Introduction

Global markets bounced back from last week's massive sell-off, but volatility remains high and near-term outlook cloudy. Will the rebound last? In the long term sense more than likely, in the near term sense, I'd say there is a good chance we'll see some more selling before this corrective action is over. Today's action saw the S&P 500, Dow Jones Industrials and NASDAQ Composite move up by more than 1.5%

International markets were largely positive although there was some notable weakness in Asian. The Japanese Nikkei fell more than -2.30% while the Shang Hai rose a little more than 0.75%. In Europe, markets closed broadly higher as bullish sentiment returns. Average gains were near 1.25%, led by the German Dax 1.46%.

Market Statistics

Futures trading was positive all morning, indicating an open near 0.75% for the S&P 500. The trade was near flat for most of the morning but there was a little back-and-forth between the bulls and the bears. The last 30 minutes before the open of today's session saw the most volatility but did not erase the early gains. The open was fairly calm, the indices opened as expected and quickly pushed higher. The early gains were lost. However, there was an orderly retreat to support, closing a small gap created at the open, that resulted in a mid-day rally. Prices reached new highs for the day shortly after 12 PM and then again just before 2 PM. Late afternoon saw them reach another new intraday high before profit-taking set in and trimmed gains. The indices did not close at the highs of the day but did post significant gains.

Economic Calendar

The Economy

There was no economic data today, but there will be a slew of it this week. US data includes CPI, retail sales, numerous reads on manufacturing and several key bits of housing data. Internationally there is CPI and PPI from the EU, the UK, and Japan as well as GDP from the EU and Japan.

Moody's Survey of Business Confidence rose by 0.3% to hit 35.3. This is consistent with expansion within the business sector and resilient in light of last week's market correction. Mr. Zandi says business remains stalwart despite the correction with less than 10% of respondents bearish on the economy. For the most part, respondents say the spring and summer should be even better than conditions now.


With just over 68% of the S&P 500 reporting earnings for the 4th quarter of 2017 things are looking pretty good. Regarding estimates, 74% are beating on the bottom line while 79% have beat on the top. Both of these figures are above average, if the rate of companies beating revenue estimates remains unchanged it will be a record dating back to 2008. All 11 sectors are producing earnings growth this quarter, 8 of them are beating estimates at that level.


Looking forward outlook remains positive, expansionary and estimates continue to rise. First quarter estimates held steady in the last week but the 2nd, 3rd and 4th quarter were all revised higher by at least a percentage point led by a near 3% upgrade for the 4th. Full-year 2018 is now expected to produce growth in the range of 18.5% following the now 10.7% expected to close out 2017.


The Dollar Index

The Dollar Index held steady in today's session as traders wait on important inflation data from around the world. Should the balance skew toward dollar strength as it has over the past month the index could continue along the upward path it began two weeks ago. Until then it is capped by the short term moving average which may continue to act as resistance over the next few days. The indicators are bullish and suggest a test of resistance is likely. A move above the EMA would be bullish but face additional resistance near $91 and previous support.


The Gold Index

Spot gold rose $10 or 0.75% to trade at $1,325 on today's dollar weakness. The gains were capped, however, at a potentially important resistance level that may keep prices from moving higher, at least until CPI data on Wednesday. Consumer level inflation is expected to rise at a pace near 2% for the headline and core read, a match or beat could spark a dollar rally and subsequent sell-off in gold. Longer term I expect to see spot prices remain range-bound as expanding global economies keep their respective currencies on a relatively even footing.


The Gold Miners ETF GDX Gained more than 1.30% on the underlying move in gold. The ETF is extending a bounce from the $21 level that began last Friday. The sector how confirmed the long-term trading range and may move higher in the near term. Upside target is $22.50 with a chance of moving higher. The risk is gold prices and this week's data.


The Oil Index

Oil prices rose in the early portion of the session but fell back on news from OPEC. The wannabe-price-fixing cartel has upped its supply forecast for 2018 on rising US production. The news affirms outlook for 2018 which is for well-supplied markets and lower prices. Today's action suggests resistance to higher prices near recently set lows and is accompanied by bearish indicators. The caveat is that stochastic is showing signs of support that may lead to sideways trading in the near term. A move below $58 would be bearish.


The Oil Index made small gains on today's move in oil and is confirming the presence but not the strength of support at the long-term moving average. The indicators have begun to roll into a trend following bullish signal, but only stochastic is confirming so far. Stochastic is forming an early and weak crossover, consistent with a bounce from support but not a reversal or true rally. A move up will now find resistance at the 1,300 level, a break above which would be bullish. A move lower will find support at or near the long-term MA, a break below which would be bearish. Earnings outlook remains strong, so I am still a bit bullish on the sector. The price outlook for the underlying commodity is sketchy, so I don't see a huge upside, but there is potential to retest the recent highs.


In The News, Story Stocks and Earnings

The Materials sector is producing the strongest earnings growth aside from the energy sector and beating estimates by the largest margin. The sector was expected to produce 28.5% growth at the end of the quarter but is now delivering better than 40% with estimates for full-year 2018 rising above 23% in the last week. The XLB Materials Sector SPDR gained a little more than 2% in today's trade, moving up from support in confirmation of last week's initial bounce. The past week's action looks like a quick and tight double bottom that could take prices up to the short term moving average over the next week or so. Long term the trend remains up, and prices are confirming that. A break above the moving average would be bullish with a target near $64 and the recently set highs.


The retail sector took a hit on mixed news, posting one of the only losses in today's trading. Both Barnes&Noble and Amazon are cutting their workforces, but for different reasons. Barnes&Noble is cutting theirs due to lackluster holiday sales while Amazon is shifting focus to the faster-growing segments of its business. The XRT Retail Sector SPDR fell more than a half percent to retest support at the long-term moving average. The ETF confirmed support with a hammer-like candle that is supported by the indicators. MACD is retreating from its bearish peak while stochastic fires a bullish crossover in line with the prevailing trend. A break below the moving average would be bearish, a move higher bullish and trend following.


The VIX fell -11% and looks like it will move lower. The fear index is retreating from its recently set highs but still has a long way to go. The indicators are consistent with a fall from resistance and move lower in prices, but MACD has not yet confirmed a full reversal of momentum. The expected move is now to the downside with a target near 20 and the short term moving average. Regardless, the index remains elevated and at levels consistent with volatile markets.


The Indices

The indices moved up strongly in rebound from last week's lows. The biggest gainer is the Dow Jones Industrial Average with an advance of 1.69%. The blue chips created a medium-sized green candle with visible upper shadow extending the bounce from the long-term moving average. The indicators are consistent with this bounce and showing an early trend following signals that is not yet confirmed by MACD. Stochastic is confirming the bounce with a relatively strong crossover that could easily lead the index higher. The first target for resistance is the short term moving average near 25,225, a break above that would be trend following and bullish.


The Dow Jones Transportation Average posted the second largest gain, 1.62%, in a move up from the long-term moving average. Today's move also extends the bounce from the long-term uptrend line that began on Friday. The indicators are consistent with a touch to support and trend-following bounce with a target near the short-term moving average. Stochastic is already firing a strong, bullish, trend following crossover so a break above the short term moving average is possible.


The NASDAQ Composite posted the third largest gain today, 1.56%. The tech heavy index created a medium-sized green candle confirming support at the long-term uptrend line and extending the bounce from the long-term moving average. The move is supported by the indicators which are rolling into a trend following signal. Stochastic is firing a weak bullish crossover with bearish MACD in decline. A bullish crossover in MACD would further confirm the move. The short-term moving average, near 72,00, is the target now, a break above that would be bullish and trend following.


The broad market S&P 500 Index made the smallest gain but is still looking bullish. The index advanced 1.39% forming a medium-sized green candle extending a bounce from long-term support targets. These targets are the long-term moving average and long-term uptrend line, targets that have produce strong and extended bounces many times over the past few years. The indicators are consistent with bullish trend following entry although it is still early in the signal process. Momentum is up, for now, a move up to the short term moving average is possible, but so is a retest of the long-term average.


The market made a strong bounce today and looks like it is going to go higher. The indices, across the board, are bouncing from long-term EMA's and trend lines, the moves are in line with the underlying trends, they are driven by economic and earnings outlook and supported by the indicators. The VIX is still high, that is a concern, and it is still early in the consolidation process, but I am bullish nonetheless. There is likely to be some more volatility near term, I would expect to see at least 1 or 2 more wild swings, but the long-term outlook is bullish. I am a buyer.

Until then, remember the trend!

Thomas Hughes