Rising geopolitical fears are upstaging positive expectations for the future.

Introduction

Despite steady economic data here at home and improving expectations for the future rising geopolitical fears were the focus of market attention today. To start the ISIL crisis and Ukraine/Russia standoff both have no end in sight. ISIL is still operational and able to gain ground along some fronts at least. Now their influence seems to be spreading as Taliban forces in Afghanistan begin to adopt similar tactics. The Russia/Ukraine situation may come to another head as the standoff has shifted to natural gas. This was always a concern and with the oncoming winter will be a problem for Ukrainians this winter. The deal brokered by the EU on behalf of the Ukraine last week may be rejected by the Ukrainian government due to disputes over price and the amount of debt owed by the Ukraine to Gazprom.

There were at least two new things to worry about today. The first and more important I think is the protesting going on in Hong Kong. It is estimated that more than 80,000 people turned out over the weekend to protest for democracy. Current leadership is willing to allow a democratic vote but wants to choose the candidates but the people aren't going for it. Today estimates say the number of people have grown and have shut down the city. The protests are being compared to the Tienamen Square during the 80's and the quest for independence from Britain in the 90's. Less of a concern but still noteworthy is the impending election in Brazil. The race has narrowed between a Socialist Party candidate and the incumbent leadership.

Market Statistics

Asian markets are best described as being mixed today. Japanese, mainland China and other indices were flat to positive while the Hong Kong based Hang Seng shed nearly 2%. European markets were down by roughly -0.75% by the end of their day after a mixed start.

Both regions also received some negative economic data as well. In China industrial profits fell by -0.6% while in Europe economic sentiment fell to a low not seen since last year, hurting inflation expectations for the region. All of this negativity took its toll on the US markets this morning, pushing early futures trading down by nearly -1%. Trading before the bell was not helped by the data released this morning and remained weak going into the open. New data shows that earnings and spending are up among consumers and in line with expectations. At the bell the indices moved sharply lower, as indicated, but found support within minutes of the open.

The indices moved steadily higher throughout the morning until hitting resistance just after 11:15AM. This coincided with 1980 on the SPX and 17,075 on the Dow Jones Industrials. The next hour saw the markets trade sideways, test resistance, and set up to move back toward the days lows. Afternoon trading was mixed. The indices retreated from the highs and then traded in a tight range about -0.25 and -0.50% below yesterday's close. Late in the day the NASDAQ and Dow Transports turned positive but only the transports were able to hold above break even into the close.

Economic Calendar

The Economy

Today's data was not bad, not good enough to support prices, but not bad. The only real negative I see was the downgrade of 3rd quarter GDP expectations by the NABE. The National Association of Business Economists lowered their target for GDP from 3.1% to 3.0% in their latest survey. This is only slightly below the consensus estimates around 3.2-3.5% going into September and not a very large revision. While modestly lower, this is still expansionary and the NABE survey also shows that economists expect growth to continue into the future. Fourth quarter estimates currently stand around 3.1%.

Personal Income and Spending were both released at 8:30AM and both rose. Personal income rose by 0.3%, as expected, while the spending component rose by 0.5%, slightly ahead of expectations. Private wages and salaries increased by over $30 billion in the month of August, nearly twice the previous month.

Pending Home Sales was reported at 10AM. The number of pending homes fell by -1% on an annualized basis, weaker than expected. Analysts had been expecting the number to remain unchanged or dip slightly at worst. I don't think this miss is too unexpected though since new, existing and starts all fell in August as well. On a year over year basis sales remain down by -2.2%. This is the fourth month of activity above 100 and a sign of above average pending sales. While a decline from the previous month, pending sales are still at the second highest level of 2014. An analyst for the National Association of Realtors says the decline is largely due to less sales of distressed properties and lower investment activity.

The Dallas Federal Reserve survey of manufacturing was released at 10:15. The survey came in strong at 17.6, more than double the previous reading of 6.8. All segments within the report showed gains with notable increases in capacity utilization, shipments and hours worked. The employment component remained steady at 10.6. Expectations for future growth slowed somewhat but remain “firmly positive” according to the report.

According to Moody's Survey of Business Confidence business outlook remains firmly up beat. According to Mark Zandi, Chief Economist, sentiment is positive across all sectors with a recent uptick in responses from manufacturers. More than half of respondents are hiring and lay off's remain low with expectations going into next year also strong.

The Oil Index

Oil began the trading day to the downside but geopolitical concerns lifted prices after the open. Rising supply levels and a lack of supply disruption were also overpowered by strong US consumer data. WTI gained about 1% by the close of the session with Brent gaining as well, but only marginally.

The Oil Index fell during the early part of today's trading but found support around 9:45, shortly after the broader market began to lift. The index traded in a smaller range today than it has in the past week or so and is now sitting just above another potential support line at 1,550. The index is extended beyond the long term trend line by about 2.5%, a move that resulted in a snap back earlier this year. The indicators are consistent with support along these levels; MACD is divergent and stochastic is trending near the bottom of the range but has not crossed the lower signal line. The long term trend may be broken but the index looks to have some longer term support near the current levels. Current support is at 1,550 while a rally will find potential resistance at 1,600 and then the bottom of the trend line around 1,625.


The Gold Index

Gold prices hovered just above break even today. Rising global fears underpinned prices while the market awaits more significant economic data later in the week. Spot prices for gold traded in a small range between $1216 and $1220 for most of the day, falling back from an earlier high just shy of $1225. This level has provided resistance multiple times over the past week of trading days and will likely be important moving forward. The fundamental picture is still bearish for gold but much of the interest rate fear may have been priced in already but that is only a conjecture.

The data later this week will be telling as up until now bullish economics have been bearish for gold. There is also the ECB meeting on Thursday to consider. If the bank increases QE or anything else to weaken the euro versus the dollar gold could move lower as well. The long term low in gold is $1192 on a close and $1185 on an intraday basis with $1200 looking like a likely place to find support, at least on a near term basis. A sustained/confirmed break below that could lead to a significant drop in gold prices while holding support may lead only to sideways market action and consolidation.

Based on some recent reading I did the long term outlook for gold can only be bullish, unless the globe just keeps printing money. Industry executives see peak gold as a nearby or currently happening event, something that will cause gold prices to rise. Industry analysts see “easily recoverable gold” as already found and a major technological advancement necessary in order to increase production levels long term.

The Gold Index fell today as low low gold prices are hurting earnings expectations for gold miners. The bulk of the senior miners are scheduled to report near the end of October. The average price for gold this quarter will be much lower than the previous but may not impact the bottom line as much as feared. The drop in oil prices will help to improve margins that have already been improving over the past few quarters and rising production levels may also help, at least in terms of revenue and EPS. The index is now within the $90-$92.50 range and at a new 9 month low. The indicators remain bullish, with a target of $90, but also indicate the move lower is running low on steam. Momentum is on the decline and stochastic remains oversold in the near and short terms. By no means does this indicate a bottom in the industry but it is consistent with anticipated support along the $90 level where a bounce could be expected. The index has bounced from this level twice this year with a resulting move of 20-25%. This is also a level in which long term investors may begin to come back into the sector.


In The News, Story Stocks and Earnings

Apple hit the news again today, no surprise, but not connected to the recent iPhone 6 launch or bend-gate. The EU is expected to announce the result of probes into tax dealings between the company and Ireland. The question is whether or not unfair advantage was given by Ireland and taken by Apple in terms of tax benefits. If found guilty the charges could result in billions in fines. As for the bend-gate scandal a study by Consumer Reports released Friday shows that the iPhone 6 and 6+ are no more “bendy” than other comparable phones. Shares of Apple opened lower today but climbed throughout the session to close above $100. This level is emerging as support and could remain active in the near term. The company is next scheduled to report in earnings at the end of October.


FactSet dramatically cut its estimates for 3rd quarter earnings growth this week. The current estimate is for growth among S&P 500 companies to average 4.7%, a little more than half the 8.9% projected at the end of the 2nd quarter and below the 6% estimated just a week or so ago. The telecom sector is still expected to lead and consumer discretionary is still expected to be the only sector to show negative growth, largely centered on the home builders. Of the 17 S&P 500 companies to have reported so far 13 have beaten the average expectation for earnings and 12 have beaten on sales.

Cal-Maine, though not on my calendar for some reason, reported earnings this morning. The company is the largest producer/provider of shell eggs and reported robust earnings growth from last year based on increased sales and higher prices for eggs. Higher consumer demand fueled much of the growth with over 18% of that in the specialty egg category. Lower feed costs also helped to improve margins, adding a boost to earnings. The company reported $1.14 per share for the recent quarter, compared to only $0.36 in the previous comparable quarter. Shares of the stock traded lower in line with the markets but found support along the short term moving average. The stock is trading just off an all time high with indicators convergent with higher prices. Support appears to be indicated around $85 with possible resistance at the current all time just high above $92.


The move lower at the open was broad. All ten S&P sectors were in the red until mid-morning when the utilities moved into the green and then later in the afternoon when technology followed suit. The biggest loser for the day was the materials sector with the financials not far behind. The XLB Materials Sector Spyder dropped about -0.40% today but found support at the short term moving average. The ETF created a doji with today's action but volume was not significant. This sector has been in an uptrend all year and this does not look to be stopping. The indicators are a little weak but still consistent with support around the $50 line. A drop below this could take the ETF down to $49 where stronger support exists. Short to long term the trend is up and appears to be holding.


The utilities sector was today's only real gainer. The techs moved into the green as well but only by a very small amount, barely above break even. The utilities Spyder XLU moved more than 0.60% higher today, matched by a 0.50% move in the Dow Jones Utility Average. The allure of yield in the face of today's sell off is likely the reason. The ETF moved up from support along $41.50 accompanied by a weak trend following signal on the stochastic. Momentum is bearish but has peaked, consistent with the early signal. The sector has been trading in a range between $40.50 and $42.50 for about 6 months and looks like it is heading up to the top of the range. Near term resistance is around $42.30 and the short term moving average.


Ford made a surprise announcement at its investor meeting today. The company announced that it expects to experience a loss next year in Europe, counter to previous expectations of at least breaking even and positive performance improvement earlier this year. Full year guidance was lowered by about $1 billion dollars along with guiding margins down to the low end of the range. The news was not taken well by investors who drove share prices down by over -7%. The stock is now down near the $15 level and a nine month low. The move is the biggest one I have ever seen in Ford and puts the stock at a level I was thinking would be attractive when looking at the chart last week.


The Indices

The market fell today and fell hard. Not quite as hard as last Thursday but hard enough to hit support and then bounce higher. Early lows were met by buyers who stepped in and drove prices higher, not quite back to break even but pretty close. Even with the bounce though, the indices are still below near resistance which could keep the markets contained until the data is released. The S&P 500 was the loss leader today, closing with a loss of -0.25%. The broad market index fell from the short term moving average and created a small doji in the process. This candle is caught between near term resistance and stronger, longer term support below around the 1960 level. The indicators are bearish but weakly so at this time; MACD and stochastic are both moving lower but without much strength. There could be further testing of support over the next few days with a possible break below that would meet up with the long term trend line.


The Dow Jones Industrial Average also lost about a quarter percent, -0.24%, in today's session. While not closing with a 100+ point move the index did move that much on an intraday basis. The blue chip index also fell from near term resistance and the short term moving average but was able to regain the moving average on the bounce. The indicators here are also a little bearish but even more weakly so, consistent with support along the 17,000 level. There may be further testing of support here as well but it looks like it will hold at this time. Near term risks are the various geopolitical concerns that are in the market as well as data outside the “Goldilocks” range.


The NASDAQ Composite was able to regain most of its losses today, closing down only -0.14%. The tech heavy index climbed upward from longer term support but fell shy of the short term moving average. The indicators are bearish and gaining some strength but still consistent with support over the short to long term. There may be some more testing of the 4,500 level but at this time it looks like it will hold. If broken there is additional, stronger, support about 100 points lower along the 4,400 level.


The Dow Jones Transportation Average was the only major index to move into the green and hold it today. The transports gained 0.16% today, after dipping below the short term moving average, coming short of near term resistance. The index is still above longer term, more critical, support and the long term trend line so I remain bullish long term. In the nearer terms the indicators are weak but bearish with a potential retest of today's support on the table. Current resistance is 8,500 and the previous all time high.


The indices moved lower today but they also found support. This is the third trading day in a row in which the indices moved down to a comparable longer term support and held there. Today they not only held, they bounced, but not enough to break above resistance. Today's move was driven by the basket full of international concerns yet tempered by a still positive forward looking view of the US economy and expectations for data later in the week. This week is another important one for the market in terms of data and could lead us into further correction or break us out of the current holding pattern the market is in.

Today's data was more of the same. Weaker, but not real weak, in one area while stronger, but too strong, in another. Yes, pending home sales fell but from the previous months year-to-date high and still at high levels. On the other hand the consumer is making more and spending more, in line with other data supportive of an improving labor market. This is much as the data has been all year. Steady improvement along all fronts but no one front taking all the credit, or making all the gains. A real nice scenario in my opinion as it allows the economy to stabilize and steadily grow.

Again, this week could be another one with volatility. The indices are at or near short term support, below near term resistance and trending up in the long term. The economics are steady and improving while geopolitical tensions on multiple fronts has the market on edge. There is a lot of data this week culminating with the NFP on Friday. Last month's reading was lighter than expected but was likely a one off event. All the other data, including any expectations for revision to last month's NFP, point to a much higher number. This month estimates are back over 200K and I am in agreement. Initial claims are trending at low levels, continuing claims are trending lower, total claims are trending lower, the employment component of today's Dallas Fed survey was positive as are the employment components of every other report I have read leading me to think that the jobs numbers this week will hold steady or show improvement across the board.

Until then, remember the trend!

Thomas Hughes