Once again we're waiting on the Fed.

Introduction

Once again the market is waiting on the Fed. The October FOMC meeting begins tomorrow and is expected to result in the end of QE. Although generally accepted as being the end, this does not mean the Fed will do as expected, giving the market plenty of reason to pause.

Monday trading began in Asia, where indices were mixed. There was little news out of the sector today leaving last week's US rally and poor economic data from the EU to dominate trading. In the EU an early rally quickly lost steam as the aforementioned poor economic data overpowered positive results from the recent EU bank stress tests. The stress test results; most of the banks revealed to be under-capitalized last year have corrected the issue. The data; weak manufacturing data from Germany and a new report showing German business sentiment near a two year low.

Early trading here was muted. The futures trade was negative across the board, indicating a slightly lower open for the major indices. Earnings released this morning failed to stimulate the rally, leaving early trading weak into the opening bell. After the open volume remained weak and trading lack luster. The SPX opened down about 3 points and quickly sank to the daily low, about 13 points below Friday's close. The market hit bottom about 10AM and then bounced back to test break even. The SPX was never able to move into positive territory but other indices like the Dow Jones Industrials, Dow Transports and NASDAQ Composite were. Afternoon trading was primarily sideways and ended with the indices flat to positive from last week's closing price.

Market Statistics

Additional factors affecting today's trade include the elections in Brazil and new Ebola news. In Brazil the leftist, anti-business incumbent was reelected. This is a negative for Brazil but only peripherally important to us. Ebola hits much closer to home; there was some good news as well as bad. The good news is that more people are being cleared from risk. The bad is that a young boy is the next possible victim. Fingers crossed he's clear. While traders took note, the market did not spin wildly out of control on the news.

Economic Calendar

The Economy

Moody's weekly Survey of Business Confidence remains very positive. Although there is still weakness in Europe and South America US business are still optimistic about the future. Mr. Zandi reports that there is still no sign of an impact on confidence due to Ebola or market volatility. The outlook into next year remains strong and over half of those surveyed report they are hiring. According to his take the survey reveals that US business confidence “reflects an economy growing above its potential”.

Pending home sales rose but not as much as expected. The number of contracts signed, not actual sales, rose by only by 0.3%. Although weaker than expected pending sales are now in positive territory for the first time in 11 months, rising 1% for the year. The index is above the 100 level for the fifth month and at the second highest level since last September. While this shows that there is not robust demand at this time the long term trend in pending sales is steady to up. Credit conditions were listed as a headwind to buyers unable to find financing.

There is a lot of data left to come out this week. Aside from the FOMC announcement Wednesday there are 12 others reports this week. Tomorrow is Durable Goods Orders, Consumer Confidence and the Case-Shiller 20 City Index. Wednesday is Mortgage Index. Thursday is weekly jobless claims along with the first estimate for 3rd quarter GDP. Friday is Personal Income and Spending, Employment Cost Index, Michigan Sentiment and Chicago PMI. GDP is likely the most important piece after the FOMC but all data points tie together for the big picture. Next week will also be a big data week as this Friday is the end of the month.

The Oil Index

Oil prices fell today, breaking $80 early this morning. The latest development is a downgrade of 2015 price targets for WTI and Brent from Goldman Sachs. Their new target for WTI is $75 in the first quarter of 2015. The downgrade caused WTI to drop below $80 but was unable to keep it there. Buyers stepped in to drive prices back above $80 by mid morning. At settlement WTI was only down a single penny from Friday's close, trading at $81.00. Goldman thinks oil is going lower on supply/demand issue and prices may be heading that direction but OPEC is still an unknown factor. They hold their meeting in about 2 weeks and could curb production as many of the members have been calling for.

The Oil Index dropped 2% at the open and traded lower during the day. By the close it had recovered some of the loss but did not move past opening price. Today's drop took the index back down to a potential support and today's price action suggests it was found. The index is retracing the bounce begun two weeks ago and is approaching a good target for support at 1,400. The indicator are bullish but weak, in line with the recent bounce and support in the 1,350-1,400 range. I've been looking for a retest of the longer term support based on the convergence with bearish MACD during the pullback. It looks like it may have started to test it but I don't think it is over yet. The big oil companies report this week and they will likely be market moving.


The Gold Index

Gold prices were basically flat today, trading just below $1230. Prices are hovering in the middle of a potential range between $1200 and $1250 on rising economics, stronger dollar, the end of QE and the uncertain onset of higher interest rates. Today's trade was of course affected by anticipation of the Fed and could foreshadow price action up until the release at 2:15PM Wednesday. At that time the only thing that I can see that would send gold prices lower for a sustained period would be if QE didn't end, or if it increased. Every other line of thinking leads me eventually to normalizing rates, inflation and higher gold prices.

The Gold Index traded lower today as well. The index lost about -1.5% on an intraday basis but closed off of the low. The index is still drifting lower and below near term support at $75. If this persists my downside target remains near $65 but there is a serious divergence from the indicators if it is moving lower. If not there will be resistance possible at $75, and then between $80 and $82.50. Aside from the Fed meeting and gold prices earnings are due from the senior minors towards the end of the week. I expect earnings will be down, but also for cost to be lower as well.


In The News, Story Stocks and Earnings

Earnings season is in full force. According to FactSet 208, just over 40%, of S&P 500 companies have reported so far. Of those 75% have reported EPS growth above the average estimate with 60% above the average for sales. The current projection for 3rd quarter earnings is an average 5.6% among all S&P 500 companies, up from last week's 5.1% and the second week of increase. This is due to strong performances from 6 out 10 of the S&P sectors. So far only two sectors are posting negative earnings growth.

Twitter was the big name in earnings today, although there were others. Shares of the stock lost nearly -3% today, trading down from an apparent support/resistance level at $50. There was heavy option volume on out of the money puts and calls, expecting a fairy large move after the bell. The heavily criticized social media giant was expected to report EPS of $0.01 and met that expectation. The company reported earnings of $361 million, ahead of projections, and more than 100% above last year at this time. The results were not enough for the bulls and shares sank more than -10% in after hours trading.


Merck&Company reported before the bell but did not inspire much action. The pharma giant reported earnings that were slightly above expectations on a 4% drop in sales. The sales drop is due, according to the report, on divestiture of assets earlier in the year. Current results allowed execs to narrow guidance within the previously given range. Current full year non-GAAP EPS is now $3.46-$3.50. Shares of the stock fell more than -2% on the news, dropping from the short term moving average. The indicators are bullish but weak. Current support is indicated at $52.50 with resistance at $57.50.


The Indices

After the initial dip the market recovered and was basically flat the rest of the day. The major indices hovered around break even most of the afternoon with a final push at the end of the day that took most of them into the green. The SPX was the only index to close in the red and then only by a small margin. The broad market lost -0.15% in a very light session of wait and see what happens.

Today's action took the index down to test the 1950 level and just above the long term trend line where it met support. By the close the index moved higher and above 1960, another near term bullish support level. The indicators are bullish and pointing to higher prices in the near term but I am still anticipating a retest of support. This is based on the convergence between bearish MACD and the recent near 10% correction. Current upside target is 2000 with long term support between 1850 and 1900.


The NASDAQ Composite poked its head into positive territory twice today. The tech sector moved up and found resistance at 4,490 both times but was able to close in the green. Today's action took the index to a new short term high with bullish indicators. MACD is moving higher into the near term as well, in line with underlying long term trends, while stochastic is moving higher following a bullish crossover. The bounce has been strong, but looking at price action may be losing some steam or is pausing for breath. Either scenario I think hinges on the FOMC meeting which I see as pivotal with or without the technicals. The index is trading at resistance coincident with the July highs and could easily move lower from here if given a reason. My first target for support is along the long term trend line near 4,400.


The Dow Jones Industrial Average gained 0.07% today after testing a long term support at 16,750. The blue chips are now above the July high and a potentially strong area of support. Support is aided by the short term 30 day moving average and accompanied by bullish indicators. The index appears to be moving up in the near term with a target of 17,200 in the near term. The longer term outlook is the same as the first two; I'm bullish near and long term but still expecting some kind of retest of support before the real rally begins.


The Dow Jones Transportation Average led today's move, as it has been doing all year. Strong earnings and positive guidance for next year from several big names last week is most likely why. The trannies gained 0.67% in today's session and are approaching the current all time high. This is quite significant in light of the recent correction and suggests that the others will move up to test long term resistance as well. The all-time high has emerged as a potential point for profit taking and/or other selling activities as it is the most obvious target now. Today's move confirmed support at 8,500 with strong bullish indicators so I would not start placing bearish trades just yet, however, caution is warranted so I bring it up. If resistance fails a break to new highs would be very bullish and I will have to rethink my retest-of-support theory.


While looking over the DJT I skimmed a few transportation names I know. One that stood out today is CSX. The rail carrier recently reported double digit profit growth and guided the same for next year. The stock has been trending up steadily since then and is indicated higher on both the long term weekly charts and short term daily charts. The move over the last two weeks tested support along the 150 day moving average and moved higher on more than twice average daily volume.


The market looks like it is in rally mode and waiting for the Fed. The transportation average, the market leader, is moving higher and about to retest the all-time high. With economics and earnings pushing it the index could easily break right above and lead the entire market higher. Only the Fed and the data stands in the way. So far the data remains steady to positive, in the sweet spot the market likes, and I don't think the Fed will do anything too surprising this meeting. So long as the earnings are good the market should be happy.

Until then, remember the trend!

Thomas Hughes