The December FOMC meeting is at hand; Will they raise rates or not . . . and will the market be happy about it?

Introduction

Anticipation for Wednesday's FOMC meeting and wild swings in oil prices drove today's session. The indices, like oil, experienced some large swings as traders position for a possible rate hike on Wednesday and options expiration on Friday.

The global markets saw some indecision but did not have an overly large impact on our market. In Asia, Japanese and Hong Kong markets were down in the range of -1% while the mainland Shanghai index rose more than 2.5% in a day of trading that saw intraday losses greater than -5%. European indices began the day with gains but the plunge in oil sparked a sell-off that carried down by roughly -2% by days end.

Market Statistics

Futures trading indicated a sharply higher open, greater than 1%, during the earliest part of the electronic session. This did not last long as oil prices fell hard throughout the morning and pulled the trade back down to break even levels. Break even held until the opening bell at which time a half hour of churning back and forth across the 0% line was followed by a short sell-off. Lows were hit shortly after 11:30AM with losses near -0.8% for the broad market.

Going into the noon hour bulls began to regain control and sent the indices up to test their earlier high, just above last week's closing price. The highs did not hold and the market drift back to the flat line. Afternoon trading was nothing but chop and churn around break even with a late day rally which took the broad market to the highs of the day just before the close of the session.

Economic Calendar

The Economy

No economic data today. Tomorrow look out for Long Term Tic Flows, CPI, Empire Manufacturing and the NAHB Housing Market Index. Wednesday is Building Permits, Housing Starts, Industrial Production, Crude Inventory and the FOMC meeting. Thursday Initial Claims, Philly Fed and Leading Indicators and Natural Gas round out the week, there are no reports on Friday.

The event most important to the market is the FOMC meeting on Wednesday. They are largely expected to raise rates for the first time since the financial crisis and likely spark some market movement. Along with policy, indications of future increases will be very important.

Moody's Survey Of Business Confidence bounced back from a long term low this week. The index gained 0.8% to hit 33.8, snapping a three month slide that began over the summer when China's financial turmoil hit a crescendo. Despite slipping from it's high, the index is still strong relative to historical data with positive forward outlook.


According to Factset the expected rate of earnings growth for the S&P 500 in the 4th quarter is -4.4%. This is down -0.1% from last week and extends a 3 month slide in expectation. If earnings come in negative it will be the first three quarter period of negative growth since 2009. To date, 83 companies have given negative guidance, above average and possibly setting us up for another season of better than expected earnings. So far 3 companies have reported for the 4th quarter; 2 beat on earnings and 2 beat on revenue so we're off to a decent start so far. 10 more report this week.

I've started some new tables. I'm going to track earnings growth outlook and the blended rate of earnings growth for each upcoming quarter and the coming year for the S&P 500. I've been expecting us to come out of a trough in earnings growth and I think this will help pinpoint it.


2016 expectations remain positive although they have been falling. First quarter earnings growth is now projected at 1.7%, down -0.3% from last week and well off the 4.9% predicted at the beginning of October. Full year expectations are for growth of 7.9%, down -0.2% from last week but up 0.1% from the low set two weeks ago. It is possible that growth expectations for next year have bottomed but I think it is a little early to make that call.


The Oil Index

Oil prices played a big role in today's market action. WTI fell hard in early trading, losing close to -3%, only to bounce back and gain 2% by settlement time. Today's lows hit a near 11 year low so today's move may have been simple profit taking. The supply/demand situation has not fundamentally changed so any rally remains suspect at this point.

The Oil Index hit a new low today as well, and bounced back to regain the losses. Today's candle has a small body and long shadows so shows some indecision but the near term trend remains down. The indicators are both pointing lower with first target for support near 1,025. Oil prices may have hit bottom but they are still at bottom, dragging on earnings outlook and dragging this index back to test support. S&P 500 energy sector earnings growth expectations have fallen for the fourth quarter and full year 2016. Fourth quarter 2015 fell to -65.4 from -60.1%. Full year 2016 growth has fallen to -1.6% from just below 1% last week.


The Gold Index

Gold prices are calling for a rate hike, falling just over -1.0% in today's session. With this in mind the possibility of a snap-back rally in gold becomes a growing possibility. Any negative surprise from the FOMC, even only meeting expectations, could easily spark knee-jerk reaction and short covering in the near term. Longer term, fundamentals remain skewed toward dollar strength; the FOMC is at the beginning of a tightening cycle, the ECB and BOJ are still easing. Support target is near $1,050 with possible resistance near $1,085.

The gold miners fell in tandem with the underlying metal. The Gold Miners ETF GDX lost more than -5%, perhaps succumbing to the idea that even gold prices snap back they will remain low for a while. Today's candle is long and black, the largest move in about 6 weeks and broke below the short term moving average. This, along with the indicators, suggest it will return to test support near $13 if not move below, depending of course on the FOMC and the dollar. Support is possibly very strong along this level, it is the all time low and has been tested 6 times in 5 months.


In The News, Story Stocks and Earnings

Not much in terms of earnings reports today but one interesting name popped up, Quanex. Quanex is a small cap building products company making pre-fab engineered building products ranging from windows and doors to wood and vinyl products and coated aluminum sheeting. The company beat earnings expectations and expanded guidance on growth of business and acquisitions. Current quarter EPS of $0.29 beat consensus estimates by $0.03 and last years comparable results of $0.08. Full year 2016 guidance of $1 billion beats estimates by $0.08 billion. Shares of the stock jumped more than 1% in the pre-market, surged 8% in the open session and then fell back to break even by the close.


I thought Quanex was interesting as a possible insight into the home builders and home building sector in general. The SPDR Home Builders ETF fell more than -1.25% to set a new 2.5 month low. The ETF has been under pressure all year and now trading near the bottom of the 12 month range. The indicators are bearish and pointing lower so a test of support looks very likely. First target is near $33.50 with $33 next target on a break through. Support is likely to be fairly strong even though the housing sector isn't exactly booming. Construction spending has been expanding all year, driven by tight supply, and is expected to continue in 2016. Looking out to next year the construction segment is expected to see growth of 7% and could beat this if labor and housing trends continue to show improvement.


Boeing announced, after the bell, an increase to the buy back and a hike to the dividend. The buy back increases the ongoing repurchase plan by $2 billion. Buying activity has been suspended but is expected to resume in January. The dividend increase is 20% and brings quarterly distribution to $1.09 per share.


The VIX has begun to spike but may have already topped out. Today's action saw a rise in volatility that quickly faded, creating a large black candle with long upper shadow indicative of resistance at the $25 level. The indicators are on the rise but very weak compared to past peaks so this spike doesn't appear to be too strong and consistent with resistance. If the Fed doesn't scare the market on Wednesday this could signal the start of a rally.


The Indices

Today the indices touched potential support levels, ahead of the Fed, and bounced back. Action was mostly what I would call churn but resulted in candles with long lower shadows for most of the indices. Although most closed with gains one, this year's laggard, did not. The Dow Jones Transportation Average closed with a loss of -0.47% and now trading and set a new long term low. The good news is that the long lower shadow indicates support at this level with a close above the previous low, the bad news is that indicators are both pointing lower so support could be tested further. If support fails next target is near 7,250.


The largest gainer in today's session was the Dow Jones Industrial Average. The blue chips posted an increase of 0.60% after moving down to test support at 17,250. The indicators remain bearish so further testing of support could happen, they are weak so current support levels appear strong. A bounce would find potential resistance at 17,500 while a break through support could take the index down to 16,750 and the long term up trend line.


The S&P 500 made the next largest gain in today's session, just shy of 0.5%, after shedding nearly -1% and testing support at 2,000. The indicators are still moving lower so an additional test of support could come but they are also divergent from the new low and consistent with support. The long term trend is up and this move appears to be confirming support along those levels.


The NASDAQ Composite made the smallest gain in today's session, only 0.38%. The tech heavy index also moved down to test support, found it, and created a candle with long lower shadow. Support appear to be along the 4,900 level with a chance for it to be tested again. The indicators are pointing lower, consistent with lower prices, but weak when compared to past prices so also consistent with support at these levels.


Today's action looks promising for us bulls but in the end is more churning market wind up as we prepare for the FOMC meeting announcement on Wednesday. I expect a rate hike this week and at least a hint of when to expect the next one. How the market reacts is anybodies guess but I think it is discounted by now. I remain bullish and looking to buy on the dips, cautious of the Fed, and looking for signs of increasing earnings expectations for the 4th quarter of 2015 and all of 2016.

Until then, remember the trend!

Thomas Hughes

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