Weak data from Asia and wildly declining oil prices had traders on edge but renewed support from the nations economists is pointing to increased growth in the US.

Introduction

The day started out with equities in the red and they never recovered the loss. The drop was due primarily to the decline in oil but was also impacted by other factors. At first it seemed like mixed economic signals would hold the bulls and the bears in check. Weaker than expected data from Japan and China plus an upgrade of US GDP expectations had a mixed effect on global trading. Asian market were largely higher while those in Europe and the US were both down. In Japan weak 3rd quarter GDP was revised lower, to -1.9%, adding pressure on both the government and the BOJ to do more to support the floundering economy. In China weak trade data shows that imports and exports declined in November. This is of course in the face of a strengthening US economy as demonstrated by the much stronger than expected NFP numbers last Friday.

Market Statistics

Global events had their impact but the real drag on the market comes down to two things; McDonald's and oil prices. McDonald's reported weak sales and weak same store comps, driving its share price down by close to -4%. Oil prices also fell nearly -4% and carried the oil complex with it; Exxon and Chevron, both Dow Components, were down -2% and -3% respectively.

The indices were indicated lower from the earliest. The SPX was indicated to open lower by about 5 points and that held steady until the bell. After the opening bell the market held steady for the fist 20 minutes or so and then moved up to test last weeks closing prices. Today's high had been reached by 10AM and then the market began to drift lower. A little after noon the market began to sell off and quickly fell to a new daily low. Selling persisted, led primarily by the aforementioned stocks and sector, into the afternoon before intr-aday bottom was hit. Today's declines were not recovered but the indices were able to close off of the low.

Economic Calendar

The Economy

There was no US economic data this morning but the latest survey from NABE reflects growing optimism over the economy. According to the National Association of Business Economist the consensus estimate for 2015 US GDP growth has risen to 3.1% from the previously estimated 2.1%. The latest survey also shows that unemployment is expected to fall to 5.4% by the end of next year. Inflation is only expected to rise a tenth, to 1.7%, while consumer spending is expected to gain a half percent. Housing and wages are both also expected to improve next with production levels the only area expected to see declines.

The government is scheduled to run out of money again this Thursday. According to the latest reports congress is close to reaching a deal to ensure there isn't a shut down similar to the one we had in October 2013.

According to Mark Zandi's latest report Moody's Survey of Business Confidence has risen to new, record, highs. In fact, the words he uses are “surged to record highs”. He goes on to say that confidence in the US is “booming” while it is only strong in Asia. Europe and South America are still struggling but at least in Europe they are “getting better”. He says that “US businesses are extraordinarily upbeat” and that “prospects into next year are especially strong”.

There is some important data coming up this week. Tomorrow look for whole sale inventories and the JOLTs report on job openings. One of the key metrics of the JOLTs report is the quits rate which measures the number of jobs open due to voluntary separation. It is considered a good indicator of labor market health as more people will leave their job when the labor market is strong because they are more confident of finding new and/or better work. Wednesday the Treasury Budget is the only release and then on Thursday jobless claims, retail sales, import/export prices and business inventories. Friday wraps the week with PPI and Michigan Sentiment. Retail sales are expected to rise by nearly a half percent to 0.7% while PPI is largely expected to remain unchanged.

The Oil Index

Oil prices continued to slide today as yet another major analyst lowered its outlook. Morgan Stanley issued a report stating its 2015 forecast for Brent crude price is around $53 a barrel. One major issue for the down grade is over supply which the company blamed on OPEC. Morgan Stanley says that without intervention from OPEC the market will become imbalanced and could push prices even lower. WTI and Brent both fell on the news, roughly 4%, to new 5 year lows. With little to support prices it is possible that WTI and Brent could keep sliding until it is obvious demand and supply are in balance.

The Oil Index fell -4% today as well, and broke through support at 1336. The index is approaching a 25% loss from its peak last summer and in danger of further declines. Low oil prices and high supply are a bad combination for the oil producers and could combine to drive them even lower. Assuming a down trend in the index, the indicators are in line with a bearish trend following signal. MACD is moving up to make a new bearish peak and stochastic is making a strong bearish crossover. One potential target for this move is about 75 points lower along a long term trend line dating back to a series of bottoms in 2010, 2011 and 2012.


The Gold Index

Gold prices firmed today and made their way back above $1200, closing the US session near $1203. There was some movement into the metal on the decline in equities as well as relative dollar weakness which both helped lift prices. Gold climbed about $20 from the low to trade just below $1210 before hitting resistance. Prices remain volatile and trading around $1200 with no clear fundamental factor driving them. Gold may be bottoming but it is not time to be chasing prices. Aside from day to day swings based on economic data and news the next major catalyst in this market may be the convergence of central bank meetings scheduled for next week.

The Gold Index fell today but bounced from support. The index bounced from the long term support line with a small candle and weakening indicators. It appears to be testing long term support and could continue to do so into the near term. Support is located at $66.59, the 100% retracement of the 2008-2011 bull market in gold. If support holds this would be the first confirmation of this level and could lead to a rise in price. If the retracement doesn't hold the index will likely move down to the long term set last month at least. This level would be the next target to find support but will depend on gold prices.


In The News, Story Stocks and Earnings

Three main stocks were the root cause in today's Dow drop. McDonald's, Chevron and Exxon. McDonald's fell nearly 4% in the premarket session. The global fast food mega giant reported sales were down 6% worldwide with noticeable declines in comp store sales and US sales. This is counter to expectations for the company to at least maintain sales volume and highlights the growing decline in old school fast food versus its competitors who are more conscious of consumer food trends. The stock dropped below potential support with bearish indicators. Watch the $93.85 level for signs of resistance with downside targets near $90. Next earnings is 1/22/2015.


Chevron and Exxon both fell with the drop and bear market in oil. Chevron fell 3.75% to hit support along the 106.75 level. This level is the low set in October and could be a bottom for the stock. Indicators are consistent with support but oil prices could sweep the stock lower if they keep falling. If Chevron breaks this level it will be a new 12 month low and could carry the stock lower.


Exxon fell less, only 2.25%, and is still well above the lows set in October. Shares of this stock are approaching support, about $1.50 below the current level, with the October low still $2.50 below that. If oil falls further, or persists at the current levels, Exxon could sink to this low, near $87.50. The indicators are suggestive of support but like with Chevron, won't hold up to much if oil prices keep tanking. At these levels both stocks are paying decent dividends, Exxon 3% and Chevron 4%, so could attract some buyers and add to volatility.


Diamond Foods released earnings after the bell today and reported much better than expected. The company reported $0.28 per share, 4 cents ahead of estimates, and sent share prices higher in after hours trading. Looking at the chart the stock has been trading sideways to down over the last two weeks, building up to today's report. Today, the stock broke down through the 30 day moving average, dropping from resistance at $30, with bearish indicators. MACD is peaking to the downside and stochastic is making a double bearish crossover, that is, it is crossing the lower signal line at the same time %K is crossing %D. The set up looked pretty bearish going into the close but may prove to be a decent entry point if the after hours action holds up tomorrow.


The Indices

The indices fell today, the biggest decline in weeks. The losses were led primarily by the energy sector but the broader market was not immune. Surprisingly, the Dow Jones Transportation Index had the largest decline of the major indices, falling 1.30%. The decline was halted at the 9,000 level, just above the short term 30 day moving average and a level looking like support. The indicators are still showing decline but so long as support keeps holding the declines are serving to alleviate technical overbought conditions. Both MACD and stochastic are consistent with support in the short term as well, with 9,000 the first most obvious target. A break below this level could bring the index down do 8,750.


The NASDAQ Composite fell only -0.84% but is looking a little more top heavy than the transports. The index is creating similar price action but the indicators are much weaker. Stochastic is dipping below the upper signal line and MACD momentum is gaining bearishness. The index is a little extended as well and could easily drop back down to the 30 day moving average, about 65 points lower. The short and long term trends are up but it is possible a near term crest has been reached. There is some data due out this week that could sustain prices but the next major economic event is the FOMC meeting in ten weeks.


The S&P 500 lost 0.73% today and is approaching potential round number support at 2,050. Today's action found support at 2,055 but the indicators are declining so further testing of support is likely. MACD is gaining momentum to the downside and stochastic is about to cross below the upper signal line. The index could continue lower based on the indicators alone but there is additional support just below in the form of the 30 day moving average and then below that along 2,020 near the September peak. The index could be cresting a peak, about to pull back or merely consolidating. It has made quite a substantial gain in the last 6 weeks and profit taking is never a bad idea, but how low a dip will go is very questionable. The trend is up and the economic data supports it so any dip that materializes now will be a buying opportunity for me.


The Dow Jones Industrial Average made the smallest decline today despite containing some of the hardest hit companies. The blue chips, as a whole, lost only 0.59% compared to the losses sustained by Chevron, Exxon and McDonald's. The index created a medium bodied black candle and formed a potential dark cloud cover pattern, similar to price action in the other indices. The indicators are also creating bearish signals and indicative of a test of support but there is no real reason I can see for one to occur, today's drop being driven by oil prices which are bad for oil companies but great for everyone eles. First target, on a decline, is the short term moving average about 300 points lower.


It looks like the indices are setting up to test support. Depending on which index you are looking at support could be just beneath current levels or up to 1.5% lower. Several reasons exist for such a pullback to occur but all boil down to locking in profits ahead of the upcoming triple shot of central bank meetings.

There is still important economic data between now and the FOMC meeting that could influence the market. This week is a little light but includes jobless claims, JOLTS, PPI, Michigan Sentiment and business/wholesale inventories. Next week is pretty full, aside from the FOMC there are nearly 2 dozen reports including reads on housing, manufacturing and leading indicators. The trends are up, as are the economic expectations, so any test of support will likely be a buying opportunity. Especially if they are driven by another decline in oil prices.

Until then, remember the trend!

Thomas Hughes

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