No follow through to Friday's job's driven rally; oil prices fall to new lows and the market slides.

Introduction

Friday's jobs number and revisions sparked a huge rally on Friday. This morning it looked as if there may be some follow through but plunging oil prices hit the oil sector and dragged the market lower. OPEC's lack of support for prices, as well as a de facto break-down of the cartel, sent Brent to 7 year lows, WTI crashing more than -6.0%, the oil sector falling by nearly -5% and the broad market down by nearly -1%.

Asian indices were largely unaffected by oil's decline as they closed before the slide began. The Nikkei gained nearly 1% while Chinese indices were flat to slightly positive; traders in both region cautious ahead of data due out later in the week. European indices were mostly higher despite the fall in oil prices. The DAX gained over 1.5% followed by a near 1.25% gain for the French CAC, both driven by ECB QE and US economic strength.

Market Statistics

Futures trading indicated a positive open during the earliest portion of the pre-market session but turned negative soon after 8AM. There was no sharp sell-off, just a mild -2 for SPX, but this level held until the open. At the open the indices began to fall, not hard or fast just a steady selling that carried them down to a morning low just over -1%. This low held for the day but was tested several times. Late afternoon saw the bulls stage a rally from support levels carrying them up off of their lows before the close of the day.

Economic Calendar

The Economy

Consumer credit levels for Q3 were released this morning. According to the Federal Reserve outstanding consumer credit fell -1% to 7.5%. On a month to month basis credit levels rose to 10% in the September, up 4.4% from August.

Moody's Survey Of Business Confidence declined by another full point this week, to 33.4 and a new low. This is the 13th week of decline since hitting a peak in late summer. According to Mark Zandi the decline isdriven by weak global economies and ongoing volatility in the financial markets. Outlook for current conditions has been hit the worst, led by businesses in North America. Prospects for the future are more optimistic. Despite the drop business sentiment remains high by historic standards.


Tomorrow only one economic release, the JOLTs report. JOLTs has been trending near record highs, a decline could indicate tightening labor market conditions. The quits rate will also be important, it has also been trending at high levels indicative of labor market confidence.

Wednesday is WholeSale Inventories, Thursday is weekly jobless claims and import/export prices. Friday is the heaviest of the week in terms of economic reports including PPI, Retail Sales, Business Inventories and Michigan Sentiment.

There are still one or two S&P 500 companies to report 3rd quarter earnings but focus has shifted to the 4th quarter earnings season. The estimated rate of growth for the 4th quarter has fallen again, by -0.1% to -4.3% and is expected to remain negative through the end of the season. Based on the four year average we can expect this to rise by roughly 4% for a final earnings growth near -0.5%. Energy is going to be the largest contributor to declining growth and is expected to post earnings decline of -65%. Ex-energy growth projections jump to 1.4%. Full year 2015 earnings growth is expected to be -0.5%, down from 1%-2% earlier in the year, with 2016 projections falling as well.

Full year 2016 estimates have risen from 7.8% to 8.1%. This is the first increase in full year estimates in nearly 2 months.

The Oil Index

Oil was the story of the day. Brent and WTI had their worst days in what may be years as support fled the market. Supply is high and demand is low, and OPEC did nothing about it, so there is little reason to get bullish on oil. WTI fell more than -6%, breaking through $40, $39 and $38 to settle near $37.50; Brent is a hairs breadth away from touching $40, their lowest levels since early 2009. Today's move could lead to further downside with possible targets as low as $30 for WTI, unless of course some sign of shrinking supply or increasing demand enters the market.

The oil sector got hit hard by plunging oil prices; Exxon, Chevron and the other top producers falling as much as -5%. The Oil Index fell -5% in a move that breaches support and looks set to move lower. Today's move also brings a possible H&S shoulders into play, with the early November rally as head. The indicators are pointing lower, in tandem with the move, and pointing lower so a move to long term support is very likely. Downside target is now 1,025 with a possible consolidation or test of resistance happening first. The market may take a day or more to digest new, low, oil prices, a time in which prices for both oil and the oil sector could experience increased volatility.


The Gold Index

Gold prices fell today as the dollar regained some lost ground, -1.25% or $13.00 . The dollar, it had a wild reaction to the ECB's new QE. The news was not quite as good as expected, sparked massive short covering in the euro and selling in the DXY, but did not change the fundamental picture. The ECB is still easing, the FOMC is still expected to raise rates, labor market remain steady/healthy, there is little sign of inflation and all putting gold under pressure. That pressure was seen today and is not expected to let up any time soon, new estimates put targets $100 lower and more. On the Fed front, Lockhart made comments this morning to the effect that conditions were right and the market was ready for a rate hike.

The gold miners of course did not perform well in the face of falling gold prices. The Gold Miners ETF fell -4.8%, reversing all of Friday's gains and dropping below the short term moving average. The indicators are bullish and could lead the ETF higher but I don't think so, not without a change in trend for gold. Momentum is peaking in the near term, indicative of resistance near the $14.75 level, and could easily lead to a retest of support. Stochastic is still moving higher but below the upper signal line, weak and softening. Support is near $13.00 with a possible break below should gold prices set a new low.


In The News, Story Stocks and Earnings

Chipotle is getting rocked by the e-coli scandal. The chain failed to contain the outbreak and it has now affected full year guidance. The company issued a warning over the weekend saying investors should expect a same store sales drop and rescinding their full year guidance. The flip-side is that several analysts have maintained their long term outlook with the belief full year 2016 targets will be met. The company's attitude and efforts to correct the issue have been cited as reasons to believe it will be able to heal it's image. Today the stock fell nearly -6% in the pre-market and then regained most of the loss during the open session.


GE announced it has terminated its proposed deal to sell part of its appliance unit to Electrolux. The deal was cut off by GE because of hurdles put forth by regulators citing anti-trust issues. GE will get a $175 million break-up fee the two had already agreed to and said the unit was operating well. GE will also seek other buyers. The stock barely reacted, falling -0.75% within a congestion band at the 6 year high.


Newel Rubbermaid and Jarden announced an intended merger late in the day. Both stocks jumped on the news, nearly 10% each. The businesses are about equal size, near $11 billion market cap, and would result in about $14 in annual sales.


The gun manufacturers did very well today, bucking the sell-off and hitting new highs in some cases. Smith & Wesson was one. Today's move is no doubt sparked by the Presidents call to disarm America, not going to happen, and carried it up over 8% and within 10% of the all time high. The company is reporting earnings later this week and has a history of positive upside surprise.


The Indices

The indices fell today but did not close at their lows. Today's declines were led by the Dow Jones Transportation Index which closed with a loss of -0.88%. The transports appear to be moving down to the lower limit of the recent trading range near 7,750. The indicators are consistent with such a move, both pointing to lower prices but neither showing much strength in the move. My first target may not hold, if broken next target is 7,500 and the August low.


The next largest decline was seen in the NASDAQ Composite which lost -0.79%. Today's move retreated from the Friday high to test support just above the short term moving average and the 5,100 level. The indicators are pointing lower so support could be tested again, possibly as low as 5,050 or 5,000, along the long term trend line. While bearish, the indicators are weakly so and consistent with consolidation/pull-back within a greater up trend.


The next largest decline was the -0.7% drop posted by the S&P 500. The broad market index made lows a little more than -1% for the day but closed up off of those lows, and above the short term 30 day moving average. Today's action appears to be further consolidation within the 2,100 – 2,200 range, a wind that is likely focused on next week's FOMC meeting. The indicators are pointing lower in the near term, suggesting support could be tested again, but consistent with a rising market in the short to long term. Support is currently at the moving average but could move down to 2,050 or 2,025 and the up trend line.


The Dow Jones Industrial Average made the smallest decline in today's session, only -0.66%. The blue chips tested support along moving average and found at least near term support. The index was able to bounce and move up off of today's lows but the indicators remain mixed. Both MACD and stochastic are indicating lower prices in the near term, suggesting a further test of support, but are also both consistent with support at/near current levels in the short to long term.


The markets have been throwing off mixed signals the last couple of weeks and months. There have been a lot of causes; China, Russia, ISIS, oil, negative earnings growth, FOMC outlook and mixed economic data to say the least. All this news, fear and reaction has caused the market to wind up and it looks like once again it is focused on the FOMC, which happens to be options expiration week as well.

Underneath it all the long term economic trends and earnings outlook has remained positive so I remain bullish. The FOMC may spook the market with a rate hike next week, it's really hard to say what is going to happen or if they even will raise rates but any dips remain buying opportunities. Lockhart seems to think the market is prepared for a hike and so do I. If so it could spark a rally and that is the direction I am leaning. After all, it will be just the first rate hike of a cycle, not the last, and indicative of economic health.

Until then, remember the trend!

Thomas Hughes

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