We are deep in 3rd quarter earnings and so far the results are supporting the market.

Introduction

This is the first really big week of earnings. There are over 100 S&P 500 companies scheduled to report, a few today, and the market held steady.

International indices were also steady, despite some mixed data from China, and had little affect on trading here at home. Third quarter GDP figures show that expansion in the Chinese economy fell below 7% to 6.9%, but came in ahead of expectations. This, along with weaker than expected industrial production and better than expected retail sales, helped Chinese indices to hug the flat line while the Japanese Nikkei lost a little more than -0.80%. European indices were also largely steady, led by the German DAX +0.59%, although eyes in that country may be more focused on the ECB meeting scheduled for later this week than they are on Chines GDP.

Market Statistics

Futures trading indicated a lower open throughout the early pre-market session, the S&P was indicated to fall about 0.5% at the open. The biggest news affecting US indices was the earnings/revenue miss reported by Goldman Sachs but it's affect was not broadly felt. Other headlines included the China GDP numbers, and Oprah's purchase of Weight Watchers. There were no economic releases before the opening bell.

The indices fell at the open, as expected, but the losses were muted and quickly hit bottom. By 9:45AM the indices were bouncing back toward break even levels and spent the next four hours trending sideways. Afternoon trading saw the indices drift higher, by 3:30PM most were back in positive territory with all moving into the green before the close of the day.

Economic Calendar

The Economy

Very little economic data today, and not that much for the week either. Today's report came from the NAHB in the form of Home Builders Sentiment. The survey reading came in at 64 for October, 2 points above expectations and the highest level in nearly 10 years. Within the report future expectations and current sales both rose while traffic levels remained flat and below the expansionary 50 level. Future expectations rose by 7 points to 75, current sales up 3 to 70.

Tomorrow we get two more pieces of housing data, Housing Starts and Building Permits. Thursday is Existing Home Sales and then next week is New Home Sales. Also this week is the Housing Price Index and Leading Indicators on top of the weekly Jobless Claims, all scheduled for Thursday.

Moody's Survey Of Business Confidence fell -2.3% this week to hit 37.3, a near 2 year low. This is the 7th week of decline since hitting the most recent peak in late August. Mark Zandi, Moody's chief economist, says that market volatility has worn down sentiment although it remains strong, particularly in the US. He does take note of two potential positives, one being that last week's reading could be an outlier, as has been seen before. The second is that businesses are reporting difficulty in finding qualified labor. If we are not on the brink of labor market collapse this could lead to increased competition for employees, higher pay and wage inflation.


Earnings, this week is one of the biggest of the season in terms of the number of top name companies reporting, over 100 S&P companies, more than 20%, along with 8 Dow companies. According to data from Factset of the 58 S&P companies which have so far reported 81% of them have beaten on the earnings side, while only 50% have beaten on the revenue side. The percentage beating earnings is above average, the percentage beating on revenue is below average.

At this point the blended rate is -4.6%. This is down from -5.6% last week, falling due to upside surprises in 6 of the 10 sectors, led by the industrials and the financials. Based on four year averages we can expect to see the blended rate continue to creep up with a target near -1.1%. Ex-energy the blended rate is 1.8% with an expected increase to the range of 4-6% by end of the reporting season.

The fourth quarter estimates have fallen, to -0.9% from -0.4%, due to downside revisions to the financials, materials and energy sectors. Ex-energy 4th quarter earnings should come in around 4.6%. Looking out to 2016 earnings expectations are also falling, to 9.2% from 9.9% last week and over 12% earlier this summer. Regardless of the downward revisions earnings outlook improves with the next quarter and turns firmly positive in the 1st quarter of next year and getting better throughout the year so it is very likely this quarter is the bottom of the earnings trough.

The Oil Index

Oil prices took a dive today. WTI fell more than -2.75%, Brent more than -3.75%, on fears driven by slowing China, the ever nearing closing of the Iran deal and the overall global supply/demand imbalance. WTI is now back below $46 and heading toward support levels near $45. In the near to short term supply and production remains high, long term there are some signs that this will change in the next year but as yet they have had little material impact on prices. Price outlook for 2016, WTI, remains near $53, about $4 above this years projected price average.

The Oil Index fell nearly -3% in today's session. The index created a long black candle falling from resistance in a move suggestive of a near term double top. The indicators are bullish but in decline and could be indicative of a top. Resistance is near the 1235 level, the 50% retracement level, consistent with resistance in August that sent prices down to the long term lows we saw in late August and September. The index could find support in the range between 1150 and 1175, near the short term moving average, but that remains to be seen. If the index should break through support a move back down to the long term lows, near 1,075, is likely. As always, oil prices and price outlook will be important drivers of this sector.


The Gold Index

Gold prices fell from resistance today as well. The dollar strengthened from last week's lows, perhaps driven on caution centered on the upcoming ECB meeting, helping to pressure gold lower. Today's action took the metal back down to the $1170 level with all eyes the central banks. The ECB is not expected to make any policy changes although there is some expectation for a dovish tone or comments during the press conference. Next week is the FOMC meeting and at this time there is little expectations for a data driven rate hike, not to say there couldn't be a surprise one. If the ECB is dovish, and FOMC is hawkish/on track for a rate hike, the dollar could shoot back to the top of the 6 month range and send gold lower.

The gold miners fell hard on golds fall below $1180. The miners ETF GDX shed more then -4.25% in a move that helps confirm resistance at the top of the three month range. Last Monday the ETF created an overly bearish candle, indicative of said resistance, that failed to result in an immediate fall to lower prices. Today's candle reconfirms that resistance, and sets a lower low, along with indicators setting up for a bearish crossover within a greater down trend.

In the near term the indicators are consistent with a top and/or confirmation of resistance, with MACD approaching the zero line from above and stochastic already forming a bearish crossover, high in the upper signal zone. This could lead to a test of support, near the short term moving average or lower, near the long term lows, but is heavily dependent on gold prices, dollar value, the ECB, the FOMC and interest rate outlook.


In The News, Story Stocks and Earnings

Perhaps the biggest story of the morning was Weight Watchers and Oprah Winfrey. Oprah bought a 10% stake in the company, took a board seat and is providing her endorsement/likeness for marketing among other consideration she is providing for the company. Shares, which have been languishing near all time lows, shot up more than 75% in the pre-market session and extended those gains in the open session. The stock closed with a gain greater than 100% and trading at an 8 month high.


Morgan Stanley was another name to hit the wires in the pre-market session. The investment banking giant reported earnings down more than -40% on a sequential and year over year basis, driven primarily on difficult market conditions in its Institutional Securities Group. Shares of the stock fell more than -5.5% in the pre-market session, gapping lower to open below the short term moving average.


Hasbro reported before the bell as well. The toy maker reported a beat on the earnings side but fell short on revenue and sent shares tanking in today's session. Despite the revenue miss the company was able to grow revenues by 5% in North America and 14% internationally. Actual EPS of $1.64, $1.58 adjusted, beat expectations for $1.51 and last years results of $1.46. Shares fell about -1% in the pre-market session and then extended those losses to near -8% during the open session.


IBM reported after the bell. Big Blue beat on the bottom line but missed on the top line, a common event in the market over the past year. The company reported $3.34 per share versus the $3.30 expected by analysts. This is the 14th quarter of revenue decline and comes with lowered guidance. The company lowered as well, to the bottom end of the previous range and in line with estimates. Shares of the stock fell nearly 5% in after hours trading.


The Indices

The market was mostly flat in today's session with most finishing in positive territory, if barely. The NASDAQ Composite made the largest gain, near 0.38%, in a move that actually extended its bounce from support. The index created a small bodied white candle and set a new one month high with bullish indicators. Both MACD and stochastic are bullish and pointing higher so a continuation of the bounce looks very possible. Resistance is just above the current level, near 4,950 and last months high. Support is near 4,800 and the short term moving average.


The Dow Jones Transportation Average came in second with a gain near 0.35%. The transports moved up from support along the short term moving average although the indicators show that near term weakness is present. MACD is bullish but retreating from a peak while stochastic %K is below %D and pointing lower. The index could retreat to test support along the moving average with downside target near 7,750 should it break. Resistance is near 8,250 should the index bounce.


The Dow Jones Industrial Average gained 0.08% in a session just below current resistance. The index created a small, doji style spinning top that closed just below my 17,230 support/resistance line with mixed indicators. Both indicators are still bullish although momentum is quickly in decline. Stochastic is still trending higher in both the near and short term so resistance could still be tested at least.


The S&P 500 made the smallest gains in today's session and was barely able to do that. A late day pop helped send the index above break even to close with a gain of 0.03%. The broad market also created a doji type spinning top candle, just above support levels and extending its bounce from support if ever so slightly. Both indicators are bullish although momentum is waning. Stochastic is strong, both %K and %D are pointing up following a bullish crossover high in the upper signal zone. The index looks like it will drift higher although there is chance for resistance to set in. Current target is near 2,050 with support near 2,020 and the below that along the long term up trend line near 2,000.


Today's action was very mild and thankfully devoid of earth shattering international headlines and knee-jerk reaction to news. There are still risks present in terms of news events but at this time they not a focus. At this time earnings are a focus and will remain so for the next few weeks.

The ECB is also a focus, expected to do little more than try to reassure the market. Regardless, the tone and words that Mario Draghi uses could go along way toward weakening/strengthening the euro, affecting the dollar and the markets driven by it. The FOMC too is a focus but the meeting is still a week away.

For now, earnings trends are positive, positive in that they are better than expected, if still showing declines from last year. So long as this continues, and forward outlook remains positive, I see the bull market continuing as we exit from the trough in earnings growth experienced over the past three quarters.

Until then, remember the trend!

Thomas Hughes