Despite a raging winter storm, economic data, earnings and a surge in oil price Punxsatawny Phil saw his shadow and predicts another 6 weeks of winter.

Introduction

Ol Punxsatawney Phil reports that we can expect another 6 weeks of winter... but I'm not sure he saw his real shadow. The sky was overcast and grey, the crowd was filled with cameras ...you be the judge. In any event the market did not react violently to the news as other more relevant issues were clamoring for attention.

To start things off weak manufacturing data in China hit Asian markets and sent them lower. Chinese PMI came in at 49.7 for the final after an initial reading of 49.8. This is the second month the indicator has been below 50 and is raising fear of slow down in China. This news had Asian market down by at least a half percent but did not have much impact on the European session. EU indices were largely higher on earnings, ECB stimulus and higher oil prices.

Market Statistics

There were a few headlines in the early hours that affected trading. First up, the President has issued his 2015 budget, about $4 trillion, and is set to fight the GOP over it. His stance, it is time to “end mindless austerity”. Other news includes auto sales estimates from data resource IHS. The company says it expects auto sales to continue to grow in 2015, but at a slightly slower pace than 2014. The number of new cars sold is expected to rise by 2.4% to 88.6 million units worldwide, led by the US and China. Earnings released before the bell were largely positive, including a beat from Exxon that is sure to help raise average quarterly earnings growth for the entire S&P 500. Finally, economic data was mixed but in line with trends.

US futures were up from the earliest. The SPX was indicated up by 4 or 5 points in early electronic trading with some volatility. The indices opened positive and held near break even for the first half hour of trading but weak ISM data sent them down to hit a 6 week low. Support kicked in once these lows were hit and by 11AM the major indices were all back in the green. The rest of the day saw the indices move higher, and then lower and then higher again with strength developing into the close. The late day rally took the indices to new daily highs nearly 1% above last weeks close.

Economic Calendar

The Economy

There was a bit of economic data released today, 4 bits from December/Q4 2014 and one from January/Q1 2015. First up was Personal Income and Spending, released at 8:30AM. Income increased by 0.3% or $41.3 billion in December. This was led by gains in income for proprietors and wages/salaries in the public sector. November data was revised lower from a gain of 0.4% to a gain of 0.3%. Personal Consumption Expenditures declined by -0.3% and November was revised lower, by a tenth to up 0.5%. While not a great sign for the consumer, is not unexpected in light of other weak December data. Construction Spending and ISM were both released at 10AM, both a little weaker than expected. Construction Spending in December rose, but only by 0.4% versus the consensus estimate of 0.8%. Helping to even out the miss is an upward revision of 0.1% to the November data. Even with the miss on a year over year basis spending is up 2.2% from December 2013.

Finally, ISM for January, expected at 54.5, was reported at 53.5. This is slightly below expectations and the previous month but still expansionary. New orders, production, employment and prices were all down while inventories rose. Despite being down, responses indicate that demand is still high. 14 of 18 sectors experienced growth in January and most reported strong demand or increasing business opportunities.


Moody's Survey Of Business Confidence continues to show positive expectations for this year. The diffusion index, which ended 2014 at an all time high, surged to a new all time in this week's report. The index is now reading 41.6 and is accompanied by the most optimistic summary I have read in the past 6 months. According to Mark Zandi, Moody's Economist and survey administrator, “Businesses remain upbeat. Confidence surged late last year and remains near record highs in early 2015. Sentiment is sky-high in the U.S. and stronger in Asia. Businesses are also feeling a bit better in Europe, likely reflecting the European Central Bank's recent moves and a weaker euro. South American confidence continues to lag. Hiring intentions in the U.S. are robust, with a record well more than half of respondents saying they are hiring. Layoffs are extraordinarily low. It is encouraging that pricing is holding firm despite the decline in oil prices, surging value of the dollar, and disinflationary forces overseas. Credit availability has also improved notably in recent weeks.” The major changes are that sentiment is now “sky high” in the US and that Asia and the EU are getting better. Other items of interest include “robust” hiring intentions, “extraordinarily low” lay-offs and that credit availability remains “improved”. All things that point to strengthening economic trends, in my opinion at least.


There is more market moving data due out later this week. Tomorrow look out for auto sales and factory orders, Wednesday is ADP employment and ISM services index, Thursday is Challenger job cuts and jobless claims followed up on Friday with the ever important NFP and US unemployment figures.

The Oil Index

I know this will be shocking to hear but oil prices were volatile again today. WTI moved in a choppy range as high as 2.5% above last weeks closing price and closed at the high of the day. A number of factors including high short interest, a steel workers strike threatening fuel production and declining rig counts contributed to the move. While at this time supply is high and rising there are signs that down the road it will begin fall back in line with demand. This is helping to support oil prices but as of yet does not signal a reversal and is not supported by data. Until then this move is likely a relief rally and could set us up for another leg lower.

In the meantime, firming oil prices and better than expected (not great but better than expected) earnings from Chevron and Exxon are helping to lift the oil sector. The Oil Index moved up by over 1.75% in today's session and is now approaching potential resistance near 1,350. Today's action held support above the short term 30 day moving average and is accompanied by bullish indicators. Although momentum is weak it is bullish and ticking higher while stochastic is on the rise and presenting an interesting set up. Both %K and %D are pointing higher, but %K is still below the other and both are below the upper signal line. This could lead to a double bullish crossover as %K crosses %D and both cross the upper signal, or could result in a confirmation of resistance if neither move higher. This scenario looks like it may play out as the index approaches the 1,350 resistance line and either breaks through or is repelled. A break above would have targets near 1,400 and 1,500 hundred. Support, upon a pull back, may be found along the long term trend line near 1,250.


The Gold Index

Gold prices held steady near $1280 after dipping to test support near $1265. Today's action created a near perfect “V” as prices declined to their bottom, bounced and then climbed higher. Prices are struggling with near term concerns such as fear of slowing economic growth, long term economic outlook and the latest FOMC statement. In terms of the FOMC it seems at this time as if the market is accepting a rate hike this year, but is having a hard time deciding just when it's going to come. The sentiment may change later this week as the fresher data begins to come out but I think so long as labor trends remain healthy rate outlook will remain stable and gold prices will hold steady. In the near to short term there could be further testing of support with $1250 the most likely candidate at this time.

The gold miners ETF GDX rose in today's session, climbing more than 1.3% in a move extending a bounce from the short term moving average. This bounce and move higher is also confirming support for the break-out the ETF made at the beginning of the month. Current support is near $20.50-$21.00 with potential resistance at the January high, $23.22. A break above resistance would have a target between $25 and $27.50 in the near to short term. The indicators are bullish but in decline, consistent with a test of support and there is chance support could be tested again. This index may trend sideways over the next week, or two even, as we wait for the macro-data and for earnings. Many of the senior and junior miners are scheduled to report in two weeks time.


In The News, Story Stocks and Earnings

As of last Friday 227 S&P 500 companies had reported earnings. According to FactSet 80% are beating the mean estimate for earnings growth and 58% are beating the mean estimate for revenue. The current estimated mean growth rate for the index is now 2.1%, up from 0.25% just last week. The energy sector led the index in downward revisions, driving the mean estimate from the high over 6% to the low we saw last week. The mean is now rising sharply on better than expected earnings from the oil sector, among others, and will no doubt rise again after today's report from Exxon. The take away; energy is lagging in terms of growth but the amount of lag isn't as bad as previously estimated.


Exxon reported earnings before the bell and provided a bit of lift. The world's largest integrated energry company reported EPS of $1.56 versus the expected $1.33 predicted by the street. Revenues were a shy of estimates but full year revenues were only $0.1 billion short of the previous year. 2015 outlook is in line with estimates but significantly lower than the last several. The stock surged as much as 2.5% in the premarket but did not hold the gain. The stock opened about a half a percent higher and then moved up from there. By the end of the day shares of Exxon had gained about 1.75% and could be bouncing from long term support.


Sysco reported before the bell too. The company said fiscal second-quarter earnings came to $157.9 million, or 27 cents a share, down from $210.8 million, or 36 cents a share, in the year-earlier period. The food distributor said revenue was $12.09 billion, up from $11.24 billion in the comparable quarter last year. Earnings are below estimates which had been expecting an increase. The stock was able to open with a small gain but quickly fell under heavy selling pressure. By the end of the day Sysco had fallen more than 2.25%.


RyanAir, the UK based discount air carrier, reported earnings in line with expectations. The company said that low oil prices were positively impacting their bottom line but that execs plan to pass on most, if not all, of the savings to customers. This move led them to caution on profit growth over the coming two years and sent the stock down by more than 4% in the pre market session. The stock opened near $63.50 and moved down from there to test potential support near $62.50.


The Indices

Today was volatile to say the least. Market action was calm and paced, but it went down a percent, then back to break even, then up a percent, then back to break even and then back up and up to the closing high. The move was led by the Dow Jones Transportation Average which closed with a gain of 1.42%. The transportation index moved higher after testing support near 8,575 and could be setting up to move higher. The index is now moving up from the bottom of a three month consolidation range within a greater up-trend with potential economic catalysts on the horizon. The indicators are in line with support at this level and could be rolling into a trend following signal but have yet to confirm.


The broad market S&P 500 index is today's runner up. The index gained 1.22% in today's session and is moving up from another test of support. Support is near 1,990 and consistent with previous all-time highs, 3 previous tests of support and the long term trend line so looks strong in my view. The indicators are in line with that support; if you will notice the last three bearish MACD peaks are progressively smaller, a sign that short term selling could be running out of steam in the face of a stronger, longer term up-trend. If support fails next target for support are 1,950 and 1,900. Near term targets if this bounce takes hold are near 2,065 and 2,100.


The Dow Jones Industrial Average is third in today's line up. The blue chip index itself led by Exxon, Chevron, JPMorgan, Goldman Sachs, UTX and 3M moved up by 1.14%. Today's move is yet another indication and confirmation that support exists at or below 17,150. This support may break down if the market can not move on from here but at this time is holding. The indicators are in line with the long term up-trend and are beginning to roll over into a possible trend following signal. MACD is bearish but weak and weakening, stochastic is convergent with support, flattened and set up for the bullish crossover. Data, or earnings or a combination could provide the catalyst for such a move. If not, a break below this level could take the index to 16,500 and the long term trend line.


The NASDAQ Composite brings up the rear in today's action. The tech heavy index gained 0.89% in a move that tested the long term trend line and created a long lower shadow. The index, like the others, is confirming support ahead of this weeks economic events but has not yet confirmed a trend following signal. The indicators are consistent with support and leading to a potential trend following entry signal but need to confirm. Bearish MACD is just as weak as it can be while the index is drifting along support; stochastic is pointing higher with both lines but yet to form the crossover. Current resistance is the short term 30 day moving average with upside targets near 4,800 and the current long term high. A break below the long term trend line could carry the index to the next potential support, which is only about 50 points lower. A break below that may lead to heavier selling.


It looks like the indices are gearing up for a move. It looks to me like it will be a move higher, in line with trends, but that is yet to be seen. Recent events have had the bulls in retreat but that may be changing. The markets have weathered a storm of overseas central bank activity, the FOMC, weak December data and lack luster earnings that have tested and retested support but today's move could be preceding another trend following bounce. The good news is that all of the negative data that drove the market lower is rear looking... as in it already happened, we know it wasn't that great and now it's time to move on. It is the time to focus on what is happening now, this quarter and to think about what is going to happen next quarter. The ADP, Challenger, NFP and Unemployment numbers are that kind of data and could be the shot of positive economic news the bulls need to spark a rally.

Until then, remember the trend!

Thomas Hughes