The market opened with the Monday blahs as global woes weigh on stocks.

Introduction

US markets had a rough day today as global woes, earnings and another FOMC meeting weigh on sentiment. Today's blame is mostly focused on China where mainland indices fell more than -8%. The drop, fueled by massive amounts of speculation and ongoing government action to stabilize markets, helped to subdue trading around the world as fears of slow-down and hard-landing for China are renewed.

The Japanese Nikkei fell nearly -1% on the China sell-off while indices in Europe closed with a loss near -2%, aided by Greece. A new round of negotiations has begun amid the usual theatrics I have come to expect from this arena. According to reports Greek officials remain stand-offish toward troika representatives as the next payment deadline bears down on them. Negotiators are reportedly in Greece and preparing for talks later this week.

Market Statistics

Futures trading indicated a sharply lower opening in the early portion of the pre-opening session. This held steady for the morning and was not aided by a better than expected read on Durable Goods orders. At the open indices fell hard to hit potential support levels by 9:45AM. The market bounced at that point but was not able to regain all of the initial losses. From then on the market trend sideways within a relatively narrow range up to and through the lunch time hour.

Afternoon trading was much the same. The indices drifted sideways in the middle of the days range until about 2:30, at which time they began to drift lower. By 3:30 they had retreated to hit a an afternoon low just above the morning low. The last half hour of trading saw the indices hover just above the afternoon low before a small bounce into the close of the day.

Economic Calendar

The Economy

Only one economic report today, Durable Goods. The headline number of 3.4% was better than expected but comes with a grain of salt. The previous month was revised lower to -2.2% from -1.8%. Analysts had been predicting durables to rise in the range of 3%. This month's gains are driven primarily by robust demand for passenger planes but other areas are expanding as well. Ex-transportation orders rose by 0.8% and on the core level capital goods rose by 0.9% although overall shipments remains flat. On a year-to-date basis core capital goods are down -3.4% compared to this same time last year.

The week is light in terms of number of reports if not so much in terms of weight. Tomorrow is the Case-Shiller real estate market report along with Consumer Confidence. Wednesday is dominated by the FOMC meeting but also includes Pending Home Sales. Thursday is weekly jobless claims along with the first read on 2nd quarter GDP.

Friday wraps it up with Chicago PMI, Employment Cost Index and Michigan Sentiment. Next week is the beginning of a new month which means a new round of monthly macro-economic data including ADP, Challenger, NFP and Unemployment reports along with auto/truck sales, construction spending and a handful of other significant data points.

Moody's Survey Of Business Confidence remains strong. The diffusion index gained 0.1% to hit 41.0%, the second week of increase after hitting a low three weeks ago. According to Moody's economist Mark Zandi the survey shows that sentiment is positive around the world, most notable in the US where sales, pricing, business investment and hiring are all strong.


According to FactSet 187 or 37% of S&P 500 companies have reported earnings so far this season. Of those who have reported 76% have beaten EPS estimates and 54% have beaten sales/revenue estimates. The blended rate of EPS growth has improved to -2.2%, up from the -4.8% predicted at the beginning of the reporting season. 9 of 10 sectors, led by telecom and energy, are reporting better than expected with Exxon and Chevron scheduled to report on Friday.

The current earnings surprise rate is +4.5% better than expected, slightly ahead of the 1 year average and slightly below the 4 year average. At this rate we can expect earnings growth to be very near to 0% by the end of the reporting season.

Energy remains the weakest link in the earnings chain. Ex-energy the blended rate moves up to +4.1% for the quarter. Looking out to the third quarter S&P 500 earnings growth is expected to remain negative, -2.2%, with an ex-energy projection of 3.8%. The energy sector is expected to decline near -50% for the quarter and the year. 2016 estimates remain robust but have moderated from +11.9% to +11.3% for the broad market and near +30% for the energy sector.

As always, forward outlook and guidance will be very important for the market moving forward. At this time 27 companies have issued guidance, 20 negative and 7 positive. There are 174 or 25% scheduled to report earnings this week.

The Oil Index

Oil prices fell another -2% as supply outweighs demand. WTI fell -2.4% to a 5.5 month low in today's session, led by a -2.7% drop in Brent. News reports are only adding to over-supply worries so I do not anticipate a bounce at this time. US rig counts have started to rise after hitting their low a month or so ago, Russia and Saudi Arabia are pumping as much as they can get out of the ground and Iran is gearing up to start selling its stockpiles. Also, poor growth expectations in China are not helping to support prices as fears of slowdown in that region persist. Oil prices could be moving down to retest long term lows seen earlier this year, near $43 for WTI.

The Oil Index fell 2.2% in today's session as the underlying commodity hit a new low. The index is now trading at a near 3 year low and below the 50% retracement of the 2009-2014 bull market in oil. The drop is driven in part by the fall in oil prices but also due to poor earnings results/expectations for this quarter and year. The sector is reporting better than expected but still down around -40% from last year which could keep selling pressure on until near-to-short term outlook improves. The indicators are pointing lower although stochastic has yet to fall below the lower signal line with target for support near 1,120 and the 61.8% retracement level. Long term outlook remains positive so this could be setting up the buying opportunity I have been waiting for. We'll get important earnings reports from Exxon and Chevron later this week.


The Gold Index

Gold prices gained about 1% in today's session but remain below $1100. Prices are being hurt by weakness in China as well as Fed speculation and interest rate time-line. A rise in rates is expected to lift the dollar, which lost about -0.8% today, and could pressure gold lower in the near to short term. Meanwhile inflation expectations remain tepid, leaving gold at a 5 year low, despite my views to the contrary.

The gold miners lost ground today as well. The drop in gold to new 5 year lows has blown earnings expectations going forward right out of the water. The Gold Miners ETF GDX tried to bounce back from Friday's low but ending up closing with a loss near -2% from last week's close. The ETF is trading below the 100% retracement level of the 2008-2011 bull market in gold and in danger of moving lower. Indications on both the weekly and daily charts are weak and moving lower suggesting prices will continue to move lower as well. Price action and increased volume also support the idea of capitulation in the market and could be presenting the entry point I have been watching for. The FOMC and earnings will tell the tale. Goldcorp reports earnings on Friday, Barrick Gold, Anglo Gold Ashanti, Randgold and Royal Gold all report next week.


In The News, Story Stocks and Earnings

Restaurant Brands International reported earnings before the bell. The results, better than expected, lifted the stock making it one of the few to trade positive in today's session. EPS of $0.30 was 10% better than projected driven on strong comp store sales and new store growth. The two primary brands, TM Hortons and Burger King, saw comp store sales growth of 5.5% and 6.7% respectively with new store growth of 52 and 141. Total sales gains were 8.4% for TM Horton and 11.6% for BK. Company exec Daniel Schwartz says company positioning should continue to provide value to stakeholders through the end of the year. The stock gained more than 3% in intraday trading and closed with a gain near 3%. Today's action created a pin-bar candle and closed beneath the$42.50 resistance line. QSR has been trading since mid-December 2014 after the merger of TM Horton and Burger King.


Rail carrier Norfolk Southern reported earnings of $1.41 per share this morning. The results are -23% lower than last year in the 2nd quarter and due mostly to fuel-surcharge (lack of) and coal headwinds, according to company CEO. If you remember, many of the rail carriers reported record earnings in 2014 driven by surcharges covering high fuel costs as well as high volumes of coal and natural gas. Despite the miss he also says that the company is positioned for growth citing trends in intermodal shipping, consumer spending and housing. Shares of the stock opened at a new 1.5 year low but were able to move higher from there. Price moved into positive territory briefly but closed with a loss of -0.2%.


Fiat Chrysler was fined a record $105 million dollars for its actions concerning recalls affecting millions of its vehicles. The Transportation Secretary says the company has made multiple blunders in its handling of recalls. He is putting the entire industry on notice that he will act if they do not take safety recalls seriously. This is only the latest of several developments that have put Fiat Chrysler in the spot light over safety concerns, the most notable before this the Takata air-bag recall. Shares of the stock lost about -4.25% in today's session. The company is expected to report earnings Thursday.


Baidu released earnings after the bell. The Chinese language search engine beat on the top and bottom lines but gave weak guidance and sent shares plunging 12% in after hours trading. Total revenue for the period increased over 38% with half of that coming from mobile. The company says it is positioned to grow but the weak guidance was not well received in light of recent market activity in China. Current projections call for another 34.7%-37.4% year-over-year increase.


The Indices

The market was weak today but it did not fall completely apart. Today's action is within recent ranges and largely precipitated by the fall in China, and anticipation of the FOMC meeting. Believe it or not we are waiting on the July policy meeting, a meeting fully on the table as a possibility for rate hike but largely expected to be another pass. What is expected from the statement is talk about the economy and indications of when the hike will or may come. Janet Yellen has said she is in favor of a 2015 hike so we can be sure it will be soon.

The NASDAQ Composite led today's decline with a fall of -0.96%. Price action created a small bodied candle, at a support line, with a small amount of upper wick. The candle is also below the short term moving average with declining indicators consistent with a bearish swing within the prevailing long term uptrend. The 5039 level could provide support tomorrow but the long term trend line, just below 5000, looks like a more likely target. The trend is still up and I believe we are bottoming/exiting an earnings trough so a dip to the trend line should present another buying opportunity provided. Stochastic and MACD are both showing strength but retreating in the near term. These need to be watched for signs of support as the index retreats to the trend line.


The Dow Jones Industrial Average lost -0.73% and has retreated to its trend line. It has also set a new 6 month low but remains within the 2015 trading range. The indicators are pointing lower but largely support range bound trading at this time. The trend line could be broken in the next day or two of trading with 17,250 and the bottom of the 2015 range as target for support.


The S&P 500 made the next largest decline, -0.58%. The broad market index closed near the low of the day but bounced off the 2061 support line twice in intraday action. It is also still well within its 2015 trading range and indicated lower in the near term. In the short term upside momentum has been growing over the past few moves up to test resistance and has left stochastic showing strength. This set-up could lead to a strong upward movement when momentum shifts back to the upside. Until then 2050 to 2060 looks like active support, if broken the index could fall to the long term trend line near 2000.


The Dow Jones Transportation Average made the smallest loss today, only -0.16%. This is perhaps because of positive forward outlook given by rail carriers and truckers. Today's action created a very small bodied candle that may otherwise just be spinning top except for where it is occurring. The index is testing for support at the 20% correction level hit earlier this month. The indicators are rolling over into a bearish crossover that could lead to lower prices so this level needs to be watched carefully.


The indices are trading within their ranges wrestling, still, with near term woes and ongoing economic recovery. The woes are largely overseas and affecting only a small portion of US business, the ongoing economic activity still slow but gaining ground all the time. In between are earnings and expectations; the near term reality not so good but so far better than expected, the longer term expectations is for improvement to point of being robust. In the end a combination that could keep the indices in their ranges until something changes.

At least one possibility for change occurs this week, the FOMC meeting on Wednesday afternoon. Another is the 25% of S&P 500 and 30% of Dow Industrials scheduled to report earnings this week. Another is economic data in the form of GDP, which is expect to swing from -0.2% to 2.6%. The FOMC statement could be the same as has been but I think we might see at least a little new verbiage. Earnings trends are unfolding as expected, so far, and I don't see much chance of this changing. Exxon and Chevron may be the most important of the week although there are numerous important names on the list. As for GDP, economic data has been steady and positive at least so should come in close to expectations. A big miss would not be good and could send the market testing support levels. And set us up for revisions in the future. Basically, this week could see a lot of activity.

Until then, remember the trend!

Thomas Hughes