The market held steady while we wait on earnings season to really start.

Introduction

The market held steady today while we wait on earnings season to really get started; the first report of the season was several weeks ago, the unofficial start was last week with Alcoa but this week is when it really begin to get started. For one, the big banks report en masse, for another the quality of companies reporting goes way up. Today there was only one name on the list I saw, tomorrow there are a few dozen led by names like CSX, Johnson & Johnson, Intel and JP Morgan Chase.

The morning started off on a positive note. Asian markets got a lift from the PBOC which said the correction in Chinese stock markets was nearly over. The mainland Shang Hai index gained 3.2% on the news followed by a 1.6% rise in the Nikkei and a 1.2% rise in the Hang Seng. The positive vibe helped support European indices as well but just enough to keep them above break even.

Market Statistics

Futures trading indicated a flat to slightly positive open in the early hours of trading. There were no economic or earnings releases to move the market and trading was fairly calm. The indices opened just above break even and then traded around that level the rest of the day. Action was a little choppy but the range was very narrow and volume was light all day and into the close. With so much on the calendar for the week, and nothing really happening today, it is not surprising to see the market hold steady like this. Tomorrow we will start to get a deeper insight into actual earnings for the season so action could be a little different.

Economic Calendar

The Economy

No economic data today but there is a bit coming out later this week with most coming out Wednesday, Thursday and Friday. Tomorrow is only Treasury Budget information. Wednesday is the Fed's Beige Book. Also, PPI, Retail Sales and Business Inventories. Thursday is Jobless Claims, CPI, Empire Manufacturing and Philly Fed. Friday wraps it up with TIC Flows, Industrial Production, Capacity Utilization, JOLTs and Michigan Sentiment. Out of them all CPI, PPI and the Beige Book top my list of things to watch. They are all important but these have the most direct impact on outlook, inflation and FOMC rate hike speculation. Both inflation gauges are expected to show slight declines, in the range of -0.1% to -0.2%. JOLTs is also a good one to watch. It shows the number of job openings. In light of the recently weak NFP report a strong JOLTs would be reassuring.

Moody's Survey of Business Confidence declined for the 6th week in a row. This week it fell -0.1% to 39.6 and the lowest level since March 6th. Despite the decline it is still trending near all time highs and above levels seen before 2008. According to Mark Zandi, Moody's Chief Economist, global businesses remain upbeat, led by those in the US. He says that in the US hiring remains strong, as do sales and pricing.


According to FactSet the blended rate for S&P earnings for the third quarter is now -5.5%. This is -0.1% lower than last week and -4.4% lower than at the beginning of the quarter. The energy sector is still leading in expected declines, near -65%. The ex-energy blended rate is now 1.8%. If the 4 year average hold true we can expect to see these number improve by up to 4% or more, leaving the final rate near -1.4% for the full index and 5.25% ex-enegy. So far 24 companies have reported, 19 beat earnings expectations, 14 beat on the revenue side.

Looking forward things are not shaping up quite as rosy as expected. The projected Q4 earnings growth rate for the S&P 500 is now negative at -0.4%. This is due largely to downward revisions in the energy sector. Ex-energy the rate is near 5%. Taking into account the 4 year averages we can expect both those numbers to rise by up to 4% by the end of the 4th quarter reporting season leaving full index growth near 3.5%, and ex-energy growth near 9%.

2016 is still positive but full index growth now stands at 9.7% for the year. All quarters are expected to see earnings growth, starting in the first quarter with 4.9% and moving up from there. Q2 growth is expected to be near 7.0%, Q3 doubles that to 14.3% and Q4 stands at 14.1%.

The Oil Index

Oil prices took a dive today, from recent highs, with both WTI and Brent shedding nearly -5%. A report that frackers had upped their hedges on oil at $50 may have been the trigger. Mixed news from OPEC may have also helped to depress prices. On the one side Kuwait oil ministers and others within the cartel are sounding bullish on prices into next year. On the other Saudi production is up 7% from this time last year. On the domestic front rig counts are still falling but supply and production remain high. Prices fell from a three month high and could be retreating back to the $45 support level.

The Oil Index fell a little more than -1.25% in today's session, closing with a loss near -0.85%. The index appears to be retreating to support at the recently broken 1175 level. This could lead to a retest of support or break through with next support target near 1125 and the short term moving average. The indicators are bullish and strong, upside momentum just made an extreme peak convergent with a new high, so a retest of this high is likely.


The Gold Index

Gold extended its rally, driven by a dovish Fed, Fed minutes and reduced inflation expectations. The metal gained an additional $5 in today's trading and crossed above $1160 for the first time since early August. At this level gold is trading near the top of its 4 month range and at resistance with a rate hike still expected to come, perhaps this year. If data continue to be weak, particularly inflation, gold could break above this range. If so next resistance is in the $1180 range, if not support is down near $1130.

The gold miners got a lift early in the day, on gold's strength, but bears were lurking. The Gold Miners ETF GDX gapped up at the open to begin trading at resistance levels and sold off from there. The ETF ended the day with a loss near -3.7% and creating a long black candle. The ETF has confirmed resistance above the top of its range and appears set to return to support, possible as low as $12.50. Stochastic and MACD are both still bullish but indicating near term decline and consistent with a trading range. Divergence is also present between the current high, a three month high, and peaks in both indicators. Today's candle is also a Dark Cloud Cover candle pattern, and accompanied by divergence in the indicators, both suggestive of lower prices. This is of course dependent on gold prices, if gold continues to strengthen or consolidate at today's levels the miners are likely to find support. In the meantime profit taking may continue.


In The News, Story Stocks and Earnings

Eli Lilly reported an end to a trial of one of its heart drugs this morning. The drug was in the final stages of trials of up til now expected to pass. The news was a surprise and comes on the recommendation the drug would not meet approval as a therapy for heart disease. Shares of the stock took a hit in the early pre-market session and lost more than -8% at the open. There were some buyers during the day, price was able to rise from the early low, but the losses were not recovered. Shares are now trading at the bottom of a 5 month range.


Many of the big banks report this week. The financial sector is only expected to produce earnings growth in the range of 4.5% this quarter but Bank of America is expected to be one of the top producers of growth for the entire S&P 500. Tomorrow JP Morgan reports, Wednesday it's Wells Fargo, Thursday is BB&T, Bank of America and Goldman Sachs. Many smaller regional banks will also be reporting, and the onslaught will continue next week. This week, today, the Financial Sector Spyder XLF gained 0.26% in a quiet day of trading. The ETF is sitting just above support levels and the short term moving average with bullish indicators. The ETF is near the bottom of a 12 month trading range and looks like it is going to move up to the top of the range, driven on a combination of earnings and earnings outlook. Support is near $23 with upside target near $25.50.


Rail carrier CSX reports tomorrow. The company is expected to report $0.50 per share, down from $0.56 in the last quarter. Shares of the stock have been on the rise but took a hit today after comments from a JP Morgan analyst. He says not to chase prices in the sector, that the bottom is not in, specifically pointing to Norfolk Southern but impacting the entire sector. The stock lost -2.44% and is now trading just above the short term moving average.


Intel is also reporting tomorrow. The chip making giant is expected to earn $0.59 per share, better than last quarters $0.55. The decline in PC shipments has been hurting the company but the release of Windows 10 is expected to have helped. Today the stock gained 0.25% and appears to be making a flag pattern within a rally. Upside target, providing earnings are not disappointing, is near $35.


The Indices

It was a quiet session today, waiting on earnings, waiting on economic data. No major news reports were out, and the credit markets were closed for Columbus Day. A quiet day indeed. The indices bobbed along throughout the day, briefly breaking below last week's closing prices only to bob back above. By end of day the indices were all in the green, led by the Dow Jones Industrial Average. The blue chips gained 0.28% and extended its march towards resistance. The indicators remain bullish and indicative of higher prices although momentum may have peaked. Upside target is near 17,250 with a possible break to the upside should earnings season unfold better than expected.


Today's runner up is the NASDAQ Composite. The tech heavy index gained only 0.17% in today's session and created a very small spinning top doji. The index is drifting higher on momentum, with rising indicators, and upside target near 4,950. Although the indicators are bullish, they remain weak so a break above resistance targets is questionable at this time.


The S&P 500 is next up on the list today. The broad market gained 0.13% in a move that barely keeps it above break even levels. Today's candle is a very small spinning top type doji just below resistance targets near 2,020. The indicators are bullish but showing signs of peaking so resistance could indicate a near term top. However, momentum is strong and convergent with this new high so a retest of it would be expected should/when a pull back occurs. Earnings could renew momentum and break the index above this resistance, with upside targets near 2,050 and 2,100.


The Dow Jones Transportation Average made the smallest gain in today's session, only 0.09%. The transports may have been affected by the comments from JPM about the rail carriers but was able to hold support above 8,250. The indicators are bullish and rising, with some indications of strength, particularly in the MACD, with upside targets near 8,500 should the index break resistance.


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The market has been in rally mode since confirming bottom two weeks ago. The rally is strong and looks like it could go higher, perhaps all the way to the current all time highs for all the major indices. In the near term, as in tomorrow and this week, it looks like earnings is the only thing standing in the way. Tomorrow is going to be a big day, no doubt, but is still only a handful of reports so I don't really expect a break out then. By the end of the week we should have a pretty good idea of what to expect for the quarter, and if it's not decisive then maybe the next week. I am bullish but remain cautious, and eagerly awaiting all the reports.

Until then, remember the trend!

Thomas Hughes