Introduction

Santa Clause Rally, Trump Rally, Tax Reform Rally you choose the label the market keeps rising. Today's move is inspired by an expectation tax reform will be passed by Congress tomorrow and could keep rising. There is some talk of buy-the-rumor-sell-the-news but there are other things to consider, namely economic and earnings trends. Both are positive with underlying momentum that will likely be boosted by tax reform. If the vote does turn into a sell-the-news event I will be ready to buy on the dip.

International markets were also up on on hopes of US tax reform. China was the noticeable laggard, closing flat for the day on the Hong Kong and mainland indices. Japan led in Asia with a gain near 1.5% followed by a 0.7% move in Australia. European indices were up in early trading and then extended those gains into the close. The German DAX led with a gain of 1.59% as CPI remains tame. Today's data show consumer level inflation within the country running cool at the core level, down a tenth for the month and up only 0.9% YOY.

Market Statistics

Futures trading was up right from the start. The trade was not overly strong but did show optimism for the week ahead. The SPX was indicated to open with a gain near 0.4% going into the open and that is about what we got. The index drift higher from there, extending the gain to about 0.5%, before leveling off into the afternoon.

Economic Calendar

The Economy

Only one economic release today, the NAHB Home Builder's Survey. The survey rose 4 points from last month to hit 74 and an 18 year high. The previous month was revised lower by -1 but that did little to offset the positive reading for December. The level of traffic contributed the most gains, rising 8 points to 58. The level of sales increased to 81 while the 6 month outlook rose 3 points to 79.

Moody's weekly Survey of Business Confidence jumped another full point on hopes of US tax reform to hit another new two year high. The index has been trending higher for the past 2 months as the tax story has unfolded and is consistent with expanding economies. Mr. Zandi says responses to all the survey questions are positive, especially those about forward outlook. The 6 month outlook expects conditions to get even better next year.


Earnings outlook continues to be robust. The fourth quarter is expected to see earnings growth in the range of 10.6%, up from the 6.4% seen in the third. All 11 S&P 500 sectors are expected to grow although 7 have been revised lower since the end of the quarter.


Looking forward the earnings expectations is also robust, and getting better. Three of the four 2018 quarters have been revised higher with this week's data, perhaps the first sign of what could come if tax reform is passed. The 1st, 2nd and 3rd quarters have all been revised up by a tenth to 10.7%, 10.3% and 11.8%. The fourth quarter offsets with a downward revision of one tenth to 11.1%. The full year estimate ticks up to 11.2% in response.


The Dollar Index

The Dollar Index fell in today's trading. Last week's central bank meetings have left it trading within a narrowing range and winding up on tax reform. The index confirmed support at the $93 level with today's candle and likely to continue testing it into the near term. Unless of course they actually do a vote on tax reform tomorrow, and it passes. The indicators are very weak and do not give much direction. A break in either direction could move $1.50 to $2.00 depending on the news and this week's data. Even so the index would remain within the short term trading range. Upper target for resistance is near $95, lower target for support is near $91.


The Gold Index

Gold prices gained in the face of impending tax legislation. Today's fall in the dollar is likely to blame and equally likely to leave gold trading sideways in the near term, with the caveat a tax vote could change the situation very quickly. Today's move added about 0.50% to the spot price, bringing up to $1265 and resistance at the bottom of the October/November trading range. A fall from this level would confirm resistance and could take prices lower although there is support near 1,240. Longer term the dollar could remain range bound and keep gold trending sideways at or near current levels.

The Gold Miners ETF GDX created a small green bodied candle although it posted losses for the day. The candle is a small spinning top doji beneath strong resistance levels. Resistance is currently at $22.32 and the short term moving average but also present just above in the range of $22.50, the long term moving average and the mid-point of a long term trading range. The indicators are bullish but very weak, consistent with a test of resistance but not breaking through. A fall from this level would be bearish with targets near $21.50, $21.00 and $20.00. Longer term the ETF looks likely to remain range bound along with the dollar and gold.


The Oil Index

Oil prices had a mildly volatile day but held above $57. WTI was up about 0.5% in the early part of the session but fell to settle with a small loss as supply realities outweigh outages and OPEC. The reality is this, no matter what OPEC does, no matter the near term effect of outages there is plenty of available supply. The oil is in the ground, we know where it is and there are people ready to pump it as soon as we need it. When that situation changes prices will go up and stay up, until then I think we can expect lower prices in the not too distant future.

The Oil Index moved higher despite the fall in oil prices. The index is moving up on earnings expectations, with prices sustaining a $57 handle forward outlook is on the rise. Today's move extends a bounce from the short term moving average and sets a new two week high in anticipation of the coming quarter's earnings cycle. The indicators are bullish but hovering near neutral so a trend following move higher could be expected. Upside target is 1,300, maybe higher, with the risk of earnings. I will venture a guess that by the time earnings roll around again there will be a clearer picture of oil price outlook for the 2018. If it there is a steep decline in prices, or an expectation for a steep decline in the second half of the year, it could easily cap upside.


In The News, Story Stocks and Earnings

Campbell's announced it had agreed to buy Snyder's-Lance this morning before the bell. The deal is worth $4.87 billion or $50 per share in an all cash deal, a whole lot of crackers. Campbell's is planning to leverage the deal to enhance its snacking platform and realized $177 million in synergies over the next 7 years. Campbell's is financing the company with long and short term debt although it is committed to deleveraging as quickly as possible. To that end the it is cutting the buyback program but expects to continue paying the same dividend. Shares of the stock moved sideways on the news, trading between the short and long term moving averages.


The Home Builders SPDR XHB gained more than 1.5% on today's home builder data. The ETF gapped up at the open and extended those gains to form a medium sized green candle just below the long term high. The indicators are mixed but rolling into a bullish trend following signal with the caveat significant resistance could exist at the high. A break above $44 would be bullish and trend following with upside targets near $46 and $48.


The VIX made a small gain today and created a small green bodied candle. The candle is sitting on the long term support level of 9.51 and looks like it may have hit support. The indicators are mixed but consistent in weakness. MACD is bearish but trending near 0 and very weak, stochastic is showing a weak bullish crossover while beginning to roll over below the lower signal line, neither indicative of strong movement. Regardless, the index is trending low and at historic lows, consistent with bull market conditions and rally.


The Indices

The indices moved higher and set new all time highs in many cases. The days leader is the Dow Jones Transportation Average with a gain near 1.25%. The transports moved up at the open, extended the gains and closed with a medium sized green candle if off the highs of the day. The index also set a new all time high. The indicators remain bullish and in support of higher prices, MACD and stochastic both ticking higher within existing bullish waves with today's action. Upside target is 25,000


The NASDAQ Composite gapped up at the open to create a small green bodied candle and set a new all time high. The indicators are ticking higher following bullish crossovers and firing trend following entry signals. Today's action is an extension of a bounce from the moving average, supported by the indicators and looking like it could extend gains into the near term. Upside target is now 7,200.


The Dow Jones Industrial Average closed with a gain of 0.56% after gapping up to create a small bodied green candle. Today's action is a little suspicious due to the size of the candle but not alarming unless confirmed by other signals. The other signals, MACD and stochastic, are both moving higher following bullish crossovers and in support of higher prices. Upside target is 25,000 in the near term.


The S&P 500 made the smallest gain, only 0.53%. It made a small gap up at the open, created a small green bodied candle off the high of the day, and it set a new all time high. It is also supported by the indicators which are both bullish and ticking higher. Upside target is still 2,700, a break above there would be bullish with further targets near 2,800.


The markets are still moving higher and you can't argue with that. There are reasons to fear a correction but like the trading masters teach, its OK to anticipate correction but not OK to trade on the notion until the signals present themselves. The signals have not presented themselves. Tomorrow things could be different. The tax vote could come and go, it could pass or not, or be postponed and the market could correct. If it does I'll be ready to buy on the dip because the fundamentals and outlook remain positive. I am bullish for the near term but remain cautious in my approach, there's no need to get crazy and every reason to stay safe, still firmly bullish for the long term.

Until then, remember the trend!

Thomas Hughes



 

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