The market staged a rebound in today's trading as tax reform, a government shutdown, economic data, the FOMC and earnings outlook vie for dominance. In the near term attention is fixed on tax reform and a possible government shutdown, in the longer term economic and earnings trends are supporting the market. There was no new news on tax reform although that is a major theme on the minds of investors. The government shut down has gripped attention but is largely expected to be resolved, and will likely be quickly forgotten in light of data and next week's FOMC meeting. Today's data was good, points to strong labor markets and is consistent with expected FOMC tightening.

Asian stocks were wildly mixed. The Nikkei surged nearly 1.5% as a weakening yen helped boost valuations while elsewhere in the region moves were muted in comparison. Shares in China and Korea both fell on weakness in blue chips and tech while Hong Kong was able to post modest gains. European indices were able to closely mostly positive. Trading was subdued in light of tax reform uncertainty, political instability and next week's quadruple shot of central bank meetings. The FOMC is scheduled to release its policy statement Wednesday afternoon, the ECB, BOE and SNB will all release theirs within the next 18 hours.

Market Statistics

Futures were flat and mixed for most of the morning. The SPX hovered around break even drifting above and below fair value up to and into the opening bell. The opening was more or less as expected; the index began the day down by a point, extended that to 2 points, and then moved higher to hover just above break even for most of the day. The day's high was just above 2,640, about +0.50%, and was tested twice before sending the index back to trend within the daily range up to and into the close of trading.

Economic Calendar

The Economy

The Challenger, Gray&Christmas report on planned layoff's rose from the last month but is still indicating strong labor market in 2017. The bad news is that planned layoffs rose 17% in November to hit an 8 month high and are up 30% over the same time last year. The good news is that on a year to date basis 2017 job cuts are -22% from last year and sitting at a 20 year low. Adding to the good news is other data which shows the number of planned hires hit an all time high.

Initial claims rose a marginal 2,000 from last week's unrevised figure to hit 236,000. The four week moving average of claims fell -750 to hit 241,500. On a not adjusted basis claims rose a smaller than expected 44.9% and remain down on a year over year basis. The seasonal factors had expected a gain of 46.2% this week, claims are down -7.3% YOY and remain consistent with ongoing labor market recovery.

Continuing claims fell -52,000 from last week's upwardly revised figure. Last week's figure rose by 3,000 putting this week's number at 1.908 and better than expected. The four week moving average rose by 1,000 to 1.912 and remains low relative to long running trends. While still elevated in the post hurricane environment the figures remain consistent with long term labor market health.

The total number of claims fell by -113,775 to hit 1.647 million. This decline is not unexpected and is in fact seen in previous year's data. On a year over year basis total claims are down -7.7% and remain consistent with ongoing labor market recovery. Looking forward we can expect to see the total number of Americans receiving benefits begin to jump beginning as soon as next week. If the trends hold up the year end spike in claims should top out toward the end of the year and around 2 million.

The Dollar Index

The Dollar Index firmed in today's trading. Yesterday's ADP and today's Challenger/jobless claims reports have reinforced the dollar's dominance in the minds of traders. Today's action added 0.25% to the index and confirms the move above the short term moving average. The index looks like it will continue higher although it remains within the short term trading range. Upper target for resistance is near $95.

While positive, the data was not definitive and did little to alter forward FOMC outlook. The current range is likely to persist into next week, up to and until the central bank policy announcements Wednesday afternoon and Thursday morning. If all banks report as expected the range may persist into the end of the year although policy is currently skewed in the dollar's favor. The FOMC is expected to continue raising rates in 2018 while no other bank is expected or likely to do the same. A break above $95 would be bullish and could take the index back up to test long term highs.

The Gold Index

Gold prices succumbed to the weigh of tax reform, economic outlook, expected rate hikes and strengthening dollar. The metal shed nearly -1.5% to fall below the $1,250 mark in a move that looks set to continue further. Now that $1,250 has been broken downside targets near $1,235, $1,220 and $1,200 come into play. Tomorrow's NFP could extend the move, as could next week's FOMC/ECB/BOE meetings, or tax reform news.

The Gold Miners ETF GDX shed another percent on today's drop in gold. The ETF is moving down toward the bottom of a long term trading range and fast approaching potential support. Support targets are near $21 and then $20 should the first target break. The indicators are both bearish and consistent with such a move.

The Oil Index

Oil prices were able to rebound from yesterday's lows on short covering and news from Nigeria. There is a possible strike brewing in the Nigerian oil sector. The nations largest union says it is trying to stop mass firings and may disrupt supply from African's largest exporter. This news sparked short covering following yesterday's sharp decline. WTI closed the day near $56.70 and at levels we can expect to see US and global production continue to rise. Bottom line, capacity and availability remain high relative to demand and will likely cap gains in the short to long term.

The Oil Index rose in today's session, gaining 0.25% in a move confirming support at the short term moving average. The index remains within the near term consolidation range, close to recent highs, and likely to remain there into the near term. This consolidation/rotation may continue into the onset of next earnings cycle bar the emergence of bullish catalyst. Looking forward earnings growth outlook remains bullish, robust and supported by oil prices so I remain bullish for the long term.

In The News, Story Stocks and Earnings

Bitcoin, I had to bring it up, I couldn't help it. The worlds first, largest and most widely accepted digital currency gained another 15% or $2,000 to trade at $16,0000 today. That brings the YTD gains to just over 1500%. Bubble or not it's hard to not be interested in a trading vehicle making such gains. Whether Bitcoin stands the test of time is yet to be seen but I do believe we are witnessing the emergence of a new, global asset class. The CME's listing of BTC futures is only one example of how BTC and blockchain are gaining mainstream acceptance. Looking at if from that perspective I think the huge gains we have been seeing, and the equally huge corrections that follow them, will be commonplace until the market flushes out. That is of course assuming BTC doesn't fail, crash or get outlawed. Regardless of what happens to Bitcion, I am pretty sure blockchain is here to stay.

Dollar General reported before the bell and beat expectations. The company reported a 10.9% increase in YOY revenue, beating by $100 million, on strong comp store sales. The company reports comps at 4.3%, well ahead of expectations, as well as increased customer traffic and higher ticket averages. Improved margins were offset by higher expenses but guidance was maintained within the previously issued range. Shares of the stock jumped more than 6% in the premarket to gap up at the open just shy of the current all time high. Sellers stepped in at that point and pushed prices down to close with a gain of only 2.77%.

Shares of materials stocks got a lift in the afternoon portion of the session rumors Trump would begin his infrastructure push in January. The details are rumored to be released before the State of the Union Address and could provide additional tailwind for an already bullish market. Shares of Vulcan Materials, Martin Marietta Materials and Eagle Materials all jumped more than 3% on the news. The XLB Materials Sector SPDR gained 0.67% in response and is bouncing on the short term moving average. The indicators are mixed in the near term but are consistent with a rising market in the longer term. Resistance is at $60, a break above there would be bullish.

The Indices

Today's action was positive but the near term outlook remains mixed. The indices remain near all time highs and in consolidation, the question is what comes next? Today's leader is the Dow Jones Transportation Average with a gain of 1.30%. This index is looking strong and forming what could become a bullish flag pattern. The indicators are both strongly bullish if showing near term weakness and consistent, consistent with consolidation within an uptrend and setting up for a trend following bullish signal. Resistance is at the all time high, near 10,500, a break of which would be bullish and trend following. A fall below the bottom of my theoretical flag near 10,250 may be bearish but likely find support near 10,000 or just below that at the short term moving average.

The NASDAQ Composite posted the second largest gain, 0.53%, and formed a small green candle just above the short term moving average. The index remains in consolidation near recently set all time highs and above near, short and long term support levels with positive forward earnings outlook. The indicators remain weak in the near term, consistent with consolidation, but do not yet give sign of major correction. A break below the moving average may be bearish but likely find support near my long term up trend line in the region of 6,650. A move higher would trend following with first target at the all time high, a break above there would be bullish with target near 7,100.

The S&P 500 and Dow Jones Industrial Average closed with equal gains, 0.29%, and very similar looking charts. Starting with the broad market SPX the index created a small green candle moving up from yesterday's close/near term support. The move is trend following but weak and not supported by the indicators. Both MACD and stochastic persist in showing near term weakness consistent with ongoing consolidation within the long running bull market. Support is currently near 2,630, a break below there may find support near 2,600 and the short term moving average.

The Dow Jones Industrial Average also created a small green candle inside what is becoming a near term consolidation range/potential flag pattern. The candle is to the side of yesterday's red candle and fully engulfs it, suggesting prices may move higher in tomorrow's session. The indicators remain mixed but generally consistent with consolidation within an uptrend and set up for a bullish trend following signal. A break above resistance at the all time high would be bullish with target near 25,000 in the near term.

This week's price action has been a little worrisome but not overly alarming. Traders have a lot to think about with tax reform, economic data and the FOMC meeting at hand and that has given the market reason to pause. This pause is good for the market and may continue into the next week or longer, unless some catalyst emerges to drive it higher.

Tomorrow's NFP could be the catalyst to drive the market higher. Strong job gains is always a good thing for the economy, the consumer and forward earnings. After that tax reform could be the ticket to new highs, or the FOMC meeting, or a boost to earnings outlook or a combination of it all. Even without said catalyst the underlying conditions remains bullish and so do I. Will there be a Santa Rally into the end of the month? Maybe so. Will the bull market persist? By all indications, yes. I am cautiously bullish in the near term and firmly bullish for the long.

Until then, remember the trend!

Thomas Hughes



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