Introduction

The US indices held steady on earnings optimism, and the estimates just got a big boost. There's been a lot of speculation about just how much tax reform will add to next years earnings outlook. The first wave of earnings revisions since Trump signed tax reform into law suggest the number is very near to 2%. This figure is a bit low compared to most estimates which means there could be more upward revisions in the near future. Up until now the trend has been for estimates to fall going into the start of each quarters earnings cycles. If this changes we'll have a trifecta of earnings based drivers to support higher prices; positive earnings, earnings growth expansion and upwardly trending estimates.

International indices are hopeful as well. Asian markets moved higher on earnings optimism, led by the Nikkei. The Japanese index gained nearly 0.90%, the mainland Chinese Shanghai index followed with a gain of 0.5%. Most indices in the region are trading at or very near multiyear highs. In Europe the situation was much the same. The major indices were up on a round of positive sentiment data that showed gains above expectation in most segments of the economy. The one laggard was consumer confidence which held steady from the previous month and as expected at 0.5%. The DAX led with a gain of 0.36%.

Market Statistics

Futures trading was tepid all morning. The indices were indicated to open with little to no movement for the entire morning and that is what happened. The S&P 500 opened with almost no change, quickly dipped to test for intraday support and began drifting higher from there. The index set a new all time shortly before noon and then extended its gains to hit the intraday high just shy of 2,748. Regardless, today's price action was weak and held within a very tight range; early losses were no greater than -0.2%, gains made later in the day were not much greater. The early high held into the close but the index was able to close near that high.

Economic Calendar

The Economy

There was no data today and there is very little this week. The most likely bit to move the market, other than earnings, are the PPI on Thursday and CPI on Friday. We did get the weekly Survey of Business Confidence from Moody's and it is good. Last week's responses resulted in a reading of 37.2, up from the previous week's 35.9 and very close to the high set prior to Christmas. Mr. Zandi says that global businesses are upbeat and that expansion is above potential. Responses indicate that current conditions are improving and forward outlook remains positive. North American is the most bullish on outlook, South America is least but showing some improvement in recent weeks.


The 4th quarter 2017 earnings cycle is at hand. The big banks begin reporting at the end of the week and are expected to do 2 things. The first is deliver positive earnings results, the second is to provide positive forward guidance boosted by tax reform. According to Factset the quarter is expected to produce 10.5% earnings growth, up from 6.4% in the first. All 11 sectors are expected to produce growth although 7 have seen estimates lowered over the past 90 days. That being said this quarter has seen the least amount of downward revision of any in over 2 years. About 4% of the S&P 500 has already reported with 78% beating earnings estimates and 94% (all but 1) beating revenue estimates.


Looking forward the outlook is good and getting better. Every quarter in 2018 has seen at least a 1% increase in earnings estimates with full year 2018 coming in at 13.1%, up 1.9% from last report. The first and second quarters are now expected to see growth above 12% each, followed up by 2 quarters of above 13% growth in the second half of the year. So, we have earnings growth, earnings growth expansion and upwardly revised outlook to drive the market into the end of the year.


The Dollar Index

The Dollar Index gained about a half percent today as economic outlook and tax reform firm outlook for FOMC rate hikes. Also, weaker than expected inflation data in the EU has lessened expectation for ECB tightening and taken wind out of the euro's sails. The data, an index of expected consumer inflation, is positive but came in much weaker than expected. The DXY created a long green candle on the news and has engulfed the entire previous week's trading. The move is indicative of support near the bottom of a short term trading range and is supported by the indicators. The index may continue to move higher this week but remains range bound in the short to long term. Upside targets for resistance are $92.75 and $94. There is no data due out this week expected to break the index out of its range.


The Gold Index

Gold prices hovered near $1,320 for another day. The metal is being supported by physical demand and the dollar's recent weakness but that support may be faltering. Economics point to further FOMC rate hikes, anything to support that outlook could send the dollar moving up and is a risk to gold. A move above $1,320 is questionable without some catalyst to move it and there doesn't seem to be one present. A fall from $1,320 would confirm resistance, a move higher might be bullish but would face resistance targets at $1,335 and $1,350.

The Gold Miners ETF GDX fell about -0.30% and continues to consolidate near 3 month highs. The ETF is supported by gold recent march to $1,325 but remains range bound in the longer term. The indicators, including the pair of moving averages, is consistent with resistance at current levels and suggest the ETF will remain range bound in the near term at least. Support may be at $23 and the convergence point of the two moving averages, a break below there would be bearish within the range. A move higher will likely find resistance near $24, a break above that would be bullish within the range.


The Oil Index

Oil gained 0.65% in today's session. The move is driven by dubious signs of market tightening and geopolitical tensions that have left prices extended and in danger of correction. Today's news includes further violence and crackdowns in OPEC member nation Iran and signs of rising output in the US. The revolutionary atmosphere in Iran may keep prices up in the near term but outlook for 2018 remains the same; average prices for WTI near $52, much lower than where WTI is trading today.

The Oil Index gained about 0.25% to set another new long term high. The index is moving up on rising oil prices, positive forward earnings outlook and upward revision to forward outlook due to rising oil prices. Today's action brought the index up to my 1,390 target and looks like it could drift a little higher. The indicators remain bullish but have begun to show evidence of peaking. The evidence is primarily in the MACD which is showing a peak consistent with slowing momentum within an uptrend. This slowing may result in consolidation or correction but there is no evidence of that yet. If the index were to fall support targets are 1,350 and 1,300.


In The News, Story Stocks and Earnings

GoPro announced a number of negative catalysts over the course of the morning that drove the stock down by more than -20%. Among these are the departure of COO Charles Prober, lowering the price of new product lines due to slow sales and lowering 4th quarter guidance. The company says discounted pricing will have at least an $80 million impact on 4th quarter revenues and that is if they work to attract customers. Morgan Stanley says the discounts will make it difficult for the company to grow 2018 revenue. Along with the bad news CEO Nick Woodman announced that the company had hired Goldman Sachs to explore the possibility of a sale. Shares fell to a new all time low but recovered much of the losses on the sale news.


NVDIA announced it had been chosen by Uber and Volkswagon to supply chips for their self driving car projects. This brings the total number of businesses using the NVDIA Drive processor to 320. The company also announced it would be shipping the first Xavier processors this quarter. Shares of the stock jumped 3% to hit a new all time high.


Seagate Technology re-revised 4th quarter guidance in a statement after the bell. The company sees revenue growth in a range above that previously expected. Revenue of $2.9 billion is nearly 6% above analyst expectations, earnings will be enhanced by a margin expansion and forward demand outlook is robust. Shares of the stock jumped more than 3.5% in the after hours session.


The Indices

Today's action was tepid but still more bullish than not; the indices all set new all time highs. The day's leader is the Dow Jones Transportation Average which closed with a gain of 0.78%. The transports created a medium sized green candle moving up from Friday's close and supported by the indicators. The indicators are both firing trend following bullish crossovers and are consistent with higher prices. A move up would be bullish and in line with trend with upside targets in new all time high territory.


The NASDAQ Composite closed with the 2nd largest gain, 0.29%. The tech heavy index created a small green bodied candle moving up to set a new all time high. This move is in line with the prevailing trend and supported by the indicators. The indicators are both moving higher following bullish crossovers and consistent with higher prices. A move up would be trend following and bullish with upside targets at 7,200 and above.


The broad market S&P 500 closed with the third largest gain, 0.16%. The benchmark index created a small green bodied candle closing near the high of the day and at a new all time high. The move is supported by the indicators which are both moving higher following bullish crossovers. Upside target remains 2,800.


The Dow Jones Industrial Average is the only index to close with a lose, -0.05%. Despite this today's price action is a bit bullish in that it set a new all time high and is supported by the indicators. The indicators are both moving higher following bullish crossovers and in line with the underlying trend. A move higher would be bullish and likely take the index up to next target near 26,000.


The indices are moving higher, no argument about that. The moves have been supported by trends and outlook and are now boosted by rising earnings estimates. With this trifecta of catalysts driving stocks there is little reason to be bearish on the market except in isolated and specific cases. Looking forward I think we can expect to see a steady inflow into the market for some time to come. This inflow is fueled by improving labor conditions (401K's and IRA's) that will provide tailwind for many years. In the near term look to earnings to drive prices; if they come in hot and I think they might we could see the bull market accelerate. I am cautiously bullish in the near term, no reason to get overly risky, and firmly bullish in the long.

Until then, remember the trend!

Thomas Hughes