There are only three days left until the September FOMC meeting and possible rate hike announcement. . . and the market is waiting.

Introduction

It's Fed week once again and like all such the market is wound up in anticipation. After months, years, of speculation we are only three days away from the next chance at an interest rate hike and indication of economic health. This week is bound to be volatile. Adding to chances of volatility will be a round of economic data and options expiration on Friday.

There was some international news to affect early trading. Chinese Factory Output fell, adding to fears of slowdown, but were offset by a surge in Retail Sales. Asian indices fell, as did those in Europe, led by the Shang Hai Index -2.67%. The Japanese Nikkei fell -1.6% while those in Europe hovered closer to break-even levels.

Market Statistics

No economic data was released today and there were no market moving earnings reports. Futures trading was indicating a positive open at the earliest part of the pre-market session. By 8AM this had changed, the indices had fallen to break-even levels and were pushing negative territory going into the open. At the open trading began near to break-even levels and then moved down from there, the S&P 500 posting a loss near -11 at the low of the morning.

The early low held and produced a bounce which carried the indices sideways into the lunch hour. Between 12:00 and 2:00 support along the low was tested, eventually producing another bounce. The second bounce of the day was short lived, the market quickly retreat back to today's support levels where a second consolidation resulted in a third bounce. The third bounce occured just before the close of the day and left the indices near the bottom of today's range.

Economic Calendar

The Economy

As mentioned, no official US economic data today but there is quite a bit this week. Tomorrow is Retail Sales, Empire Manufacturing, Industrial Production and Business Inventories. Wednesday is TIC Flows, CPI and the Housing Index. Thursday is Jobless Claims, Housing Starts, Building Permits, Philly Fed Survey and the September FOMC Meeting. Friday wraps it up with the Leading Indicators. Obviously, the FOMC Meeting is the most likely market mover of the week, although the week as a whole is fairly significant in the rate hike cycle outlook.

Moody's Survey Of Business Confidence fell -0.9% to 41.9 in the last week. According to the summary from Mark Zandi it reflects a softening in outlook for present conditions due to recent turbulence in the financial markets. On the positive side confidence remains near long time highs and showing particular strength in the US. Sales, hiring and business investment have been areas of strength all year and continue to be so now.


Another earnings season is fast approaching and it is not expected to be any better than last. According to FactSet the current expectation for 3rd quarter earnings growth among S&P 500 companies is -4.4%. This is down from -1% at the beginning of the last reporting season. Last quarter expectations hit a low near -4.8% but outperformed with a net decline of -0.7%. Based on the four year averages we can expected the 3rd quarter to improve from -4.4% to near 0% by the end of the season. There are four companies left to report for the 2nd quarter, they report this week. Alcoa officially kicks off the new season October 8th.

Energy is going to be the big drag on earnings again. The energy sector is expected to show earnings declines greater than -60, followed by -12% decline in the Materials Sector. Ex-energy S&P 500 earnings growth is positive at 6.9%, well ahead of the ex-energy final for the 2nd quarter. Next year revenue and earnings growth is expected to return with full year 2016 growth at 10.2%.

Telecom, Consumer Staples, Financials and HealthCare are the only sectors expected to show increases in earnings. Healthcare is the laggard of those four with estimated growth near 7.5%. Last quarter the Healthcare Sector had similar expectations and blew them away, more than doubling them by the end of the season, and could be set up to do so again.

The Oil Index

Oil prices fell -1.40% in today's session. Supply and production remain high despite falling US rig counts and rumors of international efforts to stabilize prices. Rumors of efforts to curb supply issues helped support prices over the past two weeks but so far have not resulted in any change to fundamentals. Weak Chinese data is also helping depress demand expectations so it looks like oil could continue to move lower. Today's action took WTI below $44.

The Oil Index fell -1.5% in today's action. The index is setting a new three week low with weakening indicators. Stochastic has already turned over, MACD is about to make the bearish crossover, and is pointing to a retest of the recent low near 1,020. Earning expectations for the energy sector is not good for the coming season and could result in a test of the low or a new low, depending on how oil trades between now and when the big companies report, about 6 weeks from now. However, the long term outlook for the energy sector is a return to earnings growth in 2016 so any weakness remains a potential buying opportunity for long term positions.


The Gold Index

Gold prices rose in today's session but are holding near the 1 month low. Trading was choppy but hovered between $1105 and $1110. Gold seems to be stabilizing just above the $1100 support level going into the FOMC meeting with price tied to their decision and how it affects dollar value. The biggest risk is that the Fed will raise rates and strengthen the dollar, a move that will likely send gold back below $1100. Should the Fed not raise rates gold could spike to $1150 or higher but I think any such move would be short lived, rates will get raised sooner or later. Economic data released tomorrow and Wednesday could add to volatility.

The Gold Miners ETF GDX lost nearly a full percent in today's session and is flirting with a new all-time closing low. The miners are now trading at support levels set and tested in August as gold was setting its lows. The ETF is now positioned to bounce or move lower, dependent on direction in gold prices. Since many of the miners have already set new lows on an individual basis it looks like the rest will soon follow. Support for the ETF is $13.00, a break below here could take it to $12.00 or lower.


In The News, Story Stocks and Earnings

Apple gained more than 1.25% after news they were on target to break all-time iPhone sales records hit the market. A separate report stating sales of wearable devices such as the Watch were going to triple this year over last helped to spur the move. Apple is now trading above the short term moving average for the first time since it began its descent two months ago. Shares are also trading above my support/resistance line at $115.50. The indicators are bullish and gaining strength so this move may not be over, we are going into the fall/holiday shopping season. Upside targets are near $120 and $125 should today's move hold. Support is just below today's closing price in the range between $110 and $115.


Alibaba made big headlines today. A big story from Baron's over the weekend, outlining the many ways in which the Chinese based online retailer is misrepresenting itself to share holders, was met by a lengthy response from Alibaba's. The story basically calls Alibaba a fraud but is nothing more than any one else has said at one time or another. Regardless, the Baron's story shook investor confidence and sent the stock down more than -3%. It is now trading just above the long term low with bearish indicators. $60 could prove to be support but it looks like it will be tested.


Oracle reports earnings on Wednesday. I like to use it as a benchmark, its roughly half-way between the end of one earnings season and the next. The software giant is expected to report a decline in year over year and quarter to quarter earnings, in the range of $0.50. Cloud computing is expected to outperform but not enough to offset weakness in software sales. The stock lost -1% in a move confirming resistance at the short term moving average. The stock has been below the average for three months and is now consolidating just beneath it, ahead of earnings. Weak earnings, particularly weaker than expected calendar 4th quarter outlook, could send it back to $35. A break above the moving average could go to $40.


The Indices

The indices fell in today's session but not hard. Today's action was no fear driven sell-off, merely an orderly retreat to support levels ahead of what could be an historical FOMC meeting. The move was led by the Dow Jones Transportation Average and a loss of -0.45%. The transports created a very small black candle sitting just above 8,000 and on the short term moving average. Today's action appears to be another in a slow wind up from the recently hit bottom that could result in a sharp move in the near future. The indicators are bullish but may have topped out, which along with a convergence with the recent low, suggest a test of that low is possible if not likely. Support target is about 250 points lower, along 7,750, with resistance equidistant near 8,250.


The S&P 500 made the second largest decline, -0.41%. The broad market also created a small bodied black candle but one that formed well below the short term moving average. It also formed below the long term trend line and comes with indicators that are bullish, but weaker than those on the transports. Today's action is near the point of a triangle pattern/wind-up that has been forming since hitting bottom last month. A retest of the bottom or support near 1,900 is likely although long term outlook remains bullish. Resistance is just above the current level in the range of 1,950 to 1,980 with a break above the trend line consistent with the long term trend.


The Dow Jones Industrial Average posted the next smallest decline, -0.38%. The blue chips created a small bodied black candle well below the short term moving average and potential resistance at the 16,500 level. The indicators are bullish but very weak, they give more indication of range bound trading than anything else. This, combined with a convergence between the most recent low and a strong bearish MACD peak, suggest a test of the low is very likely.


The NASDAQ Composite made the smallest decline, -0.34%. The tech heavy index created a small bodied candle just above the 4,800 support line and below the short term moving average. The indicators are bullish but showing signs of near term resistance that could cap forward movement at the moving average. I'm still looking for a retest of support, possible as low as 4,250, based on convergence with MACD, failing to break above the moving average could lead to that event. Long term outlook remains bullish but near term volatility is likely.


The summer is over, many of the near term fears that drove summer trading are gone, the market has corrected, the FOMC meeting is here once again and it is options expiration week to boot. I think it needless to say that this week could be volatile.

The FOMC meeting is the focus of much speculation and will likely spark a significant market move, one aided and enhanced by unwinding options positions. This unwind could lead to violent moves in either, or both, direction and result in the retest of support hinted at by the indices.

Regardless of two quarters of weak earnings growth the economy, according to the data, is back on track and growing. The FOMC may raise rates, and it may scare near term traders, but if they do raise them it will be an affirmation of economic strength and not a a sign of impending doom. I'm waiting for the meeting, and the smoke to clear once the statement is released, but I am still bullish on the market and anticipate a rally into the end of the year.

Until then, remember the trend!

Thomas Hughes