The market held steady near two month highs at the start of a big week; FOMC, GDP and a massive round of earnings are all on tap.

Introduction

The market held steady today, trading just below the two month highs set last week, in a quiet session. There is a going to be a lot of information to hit the market this week, all with the power to move the market, but little was released today. Top of the list is the FOMC meeting and policy release scheduled for Wednesday afternoon. There is little expectation for a rate hike at this time but once again the market will be hanging on every nuance in the statement in search for clues as to when a rate hike might come. Soft manufacturing data and low-to-no inflation could keep them from hiking for several more meetings.

The first estimates for 3rd quarter GDP come out on Thursday. Consensus is in a range between 1.5% and 2.5% with some estimates as high as 3.5%, down from 3.9% in the 2nd quarter. Full year estimates are still in a tight range around 2.5% as well. Along with the FOMC and the GDP this is also the heaviest week for S&P 500 earnings; 167, more than 33%, of S&P 500 companies report this week.

Market Statistics

International markets were quiet today as well. Most Asian indices closed in the green, although gains were small. The Nikkei led with an increase of 0.65%. In Europe trading was much the same although there was a higher percentage of indices closing with small losses. The euporia caused by Mario Draghi's has either already worn off or traders are waiting to see how the FOMC policy statement affects overall outlook.

Futures trading on US indices was flat throughout the early pre-market session. There were no economic releases before the opening bell, and no headline inducing earnings reports, to drive trading. After the open the market fell to a low near -0.5% from Friday's open and then proceeded to trade sideways in a narrow range the rest of the day and into the close of trading.

Economic Calendar

The Economy

There were no economic releases before the bell but there was one after the bell worth taking note of, New Home Sales. New Home Sales frell -11.5% in September from the previous month to an annualized rate of 468,000. This is well below the expected 550,000 predicted by economists. The previous month was revised lower from the original 552,000 to 529,000. This number is definitely on the weak side, and not consistent with strength in other areas of the housing market. Existing Home Sales, reported last week, was strong and above expectations.

There is a fair amount of data coming out this week aside from the FOMC meeting and the GDP esimate. Tomorrow is Durable Goods, Case-Shiller 20 City Index and Consumer Confidence. Wednesday is of course the FOMC announcement. Thursday is Jobless Claims, GDP and Pending Home Sales. Friday is Personal Income and Spending, Employment Cost Index, Chicago PMI and Michigan Sentiment.

Moody's Survey Of Business Confidence declined another full point to 36.3. This is now the 8th week of decline and a new low for the index. According to Mark Zandi's summary the index shows a notable decline from the summer highs, driven by uncertainty over China and the slump in emerging markets. He notes that expectations for the future have had the largest decline, as well weakening in labor. Despite the decline the index remains at high levels relative to its history so the two month downtrend needs to be taken in perspective.


According to FactSet 173 S&P 500 companies have reported earnings so far this season. Of those 77% have beaten earnings expectations, above average, while only 43% have beaten on the revenue side, below average. The blended rate is now -3.8%, an increase of 0.6% from last week driven by better than expected performance in 8 of the 10 sectors. Energy leads declines and is performing below expectations. Ex-energy earnings growth is now 3.5%. Two negative trends that have developed are the impact of foreign exchange, an impact likely to continue into the coming quarters, and emerging evidence of wage inflation.

Fourth quarter expectations continue to decline. Since last week they have declined to -2%, from -0.9%. This is a negative for forward outlook but remains an improvement from the current quarter with the possibility of positive growth possible, and positive growth expected in the 1st quarter of 2015. Based on the four year average, if the 4th quarte season starts at -2%, we could expect final quarter earnings growth to rise as much as 4%. Ex-energy 4th quarter growth is estimated at 3.97%.

The Oil Index

Oil prices slid again today, dropping another -1.35% to fall below $44 per barrel for WTI. Prices for WTI settled at a two month low and could go lower unless something besides hope of lower production next year materializes to support them. Storage levels are at high levels, along with on-going over production on a global scale, with declining demand growth expectations. Oil prices could easily break down from this level unless a bullish catalyst emerges, with downside target near $40.

The Oil Index fell more than -2.25% in today's session to come slamming down to near term support. The index is now trading at a 3 week low, just above my support line at 1,175. The indicators are consistent with a possible break below this support level so it will need to be closely watched with close stops in place. A break below this level could take the index as low as 1,100 or 1,050. Earnings, as well as earnigns outlook, will be the big driver, the major integrated oil companies report later this week. This quarter could see them come in a little worse than expected, with possible lowered expectations for next quarter due to the recent fall in oil prices.


The Gold Index

Gold prices held steady below $1165 today. Prices were supported by a slight weakening in the dollar but that weakening is small relative to a 2 month high in the Dollar Index and only a two week low in gold. Without inflation present the only thing to support gold prices is anticipated Fed dovishness which might not be enough with QE raging around the world. The dollar is on the rise and likely going higher, supported by the ECB's QE talk last week, possible additional QE in Japan and the FOMC which is supposedly on track to hike rates as soon as this year. Regardless of when the Fed acts, world currencies and the dollar are on diverging paths that should send gold prices lower, possibly as low as $1100.

The gold miners fell in today's session but remain within recent trading ranges. The Gold Miners ETF GDX lost more than -3% but remain within a recent congestion band near the 100% retracement line. The indicators are weak but the index remains above the short term moving average and support so could be setting up for a move higher. The caveat is that gold prices could be driven lower by diverging central bank policy and take the miners with them. A break below the current support levels near $15.50 could take the ETF down to the late summer lows near $13.


In The News, Story Stocks and Earnings

Duke Power hit the news in the early hours, but not for earnings. The large southern based energy supplier announced it's intent to purchase Piedmont Natural Gas for $4.9 billion dollars. The deal would add over 1 million new natural gas customers to Dukes already vast range. The deal is worth $60 per share to shareholders and an assumption of debt by Duke. The per share price is a 40% premium to last week's closing prices for Piedmont. Shares of Duke popped in the ealry pre-market session but sold off during the day, losing a little more than -2%.


Broadcom reported after the bell. The broad band technology leader reported earnings that were above estimates on light revenue. Adjusted eps of %$0.73 is nearly a nickel better than last year at this time but came on light revenue. Shares lost more than -3% during the day but tried to rally in after hours trading. Some gains were made but nowhere near enough to recover the days losses.


Rent A Center reported after the bell as well. The rental company reported light revenue but beat on the bottom line by 2 cents. The problem was with forward guidance which is below consensus. The company guided the fourth quarter to $0.52 to $0.62 per share, with full year earnings of $2.10. Consensus was closer to $0.70 per share with full year earnings near $2.25. Shares of the stock got hit hard on the news and fell more than 20% in after hours trading.


The Cheesecake Factory reported $0.52 per share, in line with expectations. The results come on the back of a 2.2% increase in comp store sales and the opening of 6 new stores so far this year. The restaurant chain also announced the opening of as many as 5 new stores during the present quarter. Shares of the stock responded by falling nearly -5% in after hours trading.


The Indices

The indices held steady in today's trading as the market gears up for what could be the most active week of the earnings season. Not only are there 167 earnings reports the FOMC meeting is on the way, as well as the first read on 3rd quarter GDP. Today's action was led by the NASDAQ Composite, the only index to post a gain in today's trade, 0.06%. The tech heavy index created a very small spinning top candle just below resistance targets at 5,050. The indicators continue to climb, consistent with further testing of resistance and possible break through. MACD momentum is makig a new high relative to the current rally with stochastic confirming with a bullish crossover high in the upper signal zone. A break above this level could take the indes as high as the current all time high, near the bottom of the up trend-line broken in August and the 5,225 level.


The Dow Jones Industrial Average made the smallest decline in today's session, only -0.13%. The blue chips created a small bodied spinning top candle just above resistance targets broken last Friday. The indicators are rising, consistent with the break of resistance, but also divergent relative to the 2 month high, suggestive of a weakening rally. Regardless, the index is indicated higher at this time with potential upside target near 18,000 and the bottom of the previously broken up trend line.


The Dow Jones Transportation Average made the second smallest decline in today's session, -0.16%. The transports created a small spinning top candle, just above last week's broken resistance targets at 8,280, with mixed indicators. Momenutm is bullish, and rising with today's action, but declining relative to the current rally. Stochastic is bullish in the nearest term but consistent with resistance at the current levels. This could lead to further upside but any move above next resistance is highly questionable without positive catalyst.


The S&P 500 is today's laggard. The broad market shed -0.19% in today's session and created a small bodied candle. Today's action was within a tight range, between closely packed support/resistance lines within a long term congestion zone. The indicators are bullish and pointing to continued testing of resistance but have weakenend and could lead to a retest of support. There are weak support targets near 2,060 and 2,050 with a stronger one near 2,020. A break above the current level could take the index up to the all time high near 2,130 with possible resistance levels near 2,090 and 2,125.


The market still looks like it wants to march higher although the indicators show a weakening rally. This could indicate a peak in the market and pull back to support, or it could indicate an consolidation within a greater rally waiting on catalyst for break out. In either event there are plenty of possible catalysts this week, a few tomorrow. Tomorrow the economic calendar is light; Durable Goods, Case-Shiller 20 City index and Consumer Confidence. The earnings calendar is full including names like Apple, Alibaba, Pfizer, Corning and Bristol-Meyers.

I'm still looking to earnings to be the biggest driver of the market. Results for this season are coming in better than expected, not great, but better than expected, with positive forward outlook. The risk at this time is that revenue continues to fall short, and that outlook for next quarter and next year continues to fall. So long as outlook remains positive I remain a bull and will buy on the dips.

As for the FOMC, I do not expect much from them this meeting. They could make a surprise rate hike, but I don't think it likely with inflation as low as it is and the signs of economic slowing we have been seeing since the last meeting. What I do expect is more of the same non-committal in the statement they've been giving all along; the economy is stable and will need a rate hike soon, but it will be data dependent.

One final thought that no one seems to be talking about, Obamacare. It could become a real drag on consumer spending and the economy next year, more so than any affect it is having this year. The White House announced today that rates are going up in many places around the country, my own insurance is going up by nearly 35% and are not conducive to me stimulating the economy.

Until then, remember the trend!

Thomas Hughes