Introduction

Another government shutdown is looming over the market but even that hasn't put a damper on earnings. It's still early in the season but so far the signs are good; earnings are beating expectations and companies are talking about the positive impacts of tax reform. The shut down, it's a blip on the radar that will pass and likely pass quickly. When it does we'll still have economic and earnings growth on the horizon. Today's data was positive, in line with trends and points to continued expansion into the short term.

Asian indices were mixed. The Nikkei finished the day down, shedding nearly -0.45%, after moving up to touch a 23 year high. China meanwhile moved up by nearly a full percent on better than expected GDP. Official data shows the country grew at a pace of 6.9% for 2017 and ahead of expectations. European indices were largely higher on positive earnings although gains were muted by weak action on Wall Street. The DAX led with a gain of 0.74%, the FTSE lagged with a loss of -0.32%.

Market Statistics

Futures trading was flat for most of the morning. The trade edged up to just above break even going into the open resulting in a mildly positive open. The S&P 500 held above break even for the fist half hour or so and then dipped to just below it shortly after 10AM. The better part of the day was spent with the indices in the red but losses were marginal. Around 2:30PM the market started to drift higher resulting in a move back above break even for the SPX. This move was short lived, the index dipped back below break even by late afternoon to close near the low of the day.

Economic Calendar

The Economy

Initial claims for unemployment fell by -41,000 to hit 220,000. This is a new low dating back to February of 1973 and a much better read than what was expected. The previous week's data was not revised. The four week moving average of claims fell -6,250. On a not adjusted basis claims fell -10.8% versus an expected gain of 6.0% and are up 2% from last year.


The number of continuing claims for unemployment jumped by 76,000 from an upward revision of 7,000 to hit 1.952 million. The four week moving average of claims gained 4,000 to hit 1.921 million. Despite the gains the figure remains low relative to trend and consistent with labor market health.

The total number of claims jumped a whopping 236,753 to hit 2. 341 million. This jump is above expectation but in line with seasonal and long term trends. Now that the post holiday spike has occurred we can expect to see this figure begin receding as soon as next week. Looking forward the total claims figure should hit a new seasonal and long term low sometime in May.


Building permits fell by -0.1% in December but remain up over the last year. The December figure is up 2.8% over the same time last year. Single family homes made up the bulk of gains, up 1.8% in the month and 4.7% for the year. Housing starts fell by -8.2% in December and are down 6% YOY. Single family starts fell 11.8% in the month but are up 2.4% YOY.


The Philly Fed's Manufacturing Business Outlook Survey shows expansion continues in the manufacturing sector but at a slower pace than in the previous month. Manufacturers also report a rise I prices at both the input and output levels, suggesting inflation is rising systemically. The headline activity index fell to 22.2 from last month's upwardly revised 27.9. Even so, activity remains high as does forward outlook. Most sub indices remained positive although all declined from previous levels. Unfilled orders is the only to turn negative suggesting a decline the back log of orders. Looking forward the 6 month outlook index also fell but remains high and consistent with continued expansion.


The Dollar Index

The Dollar Index tried to move higher in today's session but gains were capped and reversed. The day's candle is small and red although losses were negligible, the index holding steady at break even. Regardless, the index is now below my support target and looks like it will continue to drift lower. While the dollar is supported by US economics and FOMC outlook other world currencies are seeing similar updrafts for similar reasons; data from the UK, the EU, China, Japan and elsewhere suggests accelerating growth among global economies. With risk on sentiment driving the market the index could easily move down to lows not seen since before the FOMC began to taper.


The Gold Index

With the dollar falling gold should be rising but this is not the case. The metal shed close to -0.85% as risk-on appetite caused traders to leave the safe haven asset in favor of other investments. Spot gold is now falling from possible resistance at the $1,345 level with a possibility of moving lower. First target for support is $1,330, a break below that may move to $1,315 or 1,300. Over the next 2 to 3 weeks there is a fair amount of inflation related data culminating in the January FOMC meeting. The bank is still not expected to raise rates at this meeting but it is still expected to hike 3 times this year.

The Gold Miners ETF GDX fell -1.5% on the drop in gold and is confirming the long term trading range. The ETF has created a medium/long red candle falling below the $24.00 support/resistance target and likely to move down to the moving average cluster at least. The moving average cluster, the 30 and 150 day EMA's, are tightly packed near the mid point of a long term trading range at $23. A break below the MA's would be bearish within the range. Longer term this sector is still firmly range bound.


The Oil Index

Oil prices held steady near $64 after a record draw down of US crude supplies. The news was taken with a grain of salt, the draw down is bullish for the market but tighter OPEC supplies are still expectd to increase US production. Even so oil prices are well supported in the near term and likely to remain at or near current levels until data or outlook indicates otherwise.

The Oil Index shed about a half percent from yesterday's close but action was sideways rather than down. The index is trending sideways near long term multiyear highs and forming a likely continuation pattern within an up trend. The up trend is driven by earnings and forward outlook that are currently supported by rising oil prices. The indicators are both moving lower, consistent with consolidation, and setting up for a possible trend following signal. A move up to new highs would be bullish and trend following, upside target is 1,450 in the near term, 1,500 in the short.


In The News, Story Stocks and Earnings

Morgan Stanley reported before the bell and joined the ranks of mega-financial institutions to deliver better than expected results. The company reported a 5.3% increase in YOY earnings that beat estimated by more than $330 million. This resulted in earnings of $0.87 which beat estimates by nearly 10%. The beat was driven by wealth management services which saw a substantial increase revenue, offset by weakness in institutional and trading services. Shares of the stock jumped 2% in the premarket but opened with a gain of only about 1%. The stock proceeded to trade flat from there, just shy of 8 year highs, closing near the high of the day.


JBHunt reported before the bell and delivered an astounding beat. The company says revenue increased by 15% from the last year but earnings are up more than 200%. The EPS gain is well above consensus and driven by the estimated impact of newly passed tax laws. Shares of the stock fell in the premarket session but recovered their mojo by end of day to close with a gain of 0.80% and at a new all time high.


IBM reported after the bell and also beat estimates. The company reports revenue and earnings grew from the previous quarter and YOY period for the first time in 23 quarters. The company is expecting to see revenue growth for all of 2018 despite the expected negative impact of tax reform. The company has also announced plans to suspend the stock buyback plan for the first half of the year. Shares of the stock fell on the news, shedding more than -2% in the after market hours to trade near $165.


The Indices

The indices saw a little bit of volatility from government shut down fears but were able to hold their ground. The one posting the largest decline is the Dow Jones Industrial Average at -0.37%. The blue chips created a small red candle after setting a new all time high but does not appear to have hit major resistance. The indicators remain bullish and in support of higher prices although there is a wee bit of weakness showing in the near term. A fall from this level is not expected at this time but if so, could fall as much as 1,000 points before finding support near 25,000.


The Dow Jones Transportation Average is the only index to close with a gain, 0.03%. The transports created a small doji candle to the side of yesterday's candle and appears to be forming a consolidation pattern with up trend. The indicators are bullish but are a bit mixed in terms of signal; MACD is showing a divergence that is of concern while stochastic points lower. A fall from this level could move down to 11,000 or 10,750 if the first target is broken.


The S&P 500 posted the second largest decline, -0.15%. The broad market index created a small, doji like, red candle to the side of yesterday's candle and at current all time highs. While price action was not bullish, it was not bearish either and part of a near term consolidation. The trends are up and supported by indicators consistent with a trend following entry. A move to new highs would be bullish with target near 2,900 in the near term. A fall from this level might be bearish but more likely a consolidation and entry for bullish positions than a signal of reversal.


The NASDAQ Composite Index posted the smallest decline, -0.02%. The tech heavy index created a small doji spinning top to the side of yesterday's candle and just below the current all time high. The index is forming a small near term consolidation within uptrend and is supported by the indicators. Both MACD and stochastic are convergent with the freshly set all time high and now set up to fire trend following bullish entry signals. A move up to new highs would confirm and bring targets near 7,600 into play.


Today's action was tepid but did not end or reverse current trends. The indices took a pause as earnings season gets underway, and the country watches to see if the our duly elected leaders can agree to fund the government. In the near term it looks like the market is in a consolidation. This could carry on through the earnings cycle, or until enough companies have reported for the market to feel comfortable moving on to the next brick in the wall of worry. I remain firmly bullish for the long term and view any pull backs and corrections that may form as entry points for new positions, I am cautiously bullish in the near term.

Until then, remember the trend!

Thomas Hughes