Poor results from IBM failed to curb today's rally.

Introduction

Trading today was mixed, right from the start. Asian markets were up on the US bounce last week, Europe was down on economic woe and US markets were just plain mixed. The early futures trade was positive, then terrible earnings from IBM sent them sharply lower. Before the bell traders figured out IBM was probably an isolated event and the futures moderated but did not indicate a positive open. IBM dropped more than 10% in the early morning session and helped to send the Dow down by more than 100 points. The Dow struggled to fully regain the loss attributable to IBM but the broader market was able to move into the green early on. The indices all moved steadily higher all day, knocking out a few near term resistance levels along the way.

The Ebola factor has retreated quite a bit since Friday. There were no negative developments over the weekend and the new czar has been met with mixed response. I have heard opinions ranging from one end of the spectrum to the other but no real news that I can find about what he has or is doing. What I can find is centered on the potential for political controversy, which is why I think he was hired in the first place. Regardless, no new patients have popped up and no new centers of possible contagion.

Market Statistics

There are quite a few things on the horizon that could affect the market this week. First, China will release 3rd quarter GDP numbers overnight tonight. Next, earnings are coming in full force. IBM reported a big miss this morning, shrugged off as an outlier event, but nonetheless damaging to the market. Next is economics. There is a little bit of data this week, some housing numbers, weekly jobless claims, CPI and leading indicators.

Next week is a much bigger week and one that may overshadow trading this week. Next Tuesday is the October FOMC meeting and Friday is the first estimate for 3rd quarter GDP. The Fed is expected to end the taper as planned, an idea supported by Fed president Rosengreen this morning. He says, counter to Bullard last week, that the Fed should end the taper on time, which is by all accounts this month, next week.

Economic Calendar

The Economy

There were no economic reports today, as is common on Monday. We did get the weekly Survey Of Business Confidence from Moody's and Mark Zandi. The weekly report is as it has been all year. He says that business sentiment in the US remains strong. South America is a little weak due to Brazilian elections, the EU due to poor economic conditions. In the US hiring intentions are strong and sentiment into the end of the year and 2015 remains high. The addition to take note of is that there is no evidence of Ebola, the recent market weakness or overseas economies affecting outlook in the US.

The Oil Index

Oil prices fell today during the early part of the session only to bounce back late in the day. WTI fell more than a dollar while Brent fell nearly two dollars from Friday's closing prices. Plenty of global supply combined with news of increases to infrastructure in places like Kurdistan and Iran helped to keep prices low. There weren't any new developments in the Saudi/OPEC story although a small field shared by Saudi Arabia and Kuwait was shut down due to environmental reasons. OPEC meets next month and is being closely watched for signs of production cuts and/or division among the members. Until then supply, data and the FOMC could have an impact on oil prices.

The Oil Index climbed today, after opening lower. The index gained about a half percent but fell short of resistance near 1425. The indicators are mixed but in line with support in the near to short term. Stochastic is making a weak bullish crossover, reflecting the bounce seen last week. MACD has made an extreme peak, coincident with the recent low, pointing to a likely retest of support. Bearish momentum is in decline at this time so I would expect it to hit resistance before testing support. In the near term there is support at 1400 with short to longer support below that around 1350. Resistance is currently at 1425.


The Gold Index

Gold prices extended their rally today, climbing about $5. Gold is now trading above $1240 and closing in on $1250. $1250 has provided both support and resistance in the past, most recently resistance just last week. Near term momentum is still to the upside and without a catalyst in sight could continue testing $1250. China GDP could spark a move in gold, as could US data this week, but I am looking to the FOMC next week and then 3rd quarter GDP as potential movers of the metal.

The Gold Index traded to the upside today as well, but is still trading near long term lows. The index has become dissociated with gold prices and is not bouncing higher off of its lows as is the underlying commodity. This is likely due to uncertainty over long term gold prices as well as upcoming earnings among the gold miners. The reports aren't going to be great but I think they won't be as bad as some may fear. Gold prices hit a low but the average realized price is likely to be in-line or below the previous quarter and costs should come down due to lower oil prices.

Poor earnings from the miners could send the Gold Index down to long term lows around $65. The current long term trend is down, the index is consolidating below resistance and is accompanied by indicators consistent with a trend following sell signal. Current support is around the $75 level and may hold until earnings begin to come out.


In The News, Story Stocks and Earnings

Earnings are the story of the week; there are at least 500 companies scheduled to report. So far, 82 of the 500 S&P 500 companies have reported. 68% of them have beaten the average estimate for earnings growth and 63% have beaten sales growth projections. This is slightly below average for EPS growth and slightly above average for sales growth. The current projections for Q3 earnings is growth of 5.1%., 0.6% above the projections last week, due largely to upside surprises in the financial sector. To date only 4 out of 10 sectors are above estimates but we are still early in the season. This week we can expect 118 reports from S&P companies, more than 10%, bringing the total up to 20% for the season. The next two weeks will bring an additional +50% of S&P companies so will be quite busy.

IBM was the top earnings name, at least before the closing bell. Big Blue reported top and bottom line earnings that were well below the average estimate, well below, very low. The news was not expected and cast many doubts on the turn-around plans for the company. One of the headwinds faced by IBM is the impact of cloud-based computing on its core business, in effect it is hurting itself. Shares of the stock were sold off during the pre-open session, sending prices down about 15%. Buyers stepped in throughout the day, driving prices off the lows but only recovering a few percentage points on more than four times average daily volume.


Valeant reported before the bell too. The pharma giant missed on revenues but beat on earnings by a fair margin. The company reported total revenue grew by over 30% from the previous comparable quarter, impressive nonetheless. They also reported organic sales growth of 19% with notable increases in some of its key brands. Company executives were also able to raise full year guidance to a range above previous guidance and Wall Street estimates. Shares of the stock rose nearly 2% in today's trading, moving up from the short term moving average.


Chipotle Mexican Grill and Apple both reported after the bell, and both beat the street, Apple soundly. Chipotle reported EPS of $4.18 versus an estimated $3.84 with an smaller beat on the top line. The fast casual chain reported comp sales up over 20% on a build in traffic, but also on an increase in prices that helped to maintain margins. Outlook for next year remains in line with current consensus. Shares of the stock traded all day ahead of the report and then fell in after hours trading on 2015 growth prospects.


Apple also beat the street, but by a much nicer margin. The gadgets company reported revenue and earnings above estimates as well as providing strong revenue guidance for the next quarter and full year. The results are driven, of course, by sales of the iPhone 6 and 6+ but also by strong performance across the entire suite of products. Shares of Apple traded higher all day and surged after hours, breaking above resistance, the $100 level and the short term 30 day moving average.


The Indices

The market took a big hit this morning when IBM reported earnings. The good news is that the market was able to shake it off in favor of other, more favorable reports. The initial drop in IBM caused a near 100 point decline in Dow futures, resulting in an 80 point drop at the open. Although it took the entire day, the Dow Jones was able to push its way off of the low and back into the green. The blue chips finished the day up by 0.12%.

Today's range was much smaller than it has been over the past week or so, and created a small bodied candle. Price action was not able to move above the intraday high set on Friday, which could become near term resistance for this index. The indicators are once again in line for a trend following entry, but it is still early and unconfirmed while at the same time the short term analysis suggest a retest of support. Bearish MACD is in retreat but also convergent with the recent correction and indicative of such a test of support. Support is indicated at 16,000 with a weaker support level just above that around 16,250. Stochastic is consistent with this analysis and showing the early, and weak, trend following bullish crossover. A retest of support could set the index and the indicators up for the stronger signal sometime the next week or two.


The NASDAQ Composite made the largest move today, gaining 1.35%. The tech heavy index was not impacted by IBM and created a long white candle. Price action in this index was able to break Friday's high but is still under, and approaching, potential resistance. The index has about 60 points to go before hitting the 14-year high set this past March. Indicators are identical to the Dow Jones; momentum remains bearish but is retreating from an extreme peak while stochastic is showing a bullish crossover and confirming longer term support.


The Dow Jones Transportation Average and the S&P 500 closed within a few hundredths of a percent from each other. The transports edging out the broader market by only 0.07% with a gain of 0.98%. The trannies were also unaffected by IBM's poor results, moving up 80 points from Friday's close. The index has now moved up 5 days in a row and is trading just beneath resistance. Unlike the first two, which have a little room to move higher before hitting resistance, this index closed just beneath the 30 day moving average and the June all-time high just below 8,225. The index appears to be leading the others higher on this bounce and that is evident in the indicators as well. The bearish MACD peak is in retreat and very nearly at the zero line, much closer than the others, and stochastic is showing the early signal with a small bounce off the lower signal line by %D. I don't think this is just a dead-cat bounce but I am expecting a retest of support in some form or another. Current resistance is 8,225 as mentioned with support at 8,000 and 7,750.


The S&P 500 made the smallest advance today, only 0.91%. Today's candle is a long white, but not overly strong, although it does break a potential resistance line at 1,900. While a good sign, I won't be convinced without a move past 1,925. In the meantime the index is moving upward, on the bounce, with indicators in line with an early trend following signal. This leads me to think the index will move up to resistance in the near term. However, like the others, the indicators are convergent with the correction and highly suggestive of a retest of support.


The bounce looks like it could be good, or at least like it wants to be good. The correction took us down to 10% in some cases and has presented many market participants with the entry they have been looking for many years. The FOMC or the GDP could be the catalyst but until then there has been some damage done to the market that will take some time to fix. The good news is that we are building a pretty good base. The economic trends are still up and earnings season, x-IBM, has been pretty good. There are still some near term headwinds and reasons to wait but I think at worst those will provide another entry. Don't forget, China GDP is tonight which will likely set the tone for early trading tomorrow.

Until then, remember the trend!

Thomas Hughes