Global markets prove resilient in the wake of last week's Paris terror attacks.

Introduction

The global markets proved resilient in the wake of last week's terror attacks. What might have become a global rout in other times turned into a rally which pushed US markets up more than 1%. Asian indices were the only to post real losses, greater than -1%, and these largely in knee-jerk reaction to the news. European indices fell at their open, then regained the losses and wavered just above break even for the rest of the day.

Early trading here at home was steady, there was no indication of the rally we would see later in the day. Futures indicated a mildly positive open for most of the morning but weakened after the Empire Manufacturing data. The survey shows manufacturing declined in the region along with some deterioration in labor. There was a little business news in the early hours but focus was firmly on events in Paris. One bit, Marriott's purchase of Starwood hotels, is noteworthy if only because many of the newly acquired hotels are in the EU.

Market Statistics

Our markets opened with small losses, in the range of -0.1%, and did not fall much further. Support was present just below the opening levels and began to lift the market within the first two minutes of trading. There was no surge of bullish behavior, just a steady stream of buying that kept the indices holding steady or slightly above last week's closing prices. This steady sideways action carried through into the lunch hour when something changed.

Starting about 11:45AM the market began to rally. All the major indices picked up a bid and began a steady march higher. The rally continued into the end of the day, leaving the indices at the days highest levels.

Economic Calendar

The Economy

Very little economic data today, one release, and it is not positive. The Empire State Survey Of Manufacturing came in at a disappointing -10.7. This is down from last month's -14 but slightly worse than the expected -9. Within the report new orders, shipping and labor all showed contraction, if at a slower pace than before. Labor remains the biggest concern, forward outlook is positive but tepid at best.

Moody's Survey Of Business Confidence fell again, making the 11th straight week of decline. The survey reading remains high by historical comparisons but it as at a new low relative to the recovery. The four week moving average is now at levels not seen since spring of 2014. According to Mark Zandi slowing global economies and volatility in the financial market is to blame.


According to Factset 463, 92.6%, of the S&P 500 has reported earnings so far this season. There are 16 scheduled for this week, 2 of which are Dow components. The blended rate for earnings growth is now -1.8%. This is an improvement of -0.1% from last week and -3.2% from the start of the season, driven by upside surprises in 8 of the 10 sectors. We may see the blended rate come up a little more over the next week or two but it will likely remain below 0% and probably below -1% for the quarter. This will make it the first back to back quarter of earnings decline since 2009.

Estimates for the 4th quarter have also risen since last week. The gain is small, from -3.8% to -3.7%, but a move in the right direction. So far 63 companies have issued negative guidance for the quarter. Full year 2015 earnings growth is projected to come in just below 0 at -0.3% but this will likely rise by the end of the year. We can expect 4th quarter earnings to come in near 0% by end of the season which will lift full year totals into growth, if barely. 2016 growth expectations remain strong at 8.2% but have fallen again.

Energy continues to be the laggard and doing the most damage to headline earnings growth. The energy sector is posting a decline near -57% for the 3rd quarter and is expected to post declines greater than -64% for the 4th quarter. On an ex-energy basis third quarter growth swings into positive territory, 4.37%, and in the 4th quarter, 1.6%.

There is a lot of data due out this week, the FOMC minutes perhaps the most heavily watched. Tomorrow look out for TIC flows, CPI, Industrial Production and the Home Builder Index. Wednesday is Housing Starts and Building Permits along with the FOMC minutes. Thursday is weekly jobless claims, Philly Fed and Leading Indicators. Friday there are no releases. I am expecting to see weakness in manufacturing and possibly in industrial production with signs of strength in the housing and labor data.

President Obama gave some remarks at a press conference while at the G20 meeting. He says ground US ground troops aren't the answer in Syria and stands firm on his policy in the region. France's president Hollande spoke before both houses of parliament stating France was at war and calling for tighter border control in the EU and a coalition to fight ISIS. France is already bombing ISIS targets in Syria which could easily lead to wider spread violence in the region. Hollande also asked parliament for more authority in order to pursue the war on terror.

The Oil Index

Oil prices got a pop from global tensions in respect to the Paris bombings. The flip side is that a more focused approach to ISIS could result in a calmer region, maybe, if ISIS can be contained. Price for WTI rose nearly 1% in early trading, fell back to break even, and then rallied back to the early high and higher, closing with a gain greater than 3.5%.

It's possible that short covering played a part in today's action. Risk has reentered the oil market and could prop up prices into the short term, giving plenty of reason to close out short positions. The caution is that supply/demand imbalance remains; when fear subsides, price will retreat back to fundamentals, whatever they are at the time. At that time a reexamination of supply and demand expectations will be warranted and could change outlook. If there is no sign of supply slackening, or demand picking up the shorts could come back in force. Until then I'm fundamentally bearish, watching the bounce to see what happens.

Energy was one of today's leading sectors. The Oil Index made a nice move up, about 2%, confirming support at 1,150. This level may prove strong enough to hold but that remains to be seen, the indicators are still bearish and have only begun to show signs of support. The indicators, along with the index failure to break above the short term moving average, suggest that today's rally may be short lived if it continues at all. A break above the moving average driven by rising oil prices, if only fear induced, could take it back to retest recent highs near 1,250. A fall below support at 1,150 has a first target near 1,120 and longer term target near 1,000.


The Gold Index

Gold prices held steady in today's action. Surprisingly, there was no mass flight to safety, perhaps because the fundamental picture is still leaning toward a stronger dollar. Gold gained about a tenth of a percent in the early hours of trading and only fell from there. Price slowly slipped throughout the day, leaving gold nearly unchanged from last week's close as trader try to decide what the bombings mean for economic growth and central bank policy. The consensus; Expectations for the ECB to increase QE have risen, the reason being they will need to combat perceived slowing due to the crisis. Expectations for the FOMC to raise rates have fallen, due to risk from the global economy, but only very slightly.

Looking past the bombings there is economic data on tap this week that could move the market as well, primarily the FOMC minutes and CPI data. The minutes are important in terms of outlook and how strongly the Fed thinks we need a rate hike, the CPI because it's inflation data and could force the Fed's hand. Support is now just below $1080 with resistance possible at $1100, a break either way could see prices move $30 - $50 in the near term.

The gold miners tried to rally today but the move fizzled along with gold prices. The Gold Miners ETF created a very small black candle, another spinning top, just above the long term low and last week's closing price. The indicators are bearish and showing weakness relative to the current low, although momentum is waning in the near term, so a test of the lows still looks likely. However, the ETF may continue to consolidate over the next few days provided there is no major movement in gold prices. Support is near $13.00, first target for resistance is the short term moving average.


In The News, Story Stocks and Earnings

Early news included the purchase of Starwood hotels by Marriott. The deal is worth more than $12 billion dollars and result in a hotel chain with more than 30 brands, 5,000 hotels and over 1.1 million rooms. Immediate concerns center on how heightened alert status in Europe will impact business where many of Starwood's properties are located. Shares of both companies fell, Marriott by as much as 3.5%, but Marriott at least was able to regain the losses and more.


Department store operator Dillard's reported earnings before the opening bell and did not please investors. The company beat on earnings but reported lower than expected revenue and -4% decline in comp store sales. Sales and profits are both down from the same period last year while margins are on the rise, calling the companies ability to compete into question. Shares of the stock fell sharply in early trading, more than -7.5%, and closed at a new 4 year low.


Urban Outfitters reported after the bell but that news was overshadowed by another announcement which came before the bell. Urban Outfitters is going to buy the Vetri Family of restaurants which includes Pizzeria Vetri. It's hard to see how but Urban Outfitters CEO sees synergy in the two businesses and that they strive to bring customer satisfaction. Shares of the stock responded by shedding more than -7% during the day, and then sold off another -5% when earnings were released.


The retailers have been getting hit pretty hard over the past week. The sector is reporting much weaker than expected earnings and casting a shadow on hopes of a consumer driven recovery. Last week the Retail Sector Spyder XRT fell to 4 year lows. Today, the sector was able to bounce back from those lows but set a new low in the process. The indicators are bearish so a test of the long term support is likely, near $41.75. A break below this level could take the ETF down as much as $5 in the near to short term.


The Indices

The market rallied today but not all sectors saw gains. The airlines for one were hard pressed by fears of global violence and helped to cut gains in the transportation index. The Dow Jones Transportation Index gained only 0.52% in today's action, less than half the other major indexes, and remains below the short term moving average. The index is ranging between 7,750 and 8,250 and looks like it might pull back to test support near the lower end of it. Both indicators are pointing lower although neither are showing much strength so any downside we see from here may be minimal.


The S&P 500 made the largest gains in today's session, just under 1.5%. The broad market created a strong white candle that closed at the high of the day. The move confirms support along the long term up trend line and my support line at the 2,020 level. The indicators remain bearish so support could be tested again but for now it appears to be fairly strong. If the bounce continues next resistance is near the 2,075 level with support along the trend line should the index fall back below the moving average.


The Dow Jones Industrial Average made the second largest gain in today's session, 1.38%. The blue chips also created a strong white candle with no upper shadow. Today's move confirms support at 17,200 and could result in further upside. The indicators remain bearish, consistent with a pull back to support, but are weak and and not indicative of a deeper correction so this could be the bottom. First upside target is 17,600 with next target 18,000 should the bounce continue without consolidation.


The NASDAQ Composite made the third largest gain in today's session, 1.15%. The tech heavy index is confirming support with a strong white candle but the move was halted at the short term moving average. The indicators are bearish and pointing lower so further testing of support is possible if not likely. The caveat for the bears out there is that downside momentum is very weak and more consistent with pull back than with correction. A break below support would be bearish and could take the index down as far 4,800 in the near term and 4,500 in the short.


It really is amazing the market did not sell off today. Today's action may show a resilience in the market, or the lack of sell-off could possibly be due to the fact we have just come out of a deep, Geo-politically driven, market correction.

The attacks in France are shocking in the least and could lead to widespread conflict at worst, two situations that have sparked deep sell-offs in the past so I do not think we are out of the woods just yet. In between those two extremes are repercussions to the EU and global economy that could affect central bank policy, GDP growth and corporate earnings.

It is unclear exactly what is going to happen with ISIS and Syria. France is already bombing targets and it is certain others will get involved. The question is who. Maybe Russia,maybe us, although Obama pledges no boots on the ground and it doesn't look likely NATO will get involved. What is certain is that this subject will dominate headlines for the foreseeable future and could drive day to day volatility.

There is also economic data to consider. There is a lot of key data this week; housing, manufacturing and labor, any of which could move the market. All of which will affect FOMC rate hike speculation. Good data is good for the economy, but bad in terms of rate hikes. Bad data is bad for the economy and good in terms of rate hikes.

Options expiration may play a part in this week's action as well. The market has made some impressive moves since last expiration day that could result in unwinding of positions and market volatility later in the week.

With all this going on it may be easy to lose sight of the long term outlook, which remains positive. The near term is hazy and that is not likely to change any time soon. Looking past the current geo-political and market turmoil earnings growth returns, as does more robust GDP growth. The thing to remember is that times of uncertainty and market pull back like this are usually buying opportunities and that is what this looks like to me. I remain a bull and looking to buy on the dips.

Until then, remember the trend!

Thomas Hughes