Introduction

The market moved higher as Trump's Tax Plan passes another major hurdle. In the wee hours of Saturday morning Senate republicans came together to pass their version of the tax plan. The next phase is for a joint committee two hammer out the differences and take it back to a vote in both chambers. Analysts at UBS say tax reform could fuel an additional 25% for the S&P 500 next year.

Markets in Asia were mixed in Monday trading despite the move forward in US tax reform. There was little to move markets in the region other than news from abroad and that was dominated by the Flynn plea bargain announced Friday. Japan led the losers with a decline of -.49% while Korea led gainers with an advance near 1.5%. European indices were better able to shrug off the Flynn developments in favor of tax reform and moved higher across the board. Aiding sentiment is an expectation for Brexit negotiators to come together this week in an effort to bridge gaps left at the previous session. The DAX led with gains near 1.5% with most indices advancing 1% or more.

Market Statistics

Futures trading was positive and strong all morning. The Dow Jones Industrial average was indicated to open with a gain near 1% with the SPX trailing at 0.5%. The broad market opened as expected, the SPX began the day up 0.5% and quickly extended that to near 0.75%. This turned out to be the early high leaving the market trending sideways near the open for the better part of the morning. By early afternoon opening levels were being tested and by late afternoon many of the indices were back to break even with the tech heavy NASDAQ deep in the red.

Economic Calendar

The Economy

Factory Orders fell less than expected in the last month, down only -0.1% versus an expected -0.4%. The beat comes on a -0.6% rise in shipments and inventories. Unfilled orders remained unchanged suggesting the number of unfilled orders continues to grow but at the same pace as the previous month.


Moody's Survey Of Business Confidence jumped 1.7 points in the last week to hit 36.5 and a 5 month high. The gain comes in the wake of positive Black Friday/Cyber Monday data and with the expectation of US tax reform. Mr. Zandi says the data reveals an economy growing meaningfully beyond its potential and that forward outlook remains strong. Of not, businesses report that investment and credit conditions are good.


With slightly more than 99% of the S&P reporting for the 3rd quarter the cycle is all but done. The final rate of growth for the quarter has ticked up another tenth to 6.4%. Looking forward the 4th quarter is expected to deliver 10.5% but that is likely to fall over the next 8 weeks. All 11 sectors are expected to show growth, led by the energy sector. Full year 2017 estimate have held steady at 9.5%.


2018 estimates remain robust an in the double digits with earnings growth expanding into the end of the year. First quarter growth is projected at 10.6% which dips to 10.2% in the second before picking up again in the second half of the year. Third quarter earnings are expected to spike to 11.6% and then moderate to 11.2% in the fourth. Full year 2018 is expected to see growth in the range of 11.1% over 2017.


The Dollar Index

The Dollar Index gapped up at today's open on tax reform news but those gains were capped by data from abroad; UK and German PPI data were a bit mixed in terms of expectations but both show continued growth within their respective economies. That said the index created a small red bodied candle within the last week's narrow trading range and near the mid point of the short term range that has been dominating it for the past 2 months. The index is winding up ahead of the next round of central bank meetings which are scheduled to start tonight with the RBA and continue over the next 3 weeks. The highlight of the this cycle is in two weeks when the FOMC reports on Wednesday and the ECB and BOE both announce their decisions the day after. The $93 region is acting as support for now, a move lower could go to $91, a move higher to $95.


The Gold Index

Gold prices held steady in today's action, creating a small red candle just above $1,275. The metal is under pressure from tax reform and the expected economic growth it will bring. Now trading near the bottom of a near term range there is a possibility it will continue to test support into the near term. The bottom of the range is closer to $1,272.50 which is near term support. A break of this level could be bullish if supported by the data. This week's data is US heavy with NFP and Unemployment on Friday. NFP is expected to be 201,000, down from last month's 260,000, while Unemployment is expected to remain steady at 4.1%.

The Gold Miners ETF GDX fell a little more than -1% and very nearly set a new 4 month high. The ETF has been trending sideways within a range for some time and very near the mid point of that range. The indicators are both bearish, MACD confirming today, suggesting the near term support will be tested at least. A break of this level would be bearish within the range with downside target near $21. A strong NFP may be the trigger considering a December rate hike is all but done.


The Oil Index

Oil prices fell a little more than -1.5% on rising rig counts. Rising prices have spurred drillers to increase production as we knew it would although there is no wild boom of new rigs just yet. The latest read shows only 2 new rigs added in the last week and basically holding steady near 750. WTI shed nearly a dollar on the news and is now trading just shy of $57.50. On the flipside the OPEC extension is supporting prices near long term highs and may continue to keep prices at/near these levels into the near term.

The Oil Index tried to rally but the gains were capped by today's fall in oil prices. The index did however manage to close with gains and still looking bullish. The last two candles show signs of resistance to higher prices but are indicated higher. Both indicators are firing bullish trend following signals, MACD confirmed today, that could take it up to my 1,300 target. The move is supported by high oil prices and positive forward earnings outlook.


In The News, Story Stocks and Earnings

Topping today's business news is word from CVS that they will be buying Aetna. The deal is worth $65.8 billion in debt and equity. CEO's of both companies say the move will immediately lower health care costs as they realize synergies and increase efficiency within the vertical. There are some doubts centered on antitrust issues and the value to shareholders which caused shares of CVS to fall more than -5%.


The banks are getting a big boost from from the tax plan as they are largely expected to receive the most benefit. The XLF Financial Sector SPDR jumped 1.5% at the open on the news and set a new 10 year high. The ETF is extending a bounce from the short term moving average and is indicated higher. Both MACD and Stochastic are bullish and on the rise, in support of higher prices, with targets near pre-2007 levels and above. The hurdle at this time is of course reconciliation between the two houses and passage of the bill.


The VIX began the day moving lower but reversed in the late afternoon along with the major indices. The fear gauge is confirming support at the pair of moving averages and indicated higher. Such a move is consistent with rising fear but not necessarily correction. This move could be due to the anticipation of tax reform and positioning in the case it should be hit a hiccup, be stalled or fail. A move higher may find resistance near the $14 level, a move above there would be more alarming.


The Indices

Today's action started off great but faded toward the end of the day. Early trading saw most post new all time highs but the close was mixed. The leader in terms of gains was the Dow Jones Transportation Average at 1.78%. The transports continue to power higher although there are signs of resistance in the charts. Today's candle ended the day as a medium green candle with long upper shadow. The day's range is close to 3% so a significant day especially relative to recent action. Resistance appears to be near 10,500 at this time and likely tested again. Both indicator remain bullish and pointing higher, consistent with higher prices. A break above 10,500 would be bullish with target near 11,500.


Today's loss leader is the NASDAQ Composite with a decline of -1.05%. The tech heavy index was the first to show losses and fell the hardest creating a long red candle and Dark Cloud Cover pattern. Today's action was halted by the short term moving average which has been acting as support. Both indicators have rolled over into bearish signals suggesting support will be tested further and possibly broken. A break below the short term 30 day moving average would be bearish with target near 6,600 and my long term up trend line. A bounce from this level would be bullish and trend following.


The S&P 500 posted the smallest loss, only -0.10%, but created a red candle in the process. Today's candle is small to medium size and creating a bearish attack. The indicators are still bullish but have begun to roll over in sign of possible resistance at current levels. A move lower may move down to the short term moving average near 2592. A consolidation and/or move higher would be bullish and trend following.


The Dow Jones Industrial Average posted the smallest gains rising just 0.24%. Despite posting gains and setting a new all time high today's candle is bearish, red bodied and forming a potentially bearish pattern. The indicators remain bullish and moving higher so it may not turn out to be. Both MACD and stochastic are pointing higher and in line with the prevailing trend with only the weakest indication of resistance in the %K line. A fall from here may find support at 24,000 or just below that near the short term moving average. If the index can hold this level a move higher is likely with target above24,500.


Tax reform news moved stocks but price action shows the market is not quite convinced it will pass as quickly as it seems. While action in the indices had a bearish tone to it the indicators remain bullish for the longer term and internals are positive. Advancers and decliners were evenly matched but new highs outpaced new lows by roughly 8 to 1. Any pull back that may happen in the near term is likely to be limited in magnitude. What is important to remember during all this tax reform hooplah is that underlying the market, the fundamental driver of the market, is the long term economic and earnings outlook. Those are still sound, still positive and will still drive the market higher in the long term. I am bullish for the long term but cautious for the near.

Until then, remember the trend!

Thomas Hughes



 

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