Weak data from China, lowered GDP estimates, another new twist in the Greek bail-out plan, rate hike conjecture and diminished expectations for earnings weigh the market down.

Introduction

The bulls were not out today. Last week's better, much better, than expected NFP report has helped solidify December rate hike expectations and that, along with today's global headlines, pushed the indices lower.

Starting in Asia, weak Chinese trade data renewed fear of a slowing China economy but markets bucked sentiment in favor of other news. There are rumors that the Chinese IPO market would reopen soon, following a 4 month hiatus dating back to the summer swoon. Mainland indices, as well as the Japanese Nikkei, rose more than 1.5% while the Hong Kong index declined by -0.6%. European markets were more focused on the weak trade data, as well as a new development in the ever-present but often forgotten Greek bail-out deal. Greek creditors in the Eurozone have held off on an expected $2 billion payment due to a lack of compliance with some of the 50 reforms expected to have taken place by now. Indices across the region fell in the range of -1% to -2%.

Market Statistics

US stock futures were indicating a lower open all morning. Declines in the range of -0.25% to -0.5% were expected and that held through into the open. There was a little earnings activity in the ealry hours, and no economic data today at all, to help or hinder today's trading. The indices fell with the opening bell, as expected, and the decline continued throughout the morning, not reaching daily bottom until just after 12 noon.

Economic Calendar

The Economy

No official US economic data today and very little this weak compared to last. Tomorrow we will get the Wholesale Inventory data along with Import/Export prices. No data on Wednesday either, save for the weekly oil inventories reports. Thursday is weekly Jobless Claims, Treasury Budget and the JOLTs report on job openings and labor turnover. Friday wraps up the week with Business Inventories, Retail Sales, Michigan Sentiment and PPI. On a single release basis the PPI may be the biggest release of the week but retail sales, inventories and PPI will all carry some weight. Look out for signs of labor market health, strength/weakness in the consumer and indications/expectations for producer level inflation, all of which could affect the December rate hike outlook.

The OECD (Organization for Economic Cooperation and Development) lowered its outlook for 2015 global GDP to 2.9% in a presentation given earlier today. They expect to see global growth pick up in 2016 and 2017 to 3.6% and 3.9% but predicate that on a rebalancing of activity in China and increased investment in the developed world. GDP in the Eurozone is expected to strengthen in the next year while growth in China is expected to continue slowing, falling to 6.2% in 2017.

Moody's Survey Of Business Confidence fell again. This is the 10th week of decline. The reading for last week fell -0.9% to 34.4%, another new low. However, despite the drop, Moody's economist Mark Zandi says that business confidence is still high relative to historic levels. North American businesses have seen the most notable decline in sentiment, led by a decline in forward outlook.


According to Factset 444 of the 500 S&P 500 companies have reported earnings so far this season. The blended rate for earnings growth this season is now -2.2%, this is down a tenth from last week and counter to trend. Of those who have reported 74% have beaten on earnings estimates, above average, while only 46% have beaten on the revenue side, below average. Based on the long running trend in earnings we can still expect to see the blended rate rise another 0.5% to 1%, there are another 17 S&P companies reporting this week and another month before the last one reports.

Energy continues to be the laggard, posting a blended earnings decline of -56.6%. This is better than the -64% predicted at the start of the quarter with growth not expected to return in the sector until next year. Ex-energy the blended rate for this quarter is 4.5%, in line with expectations and will possibly go higher over the next few weeks.

Looking out to next quarter and next year. The 4th quarter is still estimated to post a decline, and that decline has grown. The projected rate of growth is now -3.7%, this is a decline of -1% from last week. Based on the long running average we can still expect to see this number come in flat to slightly positive by the end of the next reporting season, better than -3.7% but not great considering the fact that estimates have been steadily declining for the past month and more. Ex-energy 4th quarter earnins should be in the range of 2.1% to 6%.

Looking past next quarter to the first quarter of 2016 earnings growth is projected at 2.1%, revenue decline is still expected. Full year 2016 estimates are also falling, nearly a full percent in the last week, but still robust at 8.3%. Based on these estimates I think it safe to say we are still in an earnings trough and on the upslope but it may take yet another quarter for this scenario to play out. That being said, 4th quarter expectations could weigh on the market until revisions to estimates begin to increase rather than decrease.

The Oil Index

Oil prices fell today after briefly spiking in early trading. A statement from OPEC to the effect they were not going to cut production, and that they expected to see demand growth in 2016, was cause for the spike. The jump in price did not last as the weak Chinese data and current high levels of supply and production, along with OPEC's own pledge to keep production levels high, brought traders back to reality. WTI fell a little more than -0.6% to trade just above $44. Oil prices could continue to fall to retest the October low just below $43.

The Oil Index fell more than -1% in today's trade. The index is making a new one week low, below last weeks broken resistance, with increased chance for a return to support. The indicators remain consistent with my theory the index reached a peak with last week's false-break-out and are on the verge of rolling over into a bearish signal. Current downside target is near the short term moving average in the range of 1,150 and 1,175 with a possible break below that level should oil prices decline further.


The Gold Index

Gold prices held steady today, trading in a range of less than $5. Of course, prices held steady just above 3 month lows near $1090 following last week's impressive fall, driven by rate hike expectations and the wickedly surprising NFP report. The report, along with testimony from Janet Yellen and other economic data has strengthened the dollar as expected, sending the DXY to a 7 month high just below the historic high near $100. With rate hikes on the table, economic growth expected and still no obvious signs of inflation my outlook for gold remains bearish and will likely remain so as long as data points to rate hikes, economic growth and stronger dollar. Support is near $1075 but a break below this level could see it move significantly lower, and fast.

The gold miners also held fairly steady in today's action. The Gold Miners ETF GDX gained just over 2.25% after testing a new one month low, the candle however represents sideways movemet in the market more so than it does a real gain. The indicators remain bearish and weak, with downside momentum rising and at the strongest levels since last March. Current downside target is $13 with chance for a break below this level should support be broken.


In The News, Story Stocks and Earnings

There were quite a few earnings reports today but M&A activity overshadowed them. One of the earliest reported buy-outs was Weyerhausers deal to merge with Plum Creek Timber. Plum Creek shareholders will receive shares of the new company, retaining the Weyerhauser name, at the rate of 1.6 for each share of Plum Creek. The deal will create a combined company worth more than $23 billion and the largest privat holder of timberland in NA. Shares of Weyerhauser fell nearly -6% at the open and closed with a loss of -3% on the news while those of Plum Creek jumped nearly 18%.


Shares of Norfolk Southern were halted for a brief time in today's session following word of a takeover bid from Canadian Pacific. There has been no official word from either company at this time but shares of both stocks surged on the rumor. CP did release a statement saying there was no material news at this time and that they don't comment on rumors. Shares of CP gained about 5% shares of NSC gained about 10%.


Shares of Dean Foods, leading processor of milk and dairy products, surged in early morning trading after reporting earnings that beat estimates. The company reported adjusted earnings of $0.30, reversing a loss in the year ago period, and raised guidance for the next quarter. The stock opened with a gain near 5% and traded higher from there, closing with a gain near 7.5%. The stock is now trading near the top of its 12 month range but remains down nearly -80% from its all time high, set in 2007.


Priceline reported earnings in the pre-opening session as well but did not impress investors. The company reported a 7% gain in bookings with a 12% gain in profits but still fell short of consensus and lowered guidance for the next quarter. The company posted substantial gains in international business but was hurt by strong dollar exhange rates. Shares fell nearly -10% during the sesssion resulting in a loss of nearly $140 from the all-time high, set last week.


The Indices

The market sold off today. Rate hike fears may have been the cause but with so many other things for traders to focus on today it is hard to say. Regardless the reason the decline was led by the NASDAQ Composite which closed with a loss just over -1%. The tech heavy index set a new one week low in today's session but did not cross below the 5,050 support line (the 2,000 all time high). The indicators remain bullish although momentum is rapidly declining and stochastic is showing some near term weakness. The index could pull back to the 5,050 level over the next few days with a chance of breaking it and moving down to the short term moving average near the 5,000 level.


The second largest declining index in today's session was the Dow Jones Industrial Average which lost exactly -1%. The blue chips, as a group, were led lower by IBM which lost more than -2.10%, perhaps driven by Warren Buffet revelation Berkshire Hathaway has lost about $2 billion on its investment in the company. Whatever the spark, the blue chips fell and are approaching a near term support target near the 17,600 level. The indicators remain bullish, but like the NASDAQ Composite show declining momentum and near term weakness. The index could retreat the rest of the way to first support target with a chance of breaking through and moving down to the 17,500 level and the short term moving average. The short term trend is still up and the indicators show this most recent upswing in momentum is strong relative to the past 12 months so this dip appears to be another buying opportunity on the march to retest the all-time highs.


The S&P 500 made the third largest decline, just under -1.0% and coming to rest on the 2,075 suppot line. The support line was broken on an intraday basis but late day buying helped to bring it back above. The indicators here are also showing near term weakness and rapidly declining momentum so further testing of support could happen. A move below the current level could take the index down to the 2,050 level and the short term moving average.


The Dow Jones Transportation Average made the smallest decline, only -0.32%, possibly supported by merger rumors between Norfolk Southern and Canadian Pacific. The transports remain the laggard in relation to the October/November rally, today's action testing resistance near 8,275. The indicators here are very non-commital. Momentum has been trending near 0 for the last week, stochastic is trending near the middle of the range, both showing an index actively traded without underlying direction. As of now it looks like the short term moving average is supporting the index and holding it up against my resistance line. A break of either of these lines could result in swift movement. Upside target is near 8,500, downside target is near 7,750. As I mentioned earlier, 4th quarter earnings expectations could weaken the index in the near to short term, with long term expectations for economic and earnings growth providing support.


It really should not be any suprise to see the indices selling off as they did today. The sell-off was sharp, but not overly strong, and is more likely than not profit taking following the 16% (SPX) rally we have seen since the end of September. Unless some other negative factor emerges I see this is yet another buyable dip and will be looking for signs of support throughout the week.

Earnings are likely not going to be a big catalyst this week, there are some big names but not many considering that more than 85% of the S&P and a comparable number of Dow stocks have already reported. What could impact this week's trading is economic data. We'll get more labor data as well as reads on inflation, the consumer and inventories, all of which tie into growth expectatoins, earnings expectations and Fed rate hikes. I remain a bull, closely watching my stop levels and looking to buy on the dip.

Until then, remember the trend!

Thomas Hughes