The market is still waiting on the FOMC to point the way.

Introduction

It was another quiet, calm day of trading while the market awaits the Fed. The major indices all gently tested support in a day of nearly flat trading.

Asian and European markets were both mixed to start the day. Asian markets were affected by weaker than expected data from China that shows out-put and investment were both weaker than expected. Additionally, Japanese markets were closed for a holiday making trade volumes light. In Europe the struggling economy and the geopolitical standoff in the Ukraine continues to weigh on stocks with the added concern of this weeks Scottish referendum for independence.

Futures trading on the US indices was equally mixed with the market indicated to open flat to negative during the earliest part of the morning. Trading lifted somewhat going into the open but trading remained weak throughout the day. The SPX opened a point of two lower and hovered between -1 and -5 all morning. The Dow managed to hold above break even for the day but the NASDAQ composite suffered some pretty steep losses in the range of -50 points.

Market Statistics

Needless to say there is a lot for the market to wait for this week. The Fed I think is first and foremost; the taper, the verbiage around “considerable time”, the scope of interest rate hikes and anything else the market grabs onto will be the main market driver. After that there are 15 economic releases not counting the FOMC and energy inventories, including two regional Fed reports. After that and of lesser importance to us is the outcome of the Scottish referendum and a slate of corporate events. Apple releases the new iPhones on Friday and has already announced that the initial offering has been overwhelmed by demand. Microsoft announced its acquisition of game maker Mojang and there is an expected change to the S&P 500 on Friday.

After lunch trading was just about the same. The SPX drifted in a tight range below break even for most of the afternoon. There was a little strength late in the day that brought the index up into the green but it did not last. The NASDAQ was hit especially hard today, losing more than -1%, with the Dow Jones the only major average to close in the green. A sell of in high growth stocks like Tesla and Netflix, -9% and -3% respectively, was the cause of most of the losses.

Economic Calendar

The Economy

The September reading of the Empire State Survey of Manufacturing expanded well above expectations. The reading came in at 27.54, more than 13 points above the previous months 14.59 and and 10 points above the expected 16. This is the highest level of manufacturing in the New York region since October of 2009. New orders, shipments and prices received all moved higher while prices paid and unfilled orders both fell. Based on the increase in prices received and decrease in prices paid it looks like margins could be on the rise in NY. The index of expected activity also rose this month in expectation of a solid fourth quarter. This report was released at 8:30 and helped to lift the futures trade off of its morning low.

Industrial production and capacity utilization were both released at 9:15AM and helped to curb the positive spin that Empire Manufacturing data put on the market. Both fell in this months data with the drops blamed largely on the expected seasonal decline in auto manufacturing. The big three automakers typically slow down production in the late summer, a move they skipped last year in order to build inventory. Both employment indicators within the report rose pointing to an increase in jobs and hours worked, contrary to the recent jobs report. Production declined by -0.10% versus an expected rise of +0.3%, this is following a +0.2% gain last month. Capacity Utilization fell to 78.80% from 79.10%, 3/10ths, versus an expected gain of 2/10ths. Moody's Survey Of Business Confidence remains positive. Mark Zandi reports that “Business sentiment is strong and stable, particularly in the United States. Responses to the business survey questions are upbeat across the board and are particularly positive regarding the economy’s prospects through the remainder of the year. Hiring intentions also remain strong, inconsistent with the weaker U.S. employment gain in August.” There are only two reports scheduled for tomorrow; Long Term TIC Flows and the Producer Price Index.

According to FactSet the earnings growth expectations for Q3 remain the same at 6.2%. This is down from 6.9% in Q2. The telecom sector is still expected to produce the greatest earnings growth with consumer discretionary the only sector expected to decline.

The Oil Index

Oil traded mixed today as well. WTI had been down as much as -$0.75 before reversing near mid-day to add $0.65 to Friday's closing price. Brent also traded lower but was not able to recapture break even before the close. The reason for the drop was the weaker than expected data from China, putting additional pressure on already declining demand expectations. It is unclear what caused the mid day turn around in WTI but it may have simply been a technical bounce from the 7 month low near $91 or short covering, or both.

The Oil Index fell sharply in the early session and gapped lower at the open, falling below the long term trend line. The mid day turnaround in oil prices helped the index to regain the trend line and rise nearly 1% by the close of the day. The oil index has been in a correction of late, as oil prices tumble, and is now beginning to catch up with the underlying commodity. MACD reached a peak of Friday that is not extreme but a little bigger than the last bearish peak, convergent with the new low set by the index at today's open. This usually leads to a retest of lows and possible lower lows. However, the long term trend is up so it is not quite time to start thinking about a bearish trade just yet. Today's action shows that there is interest in the sector along the long term trend so we need to wait and see what happens over the next few days.


The Gold Index

Gold prices hovered just above break even from Friday's closing prices. Gold added about $2, trading just above $1230 and a 7 month low. Gold prices are being pressured heavily by Fed expectations and have corrected to trend following the summer flight-to-safety. Expectations have driven gold to a near term extreme that may produce a bounce back once the Fed statement is released but my long term targets have gold back to $1200.

The Gold Index traded higher as well, gaining close to 1% in a move up from support. The index has fallen over -10.5% in the last two weeks and is now consolidating above a long term support zone. The momentum is bearish but has peaked in the short term on the daily charts, consistent with support, but is still increasing longer term on the weekly charts. Stochastic on the other hand has not peaked and is crossing the lower signal line, indicating weakness in the index. While highly susceptible to gold prices and the Fed, the Gold Index is in the hands of traders with low expectations of profits from the sector and is heading lower. Support is between $90 and $92 right now, just below the current levels with downside targets on a break as low as $80 in the short term.


In The News, Story Stocks and Earnings

Apple announced some data relating to iPhone 6(+) sales today. They reported a record, no surprise there, 1st day pre-order ever for one of it's products. Pre-orders totaled more than 4 million and have exceeded initial supply. They are saying that it may take up to 6 weeks for some of these to ship. Yet another great problem for Apple to have, they sold all their phones and now they have to make more. Another story on Apple speculated that the company could earn as much as $0.15 for every $100 transaction on its new Pay service which could be a serious addition to income and one not tied to sales of products, just usage. Shares of Apple opened at the recent high but sold off during the day. Momentum is still bearish but about to cross the zero line so there could be a near term break. Stochastic however is still weak so I'd be careful of whipsaws for now. Current resistance is around $103.75 with support near $95.


Tesla was downgraded today and accounted for much of the loss in the NASDAQ. An analyst at Morgan Stanley said the shares are still worth more, just not right now. His sentiment is an echo of words spoken by Tesla CEO Elon Mush not once but at least twice over the last year to the effect he didn't think the shares were worth what they were currently trading for, at least not yet. The downgrade sparked a -9% drop in the stock that may have been exacerbated by fund raising executed by would be owners buyers of Alibaba, due to IPO Friday. Today's move has brought Tesla down to the $250 region and near the long term trend line. Morgan Stanley's target for the stock is still over $300, odd in the face of today's comments.


Microsoft announced the purchase of game maker Mojang, creator of Minecraft. The deal is worth over $2.5 billion but does not include Minecraft, the companies founders or top executives. What Microsoft is said to be getting is a “loyal and largely young following” which is good but now what are they going to do with it. And will they even be able to keep it in the first place. Shares of Microsoft fell over 1% on the news. The stock is just off a recent high with divergent indicators suggesting a short term consolidation or correction is likely. There is near to short term support just below today's closing level near $45 with short to long term support near $42.50.


Ken Feinberg announced the first settlements for victims of the GM ignition switch recall scandal. The first findings are that at minimum 19 deaths have been linked to the faulty switches with more to come. Shares of GM traded higher today but are below my support line at this time. The indicators are consistent with long term support at this level which is, based on the 12 month range, not an unattractive entry for longer term positions.


The Indices

All the indices were soft today but the NASDAQ really took a beating. A sell off in high growth names like Tesla and Netflix helped to send the tech heavy index down by over 1%. This move is due in part to the half cocked downgrade for Tesla and also in part to a possible pre-Alibaba IPO sell off. The speculation is that money is being raised by investors in order to buy shares of the Chinese internet retailer. It is also options expiration week which could have something to do with it as well. Today's move brought the NASDAQ down to the short term 30 day moving average where it was halted. The indicators are bearish at this time but with strong support just below the current level so any move may be small and only serve to confirm support.


The Dow Jones Transportation Average also fell today, but not by quite so much. The transports lost only -0.36% in today's session, also coming to rest just above support. This support, like with the NASDAQ and other indices, is sitting on the previous all time high set in late July. It looks like the index has calmed down and is now holding its breath waiting for the next “something” to happen. The trend is up, the index is above support and trading near all time highs so I am leaning toward that something being a rally. The indicators are neutral but still strong; MACD is hovering on the zero line and stochastic is trending sideways with %D hovering on the upper signal line.However, there is some room for the index to move down should the fed disappoint or if the market just decides it's time to take some money off the table. A break of support at 8,500 would find the trend line about 250 points below with the short term moving average in between.


The S&P 500 traded in the red most of the day in a range between -1 and -5. Late in the day the index powered higher and popped into the green a couple of times before returning back to the original range. At the close the broad market was off by only -0.07 points and sitting on support; support consistent with the all time highs set back over the summer. The indicators are bearish still but also in line with support over the short to long term. This support level may be tested further but the longer term trends are still up so I think an downside will be limited. A break below 1980, which was approached several times today, could take the index down as much as 80 points before reaching the trend line with additional near and short term supports in between.


The Dow Jones Industrial Average was able to hold in the green all day today; dividends and stability attracting investors while the Fed meeting is still a question. The blue chip index gained a little over a quarter percent today in a move up from the short term moving average. This index is still beneath the resistance of the August all time highs but still supported. The indicators are consistent with support at this level but that support may be tested. If broken, around 16,950, the index could move down to 16,750 in the near term with a full correction to trend about 6% lower near 16,000.


It really is a wait and see time for the market now. The Fed is on the horizon and what they do, don't know and hint at doing carries a lot of weight. As far as the market goes I know what it looks like is happening, and what I want to happen, but that doesn't mean it will happen. It looks like we're setting up for another leg up but there is a lot that could happen between now and the end of the week to change that.

The FOMC meeting emerged as a target pivot point for me a few weeks ago and it turns out to have been a pretty strong one. The markets have been trading sideways to down for just over three weeks now and it looks like this will keep up at least until then, the FOMC meeting that is.

A lot of this market weakness is also due to soft commodity prices as well. Low oil and low gold are hurting their respective sectors and adding downward pressure to the indices. This may not let up for a while and could be amplified by Fed speak.

The long term trends in stocks and the economy are up are and I don't see that changing. There are near term and even short term reasons to be wary but when aren't there? It is possible that the market will sell off after the Fed announcement but if there is I still see it as a potential opportunity to buy on the dip.

Until then, remember the trend!.

Thomas Hughes