Introduction

Tax reform worries linger, weighing on a market in need of good news. Questions on the minds of traders? Will tax reform get done this year, or at all? If it does, will corporate tax cuts get pushed off until 2019, or later? In the end it may not matter, the market and the economy are doing OK without reform, but it sure would be nice. In the meantime, earnings season is drawing to a close leaving little to drive markets other than data and news. In terms of data the week is fairly full, in terms of news there are plenty of issues that could create headlines, it's just a matter of when they cross the wires and the message they contain.

Asia was a bit mixed. China moved higher on the raging success of Alibaba's Single's Day. I myself watched a bit of the festivities and it was like watching a Jack Ma's telethon for himself. Elsewhere in the region equities fell on last week's decline in US markets. The Nikkei shed -1.32% while the Shang Hai Composite rose 0.47%. European markets closed largely lower as US tax reform angst spills over in the European financial sector and growing concern on the future of Brexit leads traders to doubt Theresa May's longevity as PM. The CAC led with a loss near -0.75 followed by -0.40 for the DAX and -0.24 for the FTSE.

Market Statistics

Futures trading indicated a lower open for most of the morning. The SPX was indicated to open with a loss near 8 points at the low of the early session but that moderated to about -6 points by the open. The open was a bit active as sellers were quickly overcome by buyers. The index was moving higher from the open within the first 10 minutes of trading and regained break even shortly after 10AM. After that the index trend sideways for an hour or so before edging higher into the afternoon. By 3PM the index was setting a new high for the day. Late afternoon say the index surge to set an intraday high close to +4 only to meet sellers and fall back to break even by the close.

Economic Calendar

The Economy

Moody's Survey of Business Confidence gained 1.3 points to hit 30.00. This is the highest level in a month but well off the post-election peak. Mr. Zandi says that business sentiment is still strong despite the recent weakness and in line with a global economy expanding at the top end of its potential. Of the 9 questions the ones showing the most weakness are those dealing with hiring and pricing.


Earnings season is quickly drawing to a close. A little more than 90% of the S&P 500 has reported. Of those who have reported 74% have beaten EPS estimates and 66% have beaten revenue estimates, both figures above average. The blended rate of earnings growth for the quarter continues to creep higher and is now 6.1%. Seven sectors are showing earnings growth versus the 6 previously expected while 8 are performing better than expected.


Looking forward we can still expect to see robust growth over the next 5 quarters although those estimates continue to fluctuate and/or trend lower. Fourth quarter 2017 estimate fell to only 10% and has been in downtrend since the first of the year. Looking to 2018 the 1st and 2nd quarters earnings growth is expected to come in between 10.0% and 10.5% before expanding to above 11% by the end of the year. Full year 2017 is looking for 9.4%, 2018 11.1%.


The Dollar Index

The Dollar Index held steady in a day of mild sideways action. The index is still above the $94 level and looking like it wants to continue moving higher. This week will be dominated by CPI, PPI and a lot of Fed speak including Janet Yellen tomorrow morning. Along with this will be a fair amount of similar data from the UK, the EU and Japan along with scheduled remarks/speeches from Carney, Kuroda and Draghi. At present the FOMC is diverging from the other banks, if this persists throughout the week I would expect to see the dollar move higher. In terms of the CME's FedWatch Tool the chances of a rate hike in December have reached 100% and have reached 50% for another hike by March. First target for resistance is near $95, a break above that would be bullish.


The Gold Index

The gold price also held steady in today's trade. Spot price is hanging just below the $1,280 mark supported by geopolitical risk and weighed down by dollar outlook. A move above $1,280 may be bullish but would face resistance at $1,290 and $1,300 in the near term, a fall may be bearish but would face support near $1,265 and $1,250.

The Gold Miners ETF GDX also held steady in today's trading but near its 3 month low. The ETF is still trending sideways within its long term range and now sitting on the mid-line of that range. This level will be important over the next week and likely to determine direction for the near to short term. A bounce would be bullish, within the range, with a target near $24.00, a break through support would be bearish with a target near $21.


The Oil Index

Oil prices ticked higher as Middle East tensions continue to simmer. The Saudi purge, fighting in Yemen, Saudi relations with Iran and its neighbors are only the tip of the iceberg. These risks have trumped signs of rising supply from the US and Saudi Arabia, helping to keep prices near their multiyear highs. The possibility OPEC furthering its production cap, along with an increase in demand forecast issued today, may keep prices moving higher but there is risk an easing of tensions could cause the fear premium to evaporate.

The Oil Index fell a little more than -0.60% in today's action. The index created a small red bodied candle within the 6 day range but sitting on support at the bottom of that range. The index remains in uptrend but may have entered a consolidation range that could persist into the near term. Support is near 1,265, a drop below which would break the near term up trend. I remain bullish on the sector for the short to long term but I have grown cautious for the near.


In The News, Story Stocks and Earnings

GE was by far the biggest story in business news today. The company has decided to break itself up in order to focus on core business, it is going to restructure its board, cut the dividend in half and has lowered full year guidance. The new and improved GE will focus on aviation, power and healthcare which currently account for about 58% of total revenues. The other segments will be sold off or wound down in favor of streamlining. The news was initially cheered by investors who had been expecting such a move, the rally didn't last long as other investors used the opportunity to sell. GE closed the day with a loss greater than -7.0%.


Qualcom's board unanimously rejected the Broadcom bid. This news helped to drive the stock higher on hopes of a new, improved bid and the idea QCOM is worth at least $70. Today's move breaks the stock out of a near term consolidation and flag pattern and could easily lead it higher. First target is the original $70 per share offered by Broadcom with a chance of moving higher.


Mattel continued higher today as the analyst community weighed in on the potential for the Hasbro/Mattel takeover. While there are some concerns of anti-trust/regulatory hurdles most analyst agree they should be easy to overcome. The combined company is expected to see synergies across a number of segments. Shares of Mattel jumped more than 20% on comments from Jefferies, BMO Capital and Suntrust while Hasbro gained more modest 6%.


The Indices

The indices tried to sell off and tried to bounce back but neither move was very strong resulting in whole lot of nothing by the end of the day. The day's leader is the Dow Jones Transportation Average which is beginning to show early signs of support along the long term moving average. The index created a small green bodied candle sitting on that support and the support of a previous all time high. The indicators remain bearish which suggest support may be tested further, the indicators are also fairly weak suggesting momentum is iffy and the market is oversold. A bounce from this level, near 9,500, would be bullish and trend following, a drop below it would be bearish and may lead to a deeper correction. The index is currently down about -5% from the recent all time high, a full 10% would put it near the 9,000 level and another potentially important long term up trend line.


The Dow Jones Industrial Average was today's laggard with a gain of 0.07%. The blue chips created a small bodied green candle just above the short term moving average and well within the near term consolidation range. The index is trending sideways at the all time highs with weakening indicators that give reason for caution. Both indicators are diverging from the highs and have turned bearish suggesting that support will be tested or broken. A drop below support, near 23,300, would be bearish and could lead the index down to my long term up trend line near 22,500.


The S&P 500 closed with a gain of 0.09% creating a small bodied green candle. Today's action is directly sideways from Friday's small doji candle and within the near term consolidation range. Near, short and long term uptrends are intact although the indicators are weakening suggesting support within the current consolidation will be tested in the least. Support is at the short term moving average, just below today's close, a break of which could be bearish. Next support target would be the up trend line near 2,500. A bounce from the moving average would be bullish and trend following with targets at 2,600 and 2,660.


The NASDAQ Composite also closed with a gain of 0.09%. The tech heavy index created a small bodied green candle directly to the side of the last 2 candles and within the near term consolidation range. The indicators have rolled over into bearish crossovers that suggest consolidation will continue with the possibility of correction. Near term support targets exist at 6750, 6650 and the short term moving average, and then 6,600 and a long term up trend line. A break below there would be bullish. A bounce from support would be bullish and trend following with upside targets at 6,800 and then new all time highs.


Earnings season is coming to a close and with it the latest leg of the bull market. The indices have entered a period of consolidation and rotation coincident with the end of the season and we should expect to see this continue over the next few week's or longer, up to and until the approach of the next earnings cycle grabs a hold of the markets attention. There may not be correction between then and now but there could be, and the indicators suggest it, so I have turned cautious for the near term. I am still firmly bullish for the short and long terms and looking for the next great entry for new bullish positions.

Until then, remember the trend!

Thomas Hughes


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