Introduction

A number of US large cap companies have pledged to spend tax savings on wages, salaries and bonuses. Among the announcements were plans for new construction and other capex related items. The list is broad in terms of sector including infotech, airlines and banks. Names include AT&T, Wells Fargo, Comcast and NBCUniversal.

International markets were mixed on Congress passage of the tax bill. Asian markets were flat, some up and some down, led by a half percent gain in China. Japan closed with a small loss after the BOJ left rates unchanged and indicated no change to policy should be expected in the foreseeable future. European indices were more positive, getting a lift from US markets, and closed with gains across the board. The FTSE led with a gain of 1.05%, the DAX lagged at 0.30%.

Market Statistics

Futures trading was positive all morning and gained some strength going into the open. The trade was driven by tax reform and the economic boost derived from it as well as a raft of economic data. The SPX opened with a gain of about 3 points and quickly moved higher. There was a quick dip to retest support but that resulted in a bounce from the opening level and a slow, steady march higher. The index moved higher into the early afternoon and looked like it could continue higher. Resistance set in at that point however and capped gains. The markets drift sideways the rest of the day to close very near to the opening level.

Economic Calendar

The Economy

Lots of data today, a bit mixed in terms of expectations but all positive and consistent with underlying trends. Initial jobless claims rose more than expected to 245,000 but remain well below 300,000 and near historic lows. The four week moving average of claims rose a mere 1,250 to 236,000 and is also low relative to trend. On a not adjusted basis claims rose 1.5% from the previous week, the seasonal factors had been expecting a decline near 6.5%. On a year over year basis not adjusted claims are down -8.9% and continue to trend lower in the long term.


Continuing claims rose by 43,000 to 1.932 and a 4 week high. Even so the number of 2nd week claims remains low relative to trend and consistent with labor market health. That being said, signs of bottoming persist in this figure. It suggests this measure of the labor market has ceased improving and/or hit a point of equilibrium. How that reflects on the overall labor market is yet to be seen. It may be the first indication of a “tight” labor market, one ready to sustain above average wage growth.

The total number of Americans receiving unemployment benefits fell -89,915 to 1.901 million. This is in line with seasonal expectations and a precursor to increases we are likely to see in the next month of data points. These gains are seasonally expected, the relevant figure will be the high. As long as the peak remains within the long term trend the long term trend will remain intact. My target is 2.25 million by the last data point for the year. Today's data is for 12/2 and lags initial claims by 2 weeks. On a year over year basis total claims are down 6.7% and show continued, sustained improvement in the labor market.


The final revision to 2017 3rd quarter GDP growth came in at 3.2%. This is a tenth shy of expectations and down from the previous estimate but still strong and expanding from the previous quarter. Considering the Leading Indicators I think we can expect growth to continue as it has been. GDP growth was fueled by PCE, inventories, non-residential real estate investment, exports and government spending.


The Philadelphia Fed Manufacturing Business Outlook Survey shows broad gains in activity. The headline activity index gained 3.5 points to 26.2 with positive contributions from all segments. New orders and shipments both remain positive and continue to expand, gaining 8 and 2 respectively. Employment, unfilled orders and delivery times all remain positive but declined in this month's reading. Employment has been positive for 13 months showing sustained expansion of the labor force. The 6 month forward outlook gained 2.4 to hit 53.5 and is near long term and historic high levels, indicative of continued expansion in the manufacturing sector.


The Index of Leading Indicators came in at 0.4% after rising 1.2% in the previous month. This is the 16 month of expansion in the leading indicators. Analysts at the conference board say the reading indicates solid growth will continue into the first half of next year. The Coincident Index increased by 0.3% after rising 0.3% last month, the Lagging Index gained 0.1% after rising 0.3% in the previous.


The Dollar Index

The dollar gave up a little bit of ground in today's session despite the positive data. While positive and in support of the FOMC time line it does not give reason to expect them to tighten it. The Dollar Index fell less than -0.25% and remains well within the short term range. The indicators are bearish so a move down to the bottom of the range could be expected although economic data or the signing of tax reform into law could alter that outlook. Longer term the index is likely to remain with the range of $91.50 to $95 until something fundamentally changes in the data, the outlook or the central banks.


The Gold Index

Gold prices held steady at a two week high as weaker than expected data left the dollar moving lower. The spot price is now approaching a point of possible significant resistance near $1,275. This target may be tested in the next day or so and, if broken, could lead to further upside although there is still significant resistance possible between $1,275 and $1,300. The risk is tax reform and passage of the bill; if it sends the dollar higher on expected GDP growth it will likely cap gains in gold and send it lower.

The Gold Miners ETF GDX gained 0.62% on the news and is extending a move up from support. Support is near the bottom of a long term trading range and is confirmed by the indicators. The indicators are both bullish and suggest higher prices within the range. Today's action has moved the price above the mid-point of the long term range but faces resistance at the long term moving average. A break above there would be bullish with a target near $24 and $25. If the moving average caps prices and/or should gold prices fall a move back to the recent low should be expected.


The Oil Index

Oil prices moved higher today on continued outages in the North Sea and signs of tightening US supply. Those signs are near term as are today's gains. Gains are capped by the longer term outlook which suggests global oil markets will be well supplied in 2018. Supplied enough to increase global storage levels and drive the price of crude to sub $50 levels by the end of the year. Prices may move higher in the near term but those high prices are likely point of reversal for those with a longer term outlook.

The energy sector jumped on today's rise in oil prices, and forward earnings outlook, tax reform, economic data etc. The Oil Index gained nearly 2% and exceeded by original target of 1,300. This is a strong move, supported by the indicators, and brings new targets into play. My new target is in the range of 1,400 to 1,450 and may be reached by the end of next earnings cycle. Longer term I will be watching for signs of topping and reversal.


In The News, Story Stocks and Earnings

Conagra reported before the bell this morning. The maker of higher end packaged foods grew revenue more than 3% over the prior year and beat expectations. The company reported earnings of $0.55, $0.03 ahead of consensus, and issued positive guidance because of it. The beat is driven by organic sales, up 2.3%, which is expected to continued growing into the coming year. The shadow overhanging share prices is the fact organic net sales are expected to come in flat for the year. Shares of the stock moved higher on the news but resistance pushed them back to break even, creating a large red candle closing with a loss on the day.


Nova Lifestyle, maker of designer and manufacturer of modern home furniture, made a major announcement today. The company will begin taking payments with Bitcoin. Along with this they plan to integrate a network of designers, decorators, users and suppliers built on blockchain technology. Shares of the stock jumped on the news and gained more than 18% by the close. The stock created a large doji candle, possibly a hanging man, just below resistance. Resistance is near $3.00, a break of which would be bullish. Assuming that Bitcoin continues to appreciate as some analysts say it will, and assuming the company actually follows through on the announcement, this could turn into a decent play on cryptocurrency.


Nike reported after the bell and beat on the top and bottom line. Revenue of $8.55 billion beat by $.150 billion, EPS of $.46 beat by $0.06. Sales were driven by international growth as well Nike Direct, offset by an expected decline in US wholesale sales. Although revenue grew year over year diluted EPS did not, hit by declining margins and higher expenses. Looking forward the company is expecting to build on growth but did not give guidance.


The Indices

The indices tried to move higher but did little more than move sideways within what is now a tight 4 day range. This range began on Monday when the market gapped up on tax hopes and has carried through until today. Today's leader is the Dow Jones Industrial Average. The blue chips closed with a gain of 0.22% and created a small doji candle within the four day range. This candle, the past 4 days, can be considered spinning tops as the market is waiting on tax news and etc. They can also be considered a consolidation with uptrend and are one until proven false. The indicators are a little mixed but bullish and in support of rising prices. My new target is 25,500, a move to new all time highs would confirm this outlook.


The S&P 500 closed with the second largest gain in today's tepid session. The broad market also created a small doji candle within the 4 day range and looks like it could move higher. MACD momentum and stochastic are both consistent with the onset of a trend following move higher although there are some warnings signs. Both are showing divergences from the all time highs that suggest an end to the near term portion of the bull market are nearing a point of possible reversal. When that reversal begins is yet to be seen but the possibility is there. A move to new highs would just about hit my 2,700 target. A break above there would be bullish with target near 2,775.


The NASDAQ Composite comes in third with a gain of 0.06%. The tech heavy index created a small doji candle within the four day range and looks like it could go higher. Both indicators are bullish and pointing higher with only resistance at 7,000 to hold it back. A break above 7,000 would be bullish with target at 7,200.


The Dow Jones Transportation Average comes in last with no gain and no loss, it was unchanged. The transports created a small red bodied candle moving down to close at yesterday's close and almost completely within yesterday's upper shadow. The index did create a new all time high. The indicators are bullish and consistent with higher prices although there is a strong divergence from momentum. This divergence is a sign of possible reversal but not a guarantee. A move lower may find support at 10,500 and 10,250 with a possible move lower should sentiment deteriorate. A move higher would be trend following and in line with a recently formed continuation signal, upside target is near 11,500.


The markets have been moving higher but the indications are mixed. There are signs the rally is slowing, divergences suggest correction could come, but this type of thing happens whenever the market sets up for a move higher. The underlying trends remain bullish, earnings outlook remains bullish and today's data supports that outlook so there is no reason for me to bet against it. The near term risk is tax reform and how the market reacts when it gets signed into law. A knee jerk reaction to sell-the-news could turn into the next great entry point for long term positioning. I am cautiously bullish for the near term, firmly bullish for the long.

Until then, remember the trend!

Thomas Hughes


 

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