Introduction

Monday traders provided some follow through to last week's rally, the caveat is that much of the gains were driven by oil prices. A variety of factors, including the evolving potential for a deal to support oil prices, helped to drive WTI up by nearly 7% today and the market followed it higher.

The rally started early. Asian indices climbed about 1%, led by the Shanghai index 2.37% gain. Aiding the rally in China, and perhaps the rest of the world, is the weekend announcement that the head of China's securities regulation department was removed and replaced. Xiao Gang, former head of regulation, was singled out for blame concerning the series of missteps taken by the regulator over the past year. European indices made gains near 2%, driven by oil prices, the rally in Asia and relief over the deal keeping the UK in the EU>

Market Statistics

Our indices were indicated higher from the earliest part of the pre-opening session; futures indicated an open nearly 1% higher all morning. At the open the indices quickly moved up by the 1% indicated and were pushing 1.25% within the first 15 minutes of trading. The early surge higher reached its peak at 10AM, about +1.5% for the SPX, and the drifted sideways until early afternoon. Around 1:30PM news that United Technologies and Honeywell may be in talks for merger sent the indices back to test their early highs and then move a hair higher. Late afternoon trading saw the indices trend sideways into the end of the day leaving the indices at or near their highest levels.

Economic Calendar

The Economy

There was no economic data released today but there are some important releases on the schedule for this week, next week is the first of March so we will be getting the monthly round of macro data including ADP, NFP and Unemployment. This week look out for the Case-Shiller 20 City Index and consumer confidence on Tuesday; New home sales on Wednesday; jobless claims, durable goods and the housing price index on Thursday and then personal income and spending, Michigan Sentiment and the 2nd estimate for GDP on Friday. GDP is expected to fall to 0.5% with this read.

Moody's Survey Of Business Confidence ticked higher this week, gaining 0.4% to hit 28. This is up from last week's reading of 27.6 which was a new near term low. The index has been in steady decline since hitting a historic high last summer and shows no sign of bottoming. Mr. Zandi says that the decline in sentiment is clearly linked to global financial market turmoil.


According to FactSet 87% of S&P 500 companies have reported so far this season. Of those 68% have beaten on the bottom line while only 48% have beaten on the top line. Since the start of the reporting season 7 sectors have performed better than expected, led by telecom which has posted a +79% increase in earnings over the previous quarter. Energy of course is the laggard, earnings growth is -73.7%. Ex energy things look a little better, earnings growth is in the range of +7.9%. There are 48 S&P 500 companies and 1 Dow component due to report earnings this week


Looking forward the earnings growth picture continues to deteriorate. First quarter earnings growth projections have now fallen to -6.5%, as have had second quarter growth projections, now -1.1%. Beyond that growth is expected to return but projections continue to decline. Third quarter growth is projected to be 5.1%, fourth quarter projections are 10.0%. Full year 2016 earnings growth projections are now only 3.4%.



I've been looking for the dip in earnings growth to come to an end for the past two quarters, so far it has not materialized. Based on the projections, and aided by the potential bottom in oil prices, it looks like the 2nd quarter could be the turning point. However, until the estimates begin to rise negative expectations could weigh on the market and send the indices back to retest support.

The Oil Index

Oil prices made their largest move yet. WTI gained more than 7.5% on an intraday basis to briefly touch $32. There is still no real sign of a change in fundamentals but there is growing reason to suspect that sign may be at hand. Not only is the chatter surrounding the OPEC/Russia deal to curb output growing, last week's drop in US rig count and today's prediction by the IEA suggests that US production will soon start slowing as well. The IEA says that US shale production will decline by 600K bpd in 2016, followed by another 200K decline in 2017. The caveat is that until some concrete sign of falling production and/or supply hits the market prices are being supported by rumor and subject to quick reversal. Near term resistance is about $32, next is about $35, break above these levels could help draw in more bulls.

The Oil Index gained about 2.75% in today's session. The move appears bullish but was halted at resistance, just above 1,000. This level has been resistance twice before and is now the top of a two month trading range. The indicators are pointing higher but still look weak to me and suggest that the trading range will hold unless another catalyst emerges to drive oil prices higher. A break above 1,000 could go to 1,100 in the near term, support is currently around 950.


The Gold Index

Gold prices fell today, losing about -1.75%, but remain above $1200. Today's move was driven by strength in the dollar, likely due to last week's CPI data. CPI was slightly hotter than expected, not much, but enough to keep an FOMC rate hike on the table. This week GDP and personal income/spending data may help drive this trade; stronger data would support rate hikes and the dollar, weaker data would support no rate hike and gold. Upside resistance for the metal is between $1230 and $1250, support is just above $1200. In any event, gold prices are well off of their lows and helping to support the gold miners, at least in the near term.

The Gold Miners ETF GDX opened the day with a substantial loss, greater than -3%, only to have buyers step in and drive the sector higher. By end of day the ETF had gained more than 1.25% to close near the high of the day. Over the past week or so the sector has been consolidating, at this time it looks like a potential pennant or flat topped triangle but as yet is not confirmed. Gold prices will no doubt play a part in how this pans out, pun intended, as will Goldman Sachs call to short gold.

Regardless of the data this week, next week and the week after will be very important in terms of FOMC speculation, the dollar and the path gold prices take from here. I am not really expecting a hike at the next meeting, about 3 weeks away, or any overtly hawkish statements, a move that would likely help devalue the dollar and support gold. On a technical basis momentum, specifically an extreme peak in the MACD, suggests that the rally in gold is not over.


In The News, Story Stocks and Earnings

The Dollar Index got a little boost today, about 1%, but was halted at resistance. Resistance was met at the 38.8% retracement level which was able to push the DXY back below the 30 day EMA. The indicators are pointing higher so resistance may be tested again but in light of the December to present down trend in the index such a move looks more like a shorting opportunity than not. Resistance is at $97.50, first target for support is near $96.50 and the 50% retracement line.


The news that Honeywell may be in the market to buy United Technologies helped to lift the market during the afternoon portion of today's session. The news also helped to lift shares of UTX, and initially Honeywell too, but by the end of the day Honeywell was down nearly -2%. The deal is expected to be almost a merger of equals but puts a premium on shares of UTX. At this time there is no deal on the table and there is expected to be pushback from regulators and companies doing business with both UTX and HON.


Dean Foods reported better than expected earnings and upbeat first quarter guidance before the opening bell. The nations leading dairy foods company beat adjusted earnings by $0.02 and provided guidance in a range above consensus estimates, driven on a decline in milk prices. Despite the good news investors dumped the stock, driving share prices down by more than -8.5%. The only reason I can see for the sell off is lack of confidence in the guidance. According to forecasts by AGWeb currently low milk prices are expected to lead to lower global production and increased demand among consumers, leading to a shortage of dairy and an increase in prices later on in the year.


Lumber Liquidators suffered from a revised statement by the CDC. The new release says that the cancer risk associated with formaldehyde treated wooden flooring was greater than first assessed. The reason being an error in calculations. The news sent shares down by nearly -20% to trade just above the long term low set in the wake of the initial report released last year.


The Indices

Today was a good day for us bulls. The Monday morning buyers were out in force, drove the market higher right from the start, held those levels all day, pushed to a new high and closed near the high of the day. Gains were fairly even across the board but one index stood out as the definite leader, the Dow Jones Transportation Average. The transports gained 1.86% in today's session to come just shy of upside resistance target of 7,500. The indicators are on the rise and gaining strength so it looks like this level could be tested at least. Stochastic and MACD are both showing some strength although stochastic is still suggestive of a trading range, it is at the upper signal line and may cross over but has not yet. MACD on the other hand is ticked higher in with today's action and remains at a multiyear extreme and suggestive of ongoing up trend. A break above 7,500 would help confirm reversal and could take the index up to 7,750 8,000.


Th next biggest gainer was the NASDAQ Composite. The tech heavy index gained 1.47%, breaking above the 4,550 resistance line and the short term moving average. The indicators are on the rise and pointing to higher prices although stochastic is not yet showing a lot of strength. MACD is at an extreme peak and on the rise suggesting ongoing up trend and/or a retest of the current high should a pull back to support should occur. Next upside target is near 4,650 with first target for support near 4,500.


Third up in today's run down is the S&P 500. The broad market made a gain of 1.45%, closed near the high of the day and just short of a key resistance level at 1,950. A break above 1,950 would help to confirm the reversal and may be on the way. The indicators are bullish, pointing higher, suggestive of a test of resistance or break out but not yet showing a lot of strength. Momentum has not reached an extreme but it is still on the rise, stochastic is pointing higher but overbought in the nearer term and consistent with a trading range in the longer.


The Dow Jones Industrial Average brings up the rear in terms of daily gains but is the most bullish of all in terms of price action. Today the blue chips broke above the top of the two month trading range with rising indicators and appears to be heading higher. The indicators are bullish but like on the SPX chart still weak when compared to the transports and techs; MACD is on the rise but not yet at an extreme level, stochastic is pointing higher but from the middle of the range. The good thing about this is that the indicators show there is room for the index to run with next upside target near 17,000 and the underside of the long term trend line.


It looks like rally on, at least into the near term. Today's action was very promising and could continue to drift higher into the end of the week. The risks are economic data, FOMC speculation, rumors from the oil patch and earnings. This week is going to be fairly light on earnings, not devoid but light, as are economic releases.

The headline sector for earnings this week will be the retailers. Names on the list include Target, TJMaxx, Best Buy, Kohl's and others. Also of note are food and berage companies such as Anheuser-Busch and Domino's Pizza. FOMC speculation may simmer some tomorrow with the release of consumer confidence numbers but the real movers in terms of data aren't due out until Friday. As for OPEC and oil, rumors are solidifying a production cap could be agreed upon but even so, fundamentals are still bearish so I expect to see more volatility in the $28 to $32 range.

I have to say it looks like the market has hit bottom and is in processing of reversing. I am however still concerned about earning outlook for the coming two reporting seasons. If projections continue to decline we could easily see the indices return to retest support levels. Once we get past what we can say for sure is the bottom of the earnings recession and actually begin to look forward to real earnings improvement I will be much more bullish. Until then I'm bullish but still ever so cautious.

Until then, remember the trend!

Thomas Hughes