The bulls started off strong but failed to hold the gains as oil plummets and traders wait on the FOMC.

Introduction

There were many things for traders to take note of today but media attention was dominated by two things; events in Australia and falling oil prices.

A hostage situation in Australia resulted in several deaths unfolded throughout the morning hours. A lone gunman held dozens of hostages in a popular cafe for upwards of 16 hours. The situation came to a head around 10:15AM, right around the time the market started to fall. Also affecting early trading were volatile oil price which began the day in positive territory but sank to new lows following OPEC statements defending current oil production.

Even without this tragic event the day was full of news. Starting in Japan weak manufacturing sentiment sent the Nikkei plunging even as Shinzo Abe receives renewed support. Prime Minister Abe was elected to a new term over the weekend and is expected to begin enacting Abenomics 2.0 as early as this month. Not only that, the BOJ is meeting this week with a scheduled policy release for Thursday and could surprise the markets. The Japanese data, along with declining oil prices helped to send the entire region lower. European markets were able to shrug off the Asian decline but eventually fell into the red. A,lso on tap this week, a meeting of the ECB but I don't expect much from them.

Our markets were strongly higher from the earliest of electronic trading. The S&P 500 future was trading between 12 and 16 points above last week's close with the Dow Jones Industrials and NASDAQ Composite trading at relative levels. The FOMC meeting, scheduled for Tuesday and Wednesday of this week, were the focus of early trading despite the unfolding situation in Australia and poor Japanese data.

Market Statistics

Economic data was largely as expected, despite one spot of weakness, and helped to support early pre-market trading. The markets held pre-market levels and opened as indicated. The opening bell was followed by a rally that carried the indices roughly 0.75% higher within the first five minutes. Unfortunately, these levels did not hold. After 30 minutes of testing resistance the indices began to fall back.

It was about this time that the Australian hostage situation began to heat up. Shots were fired, we saw action on TV and the market went with it. However, what really had the market down was oil. New comments from OPEC, released about the same time, have them in support of current production levels. This sent prices for WTI and Brent seeking new lows and the broad market with it. The SPX was testing break even by 10:45 and then falling down to test long term support near 1985 by 11:30. The low of the day was reached by 12:00 noon at which time the indices began to recover some of the loss. Selling moderated during the afternoon but the decline was not recovered. The market was able to move off of the lowest levels of the day but still closed with most indices in the red.

Economic Calendar

The Economy

There was quite a bit of economic data released for it being a Monday, and not all of it positive. Empire State Manufacturing Survey being first on the list and the negative bit. The Empire State Manufacturing diffusion index fell 14 points to -3.6. This is the first negative reading, the lowest reading, in roughly two years. The drop was unexpected as general consensus was around 14 and the previous reading was 10.2. New orders and shipments both fell into negative territory, leading the decline, but labor remained steady at 8.7 despite a drop in the number of hours worked. The six month outlook remains positive but slightly muted from previous months.

Industrial production and capacity utilization were released at 9:15AM. Industrial production rose by 1.3% in November, following an upward revision for the June-October period. The upward revisions are not surprising in light of positive revisions we have been seeing in labor data as well as GDP in general. Output also increased, by more than 1%, and is above the long term average. Industrial production itself is nearly 7% above its long running average and more than 5% levels at this same time last year. Capacity utilization also increased, gaining 0.8%, and is now equal to its long running average.

The National Association of Home Builders released their gauge of home builder sentiment. Builder sentiment fell one point in November, to 57, from last month's reading of 58. This is the 6th month of positive sentiment and is expected to remain steady if not strengthen into the first half of next year. Two of the three sub indicators declined slightly, current conditions (-1) and future expectations (-1) while traffic remained steady at 45. Traffic is the only indicator to remain below the expansionary 50 and is expected to improve, outlook into 2015 remains positive.

Moody's Survey Of Business Confidence has reached new highs, according to Chief Economist Mark Zandi. His summary states that "Business sentiment is ending 2014 on a very high note. Confidence has surged to a new record high... consistent with an economy that is expanding well above its potential (and)... expectations regarding the economy’s prospects into next year are especially strong." He also notes that spending, hiring and sales are very strong.

The Oil Index

Wow, oil, it's still slipping. Early indications that prices may bounce were dashed when OPEC stood tall and defended current out put levels. Early on, prices were being supported by news Libyan ports were closed but this was not enough to keep them up. Brent had been up by nearly 1.5% in the early session with WTI lagging with a gain near 0.65% when OPEC announced it would not be making any production cuts. Oil prices, both Brent and WTI, then proceeded to fall with no bottom in sight. WTI led the decline with a drop of more than 3% followed by Brent's drop of just over 1%. WTI is now trading at new lows below $55 per barrel, Brent just above $60.

The Oil Index fell in tandem with the underlying commodity. The index fell a little more than 1% and dropped below a previous support line at $1250. This line was also my most recent target and now may provide additional resistance. Bearish indicators continue to gain strength, led by stochastic and a drop below into the lower signal zone. The index looks incredibly bearish at this time, but also extended from the moving averages and the trend line. There could be a snap back or consolidation but I am not holding my breath, while oil is falling the index will not doubt fall as well. Based on the height of the bearish MACD momentum is at least as strong now as during the previous low set in October.


The Gold Index

Gold sold off more than 2% as central bank expectations have dollar value firming. The triple shot of central bank meetings being a major cause for speculation this week. Not only is the Fed expected to increase hawkish verbiage, the other central banks are at least expected to defend current dovish policy if not increase it. This is a combination which could send the dollar even higher and gold potentially lower.

Gold prices fell more than $20 by 3PM, dropping back below $1200, and could go lower but I think that will depend on what the FOMC actually says. Most importantly what they say about inflation and interest rate expectations. If the interest rate time line gets pushed up gold prices could go up as well. Current expectation is for the first hike to be around mid 2015 with the bias leaning to the early side, ie the June meeting.

The Gold Index held support for the first half of the day but it did not last. Long term support at the 100% retracement line was broken by today's 4.5% decline. The indicators are now bearish and confirming the break but not overly strong. The index is moving lower with next target at or near the long term low, just below $60, set at the beginning of November. A move down to support is now likely, but a break below support is needed for a longer term bearish outlook. Gold prices will lead with the FOMC policy statement a high probability catalyst for either event.


In The News, Story Stocks and Earnings

Alcoa announced that it is buying a German titanium and aluminum casting company in order to exand its global aerospace foot print. The financial details of the deal were not disclosed but the announcement itself is important. It underscores the growing nature of the aerospace industry. There have been several deals announced this year, most of which include Alcoa already, and this move may help secure some more. Shares of the stock traded higher during the morning but fell back to support later in the day. The stock is now sitting on long term support and the bottom of a 6 month trading range. The indicators are bearish and at an extreme so support needs to be closely watched. If Alcoa recovers from the recent pull pack to support upside targets, near the top of the 6 month range, are near $17.75 or +18%. If support should fail next target for support is near $14. Alcoa is scheduled to report earnings ina about four weeks, 1/8/2015.


Today is supposed to be the biggest shipping day of the holiday season. It is the last week, very nearly the last day, to be sure you packages get to where they are supposed to be going by the 25th. And that is if there are no SNAFU's like last year. FedEx alone is expected to ship a record setting 22.6 million packages, an estimate based on industry wide projections of a 16% increase in on line sales. The jump in sales and shipping led FedEx to increase seasonal workers. Shares of FedEx were one stock to buck today's sell off, gaining a little over a half percent. The stock traded in a wide range and tested support at the 30 day moving average. The indicators are bearish but weak and in line with a pull back to support. FedEx is scheduled to report earnings on Wednesday.


According to FactSet earnings for the S&P 500 are expected to run an average of 3.0%. This is down from the 8.0% estimated earlier this year, led by downward revisions in the energy sector. This will likely move higher as more companies report; the actual average earnings usually running about 5 points above estimate and will rise over the course of the season. So far three S&P companies have reported, all three reporting sales and earnings above the mean estimate. Telecom is expected to lead earnings this quarter, energy is expected to lag.

Interestingly enough, FactSet is scheduled to report earnings tomorrow. The data analyst is expected to report EPS of $1.33 versus the previous quarter's earnings of $1.31. Today the stock traded to the upside, barely hanging on to positive territory and the 30 day moving average. The stock is testing support at $135.


Looking over the earnings calendar for the week I see that Oracle is scheduled for Wednesday as well. Oracle always stands out for me, no special reason, but it also marks the onset of an upcoming earnings season. It reports earnings roughly 4 weeks ahead of Alcoa. It was, surprisingly, another stock to buck today's sell off. Surprising as the tech's were one of today's hardest hit indices. Today Oracle gapped back up from a low set last Friday and moved back above the 30 day moving average. The stock appears to be bouncing from a test of support but is still well within the 12 month range and beneath technical resistance. Resistance is just above the current level near $42.


The Indices

The day started off strong. Futures were strong, data was largely positive and supported futures trading, the open was positive and the first five minutes of open trading was real strong. The strength did not last because the market is still waiting on the Fed and there were other events to grab attention.The events in Australia and the drop in oil each played a part, mostly the drop in oil, but the Fed I think is the underlying reason.

Today's drop was led by the NASDAQ Composite. The tech sector shed more than 1%, falling down to test support at 4,600 and stopping there. The index is now below the 30 day moving average with bearish indicators and looking like it is heading down to the long term trend line. Both MACD and stochastic are both moving lower suggesting that current support, 4,600, will be further tested at least.


The S&P 500 was next biggest loser today, dropping 0.64%. The broad market fell to test support consistent with the July all-time highs and the long term trend line. Support appears to be holding but as of now the indicators are still bearish. Today's candle is bearish, as it is long and dark, but has both long upper and lower wicks which lead me to think there is also indecision in the market. I see the FOMC meeting as the next likely catalyst so tomorrow could see another test of support. Support is currently in the range of 1980-1990.


The Dow Jones Industrial Average made today's smallest decline, dropping a little more than a half percent. The blue chip index also created a bearish candle with long wicks and retested the July all-time highs. The indicators are in decline and suggest that support will continue to be tested, perhaps until the FOMC report is released. Support is currently around 17,150 with a next possible target at 17,000 if broken.


The Dow Jones Transportation Average did not decline today. It did not close at the highs of the day but it not close in the red either. The trannies created a small doji today, with equal length candles, just below the 30 day moving average and just above the 8,750 support line. The indicators are bearish, but unlike the others, are once again showing early signs of rolling over. If support is broken next potential support is 8,500 with upside targets for a bounce near 9,000 and 9,250.


Once again the FOMC meeting is upon us and once again I think it no coincidence the markets are testing long term support just before. The trends are up, outlook is good and expectations are for policy to show this. The question is, will the statements and forward outlook support the low-interest-rate-low-inflation Goldilocks rally we are in? Along with the Fed meeting is a plethora of economic data as well. Tomorrow are two key gauges of the housing sector with CPI, Philly Fed and Leading Indicators due out later in the week.

Regardless of the Fed there are still some head winds to keep in mind, primarily Obamacare. It is still unclear how negatively it will impact job creation and the consumer, two segments of the economy important to the recovery.

Long term economic trends are still positive, and showing underlying strength. The Empire Manufacturing number is a an isolated spot of weakness for now so not alarming by itself. Outlook for next year is positive, as evidenced by numerous forward looking reports released last week. I am bullish, but still waiting to buy on the dip.

Until then, remember the trend!

Thomas Hughes

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