Trading was light as the market waits for the results to Cyber Monday, a host of monthly macroeconomic data and a policy decision from the ECB.

Introduction

Trading was light today as the market waits for the results of Cyber Monday. By all accounts it was a strong one but so far there is little hard data. While Cyber Monday is an important, attention may actually be more focused on events scheduled later in the week. It is once again the turn of a new month so there is a full calendar of economic releases including the NFP, several speeches from FOMC members and a policy meeting from the ECB.

Global markets began the week mixed. Asian indices closed mostly lower but losses were limited. The Nikkei led with a decline of -0.69% followed by -0.39% for the Heng Seng, the mainland Shanghai index made a gain near 0.25%. Mainland shares were boosted by the financial sector and possible acceptance of the yuan as a reserve currency which the IMF confirmed later in the day. Weighting for the yuan in the SDR basket is just over 10% compared to 41.7% for the the dollar and over 30% for the euro.

Trading in European markets was positive and light, led by the DAX gain of 0.8%, a new three month high. The gains were made on hopes the ECB will increase and expand its QE efforts at the meeting on Thursday, something the ECB and Mario Draghi have indicated likely to happen.

Market Statistics

The FOMC is not out of the picture this week. First, it announced today it would adopt new emergency lending rules. The rules include no lending to individual companies, penalty rates for emergency loans and no aid for insolvent companies. This means only broad based sector wide assistance and no aid to failing companies, essentially excluding companies like Bear Stearns and AIG from bail-out.

Futures were indicating a positive open all morning. The S&P 500 was indicated to open with gains near 6 points in the earliest trading but this moderated going into the opening bell and after the release of Chicago PMI. Needless to say, PMI was a miss. Trading got off to a positive start, the indices gained a few points right after the open but trading was choppy and the gains did not hold. By 10AM the indices were all in negative territory.

Losses were minimal for most of the day. Early morning through lunch time say the S&P range between 0.00% and -0.025%. By noon the indices were setting new lows, but only just below the morning range, and then held those lows until mid afternoon. Around 2PM a rally took the indices back up to touch break even levels but it did not last. Selling followed and took them back down to the low of the day and lower, where they stayed until the close of the regular session.

Economic Calendar

The Economy

Chicago PMI was released at 9:45AM and came in lighter than expected. Analysts had been expecting a decline but for manufacturing to remain at or slightly above the expansionary 50 level. The actual results were 48.7 and driven largely by a sharp decline in new orders. This is a decline of -7.5 points from last months reading of 56.2 and the 6th month this year of contraction in this index. Employment remains steady and slightly above 50.

Pending Home Sales came out at 10AM and was also weaker than expected at +0.2%. Analysts had been expecting 1.5%. Low inventory and rising prices are to blame. Despite the weak showing this month pending sales, a forward looking indicator, is 3.9% above last year at this time and has been trending higher for 14 months straight. NAR economist Lawrence Yun sees a combination of factors at play; on one side low inventory is driving up prices and hurting demand in some areas while ongoing health in labor is supporting the market overall. He expects sales growth to continue in 2016 but moderate to a pace near 3% unless new supply hits the market.

Moody's Survey Of Business Confidence fell a full point to 33.4 and a new long term low. Mr. Zandi reports that instability in global financial markets and the recent attacks in Paris have taken their toll on sentiment, particularly in the US. The caveat is that this week's reading is affected by a low response rate due to last week's holiday. Concern for current conditions weighs heaviest on the reading while outlook for next year is brighter.


According to FactSet 98% of the S&P has reported earnings for the 3rd quarter with the remaining 2% scattered over the next couple of weeks. Of those reporting 74% have beaten earnings expectations while only 45% have beaten on the revenue side. The blended rate for 3rd quarter earnings growth is now -1.3% with positive growth not expected until the 1st quarter of next year. The energy sector led the decline with growth of -56.8%; ex-energy S&P 500 earnings growth jumps to 5.7%.

Fourth quarter expectations have declined again. All index growth is now estimated at -4.2%, down -0.2% from last week and down more than 6% from earlier in the year. Factoring in the 4% improvement in the blended growth rate that we can expect due to long running averages brings growth up to only -0.2%. Ex-energy 4th quarter growth expectations move up to 1.5%.

Growth is expected to return in the first quarter of 2016 and gain strength throughout the year. First quarter is expected to come in at 2.1% and average 7.8% for the year. Full year expectations have come down further, primarily due to declining expectations in the energy sector. Earnings growth in the energy sector is now barely above 0%, down substantially from earlier projections in excess of +45%.

There is a lot of data to come out this week. Tomorrow is Auto/Truck Sales, ISM Manufacturing. Wednesday is ADP Employmnent in the morning with the Fed Beige Book later that afternoon. Thursday is weekly jobless claims along with the Challenger report on planned lay-offs, Factory Orders and ISM Services. Friday wraps up the week with NFP, Unemployment and hourly earnings. The data will heavily influence the upcoming FOMC decision, the stronger the data the more likely the FOMC is to raise rates. The NFP is expected to come in around 200K, down from last months 271K and consistent with the recovery. Last month's number was freakishly strong so there could be significant revisions to color the headline number as well.

The Oil Index

Oil prices tried to rally today but were not able to hold gains. The OPEC meeting has raised some hope that the cartel will make moves to support prices but there is little sign that will happen. If anything, the members all seem bent on pumping as much as possible even with the Saudi's pledging a willingness to support prices. The meeting could result in changes to policy but until production and supply levels are more in line with demand prices are likely to stay low. WTI gained as much as 3.5% intraday but fell back to break even levels by settlement time.

The Oil Index gained 0.75% in today's session. The index created a small bodied candle sitting on the short term moving average and continues recent the recent sideways trend. The index appears to be hanging between support and resistance at 1,150 and 1,250 with no real indication of direction. The indicators are mixed but largely consistent with a range bound index, underlying direction will be driven by oil prices; oil prices drive earnings in the sector and earnings expectations are poor. If oil falls further, or simply trends near the recent lows, expectations for next years growth could easily turn negative.


The Gold Index

Gold prices rebound from the 6 year low set last week. Gold gained as much as $10, about 0.85%, intraday but closed below $1075. The metal is getting hurt by rising dollar values and is likely to move lower should the ECB act as expected, weakening the euro and strengthening the dollar. There is economic data to consider as well. This week's data is likely to influence FOMC outlook and could help cement rate hike expectations.

The gold miners got a lift from gold prices but remain near recent lows. The Gold Miners ETF GDX gained just over 2% in a move that keeps the ETF near its long term low. The ETF has been trending sideways for nearly a month, while gold prices are hitting 6 year lows, and could be getting ready for another test of support at the $13 level. The indicators have rolled into a bullish crossover but momentum is weak and more consistent with consolidation within a down trend than a reversal or bounce. I remain bearish on gold and the GDX.


In The News, Story Stocks and Earnings

The Dollar Index rose today on ECB and FOMC expectations. The ECB is expected to loosen policy, the FOMC expected to tighten, moves that are both supporting dollar value. Today's move takes the index to a new 8 month high and just shy of the all time high set last March. The indicators are mixed, the index could have reached the top of the range, but there is some underlying strength in the move so a break out is not out of the question.


Target made Cyber Monday headlines, for having its website crash. The website received so much traffic it caused delays for many users and even shut down for about 20 minutes. This is not the first website crash of the season or even the only one today. Nieman Marcus crashed on Black Friday and PayPal had troubles today too, both signs of increase on line traffic and possible trouble for brick and mortar locations. Despite the problems many retailers are reporting that sales have been good the entire weekend and upped the chances for a strong consumer holiday season.

The XRT Retails SPDR lost -2.17% in today's session and fell back below the short term moving average. The indicators are bullish, consistent with the ETF's bounce from support, but weakening in the near term and consistent with a retest of support. First downside target is near $44 with a pull back to long term support near $42 likely if Black Friday/Cyber Monday numbers do not match expectations. The sector has been in rotation the last few months and could continue as investors size up which stores, and which types of retailers, are going to profit in 2016.


FitBit received an upgrade today in the wake of positive sales reports from Target and Best Buy. Both retailers report strong sales of FitBit and other wearable technology. Target says FitBit is one of their most popular items, BestBuy that sales of wearables are double their levels of last year. Mathew McClintock of Barclays upgraded the stock to outperform saying the recent slide was unjustified and that holiday sales would be a meaningful catalyst. Shares of the stock gained more than 5% in the pre-market session and closed the day with a gain of 3.5%.


Shoe Carnival reported before the bell. The discount shoe retailer reported comp store sales of 6% but earnings and revenue slightly below estimates. This wouldn't have been a problem I think except that they also lowered guidance to a range of $1.38 to $1.43, below the previous range and consensus estimate of $1.47. Comp sales are also expected to come in light next year at 3%. Shares of the stock opened higher, touched the short term moving average, and then sold off hard to close with a loss near -3%.


The Indices

The indices fell in today's action but most were able to close the month with gains. While most losses were minimal the Dow Jones Transportation Average posted a more substantial decline, -1.39%. The index has continued its fall from resistance which it began last week and has today crossed beneath the short term moving average. The indicators are pointing lower in the very near term but remain very weak and consistent with sideways range bound trading in the short. The index could continue to fall with downside target near 8,000 and then 7,750 if the first target does not hold.


The S&P 500 made the next largest decline but less than half that posted by the transports, only -0.46%. The broad market created a black bodied candle, but a relatively small one, that fell back toward potential support near 2,080. This support level looks good for now but may be tested in the near term. The indicators remain mixed but consistent with a trend following bounce; stochastic is pointing higher but momentum has yet to confirm. Upside target is the current all time high, first target for support is just below today's closing level near 2,080 and then below that along the short term moving average.


The Dow Jones Industrial Average made the third largest decline in today's session, -0.44%. The blue chips also created a small black bodied candle in a move that may be seeking support. First target for support is near 17,600 and the short term moving average from which the index has recently bounced. The near and long term trends remain bullish, short term trends are range-bound/sideways, so it looks likely the index will bounce from the moving average again with upside targets near 18,000 and 18,250.


The NASDAQ Composite made the smallest decline in today's session, only -0.37%. The tech heavy index created a very small black candle that while not bullish, does not look over bearish either. The indicators are mixed, like with the other indices, but largely consistent with the trend following rally we have seen over the last couple of months. Today's action looks more like a pause in a rally, possibly precursor to a small pull back, but not the start of a major sell-off or correction. First target for support is near 5,050 and the short term moving average.


Over the past three months the market has corrected, bottomed, bounced and rallied. The indices, except for the transports, are trading near their all time highs and above long term trend lines. A test of the highs seems likely but is by no means guaranteed; outlook is positive for next year, no reason to sell off, but nearer term events have the market wary and could cause further consolidation and/or a drop to firmer support levels. Despite the concerns, assuming that no other hurdles appear, outlook for next year is still good. Economic recovery is expected to continue and earnings growth is expected to return. With this in mind I remain a bull and a buyer of dips. In the meantime I am keeping a close eye on my positions and eagerly awaiting this weeks events. My top picks for possible market movers include the Fed's Beige Book, the ECB meeting and the NFP release on Friday. . . and the OPEC meeting, which could have serious impact on oil prices.

If the stars are in proper alignment a vote of confidence from the FOMC, a dose of QE from the ECB and a healthy jobs number could be the spark that starts this years Santa Rally.

Until then, remember the trend!

Thomas Hughes

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