This is what you need to know today.

Trump’s Tax Cut Promise

Stock indices have hit new highs on Trump promise that business taxes will be cut in the next few weeks but all is not clear.   The most likely scenario is that a pullback will occur before the next big leg up.

10% Gain In Stocks From Tax Cut

At The Arora Report, we have done a lot of work on proposed tax cuts and their impact on stocks.  In our analysis, tax cuts will result in earnings going up by about 10%.  The problem here is that the stock market has already gone up about 10% in anticipation of tax cuts.

Overbought Condition

Stocks are still overbought.  Overbought markets tend to be vulnerable.

In theory, an overbought condition can be relieved in two ways.  One is price pullback.  The other is consolidation over time.

Right now bulls are arguing that the overbought condition has been relieved as the market has consolidated over the last month and now it is time for another leg up without a major pullback in price.

Bears argue that low volume and high sentiment are supportive of a pullback first.

At The Arora Report, for market timing, we rely on one of the most sophisticated algorithms out there — ZYX Global Multi Asset Allocation Model.   This model automatically changes with market conditions, has inputs in 10 categories from across the globe and has proven track record in both bull and bear markets.  At present the model is predicting muddled markets and giving a pullback first before a leg up higher odds than a leg up without a pullback.

Blow To Trump

In a blow to Trump, an appeals court unanimously ruled against Trump on immigration ban.  At least for the time being, markets have stopped caring about this issue.

Smart Money Sells Gold

Yesterday we wrote,

…Hence there is high risk in gold at this level.

The day before yesterday we wrote,

Gold is the obvious beneficiary of uncertainty.  However it is close to the resistance zone of $1242 – $1250.  The resistance zone is likely to have many sellers waiting.

Subsequently, gold hit high of $1246.20.  After being inactive for a while, the ‘smart money’ stepped in lightly to sell gold as it went over $1245.  The momo crowd which is usually bullish on gold continued to buy near the highs but could not contain even light selling by the smart money.  The result is a pullback.

Oil

The momo crowd has continued to buy oil based on  tight gasoline inventories.  Our experience over the years has shown that moves based on tight gasoline inventories that are not backed with tight crude inventories are short lived.  Right now there is a massive buildup of crude inventories.

This morning oil is also being supported by a report from International Energy Agency (IEA) of robust world wide demand.

Markets

Our very, very short-term early stock market indicator is neutral.

Bonds are coming under pressure.

There is strong buying in iron ore.

Euro and yen are weaker.

Gold futures are at $1227, silver futures are at $17.60, and oil futures are $53.76.

S&P 500 resistance levels are 2334, 2363 and 2400; support levels are 2300, 2288, and 2250.

DJIA futures are up 28 points.

This is what you need to know today.

Trump Stimulus Hopes Fade

Stocks have run up and bonds slaughtered partly in hopes of a quick Trump fiscal stimulus.  Now the ‘smart money’ is beginning to realize what we told you in advance some times ago that getting any fiscal stimulus plans through Congress would take a long time.  The bond market is realizing this but the stock market is still oblivious.  The 10-year note has gained for the last four days.  Even though stocks have held mostly steady, risk has increased in stocks.

Gold Focused On Interest Rates

As bonds rise, interest rates fall.  Gold bulls are focused on lower interest rates.  Gold is very sensitive to interest rates.  On the flip side, bonds are rallying because hopes of inflation from Trump’s stimulus are fading.  The first part of the move in this swing in gold was caused by rising inflation expectations.  Now gold bulls are building on top of prior rising inflation expectations based on lower interest rate expectations which in turn are based on lower inflation expectations.  There is a contradiction here. Gold simply cannot continue to hold gains that are built on rising inflation and lower interest rates at the same time, this is just not tenable over the medium-term.   Hence there is high risk in gold at this level.  This is the reason that the ‘smart money’ is inactive in gold.

Not withstanding the economic reasons described above, there is a bid under gold due to political risks perceived by some in Trump’s presidency.

Worst Loss In Three Years In Bonds In India

Indian bonds experienced the worst loss in three years after the Reserve Bank of India left rates unchanged.  The 10-year bond yield surged 31 basis points to 6.74%.

Yen

Trump and Abe are meeting later this week.  The outcome of the meeting will determine if the present retracement of gains by dollar against yen has run its course.  If the dollar starts rising again, it will be good for Japanese stocks but bad for U. S. stocks.

Oil

Oil prices have risen due to a larger than expected draw in U. S. gasoline inventories.  This indicates that at this time U. S. consumption of oil is strong.  On the flip side, U. S. production of oil is increasing strongly.  As demand and supply balance out, oil traders are simply getting whipsawed.  Yesterday in advance of this oil move at a time when oil was falling, we wrote,

The pattern of oil falling on API data and then reversing on EIA data has lately been common place.  Moreover we have seen many instances of oil going higher on bearish EIA data and going lower on bullish EIA data. Under these market conditions, risk is extremely high in taking a position in oil.  It is best to wait until next week.

Initial Jobless Claims

Initial Jobless Claims came at 234K vs. 250K consensus.  This is a leading indicator and carries a heavy weight in our models.

Markets

Our very, very short-term early stock market indicator is neutral but expect stocks to start the day higher.

Currencies are range bound.

Gold futures are at $1242, silver futures are at $17.77, and oil futures are $52.91.

S&P 500 resistance levels are 2300, 2334 and 2363; support levels are 2288, 2250, and 2222.

DJIA futures are up 23 points.

This is what you need to know today.

Muddled Markets

Markets are muddled.  There is a battle between those who see trends in place since Trump’s election reversing and those who believe these trends are about to take another leg in the same direction as the prior leg.  At this time trading data shows that neither side is able to overwhelm the other side.

There is no significant economic data to move the markets in either direction.  Any major move today in any of the markets including stocks, bonds, gold, oil and forex is likely to be suspect as the only driving force is technical factors and not fundamental factors.

Unless new data indicates otherwise, it is prudent to not initiate new positions until next week.  Consider continuing to hold existing positions.  Risk is simply too high to take new positions this week.

Gold Benefits From Uncertainty

Gold is the obvious beneficiary of uncertainty.  However it is close to the resistance zone of $1242 – $1250.  The resistance zone is likely to have many sellers waiting.  The ‘smart money’ continues to be inactive.

Oil Falls On API

API inventory data came at 14.227 million barrels vs. 2.4 million barrels consensus.  This inventory build is the second largest build in the U. S. history.

The pattern of oil falling on API data and then reversing on EIA data has lately been common place.  Moreover we have seen many instances of oil going higher on bearish EIA data and going lower on bullish EIA data. Under these market conditions, risk is extremely high in taking a position in oil.  It is best to wait until next week.

Markets

Our very, very short-term early stock market indicator is neutral.

Currencies, bonds, and interest rates are range bound.

Gold futures are at $1238, silver futures are at $17.72, and oil futures are $51.63.

S&P 500 resistance levels are 2300, 2334 and 2363; support levels are 2250, 2222, and 2200.

DJIA futures are up 28 points.

This is what you need to know today.

Chang In The Wind

The second reaction is not working out in a manner that produces clear signals in stocks, gold, bonds, forex and oil.  Cross currents will continue and we will continue to invest in a manner that has the highest probability of producing high risk adjusted returns.  In plain English, there are no strong buy or sell signals in any markets at this time but that can change quickly.

Cure All Ills

Speculation is building in the markets that Trump’s fiscal plan will cure all ills.  This speculation is making the dollar stronger which in turn is likely to lead stocks higher.

Gold

There is some selling in gold due to stronger dollar.  However, there is also strong bid under gold right under $1230.  Next major resistance zone in gold is $1242 -$1250.  Major support is also near by $1200 – $1222.

Of special interest is that the ‘smart money’ is staying totally inactive in gold.

Oil

Oil is trading lower as expectations are API inventory data to be released later today will show a large inventory build as rig counts are increasing at a faster pace.

Markets

Our very, very short-term early stock market indicator is positive.

Bonds are giving up some of yesterday’s gains and interest rates are beginning to tick up higher.

Base metal prices are falling.

Gold futures are at $1230, silver futures are at $17.63, and oil futures are $52.73.

S&P 500 resistance levels are 2300, 2334 and 2363; support levels are 2288, 2250, and 2222.

DJIA futures are up 61 points.

This is what you need to know today.

Big Change In The Wind

So far it seems that time may bear out Friday’s Morning Capsule to be one of the more important ones.  Consider reading it again, especially the table.  We wrote in part,

If the first reaction holds, a big change for the markets is in the wind.  Investors better pay attention.

The first reaction roughly  held Friday and is mostly holding in the global markets before the opening of the stock market in New York after adjusting for the news  since release of the economic data since Friday morning.

If the market reaction continues to hold, it would mean much higher gold, higher oil, somewhat higher bonds and highly volatile stock market with risks generally not appreciated at this time.

French-German Spread Highest Since 2013

The bond yield spread between French and German bonds hits the highest level since 2013.  We have previously given you an early warning of the risk coming out of France.  This is another early warning indicator.  The reason behind all of this is the unveiling of a manifesto by Marine Le Pen to pull France out of the euro and impose immigration restrictions like Trump.  Pen is running to become president of France.

The spread hit 72 basis points.

Gold Higher On France

There is strong buying in gold on heightened political risk coming out of France.

Our algorithms are a hair close to giving another buy signal on gold — increasing allocation for those who always want gold,  adding gold to long model portfolios and increasing hedges on short precious metal positions.

Euro

Euro is weaker on higher political risk.

Positive Economic Data From Europe

German factory orders surged by 5.2% in December vs. consensus of 3%.  In November they had fallen 3.6%.

Economic sentiment is beginning to hit high levels in Europe.   Ifo index of economic confidence for the Eurozone surged to 17.2 vs. 8.2 in the prior month.

Trump Ban Banned

A federal judge has banned Trump’s ban on immigration from certain countries.  The case is likely headed to the Supreme Court where one seat is vacant.  Given the even number of judges right now, there is the possibility of a stand off.

Oil

There are cross currents in oil.  It is being pressured by increasing U. S. shale production.  On the flip side, Trump’s actions towards Iran are providing strong support to oil.

Markets

Our very, very short-term early stock market indicator is negative.

Interest rates are ticking down and bonds are ticking higher on political risk.

Nickle prices are surging on the shut-off of a mine in the Philippines.

Copper prices are higher on the possibility of a strike in Chile.

Gold futures are at $1231, silver futures are at $17.60, and oil futures are $53.68.

S&P 500 resistance levels are 2300, 2334 and 2363; support levels are 2250, 2222, and 2200.

DJIA futures are down 38 points.