Introduction

Not one but three important testimonies were given on Capitol Hill and the market took it in stride. Testimonies include day-two of Jerome Powell's visit to the House, comments, and remarks from Trade Representative Lighthizer to the Ways And Means Committee, and evidence from former-Trump lawyer Michael Cohen.


Mr. Powell's testimony is perhaps the most important to the market although Mr. Lighthizer's work on the China trade deal comes in a close second. To start, Mr. Powell reiterated his positions from yesterday stating the U.S. economy is still healthy but risks are present. Regarding outlook for the economy and assuming a trade deal is reached, he expects economic activity will begin to pick back up, inflation will begin to rise once again and there will be a need for additional rate hikes sometime down the road.

More importantly, Mr. Powell made some interesting comments about the balance sheet. First, the market should not expect to see the balance sheet return to pre-crisis levels, it's just not possible. The balance sheet has quadrupled since before the crisis, allowing it to run off to pre-crisis levels would throw the economy into recession. That said, Mr. Powell indicated the 'decision the market has been waiting for' is close to hand. The only decision from the FOMC the market is waiting for is when they will end the balance sheet wind-down otherwise known as Quantitative Tightening.

Market Statistics

Mr. Lighthizer's comments were equally interesting if of a different nature. His testimony centered on trade-relations with China and progress on negotiations. He says talks are progressing well but one negotiation won't solve all the problems with China. Translated is; we're close to a deal but it doesn't cover everything. The problem for him, as it has always been, is not in the details of the deal but in its enforcement.

Michael Cohen's testimony was a joke. He may have brought in new evidence but they didn't talk about it much. The esteemed Members of Congress from both sides of the aisle used their times to attack Cohen, grandstand, and posture instead of examining new evidence. If his evidence is worth anything it will go to Mueller and be added to the pile.

Trump is in Vietnam today, meeting with Kim Jong Un. So far, based on the Tweets, the meeting is going well. Trump's new tactic is showing Kim how prosperous North Korea could be if it would only give up its nukes. We'll see how far he gets.

The bull market is about to turn ten years old so we are going to start seeing a lot about it in the news. At ten years old it is long in the tooth but for those who think it is close to ending let me say this. We are in a secular bull market, not just a regular old bull market. In my opinion, and I'm going out on a limb here, the fundamental make-up of American demographics is set up to drive the secular bull market for another ten years. We may see bear markets develop within the longer-term uptrend, those consolidations may take months or even years to unfold, but mark my words, they will provide fantastic buying opportunities for long-term capital gains.


Economic Calendar

The Economy

Mortgage applications jumped another 5.3% in the last week. The surge is attributed to lower interest rates and points to a solid home-buying season this spring.

Pending Home Sales jumped 4.6% in January. This is about 4.0% more than expected and another sign home-buying activity is rebounding in 2018. The rise is due to lower rates and aided by slowly increasing inventories. Despite the increase, sales are down -2.3% from last year making this the 13th month of year over year decline. If mortgage apps and sales continue to increase at it looks like they will the YOY comparison should turn positive in the next month or so.

Factory Orders rose a tepid 0.1% in December, a full half percent below expectations. The slowdown is not unexpected but weaker than forecast and a new drag on already weak GDP forecasts. Within the report shipments, unfilled orders, and inventories declined. New Orders for Durable Goods increased by 1.2%.


The Dollar Index

The Dollar Index fell in early trading but rebound midday to recover the losses. The index closed with a small gain creating a small green candle. The candle shows support at the $96 level but the indicators remain bearish so downward pressure is still dominant. Tomorrow's data, GDP, is likely to have an impact on the index direction but the more important data, PCE prices, comes out on Friday. If the DXY moves lower support is at the short-term EMA and then $95.50, if it moves higher I would expect to find resistance near$97.50.

The index is caught in a mix of sentiment that may cause some volatility in the near to short-term. On one front there is the FOMC talking about patience and ending QT, bearish for the dollar, while on another there is the data. The data, from here and abroad, shows US economic dominance and suggest upward movement for the dollar. While there is still so much uncertainty I expect the DXY to remain within the range of $95.50 to $97.50 but which way it moves and when is hard to predict.


The Gold Index

Gold prices fell in today's session as traders seek clarity on the metal's longer-term direction. The spot-price shed about -0.80% to set a two-week low and it looks like it could fall a little further. Today's low is just above the short-term moving average but there is still some room for it to fall. The indicators are also bearish and suggest downward momentum is building. A break below the moving average would be bearish but additional support targets exist at $1,300 and along the uptrend line. A move below the uptrend line would be bad news for gold bears.


The Gold Miners ETF GDX fell -2.0% in today's trading and could go lower. The ETF is now below the $22.50 support target and indicated lower by both MACD and stochastic. The next target for support is the short-term moving average near $22.00 and may be easily broken if gold prices continue to fall as well. A move below $22.00 would be bearish and likely take the ETF down to the $21 level.


The Oil Index

Oil prices surged today extending the rebound from recently tested support levels. The move began in response to OPEC's response to Trump's Monday Tweet, they basically yawned and ignored him, and then later accelerated on bullish inventory data. The EIA says U.S. crude stockpiles fell 8.6 billion barrels which is far more than expected. The data was partially offset by a build in distillates but that was in turn wiped out by a larger than expected decline in gas storage. Bottom line, OPEC's plan to tighten the market is working, slowly but surely, and oil prices are rising. If we get a close above $57 I think $60 and $64 are right behind.


The Oil Index is gearing up to move higher and aided by rising oil prices. The index moved up in today's action but did not set a new high. The index is in consolidation with mixed indicators but supported by oil prices so a move up is more likely than not. When that happens the first target for resistance is near the long-term moving average, a break above that would be bullish and take the index up to 1,400 in the near to short-term.


In The News, Story Stocks and Earnings

Other analysts on Wall Street are chiming in following UBS stark downgrade of Caterpillar. The general consensus is that the move was extreme and investors shouldn't run away from this dividend aristocrat. Shares of the stock rebound 1.0% in today's action and look like they could begin a sustained move higher. The price is above both moving averages and the moving averages are set to form a bullish crossover so there is some momentum here. Resistance is present just above today's close, near the Monday high, and may keep prices from moving higher in the near-term. Once broken, however, I suspect this stock will move up into the $150 $160 range.


Home improvement retailer Lowe's reported before the opening bell. The company delivered some mixed results but one thing is clear, it is catching up with competitor Home Depot and taking market share. The company reports comps were up 1.7%, 2.4% in the U.S., margins declined 70 bps, and inventory is up 10.3%. The number of stores in operation fell 137 over the last year as the company cuts costs and overlap. Forward guidance is calling for a 2% revenue growth on a 3% increase in comp sales and helped drive the stock up more than 5.0%.


Discount retailer TJ Maxx also reported before the open. The company beat on the top line but EPS was only as expected, not bad but not great either. Comparable store sales rose 6.0% in the quarter to beat the consensus by 4%. Comp's were strong in all three brands but led by Marmaxx. Net margin was also better than expected and helped drive shares higher in early trading. The company also announced an 18% increase to the dividend and an additional $1.5 billion in buybacks which helped the stock extend its gains during the session.


Best Buy reported before the bell and beat on the top and bottom lines. The company says comp sales are nearly double the consensus estimate and led management to up guidance for the coming year. Guidance is now in a range around consensus with consensus estimates near the low end of that range. The company also replaced the existing buyback plan with a new one worth $3 billion and sent shares zooming higher.


Fitbit reported after the close of trading and did not offer a healthy outlook. The consumer-tech company report revenue for the quarter was flat from the year-ago period as lower selling costs offset an increase in sales. Gross margins fell slightly, active users grew 9%, and sales rose 3%. Looking forward the company expects sales in the first quarter to be light compared to past quarters, news that sent the stock down about -10% in after-hours trading.


The Indices

the indices opened lower and then moved lower but buyers eventually won the day. The indices are showing evidence of near-term support but I don't think we're clear of danger yet. Today's leader is the Dow Jones Transportation Average with a loss near -0.50%. The transports created a small red candle with visible lower shadow, set a new two-week low, and broke the 10,500 level in today's action. The move was met by buyers but the indicators remain bearish so I expect to see support tested again at least. A close below10,500 would likely lead the index down to 10,300, a move below that will likely retest 10,000.


The Dow Jones Industrial Average was the second biggest loser in today's action with a loss near -0.25%. The blue-chips moved down to test for support at my uptrend line and so far support is present. The indicators remain consistent with a top so I expect to see support tested again. A move below the trend line, near 25,900, would be bearish but the move may not be very deep or sustained.


The S&P 500 opened lower but was able to move up to close with only a small loss and form a green candle. The bad news is that today's resistance is my long-term uptrend line so prices may have a hard time moving up over the next few days. The indicators are still rolling into bearish signals so downward pressure is present, a move lower would confirm resistance at this level and may lead the index down to 2,750 or lower.


The NASDAQ Composite was able to close with a small gain, about 0.05%. Today's action shows support at the 7,500 level but the candle is not strong and the indicators do not concur. The indicators are still consistent with a top at this level and suggest a move lower is on the way. A close below 7,500 would be bearish and may take the tech-heavy index down to 7,300 in the near-term.


Today's action was iffy. It looks like there is support in the market at current levels but it's questionable how strong it is. With earnings season coming to a close all that's left to support the market is outlook and that leaves something to be desired. The outlook for earnings isn't bad but it's not great either. There is growth in the forecast but there is at least one hurdle and a headwind for the market to overcome.

The hurdle is first-quarter earnings, the cycle is expected to produce negative earnings growth and to me that means negative market movement. The headwind is analysts estimates, analysts estimates for 2019 are still falling if otherwise bullish. Once we're in a position to look past the first quarter earnings cycle I'll feel more confident of a market rally. When the estimates begin to rise I'll be sure of it. For now, I remain firmly bullish for the long-term but neutral in the near-term.

Until then, remember the trend!

Thomas Hughes