On this day in 1777, George Washington's Continental Army defeated the British garrison at Princeton, New Jersey. The battle, though minor by British standards, was the Continental Army's third victory over British forces in eight days. The British were forced to evacuate southern New Jersey. George Washington went into Winter quarters at Morristown with a renewed morale and a suddenly improved ability to recruit the local area. This certainly saved his army, and probably resulted in a nation whose 115th Congress takes office today.
The two features that every average person can take from this are perseverance and decisiveness. Ultimately, these traits turn into the ability to endure hardship and the ability to recognize opportunity -- very useful skills in our field.
Following the Script
Just as last week's market action surprised no one, neither should what we have seen early this morning. Equities struggled into 2016's finish line as bonds found bids amid the best telegraphed pension fund rebalance that I can remember. Now we see equity index futures trading well above fair value as the scene in front of us continues to follow the script.
For those new to this, the first trading sessions of January typically see inflows and are considered to be part of what is traditionally known as the "Santa Claus" rally. This year, as an added boost, global markets seem to be moving higher together as manufacturing PMIs have either met or beaten expectations in China and all across Europe.
Fly in the Ointment
The negative is that money is now coming out of the bond market, which is forcing the U.S. dollar higher again. One U.S. dollar again buys you more than 118 Japanese yen. The euro and the pound are also working their way toward the lows of their recent ranges vs. the dollar. At some point, a strengthening dollar becomes a serious impediment in the path of earnings growth for the multi-nationals.
If it comes as the result of, or in reaction to growth and quality, then this becomes a net positive. If dollar strength is the result of inappropriate monetary policy, then we'll have problems. This is December "Jobs Week", and will be the last such data to be released prior to the FOMC's next policy announcement on Feb. 1.
Possibly the most important markets-related item that I see this morning is the pricing of WTI Crude. WTI traded above the $55 level early this morning and met resistance. This is the second time that this specific level has been tested over the last three weeks, and the second time that there has been some trouble holding the spot.
A stronger U.S. dollar should be a headwind for commodity prices such as oil that are priced in U.S. dollars. Should we see some dollar weakness later today or this week, that could allow this important level of $55 to be pierced once again. Remember, this level is a gateway to $58, which itself is a gateway all the way to $65. I don't necessarily see Crude going that far, but if you're in the space, or in Energy names, this is crucial. If you're wearing profits, maybe play with house money from here.
09:45 - Markit Manufacturing PMI (December -f): Flashed 54.2. This item has shown consistent strengthening in the pace of expansion since the spring, without ever having dipped into contraction. That said, the marketplace does not watch this item. You can move on to the 10am data at this point, but thanks for coming in.
10:00 - ISM Manufacturing Index (December): Expecting 53.7, November 53.2. Unlike its Markit sibling, the ISM manufacturing print hit the tape in a state of contraction three times in 2016, most recently for August. As we have seen, the regional manufacturing surveys released by the Federal Reserve districts improved dramatically into the end of the year.
There has also been confirmation of that trend in this space. The sub-component for New Orders, always the most important underlying number, has been keeping pace with the headline print. However, the Employment line, though still expansionary, appears to be slowing somewhat. That specific sub-component could get some attention today.
10:00 - Construction Spending (November): Expecting 0.5%, October 0.5% m/m. The good news is that for October this data-point printed its best month-over-month improvement in four months. The bad news is that revisions in these numbers (made by the Census Bureau) tend to be sizable, and for that reason the markets tend to take this data with a grain of salt until the first revision. In other words, traders will look at that October number today more than they will the headline November print. This release will not make or break your trading session.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500 and the Russell 2000 might either pause or turn.
SPX: 2267, 2259, 2250, 2243, 2234
RUT: 1383, 1376, 1366, 1357, 1349
Tuesday's Earnings Highlight
After the Close: (SONC) ($0.21)