The market held near Friday's high, waiting on another week of earnings and NFP data due Friday.

Introduction

The market tried hard to extend Friday's rally despite falling oil prices and weak data from China. Better than expected earnings and growing hope the Fed won't raise rates again soon are supporting the market.

Global indices had a much harder time in today's session than ours did. Weak manufacturing data from China sent most Asian indices into the red, led by the Shanghai's decline of -1.75%. The Nikkei bucked the trend, rising nearly 2% in the wake of last week's surprise BOJ action. European markets fell a little more than -1% intraday, driven by weak China data and plunging oil prices, but were able to regain a little more than half of that before the close of trading.

Market Statistics

Futures trading indicated a negative open for the US indices all morning. Pre 8:30AM the SPX was indicated to open with a loss near -6 points, then hit a low near -1% on oil prices, then moderated that to about -.4% after the release of economic data and held that going into the opening bell. After the bell the indices started with small losses, then extended them until hitting early bottom just after 10AM. From that point on the indices drifted sideways to up, slowly regaining the early losses, until reaching opening price levels just before 2:30PM. By 3:30 they had all at least touched higher prices, leaving them at or above break even at the close.

Economic Calendar

The Economy

There was quite a bit of economic data for a Monday. Personal income and spending were the only bits to be released before the opening bell. Personal income rose by 0.3%, a little better than the 0.2% expected by analysts. Disposable personal income also rose by 0.3%, both a sign of slowly rising upward pressure in wages. The core PCE fell by -0.1% but revisions to November data wash that out. Both Income and core PCE were revised higher, income to 0.3%, PCE to 0.5%. The less than expected news was an unchanged reading for spending, 0.0%.

ISM Manufacturing and Construction Spending were both released at 10AM, and both were below expectations. ISM came in at 48.2 for January, below the expansionary 50 level but up 0.2 from December. This makes the 3rd month of contraction within the manufacturing sector but there are some bright spots within the report; both New Orders and Production are up from last month. New orders is up by 2.7 and expansionary at 51.7, Production is up 0.3 to 50.2 and mildly positive. The worst reading was for employment, -2.3 to 45.9.

Construction Spending rose a meager 0.1% in December, far below the 0.5% expected by the analysts. On the upside, the previous moth was revised higher by 0.2% to 0.6% and year over year growth stands at 8.2%. Based on housing and labor data I think we can expect at least similar growth this year.

Moody's Survey of Business Confidence rose 0.3 to 30.6. This is up from last week's low but only just. Sentiment has fallen noticeably since the summer and Mr. Zandi has little positive in his report. Global market turmoil is having an impact, views on current conditions have been hit the worst while forward looking sentiment is stronger. Based on my chart there is no sign sentiment is bottoming at this time.


According to FactSet 40% of the S&P 500 has reported earnings so far, another 20% is due to report this week. Of those who have reported 72% have beaten earnings projections while only 50% have beaten revenue projections. The number beating on earnings is above average, the number beating on revenue is below average. To date, the blended rate of S&P 500 earnings growth is now -5.8%, up slightly from last week. If this is the bottom in expectations we can expect to see the final rate of growth for the 4th quarter of 2015 run in the range of -1% to -2%. Energy of course is leading the decline.


Expectations of growth for all of 2016 are coming down, led by the energy sector, but only the first quarter is projected to be negative at this time. First quarter growth is now forecast at -3.8%, down more than -2% from last week, and could fall further as we get reports from the different segments of the energy sector. Looking past that growth is still expected to return by the 2nd quarter, +0.8%, but that looks like it might fall below 0% as well. Beyond that expectations are more robust, 6.3% in the 3rd quarter and 13.6% in the 4th. Full year 2016 estimate fell -0.9% to 5.0%. Looking forward I see another quarter of poor earnings unfolding; longer term outlook remains positive, if under pressure.


This is a big week for earnings. The turn of the month means a new round of macroeconomic data. Tomorrow is light, only auto/truck sales but the rest of the week is full. Wednesday is ADP Employment and ISM Services, Thursday is Challenger Job Cuts, jobless claims, productivity, labor costs and factory orders. Friday will be the big day with NFP, Unemployment and hourly earnings.

The Oil Index

No big news in the oil sector today except that the Saudi deal to curb price declines was smoke and mirrors, as expected. The prices of WTI and Brent fell by more than -6% on an unwinding of speculative positions and could lead both back below $30. WTI settled just above $31.50, down more than $2 from Friday's close. Still no change to supply/demand that I can see. Iran is in business, the Saudi's and OPEC are still at record levels, Russia is doing what it can and we're still pumping too.

The Oil Index fell as I would expect on a day when oil loses -6% but not as much as I might have thought, only about -1.5%. Today's action helps confirm resistance at the short term moving average, near the 1,000 level, and may precede a move lower. The indicators are currently pointing higher but are weak compared to the longer term and overbought in the longer term. Resistance may be tested again but without strong catalyst will likely hold. First target for support is near 950 and the 78.6% Retracement level and then below that at 900.


The Gold Index

Gold prices are being supported by a number of factors that may continue to add lift into the near term. Lack of indication from the Fed on when interest rates would be raised is one. The economic situation is another, weak global growth and weak US growth have added speculation the Fed won't raise rates again very soon. This morning that sentiment was echoed by the Fed's Fischer who said concerns were growing, he didn't know what the Fed would do next, and that maybe the market was getting it right.

Another factor supporting gold prices is a flight-to-safety trade driven by global market turmoil and slowing in China. Yet nother is the oncoming Chinese Lunar New Year and seasonally strong physical demand in China and other Asian nations. Today's action left gold above $1130 for the first time in over three months. This move appears to be gaining some traction and could take prices to $1150 or higher.

The gold miners are riding high on rising gold prices. The miners ETF GDX gained more than 3% in today's session and is now at a potential resistance target. First target is just above $14.50 but likely to fail, next target is closer to $15. The indicators are pointing higher but very weak so any move is likely to remain within the longer term 7 month trading range with upper target near $16.50.


In The News, Story Stocks and Earnings

The Dollar Index fell on today's economic data. There were some positives within the reports but on a whole were not as good as expected and adding to concern we are entering a possible slowdown of economic growth. The index fell nearly -0.65% and is now sitting on support at the short term moving average, well within the three month range. I think at this point the next steps for the FOMC, the ECB and the BOJ are to unclear for the market and may leave the index range bound in the near to short term. The indicators are perfectly consistent with a range bound asset; MACD is weak, barely moving above or below the zero line and stochastic is trending nearly flat in the middle of its range. My range targets are $98.25 to $100.25.


There were quite a few health companies reporting today, all beating expectations. Cardinal Health, a company providing services to the health care industry, reported a 24% increase in revenue, beating on the top and bottom line. Aetna, health insurer, beat on the top and bottom lines as well. Profits were up 38% driven by an increase in fees and led the company to reaffirm guidance. The health care sector as a whole has been beating expectations for the past several quarters, more than doubling earnings growth projections in the last two at least. This quarter the sector is already on track to do the same; expectations were for growth to rise 4.9% and the blended rate is already up to 7.2%. The XLH Health Care SPDR rose just a little more than 0.15% in today's session but looks like it could be bottoming at the $65 level.


Toy maker Mattel reported after the closing bell. The company reported a beat on the top and bottom lines driven by a 7% increase in global sales. Shares had been down as much as -3% during the day but pared that loss after the news was released. By 4:15 share price had turned positive on the day, breaking above resistance at the $27 level.


Google, excuse me, Alphabet reported after the bell as well. The company that makes the internet what it is today reported a beat on the top and bottom lines and pleased investors with the break-down of business segments. The Google segment performed better than expected and helped to drive the stock higher in after hours trading. Alphabet is now valued with a market cap greater than Apple, up more than 7% in after hours trading.


The Indices

Today's action wasn't overly bullish but it is nonetheless a good sign for the bulls following Friday's rally, at least in the near term. After making a test for support the indices were able to move into the green and extend the Friday rally but not all were able to hold those gains into the close. The move was led by the Dow Jones Transportation Average with a gain of +0.90%. Today's candle is relatively small for the transports but carries the index up to resistance, closed at the high of the day and is accompanied by rising, strong momentum. Resistance target it the 7,000 level with a chance it will be broken, a move higher would find next resistance just above at the short term moving average.


The next biggest gain in today's session was made by the NASDAQ Composite. The tech heavy index advanced 0.14% and looks set to move higher. The indicators confirm the move and have room to run. First upside target is the underside of the short term moving average, near 4,700, with a chance that will be broken as well. A move above the short term moving average could go as high as 4,800.


The S&P 500 closed with a loss of only -0.04% after hitting lows greater close to -1%. Today's action created a doji candle just below resistance that may be nothing more than a spinning top. The indicators are rising, confirming the move higher, with first resistance target just above today's close at the short term moving average. A break above the moving average could take the index up to 1,975, a failure could result in a retest of support levels near 1,900.


The Dow Jones Industrial Average closed with a loss of -0.10% after hitting lows as much as -1% below Friday's close. Today's action created a doji candle that confirms resistance at the 16,500 level but does not yet indicate reversal. The indicators remain positive and gaining strength so a test of resistance at least is on the way. A break above this level could go as high as 17,000 and the bottom of the previous up trend line.


The market is moving higher after bouncing from support but whether or not we have begun to reverse is yet to be seen. Having a bounce is nice and could lead to a full reversal but for now it's just that, a bounce, and not enough evidence to get bullish on just yet.

This week is going to be another hurdle for the indices, what with over 20% of the S&P 500 and 10% of the Dow Jones Industrials reporting earnings alongside a round of monthly macroeconomic data, so whatever happens in terms of price will likely have a lasting impact.

I remain a bull in the longer term, earnings growth outlook is positive, but I have growing concern for the short term. In the longer term a return to growth is going to drive a market rally, the question is when? Expectations have been positive for 2016 earnings growth for the last year, but those expectations seem to be slipping away. 1st quarter earnings are likely going to be negative, the 4th quarter in a row of negative earnings growth, and could provide catalyst for the market to test support if they keep falling. If 2nd quarter expectations fall below 0% the market could remain range bound or in bear market conditions until later in the year.

Until then, remember the trend!

Thomas Hughes