Short-Term Summary:

After only having four 1% daily changes in the first seven months of the year, there have now been three
in the past week. Two of these days were on the downside. With a strong 2Q17 earnings season ending,
the seasonally weak period of the year beginning, and major legislation on the agenda this fall (i.e., budget
resolution and tax reform), volatility could be set to increase from historically low levels.

Economic activity, both global and domestic, continues to be healthy. The pick up in growth overseas,
along with low inflation readings domestically, has contributed to a softer U.S. dollar. This has been a
boost to U.S. earnings in 2017 and have supported estimates moving forward. It has also likely given the
Fed more time to normalize rates. Current rate hike odds by the end of the year are 40%.

2Q17 earnings season came in much better than expectations, growing by 10.3% on sales growth of 5.3%.
Full year 2017 earnings estimates have remained steady at ~$131 (reflecting 10.5% growth). This is the
main reason that equities have extended their move this year, and will continue to be the major influence
over the course of this year (due to high valuations).

Technically, we note some divergences that have occurred beneath the surface. Deteriorating price action
in the small cap, mid cap, and equal weighted indexes, along with the semiconductors failing to make new
highs, causes us to believe that a period of consolidation is more likely than a strong move to the upside in
the short term. Over the past week, the two 1% down days for the S&P 500 referenced above came on
down volume well above 80% on the NYSE. The heavy down volume is a sign of willingness to distribute
shares. Unless the S&P 500 is able to bounce back above 2450 (50 DMA) in the next few days on heavy up
volume, the odds of a test of additional support levels near 2400, followed by the 200 DMA (currently at
2345) will be elevated.

In sum: There has been some technical deterioration within the past couple of weeks. With valuations at
lofty levels, this increases the odds of a market consolidation (or pullback) in the short term. However
given the improving economic and fundamental backdrop, pullbacks should be normal in nature; and we
would treat them as buying opportunities.


July retail sales grew 0.6%, better than consensus estimates of 0.3% and June’s 0.3% reading.
Core retail sales also showed a pick up from June, and above estimates, getting 3Q17 started
on a positive note. August empire manufacturing, NAHB housing market index, and initial
jobless claims also reflected strength over the past week. On the flip side, July housing data
disappointed with headline starts and permits dropping by -4.8% and -4.1% respectively. Also,
July industrial production and CPI came in softer than expected (allowing the Fed to move
slowly). The overall mixed economic readings have the odds of a Fed rate hike by its
December meeting remaining at about 40%. On the global front, Chinese retail sales and
industrial production disappointed in July; however on the whole, global economic activity and
expectations continue to show improvement this year. This, along with continued low
inflation, have contributed to the U.S. dollar moving near the lows of its range from the past
two years (good for corporate profits- particularly for the large cap multinationals).

Economic data reported in the past week (actual vs estimate):


 CPI m/m (Jul): 0.1% vs 0.2%, 0.0% prior
 CPI Ex Food and Energy m/m (Jul): 0.1% vs 0.2%, 0.1% prior
 CPI y/y (Jul): 1.7% vs 1.8%, 1.6% prior
 CPI Ex Food and Energy y/y (Jul): 1.7% vs 1.7%, 1.7% prior

 Import Price Index m/m (Jul): 0.1% vs 0.1%, -0.2% prior
 Empire Manufacturing (Aug): 25.2 vs 10.0, 9.8 prior
 Retail Sales Advance m/m (Jul): 0.6% vs 0.3%, 0.3% prior
 Retail Sales ex Auto m/m (Jul): 0.5% vs 0.3%, 0.1% prior
 Retail Sales ex Auto and Gas (Jul): 0.5% vs 0.4%, 0.3% prior
 NAHB Housing Market Index (Aug): 68 vs 64, 64 prior

 Housing Starts (Jul): 1155k vs 1220k, 1213k prior
 Housing Starts m/m (Jul): -4.8% vs 0.4%, 7.4% prior
 Building Permits (Jul): 1223k vs 1250k, 1275k prior
 Building Permits m/m (Jul): -4.1% vs -2.0%, 9.2% prior

 Initial Jobless Claims (Week): 232k vs 240k, 244k prior
 Philly Fed Business Outlook (Aug): 18.9 vs 18.0, 19.5 prior
 Industrial Production m/m (Jul): 0.2% vs 0.3%, 0.4% prior
 Leading Index (Jul): 0.3% vs 0.3%, 0.6% prior

Disclaimers and Disclosures

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