The bulls and bears continue to duke it out while the market winds up on Fed speak, economic data and earnings.

Introduction

Trading was light on this first Monday since the last time the FOMC didn't raise interest rates. The market basically held steady after Friday's drop, trading in a relatively narrow range between near term support and resistance levels.

Market Statistics

Asian indices were mixed but nothing new in terms of head line material came out of that sector today. The Nikkei fell nearly -2%, the mainland Chinese Hang Seng gained nearly -2%, each responding to global and local growth concerns. European indices were choppy but were able to close with gains. Global concern weighed heavily and a revelation from Volkswagen they had cheated on emissions tests didn't help. Despite the early fall and massive losses in Volkswagen EU markets were able to recover losses.

Early morning trading on US futures was mildly negative at the start although that did not last long. By 8AM futures were indicating a positive open and that held into the opening bell. There was no economic data, before the open, and no earnings reports of note so early trading was mild.

Once the equities markets opened they began to move higher; at the high of the day posting gains close to +1% but the gains did not hold. Resistance was met within the first hour of trading and by lunchtime the indices were testing break even levels. By early afternoon all the indices had at least moved down to test last week's closing prices led by the Nasdaq.

The NASDAQ got hit hard by comments from Hillary Clinton in response to a New York Times article about high drug prices, and in particular about one drug skyrocketing from $13.50 to $750. She is now set to present a plan to prevent this kind of thing from happening in the future and sparked a -5% drop in the biotech sector.

Economic Calendar

The Economy

Only one official economic release today, existing home sales. The National Association of Realtors reports that existing home sales fell -4.8% last month after 3 months of gain. This is more than the -1% expected, the previous month was also revised slightly lower. Despite the drop existing home sales are up more than 6.5% over last year and have been above last years levels for the past 11 months. Within the report first time home buyers rose to 32% matching the highest levels of the year, median home prices rose and inventory declined.

Moody's Survey Of Business Confidence declined by -0.7% to 41.2. This is the 3rd week of rebound since hitting a peak earlier this month but still trending near the all-time high. In his report Mark Zandi, chief economist at Moody's, says business remains upbeat in the US and reports robust sales, sturdy pricing, ample credit and healthy investment spending/hiring.


Adding to the economic mix and providing fuel for the FOMC rate hike debate were comments from two Fed presidents. Both were pretty hawkish in light of the statement and press conference last week. Bullard says there is a "powerful case" for a rate hike, Lockhart says "later this year" is still very much in play in terms of possible lift-off.

According to FactSet there have been 3 earnings releases for the 3rd quarter so far. Of those two have beaten on earnings and two have beaten on revenue, there are 14 scheduled for this week. The current estimated earnings growth for the quarter is -4.4%, unchanged from last week. Now that we are in the season it is possible this is the low estimate cycle, if so we can expect to see final earnings more in the range of 0% to -0.5%. Energy is still expected to be the biggest impact to negative earnings declines but is not the only sector expected to show decline. Ex-energy earnings growth should be in the range of 2.5% to 6%.

2015 earnings is now only 0.8% compared to 1.7% just 2 months ago. This is worth noting now as it is likely to come up by the end of the quarter. Outlook for the 4th quarter is still positive for earnings growth that will expand into 2016. Full year 2016 earnings growth estimates have fallen a little but remain above 10%. The biggest reason for declining 2016 estimates are oil prices and lower estimates for growth among the energy producers.

The Oil Index

Oil prices surged more than 4% on fears of slowing US production. Recent rig counts show a third week of declines, fueling speculation that supply/demand issues could change. According to estimates the decline could equal 250K bpd, but that is assuming the rigs we've lost were all actively producing and not aging wells taken off-line as part of the natural cycle. In either event oil supply and production remains high with no sign of increased demand. The supply/demand scenario may be shifting but we are still in the very early stages of such a shift so I remain skeptical of oil rallies.


The Oil Index gained only a half percent in response to oil's move higher. Despite the gain the index remains below resistance at the 61.8% retracement level and the short term moving average and looks like it could move lower. The indicators are mixed, MACD is bullish and stochastic is making a bearish crossover, but are consistent with a possible retest of support and/or move down near the recent low. Oil prices are possibly stabilizing, but earnings declines are still on tap and could easily keep the sector in check until outlook begins to improve.

The Gold Index

Gold prices moved down from last week's high but held steady today just above $1130. Prices shot up on the FOMC lack of action and dovish stance but have not yet reached the $1150 resistance level. Despite the dovish Fed stance the chance of a rate hike remains, as evidenced by today's comments by Lacker and Bullard, and will come eventually. Data and the dollar will remain a big mover of gold and could pressure it lower in the near term. Strong, even just steady, data will lead the Fed to raise rates and both should strengthen the dollar.

The gold miners ETF GDX fell more than -2.5% in today's session and could be heading back to support levels near the long term low. The sector is strong in terms of rising production levels and falling costs but is weak in terms of gold prices, which remain near long term low levels if not at the lows. At best the miners can expect earnings this quarter to hold flat to last quarter and last year and at worst to see gold prices decline again. The ETF is sitting on the short term moving average with weakly bullish indicators. A break below the moving average, near $14.00, could take down to support along the long term low near $13.00. A move up from the moving average would find resistance near $15.75.


In The News, Story Stocks and Earnings

The dollar has proven to be resilient in the wake of the FOMC meeting. Much of its strength is due to expected Fed tightening, tightening that did not come. The lack of Fed move could have sparked a major decline in values except for one thing, the rate hike is still coming, unless of course the economy starts to break down. The Dollar Index moved lower after the announcement but found support above the bottom of the 9 month range. Today the index continued to move higher after making a bounce last Friday and is now back above the short term moving average and pushing up against resistance. The indicators are mixed but showing a hint of bullishness; MACD is at 0, stochastic is showing a weak bullish crossover. The indicator signals could easily be halted by resistance, but if accompany a cross of resistance could lead the index higher. Resistance is near $96 with upside targets near $97.50 should it break.


There were a couple of interesting story stocks today. First up is Volkswagen. The German automaker faked results for emissions tests on its eco-friendly diesel models. The charges are that Volkswagen software can detect when a test is being run and somehow reduce emissions by as much as 40%. The EPS has ordered VW to recall half a million models of its diesel powered cars and to pay fines that could go into double digit billions of dollars. Shares of the stock fell more than -18% in today's session.


Pandora experienced some wild action that triggered circuit breaker trading stops more than once during the day. The company received a favorable ruling from the Register of Copyrights that sets a previous deal as a benchmark in how it sets royalty rates. The news will affect additional rulings due out in December and pleased the market. Shares of Pandora gained more than 5.5% in today's session.


GoPro got a big down grade in article by Barron's. The magazine compared the company to BlackBerry calling it a one-hit wonder that was doomed to fall from grace. According to the article shares of GoPro could fall to $25. Today the stock hit a new low and looks like it could easily slip lower. The caveat is that this company is still growing and making a lot of money so the fall from grace may still by a future event.


The Indices

The bulls tried to move the indices higher today and despite some resistance were largely able to do so. Today's biggest winner was the Dow Jones Transportation Index. The transports gained 0.79% and appear to be testing support on a day where other indices appear to be testing resistance. Today's candle moves up from the short term moving average and the bottom of the narrowing trading range in which the index has been winding over the past few week. The indicators are bullish but mixed; MACD is retreating from a bull peak while stochastic is showing a weak bearish crossover while crossing the upper signal line. This combination is consistent a retreat from the top of a trading range, a top highlighted by the shooting star candle which appear last Thursday. The indicators are still bullish even though they suggest a top so a test of resistance is more than possible, near 8,250. Support is near 8,000 for now and could lead to a move down to 7,750 if it is broken.


The Dow Jones Industrial Average made the next largest move, 0.77%, perhaps because it, like the transports, was largely insulated from the sell-off in bio-tech. The blue chips created a small white candle that moved up from the bottom of Friday's long black candle but failed to close above resistance. Today's move was halted by the short term moving average and resistance line at 16,600. The indicators are bullish but also indicating a top, or the top of a range, similar to the transports. This could lead to additional upside and bullish signals but is dependent on a break above resistance. Until then a retreat to the recent, as indicated by previous convergence in MACD, remains an equal if not more likely possibility.


The S&P 500 gained only 0.46% in today's session, creating a small white candle below resistance levels. The broad market was halted at the bottom of the long term up trend line with additional resistance targets immediately above. These include the short term moving average and the 1,985 level which has been important on multiple occasions. The indicators, like the previous two indices, show bullish activity with near term weakness consistent with resistance to higher prices. Should resistance hold a move down to recent lows near 1,860 is likely.


The NASDAQ Composite made the smallest gains in today's session and almost did not make any gains at all. The tech heavy index managed to close with a gain of 0.04% after moving as low -0.5%. Today's action is a move down from the short term moving average, after testing higher prices, that met support at 4,790. Today's move was most likely due to Hillary Clinton's attack at the pharma companies and subsequent drop in the biotech sector but would not have significantly changed the technical picture otherwise. The index is retreating from a peak, like the others, with indicators in support of a peak and/or top of a range. Longer term analysis of MACD is still pointing to a retest of recent lows so this hint may lead to more than just another test of 4,790. A break below this level could move as low 4,500 or 4,250.


The indices certainly look to be in a precarious place. The long term outlook for the economy and earnings is positive so I am still bullish but near term factors make a test of the recent lows a real possibility. Not only are there significant convergences with MACD on all the charts we are on the brink of the 2nd negative earnings season in a row with fear of global slowing and FOMC rate hikes ever present.

I expect earnings season to be much better than currently projected by the FactSet data, and for next quarter to be even better, but there is a lot of time between now and the end of the season. We can expect to see the blended rate slowly increase but it'll be another month or two before the market starts to really look to the fourth quater. In that time another move lower, down to test support, would be good for market health and set us up for another sustained rally.

The FOMC rate hike and all it implies for the market may turn out to be a non-event. Up until the last meeting there was a lot of speculation built into the market. Now it may be possible the market is over it, we know its coming, we know policy will remain accomodative and we know its only the beginning of a longer period of economic expansion.

Data will be the big mover over the next two weeks. This week's calendar is a little light but next week makes up for it. This week look out for the Housing Index tomorrow, jobless claims, Durable Goods and New Home Sales on Thursday and then Michigan Sentiment and the 3rd estimate for 2nd quarter GDP. Next week is the first of October if you can believe it which brings another round of monthly macro-economic releases, capped off by the NFP. By all accounts labor markets have improved over the past month so there could be some strong numbers among ADP, Challenger, NFP and unemployment.

Until then, remember the trend!

Thomas Hughes