Bad news sent the market lower, good news sent the market higher.

Introduction

A mix of news sent the market spinning. First, bad news sent the indices down to test support, next good news caused a bounce that reversed early losses and sent them higher. The most talked about subject was the PBOC re-pegging of the yuan, which happened again Sunday night, followed by weak Japanese GDP, weak Empire Manufacturing data and strong housing numbers. . . all of which got tied back to the FOMC and rate hike expectations.

The PBOC re-pegged the yuan again. The move caused ripples of fear to spread throughout the market and contributed to negative sentiment. Along with this was weaker than expected GDP data from Japan, together leaving Asian markets mixed. Japan closed higher on stimulus hopes while Chinese indices were split. The BOJ is meeting this week with a Thursday statement on the schedule, no changes to policy are expected.

Market Statistics

European markets were higher in early trading despite the weakness in Japanese data. Later in the day they reversed, likely in response to the early sell-off in our markets, but were able to recover most of the losses before the close of trading. Greece was also a topic in international headlines and played a part in early market actoin. The Greek parliament accepted the latest reform-for-money package offered by creditors and is now awaiting ratification by EU member nations. The deal is largely expected to go through but faces tough criticism.

Futures trading was indicating a lower opening all morning. In the earliest part of the pre-market session the decline was marginal but it deepened after the release of the Empire State Report On Manufacturing. It declined to its lowest level since 2009 and sent futures to the lows of the morning.

At the open the market sold of as expected. The selling continued for the first 20 minutes or so. The bears could not get the market to break down and last week's support levels held, near 2080 for the S&P 500. By 10:15 negative sentiment had reversed and the market was moving up and off of the low, a move sparked by the NAHB survey. It showed housing conditions to be a little better than expected. The market reached break even levels by lunch and by early afternoon were setting new intra-day highs. There were a few brief pauses during the afternoon session but the indices pushed higher into the close with many closing near the highs of the day.

Economic Calendar

The Economy

Empire Manufacturing declined to -14.9 in August, versus an expected rise to 4.5. This was no doubt a shock to the market and reason for weakness in early trading. The decline is due to large drops in New Orders, Shipments and Inventories which fell to -15.7,-13.8 and -17.3 respectively. The workweek and earnings remained flat however and there was a rise in Future Expectations. The forward looking measure gained 7 to hit 33.6.

The National Association Of Home Builders released their monthly survey of home builder sentiment at 10AM. The headline reading of 61 is a gain from last month's reading of 60 and above consensus estimate of 59. On a year over year basis the reading is up 6 points from last August and the highest level since November, 2011. Within the report traffic rose 2 points to 45 but remains below the 50 mark, the current sales rose one point to 66 and future sales expectations held at its high of 70. According to NAHB economist the report shows continued and steady improvement in the housing market.

Moody's Survey Of Business Confidence jumped 1.3 points to hit 44.5, the second week of robust increase. The survey reflects high levels of global optimism, particularly in the US. Mark Zandi, Moody's economist, says that US businesses are reporting strong sales and business conditions with little effect from actions in China. This is the highest level in 3 months and the 3rd highest level all-time.


There is no report from FactSet this week, the next one is due out in two weeks. At last report the blended rate for earnings was -1.0%. This week could further influence that number as the bulk of the big retailers are due to report. Be on the look out for Target, Wal Mart, Lowes, Home Depot and many others.

The Oil Index

Oil prices sank to another new low in today's session. WTI sank to prices below $42.00 following the Japanese GDP data but were able to recover. Shrinking Japanese economic output is yet another drag on expected global demand while supply is rising. Last week's rig counts show a small uptick in US capacity, yet another sign of ample supply. By midday prices for both WTI and Brent had moved back to break-even levels but could not hold the gains. Weakness is likely to persist in the near to short term so long as supply and demand expectations remain unchanged.

The Oil Index closed slightly lower in today's session creating a small spinning top. The index moved down on the early weakness in oil and touched 1,200 level, just above recent support, before recovering to break even by end of day. It looks like the index is stabilizing around the 1,200 level with bullish momentum and rising stochastic. However, upside momentum may have stalled after hitting resistance near 1,235 and with oil prices hitting new lows a test of support looks more likely than one of resistance. First support target is near 1,175 and could go lower should oil prices continue to decline.


The Gold Index

Gold prices are holding steady and moving higher as Chinese PBOC moves are raising fear levels in the market. Today's economic data also sent a ripple through the gold market that helped to give it a lift. Weak Empire numbers do not bode well for interest rate hawks and could weaken the dollar/strengthen gold if rate hike expectations get pushed back.

Gold has now traded above $1100 for the 6th day in a row and could be setting up for another leg up. FOMC minutes are due out on Wednesday and, along with the data, will provide yet another clue to the interest rate lift-off time line. A hawkish fed and stronger dollar could send gold back to test recent lows near $1080, a dovish fed and a weaker dollar could send it up to hit $1150. Also, reports of physical buying have increased so any downside could be muted. Asian and European buyers are taking advantage of low prices due to economic uncertainty. In another report billionaire Stanley Druckenmiller has increased his holdings to their largest levels ever.

The gold miners got a lift today as well. Rising gold prices and a couple of upgrades in the sector helping to provide support. The Gold Miners ETF made some gains in today's action, about 3.5%, but trading remains beneath the short term moving average and resistance levels near $15.50. The ETF has bounced back from recent lows along with the underlying commodity but remains near those lows. The indicators show momentum has shifted to the upside with a retest of resistance possible but longer term direction is tied to gold prices and the FOMC. Inflation may be the key, the FOMC minutes and CPI data are potential catalysts.


In The News, Story Stocks and Earnings

Earnings season is winding down but it is not over yet. This week's list is very short but chocked full of big name retailers like Home Depot, TJ Maxx, Wal Mart, Target, Staples, Lowes, Sears, Gap Footlocker and many others. The only name on the list reporting today was Urban Outfitters. The teen retailer reported after the bell and sent shares soaring higher. The company beat both revenue and sales estimates, posting $0.54 per share versus the expected $0.49.


The Retail Sector Spyder XRT was one of today's leading sectors. The ETF gained a little more than -.5% and extended its bounce from support. Today's action broke above a potential resistance line near $97.40 but has not yet reached the short term moving average. The indicators are consistent with range bound trading a possible move up from support. Divergence in MACD suggest support at the bottom of the range, between $95 and $97, while stochastic confirms upward movement with a strong bullish crossover. MACD has not yet confirmed but is crossing over at this time, first target is the moving average with the top of the range, near $102, as target should the moving average be crossed. Earnings in the sector are the tell and more importantly outlook for earnings into the holiday season and beyond. If Urban is a sign of what to expect then upside movement is looking more likely.


The Home Builders were today's leading S&P sector, driven by the NAHB survey. The XHB Home Builders ETF gained more than 1% on the news and set a new high dating back to late January 2007. The NAHB data went a long way toward supporting the ongoing rebound in housing and by extension expected growth in the housing sector and profits for home builders. The rebound is not strong or robust but it is steady, has been gaining momentum and is at high levels so should not be ignored. Today's move looks strong and is confirmed by rising indicators but the indicators themselves are not strong so caution is still due. Stochastic at least is flat and possibly showing a top. Possible target is $40 with housing data, and data, as potential risk and catalyst. Two releases are due tomorrow, Housing Starts and Building Permits, Existing Home Sales comes out on Thursday. New Homes sales is scheduled for early next week.


Looking out to next quarters earnings season I am interested in the health care sector. This is because they more than doubled earnings expectations in the 2nd quarter and could do so again. Last quarter they were projected to grow earnings 7%, they produced 15.4%. They are expected to grow earnings at a rate of 7% in the third quarter and since there has been little change in the underlying fundamentals driving the sector there is a chance for significant upside surprise yet again. The sector has been trending higher since the beginning of the year and is set up for a trend bounce. Today's action carried the Healthcare Spyder XLV up off of its trend line with a long white candle and mixed indicators. MACD momentum is bearish but retreating from a peak, consistent with a trend line bounce, but it is not yet confirmed by stochastic. The ETF could move up to test resistance near $97.50 but does not appear strong enough to break resistance at this time.


The Indices

The tech heavy NASDAQ Composite led today's field of major indices. The index gained 0.86% in a move creating a long white candle closing at the high of the day. The move is a bounce from the long term trend line that breaks above the short term moving average and looks set to trend higher. The indicators are mixed but rolling over into a trend following signal. MACD is still bearish, stochastic looks stronger with %D flat and %K making a bullish crossover. Upside targets are 5,150 and 5,250 depending on news/data with support along the trend line.


The Dow Jones Transportation Average made the next largest move, 0.73%, and confirmed support. Today's action carried the index down to support at 8,250 where it confirmed with another bounce that created a candle with long lower shadow. Price action was centered around the short term moving average and closed above it, at the high of the day. The indicators are weak but are consistent with support at current levels, 8,000 and 8,250. Despite weakness momentum is bullish, barely, with a target near the next resistance line at 8,500.


The S&P 500 made the third largest gain in today's session, just over one half percent at 0.52%. The broad market tested support at 2,080 and closed above the short term 30 day moving average. Today's move is a trend following bounce confirmed by indicators but remains well within the recent range and below short term resistance levels. The indicators are rolling into a trend following entry led by stochastic which is creating a strong bullish crossover. MACD has yet to confirm but is hovering at the zero line. The index looks set to test resistance at the all time high and top of the current trading range but may remain so while data, earnings and the FOMC hang over the market. Upside target is near 2,125 with support at or just below 2,080.


The Dow Jones Industrial Average comes in last place today with a gain of only 0.39%. The blue chip index created a small bodied candle but one with long lower shadow as sign of its test of support. The index is moving higher following a bounce made last Wednesday but is still below the short term moving average and long term trend line. Despite being bellow the trend line at this time the trend remains up and this bounce is trend following and supported by the indicators. Stochastic is showing a strong bullish crossover while MACD crossing the zero line. A break above the trend line and resistance near 17,500 and 17,750 would help to confirm.


The indices closed up for the day but remain trapped inside their respective trading ranges. Today's news helped to confirm support levels in each of the indices but did little to give evidence of impending break out and may remain trapped in this range until the FOMC meeting next month, or earnings outlook begins to brighten.

This week poses a potential catalyst to significant price movement in the form of the FOMC minutes due out on Wednesday afternoon. It's hard to say whether or not there will be a rate hike in September but it is easy to say that whatever they put in the minutes will be significant to the market.

Data and earnings will also play a factor. Tomorrow two important pieces of the housing picture will be revealed, housing starts and building permits, and expectations are for growth. Later in the week Existing Home Sales as well as important CPI data, Philly Fed and Leading Indicators may sway sentiment.Earnings, along with a glimpse of consumer strength, comes in the form of reports from a dozen top names in the retail sector and may also sway sentiment.

The long term earnings and economic trends are up so I remain a bull. Short term trends are more sideways as numerous caution inducing factors play themselves out so I am very cautions. So long as none of the short term issues derail long term trends I will be looking to buy on the dips.

Until then, remember the trend!

Thomas Hughes