Only three days left till Christmas; Holiday conditions are in effect, low volume and big swings are two things we might expect this week.

Introduction

The Santa Rally got off to a shaky start today. Price action was largely to the upside but low volume and big swings point to Holiday trading conditions so I wouldn't read to much into it just yet. There are only two full days of trading left this week, and a half day on Thursday, so I expect to see volume remain low.

Market Statistics

The morning got off to a relatively quiet start. There was little in the way of international news, Asian and European indices were mostly higher, and our indices were indicated to open with gains as well. The most closely watched headline of the morning was oil prices, with a lot of chatter focused on Star Wars and Disney. I saw it on Saturday, Star Wars, liked it and will probably go see it again further entrenching it as the largest opening weekend box-office take of all time.

An early rally in futures led to a higher open for the indices and an initial gain for the broad market of 0.75%. Today's high was hit within the first 3 minutes of trading and held for the first hour of the day. At 10:35 a test of the high was met by sellers, or maybe just a complete lack of buyers, which were able to drive the indices back down to break even. Break even levels were able to hold going into the lunch hour, after which the indices tried to stage another rally. This time resistance set in at a lower level and the indices fell once again to break even. By 3:30PM bottom had once more been hit, slightly higher than the first time, resulting in another attempt at rally. The last half hour of trading saw the indices move up off the low and close near the high of the day.

Economic Calendar

The Economy

No economic data was released today but there is quite a bit due out this week. On top of that the holiday week means the market is closed on Friday, half day on Thursday, and all the data will be squeezed into the next three days. Tomorrow is the 3rd revision to 3rd quarter GDP, expectations are for it to hold steady at 2.1%, along with existing home sales. Wednesday is personal income and spending, durable goods, new home sales and Michigan Sentiment. Thursday is jobless claims.

Moody's Survey of Business Confidence by -1.3% to 32.5, an historically high number but well off the highs we saw earlier this year. Based on this survey global confidence has hit a new low and is being driven lower by declines in all nine questions of the survey. Pricing power is the biggest contributor to falling sentiment while demand for office space remains the strongest. In this week's summary Mr. Zandi mentions terrorism as another cause of declining sentiment which led me to some tangental research. I began looking up terror attacks and discovered a data base at the University of Chicago and other information on suicide bombings. There has been an average 1.8 suicide bombing per DAY in 2015, up nearly 50% from last year at this time.


According to FactSet 12 S&P 500 companies have reported for the fourth quarter. Of those 8 have beaten earnings expectations and only 5 have beaten on revenue. There are 4 due out this week including 1 Dow Component. The expected rate of earnings growth for the entire index is now -4.5%, down -0.2% from last week. The blended rate continues to move lower and will likely remain negative until the end of the reporting season. Things to look out for this time around include currency exchange/strong dollar, lower energy cost and rising wages. Energy s expected to be the laggard in terms of growth at -66.01%, down -6% from last week. Ex-energy 4th quarter projections are near 1.1%.


Earnings growth is expected to return in the 1st quarter of next year but projections are still falling. First quarter and full projections both fell by -0.2% this week. First quarter earnings are projected to grow by 1.5%, full year 2016 by 7.7%. The estimates are being hurt by energy which is now expected to see earnings decline by -9% in 2016. Energy had been estimated to see earnings growth as high as 50% earlier this year.


The Oil Index

Oil prices dragged on the market again today. WTI fell more than -1% to trade below $34.50 early in the day, with Brent falling more than -1.5% to trade below $36.50, all on bearish supply/production/demand fundamentals. Later in the day prices rebound to close a penny above break even. Outlook for 2016 demand growth remains tepid with no indication of declining supply so I think oil could go lower.

The Oil Index fell -0.75% in today's session and set a new nearly 3 month low. Today's action brings the index closer to support targets near 1,000 - 1,025 with bearish indicators. Both MACD and stochastic are pointing to lower prices although there is some sign that support will hold. MACD is diverging from prices, a sign that the sell-off is losing momentum and ripe for reversal, while stochastic is in oversold territory. The caveat is oil prices, if oil prices continue to fall support could be broken and lead the index lower.


The Gold Index

Gold prices continued to bounce today after advancing more than 1% on Friday. Today spot prices rose another +1.25% to $1080 but remains below resistance targets. The move is in response to a softening of the dollar and some weaker than expected data last week. Now that the FOMC has raised rates the first time speculation has shifted to when the next hike will come and how many basis points we'll see in total for 2016. Weak data will mean a slower rate of pace, fewer basis points and softer dollar values versus strong data and strong dollar. At the same time the ECB will need to be watched for signs of additional QE, or that economic recovery is taking hold. For now, FOMC and ECB policy remains divergent so I see the dollar getting stronger and gold moving lower. My current resistance target for gold is near $1090, and then $1100. A break above these levels could take it up to $1125.

The gold miners got a lift from gold's rally but remain near the long term low and indicated lower. Today's action produced a gain greater than 1.25% but also a spinning top candle below the short term moving average. Adding to this, stochastic has been moving lower for over a week and today was confirmed by a bearish MACD crossover. This in line with the underlying long term down trend but may be a false signal in the near to short term, while gold prices are bouncing. If gold prices keep moving higher this ETF will likely follow it. The near to short term trend is sideways/range bound so we could easily see this continue over the next few weeks.


In The News, Story Stocks and Earnings

The Dollar Index lost about -0.25 to trade near $98.50 and a possible support level. The index appears to be testing support after breaking above the short term moving average and $98.50 in response to the FOMC rate hike last week. Stochastic is pointing to higher prices in the near and short term with MACD on the cusp of confirming. A bounce from here could take the index back to test its highs again.


Shares of Disney got hammered again today as investors weigh the negatives inherent in ESPN with the positives of Star Wars. The analysts can't agree. On the one side bearish analysts are saying Star Wars won't off-set weakness in the media branch of the business while on the other bullish analysts think Star Wars is going to do even better than previously expected with upside targets for stock price near $130. Today the stock lost about -1%, after an initial push higher, to trade at a +2 month low near $106.75. The indicators are bearish and pointing to lower prices but divergence suggests support is near $105.


Cintas, supplier of rental uniforms, first aid supplies and other services for employers reported earnings after the bell on top of another announcement this morning detailing an acquisition. The company reported better than expected with nice gains in margin, operating income and organic growth. Net income was up $12 million with EPS of $1.03, up 19.75% from last year. Shares of the stock opened the day with a gain near 1% and then traded mixed throughout the day. There was little movement following the release.


In terms of earnings growth consumer discretionary is expected to lead the market in 2016. Full year growth is expected to be in the range of 14.8%, outpacing materials and healthcare. Revenue is expected to grow at a slower pace, 6.1%, but still top three for the year. For the upcoming reporting season, calendar 4th quarter 2015, earnings growth is 5.8%, 3rd behind telecom and financials, on revenue growth of 3.8%. Today the sector gained 0.5% but looks like it might be heading lower. Support is currently indicated along the $77.50 level with bearish indicators. A break below here could take it down to $75 or lower.


The Indices

Today's action was typical holiday trading. Volume was incredibly low which led to some wild swings in the market. First up, then down, then back up, led by the NASDAQ Composite. The tech heavy index made a gain of 0.93% in a move that confirms support just below the long term up trend line. The indicators are mixed in their strength but both pointing lower so this support, near 4,925, could be tested again. A break below this level could take the index down to the 4,800 level. Resistance is the up trend line near the 4,990 level, about 25 points above today's close.


The next largest move in today's session was the S&P 500. The broad market gained 0.78% in a move that bounced off support just above 2,000 and closed above y 2,020 support/resistance line. The index appears to be confirming support at 2,000 but with the low volume the strength of the support is questionable. The indicators remain bearish and pointing lower so support could be tested again, divergences in MACD suggest it will hold, at least for now. The index appears to be consolidating along the long term trend line so any test of support is a likely buying opportunity.


The Dow Jones Industrial Average made today's third largest gain. The blue chips closed with a gain of 0.72% and regained the 17,250 level. Despite the gain the indicators remain bearish with a slight uptick in momentum so another dip below 17,250 is likely with a possible target as low as the long term uptrend line. The trend line is in the range of 16,750 and the top of the September bottoming pattern so support here could be strong. If the bounce continues next resistance is near 17,500.


The days smallest gain was made by the Dow Jones Transportation Average. The transports gained 0.70% but remain below last weeks broken support target of 7,500. The index has made a new low and indicators are bearish so today's bounce looks like it will be short lived. Down side target is near 7,250 with the danger that the transports could lead the whole market lower.


The bulls tried to get a Santa Rally in gear today but just couldn't do it. Regardless, Holiday trading rules apply as we have definitely entered a period of low volume. Today's action, while bullish, left the indices looking rather poorly but this should be taken in the context of holiday trading. The next two weeks, until after the first of the year, will likely see range bound trading driven by news, economic data releases and expectations for earnings and next year. Support and resistance targets will be important to watch and there could be some big swings in direction.

Economic trends remain positive, as does expectation for next year, so I remain a bull in the long term. In the near and short term I remain cautious. The upcoming earnings season is not going to be pretty, it will most likely turn out better than currently expected, but not pretty, so there is risk of additional consolidation and/or correction in the indices once it begins.

Tomorrow's focus will be the data, and a few earnings reports. GDP makes a big headline, even if it is the third estimate, consensus is for it to hold steady with the last estimate. Along with that, and maybe more important, is existing home sales data, more important because it is a lot more current than a twice revised estimate for last quarter. Earnings reports are light in number but make up for it with names like Micron and Nike.

Until then, remember the trend!

Thomas Hughes

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