Equity markets bounced back today but remained focused on next week's FOMC meeting.

Introduction

The equity markets tried to bounce back today but focus remains centered on next week's FOMC meeting. There is an overwhelming expectation we will get a hike. The CME's Fed Watch Tool shows an 85% chance for a 50 basis point increase.

Global markets remain under pressure. Anticipation for next week's FOMC meeting, plunging oil prices and weak data are to blame. Asian indices closed mostly lower, led by the Nikkei's -1.3% decline. European indices were mixed but closed mostly higher after a late day rally in response to strength in our indices. The energy sector was one of today's leaders but the snap back is probably going to be short lived; oil prices fell to hit a new low below $47. Also in the news, three central banks made no changes to policy; the Bank Of Korea, the Bank of England and the Swiss National Bank.

Market Statistics

Futures trading indicated a positive open all morning, driven by anticipated strength in the energy sector. A new report from OPEC says production from non-OPEC nations will contract in 2016 while demand increases. Their report shows 2016 supply shrinking by 380,000 BPD after rising by 1 million BPD in 2015 so I don't really see this as an overly bullish forecast.

The indices opened flat and after a few minutes testing support began to rise. The first rally added roughly 0.5% to them but gains did not last, by 9:50 most indices had fallen back to break even levels. Another test of support ensued, followed by another rally. The second rally of the day had a little more strength and took the indices up by a full percent or more in some cases. The morning peak was reached at 10:44AM at which time the market began a slow descent back to earlier support.

A third rally which began during the lunch hour was the strongest of all. It took the indices to highs in excess of 1% but it to reached a peak that was unsustainable. By 2:45 the indices were once again retreating from a high and headed back down to support levels.

Economic Calendar

The Economy

There was not a lot of data today, only one report other than the weekly jobless claims. Initial claims rose 13,000 to 282,000 from last week's not revised figures. This gain is not surprising, we have entered a period of increased lay-off's due to end of the year restructuring. What we have to watch now is how high and how long the increase lasts, and if there is pass-through to the longer term unemployment figures. Until then, initial claims are off their long term lows but remain low by historic standards and consistent with labor market health.

On a not adjusted basis claims rose by 46.4% versus a gain of 39.5% as predicted by the seasonal factors. Year over year not adjusted claims are down only -1%. This is a mild concern due to this figure running at a rate over -5% most of the year. However, until a noticeable shift in trend occurs this figure is also running near historic low levels and consistent with labor market health. Wisconsin and Ohio had the largest increases in new initial claims, + 4,677 and + 2,212, while California and Texas had the largest declines, -20,308 and -7,225.


Continuing claims rose by 82,000 to hit 2.243 million from last week's not revised figure. The four week moving average of claims rose by 16,500 and at a one month high. This week's rise in claims is likely due to seasonal factors as mentioned before. Despite the rise continuing claims remain near the historic low, where they have been trending for over 8 months, and consistent with labor market health.

Total claims did not rise this week. Total claims fell by -124,632 to hit 1.934. This is a one month low and just off the long term low set two months ago. Year over year total claims are down -10% and consistent with ongoing health and recovery in the labor market.


Import and export fell in November. The headline decline in import prices was -0.4%, the decline in export prices was -0.6%. Import prices were driven by falling fuel prices led by gasoline's 2.5% decline. Ex-energy import prices fell -0.2%. Export price declines occurred in both agricultural and non agricultural products. Ex-agriculture prices fell -06%. We have now had declining prices for over 12 months. Import prices are down -9.4% and export prices are down -6.3%.

Tomorrow be on the look out for PPI, Retail Sales, Business Inventory and Michigan Sentiment. PPI is expected to remain steady from last month with a gain of 0.1%. Business inventories are also expected to rise by about 0.1%. Retail sales are expected to grow by a slightly faster pace of 0.3% and will be closely watched for signs of seasonal strength. Michigan sentiment is expected to remain strong but decline to 91.6 from just over 93.

Next week the biggest economic event will be the FOMC meeting. Exactly one week from today will be the day after the Fed did or didn't raise rates at the December meeting. We've been building up to it for so long it is most likely factored into the market, failing to raise rates may cause a bigger stir than raising them.

The Oil Index

Oil prices continue to remain under pressure. OPEC's view of production and demand for next year did little to alter current conditions. Supply remains high, demand remains low. WTI fell in today's session, losing close to -1% and setting a new low near $36.75. There is reason to believe that supply will tighten, or begin to tighten, in 2016 but as of yet there is not much sign of it. Until then I expect oil prices are likely to remain low or move lower.

The energy sector managed to stage a rally despite falling oil prices. The Oil Index itself gaining more than 1% intraday. However, today's action appears to be a test of resistance within a near term down trend rather than a reversal in prices. The indicators remain weak, pointing lower and convergent with a test of the recently set low if not a lower low. Resistance is the 61.8% retracement level near 1,120. Downside target is the September low near 1,025.


The Gold Index

Gold prices are holding steady near recent lows, today's action was choppy and shed $5 to settle near $1070. The Fed is the focus, and what may happen to the dollar after the meeting. The dollar has been falling since the ECB failed to fulfill market expectations and could continue if the Fed does the same. The risk with gold is that the Fed will not meet or exceed expectations and spark a short covering rally similar to the one started by the ECB two weeks ago.

The Gold Miners ETF GDX gained about 0.75% on an intraday basis but fell into negative territory before the close of trading. Today's candle is sitting on the short term moving average which has been support the past 5 sessions. The ETF appears to want to move higher, perhaps anticipating a rally in gold, but is also still below resistance so a break out is needed to get bullish.

The indicators are bullish but MACD is declining and stochastic is rolling over, forming a crossover in line with the underlying trend, so it looks like resistance could be strong. Resistance is near $15 with support at the short term moving average. A break below the moving average has a target near the long term low near $13. A break above resistance could take the ETF up to $17. I remain bearish on gold but wary of the FOMC and how the market will react to what they do.


In The News, Story Stocks and Earnings

The dollar regained some ground today but remains near the one month low. The ECB caused a rebalancing of expectations and a sharp drop in the Dollar Index but it's policy remains divergent from the FOMC, which has been strengthening the dollar. So long as the ECB is dovish and the Fed is hawkish the dollar should gain ground over the euro. Today's action was bullish but below a previous resistance level so appears to be heading lower in the near term; the indicators are both bearish and convergent with near term weakness. Resistance is near $98.50 and the short term moving average with downside target near $96. The caveat, with the FOMC expected to raise rates next week any dip over the next few days is likely a buying opportunity.


Atlassian Corporation went public today in what may be the last IPO of the year. The company, founded 2002 in Sydney, Australia, sells software and services intended to help collaboration and team based projects. Shares priced above the high end of the forecast range and then opened with a gain near 30% on top of that. Shares sold off from their early high but managed to hold steady near $27 until a late day rally took them back up to a new high. Fist day gains; 32%.


Healthcare is expected to be one of our leaders in terms of earnings growth in the 4th quarter. As a sector it is expected to post earnings growth near 5%. The last two quarters the sector has beaten earnings projections and more than doubled growth expectations. Healthcare was one of the strongest sectors in today's session. The Healthcare Sector SPDR gained over 1.25% but remains in the middle of a one month trading range . Today's action moved the ETF above the 30 day moving average but indicators remain weak. Any upside movement will meet resistance with first target near $73.25


Seritage Growth Properties got a big boost this morning when Warren Buffet disclosed a personal stake in the company. This company is the spin-off of more than 200 top performing Sears and K-Mart stores and operated as a REIT. Mr. Buffet's stake is worth a little more than 8.02% of the company and sparked a 12% surge in share prices.


Adobe Systems reported after the bell and blew away expectations. The company was projected to earn about $0.45 per share but came in at a whopping $0.62. Results are a quarterly record and a 22% gain over last year. Looking forward company guidance is for full year 2016 earnings of $2.70, 9 cents below consensus. Shares of the stock traded down by -0.6% during the open session and then jumped 4% after the news was released. If the after hours gains hold into tomorrow the stock will open at a new all time high.


The Indices

The indices tried three times to rally and three times fell back to support at or just above yesterday's closing prices. Each time the rally moved a little higher and each pull back support was found a little higher but nevertheless the indices did not close near the high of the day. Today's action was led by the Dow Jones Transportation Average which closed with a gain of 0.60%. The index may have led today's gains but it is trading below my first support target and indicated lower. MACD may have peaked but remains strong relative to the current down draft, stochastic is moving lower in both the near and short term, so further downside may be muted. Next target is just below yesterday's candle near 7,500 and the long term low.


The next biggest gainer in today's session was the Dow Jones Industrial Average. The blue chips attempted to move up from support levels but was capped by the short term moving average. Today's candle is smallish with a long upper shadow, indicative of resistance along the moving average. The indicators are bearish and pointing lower but momentum is weak and stochastic is trending in the middle of the range so support range bound trading rather than market reversal. Any further drop ahead of the FOMC meeting has a first support target near 17,225. A break below this level could take it down to 17,000 and the long term up trend line.


The NASDAQ Composite made the third largest gains in today's session, 0.44%. The tech heavy index is trading just above the long term up trend line but failed to break above the short term moving average. Today's action was not strong or overly significant but the indicators remain bearish so near term weakness could persist. Support is likely to be found just below today's candle, along the long term trend line near 5,000.


The S&P 500 made the smallest gains in today's session, only 0.23%. The broad market tried hard to move up off of support levels but was halted at the short term moving average. Today's action appears to be yet another within a recent range and consolidation pattern with the FOMC meeting the most obvious focal point. The indicators remain bearish, if weakly so, so further testing of support could come. If the index moves lower, below 2,050, next target for support is the long term trend line near 2,025. The long term trend remains up so any dip is a potential buying opportunity.


Today's action is more churn. The market is in sector rotation ahead of an important FOMC meeting, and ahead of another round of corporate earnings. This churn may continue into the next few weeks but in my view is only leading to a continuation of the bull market. Long term economic trends are positive as is outlook for corporate earnings, a combination that usually leads to higher prices for equities. Near term fears and concerns may be clouding the view but in the end nothing more than the proverbial wall of worry.

Earnings season poses a bit of a risk. Earnings growth is expected to be negative again, before turning positive in the 1st quarter of 2016, and could cause the market to seek strong support levels before moving higher.

The FOMC meeting poses the biggest risk in the near term and could spark some big moves next week. Don't forget next week is options expiration, a fact that will likely add volatility to the market. I remain bullish and a buyer of dips, cautiously waiting for the FOMC.

Until then, remember the trend!

Thomas Hughes

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