The Institute for Supply Management released their manufacturing and service sector reports this week. The former increased 1.5 points to 54.7. New orders rose a very strong 7.2 points to 60.2; production and exports orders also rose. The latter was unchanged at a high reading of 57.2. The new order component rose 4.2 points. Both reports contained bullish anecdotal comments. 

Construction spending rose .9% M/M and 4.1% Y/Y. Underneath the headline report note that private spending (residential in blue and non-residential in red) is at higher points than at the end of the recession while public spending (in purple and green) is at lower levels than the end of the recession:

This chart shows the lack of fiscal policy during the last 8 years.

   Auto and light truck sales rose to a record high of over 18 million:

This is a very important indicator; it shows that low unemployment and long economic expansion are translating into higher consumer confidence and strong durable goods sales.

The BLS issued their latest employment report on Friday, which reported an increase of 156,000. This is a standard, late-cycle employment report. With the unemployment rate at 4.7%, 200,000+ gains are extremely difficult to achieve. The 3, 6 and 12-month moving averages are far more illustrative of the underlying trends:

Save for a late-year bump, the 3 and 6-month moving averages have been below 200 for most of 2016. The 12-month moving average has consistently declined since late 2013. 

Economic Conclusion: This week’s news was solidly positive. Both the manufacturing and service sectors are performing well. Consumer confidence, as represented by new car sales, is positive while the economy is at full employment. 

Market Overview: The markets rallied after the election, with the IWM and IYT driving the move. But at the beginning of December, the IWM started to consolidate in a sideways pattern while the IYT formed a downward sloping channel. It’s possible the QQQ could now provide continued upside momentum:

Rather than rally after the election, the QQQ remained in a sideways channel. It rallied a bit above the 120 level in early December, but has remained fairly subdued since. But on Friday, the chart printed a solid candle that moved through short-term resistance .Two key technical indicators – the MACD (top panel) and the RSI (panel second from the top) – indicate upside room exists. 

Last week’s sector performers adds credence to a continued upside move story:

Health care was the best performer. Although this is usually classified as a defensive sector, this ETF has underperformed after the election, meaning this week’s move could be described as traders “catching up.” In addition, consumer discretionary and technology ETFs were the second and third best performers, respectively. Both are considered more growth than defensive. 

However, as with all things economic, there is always the “other hand,” which in this context is comprised of two elements. First, the market is already expensive (from the WSJ):

Second, 83% of NYSE stocks are above their 50-day EMAs while 71% of NASDAQ stocks are above theirs. Both of these measures indicate little upside room remains. 

I would argue that, at most, we’ll see a rally of 1%-3% from current levels. The market is already expensive and the underlying technical indicators show a pretty exhausted rally. While the economy is in good shape, the market really needs additional earnings increases to move higher.