Earnings and a surprise move from the PBOC lifted the market and erased Friday losses.

Introduction

The Peoples Bank Of China provided a nice lift for the markets today by lowering their capital requirements by 1%. This is the largest move made by the bank since the depths of the 2008 financial crisis but not enough to lift Chinese stocks. Both the Hang Seng and Shang Hai indices fell more than -1.5% while the rest of the world rallied. European indices climbed on the new led by the German DAX 1.6% gain. Futures trading here at home was also positive and led to a strong day of trading. The S&P and Dow were both indicated to open higher by at least a half percent the entire morning and did not fail to deliver once the opening bell sounded.

Market Statistics

Other news impacting early trading included earnings, several announced stock buybacks, increases in dividends and the NABE Survey of Business Conditions. Earnings continue to come in better than expected, led by the financials, while the NABE survey shows that outlook for the rest of the year remains strong. There was no economic data released today other than Moody's Survey Of Business Confidence which remains near the all-time high.

The market opened as strong as indicated. The SPX, Dow and NASDAQ Composite were all up by a half percent or more in the first 5 minutes, approaching 1% within the first half hour and over 1% higher within the first two hours of trading. The market remained strong all day, trading near the days highs until the closing bell. Today's gains just about erased all of Friday's losses, leaving them just below their current long term and all-time highs.

Economic Calendar

The Economy

The National Association of Business Economists released the results of their quarterly Business Conditions Survey. Their headline “NABE Survey Shows Outlook Remains Strong Despite Weak First Quarter” . Within the results it was revealed that four measures of employment and wages rose in the first quarter and are either holding steady or on the rise going into the 2nd quarter. Growth expectations for the next two quarters remains intact with an expected rebound in sales as well as rising margins.

Two interesting things that stood out to me were that 74% of respondents reported that the slowdown in China has had little to no negative effect on their businesses and may have even positively affected some. Also, 62% report no negative affect from strong dollar values and 49% say the upcoming FOMC rate hike is not expected to have material affect on business.

Moody's Survey Of Business Confidence fell by -0.6% this week but remains near the all-time high. Mr. Zandi's summary of the results is also at or near all-time high levels. His reading of the data shows increased confidence, optimism and business conditions. In the first take he says...

“Business confidence has never been stronger in the more than 12-year history of the survey. Sentiment is strongest in the U.S. but has recently improved in much of the rest of the world. The slowing in U.S. growth is not evident in the survey results. Hiring has never been stronger, and sales and investment spending are robust. Credit is widely available, and pricing is sturdy, despite heightened deflation concerns in much of the developed world”


According to FactSet just over 10% of S&P 500 companies have reported earnings so far this season. There are an additional 25% of them scheduled to report this week making it one of the busiest for the season. Of those who have reported 77% have been above the blended rate for earnings and 46% have beaten the blended rate for revenue. The projected blended rate for 1st quarter earnings growth is now -4.1%, up 0.7% from last week led by strong earnings in the financial sector.

Stripping out the energy sector the blended rate has also increased, by 0.77% to 1.97%. Based on the four year averages and the way the season is going so far we can expect both the full blended rate and the rate ex-energy to increase by another 3% or so. Outlook for the 2nd quarter is still weak with an expected earnings growth rate of -2.6%. Looking out to the end of the year full year earnings growth has also fallen marginally but the 2016 outlook remains above 12.5%.

The rest of the week is pretty light too, probably a good thing because next week is super charged. It's the end of the moth again so the monthly macro-data will start to roll out although the labor numbers won't be released for 2 weeks. On deck are Pending Home Sales, Income & Spending, PMI, Auto Sales, Construction Spending and Michigan Sentiment. What makes next week such a potential powder keg for the market is the FOMC meeting and policy statement, scheduled for Wednesday at 2PM, and the 1st estimate for 1st quarter GDP. The market is looking for 2.2% growth; there is no telling what the FOMC may do. Possibilities include no change to statement all the way through a surprise rate hike however unlikely that is.

The Oil Index

Oil prices were volatile today as a weekend report of near record Saudi output was weighed against rising tensions in the Middle East. The conflict in Yemen between the Saudi's and Iran backed militants rages on and has reached a new intensity. The Saudi's are now on high alert for a terrorist attack, possibly targeting a shopping mall. Prices for Brent and WTI had been done, about -1.25% in the early part of the trading day, and both rebound to new highs. WTI gained more than 1.5% to trade above $56.50 while Brent made a more modest gain of nearly 0.35%.

The oil sector gained on the rise in oil prices, as expected. The Oil Index gained nearly 0.75% in today's session, testing resistance, and then falling back to break even. The index has been trending higher over the past few weeks, is now near a 5 month high and may be about to break to another new high. Both indicators are bullish but have formed a peak consistent with resistance at this level. A break above resistance, near 1,435, would be bullish. Price action is setting up in a potential flag pattern with a target roughly 150 points above the current level. Earnings are likely to be a catalyst for this sector with an eye toward the earnings rebound expected for later this year and next. Speaking of earnings, Haliburton its earnings expectations posting adjusting EPS of $0.76 versus the expected $0.46.


The Gold Index

Gold prices are still dancing to the tune of the dollar. Today the dollar index gained 0.24% in a move confirming support near the bottom of its two month range. The slight rise in dollar value caused gold prices to drift below $1200 and approach support near $1190. This situation, mild fluctuations in the dollar leading to similar fluctuations in gold, could continue until the FOMC next week. At that time there is likely to be some change, either from the FOMC itself or in investor sentiment, that will lead to a more pronounced move in both.

The Gold Index remains within its bottoming pattern and has yet to make a move in either direction. The index is supported by gold prices and by extension earnings outlook. The miners begin reporting next week and may provide additional lift to the overall blended rate for earnings growth. I am specifically looking to production levels and selling prices; production levels have been on the rise and this quarters average selling price for gold is likely to be higher, a combination that could produce positive earnings surprises. Today the index gained just enough to close in the green after opening lower. Today's move found support at the short term moving average with bullish indicators. The MACD and stochastic are both bullish and indicating support at these levels. If the index breaks to the upside my target is $22.50/$23 in the near to short term.


In The News, Story Stocks and Earnings

Lots of business news today including deals, buybacks, dividend increases and earnings. To quickly recap some headlines that do not include earnings; Raytheon is investing $1.7 billion in a cyber unit. Costco is buying back $4 billion in stock. Groupon is also buying back stock, $300 million, and is also selling a 46% stake in Ticket Monster to a group including KKR.

Moving on to earnings. Today Morgan Stanley reported earnings that beat on both the top and bottom line, increasing the boost earnings growth is getting from the financial sector. The company reported a profit of $2.9 billion on $9.9 billion in revenues. The gains were driven by an increase in M&A activity as well as as trading volumes. Shares of Morgan Stanley gained over 1% in today's trading but created a black candle. The stock gapped up to resistance from whence it fell.

The entire financial sector got a boost in today's session. The XLF gained a little over a half percent in a move that regained the upper side of the short term moving average. The ETF is basically trending sideways with indicators that are relatively neutral. Both MACD and stochastic are consistent with a meandering, range bound stock. Over the past month the ETF has traded within the $24-$24.50 range and looks like it could keep doing so... maybe until next week and FOMC meeting? The expected/projected rise in interest rates is pretty important for earnings projections in this sector.


Hasbro reported earnings and revenue above expectations. The company also reported that operating profits increased 25% while net earnings increased 43% excluding a $0.10 per share favorable tax charge. Company execs said they were able to grow sales across all brands and all markets, particularly in Europe and emerging markets, and was able to do so while overcoming “significant exchange headwinds”. Shares of the stock jumped on the news gaining about 5% in the pre-opening session and then doubling that gain and more during the open session. Hasbro is now trading at an all-time high with strongly bullish indicators. Hasbro is the owner of several Disney and Marvel licenses as well as its own classic lines of toys.


Royal Caribbean reported better than expected earnings and a strong first quarter. Results of $0.20 per share are more than a nickel above expectations and likely to continue. However, the company cited currency exchange issues and rising costs as the reason for lowering full year guidance. Guidance was lowered from $4.65-$4.85 to $4.45-$4.65. The news was not met with glee and sent shares tanking in the early session. The stock lost about 5% before the opening bell even sounded and then extend those losses during the day. The indicators are bearish but may be indicating some support at this level with a long lower shadow. My first thought it is that the company could be setting itself up to beat earnings later in the year, if so a support level may form around $71.50.


IBM reported after the closing bell. Big Blue was expected to earn in the range of $2.84, about 45% lower than the previous quarter, and beat them by a nickel. IBM reported earnings of $2.91 on slighly weaker than expected revenues. Shares of the stock rallied all day, positing a gain of nearly 3.5%, and then extended those gains in the after-hours session.


The Indices

The bulls came charging out of the gates today. The fall on Friday turned out to be a pretty good entry for trend followers and resulted in some of the biggest moves the indices have seen in many weeks. Today's move was led by the Dow Jones Transportation Average which made an impressive 1.69% bounce from Friday's lows that helps confirm support at the bottom of the 6 month trading range. The indicators are bullish but showing weakness in the near term consistent with last weeks fall to support. The index continues to trend sideways within the range with a slight upside bias and a target near the top of the range.


The NASDAQ Composite is runner up in today's race. The tech heavy index gained 1.27% but fell short of the 5,000 mark. It looks like the index is making a bounce from the short term moving average in line with the underlying long term trend but resistance is just above so caution is still due. The indicators are bullish but showing near term weakness that could indicate a peak. Longer term indications are consistent with support along the moving average, in line with the trend, but there is still resistance at the 15 year high. A break above the high could take the index as high as 5,250 in the near to short term. Support is still along the moving average, with the long term trend line near 4,750 below that upon a break down.


The Dow Jones Industrial Average gained 1.11% in today's action. The blue chips created a long white candle that regained the high side of the short term moving average and the 18,000 level, confirming support. The index is making a bounce from support with bullish indicators and a target near 18,250. While bullish, the indicators are also very weak and consistent with a trading range. If the index does not break to a new high the 6 month trading range may remain intact.


The S&P 500 brings up the rear today. The broad market gained only 0.92% compared to the +1% moves put in by the other major indices. Today's move confirms support along the long term moving average and is supported by the indicators. Stochastic and MACD are both bullish, although showing near term weakness consistent with Friday's plunge in prices. The index has been winding up over the past 2-3 months and is forming a possible pennant formation. During this time the index has trended sideways, supported by the long term trend line, with consecutively lower peaks. It appears to be bullish but has yet to break out. There is resistance in a narrow range just above the current level with a break above it carrying a target near 2,220 in the near to short term.


The market still looks strong, but it also still looks a little indecisive. Today's action was a good sign for the bulls but until there is a break above resistance at the current all-time/long-term highs the future of the rally is in question. The test and possible break above resistance is likely going to be centered on or around the FOMC meeting next week, no surprise there, this has been the trend for quite some time. A move and then a consolidation and/or correction all timed between earnings seasons and FOMC meeting. Until then the market may continue to do what it has been, churning within a range, looking like it wants to go higher but just not doing it.

Of course, there is the earnings picture to consider. This is a big week filled with big names that could move the market regardless of the FOMC. At this point the idea of a rate hike is so bake into the cake that I think not raising would be worse for the market. If earnings are still good, if expectations continue to be exceeded, if outlook remains rosy then the market could move up. In other words, I'm still bullish, buying on the dips and keeping a very cautious eye on the market.

Until then, remember the trend!

Thomas Hughes