It's Fed week and once again the market is wound up, waiting for the news.

Introduction

Fed meeting week has rolled around once again and once again the market is at a potential turning point, waiting for the event to occur. There is little expectation for another rate hike this go round but the statement and the FOMC's outlook will fuel speculation.

Global trading was mixed today. Asian indices were able to make gains but those in the EU and US did not. Asian indices closed with gains near to or just above 1%, those in the EU close with losses in the range of -0.25% to -0.5%. Oil prices are most likely the reason for today's declines, WTI and Brent both fell below $30, erasing Friday's gains.

Market Statistics

Early futures trading indicated a negative open for the US indices all morning, if a small one. The SPX was indicated to open with a loss of -6 points and this level held fairly steady all morning and going into the opening bell. After the opening bell the indices moved lower in choppy trading to post intraday losses near -0.75% . Intraday lows held until just after 3PM. At that time the market broke through intraday support and moved to new lows led by the transports. The late day sell-off intensified into the final half hour of trading and left the indices near their lows at the close.

Economic Calendar

The Economy

No official economic data releases today but nonetheless the economy was affecting trading today. The big event of the week is the FOMC meeting and policy statement on Wednesday afternoon. The second biggest is probably going to be the 4th quarter GDP first estimate on Friday. Between then an now are the Case-Shiller 20 City Index, Consumer Confidence and Housing Index on Tuesday; New Home Sales on Wednesday; Initial Claims, Pending Home Sales and Durable Orders on Thursday and then Employment Cost Index, Michigan Sentiment and Chicago PMI on Friday.

Moody's Survey of Business Confidence fell by -2 points to hit a new low. The index remains high by historical standards but has continued the slide begun last summer. Mr. Zandi says that financial market turmoil is to blame and under current conditions sentiment "appears fragile".


Earnings season is underway and not looking great at this time, primarily due to oil prices and some earnings misses in the financial sector. According to FactSet, the blended rate for earnings is now -6.0%, down from -5.9% last week and -5.3% the week before due to downward revisions within 6 sectors. I still think we can expect to see this rise by the end of the season but at this time no sign of that is present. So far 15% of the S&P 500 has reported; 73% of those have beaten on earnings but only 49% have beaten on revenue with another 27.2% of the index reporting this week.


Energy is the lagging sector for the quarter. The sector is expected to see earnings declines greater than -72.0%, down from -65% earlier in the quarter. With prices at current levels earnings growth is not expected until the 2nd quarter of 2016 at the earliest. 1st quarter earnings growth in the energy sector is now expected to be greater than -60%, down from -6% just a month or so ago. Looking further out earnings growth is expected to return in the second quarter but leave full year 2016 growth near -30%. Looking even further out 2017 earnings growth is project to be greater than +90%.

First quarter earnings growth, for the entire S&P 500, is now expected to be -1.7%. This is due to the massive downward revisions see in the energy sector. Positive growth is not expected until the 2nd quarter, about 2.3%, with that expanding into the end of the year, +6.5 in Q3 and +14.4 in Q4. The Consumer Discretionary sector is expected to lead positive growth in both the 1st quarter and the full year, near 15% for both. The first estimates for 2017 are coming out as well, FactSet is predicting about 13%.


The Oil Index

Oil prices fell in today's trading, reversing most of the gains seen during Friday's short covering rally. WTI fell nearly -6%, Brent just over -5%, both trading just below $31 and very near the $30 level. So far as I can tell there is still no reason to think that the supply and demand situation is changing so prices are likely to persist at these levels if not mover lower again. Production remains high, supply and storage remains high, demand remains low; oil may not reach new lows but there is little reason to get bullish on prices. According to FactSet, the average of 51 estimates of 2016 average oil prices are higher than 2015, but only by $0.15, so I think at best we can expect prices to stabilize between $40 and $50 although I don't see that rally starting now.

The Oil Index fell about -4.48% in today's session, dropping back below the 78.6% retracement level. This move is not a positive for sector bulls and closes the gap formed with Friday's candle. The indicators suggest a test of resistance may come but are otherwise weak and consistent with a relief rally within a a down trend. If the index is able to move higher resistance above 950 is near 1,000 and the short term moving average. If the index remains below 940 a move to retest the support at 900 is likely.


The Gold Index

Gold prices are getting a boost from diminished expectation for aggressive FOMC rate hiking in 2016. The ECB and the BOJ has set the dollar up for potential strength should either bank act but that potential is also tied to FOMC policy. If they do not give the market reason to think they will stay on track in 2016 the dollar could fall versus the euro and yen, or at best remain stable near current exchange levels. If the dollar weakens gold prices will likely continue to rise with targets near $1125 and $1150. If the FOMC sounds hawkish, combined with the already dovish ECB and BOJ, gold prices could fall back to test the lows near $1050.

The gold sector got a boost from the rise in gold prices, the miners ETF GDX rising more than 2.5%. Today action is a sign the market thinks the sector could rise but a very tentative one. The candle is a small spinning top just above the $13 support and below the short term moving average. The indicators are mixed, basically bearish but consistent with a bounce from support. In the near term, price action appears to be holding near the long term low with focus on the FOMC meeting, the dollar and gold prices.


In The News, Story Stocks and Earnings

The Dollar Index fell about -0.25% in today's session but remains perched near the midpoint between support and resistance targets. The indicators are exceedingly weak and without direction, leaving the index open to sharp movement in either direction, the FOMC meeting the most likely catalyst. Upside target is just above $100, downside target is near $98.25.


McDonald's was the star of the early morning session and one of today's market leaders. The global fast food giant reported a beat on earnings, revenues and comp store sales driven on turn-around efforts of new CEO and the new all-day breakfast menu. Consensus estimate for earnings was $1.23, actual was $1.31. Global comps were +5%, led by the US +5.7%. Shares of the stock jumped on the news during the early session, gapped up at the open but sold off during the day. Shares managed to close with a gain and look like they could continue higher. The indicators are confirming the break-out, the candle suggesting their may be a test of support before it moves on.


DR Horton also reported before the bell. The home builder reported revenue in-line with estimates and earnings that beat by a penny, along with other positive data, but did not inspire investors. Revenue rose by 4%, sales order rose by 12%, margin improved by 40 bps and back log is up by 16% and yet shares of the stock fell by -5% in today's session.


The banking sector has reported except for a string of small operators. The results are mostly in and they are not that great. The sector was expected to show growth in the range of 8.5% but so far has only produced 4.5% resulting in a near 1% on full year projections. The sector is also lowering outlook for Q1 and the full year. Q1 is now negative -0.5%, down from +2.5% at the beginning of the season, and full year is down to +8.6% from +9.4%.

The XLF Financial Sector SPDR is trading near a 12 month low and forming a pattern that could turn out to be a flag. The sector has been moving lower in the near term, is trading at 12 month lows, has bearish indicators strong and consistent with consolidation while earnings expectations are in decline. Is so, such a move would have a target near $19. The FOMC may be the trigger here too, rate hike outlook could impact earnings outlook across the sector.


RAMBUS reported after the bell. The chip maker announced better than expected revenue, earnings and guidance along with plans to make an acquisition. The stock jumped on the news, gaining 4% in after hours trading after closing with a loss near -1.5% .


The Indices

The market sold off today on a lack of data, mixed earnings and anticipation of the FOMC meeting. Today's action was led by the Dow Jones Transportation Average which lost about -1.86% and fell back to support levels near the recent low. The indicators are rolling over into what may become a bullish signal but for now simply consistent with bear market consolidation. Longer term, the past two MACD peaks are divergent from the recently set low and suggestive of support. Support target is between 6,500 and 6,600, if a bounce solidifies upside target is near 7,000, if support fails downside target is 6,000.


The NASDAQ Composite lost a little more than -1.55% and fell below 4,550. The index appears to be making a run for support with target possibly as low as 4,400. Today's candle is long and black, closing well below the previous candle, marking a peak and indicating lower prices. The indicators are mixed with bearish bias, consistent with bear market rally yet suggestive support will be retested, also consistent with the candle signal. Support targets may be reached before the Fed meeting but I don't think a decisive move in either direction will happen until Wednesday afternoon at the earliest.


The S&P 500 made the next largest decline, about -1.56%. The broad market fell from Friday's high to test support at 1,900, fell through and created a long black candle. Today's candle is a Dark Cloud Cover, a bearish signal within a near term down trend and suggestive of lower prices. Next target for support is 1,860 with 1,850 just below that. The indicators are rolling over in the near term and could become a buy signal but have yet to confirm, at this time they are merely showing a bounce from support that may be fading. In the short term MACD peaks are convergent with the recent low and suggestive it will be tested again, stochastic is oversold but pointing higher and about to cross above the lower signal line. If support holds and the index can get back above 1,900 upside target is near 1,980. If not downside targets are below 1,800.


The Dow Jones Industrial Average made the smallest decline in today's session, only -1.30%. The blue chips created a long black candle that closed below the Friday low, engulfing the previous candle and forming a dark cloud cover. This points to lower prices, in line with the near term down trend, with a target between 16,500 and 16,750, near the recent low. MACD momentum is convergent with the recent low so a retest at least should be expected, if not a new low. Stochastic is set up for some near term selling but is otherwise oversold. If support is broken down side target is near 15,000.


I'm still bullish for the long term and expecting a bounce to form but it is getting harder to stay so. The earnings led rally I have been expecting is still expected but, like the proverbial carrot on a stick, keeps slipping away. The ray of light, the silver lining, is that most of the weight of earnings declines falls on the shoulders of the energy sector. It sucks for them but otherwise is a plus for the rest of the economy.

It may all come down to the Fed and the dollar. If the Fed is more dovish and weakens the dollar outlook it could lead to a broad market rally. I say this because a weaker dollar will help improve currency impact for companies and firm forward earnings outlook for the broad market, help stabilize the commodities market and possibly put a bottom into oil prices.

Until then, remember the trend!

Thomas Hughes