Introduction

US equities moved higher as trade talks resume. Both sides indicate a willingness to work but Trump hasn't let up the verbal jabs and Tweets so we'll see how far the talks get.


The talks are being held in Beijing and started today so we should get some news tomorrow. The talks are only at the vice-minister level so whatever news we do get won't be very binding but it will be market moving.

China says both sides want to deal and that China is ready to resolve the trade issues while on an equal footing with the US. Wilbur Ross says China needs to deal because tariffs are hitting China's labor market and that is causing political unrest and hindering the country's economic activity.

The trade talks are going to dominate the news but only for the next 24 hours or so. After that, the market will turn to domestic issues like the FOMC minutes to be released on Wednesday, a handful of speeches by FOMC members, and some important economic data.

Jerome Powell's comments last Friday were fantastic in my view and should keep the market happy so long as the minutes and inflation data don't surprise us. I won't rehash what he said, the bottom line is that the Fed is still data dependent and ready to hold off on rate hikes if inflation remains in check.

There is not a lot of data due out this week and what there is may be delayed because of the government shutdown. Topping the list of releases this week is the CPI, consumer price index, due to be released on Friday. If it is delayed it will add to the market's anxiety over the FOMC.

The government shutdown is in its third week and does not show any signs of ending. Reports are beginning to emerge government employees are coming down with the 'blue flu'. If the shutdown doesn't end soon there are going to be widespread effects felt throughout the economy. The IRS says it will be able to send tax refunds during the shutdown, so we have that at least.

Market Statistics

Today's open was flat and without much fanfare. The indices opened near break-even to last week and held that level for the first hour of trading. Then, around 10 AM, word that OPEC would aggressively cut supply levels in order to prop up prices for oil and support its budget helped the market begin to rally. That news, along with hopes this week's trade talks will lead to more positive developments, fueled optimism for 2019. Now that the year has started and we've passed 'peak earnings growth' the market is beginning to refocus on the fact earnings and GDP growth are still expected.

Economic Calendar

The Economy

The ISM non-manufacturing index fell -3.1 and more than expected to 57.6. This figure shows expansion within the US economy for the 113th month but at a slower pace than the month before. The decline is due primarily to a slowdown in activity, -5.3 to 59.9, but activity remains strong across the nation. New orders fell marginally while employment fell -2.1 to 56.3. Regarding employment, employment activity has slowed for two months but remains above the three-year average. On the inflation front, prices paid fell -6.7% to 57.6 and show another deceleration of inflationary pressure that is in line with the Fed's less-hawkish stance.


Factory orders were delayed due to the government shutdown.

Moody's Survey of Business Confidence slid over the holiday's to the lowest levels since I've been tracking it. The survey is now at a long-term low driven by declining global growth outlook that is in turn tied to the US/Sino trade war. Mr. Zandi says outlook slumped as the New Year began on softening responses regarding current conditions and investment intentions. I suspect once we see some substantial progress on US/China trade ties sentiment will begin to rise sharply, until then expect the negative outlook to weigh on earnings expectations.


The fourth quarter 2018 earnings cycle is about to gear up and things are looking OK. The estimate for earnings growth for the S&P 500 is still double-digit but has fallen to 11.4% from the peak near 20% set in the middle of last year. The good news is that we can expect to see the final rate of growth closer to 16%; the average S&P 500 company has beaten the analyst's estimates by roughly 5% over the past two years. As of now, about 4% of the index has reported and 90% of them beat their consensus estimate.

All eleven sectors have been revised lower over the past quarter. The caveat is that, with the market in correction mode, the S&P 500 is trading at only 14.1 times forward earnings which is the lowest level relative to earnings in over five years. The low valuation may prove to become a catalyst for buying as the earnings season wears on, it assumes the market will undergo an earnings recession and there is no sign of that in the outlook that I can see.


Looking forward, the outlook for growth continues to be downgraded although the weakness is tilted to the first half of the year. Over the past few weeks, the outlook for the first quarter has fallen to only 2.9% growth, a far cry from the 25.9% we saw last quarter. Moving on from there growth will accelerate to 3.7% in the second quarter, 4.3% in the third quarter and then surge to 12.1% in the fourth. The good news is that while the estimates for the 1st, 2nd, and 3rd quarters have been falling the estimate for the 4th quarter is edging higher.


The Dollar Index

The Dollar Index fell on today's weak ISM report. The report shows US economic deceleration and lessening of inflationary pressure which are both consistent with the idea the FOMC will hold off on future rate hikes. The index created a longish red candle that moved down to test support at the bottom of the three-month trading range it has been trapped inside. This week may see the index fall further and there are numerous reasons why. The first is the handful of FOMC speakers we are expecting to hear from this week, the second is the FOMC minutes due out on Wednesday, and the third is the ECB meeting and policy release on Thursday.

The $95.65 level is holding as support but may be broken in the near-term should the FOMC give more signs of dovishness. The caveat is that the ECB, which began its exit from QE last month, may also sound less hawkish than it has and that could keep the index range-bound over the longer term. Up til now, the ECB has indicated a willingness or intention to hike rates in the second half of this year. With economic outlook under pressure and data within the EU coming in weak, it is possible, maybe even likely, the ECB will soften its tone or alter the forecast for Eurozone growth and inflation targets.


The Gold Index

Gold moved up on expectations for a dovish Fed, today's weaker dollar, and uncertainty over the ECB but the gains did not hold. The metal advanced a little more than 1.0% intraday to retest last week's resistance but fell back to close with a gain closer to 0.25%. The candle is a doji and could signal a turning point but formed within a consolidation at a new peak in prices so I don't think so, not yet anyway.

The indicators remain bullish but are showing weakness consistent consolidation so we may see prices move sideways the first half of the week. A move higher will find some resistance near $1,300, a break above that level could be bullish. If it is sparked by the FOMC or the ECB I would expect to see it move up to $1,320 fairly quickly.


The Gold Miners ETF GDX is still winding up within its rising wedge pattern. Today's move created a longish red candle moving down to test support at the bottom of the wedge and the $21 level. The indicators are bullish and suggest prices will rise but there is a red flag to be wary of. The MACD and stochastic are diverging from the recently set highs and do not support the idea of major rally ahead. A move lower to retest support at the $20.50 level is more likely. The ETF is in a reversal that may result in a rally, or a period of sideways range bound trading, and $20.50 is the closest strong support level. A fall below it could keep the ETF range bound, a bounce from it may signal a rally in the gold miners has begun.


The Oil Index

Oil prices moved up about 2.0% in today's action on word from OPEC. OPEC says it will aggressively control supply in order to tighten the market and the market believed them. Later in the day, when Libya announced it would work to double its production over the next two years, the market believed that too and gave up some of the early gains. WTI is now trading just below the $49 level and the short-term moving average where it is showing signs of resistance. Today's candle confirms hesitation at a key level that may lead WTI back to retest the recent low at $44 if this week's inventory data is strong.


The Oil Index edged higher in today's action and is also showing signs of resistance at a key level. The index is testing resistance near 1,230 which is consistent with previous support and the short-term moving average. The indicators are bullish and suggest a move higher could come but that will be dependent on oil prices and they can only move so high on OPEC's talk. A move above the 30-day EMA could be bearish but faces additional targets for resistance at 1,275 and 1,300 that may cap gains.


In The News, Story Stocks and Earnings

Eli Lilly announced the purchase of Loxo Oncology this morning and got shares of both stocks on the move. The deal is worth $235 per share in cash which is a 70% premium to Friday's closing price for Loxo. Loxo is a highly successful oncology player and has several ground-breaking treatments in its pipeline. The purchase will be beneficial for Eli Lilly almost immediately and could drive billions in revenue over the next few decades. Shares of Lily advanced about a half percent on the news and are indicated higher.


Disney announced a price hike at its parks and got the market talking. The move is in preparation for the launch of the new Star Wars land. The hike is more than 10% and puts the fare for a one day pass at over $100. I'll have to wait for the reviews but $100 to take a ride on the Millennium Falcon sounds pretty reasonable to me. The increase and launch should result in a significant increase in park revenue that, alongside studio and media, should produce big increases in EPS this year. Shares of the stock were up more than 1.0% on the news but had a hard time with resistance. Resistance is the pair of moving averages, a close above them would be bullish.


The VIX fell a half percent in today's session and is at a new low, for this year. The fear index is still above 20 but heading lower and supported by the indicators. A move lower may surpass 20 but there is a high likelihood support will kick in at the short-term 30-day moving average, near $18.50. This week's central bank news may be the ticket to get fear moving lower, last week's sure helped, if not then perhaps it will be the trade talks, assuming, of course, they result in good news. If fear spikes again I think 35 may be easily reached and exceeded.


The Indices

The indices moved higher today, and look like they want to move higher again, but this may be the calm before the next storm. Bad news on trade or not as-expected news from the FOMC could send the market seeking support at lower levels.

Today's leader is the NASDAQ Composite with a gain of 1.25%. The tech-heavy index created a small candle that extended the post-Christmas rally and halted at the short-term moving average. The move is bullish and supported by the indicators but resistance is present at the moving average, and just above at a long-term uptrend line, so I am cautious in my outlook. A move above the 6,900 level would be bullish and could take the index up to 7,300 in the near-term.


The Dow Jones Transportation Average was the second biggest gainer in today's session. Positive results on trade mean increased trade and that is good for shippers, truckers, rails, and airlines. Today's candle is small and green and moved up to set a three week high. The move looks bullish and is supported by the indicators which are both showing bullish crossovers. A move up is expected with the caveat resistance targets are just above between 9,500, 9,600, and 9,700.


The S&P 500 posted the third largest gain with an advance of 0.70%. The broad market index had been as high as 1.5% intraday but fell late in the day to form a small green candle with a visible upper shadow. The shadow is indicative of resistance and touched the short-term moving average, confirming the presence of resistance at that level. The indicators are bullish and suggest higher prices may come if the moving average can be surpassed. A move above the 30-day EMA would be bullish and likely take the index up to 2,650 or 2,700 in the near-term.


The Dow Jones Industrial Average posted the smallest gain in today's session and created the weakest candle. The blue-chips formed a small spinning-top type candle just above resistance and looks like it may move higher. The indicators are bullish and suggest a move up is coming provided the market can make up its mind what to do. A move up may find resistance at the short-term moving average, just below 24,000, a break above that would be bullish. If prices fall back below 23,350 a move to retest recent lows may be coming.


Today's market was hesitant. Futures were hesitant, the open was hesitant, and the candles formed with today's action are indecisive. The good news is that the action is bullish and shows a willingness to buy when the news is good. The news US and Chinese representatives are discussing trade, that both sides are willing to deal, is good still tainted with uncertainty. The uncertainty may be enough to keep the market from moving higher but I'm not willing to bet on that. Earnings season is at hand and earnings growth is positive. With the S&P trading at the cheapest levels relative to growth in nearly a decade, I think there is a real chance the market will continue to move higher. I am bullish for new long-term oriented positions, and cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes

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