The market faces a tough week of earnings and economic data that could provide a lift for the market, or a brick ceiling.

Introduction

This may be a make or break week for the equity market. We are facing a long list of macro-economic reports as well as a host of telling earnings reports. Depending on which way the wind blows the market could get a boost, or hit a ceiling it can't get past. The week has started off a little lack-luster but the real action won't start until tomorrow.

Asian and European indices were all flirting with new highs today though most closed flat or slightly in the red. Our own indices were indicated marginally lower in the early pre-market session and this held into the opening bell. Once trading began in earnest things were a little different, the indices opened flat to mildly positive. Morning trading maintained a very narrow range with none of the indices moving higher than 0.5% or so.

Market Statistics

There was only one economic report today other than Moody's weekly Survey Of Business Confidence Later this week we can expect reads on inflation, housing, industrial production, consumer sentiment and the future. On the earnings front there were only 8 reports today, none with enough consequence to grab the markets attention. Later this week there are about another 100 reports due, primarily from the banking sector but including a few from the transportation, consumer products, semiconductor and industrial sectors.

During the lunch hour the indices began to retreat. By noon most if not all had at least dipped into the red if not taken the plunge below. From that point forward trading was much like it was in the morning, only reversed. The indices traded in a tight range just below break even with most of them posting less than a -0.5% loss on the day.

Economic Calendar

The Economy

Moody's Survey of Business Confidence remains at record highs. The index reading this week is 44, the second week it has been at this level. In his summary Moody's Economist Mark Zandi remains upbeat on the state of the US economy, adding in that sentiment from international businesses is on the rise. He says …

“Global business sentiment remains near record highs. U.S. businesses are very upbeat, but confidence has improved in recent weeks across the world. The recent slowing in U.S. economic growth is not evident in the survey results. Sales are robust, as is investment and hiring. Credit is widely available, and pricing is sturdy, despite heightened deflation concerns in much of the developed world. “


Treasury Budget figures were released today at 2PM. The expectation was for a widening of deficit to -$44 billion from last months -36.9 billion. The actual was much worse than expected, -$52.9 billion, and may have contributed to today's losses.

Tomorrow look out for retail sales figures from the US Census Bureau along with PPI and business inventories. Wednesday is the Fed's Beige Book as well as long term TIC flows, Empire Manufacturing, Industrial Production, Capacity Utilization and the NAHB housing market index. On Thursday is weekly jobless claims, housing starts, housing permits and the Philly Fed Survey. Friday caps the week with CPI, Michigan Sentiment and the Leading Indicators, a gauge of last months read on how good this month should be.

The data could cause some volatility this week, particularly in the dollar and dollar based commodities. On a piece by piece basis I will not be too worried about any negative surprise unless the sum total changes the economic outlook. I'd like to see firmness if not strength in the manufacturing data, low jobless claims, a sign of the expected spring uptick in the housing sector and at a rise in the LDI.


Factset reported a decline in the expected blended rate for S&P 500 earnings this weekend. The new rate is now -4.8%, down -0.2% from last week, due to declining expectations in the oil patch. So far, 24 S&P companies have reported earnings with 83% beating on earnings growth and 50% beating the blended rate for revenue growth. The expected rate, ex-energy sector, remained steady this week at 1.1%. Chevron and Conoco Phillips are the two biggest contributors to earnings declines expectations so will be of extra importance when they report later this month.

The thing to keep in mind is that over the past four years the S&P has beaten both earnings and revenues expectations by an average of 3.1%. If the four year average is applied to today's expectations there is a strong chance that earnings growth will only decline by -1.7%, and if you take out oil it rises earnings growth to +4.2%. Add in the expected return to growth that is expected in the broad market later this year and the earnings picture brightens a little more. Outlook for 2015 remains just over 2.2% for this calendar year, with a jump to 12.4% for calendar year 2016 on an expected increase in net margins.

The Oil Index

Oil prices were a little choppy today but held above last week's prices. WTI traded above $52 with an early spike to $53 that brought out some profit takers. Brent was equally choppy but held above $58. Other than that there were little in the way of headlines in the energy sector today except for isolated areas of violence.

The Oil Index itself lost nearly -1.25% in today's session and could be confirming resistance. The index made a slight pop in the pre-opening session that caused it to open just above 1,400 and the top of the four month trading range. The indicators are both making a peak and supportive of a possible top. The long term trend is up but the index is more than 7.5% above the trend line at this time, facing a tough earnings season and uncertain oil prices so I think there's a good chance it could remain range bound until earnings are released. BP is scheduled for April 28th, Conoco Phillips and Exxon are scheduled for April 30th, Chevron May 1st .


The Gold Index

Gold prices held steady around $1200 today as the dollar wrestled with the 100 level. The dollar got a little lift in early trading but the DXY appears to be striking resistance. FOMC speak and rate hike speculation are driving the dollar but I think it may remain range bound until a hike actually occurs. If so gold prices could easily see a rise from the $1200 level. Also on tap this week is economic data which is likely to drive Fed speculation, dollar and gold values including both CPI and PPI. I'm in the camp that inflation is only around the corner and will lead, if it isn't already, to long term support for gold prices.

The Dollar Index is showing wicked divergence from both MACD and stochastic while it is testing resistance. The chart does not inspire a lot of confidence but the buy signal remains; MACD and stochastic are both point up. Resistance is just above 100 and could be strong. Economic data will point to either June or September for a rate hike, two scenarios I think priced in by now. Not to mention the fact that both the euro and yen are also both at or very near their respective support/resistance levels and indicative potential reversal.


The Gold Miners ETF GDX lost about -1.0% today but was able to hold above the short term moving average. The ETF is moving higher on a bounce that is looking more and more like it could be the 2nd bottom in a long term double bottom formation. The indicators are currently bullish and showing a weak buy signal with only gold prices and earnings standing in the way. The miners don't really report as a group but will start trickling in next week and into the next. Based on last quarters report the sector has a few things going for it right now. Production levels are on the rise, this quarters average selling price is likely to be higher than it was last time, and low oil prices; all things that will aid the bottom line.


In The News, Story Stocks and Earnings

Earnings. This week its the banks in focus although there are importance reports from Johnson&Johnson, United Health Care and CSX Corporation. The financial sector kicks off tomorrow with Wells Fargo and JPMorgan, both before the bell so expect action in the pre-opening session. The banks are expected to produce earnings growth of 8.2% and if the earnings trends hold true could be as high as11.3% Regardless of what kind of earnings growth they produce now, it will the future expectations, expectations driven by higher interest rates, that will be more important. Of course, a round of bad earnings will not be good.

Today the XLF Financial Services Spyder gained a little over a half percent on an intraday basis and fired a buy signal. The ETF is in a general uptrend, if weak, and is now showing a stochastic cross confirmed by a MACD and moving average crossover. The ETF looks likely to move higher, provided earnings are in line with expectations, with a target between $24.50 and $24.75. If earnings roll out as expected, with positive future outlook, then the sector could move higher. Support on a pull back looks possible around $24 and then $23.50 if it doesn't hold up. Something else to consider is that a the expected uptick in the housing sector will also be a boon to the banks so the economic data may play a big role in whether this sector is able to break above resistance.


Johnson & Johnson also reports tomorrow. The consumer products and health care conglomerate is expected to report before the bell. Analysts are expecting earnings to be flat from last year, around $1.54 ex-items. Important factors to take note of will be impact from strong dollar in overseas markets, an impending increase in competition as generic versions of at least one of its major drugs enter the market and possibilities for merger/acquisitions. Today the stock lost over -1.5% and fell below the short term moving average.


CSX Corporation is also scheduled to report tomorrow and if today's pre-announcement from Norfolk Southern is an indication of the sector then it may a little worse than expected. The rail carrier is expected to report $0.45, slightly below the last quarters $0.49 per share. The decline is largely due to the decline in oil prices and more specifically a decline in shipments from producers. However, I seem to remember hearing several interviews with company CEO's last summer where they, the CEO's of companies with things to ship other than oil, were having a hard time getting their goods to market because the rails were loaded with oil.... my point is that it is possible there is plenty for the rails to carry besides oil. And, if I'm not mistaken, most trains run on diesel which is a lot cheaper than it was last year adding another factor that could help the company beat expectations. Today the stock lost just over -1%, falling from the short term moving average, to create a small doji right at the $35 support line that has been in play since last October.


United Health Group is another important name to watch this week. The hmo and Dow component is expected to report earnings of $1.32, down from the previous quarters $1.54. Regardless of the decline in earnings, and a recent downgrade in the amount Americans are expected to spend on health care, the company has received a couple of notable upgrades in the past few days. Today the stock moved higher, gaining on last week's closing prices, but created a black candle. The stock is approaching the all time high and appears to have some resistance at this level. The indicators are mildly bullish and could lead to a test of the all-time high before earnings are reported on Thursday.


The Indices

The bulls tried to charge out of the gates this Monday morning but earnings fears weighed them down. There is a lot of dread in the market right now and may be presenting us with additional buying opportunities. Today's drop was led by the Dow Jones Transportation Average. The transports lost -0.70% in a move that tested resistance at the 30 day moving average and failed to break it. Today the index created a candle with a long upper shadow, a black body and a close below Friday's open. At face value this is looking a little on the scary side but taken in light of the indicators and the possibilities that lay before us this earnings season may only be temporary. Stochastic is showing a bullish crossover in confirmation of the bottom of the 6 month trading range and MACD is at the zero line now. Together they appear to be forming a buy signal in line with the underlying long term trend with the caveat that important earnings are being released tomorrow. Not only is CSX reporting, so is JBHunt. A surprise pre-announcement warning from Norfolk Southern after the close of trading does not, however, shed positive light on my rail carrier theory.


The S&P 500 made the next biggest loss, about -0.46%. Today's action reached a new three week high before resistance sent it shooting lower. Despite the drop the broad market did not fall below support and is still well above the short term moving average. The indicators are still bullish and in line with a trend following entry but a slight decline in MACD is revealing the markets trepidation ahead of earnings. The index is currently sitting on the support of a previous all-time high with next support about 25 points below that along the short term moving average and the long term trend line. Resistance is the current all time high.


The Dow Jones Industrial Average comes in third today with a loss of -0.45%. The blue chips struggled for most of the day with support at the December all-time high but eventually fell through. It's drop was then halted by the short term moving average. The indicators remain bullish following the strong signal which formed last week. Both stochastic and MACD are on the rise so it looks like the index may be able to make another run at a new all time high.


The NASDAQ Composite made the smallest loss of the day, came the closest to reaching the current 15 year high and appears set to move higher. The index created a small bodied candle with small upper wick today but looks more like a spinning top than anything else. The indicators remain bullish following the strong signal fired off last week so the high looks likely to be tested. If not, or if resistance is enough to repel the bulls support is along the short term moving average and then below that near 4,800 and the long term trend line.


The indices still look like they want to move higher but resistance remains. I think it will remain at least until and if this quarter's earnings trend is set. If things are as bad or worse than feared then we could see a ceiling put in the market that could last until the earnings outlook begins to pick back. If they are better than expected, as I think they will be, then perhaps the market will be able to set a new high. In either event it will be the forward outlook, and the economic data, that drive direction.

Until then, remember the trend!

Thomas Hughes