Introduction

There's so much going on this week I don't know where to start; the FOMC tops the list but is by no means the only thing moving the markets. Along with the meeting is a round of important monthly macro data that happened to include the PCE price index this morning. Later in the week we'll get important reads on manufacturing, real estate and labor to include the ADP, Challenger and NFP reports. On top of that this is peak earnings. This week is the busiest week of the season, there are 125 S&P 500 companies reporting, and a make or break week for the market. Also on tap is the State of the Union Address which should be interesting if nothing else.

Asian indices began the week mixed. Chinese markets were down across the board while Japan closed with a negligible loss and others in the region posted small gains. Chinese markets were driven by a government sponsored op-ed stating black swan or gray rhino events were due this year; my take, if a black swan is something you can't predict what value does this statement have other than to spook or caution markets? European indices were also mixed but more flat than not as earnings, the FOMC and data come into focus. The EU is expecting a read on 4th quarter GDP along with other data.

Market Statistics

Futures trading was flat to down all morning, the down part taking dominance as we approached the opening bell. Trading was driven by earnings uncertainty, economic/FOMC anxiety, growing scandal related to sexual misconduct and interest rate angst. Interest rates have begun to move higher and that has the market spooked. Traders have begun to move en masse from bonds to stocks and that has, in the past, been a harbinger of doom. My take on that is that was then this is now. The SPX opened with a loss near -0.25% and extended to that to roughly -0.75% by mid day. The lunch time lows turned out to be intraday bottom resulting in a small bounce. By mid-afternoon the indices were very nearly back to the opening levels before selling took hold of the market again. The late day push lower left the indices trading at new lows for the day where they held into the close of the session.

Economic Calendar

The Economy

Today's report of primary importance and sole release of the day is Personal Income and Spending. Personal income increased by 0.4% and a tenth ahead of expectations while spending rose by 0.4% and missed by a tenth. The good news is that both figures are strong and point to expansion within the economy. The gains income were due to salaries and wages suggesting they will be long lasting. The all important PCE price index came in at 0.1% headline and 0.2% core, both as expected, with YOY gains of 1.7% and 1.5% respectively. While these numbers are not hot they do suggest the FOMC will stick to their time line with a chance of picking up the pace if inflation shows further signs of acceleration.


Moody's Survey of Business Confidence shows business sentiment is trending near multiyear highs. The latest read came in at 35.0, up from 34.3 but below the recent high of 38.2. Regardless the index is consistent with positive business conditions and forward outlook. Mr. Zandi says businesses are feeling good. The survey results show an economy growing above potential with few concerns. One is legal and regulatory issues but that is receding. Another is labor scarcity and cost and that one is getting worse.


With 24% of the S&P 500 reporting the earnings season is looking very good. I have to say that at this time there are many earnings fueled tailwinds driving the market and it doesn't look like they are going to run their course for at least another year and probably much longer. These include positive earnings outlook, earnings expansion within that outlook, improving expectations and, at least for now, businesses that are still beating despite increased analyst confidence.

So far 24% of the S&P 500 has reported with 76% beating EPS estimates and 81% beating revenue estimates. Both the EPS and revenue beat rates are above average, the revenue rate is at an all time high. The blended rate of growth has risen to 12% already and may continue higher. All 11 sectors are showing growth while 8 are outperforming expectations.


Looking forward growth is good. All four quarters of 2018 are expected to show double digit growth and those estimates have been rising. The first quarter is now expected to see 16% earnings growth as is the second. The third quarter is expected to see growth expand to 17.3% and then again in the fourth to 28%. Yes, 28%. The last time that happened the economy was rebounding from the Global Financial Crisis and hitting a peak, this time around it is growing and and growth is accelerating.


The Dollar Index

The dollar steadied a bit after last week's fall. The Dollar Index gained about 0.20% creating a small green bodied candle sitting on a support target. Support is currently near $89.00 and may hold provided the FOMC sticks to its guns. If they back off their stance the dollar could fall further. If they sound hawkish the dollar may be able to gain ground versus the basket of world currencies. The risk is that global growth is accelerating as well and that will continue to undermine dollar strength keeping the index range bound.


The Gold Index

Gold prices edged lower extending losses begun last week. The metal is moving down off of a long term peak and is indicative of resistance at the $1,350 level. Today's move was driven by strength in the dollar and may continue lower should the dollar begin to strengthen longer term. The indicators are both consistent with a peak and correction showing divergence and bearish crossovers. At this time spot prices are well above the short term moving average and within a trading range so a move down to the average is possible, near $1,320, with a chance of going lower.

The Gold Miners ETF GDX fell -2.75% on the fall in gold. The ETF broke through the $24 support target and is now resting on the short term moving average. Support is near the middle of the long term range and likely to be tested again. The indicators are mixed, consistent with range bound trading and a move lower within the range. A fall below the short term moving average would be bearish with downside target near $22.50 in the near term.


The Oil Index

Oil prices fell nearly a full percent in today's session. WTI was pressured lower on strengthening dollar and signs of rising output in the US. The number of rigs operating in the US/Canada region increased by 24 in the last month, up 228 in the last year, and suggest markets will remain well supplied despite the OPEC production cap. Today's move gives further indication that resistance exists above $66 but no signs of reversal have emerged yet. Contrarily, JP Morgan just raised their price target to $70.

The Oil Index fell -1.54% in response to the fall in oil prices. The index appears to be on the verge of correction and no surprise there, the prices is up substantially in the last few months. The indicators are consistent with a decline in prices, both showing divergences from recent highs and bearish crossovers. A fall from this level may find support at the short term moving average, about -3.5% from today's close, a move below that may go as low as 1,350 or 1,300.


In The News, Story Stocks and Earnings

Wynn resorts stock fell another -16% on growing scandal centered around CEO Steve Wynn. New allegations came out today expanding the scope of the abuse case which rocked the market last week. Simply speaking to the company and Mr. Wynn's ability to run it, most of Wall Street agrees the business is in peril without him. Today's move created another large red candle, broke below the short term moving average and looks like it will test $160 if not move lower.


Dominion Energy reported before the bell delivering mixed results. The company grew revenues by more than 4% over the prior year but fell short of estimates. EPS of $0.91 beat by $0.02. On an as-reported basis the bottom line nearly tripled on benefits from tax-reform. Forward guidance is in line with expectations helping the stock to inch up in early trading. Late in the day market angst took its toll, driving shares back to break even and below.


Lockheed Martin reported before the bell dropped an earnings bomb. The company reported revue grew more than 10% resulting in earnings of $4.23. EPS beat consensus estimates by more than $0.20 and last years results by more than a dollar. All segments save space produced double digit growth with strong outlook for 2018. Shares of the stock jumped 3.5% in the premarket session, opened with a gain near 2% and closed at that level after a volatile day of trading.


The Indices

Today's action was bearish at face value but not overly alarming when looking at the daily charts. All the major indices created red candles, some stronger than others, but none strong enough to indicate reversal or even correction with so much ahead of us this week. The S&P 500 made the biggest decline but only -0.67%. The broad market created a small bodied red candle that qualifies as an inside day but not one I would trade on. The indicators remain bullish and consistent with ongoing rally although they are showing some weakness in the near term. This could result in correction and a possible move down to the short term moving average but no guarantee there. Bottom line, the trend remains up with expected, possibly bullish, catalysts at hand.


The Dow Jones Industrial Average posted the 2nd largest decline, -0.66%. The blue chips created a small to medium sized red candle that is forming a dark cloud cover but not one that looks significantly different from any other red candle we've seen over the past few months. The index is in up trend and that has not changed. The indicators remain bullish but have begun to show peaks consistent with consolidation and/or correction. A move lower may be bearish but would likely find support at 26,000 or just below that at the short term moving average.


The NASDAQ Composite fell -0.52% creating a small red candle. Today's candle is to the side of Friday's and completely inside of it. The indicators are bullish but consistent with a consolidation and set up to fire trend following signals should the index move higher. A move higher would be bullish with upside targets near 7,750 and 8,000.


The Dow Jones Transportation Average posted the smallest decline in a light session of trading. The index closed with a loss of -0.10% creating a small doji candle. The index is bouncing up from the short term moving average in a trend following move but some resistance is still present. The indicators are still pointing lower following bearish crossovers so support may be tested again. A break below the moving average would be bearish with target near 10,500. A bounce would be trend following and bullish with target near 11,500.


I've been bullish a long time and, if my perspective is true, I will be bullish for a long time to come. That being said the market looks like it could correct right now. The problem is that we are at the start of a really big week for the market. Data and the FOMC are going to affect trading but what I am really looking to is the 125 S&P companies that are reporting earnings this week. If they produce stats like the first 24% did I don't see the market moving lower. I'm bullish, cautious, but bullish.

Until then, remember the trend!

Thomas Hughes