Lots of news impacted today's trading but the market is still just waiting on the Fed.

Introduction

There were quite a few headlines to impact today's markets ranging from Chinese government support of financial markets to weak international economic data to declining earnings expectations to oil prices. Take your pick for which one moved markets more, in the end traders are still waiting on the Fed to see if and when they will actually raise interest rates.

Starting in Asia both Japan and China made headlines today. Japan released PMI data that was much weaker than expected. Official readings came in at -0.6%, a half percent below consensus. This, added to new announcements from the Chinese government, helped send most indices lower. The Nikkei lost -1.28%, the Hang Send fell -0.78% but the mainland Shang Hai index actually gained a little.

The news from China, per a report in the Financial Times, is that government will stop trying to support the market through equity purchases and focus instead on activities and people who are undermining it (the market). So far it looks like several hundred have already been arrested in connection to creating market rumors, adding to volatility and/or out-right fraud. Those arrested include bloggers, the media, accountants, investors and officials working in the financial system.

Market Statistics

European indices were pressured lower on the Asia news, although they had some of their own data to consider. New data shows that Eurozone inflation grew at only 0.2%, unchanged from last month, and raised talk of additional stimulus. EU economists largely agree that the ECB will not meet its inflation targets for the year, which could spur them into action. The ECB is meeting this week with an expected announcement and press conference on Thursday.

Futures trading here at home was a little volatile. The major indices were indicated to open about a half percent lower for most of the morning. There was one or two attempts to move the trade higher but these failed.

At the open the indices quickly lost a half percent and then continued to fall to the lows of the day, near a full percent below Friday's close. Bottom was hit shortly after 10, the market rallied from then until 11:42 at which time resistance was hit. The move higher was driven largely by the energy sector and the rebound in oil prices, resistance was slightly below last week's closing prices.

After hitting the days high the market traded sideways for an hour or so, until about 1:15. This was followed by a decline to the earlier lows that hit bottom mid afternoon. Another small bounce ensued but was not enough to recover today's losses, leaving the indices near the bottom of today's range.

Economic Calendar

The Economy

Only one piece of official economic data today, Chicago PMI. The index came in at 54.4, slightly below expectations and last months reading of 54.7. Analysts had been expecting it to hold steady. Despite the decline the number is expansionary and consistent with rebound following weakness seen earlier this year. Most of the decline is due to softness in New Orders and Production but a strong Inventories number helped to counter balance it. Employment rose to the highest level in 5 months but remains in contraction territory for this study.

Moody's Survey of Business Confidence gained 0.2% to reach 44.4. This is just below the 4 month high set two weeks ago and the fourth highest reading of all time. Moody's economist Mark Zandi says there is no indication recent market volatility is affecting business sentiment, that sentiment is steady at/near all time highs and that US businesses are reporting strong sales, investment and hiring, as they have been all year.


We got a new report from Factset this week, after two weeks without. As of last Friday 490 S&P 500 companies had reported earnings this season with 5 more expected this week. Of those who have reported 74% have beaten on earnings estimates, above average, and only 50% have beaten on revenue estimates, below average. The blended rate of earnings growth for the 2nd quarter now stands at -0.7%, up 0.3% from last report but unchanged from last week (there was no report last week). So far 9 of the 10 sectors are reporting growth better than expected, led by the healthcare sector which has more than doubled expectations.

Ex-energy the blended rate jumps to 5.8%, consistent with expectations. Looking out to the third quarter things are not beginning to look better. Expectations for the entire S&P earnings growth have now fallen to -4.1% due to downward revisions to 9 of the 10 sectors, including energy. However, based on trends and the low bar that analysts are setting, we can expect to see third quarter earnings growth come in closer to 0% and possibly even turn positive with ex-energy growth in the range of 2.6% to 6.6%. Analysts still expect to see strong earnings growth return in the 4th quarter, with revenue growth returning in the first quarter of 2016. 2016 full year growth expectations remain above 10.5%.

The Oil Index

Oil prices continue to bounce back. Prices had been under pressure in early trading but a combination of reports helped to spark a rally that took WTI more than 8% higher. WTI is now trading back above $49 but this move may be more short covering/near term reaction than a change in fundamentals. I say this because of three reasons, all found in today's headlines.

The first is that US production declined from its peak set earlier this year. The second is that OPEC said in its monthly newsletter it was ready to talk to other producers in an effort to stabilize prices. The third is that Russia/Putin is talking to Venezuela/Maduro about the same thing, what they can do to stabilize prices. OK, production did fall in July, but remains near all time high levels, with supply and storage at high levels. OPEC has said this same thing before, maybe they mean it more than before but at this time no other producer has stepped up to join them. Finally, what can Russia and Venezuela do to curb supply without hurting themselves? Needless to say I am wary of the bounce and expect to see a test of support sometime in the near future.

The Oil Index got a boost from the rise in oil but only about a tenth compared to what we saw in WTI prices. The index gained 0.83%, extending its bounce from recent lows and confirming near term support at 1100. The index is now moving higher after hitting a long term low and has now also regained the 61.8% retracement level. The indicators are rolling over into a possible bullish signal but have yet to confirm and still have significant resistance above. Strength in the recent bearish MACD peak could lead to a retest of the recent low despite higher oil prices, stochastic remains divergent from the low and consistent with a potential reversal from the recent down trend. Current target is near 1175, near the short term moving average and a near-term support level breached earlier this month.


The Gold Index

Gold prices were mostly flat, near $1130, in today's session. Price is stuck between rate hike or not with little sign of rising inflation and a fountain of fed speak to drive volatility. This week's data is likely to spur more speculation and that is before you consider the Beige Book release on Wednesday. On the one hand you have signs that the economy continues to improve, if slow and steady. On the other inflation is still largely absent. In between we have repeated, and conflicting, opinions being issued by the Fed governors.

The gold miners lost a little ground today but basically are flat from last week. The miners ETF GDX fell 1.1% but remain above support levels hit last Thursday. The ETF is bouncing from support with mixed indicators that could be setting up for a retest of the highs set two weeks ago. Bullish momentum is in decline but remains bullish, the most recent peak fairly strong compared to the last 8 months but not extreme. Stochastic %D is moving lower in the range but suggestive of support at these levels, near $13. The ETF is below the short term moving average, which could provide resistance on an upside move with additional resistance targets just above.

However,with the FOMC meeting just 3 weeks away and so much speculation on dollar value, rate hikes and the economy it is very possible for gold to remain in a range around $1130 and the GDX to range between $13 and $15.


In The News, Story Stocks and Earnings

Not too much in the way of actual business news today but there was some. The biggest headline this morning was a new $4.48 billion stake in Phillips 66 taken by Warren Buffet and Berkshire Hathaway. The move is seen as calling a possible bottom in oil by some and as merely a smart way to play oil while prices are down by others. Phillips is a refiner and as such benefiting from the lower cost of oil. According to FactSet, the refiners have seen a 45% increase in earnings growth in 2nd quarter while the energy sector as a whole saw earnings decline by 55.6%. Shares of Phillips 66 jumped on the news, gaining 2.38%, to trade above the short term moving average.


Netflix also made the news today. The online streaming service announced it was not renewing a deal with EPIX which would take some high profile content off of the site. The reason, according to company execs, is because those movies were already available on other services such as Amazon and therefore not exclusive to Netflix. The company is going to be focusing on exclusive content in its efforts to drive business.... but the move may yet have a negative impact on revenue. Shares of the stock responded by dropping 2.24% but was able to hold above the short term moving average.


There aren't a whole lot of earnings reports this week but there are one or two to take note of. One is Costco, reporting on Wednesday. The discount warehouse is expected to report in the range of $1.66, slightly better than last years $1.52. Based on monthly sales reports we can expect to see sales run in the range of +1% to +3% over last year at this time.


The Indices

The indices went on a wild ride today, not as wild as last week but still a little volatile. The day's range was greater than 1% and trading action left prices near the bottom of the range. Today's move was led by the NASDAQ Composite which closed with a loss of -1.07%. The tech heavy index wrestled with a resistance level reached with last week's bounce and was not able to hold it. Price action appears to have hit a near term top, or at least a place to pause, with a chance of moving lower to retest recent lows. The indicators are mixed at this time but suggest such a test is possible if not likely. MACD momentum is still bearish with the most recent peak an extreme for the year and convergent with lower prices. Stochastic is iffy in that it is making a bullish crossover at this time, but the crossover could be setting up for another move lower just as easily as it could be leading the index higher.

If this is the halfway point in the bounce we can expect to see the index move up as much as 500 points in the near term with a target above the long term up trend line and near the current all time high. If this is a near term top and we see a retest of support that target is roughly 500 points today's close, at or near the low set last week. Of course, a third possibility exists. The shift in momentum could take us up to retest resistance in the range between the trend line and the all time, and then take us back down to test support.


The next largest decline on the day was in the S&P 500. The broad market fell -0.84% in a move that confirms resistance at 1985. The indicators are bearish with momentum convergent with a retest of the recent low so a retest is looking very possible. Add in the latest estimates for 3rd quarter earnings and a retest appears even more likely. On the flipside, stochastic remains consistent with an underlying bull market and support with several targets for support between today's close and the recent low near 1960, 1920 and 1900.


The Dow Jones Transportation Average made the third largest decline today, 0.80%. The transports also appear to be cresting a near term peak, or entering a consolidation zone, with support targets near 7750. The indicators are mixed but are consistent with such a consolidation/test of support. MACD momentum is bearish and retreating from an extreme peak, suggesting lower prices are on the way. Stochastic is forming a weak/early bullish entry signal and is consistent with support at or near recent lows.


The Dow Jones Industrial Average made the smallest decline in today's session, only -0.69 at the close of the day. The blue chips created a small black candle with a small amount of lower wick, with price action centered around the 16,580 resistance line and bouncing off of the 16,500 level. The indicators are much the same as the other indices, consistent with a bounce but suggestive of a retest of support. The index appears to be positioned near the middle of a potential range with an upper target near 17,250 and lower target near the recent lows.


The bounce is on. The question today is, is the bounce only half over or has it already reached its first peak. The indices all appear to be in similar straits, roughly halfway from their recent low and halfway to potentially strong resistance levels with mixed indicators. If what we have seen is only a corrective action within a greater bull market then the indicators are consistent with a shift of momentum that is trend following and leading them indices higher. If the correction is a sign of underlying weakness in the economy then the indicators are set up for another bearish signal and retest of current lows or new lows.

I am still bullish on the economy. The recovery is ongoing and in its early phases. The data supports long term steady and continued growth. There are no troubling hot spots that lead me to think bubble and little reason to expect a crash, at least not domestically.

Aside from the day to day news and other near term factors, what I think is causing this turmoil is two things. First, earnings growth is poor. No doubt earnings are better than expected but earnings growth is poor, at least for now. Expectations for later this year and next year are quite good but we still have one more quarter of weak, tepid, lack luster earnings.

Second, the FOMC. The FOMC and their rate hike is causing the market and the globe a lot of stress. They can't be firm on when it's coming and that is making it hard for business and investors to make decisions. At the same time we are getting way too much Fed speak from the wings. The governors, in my humble opinion, should not be allowed to make the kinds of comments they do unless it is through one of their official channels, like the policy statement, the minutes or the Beige Book. All these random comments, interviews and speeches are doing nothing to calm the market and a lot to help roil it.

Not much in the way of earnings this week but there is a lot in the way of data. Tomorrow is auto sales, ISM and construction spending. Wednesday is the ADP employment report, and the Beige Book. Thursday is Challenger and jobless claims and then on Friday the all important jobs report. Each will add to FOMC speculation . . . if it leads to a September rate hike remember, its the first rate hike after years of 0% policy and a sign of economic stability, not the end of economic expansion.

Until then, remember the trend!

Thomas Hughes