Consumer Sentiment Hits 13-Year High on the Back of Bullish Expectations in 2017

The University of Michigan reported a 98.2 reading for December 2016 in the consumer sentiment index. This marks the highest level in 13 years, and it comes hot on the heels of bullish expectations around a Trump presidency. Trump has promised a massive fiscal stimulus with infrastructure spending on roads, railways, highways, schools, airports, et al. The consumer sentiment reading on Friday, December 23, 2016, was forecast at 98, but the actual reading came in above expectations at 98.2. The next reading will be announced on January 13, 2017, and the consensus forecast is 97.35. The consumer sentiment index is a broad measure of how US consumers feel about the state of the US economy. That it has been rising strongly since October 2016 (87.2) through November (93.8), and December (98.2) is significant. The gauge declined from January through April, increased in May and consistently decreased through August. The bullish moves are part of a strong trend in the broader US economy. Wall Street indices have rallied to all-time highs, the USD is at the top of its game, and traditional safe-haven assets such as gold have plummeted.

Why the Consumer Confidence Index Matters?

The current reading in the CCI is the highest since January 2004. That it surged 4.4 points from its high in November 2016 is significant. One year ago, the reading was at 92.6. This is part of an overall trend in the US economy that the all-business approach of President-elect Donald Trump will likely yield positive results for the US. Despite protestations to the contrary, Trump’s America first policy is getting the corporate sector excited. What is even more encouraging is that a total of 18% + of consumers believe that Donald Trump’s policies will positively impact the US economy. This figure is significant when you consider that President-elect Ronald Reagan, generated excitement among just 9% of consumers back in 1981. When it comes to economic matters, the consumer is clearly in Trump’s corner. In 2013, 37% of consumers had an unfavorable opinion of the US economy, but those holding similar views measured just 16%. Positive sentiment is being buoyed by expectations of growth as a result of policy changes. Unfortunately, Trump has set the bar high and he will have to perform accordingly.

Performance of Indices Largely Bullish

Heading into the Christmas weekend, the Dow Jones Industrial Average edged higher by 0.07%, for a net change of 14.93. The premier US index closed at 19,933.81, still shy of the elusive 20,000 level. The S&P 500 index closed 0.13% higher, up 2.83 points at 2,263.79 while the tech-heavy index – the Nasdaq– closed 0.28% higher, up 15.27 points, at 5,462.69. Across the pond, the Euro Stoxx 50 PR, FTSE 100 index, CAC 40 and the Ibex 35 ended in the black while the German DAX inched 0.05% lower to close at 11,449.93. In Asia, indices were hemorrhaging. The biggest loser was the CSI 300 index in China which lost 0.84% to close at 3,307.60, followed by the Hang Seng index and the S&P/ASX 200 index, both down 0.28%. For US traders, though, the Dow Jones delivered a Christmas surprise with a 14.40% return and a 1-year return of 16.65%. The S&P 500 index is up 10.76% for the year-to-date, and it has a 1-year return of 12.27%. The NASDAQ composite index is up 9.09% for the year-to-date, and it has a 1-year return of 9.68%.

Trading Opportunity #1 – Dow Jones Industrial Average Short-Term Bullish

The unprecedented performance of the Dow Jones Industrial Average warrants attention. The Dow is currently trading at 19,933.81, up 0.07%, or 14.93 points. The index is significantly higher than its 50-day moving average at 18,904.12, and its 200-day moving average of 18,247.55. The 1500+/- point gain since the elections marks a surprising spike in this index option. Traders will be cautious about over-optimism with the Dow, given its sharp increases in such a short period of time. However, the index appears to be consolidating in a tight trading range between 19,000 and 19,950. Trading volumes will be light in the week ahead since most traders will be away from their desks for the holidays. Nonetheless, we can expect the optimism around Trump’s inauguration on January 20, to hold steady. On Friday, 23 December 2016, the 30-member index had 17 performers up and 13 performers down. The top performing stocks on the day included the following:

• United Health Group Inc up 0.90%
• Procter & Gamble Co up 0.58%
• American Express Corporation up 0.52%
• Johnson & Johnson up 0.45%
• Pfizer up 0.43%

The laggards on the day included Microsoft Corporation (-0.49%), McDonald’s Corporation (-0.47%), Nike Incorporated (-0.44%), and Chevron Corporation (-0.29%).

Trading Opportunity #2 – Gold Bugs Retreat

Gold is a traditional safe-haven asset. When equities markets are roaring, gold is lagging. The current gold price is $1,133.45 per ounce, up 0.14% or $1.55. Gold now has a 30-day performance of -4.81%, down $57.20 per ounce. The performance of the precious metal over 6 months is 10.25% lower, down $129.30 per ounce. Just several months ago, gold was the top performing commodity of the year, with gains of over 20%. Now, the 1-year performance of bullion is just 5.84%, half the gains of the weakest performing index in the US – the NASDAQ Composite Index. Despite the recent performance of gold, gold stocks have been doing incredibly well in 2016. The top performing gold stocks have enjoyed gains of 130% + in 2016. These include the following strong gainers:

• Gold Resource Corporation – up 130% YTD
• Compania de Minas Buenaventura SAA – up 137% YTD
• DRDGOLD Ltd – up 163% YTD
• McEwan Mining Inc – up 164% YTD
• Gold Standard Ventures Corporation – up 199% YTD

Gold thrives in uncertain times, and there have been plenty of these geopolitical shocks in 2016. Foremost among them are the Brexit, the US presidential elections, the precarious predicament of emerging market economies, and ongoing concerns about Fed rate policy. Now that Trump is the President-elect, equities markets are roaring and gold is fading. For day traders, gold has lost some of its lustre. We can expect sellers to dominate, but if the price drops significantly, buyers will re-enter the market and raise the price.

Trading Opportunity #3 – Twitter’s Wings Clipped

The story of Twitter is one of confusion. The stock has had growth ‘burst spurts’, followed by dramatic crash landings. The latest snafu for Twitter could prove devastating. The stock appears to have tanked, with no safety net in store. Twitter is now trading well beneath its 50-day moving average of $18.12 per share and well beneath its 200-day moving average of $17.54 per share. The current price of the stock is $16.50 per share. The recent performance of the Twitter tech stock will give investors pause. It has failed to deliver consistent returns, and analysts are uncertain how to issue forward guidance for 2017. Perhaps the most positive aspect of Twitter is that the president-elect of the United States uses the service daily. It is also the go-to microblogging platform for celebrities, but it has failed to generate the types of returns that are necessary for the company to inspire confidence among investors. Consider for example that there has been a mass exodus of executives from Twitter in 2016. These include the product vice president, Jeff McFarland, the product head, Kevin Weil, the chief technical officer, Adam Messinger, and the chief operations officer, Adam Bain. Whenever a company loses its top-tier executives in such dramatic fashion, the stock tanks. Wall Street is disappointed by the performance of this tech stock, despite its 317 million user-base. Compared to Facebook with 1.8 billion users, Twitter is a hatchling waiting to take flight.

Trading Opportunity #4 – Trading the GBP/USD

The cable – the GBP/USD pair is currently trading at 1.2283, down 0.02% or $0.0003. The recent performance of the GBP has been disappointing given that the dollar has hit a 14-year high. For the year-to-date, the GBP/USD pair has shed 17.63%, making the pound the weakest performing G10 currency by far. Of course, the GBP plunged in the wake of the Brexit referendum on June 23 2016, when it was trading at 1.4789 to the greenback. It hit a low of 1.2171 on October 27 and is moving perilously close to that level as we close out 2016. The performance of the GBP in 2017 will depend largely on how Prime Minister Theresa May moves forward with Article 50 of the Lisbon Treaty – a.k.a. the Brexit, this will have an impact on additional forex options across the EU. She will want to move swiftly before the end of Q1 2017, failing which markets will grow increasingly anxious and the GBP will falter. We are still waiting for the Supreme Court of the UK to issue a ruling about the Prime Minister being able to invoke Article 50 without referring the matter to Parliament. For currency traders, the trend is clearly bearish and sentiment will likely remain that way heading into 2017.