The market sank more than -2.5% in Monday trading, weighed down by oil, rate hike fears and financial market turmoil. . . and then tried to bounce back.

Introduction

The market sank more than -2.5% in today's action as weak oil prices, weak global growth and uncertainty over the FOMC rate hike timeline weighs on future outlook. Despite the near term negativity forward outlook for earnings remains positive so I ask the question, could this be capitulation. If it is we can expect to see buyers step into the market, if not this week then very soon. If not the market could be in for a real roller coaster ride.

Market Statistics

International markets were affected as well, those that were open, all except the Japanese Nikkei. The Nikkei rose a little more than 1%, snapping a losing streak, possibly in response to market to closures throughout the Asia region. It is the start of the Chinese Lunar New Year and markets from China to Taiwan and Korea are closed for the week. European indices fell more than -3% and hit a 15 month low.

Futures trading here at home indicated a weak open right from the start in extension of Friday's sharp sell-off. At 7:30AM indices were indicated to open with losses near -1.25%, by 8:30AM the indicated loss had been extended to greater than -1.5%, led by a -2.25% decline for the NASDAQ.

At the opening bell the indices lost more than -1% in the first minute of trading and extended that loss throughout the morning. All ten sectors of the S&P were hit but the tech sector was hit the hardest. Last week's poor showing from LinkedIn, among others, is really taking its toll. The early low was hit around 11AM, followed by a couple of hours of basically sideways trading. The days lowest low was hit just after 2:30PM, 2:32 to be exact, and this was followed up by a bounce that carried the indices into the close and recovered more than half of today's losses.

Economic Calendar

The Economy

There was no official economic data released today, the calendar for the rest of the week is pretty light as well. Other than Thursday, weekly jobless claims, Friday is the only the day that I see as a potential market mover in terms of new data. On this day we can expect to see Import/Export Prices, Michigan Sentiment, Retail Sales and Business Inventories and I am not expecting to get much in the way of bullish data.

Next week's calendar is more likely to move the market. We'll get the FOMC minutes, several reads on the housing sector as well as CPI and PPI, among other reports.

Moody's Survey of Business Confidence fell another -1.1 to hit 29.5 and a new low dating back to late 2013. The survey index has been in decline since August, driven by deteriorating global financial markets, and does not appear to be bottoming. According to Mr. Zandi concern for present conditions is the weakest while outlook for summer 2016 remains strong.


According to data from FactSet the blended rate for Q4 earnings growth is now -3.8%, a +2% increase from last week's data. This move is due to upside surprises in 6 of the 10 S&P sectors, led by Materials, Healthcare and Information Technology. Energy remains the laggard posting a blended earnings decline of -74.3%, much larger than first expected.

On an ex-energy basis the all-index blended rate stands at +2.2%. Within the energy sector 7 of 8 sub-sectors are posting earnings declines. The only one with positive earnings growth is the Storage and Transportation sector with growth of +29%.


Looking forward I can say that 2016 earnings growth expectations have officially hit the crapper. First quarter growth expectations have declined by nearly -2% to hit -5.4%, second quarter estimates have now turned negative and stand at -0.4%, 3rd quarter expectations fell nearly a full percent and 4th quarter projections by nearly 3% leaving full year 2016 earnings growth expectations at 4.0%, well below the 15% analysts were projecting as recently as early fall 2015.


All ten sectors are experiencing downward revisions to 2016 earnings projections but the energy sector remains the real drag. Projected earnings decline for the sector have doubled in the first quarter alone, from -42% on 12/31 to -84% today. As for the full year calendar 2016, projections are 5 times worse than just 5 weeks ago, falling to -49.2% from -9.8% at the end of December.

So long as projections continue to decline I see little reason for the market to sustain a rally, the bottom in earnings decline I have been looking for is not here and it looks now that we may have two more quarters to go before it happens. Of course, if oil prices can stabilize/rebound and/or the benefits of low oil prices begin to show themselves in the economy this may change.

The Oil Index

The news of the day in the oil patch is a lack of news, concerning the non-OPEC/OPEC rumor for a deal to support prices. Without that to buoy sentiment supply/demand imbalances return to the forefront. Supply remains high, production remains high and demand expectations remain diminished. Today WTI fell more than -3% intraday to break below the $30 level, and close with a loss near -3.75. Without catalyst for support this could drop to the recent lows or further.

The Oil Index fell as well, dropping more than -1.5% intraday to fall below the 950 level. The index is in down trend, concurrent with the underlying commodity, with indicators consistent with a move lower. The bullish MACD is in decline, showing a loss and reversal of upward momentum, with a bearish crossover on stochastic, indicative of a return to support, with target near the 900 level. If oil prices continue to fall this index is likely to fall with it and set a new low. A break below 900 could go as low as 800 in the near to short term.


The Gold Index

There be gold in them there hills! The price of gold skyrocketed today on flight to safety concerns and weaker dollar. Today spot prices shot up nearly $40, 3.35%, to come very close to hitting the $1200 resistance target. This move is gaining strength and indicated to move higher and at least test resistance. If resistance sparks profit taking or other form of pull-back this will likely be a good entry for bullish positions into the short term. I say this because the current MACD peak is very strong, setting a +12 month extreme, and indicative of higher prices and/or a retest of current highs.

The gold miners got a boost too, rising gold prices are going to do wonders for their earnings and margins, coupled with lower energy costs, and will likely be seen in the reports as early as next reporting season. Today the miners ETF GDX gained 4.30% after gapping up at the open and has exceeded all my targets. The indicators are very strong, MACD is setting an extreme peak and stochastic has crossed the upper signal line, so I expect to see a test of the $18 level if not new highs in the coming weeks. Resistance may spark profit taking or consolidation which would be prime time for additional bullish entries. Today's candle, a possible shooting star or pin bar, is indicative resistance or profit taking is already setting in.


In The News, Story Stocks and Earnings

The dollar remains weak with no expectation of strengthening this week. Today the DXY fell about a half percent after attempting to move higher and is now sitting on the 50% retracement level hit last week. The index appears to be consolidating into what could become a bearish flag. If so a move below the 50% line is likely to take to the 61.8% line, near $95.50. There is very little data to move the market this week and what there is comes out on Friday. EU GDP could move the EUR, US retail sales could move the dollar, both will affect central bank outlook. In order for the dollar to strengthen the data will need to either show a much weaker EU economy, or a much stronger US consumer, than currently expected. Simply speaking of US data, weak or lackluster retail sales may decrease FOMC rate hike expectations and further weaken the dollar all on its own.


The techs got hammered again today. Last week's poor results and weak guidance from LinkedIn has put a hurting on the sector along with some massive downward revisions to earnings expectations for companies like Yelp(reported today after the bell), Tesla, Zynga, Groupon and Pandora, many of which report this week. Facebook lost -6% in today's session, Zynga -8% and Yelp -13.5%. Today the XLK Technology Sector SPDR fell more than -2.5% and is approaching a 6 month closing low.


It wasn't all pain in the market today. Tyson Foods surged more than 5% to hit an all time high. This is after hitting an all time high last week, on the heels of a much better than expected earnings report, and comments from company execs to the affect that record profits would be reached again in 2016 (1st quarter profits rose nearly 50% from the previous year). Today the stock is riding high on more than 4X average daily volume with strong momentum and strengthening stochastic.


Yelp's earnings, scheduled for release after the bell, actually hit the market around 1PM due to a software bug. The report was better than expected but came with weak guidance and the announced departure of company CFO. This quarters report, while better than expected, nevertheless showed a loss compared to last year's profit and helped to send the stock down more than -13% to hit a 4 year low.


The Indices

The indices got hit hard today there is no doubt about that. What there is also no doubt of is that buyers stepped in at the lows. Today's action was led by the tech heavy NASDAQ Composite which closed with a loss of only -1.65% after hitting an intraday low more than -3%. Today's action created an opening gap, a move higher, a move lower and a close near the open, setting a new low and leaving a doji candle below previous support. The doji, along with indicators that are highly divergent from the low, suggest we may in fact be at or near the bottom of the current correction. Resistance is at 4,350, next target for support should the index fall further is near 4,100. A move back above 4,350 would confirm this bottom, at least in the near to short term.


The broad market S&P 500 did not form a doji today but it did form a long lower shadow attached to a medium size black candle that confirms support at the 1,850 level, the second such candle in the last month of trading days. The indicators are weakening, pointing to possible further testing of support, but also divergent from today's new closing low in support of support. This combination, indicators and candles, is setting the index for a possible bounce back to resistance but that is yet to be seen. If a bounce occurs resistance is near 1,900. If support fails a move to 1,800 could happen pretty fast.


The Dow Jones Industrial Average made the third largest decline in today's session, -1.10%. Today's candle has a relatively small body, not big or not small, with a long lower shadow in confirmation of the 15,600 support level. Today's action is not overly bullish but when combined with the previous test of the 15,600 level and bullish bias to the indicators make the blue chips look like an index setting up to rally off a bottom. Current support target is the 15,600 level which may be tested again, resistance target is near 16,500. A break below support would be bearish, a break above resistance bullish, in the meantime look for continued consolidation driven by news, earnings and the ever shifting price of oil.


The Dow Jones Transportation Average was today's smallest loser and actually touched into positive territory before closing with a loss of only -0.26%. The transports have long been the leader of the market; they led the rally to new all time highs for many years, they led the market into correction last year and now look as if they might be leading us again, out of correction. Today's action created a small doji candle, confirming both the near term resistance of the short term moving average but also rising support following the January bottom. The indicators are bullish and gaining strength so I would expect to see at least a retest of the short term moving average if not a break above. MACD momentum is also setting an extreme peak, if not a very strong one, which is often indicative of a more prolonged move to follow. A break above the 7,000 level would be bullish, at least in the near term, and could carry the index up to 7,500.


I don't want to come out and say that we are at the bottom, there are certainly risks and reasons to be worried about the economy and the market, but there is also a case to be made in defense of a bottom. The indices have bounced from support, bearish peaks in momentum are, across the board, divergent from the lowest lows, bullish peaks are at least 12 month extremes and today's market action is at least reminiscent of capitulation.

The flipside of the coin is that, before we see positive earnings growth, we're going to see some more negative earnings growth. This could, and is likely to, weigh on the market and at least cap any gains we see if not keep the market trending at or near these levels up to and until earnings expectations begin to brighten. Worst case scenario, we're getting set up for another leg lower before hitting bottom.

In the meantime there is the FOMC to contend with; Janet Yellen speaks twice this week, FOMC minutes are due out next week and the next meeting is about a month away. Rate hikes are still on the table however unlikely the data makes them seem. At this point it's hard to handicap what they might do, and how the market may take it. Dovishness could send the market into stimulus driven rally or scare it into thinking the economy is falling apart. Hawkishness could scare the market into thinking the recovery will be quashed, or confirm that it is on solid footing.

And the oil factor. Plunging oil prices have helped to tank the market. Low prices are bad for energy companies which we have seen. Low prices are good for EVERYONE else, which we have yet to see. In the end, it will all come down to earnings and earnings expectations.

Until then, remember the trend!

Thomas Hughes