The new month opened up with a bang, the major indices gained over 1% on earnings and economic data.

Introduction

November opened up on a positive note. The indices gained across the board, supported by earnings, M&A activity and economic data. There were at least a a half dozen reported buy-outs or mergers this morning, over 125 earnings reports throughout the day and two key pieces of economic data that were both better than expected.

Market Statistics

International markets were mixed in today's trade. Asian indices were largely lower, driven by weak China manufacturing data. Official Chinese PMI came in at 49.8, unchanged from last month and weaker than the expected 50.0. Another, non-official private gauge of ISM came in at 48.3, also weaker than expected but stronger than last months 47.2. The Nikkei led with losses greater than -2% followed by similar losses in both the mainland Chinese and Hong Kong indices. European markets were not affected by the weak Chinese data, or were able to shrug it off in any event, with most of the indices posting gains. The DAX led with an increase near 0.80%.

Futures trading here at home was flat to positive for most of the morning. News did not have a noticeable impact before the bell, except in specific names such as Dyax, Conagra, Visa and Coty which all announced purchases or mergers. The SPX opened with a gain of only a few points, consistent with futures trading, and then proceeded to steadily rise for the next hour and half.

The market hit resistance just after 11AM but it was not enough to reverse today's gains. After an hour or so of consolidation the market moved back up to test the early high and broke through to make a new intraday high. From that point on the bulls were firmly in control and kept price moving higher into the late afternoon and the close of today's session.

Economic Calendar

The Economy

No economic data was released before the opening bell. ISM and Construction Spending were both released at 10AM. ISM came in at 50.1, the lowest level of the year, but also a little better than expected. Consensus estimate was 50.0 with some estimates showing expected contraction. Withing the report the employment index fell more than expected, to 47.6, and is showing contraction. On a positive note the new orders component rose more than expected to 52.9. Production also increased to 52.9% although shipments showed a slowing of expansion. Only 7 of the 18 manufacturing sectors showed growth.

Construction Spending was also better than expected. The amount of money spent on new construction rose by 0.6%, 0.1% ahead of expectations. Last months figure was unrevised at 0.7%. Residential construction spending rose by 1.8%. Total construction spending is now up 14.1% over this same time last year with residential spending up 17.2%.

Moody's Survey Of Business Confidence continues to contract. The index reading dropped a full point from last week to hit 35.3. In his commentary, Mark Zandi says that despite the recent hit to confidence the index remains strong compared to historical levels. The biggest drag on confidence is expectations for next year followed by a downturn in hiring. This is now the 9th week of steady decline and a new 12 month low.


Earnings season continues to roll on. According to Factset 340 of the 500 S&P companies have reported with another 105 on the schedule for this week. Of those that have reported 76% have beaten on EPS and 47% have beaten on revenue. The blended rate for earnings growth is now -2.2%. This is an improvement from last week's blended rate of -3.9% and the 5.2% projected at the start of the reporting season. Based on the four year averages, and performance among index companies this quarter, we can expect this to rise another 1% at least bringing the season rate to the range of -1%.

So far this season the energy and healthcare sectors have provided the largest upside surprises. Looking at the health sector. It is beating earnings growth expectations by 13.2%, more than double the 6.2% expected at the beginning of the season. Earnings declines in the energy sector are not as bad as feared. As of this weekend declines of -60% are up 4.2% from expectations. The sector is expected to post large declines next quarter as well, estimates have been falling and now stand at -66%.

On an Ex-energy basis S&P 500 earnings growth is 5% this quarter and 3.1% next quarter. Looking out to next quarter the all-index projection is -2.7%, a decline of -0.7% from last week. Fourth quarter growth expectations have been falling over the past month but at current levels are still in range to turn positive should the trend for earnings to rise about 4% between the start and end of the season hold through into next quarter. The first quarter of next year is project to see growth of 3% with full year estimates at 8.6%. Full year 2016 estimates have fallen again but remain positive in each quarter of the year.

This week will be busy, there are close to 1000 scheduled earnings reports along with the monthly round of macro-economic data. Of the data, Friday's NFP and unemployment may be the most heavily watched but all will play their part in coloring how the numbers are interpreted and their affect on the FOMC rate hike time line.

The Oil Index

Oil prices remain choppy and under pressure. Today' WTI lost about 1% on an intra-day basis, tried to rally, failed to hold it fell back to the days lows. Hurting prices today was China's manufacturing data as well as news that Russia's production was hitting record levels and news Iran is planning to raise production by 500,000 bpd in the near future. Offsetting the bearish news is last week's rig count which showed declines in all types of drilling and oil producing rigs. Despite the drop in rigs however, global production remains high, storage levels are near records and demand growth outlook if weak leaving me with little reason to expect prices to strengthen in the near future.

The Oil Index gained more than 2.15% in today's session. The index is supported not so much by oil prices, or even expectations of increased earnings next year, but I think more on the fact that earnings declines are not quite as bad as feared and the energy companies are making more moves to cut costs. Today's action carried the index up for the fourth day since bouncing off support last week. The indicators are mixed but consistent in showing a near term upswing in momentum. The index could keep rising in the near term, despite lower oil prices, but resistance is just above the current level near 1,230. A break above this level could be bullish, if supported by bullish oil prices, but I would not be surprised to see a whipsaw/false-break at this point. Support is near the short term moving average near 1,150.


The Gold Index

Gold prices fell to a one month low on renewed fear of the Fed rate hike. The FOMC statement has firmly placed a December hike on the table which has strengthened the dollar and, along with low inflation targets, has taken the bid right out of the gold market. Today the metal fell a little over -0.6% to trade just below $1135. This week's data may add momentum to gold's fall, there is a lot of data due out, any strength could be seen as leading the FOMC to raise rates.

The gold miners ETF GDX opened at a new one month low but rose throughout the day. The ETF gained a little over 1% on an intra-day basis, closing with a gain of 0.4%, in a sign of possible support but failed to regain the short term moving average. Despite the gains the indicators are pointing lower with momentum on the rise so the down turn is likely not over. Resistance is at the short term moving average near $15.25 with downside targets near $13.00.


In The News, Story Stocks and Earnings

Lots of new today, earnings and otherwise. Topping the list in the early hours was earnings reported by Visa. The credit and payment processing firm reported rising revenue and earnings but failed to meet expectations. Revenue increased to $3.23 billion with adjusted earnings per share of $0.62. This is up nearly 50% from last year's $0.43 but fell one cent shy of consensus. Along with the report are plans for Visa to buy Visa Europe in a deal worth more than $24 billion. Shares of the stock fell about -3% on the news but found support at the short term 30 day moving average.


ConAgra announced the sale of it's private label operations to Treehouse Foods. The sale is worth $2.7 billion and is expected to boost sales for Treehouse Foods by $7 billion. Conagra is going to focus on it's name brand operations such as Chef Boyardee and Slim Jim. This is the second major move by ConAgra to restructure, the first being a major reduction in workforce and restructuring of operations. The company is shedding over 1,500 jobs aside from those which are included in the sale to Treehouse Foods. Shares of Treehouse fell more than -5% on the news while ConAgra gained nearly 3%, on an intraday basis at least. The stock posted a strong open and the moved higher only to peak out within the first half hour of trading and lose most of the early gains.


Today is the day that HPQ finally split. The two new companies, Hewlett Packard Enterprise Company and Hewlett Packard Inc. The move has been long in coming and resulted in 10's of thousands of job cuts but has left the two companies better positioned, theoretically, to perform well into the future. Shares of both companies were scooped up in today's led by HPQ, HP Inc., with a gain of 14% from the post split pricing.


AIG reported after the bell and produced a huge flop. The company was expected to reported $1.02 per share but actual results were close to 50% that figure. The company cited lower income on hedge fund investments and assets marked to fair value through earnings as well as restructuring charges incurred during the quarter. On top of this the company announced it would be incurring another $0.5 billion in restructuring charges moving forward in its attempt to become a leaner operation and to "rationalize" its business. Shares of the stock had been trading higher during the open session but reversed those gains, falling nearly -1% in after hours trading.


The Indices

The indices were indicated to open higher and they did. They just weren't indicated to open strongly higher. Today's rally was stealth; it came out of nowhere, almost, supported by positive earnings surprises and anticipation of ongoing economic growth in the US. Action today was led by the Dow Jones Transportation Average. The transports gained more than 1.5% in a move falling just short of potential resistance at 8,260. The move confirms support along the short term moving average but comes with mixed indicators so caution is due. A move to test resistance could result in A move above resistance would be bullish and could take the index up to next target near 8,500.


The NASDAQ Composite made the second largest gain in today's session, just over 1.40%. The tech heavy index made a long bodied white candle, moving up from support, and created a new 2 month high. The indicators remain bullish and consistent with new highs although there is some sign the rally is weakening. Next target is the current all time high and the bottom of the previously broken long term up trend line. A move to this level could find significant resistance and is a prime target for profit taking, it would be a 20% move from the September lows.


The S&P 500 is next up in today's session. The broad market gained about 1.20%, created a long white candle and set a new two month high. The index is riding a wave of strong upward momentum that looks likely to take it up to test the all time high at least. There are signs the rally is slowly losing momentum so caution is due as it approaches the all time high but until then there are no significant resistance targets. A break above resistance to set a new all time high could very well be the trigger profit takers are looking for so tight stops are a must.


The Dow Jones Industrial Average is today's laggard gaining only 0.94%. The blue chips created a medium sized white candle and set a new three month high with the 18,000 level less than a stones throw away. The indicators remain bullish although they too are showing signs of slowing momentum so it looks likely that 18,000 will be hit. This level is consistent with the underside of the long term trend line, broken two moths ago, and could provide significant resistance so caution is due here as well. A break above the trend line could take the index up to test the all time high.


The rally is rolling on with many of the indices set to test their all time highs as early as this week. The market is being supported by better than expected earnings and expectations for earnings and economic growth into the end of the year. The caveat is that economic growth has slowed and earnings outlook for next quarter and next year is declining from peaks seen in late summer. My long term outlook and stance remains bullish but I see a chance for resistance and consolidation at the all time highs, if not an actual pull back to support levels, so near term I am very cautious. If a dip does develop I will be looking to re-enter.

Until then, remember the trend!

Thomas Hughes

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