The market began the year in retreat as mounting global woe weighs on stocks.

Introduction

The global markets began the new rear in retreat as mounting woes weigh on sentiment.

The bad news began in China where a number of events combined to force indices down by more than -7%, triggering circuit breakers and closing the market. The PBC raised the midpoint for the yuan before the market opened, then, after the open, weak PMI showed another month of contraction in China's industrial sector.

European markets were not cheered by the sell off in Asia and followed suit. Losses here were not as large but aided by the mounting tensions between Iran and Saudi Arabia. The Saudis have responded to Iran's storming of it's embassy by cutting off all diplomatic ties.

Market Statistics

Futures trading indicated a negative open right from the start. The S&P and Dow Jones Industrial Average were looking at a loss of -1% and that was achieved within minutes of the open; there were no economic or earnings releases before the opening bell. After the opening bell the market sold off and sold off hard, hitting the day's bottom near 11AM and -2.5% below last years close. A small bounce regained a fraction of the days losses and led to an afternoon of sideways trading and another bounce that carried the market into the close of today's session.

Economic Calendar

The Economy

Two pieces of the economic puzzle were released today, both after the opening bell and both weaker than expected. Construction spending fell by -0.4% versus the expected +0.8%. However, this month's release came with a footnote detailing a revision to the past 10 years of data. The revisions are expected to raise 2014 GDP by 0.2-0.3% with a similar impact for 2015. Within the data the housing sector saw an increase of 0.2%.

Manufacturing ISM fell unexpectedly to 48.2, down -0.4 from last month. Analysts had been expecting the reading to rise slightly to 49. Within the report New Orders, Employment, Shipments and Production are all down and with Inventories in contraction.

This is a big week for data. Tomorrow auto/truck sales data, later in the week the monthly labor data. Wednesday is ADP, Thursday Challenger layoffs and Friday NFP/Unemployment/Earnings. Also this week we will see Factory Orders, both manufacturing and services ISM, consumer credit and auto/truck sales.

Moody's Survey Of Business Confidence fell back to its recent lows. This week the index fell by -1.5% to 32.4 and near an 18 month low. While still high compared to past recoveries the index shows a noticeable downturn in sentiment since the summer that Mr. Zandi attributes to weak global growth, financial market volatility and possibly the recent rise in world wide terror activity. He also mentions this week's data may be skewed due to a low, holiday induced, response rate.


According to FactSet the blended rate for S&P 500 earnings growth in the 4th quarter of 2015 is now -4.7%. This is up -.2% from last week and may, maybe, possibly, signal the bottom in expectations for the quarter. If trend holds true we can expect to see final 4th quarter growth come in about 4% above this level.

We have seen 17 reports so far this season; 13 beat earnings expectations, 6 beat revenue expectations. Energy remains the weakest sector with expected growth of -66.3%; down from last week. Ex-energy, 4th quarter growth should be in the range of 1-5%.


Full year 2016 earnings growth projections rose by a tenth to 6%; ex-energy is 7.6%. The energy sector is now expected to to see a decline in growth of -8.4%. The season gets off to its unofficial start next Monday when Alcoa reports after the bell. The company is expected to report in-line with the previous quarter.


The Oil Index

Oil prices had a wild day. The early trade was driven on knee-jerk reaction to the Saudi/Iran situation and then later on supply glut fear. In early trading WTI was up as much as 1.5%, later in the day rumors of supply glut in Cushing sent prices down by -1.25%. Fundamentals remain in place for low oil prices, the risk now is that global tensions will lift prices. Today's action may be telling, fundamentals overcame fear to send prices lower.

The Oil Index had a mixed day as well. The index opened lower, despite oils early rise, moved higher and into positive territory, only to be repelled by resistance and eventually fall to test support at 1,050. Today's candle is relatively small but has returned the index to support targets. The indicators are rolling into a bearish signal, in line with recent trends, that could lead to additional testing of support or new lows. If 1,050 is broken the next target is in the 1,000 to 1,025 range.


The Gold Index

Gold prices got a boost from a falling dollar and perhaps some safety seekers. The spot price jumped as much as 1.5% to trade near $1,080 before falling back to settle with a gain near 1.25%. Today's saw prices rise from support levels near $1,060 to resistance levels near $1,080 and contained by both. It looks like near term news is moving price within a range while we wait on data and the FOMC. This week could see FOMC outlook change, but it all depends on the data. For now, fundamentals support stronger dollar and weaker gold.

The gold miners tried to move higher but the move was without conviction. The Gold Miners ETF GDX gained about 2.5% but the move does little to change over all direction. The indicators are pointing higher, but very weakly and consistent with the recent trading range, so this move could continue with upside target near $14.75. However, this ETF, like gold itself, appears to be range bound while the market waits on data and the FOMC. A break outside of the range is the signal; a move higher could take it up to $16, a move lower down to $12.50 or below. The next FOMC meeting is January 26/27, both gold and GDX could remain range bound until then.


In The News, Story Stocks and Earnings

The dollar saw some weakness in the early part of the day as safety seekers flocked to the yen and gold. The Dollar Index fell more than -1% to test support near $98 but this move did not hold. Dollar bulls stepped in and drove the index back to break even and higher, confirming the $98 support level. The indicators are beginning to look pretty good for a bullish movement. Both MACD and stochastic are confirming support and a move higher with upside target near the current highs.


Tesla reported that 4th quarter sales were at the low end of their previously guided range. Sales came in at 17,400 units, up sharply from last years 11,603, but barely met expectations. The news renewed fears in the company and sent the stock down by more than -7%.


President Obama held a news conference today talking about gun control. He says he is looking over his options as head of the Executive Branch and will be announcing some initiatives over the next few days. The news helped spur buying among the gun manufacturers, a few of today's biggest winners. Smith&Wesson gained close to 6% in today's session and is fast approaching the recent all time high. The indicators are consistent with support, just under $22.50, and a move up to the highs near $24.


The Indices

The indices fell today, and fell and fell, but volume was light and by end of day rose up from support levels. Today's action was led by the Dow Jones Transportation Average, and the NASDAQ Composite, which both lost -2.08%. The transports fell to set a new low and hit my support target near 7,250. The indicators are rolling into what could be a bearish signals but are also highly divergent from the new low. This could indicate a bottom or potential trading range with a chance 7,250 will be tested again.


The NASDAQ Composite also fell -2.08%. The index opened with a loss near -2%, traded in a wide range, and then closed with a loss near -2% creating what could become a very significant doji. It looks like price action is confirming support near 4,900 but is unsure about future direction. The indicators are pointing lower, suggesting today's low and/or support levels could be tested again. The indicators are also divergent from the low set today, indicating support and a possible point of reversal. If the index moves lower next target is 4,800 with upside resistance near today's high, around 5,000 and just under the long term trend line.


The next biggest decline posted in today' session was by the Dow Jones Industrial Average with a loss of -1.58%. The index fell to set a new 2.5 month low but also appears to be confirming support at the 17,000 level. Today's candle is long and black but has a long lower shadow supported by divergent indicators. However, while divergent, the indicators are also pointing lower so further testing of support, possibly as low as the long term trend line near 16,750, is very possible.


The S&P 500 made the smallest declie in today's session, only -1.53% by end of day. Today's session created a new 2.5 month low, barely, and is accompanied by bearish indicators. The indicators are pointing to further testing of support but also very weak and consistent with support/range bound trading. Support appears to be near 2,000 with a move as low as 1,985 possible. The long term trend remains up so this move is looking like a potential entry for bullish positions.


Today's move was surprising and a little alarming but overall not to damaging to the markets, yet. The move was driven by knee-jerk reaction to near term news that will likely be forgotten in a few weeks. The China data at least was expected, not great, but expected.

Today's move was also likely due to a lack of volume as market participants wait for this weeks data and the start of earnings season. This week may see some more volatility, and perhaps low volume, up to and until the NFP report on Friday.

For now, except for manufacturing, economic trends are positive with expectations for growth throughout 2016. Earnings trends are a little less positive, the coming season is expected to show negative growth but that is expected to change with the next, and improve all year. So long as this remains true I remain a bull and looking to buy on the dips.

Until then, remember the trend!

Thomas Hughes

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