The bulls were able to hold their ground as the market gears up for another big week of news.

Introduction

Market wobble persists but the bulls were able to hold their ground today. There was quite a bit of international news to impact trading, and a fair amount of domestic news, as well as anticipation for a full week of potentially market moving events.

Starting at the beginning, indices in China and Japan extended Friday gains on Chinese PMI. The country's official manufacturing PMI rose to 50.2 from 50.1, showing a very mild expansion in the economy. Balancing this was a slight decline in the services sector PMI but it remains expansionary. The news helped to support indices in Europe while Eurozone PMI and Greece worries weighed them down.

Market Statistics

Futures were trading in the red at the start of the early electronic session. This changed dramatically around 8AM when rumors a Greek deal was at hand began to hit the market but nothing every materialized. Regardless, futures moved into the green and held those levels in to the open.

Today's trading churned within a fairly tight range. The market opened with a slight gain and moved higher in the first 15 minutes but the rally was short lived. By 10AM the indices had retreated to break-even and begun a bounce that failed to recapture the early high. Another test of support found its bottom at 10:15AM, at which time a slow and steady advance took the market back to test the early high. A new intra-day highs was set in early afternoon, but once again near term resistance kicked in to cap gains. Late afternoon trading was much like the morning, sideways drift, with most indices closing near the middle of their respective ranges.

Economic Calendar

The Economy

There was quite a bit of data released today, much more than we usually get on a Monday, and as a whole has economists revising their Q1 and Q2 GDP estimates to the upside. First up is new auto-loan data released by Experian. According to them auto loans reached a record high in the first quarter of this year. The average size of a loan grew to $28,711 with a 67 month term (5 year, 7 months).

Personal Income, released before the open, rose slightly more than expected, 0.4%, from last month's not revised figures. Spending remained unchanged from last month, but the previous month was revised up by 0.1% to 0.5%. This months data is consistent with recent trends in which spending rises one month, income the next, both slowly and in tandem with improving labor markets. On a core basis PCE declined by -0.1%. Within the report wages and salaries increased at a rate nearly double the preceding month.

The ISM PMI was released at 10AM. It showed growth in manufacturing ahead of expectations for this month and expanding from the previous. The current reading is 52.8 versus the expected 52 and last month's 51.5. All but two components of the index rose this month, led by new orders and employment. The prices paid component is the only one below the expansionary 50 level but showed a significant increase of 9 points to 49. Inventory of raw materials, which had been in contraction, is now above 50 at 51.5. Production and exports are the only two segments to show decline but are both still firmly above 50.

Construction Spending was the real gem in today's round of economic releases. It rose by 2.2%, well above expectations and the largest monthly increase since May 2012. Analysts had predicted a rise of only 0.7% from the previous month's decline of -0.6%. On a year over year basis spending is up 4.4% from May 2014 and the first four months of 2015 are up 4.1% versus the first four of 2014. This, along with other home sales data, is further sign the housing market rebound predicted for this summer has begun.

Moody's Survey Of Business Confidence continues to show high levels of positive sentiment. The index rose by a full point from last weeks figure and remains near the record high. According to Moody's Economist Mark Zandi global businesses are “supremely confident”, led by those in the US. He reports that more than 50% of US firms are hiring and expectations for the future are improving.


According to data from FactSet 494 S&P 500 companies have reported earnings for the 1st quarter of 2015. Of those 71% have beaten the mean estimate for earnings growth, 45% have beaten the estimate for revenue growth. 9 of the 10 S&P sectors have higher growth rates now than first predicted due to the amount and number of upside surprises.

The current blended rate for earnings growth in the 1st quarter is 0.7%, more than 5% above the -4.7% predicted at the start of the season. This represents an increase in the blended well above the 4% average we have seen on a quarter to quarter basis over the past 4 years. Stripping out the energy sector the rate for S&P 500 earnings growth is 6.3%, ahead of my own predictions in the range of 4-5%.

Looking to the next quarter, earnings growth expectations have deteriorated despite significant increases in EPS projections for the energy sector. FactSet is project a decline of -4.4% but I am not going to bet on that. Based on the averages, and performance in the 1st quarter, I would expect to see this moderate to something closer to 0% with a chance it will go positive. Stripping energy out of this projection puts 2nd quarter growth in the range of +2-6%. Looking out to the end of the year and next year we can still expect full year 2015 earnings growth in the range 1.5%, and 2016 growth in the range of 12%.

This going to be a big week for data. It's the first week of the month yet again which means monthly macro economic data such as ADP, Challenger, Jobless Claims, Unemployment, Auto Sales, ISM services index and labor costs. In addition to this there is also the Fed's Beige Book and a policy meeting of the ECB scheduled for Wednesday. The ECB is not expected to make any changes but it is likely we will hear something about their recently announced intentions to buy bonds over the summer.

The Oil Index

Oil prices were volatile today as global fears mesh with supply/demand fundamentals and economic data. WTI traded choppy between $59.50 and $60.50, closing with a slight loss near $60.20. Brent had a more pronounced decline, losing a little more than -1%. Fighting continues to be widespread throughout the middle east as the Iranian nuclear deal deadline draws closer. Coalition forces are fighting in Falujah as well in Yemen. At the same time global production remains high and at/near record levels. A weekend report put OPEC production at 31.22 million BPD, a 2.5 year high and above the 30 million BPD target currently set by the bloc. OPEC is meeting later this week and is not expected to cut production.

The Oil Index drifted lower again today. The index remains below 1,350 with bearish indicators but signs the near term bearish movement is losing steam persist. Bearish momentum is divergent from the near term low and in decline and stochastic is overbought and showing a bullish crossover. This combination could lead to further downside with a target along the long term trend line near 1,300. This combination, along with the underlying long term up trend, are also consistent with the early stages of a trend following bounce but not yet a tradable signal.

The index could remain range bound between support along the trend line and the 1400-1450 region until we get past the next round of earnings. Oil prices will affect nearer term direction but earnings I think will be the longer term driver. The energy sector is expected to post another huge decline for the 2nd quarter of 2015, in the range of -60%, but after that outlook improves with full year growth close to 45% in 2016.


The Gold Index

Gold prices were volatile as well. Prices spiked in early trading on data and the dollar only to fall later in the day. The initial reaction was to the income/spending data which put rate hike targets further out, the follow up reaction was to construction spending and ISM which brings rate hike targets closer to the present day. Regardless of when the rate hikes come, consensus targets are in the September-December range with some talk that June or July is still on the table. In any event gold prices surged more than $15 to cross above $1200 only to fall back to $1189. Today's action shows some resistance at the $1200 level, but also the presence of buyers/support below $1190 in the range.

The gold miners ETF GDX opened strong on the back of the early surge in gold prices. Then it sold off, closing with a loss near -0.50%. Today's action began at the short term 30 day moving average and moved down to my rising support line. The index is testing support, driven by the drop in gold prices we saw last week, and could continue to do so. In the near term the indicators are bearish, pointing further testing of support. Over the short to long term they are still consistent with that support, currently around $19.50 after 3 months of trading up along the trend line. If the trend line is broken the ETF could go as low as $17.50 but would be dependent on a similar drop below support in gold prices. This week could be a real exiting one for gold traders, what with all the data, the Beige Book, dollar value and the ECB.


In The News, Story Stocks and Earnings

Coca Cola (KO), not to be confused with Coca Cola Bottling Company (COKE), received an major upgrade this morning. The international beverage retailer is “prime for a turnaround” after years of lack luster results according to BMO Capital. The company sees as much as 20% upside based on case volumes, sales trends and cost savings measures. The stock responded by opening strong, and then selling off to close slightly below the short term moving average. The stock has been languishing near the bottom of its 12 month range and doesn't look ready to pop just yet.


Shares of Coca Cola Bottling Company popped, either on the KO upgrade or the idea that what's good for the goose is good for the gander. Regardless the reason the stock, which has been trending higher all year, jumped more than 9% in today's action. Share prices are now at an all time high with strong indicators.


Apparel and footwear retailer PVH announced earnings after the bell. The own of brands such as Calvin Klein beat on both the top and bottom lines, raised guidance and announced a $500 million share buy back. Revenues were only slightly ahead of estimates but earnings of $1.50 are nearly 9% better than predicted. Shares of the stock gained more than 3% on the news.


Guess, maker of jeans and other consumer apparel items, is scheduled to report tomorrow after the bell. The company is expected to report a loss of -$0.05, well below the $0.63 reported in the last quarter, and reaffirm full year expectations. Today the stock traded in a tight range just above $17.50 and created a candle suggestive of a very quiet market. The stock has been drifting lower over the past three months, since popping just after the last earnings report, and is set to make a move similar to the one in PVH, providing earnings/outlook is good.


The Indices

Market churn continues to drag the markets sideways. Today's action had most of the major indices moving up, if only marginally, from support levels reached during Friday's sell-off. For the most part today's action was light and held within narrow ranges, most indices closed with a gain of a quarter percent or less, except for the Dow Jones Transportation Average.

The transports more than quadrupled the gains made by the other averages. Today's action formed a long white candle with a gain of 1.14% and created a bullish engulfing pattern. The move is accompanied by indicators that aren't quite bullish but are consistent with a bounce from support. This bounce looks as though it may have some strength, at least enough to test resistance near 8,500. This could be an important move for the index, if it does not move back above the long term trend line, or at least support/resistance at 8,500, a deeper correction may ensue.


The NASDAQ Composite gained only 0.25% but was the next largest move of the day. Today's action, despite the gain, created a black candle with doji like qualities; it has a small body and long lower shadow created by a test of support. Price is still above the 5,000 level and the short term moving average but the indicators have rolled over so further testing is likely if not a break through. A break below 5,000 could lead the index lower, with a possible target near 4,800.


The S&P 500 closed with a gain of 0.21%. Today's action bounced off of support but failed to cross above the long term up trend line. The indicators continue to roll over and are now forming bearish crossovers. This could lead to deeper testing of support but does not yet constitute reversal. At this point the trend is still up so any dips are potential entry points for longer term positions.


The Dow Jones Industrial Average made the smallest gain in today's action, 0.14%. The blue chips moved up from support at 18,000 only to find resistance along the short term moving average. The index is now being squeezed between long term support and near term resistance with indicators consistent with a test of support. Both MACD and stochastic are moving lower following a bearish crossover and indicating further testing of support if not an actual break below it. Over the longer term the indicators are still consistent with support along 18,000 and the long term trend is up so any test or dip below this level is a buying opportunity in my view. That being said a dip below 18,000 could take the index all the way down to the long term trend line, about -4% below today's closing price, so I won't be too hasty on my entry.


The long term trend is up on all the indices. At the same time near term indications are bearish. Looking to what moves the market, earnings and economics, I see it like this. The long term economic and earnings trends are up and they are supporting the market. In the short term expectations for the coming earnings season are poor, not to mention numerous global events with market moving potential. It's likely that earnings won't be as bad as feared but it's very possible the expectation could lead the market lower until we start to get proof, unless the data is so good it trumps 2nd quarter earnings expectations.

Until then, remember the trend!

Thomas Hughes