The market continues it corrective action in today's session, the major indices are now approaching the recent lows.

Introduction

The market continued corrective action in today's session. A slew of headlines ranging from slowing China to economic data to corporate news all playing a part in a sell-off which took the indices down more than -1.25%.

The sell-off began in China where new data renewed fears of a hard-landing for its economy. According to reports Chinese industrial profits fell -8.8% year-over-year, the fastest pace of decline in over 4 years. Markets in Asia were mixed on the news although several key exchanges are closed for holiday's. Japanese stocks sold of the hardest in the Asia region. The Nikkei fell -1.32% but was also heavily impacted by a round of stocks going ex-dividend.

Market Statistics

European indices were hit hard. The China news as well as the ongoing VW scandal, a sharp drop in mining stocks and an expected downgrade in global growth. On the VW front Audi says some of its vehicles are affected while on the growth front Christine Lagarde says slowing in emerging markets is hurting estimates.

All this news had US futures trading in the red from the start of the early session. A few positive bits of corporate news was not enough to off-set other, less positive, news as well as some tepid economic data. Futures weakened going into the open with the SPX indicated down about a half percent. After the open the indices moved lower as expected and kept drifting lower into the early afternoon. Intraday bottom was finally hit in late afternoon but it did not produce a significant bounce, the indices closed near the lows of the day.

Economic Calendar

The Economy

First up on the economic front is Personal Income and Spending, released at 8:30AM. Income rose by 0.3%, slightly below expectations for 0.4% and last month's 0.5%. Spending rose by 0.4%, above expectations for a gain of 0.3% and in line with last months 0.4%. While not robust these numbers remain positive and show continued growth in wages and spending. From my perspective it shows that wage inflation remains steady, if tame, and that the consumer is spending more, both in-line with current trends and future expectations.

Pending Home sales, based on signed contracts and a leading indicator of Existing Home Sales, declined by -1.4% from last month's figures. Despite the decline Pending Sales are up 6.1% year-over-year and this is the 12th month of year-over-year increases. The decline in signed contracts is attributed to tight supply and higher prices by Lawrence Yun, NAR's chief economist. Again, this month's number is not robust but remains positive and consistent with long term recovery in the housing market. Mr. Yun went on to say in his statements that he expects this years pace of sales to remain constant although there are some obstacles ahead.

Moody's Survey Of Business Confidence declined for the fourth week since hitting a peak in late August. The index declined by -1.3 points to hit 39.9, the lowest level since March of this year. Despite the decline the index remains near long term high levels and according to Mark Zandi, Moody's chief economist, indicates strong levels of confidence for international businesses. According to his summary the US leads in sentiment. Fear of Chinese slowing and global financial turmoil are possible causes for the decline in the index but as yet there are signs of sentiment reversing.


According to FactSet the blended rate for Q3 S&P 500 earnings growth is -4.5%. This is steady from last week and down -3.5% from expectations at the start of the third quarter. So far 15 companies have reported with 14 beating on EPS estimates and 10 beating revenue estimates. Bank Of America is expected to have the single largest positive impact on earnings growth. On a sector level Telecom is expected to be the single largest positive contributor, 17%. There are 4 companies reporting this week.

Energy is expected to be the sector with the largest decline in earning growth, over -64%. This is more than the -50% expected earlier this year. Ex-energy growth should be in the range of 2.3%. Based on the four year averages we can expect to see final S&P 500 Q3 growth in the range of -0.5%, with ex-energy earnings in the range of 6.0%.

Looking forward, analysts are still expecting to see earnings growth return in the fourth quarter. According to FactSet this growth could result in record setting EPS for the index. Revenue growth is not expected until next year. Earnigns growth in 2016 has come down a half percent, largely due to revisions in the energy sector, but is still +10%.

This is a big earnings week. Tomorrow is Case-Shiller and Confidence, Wednesday is ADP Employment, and Chicago PMI. Thursday is weekly Jobless Claims, Challenger Lay-off's, Auto/Truck Sales, ISM and Construction Spending. Friday will be the big day with NFP and Unemployment Rates. NFP is expected in the range of 200K and this could be on the weak side. We've gotten good employment data this month, even within the headline poor manufacturing data. Unemployment is expected to hold steady.

Also on tap this week are several, at least 4, speeches from Federal Reserve Governors. Today Dudley spoke and says that an interest rate hike is most likely going to come later this year. He also said that the move would be data dependent, no surprise, and that it would not be driven by the calender. Expect more this week from Janet Yellen, Lael Brainard and Stanley Fischer. The minutes of the last meeting come out next week.

The Oil Index

Oil prices took another hit today. The weak China data is the most likely culprit although the global market sell-off bears some of the blame. WTI fell nearly -3% on an intraday basis to trade below $44.50 and near the bottom of the one month range. The market is still trying to make sense of supply/demand imbalance. A few draw-downs in US supply has been providing support the past couple of weeks, along with a decline in the US rig count, but global production remains high, storage remains high and demand growth is weak with China weighing heavily on it.

The Oil Index fell about -2.75% in today's session. The index is now just a few points above the recently set low and appears to be set up for a full retest of support at that low. Stochastic has been moving steadily lower over the past few weeks, leading the index, and MACD has now confirmed with a bearish crossover. Support target is near 1,020, I will be looking for signs of bounce with next year's earnings growth in mind. However, if oil moves down to retest it's lows or even lower this support may not hold. Earnings are not expected to be good this reporting season, they get better next quarter and next season but a fall in oil prices will hurt that outlook.


The Gold Index

Gold prices fell more than -1%. The move was supported by renewed FOMC rate hike fears which have been whipped up over the past few trading days by Fed Speak. Today's move was a little odd due to the dollar trade. The dollar index lost about a quarter percent on tepid housing and spending data, a move that ordinarily pushes gold higher. The metal is now trading just above $1130 and back near the mid-point of recent trading ranges. Strong dollar or strong FOMC rate hike expectations could send gold down to $1100, weak dollar or dovish FOMC expectations could send it up to $1150, both on knee-jerk reaction and both driven by the data. Without inflation and a rate hike on the horizon gold does not appear to be reversing its down trend. The caveat is that we have a government shut-down looming and that could put a bid into gold regardless of Fed Speak, inflation or dollar strength.

The gold miners have retreat to last week's lows. The Gold Miners ETF GDX lost -4.5% in a move that gapped down from the short term moving average and looks set to test long term support. Support is near $13 and has been tested twice since being set in early August. The indicators are consistent with an index settling down to support levels and rolling over into a possible bearish signal. MACD is retreating from weak bullish peak and looks like a test of support would bring it to the zero line at least, stochastic is forming a bearish crossover in-line with the prevailing down trend in the index. A break below this line would be bearish and could result in a move down as low as $11. If support holds, and there is catalyst to get gold moving to the upside, the ETF could rise to the top of the two month range near $16.00.


In The News, Story Stocks and Earnings

There were several head lines from the corporate front to help get the market moving today, not all of them bearish. Apple reported that it experienced record sales of iPhone 6's over the weekend, pretty much as expected. The company reported sales of 13 million phones, better than last years numbers, and ahead of analysts expectations in the range of 12-13 million phones, but comes with a major caveat. Last year did not include numbers from China, this year they did and reveal slower sales growth than the headline would lead you to believe. The news is nonetheless good for Apple and helped cushion it in today's trading session. Shares of Apple fell about -1.5% to trade below resistance and the short term moving average. The indicators are rolling consistent with a peak and resistance so a retest of support is possible. Support targets are near $110 and $105.


Alcoa announced that it was splitting into two companies, an upstream miner/smelter and a down stream value added products group. The move is and isn't surprising. The company has been scooping up value added businesses for several years in an attempt to diversify into an integrated aluminum company from its historic role as a miner. This move is intended to unlock value and will roughly split the business in two based on annualized revenues. Alcoa was one of very few companies to trade positive today although it did fall from the short term moving average to form a black candle (after gapping open). The stock is forming a potential bottom that as yet is unconfirmed. A break above $10 would be bullish but require the companies to prove their earnings potentials. Support is in the range of $8-$9.


Veleant made the news today as congressional democrats push to have company execs subpoenaed. This is due to the recent price gauging issues that came to light last week in and in the wake of Hillary Clinton's vow to stop such practices. Valeant is accused of buying the rights to two drugs earlier this year and then immediately raising the prices. The news was bearish for the pharma company and not good for Bill Ackman's Pershing Square. The last report I saw says Pershing has invested 20% of its capital in the company, which lost -15% today and -30% over the past week. One report I read today estimates Pershings loss for today at $700 million.


Cal-Maine, one of the nations largest egg producers, reported stellar earnings today but fell short of analysts expectations. The company reported +70% increase in sales, driven by expansion plans and rising egg prices, but the cost of purchased eggs and enhanced bio-security efforts cut into the bottom line. On a split adjusted basis earnings per share rose more than 500%, with additional expansions plans about to begin production, and yet the stock lost more than -12% in today's session. The stock is now trading near the bottom of the 4 month trading range. The indicators are rolling over into a bearish signal with down-side targets near $45. Looking forward, if the US hen flock is able to recover this year, as in no more bird flu outbreaks, then earnings could have a negative impact. So far no new outbreaks are reported, Cal-Maine's flock is untouched as yet, but we are still in a risky part of the season as migratory birds are still moving.


The Indices

The market continued its sell-off today in a move that has taken the indices down to support levels. Today's action was led by the NASDAQ Composite which was led lower by the bio-techs. The tech heavy index fell a little more than -3% in what was the biggest movement of the index in nearly a month. The index created a long black candle and broke through my first support target with indicators in confirmation of the move. Both indicators are bearish, and pointing to lower prices, with next support target just below 4,350. This would put the index back to the low set last month and consistent with the short term MACD analysis which had been indicating a retest was at least possible, if not probable. Once reached support will need to be watched for signs of strength and/or weakness.


The SPX was the next biggest loser in today's session. The broad market shed -2.57% in a move that just about reached the low set in August where the NASDAQ is still well above its low. The indicators are bearish, MACD confirmed with today's action, and are pointing to a retest of the low if not a breach of it. Support is near 1,860 with a possible move below that to 1,850 or even 1,800. Data will be important, but I think earnings and earnings growth and earnings expectations are going to be what makes or breaks support.


The Dow Jones Transportation Average made the third largest decline in today's session. The transports lost -2.23% and are setting up for a retest of support just like the techs and broader market. Today's candle is long and black, not the longest in the last month but pretty close, and broker my first support target near 7,750. The indicators have rolled into a bearish signal with rising momentum with next target at the recent low set last month. Next target for support is just shy of 7,500,


The Dow Jones Industrial Average made the smallest decline in today's session, only -1.92%. The blue chips not only made the least decline, they also have not yet reached first support target which is near 15,750. The indicators are retreating and leading to a possible test of that target but momentum remains bullish at this time, it has not confirmed. A break below this target could take it as far as the intraday low set last month.


The market sold off today, and sold off hard. On a positive note, despite today's decline it still looks like we're in for a retest of support and not a full market reversal. I say this because economic trends remain positive, as do forward earnings expectations. If the economy was in decline with a contraction of revenue and earnings on tap I would probably be singing a different tune. This quarters reporting season is not going to be a good one, but it is expected to be the last bad one ahead of at least 5 quarters of earnings and revenue growth.

There is still a little time before positive forward earnings expectations will become the focus of near term traders so nearer-term issues such as 3rd quarter earnings, slowing China, the as yet unfulfilled promise of an FOMC rate hike, and election hoopla will continue to drive the day to day trade. This being said I am going to be looking for a bounce, a bullish entry and possible rally into the end of the year.

Things to watch out for this week include earnings, as mentioned, but also the end of a quarter. The 3rd quarter ends on Wednesday and could produce a bit of volatility of its own. Economic data is going to be important as well, including Fed Speak. So long as trends remain intact I remain a bull.

Until then, remember the trend!

Thomas Hughes