy growing in line with trend.

Moody's Survey of Business Confidence fell -3.3% to 27.4. This is the lowest reading since before the election. Mr. Zandi says answers to all 9 questions have weakened over the past few weeks although the overall reading is still strong and consistent with an economy growing at or above its potential. Some of the recent weakness may be attributable to the hurricanes, there may be a snap back in sentiment over the next week or so.

About 17% of the S&P 500 has reported earnings so far this season. Of those 76% have beaten on earnings estimates and 72% have beaten revenue estimates. Despite both those figures being above average the blended rate of growth continues to fall, down now to 1.7%. Only 6 of the 11 S&P 500 sectors are showing growth, led by the financials, as downgrades and misses drive the blended rate lower. Misses in the financials and industrial sector are largely to blame. Looking forward though I still expect to see some rise in the blended rate going into the end of the season.

Looking forward the outlook remains positive and, dare I say it, improving. Fourth quarter 2017 estimates have risen driving quarterly growth target up by 0.2% to 11.4% while first quarter 2018 has risen 0.1% to 10.7%. Full year 2017 also increased a tenth but full year 2018 estimates have held steady.

The Dollar Index

The Dollar Index rose about 0.20% on Abe's win in Japan and hopes of tax reform here at home. Gains were capped though as the week's big events are still to come. The headline event will likely be the ECB meeting on Thursday, the bank is not expected to raise rates but it may engage in some form of tapering as expected by the market. Today's move met resistance just shy of $94 but may move up to a firmer target near $94.20. A break above there would be bullish and help confirm reversal in the index. A fall would be bearish and confirm the top of a short term trading range. Tomorrow's action will likely be impacted by German and EU PMI data.

The Gold Index

Gold prices held steady near $1,280 as the market awaits news from the ECB this week and the FOMC next week. Spot prices have wound up near the middle of the long term trading range and above below the $1,300 level. Price action appears bearish, possibly on strengthening FOMC rate hike expectations, with a possibility of falling to $1,250 or $1,200 in the short to long term. If the ECB fails to sound or act as hawkishly as expected, and the FOMC remains on track for December rate hike, the dollar could easily move higher and drive gold lower. Near term support targets are at $1,280 and $1,275, a break below there would be bearish.

The Gold Miners ETF GDX fell about -0.25% today, dropping below the long term moving average and looking like it will head lower. The ETF is moving lower within a trading range and well above support targets at $22.50 and $21.00. The indicators are consistent with a trading range and confirm resistance at the moving averages. Both are pointing lower but MACD looks bearish in particular, firing a crossover and confirming resistance at the zero line. The caveat is that the ETF is sitting on potential support at the $23 level that needs to be broken. A bounce from this level would confirm support and negate my bearish outlook.

The Oil Index

Oil prices were able to hold steady in today's trade. Fighting in Irag and last week's decline in US rig counts adding support to hopes OPEC will extend and expand its production cut at the meeting next month. WTI closed with a gain of 0.10% after dipping to test a 4 day low near $51.00 but appears to be facing resistance just below $52.50. This resistance may break down in the face of OPEC expectations but has yet to do so. Longer term the supply/demand issue remains unresolved, there is a lot of supply/capacity and only tepid demand, so I expect gains will be limited if prices are able to move higher.

The Oil Index closed with marginal losses but action was sideways within the near term trading range. This is the 20th trading day within this range and gives no indication it will be broken in the near future. The indicators persist in bearishness which would be alarming if not for the fact the index continues to trend sideways within its range. This combination is consistent with a consolidation within uptrend and a positive for the market. The near term range has support just above 1,200 and resistance just below 1,250. A break beyond either likely to carry the index 40 to 50 points in the direction of the break. A move to the upside would be trend following.

In The News, Story Stocks and Earnings

Shares of GE moved lower on a string of downgrades. The downgrades come in the wake of last Friday's earnings release which left the investment community in fear of a dividend cut. Morgan Stanley and UBS lowered their rating and price targets on higher probability the distribution would be cut and long range guidance would be impacted. Countering this, later in the day, were a number of comments from the analyst community to the effect that the stock is at or near a bearish extreme, the company likely to emerge from an earnings trough in the coming quarters. Shares of GE fell more than -6% to a 2 year closing low.

Potlatch announced a merger with Deltic Timber which will result in a timber company with close to 2 million acres in holdings. The deal is worth a 7% premium to Deltic shareholders in an all stock deal. Additionally, shareholders of the resultant company will receive special distributions to the tune of $250 million over the next year as part of the REIT conversion. Shares of both companies jumped to new all time highs, shares of PCH sold off throughout the day to close with a loss near -1%.

Rambus reported after the bell with a beat on the top and bottom lines. Revenue grew by 10% over last year in the 3rd quarter and is up 20% for the YTD period. Adjusted EPS came in at $0.19, $0.02 above consensus. The company also provided guidance in line with expectations but it was not enough to please investors, shares were down about -1% in the after Thours session.

The Indices

The indices got off to a good start this morning, it just didn't last longer than the opening bell. Today's action was a slow, steady stream of profit taking with the indices at all time highs. The day's leader is the NASDAQ Composite with a loss of -0.63%. The tech heavy index created a medium-long red candle falling from the all time high and forming a Dark Cloud Cover. The indicators are both bearish, showing bearish crossovers, and indicative of lower prices. First target for support is the short term moving average near 6,525. This moving average has provided support numerous times over the past year and likely to do so again should it be tested. A break below the MA would be bearish for the near term with downside target near 6,400 and a long term up trend line.

The S&P 500 made the 2nd largest decline, -0.39%, and created a dark cloud cover or bearish engulfing pattern. This pattern is accompanied by weakness is in the indicators which suggests a pull back to support levels. Stochastic is showing a bearish crossover and MACD is not far off of one, both suggesting near term weakness with the caveat we are still in an uptrend. Without a major reversal in market sentiment any downside is likely to be limited and an entry point for new positions. First target for support is 2,550 with 2,525 next target should the first one break. A consolidation at this level, or bounce from near term support targets at the moving averages, would be bullish and trend following.

The Dow Jones Transportation Average made the 3rd largest decline, -0.32%. The transports opened just shy of the current all time high, at 10,000, and fell from there. The candle is medium sized but red, confirming resistance at the 10K level and setting the index for a deeper pullback. The indicators are mixed, bearish but weak and showing signs of support at current levels, so not much guidance there. Support target is near 9,800 and the short term moving average.

The Dow Jones Industrial Average made the smallest decline, -0.23%, and created a small red bodied candle. The candle forms a bearish piercing pattern which is weaker than dark cloud cover but still indicative of lower prices. Both indicators remain bullish so the extent of any fall we see over the next few days may be limited. First target for support is at Friday's close and then just below that near 23,125.

Today's action would be alarming if there had been a catalyst to induce market reversal. Sure, the earnings reports for this quarter haven't been up to snuff but we've only seen 17% of them. As it is these signals are nothing more than near term movements in the market as it awaits a week of very important news. If they persist into the end of the week it'll be a different story. I remain bullish for the long and short terms, cautious in the near.

Until then, remember the trend!

Thomas Hughes