The market opened strong and finished strong in a week largely focused on earnings.

Introduction

The market opened strong and finished strong despite the surprisingly weak NFP we saw last week. The poor number could be sign the economy is faltering, not ordinarily good for the bulls, but was taken as a sign the FOMC doesn't need to raise rates just yet. The dovish tone set by the NFP, along with a noted absence of other fear inducing headlines, allowed the bulls to march higher and take out near term resistance targets.

Market Statistics

The bad-news-is-good-news effect was not limited to US markets. Asian and European indices were also riding high. Asian indices gained about 1.5%, European indices gained 2.7%-3%.

Futures trading indicated a higher open for the US indices right from the start. The SPX was looking at a 0.75% jump at the start and that held fairly steady throughout the early morning. There was a little new and data in the early hours but nothing to really move the market. On the economic front ISM was weaker than expected but expansionary, on the business front Nelson Peltz took a $2.5 billion stake in GE and on FOMC front Boston Federal Reserve President Rosengren made some comments. He says a 2015 rate is still on the table but if thing change from here he would want to wait until 2016. Changes he is looking for are a rise in unemployment from 5.1% or if GDP slows to less than 2%.

The equity market moved higher right at the start of trading. The SPX gained the indicated 0.75% and more on steady trading. The indices hit a high in the first few minutes and then held those high, and slowly drifted higher, throughout the rest of the morning. The bulls held their ground through the lunch hour and by 1PM were approaching another new intra-day high. Bullish sentiment dominated during the afternoon as well. The indices continued to drift higher and were setting new intra-day highs on a regular basis. Strength held up until the end of the day leaving the indices at or near their highs when the closing bell sounded.

Economic Calendar

The Economy

Only one economic report today, ISM Services Index, and it was not as good as expected. It came in at 56.9%, firmly expansionary and the 68th month of expansion in the non-manufacturing sector, but below the 59% reported last month and the 57.5% expected by the analysts. Within the report 2 of the three major components declines, Business Activity and New Orders, while Employment rose. All three components are above the 50 level.

Later in the week look out for Trade Balance and Consumer Credit coming out tomorrow, the minutes to the last FOMC meeting on Wednesday and Wholesale Inventories on Friday. And of course, the weekly jobless claims on Thursday. Also up this week is earnings from Alcoa which may become the focal point of the week. It is the only major report due out this week, the big banks start reporting next week.

Moody's Survey Of Business Confidence declined for the fifth week. The diffusion index dropped 0.2% to 39.7 and is at the lowest levels since mid March. According to Mark Zandi, Moody's chief economist, global business sentiment has downshifted in recent weeks due to market turbulence. Despite the downturn he says there is no sign businesses are getting "decidedly more cautious". US business sentiment continues to lead with reports of steady hiring and strong sales.


The Moody's report, and in particular Mark Zandi's comments about hiring, remind me of some thoughts I have had in regards to labor trends and jobs creation. Jobs creation is good and we need it, that is without a doubt. However, in light of all the supposed businesses who can't fill jobs they already have is it more important that hiring be strong or job creation? Does it matter if NFP is not above 200K every month if unemployment is declining because people are getting hired into existing jobs rather than new jobs? According to Factset the blended rate for 3rd quarter S&P 500 EPS growth is now -5.1%. This is down -0.6% from last week and is now the lowest level we have seen, the expected decline was closer to -1% at the start of the quarter. The drop this week is due to downward revisions in energy, no surprise, and in materials. The energy sector is now expected to produce earnings growth declines of -64.5%, down from 58.9% at the start of the quarter. The materials sector is now expected to show declines of -13.7%, down from -15% on June 30th.

Ex-energy 3rd quarter earnings growth should be in the range of 1.9%. Factor in the 4% upside as predicted by the four year average difference in the earnings growth rate between the start and end of the quarter and growth in the 3rd quarter should be closer to -1.5%, or 6% ex-energy. So far there have been 19 reports this season, 17 beat on EPS projection and 13 beat on revenue projections. Full year 2015 and 2016 estimates have also fallen, 2015 is now at 0.5%, 2016 at 9.9%.

The Oil Index

Oil prices got a big boost today on talks that Russia was willing to meet with OPEC and non-OPEC countries about stabilizing prices. This comes on top of a big drop in US rig counts last week and fueled speculation of a bottom in oil prices. Despite the talk, and the drop in rigs, supply and production remains high with little sign of demand build up. At best we are on the brink of production coming more into line with demand. WTI gained more than 3% on an intra-day basis to trade above $46.50.

The Oil Index made another nice move higher in today's session, a little more than 3%, and extended its bounce from support levels. The index is now trading above the short term moving average with bullish indicators confirming the move. MACD is pointing up and gaining strength while stochastic makes a strong bullish crossover, both %K and %D are pointing higher, so it looks like this move will continue upward until it hits resistance. Resistance may be found near 1,150, or 1,175 if first target is broken.


The Gold Index

Gold prices held steady near $1135 in today's session. The metal got a big boost on Friday from the weak jobs data but was not able to follow through on the move today. Poor NFP has renewed outlook for a later rather than sooner rate hike and weakened the dollar/strengthened gold, in the near term. Outlook for rate hike remains so upside based on the dovish numbers is limited. Unless the FOMC gets off the rate hike path, which would be wickedly bullish for gold I think, there is going to be a rate hike sometime soon and this expectation could send gold testing its lows if not moving lower. Until then it still looks like gold is consolidating around the $1130 level with support near $1100 and resistance near $1150.

The Gold Miners ETF GDX gained more than 4.25% in a move disconnected from the underlying commodity. This move is taking the miners to a new 6 week high while gold prices remain well within the 6 week range. The indicators have rolled into a bullish signal, MACD is bullish and rising while stochastic is making a bullish crossover, so it looks like this move will continue into the near term. Upside targets are near $15.72 and the previously broken all time low. Resistance could be strong at this level, a break above here would be significantly bullish and highly dependent on gold prices. If prices move to this level and/or surpass it without a similar move higher in gold prices I will be skeptical to say the least.


In The News, Story Stocks and Earnings

GE was the biggest headline in business news this morning. The global conglomerate caught the eye of Nelson Peltz, who decided to take a $2.5 billion stake in the company through his firm Trian. He is expected to push for deeper cost cuts and quicker action from execs in order to boost shareholder value. The announcement was met with approval and sent the stock shooting higher. Shares of GE climbed more than 3% in pre-market trading, gapped open and closed with a gain of nearly 5.5%.


Yum! Brands reports earnings tomorrow, before the bell. The operator of Taco Bell, KFC and Pizza Hut is expected to report $1.08 per share, up from the $0.69 last quarter. The company has been struggling in China and emerging markets so estimates may be high. Today the stock gained 1.62% in a move that appears to confirm support along the short term moving average. The indicators are moving higher in confirmation of the move and point to higher prices, or at least expectations of a decent earnings report. Resistance is just above the current level, near $84, and could be important in tomorrow's action. A break above this level would be bullish, a failure could send it back to test support near $80 or $75.


Pepsico is also expected to report before the bell tomorrow. The international beverage and snack giant, also make Doritos etc, is expected to report $1.27, down from last years $1.36, largely due to emerging markets and currency conversion. Weakness in international business is expected to be offset by US sales, in particular with snacks. Shares of the stock gained about 1.75% in today's session but gains were capped by resistance. Today's action created a medium bodied white candle with rising, strong, bullish momentum but there is still resistance ahead. Resistance is near today's closing price, about $96.25 and top of a gap/open window, and could keep shares from rising further.


Dupont made the news in after hours trading. The company first came out and said that it was lowering guidance for the full year, due to foreign exchange. Second they announced the retirement of CEO which was taken as good news. The stock shot up more than 10% in after hours trading.


The Indices

The bulls came out of the gates strong today and were able to extend the bounce from support which began last week. The indices gained at least 1.5% in today's session and were able to close near the highs of the day. Today's session was led by the Dow Jones Industrial Average which advanced more than 3%. The blue chips created a large white candle with a significant lower shadow to form the largest candle in over a month, and the largest white candle in at least a year. This move confirms support at the 16,000 level, takes the index above the short term moving average and is accompanied by bullish indicators. Both MACD and Stochastic are bullish and moving higher although both are still weak. It looks like we got the test of support I mentioned last week and if so could lead this index back to recent all-time highs. For now upside target is near 17,250 which could be reached in anticipation of the fast approaching earnings season.


The next biggest gain was in the Dow Jones Transportation Average. The transports added close to 2.5% in today's session and created one of the longest candles in over a month. Today's action extends the bounce begun last week and carries the index above the short term moving average. The indicators are mixed but generally bullish as the index advances with upside target near 8,250. MACD is bullish, and rising, and leading stochastic higher; stochastic is rolling over into a stronger bullish signal after making a weak bullish crossover. Although indicated higher, in line with longer term economic and earnings outlook, the move remains weak with significant resistance ahead.


The S&P 500 made the third largest gain in today's session, about 1.75%. Today's move was capped by resistance at 1,990, coincident with the convergence of my resistance line and the bottom of my up trend line, always an interesting occurrence. The move was strong and accompanied by mildly bullish indicators so could break through. I say mildly because while MACD is rising, stochastic has not yet fully rolled over into its bullish signal. A break above the trend line, or at least the resistance level as time wears on, would be bullish and help to confirm further upside. Such a break could lead to a retest of the most recent all time highs. Support may be found along the short term moving average but looks more likely near 1,950 and 1,900.


The NASDAQ Composite was the laggard today and only gained about 1.55%. Regardless, the index made a strong move that carried it higher all day, closing near the high of the day. Today's candle crosses the short term moving average, after making a small gap to the upside, but was capped at resistance. The indicators are weak but rolling into a bullish signal so resistance could be tested at least, at break above this level would be bullish and could take the index up to 4,900 or 5,000. A failure to break above the current level could result in a retreat to support near 4,500.


The indices made a nice move higher and appear to be completing a double bottom type reversal following the August/September correction. Today's action carried them back out of correction territory and is supported by the indicators. The problem is, there is technical resistance ahead and still reason for caution in the market. Number one on the list is earnings; there is reason to believe the season will be better than expected but until then expectations are poor. Outlook beyond this reporting season is good and that I think will lead the market higher but I don't think we are there just yet.

After earnings there is a host of items to be wary of. US economic data has been a little weak the last month, the FOMC rate hike debate is still raging, China is still out there with a sluggish economy, the EU is still on shaky ground, global growth is in question and on and on. What was noticeably absent from today's trading, and from weekend news and news in general, were new headlines to be worried about and that allowed the bulls to move higher as much as anything that spurred them to rally.

The market is rising, and looks like it will continue to rise, but I am not yet ready to go full bull. I'm a cautious bull, to get more bullish I'd like to see the indices breach resistance levels first, I'd also like to see earnings come in better than expected, as expected. It would also be nice to see the pundits and analysts start talking more about Q4 earnings season but it may be a few weeks at least before that starts to happen. In the mean time I am watching resistance levels very closely.

Until then, remember the trend!

Thomas Hughes