The bulls were set for a positive open but another downgrade for oil sent it lower, and the market followed.

Introduction

Futures were up in early trading, the S&P 500 and Dow Jones both indicated up by near a half percent in the early electronic session. Earnings, economic data and the FOMC were all in focus but a surprise down grade for oil from Goldman Sachs sent the market ducking for cover. Goldman now sees oil prices near $40 and expects that level to hold until it drives the shale players out of the market. This caused oil to begin another plunge, dropping more than 4% at the low point of the day. The drop in oil caused a sell off in oil stocks, led by shale producers, that in turn caused the equity markets to seek support levels.

Market Statistics

Other news impacting trading were a flurry of upgrade and downgrades, positive and negative guidance revisions, early earnings reports and economic data due out later this week. A number of high profile names either received or produced a revision as the market gears up for earnings season. The season started today with Alcoa who reported after the bell.

Asian and European markets were up, though the Asian indices were more mixed than anything. European indices were as high as 1.5% above last week's closing prices before weakness in our markets caused some volatility later in their day.

The market tried to rally once the opening bell sounded. The indices opened up by a few points but were heading lower within the first five minutes of trading. The SPX lost a little more than 1% before hitting bottom and bouncing higher. The market drifted sideways the rest of the morning and into the afternoon. The lows were tested late in the day but produced another bounce that lifted stocks into the close. The indices were able to recover some of today's losses and are now sitting just above long term support levels.

Economic Calendar

The Economy

No economic data was released today although there was plenty to talk about. Labor data released last week including the NFP, Unemployment Level and Hourly Earnings show that job creation remains strong, unemployment is falling and that average earnings fell. The NFP was strong and shows momentum in positive revision to the previous month that brings it up over 350K. The strength in job creation and other factors contributed to a surprise decline in unemployment to 5.6%. The negative of the report is that hourly earnings fell but my take is this; if we added a lot of entry level/lower paying jobs then it is not surprising the average rate would dip. More important is that the average workweek remained steady.

Other data due out, and there is a lot, includes manufacturing, retail, inflation, housing and industrial figures. Perhaps the biggest item on the list is the Feds Beige Book, scheduled for release on Wednesday, revealing the state of the economy and outlook for the future. Also up this week are Michigan Sentiment, Philly Fed Survey, Empire Manufacturing, CPI, PPI, Retail Sales, Industrial Production, Capacity Utilization and others.

Moody's Survey of Business Confidence rebounded this week, from a revision to last week's release. The index rose to 38.2 and remains near all time highs set at the end of last year. Survey administrator Mark Zandi reports in his summary that US business confidence remains upbeat and that hiring, sales and spending are all strong. Improvements in credit availability are still being noted which I see as a good sign, along with expectations for this year which also remain strong.

The Oil Index

Oil prices fell to hit another new low. Prices which began to fall on supply/demand imbalance are gaining momentum on downgrades to price expectation. Today's downgrade from Goldman Sachs is only the latest and forecasts oil to trade at or near $40 for a good part of 2015. This is supposed to drive the shale players out of the market... at which time supply imbalances will correct and prices can go back up. This is indeed a problem for shale producers and energy in general but I just can't help getting excited about gas that is $2 a gallon or lower.

The Oil Index fell as well but is still above near term support, unlike the underlying commodity which as at a +5 ½ year low. The index is falling from the four month down trend line and approaching potential support. There is a chance for support near $1,250 but a more likely target is below that near $1,212 and the current low. The indicators are bearish but very weak and currently suggest that support may exist at these levels. Support will need to be watched, if oil prices keep falling then I don't expect it to hold. A break below support would present an opportunity for bearish plays.


The Gold Index

Gold moved sharply higher today as safety seekers fled equities. Spot gold rose more than 1.5% to trade above $1,230 for the first time in over a month. Today's move extends the break above $1200 resistance and takes it another step closer to the next targets near $1245 and $1,250. The bottom may be in, but the trend is still not set so I expect volatility centered around economic data, oil prices and Fed expectations.

The GDX Gold Miners ETF has formed a bottom and today broke out of the pattern. The ETF surged more than 4.5%, breaking above resistance at $20.50. This may be a whipsaw but the indicators are bullish and on the rise, consistent with a strong market. The MACD peak is convergent with the new high, signaling that new highs are probable, while stochastic is moving higher and about to cross the upper signal line. This set up looks strong and could carry the ETF up to $22.50 or higher in the near term. If gold prices can hold at or near current levels the miners could keep rallying with a target on this ETF near $25 and $27.50.


In The News, Story Stocks and Earnings

Earnings season kicked off today with Alcoa. The aluminum giant reported after the bell so I'll get to that one last. According to FactSet the average earnings expectation for the S&P 500 has fallen to 1.1% over the last week. This is down from 8.4% at the beginning of the quarter and driven by massive reductions in earnings expectations from the energy sector. To date, 87 companies have issued negative guidance with a few more added to the list today; Tiffany's and Sandisk both lowered guidance outlook this morning. However, over the past few years an average of 72% of companies beat the average each quarter with an average increase of 2.1%. This means that the quarter will likely end up much better than expected around 3.7% or higher.

Rail carrier CSX reports earnings tomorrow. The company is expected to earn $0.49 per share and is likely to beat based on strength in the shipping sector. Of concern will be forward outlook and how low oil will impact volumes. Lower oil is good for input costs but much of what the rails are loaded with is oil products from the shale regions so falling prices could be a negative factor. Today the stock lost a little over 1.65% and approached potential support near $23.25. The stock is indicated lower at this time but both MACD and stochastic suggest support could be near this level as well. Tomorrow's earnings report will be the tell and may be as important to the market as Alcoa in terms of gauging specific sectors as indicators of the overall market.


KBHomes is also scheduled to report earnings tomorrow. The home builder is expected to earn $0.52 per share, nearly double the previous quarter. Earnings will be key but as always it will be the “what can you do for me next” attitude toward earnings that will likely drive prices and oil is behind a lot of the speculation. On the one hand low oil is a discount for consumers and may lead to more free cash flow and possibly increases in the housing sector. On the other hand housing projects in key oil producing areas are likely to slump due to lower activity. Today KBH traded in a wild range creating a near-doji candle in the middle of a 9 month trading range. The stock is currently moving up from the lower end of that range, is above the 30 day moving average and accompanied by bullish/neutral indicators.


Bristol Meyers Squibb was one of few stocks to trade to the upside today. The company announced positive results for a cancer drug test that may prove to become a new product. The stock jumped more than 7.5% in today's action but was not immune to the bears. The stock gapped up at the open then fell the rest of the day to close with a gain closer to 3%.


Alcoa received an upgrade from Nomura this morning in anticipation of a strong report after the bell. The aluminum giant was expected to report $0.26 for the quarter with a full year projection of $1.13. The company shocked the market with earnings that were above expectations. Alcoa reported earnings of $0.33, much better than expected on revenue that was above projections and 14% higher than last year. 2015 expectations are good as well with high single digit growth projected in aerospace and single digit growth in autos. Aluminum demand is also expected to rise globally. This report is not to surprising due to the high number of new contracts announced by Alcoa last year, particularly in the airline industry. Another indication may be Ford's use of aluminum in the new F-150's, which won Truck of the Year once again. The stock traded up in after hours action.


The Indices

The market fell today and just couldn't get its mojo back. The declines were not large but along with the drop on Friday erased most if not all of the gains made last week. The NASDAQ Composite was today's biggest loser. The tech heavy index fell 0.84% despite a positive pre-announcement from software provider SAP. Today's action erased all of the gains made last week and more, closing the gap formed at the open on Thursday. The indicators are bearish, but very weak, and suggest that the index could move down to support near 4,600 and the long term trend line. The long term trend is up and has proven support exists several times. With this in mind any move lower would be a buying opportunity provided economic data, the Beige Book and earnings are enough to fuel the rally.


The S&P 500 was another big decliner. The broad market got hit hard by the plunge in oil prices but was able to close off of the lows of the day. Today's action brings the index down to levels just above long term support. The indicators are weak and suggest that support may be reached, if not tested. Support includes the September all time high and the long term trend line near 2,000.


The Dow Jones Industrial and Transportation Averages experienced similar losses today, although the transports were a touch lower. Today's action carried the index down by 0.58% and nearly erased the gains made in last Thursday's monster rally. The index is now down near potential support with indicators that are weak in the near term but still consistent with support in the longer term. The index could move lower to test support at 8,750 or 8,500 in the near term.


The Dow Jones Industrial Average was today's best performer, losing only 0.54%. Today move took the blue chips down near support comparable to the other indices with indicators equally bearish and weak. The index looks like it may dip down to test support at 17,500 but this may not happen. I say this because today's drop was based on oil, a near term fear. When long term economic data and earnings outlook start coming out things may look different. The long term trend is up and I remain bullish.


The market fell today on plunging oil prices. Plunging prices led to diminished earnings outlook and that led to selling in the oil market. Now earnings expectations are so low it would be hard for the average S&P 500 company not to beat them. With this in mind, economic trends positive and outlook for 2015 good the dips still look like attractive places to buy. Caution is due as always, the prospect of Fed policy tightening may serve to reverse the market but I don't think it's happening yet.

Until then, remember the trend!

Thomas Hughes