plunging oil prices drag market to new lows.

Introduction

The market saw some big moves today as China, energy, earnings and data weigh on the minds of traders.

The mainland China Shanghai index fell more than -5% in late day trading after an earlier move by the PBOC to strengthen the yuan. Other indices in the region, while affected, did not suffer near the same losses. European indices were positive for most of the day. The China sell-off may have been responsible for a mid-day test of support but that led to gains of 1% for the DAX, and then another test of support later in the day that left the region flat to negative at the close of the session.

Market Statistics

Futures trading indicated a positive open for US indices all morning. The SPX was indicated to open with a gain of about 3 points in the early electronic session and that strengthened to +4 or 5 by the open; there were no economic releases before or after the bell, and little in the way of market moving earnings reports; Alcoa reported after the closing bell.

Early in the day the indices moved in a 1% range around break even that left them flat going into the lunch time hour. Just before noon things changed, oil prices fell to new lows and the market followed. The SPX fell more than -1% on an intraday basis and is quickly approaching the Sept/Oct 2015 support levels. Late in the day support levels were hit, the market bounced, the market rallied and the indices regained all of the days losses and more.

Economic Calendar

The Economy

There was no economic data released today but there are some big reports due out later this week. Tomorrow is the JOLTs release, important points will be number of job openings and the quits rate. Wednesday the Treasury budget is released in the morning, the Fed's Beige Book later that day. Thursday is weekly jobless claims with import/export prices and then Friday is the big day of the week. Retail Sales, PPI, Empire Manufacturing, Industrial Production, Business Inventory and Michigan Sentiment are all on the schedule.

Moody's Survey Of Business Confidence fell again. The index shows sentiment continues to fall from its high set last year but, according to Mr. Zandi, remains strong relative to historic levels and consistent with an expanding economy. He explains that much of the down turn is due to negative sentiment for present conditions, driven by sluggish global growth and market turmoil. Despite the down turn in sentiment the survey still indicates upbeat sales and good credit availability.


The Federal Reserve transferred $97.7 billion to the Treasury today. Much of the money was reported to be interest earnings from securities purchased through its now concluded open market purchase program.

There was a little bit of Fedspeak today, expect more over the next 2 weeks. Lockhart said in a statement that he did not expect to see enough data to warrant another rate hike at the January meeting. He also said that he was confident December was the right time to initiate the first hike.

According to FactSet the expected growth rate for S&P 500 earnings in the 4th quarter is -5.3%. This is down -0.4% from last week and a new low in the series. If the season goes according to trend we can expect this number to rise over the next few weeks by roughly +4%, leaving us with the third quarter of negative earnings growth. The reason for this week's decline is the financial sector which saw a number of downgrades ahead of some expected earnings reports.


On an ex-energy basis 4th quarter growth is projected to be +0.4%. Adding in the expected 4% increase this may go as high as 4.5% by the end of the reporting season. So far 21 companies have reported. 16 have beat on earnings, about average, while only 7 have beaten on revenue, below average. This week 19 more are expected to report.

Expectations for next quarter and next year continue to fall but remain positive. First quarter projections fell by 2 tenths to 0.5%, full year projections fell nearly a half percent to 5.5%. The declines are driven primarily by lower expectations in the energy sector, driven by low oil prices.


The Oil Index

Oil, WTI, fell close to -6% today as supply and production continue to swamp demand. Today's action has taken oil prices to a new low, dipping below $31 and closing below $32, with the $30 level a short drop away. There is still no sign of demand increase, or the production has equalized with demand, oil is likely to remain at or near these levels in the near to short term.

The energy sector got hit again today as plunging oil prices continue to drag on earnings expectations. The Oil Index fell about -2.5% in response, creating a long black candle and hitting my next support target at 950. The indicators are bearish and gaining strength so this level is likely to be tested again if not broken. If oil falls further it will likely be broken. The caveat is that the indicators are also diverging from the new lows so caution is due.


The Gold Index

Gold prices fell in today's session but only marginally. Spot prices lost about -0.05% but did close below $1,100. Prices are being supported by a flight to safety trade as well as Fed speculation, a move that does not yet appear to be very strong. Prices may hang at or near current levels until the FOMC meeting unless economic data is unusually strong or weak.

The gold miners were not supported by gold prices today. The miners ETF GDX fell more than -4.5% in a move that confirms resistance at the $15 level. The indicators are also rolling over, led by stochastic, consistent with the upper end of a trading range. It looks like the GDX will remain range bound between $13 and $15 for now.


In The News, Story Stocks and Earnings

Arch Coal, the nations 2nd largest coal miner, filed for Chapter 11 bankruptcy and is only the latest casualty in the ailing coal sector. The move is aimed at cutting billions in debt from the balance sheet. Reduced demand and lower prices have been hurting the sector for years and is likely to continue. Rival Consol Energy recently issued an earnings warning to to those very factors. That stock lost more than 10% on the news and is approaching 12 year lows.


There were several up and down grades in the financial sector. The most notable was an upgrade to Wells Fargo at Goldman Sachs citing the companies position in a difficult time. At the same time, Goldman downgraded JP Morgan after a period of outperformance. The sector responded by selling off, the Financial Sector SPDR falling nearly -0.75% in a move that set a new 3 month low. The ETF is now trading at potential support levels with bearish indicators and earnings season at hand. If the banks are able to at least meet expectations with positive outlook support at $22 could hold, if not, a break below could take it down to $21 or $20. JP Morgan reports on Thursday: US Bancorp, Wells Fargo and Citigroup report on Friday.


Alcoa reported after the bell, better than expected. The company reported $0.04 per share, double the expected $0.02, on a slight revenue miss and provided positive outlook for 2016. According to the report the company exceeded its own expectations and is forecasting a 6% increase in aluminum demand next year. The stock closed with a loss but gained more than 2.5% in after hours trading.


Rail carrier CSX is expected to report earnings tomorrow. The company and the sector have been hit hard by declining coal prices, just last month CEO Frank Lonegro lowered full year guidance by a full percent, to about 3% from a previously stated range near 4%. Today the stock fell more than -1% to hit a new 2.5 year low. The indicators are bearish and gaining momentum so this move could continue unless tomorrow's report provides positive outlook.


The Indices

The indices had a wild ride today, first up, then down, then up again to close at or near last week's closing levels. Two of the four major indices closed with a small gain, the Dow Jones Transportation Average closed with a loss. The transports lost about -0.45% in today's action and looks like it might go lower. The indicators are bearish in the near term, suggestive of weakness, but divergent from the new low in the short term, suggestive of support. The candle is also suggestive of support although it is unconfirmed. A drop below this level could take the index down to 6,500, if a bounce takes hold first upside target is 7,250.


The NASDAQ Composite also closed with a loss, -0.12%, and appears to be moving down to test support near the Sept/Oct lows. Today's action almost reached those levels and produced a long lower wick on today's candle, suggestive of support. The caveat is that bearish momentum is on the rise so this support is likely to be tested again, near 4,550.


The biggest gainer in today's action was the Dow Jones Industrial Average. The blue chips gained close to 0.3% in today's session and created a bullish candle. Today's signal could indicate the market has reached an extreme of near term bearishness and level of potential reversal. The indicators are mixed; momentum is bearish and gaining strength while signs of support persist in both the MACD and stochastic, consistent with a bull market sell-off. If a peak has indeed been reached and the market bounces back 16,600 is first target for resistance. If the index continues to move lower next target for support is 16,000.


Today's other gainer was the S&P 500. The broad market gained almost 0.1% and created a very interesting doji candle. This candle may signal a bottom to selling although that bottom is unconfirmed. The indicators are mixed; MACD is pointing to lower prices while stochastic is oversold and consitent with support. The index could continue down to retest support levels, near 1,900, with a move beyond that depending on earnings and data.


Today's action has brought the indices down to the Sept/Oct support levels, driven on geopolitical tensions, sluggish growth, financial market turmoil and an expected quarter of weak earnings. This move could continue but there are signs support is at hand, both on the charts and in the market, .

There are concerns and for sure reasons to be cautious but I just don't see a reason to expect a sustained downtrend. Earnings and GDP outlook for 2016 remain positive, with a labor market tail wind, so I do see a reason to expect a rally when near term fears subside. If Alcoa's earnings are a sign of what's to come I think we could see the start of another long term rally within the greater secular bull market begin to unfold. I remain bullish for 2016, waiting for earnings and data, watching for entries.

Until then, remember the trend!

Thomas Hughes