Introduction

The FOMC and ECB up their forward growth estimates but toned down their statements, and the market held steady. Counter intuitive as that may be it is consistent with economic trends; the data isn't quite as good now as we thought it would be a few months ago, but it still suggests growth is expanding ahead of us.

International indices closed the day lower on the FOMC, BOE and ECB policy statements. Losses in Asia were minor and in the range of -0.25%. Losses in the EU and UK were more substantial but still only in the range of -0.5% to -0.75%. The statement were more or less as expected, as were comments made by Janet Yellen and Mario Draghi, and did not provide stimulus for higher prices.

Market Statistics

Futures trading was flat to positive all morning. The trade held fairly steady through the data, 2 central bank statements (3 counting the SNB), and right into the opening bell. The open was calm, quiet and without remarkable event. Trading was flat until about 11AM when the market turned lower and then downward pressure persisted into the close. Losses were not great but the indices did close at or near the lows of the day.

Economic Calendar

The Economy

There was a fair amount of economic data released today and it was good. Starting with Retail Sales sales jumped 0.8% and more than 0.5% better than expected. Sales are up 5.8% YOY and 5.2% YTD driven by rising employment. The October figure was revised higher to 0.5% from 0.2%.


Initial claims for unemployment fell -11,000 to 225,000 and very near the historic low. The last week's figure was not revised. The four week moving average of claims fell -6,750 to 234,750 and is also just above the historic low. On a not adjusted basis claims fell by -13.7% versus an expected -9.10% and are down -7.7% from last year. Claims taking from Puerto Rico and the Virgin Islands has still not returned to normal but we've past the point at which they are expected to have noticeable impact. Regardless, claims continue to trend at the historic lows and are consistent with ongoing labor market health if not improvement.


Continuing claims fell -27,000 to 1.886 million from last week's upwardly revised figure. Last week's figure was revised higher by 5,000. The four week moving average of claims rose by 4,500 to 1.918 million but remains low and trending near the historic low, consistent with labor market health.

The total number of Americans filing for unemployment benefits jumped 346,039 in this week's data, remembering that this figure lags initial claims by 2 weeks. This figure would be a shock if not for the fact it is seasonally expected and well within trend. We can now expect total claims to trend sideways for a few weeks before spiking again in the first half of January. So long as the peak is lower than last years the labor market will still be in recovery mode. Total claims are down -5.8% over the same week last year and are expected to continue trending lower into the foreseeable future.


Flash PMI readings for both manufacturing and services were released by Markitt at 9:45AM. The manufacturing index came in at 55, above expectations and the previous month's 53.9. The services index came in at 52.4, expansionary but well below expectations of 54.6 and the previous month's 54.5.

Business Inventories fell -0.1% and as expected and consistent with the -0.1% drop in the previous month. On a year over year basis inventories are up 3.5%.


The Dollar Index

The Dollar Index steadied after yesterday's fall. The fall was due to a dovish tone in the Fed statement, concern over low inflation and a relaxed view of rate hikes in 2018. Today's bounce is due to a similarly dovish tone to the ECB and BOE meetings which consequently weakened the euro and pound. The index is still trapped within the near term trading range, near the middle of a short term trading and looking like it will remain near these levels for the foreseeable future. Now it's back to the data for hints, signs and portents of what the bankers will do in January.


The Gold Index

Gold prices edged up even as the dollar regained ground. The metal gained about $8 to trade near $1,255 to close at a 5 day high. Even so, the metal remains below resistance targets just above $1,263 and poised to move lower. Now that the central bank meetings are past with no unexpected changes to policy the market can focus on the data and tax reform. The combined House/Senate tax bill is expected to pass very soon, possibly tomorrow, and is potential catalyst for gold. Support target is near $1,240, a break below there would be bearish. A move higher will face resistance at $1,260-$1,265, a break above there would be bullish.


The Oil Index

Oil prices had a volatile day moving up sideways and down in turn. The day's action is a result of conflicting signals that show some signs of tightening with an otherwise well supplied market. WTI end the session with a gain near 0.75% as traders chose to focus on yesterday's surprise draw of crude, OPEC's production cap and pipeline outages. The EIA's upward revision to US production growth did little to dampen spirits although it is another indication of high capacity. According to both the EIA and IEA oil prices are expected to trend near $57.50 over the next few months and then fall sharply in the second half of 2018 as global supply outpaces demand.

The Oil Index tried to move higher but the gains were capped. Today's candle is a small green with visible upper shadow just to the side of yesterday's candle. Prices have been consolidating over the past 6 weeks as oil prices top out near $57.50 but look like they are heading higher now. The index has bounced from the short term moving average in line with the prevailing trend and that move is now confirmed by the indicators. Today's action looks like a small flag consolidation within the 6 week range with target near 1,290 to 1,300. Looking forward the sector is still expected to see substantial earnings growth over the next few quarters. I expect this to support prices if not drive them higher in the near to short term.


In The News, Story Stocks and Earnings

Disney confirmed it would be buying assets of Fox spun-off of the parent company. The deal include movie and TV studio properties alongside cable and international TV. According to the deal shareholders of FOX will receive 0.2745 shares of Disney in return for the assets. This values the deal at over $66 billion. Bob Eiger, also as part of the deal, will remain at the helm of Disney until the end of 2021. Shares of Disney gained more than 3% to close at a 7 month high.


The retail sector got a boost from today's Retail Sales data but the gains did not hold. The Retail Sector SPDR created a long red candle engulfing nearly two week's of trading and forming a potentially bearish dark cloud cover. There some signs of support within the candle but the indicators both show divergences consistent with lower prices. Support may be near $43.50 to $44.00, a break of which may go as low as the long term moving average before finding support again. A bounce from or near current levels would confirm the near term up trend with a possibility of moving higher. Resistance is at the top of the near term consolidation range, near $45, a break of which would be bullish.


Owners of Snyder's-Lance got a tasty treat today, the company is looking into a possible sale to Campbell's. An anonymous source leaked news that the company had hired investment bankers to assess the merits of such a sale and that there were possibly two companies interested. No terms were disclosed which left imagination to drive prices. Shares of Snyder's-Lance jumped more than 12% to hit a new all time high.


The after hours were active as well with several earnings releases from early reporters. Adobe, Oracle and Costco all reported better than expected top and bottom line results.

The Indices

The indices moved lower but action was weak. The Dow Jones Transportation Average led with a loss of -0.64% creating a red bodied with potentially bearish implications. The candle is technically a dark cloud cover but a very small one and within a near term consolidation range, more consistent with continuation of consolidation than reversal. Support may be found near 10,250 or just below at the short term moving average, a break below there would be bearish. The indicators are weakening after hitting bullish peaks, MACD a multiyear extreme peak, and setting up bullish continuation signals although those signals have not fired yet.


The tech heavy NASDAQ closed with a loss of -0.38% forming a small red bodied candle above the short term moving average. Today's action may indicate further downside but if so I expect it to be limited. The index is bouncing higher in the nearest term, within a near term consolidation range with mixed indicators. This combination is consistent with consolidation within an uptrend with no reason to end. MACD remains bearish but is very weak, if there is a move lower support is likely to be found near 6,800 and the short term moving average. A break below the moving average may be bearish but also likely to find support relatively quickly. A bounce from the moving average would be bullish and trend following.


The S&P 500 also created a small red candle and looks like it may move lower in the near term. The indicators are mixed but showing divergences that could lead to correction. A move lower may find support near 2,620 and the short term moving average. A break below the moving average would be bearish with targets near 2,600 and 2,550. The caveat is good news; good news could firm support and send the index up to set new highs. That would be bullish with target near 2,700.


The Dow Jones Industrial Average also created a small red candle just at the all time high and forming a weak dark cloud cover. The candle signal is weak but the indicators concur, both of which are showing divergences from the freshly set all time high. A pull back from this level may find support at 24,000, a break below there would be bearish.


Price action is looking a little tepid and no wonder; the market is trading at all time highs and is extended on earnings hope and tax reform. The candles and the indicators suggest a small pull back or consolidation is in the making but there is risk; earnings after the bell suggest strength in the upcoming cycle, tax reform news could hit the wires before the open tomorrow and GDP outlook is on the rise. The charts make me nervous for the near term because there could be correction. The underlying conditions make me nervous to be nervous because I just don't see a reason to sell other than rotation. I may be adding a brick to my wall of worry but I am cautious for the near term, still firmly bullish for the long.

Until then, remember the trend!

Thomas Hughes


 

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