Introduction

The market pulled back from resistance in today's session, but basically held steady near last week's high, ahead of a big week of economic data. It is once again time for the monthly blast of macro-data including the Fed's Beige Book, auto/sales, unemployment rate and non-farm payrolls. Low expectation for another interest rate hike, rising oil prices and rising gold prices helped add support.

Market Statistics

Action in the international markets was mixed, Asian indices got slammed by negative sentiment following the G20 summit (no plans to boost global growth were unveiled) and that sentiment spilled over into the European markets. Asian indices were led lower by the mainland Chinese Shang Hai index (-2.87%) but losses may be reversed on news from the PBOC. The PBOC announced, after the close of the Chinese trading day, that they were lowering the capital reserve requirements for banks in hopes of further stimulating their slowing economy.

European indices began their day with losses in the range of -2.5 to -3% but regained most of those losses by end of day on the PBOC news, and another positive headline out of the oil patch.

Early action in the futures market indicated a flat to negative open for the US market during the earliest part of the morning. Trading turned positive by 8:45AM, by 2 to 3 points for the SPX, and held that level into the opening bell. Trading after the open was choppy for the first hour, testing support and resistance in a very narrow range around last weeks closing prices, until about 10:40 when oil prices started to climb. From 10:45 to 11:45 the market steadily rallied, adding about 10 points to the SPX from the morning low.

The next two hours saw the market sell-off in the same slow steady manner as it rose, leaving the indices at or near break-even levels for the day. By 2PM the bears were back in control, breaching break-even levels and sending the indices marching lower for the rest of the day. By 2:30 the morning lows were broken, by 3:00 the SPX was down by -10 points and by the close of trading nearly -16.

Economic Calendar

The Economy

There was not a whole lot of data out today although the calendar for the week is packed full. Today we got reads on pending home sales and Chicago PMI along with the weekly Moody's Survey, all out at 10AM. The Moody's Survey of Business Confidence gained a half point to hit 38.5. This is the second week of advance since hitting a multiyear but leaves the index very near to that low. In the near term declining business sentiment is driven on global financial market turmoil and uncertainty over China's economic outlook. Outlook for the future remains a bit more positive with signs, according to Mr. Zandi, that sentiment is stabilizing.


The Chicago PMI came in at 47.6 versus the expected 52 reversing gains made last month. Within the report 4 of the 5 gauges of activity were negative led by an -18 point drop in production. The only positive reading was for delivery marking a continued draw down in inventories. Inventories have been in contraction for 4 months, negative in the near term but a positive for the long term as those inventories will need to be rebuilt at some point. Employment has contracted for 5 months now and is at the lowest levels since 2009, for the manufacturing sector.

Pending home sales fell by -2.5% from December to January, December data was revised higher making this month's decline a wash. On a year over year basis January sales are up 1.4% making it the 17th month of year over year sales increases. NAR economist Lawrence Yun says that weather conditions had some effect on slowing sales but the real problem is higher prices driven by low inventory.

This week's economic calendar: On Tuesday auto sales, ISM index, and construction spending. Wednesday ADP employment is released in the early morning, followed by the Beige Book later in the day. Thursday is weekly jobless claims, Challenger report on planned layoffs, productivity, unit labor costs, factory orders and ISM services index. Friday wraps it up with average work week, hourly earnings, the unemployment rate and the NFP.

According to Factset 96% of the S&P 500 have reported earnings, 11 companies are scheduled to report this week. Of those who have already reported 69% have beat earnings expectations while only 48% have beaten revenue expectations. The blended rate of earnings growth is now -3.3%, much better than the low of -6% forecast at the end of January but a far cry from positive. This is now the 3rd month of negative growth and we will likely see at least 1 more if not 2.


The energy sector remains the biggest drag on earnings growth, the sector is posting a -72% earnings growth rate so far this season. Oil will continue to drag on growth for the next few quarters. First quarter projections have the energy sector posting a -92% growth rate as of this week's esimates and that does not improve substantially until late in the year. Earnings in the sector should start growing again in 2017 and are forecast to expand in the range of 143%.

Projections for the 1st quarter and full year 2016 continue to decline although on a quarter to quarter basis begin to improve starting with the 2nd quarter. Full year 2016 earnings growth is now forecast at 2.8%, positive but well off the highs set last summer near 15%. First quarter earnings projections have fallen to -7.4% and a new low.


Looking out to the 2nd, 3rd and 4th quarters of 2016 projections are in decline but turn positive in the third quarter and expand into the 4th. Second quarter growth is forecast at -1.6%, 3rd quarter forecast if 4.7% and 4th quarter is 9.4%.

The Oil Index

Oil prices jumped more than 3.5% to close near $34. Driving the move was a variety of factors that help support the idea that oil prices have bottomed. Last week rig counts were reported down for the tenth week in a row adding to the idea US production is on a declining path. Russia is having a meeting of its oil chiefs tomorrow in an effort to prepare for the upcoming meeting between it and OPEC. In addition to this a statement from the Saudi cabinet and January output data raises the chances an actual curb to output to could be on the way.

From the Saudi Cabinet . . . "The kingdom (of Saudi Arabia) seeks to achieve stability in the oil markets and will always remain in contact with all main producers in an attempt to limit volatility and it welcomes any cooperative action," . The Reuters poll shows that output held steady in Saudi Arabia from December to January although overall OPEC production fell. The two largest and offsetting factors are a decline in Iraq due to violence in the region and rising output from Iran.

A new shot was fired from the shale drillers that will have an impact on oil prices into the future. They say that they are ready to ramp up production as soon as oil hits $40 a barrel.

In the near term oil is rising and will likely test its recent high near $36, longer term supply and demand are still out of balance. Oil may have bottomed but I think it too soon to call a reversal, at best we may see some stabilization which is in itself a good thing. Stable oil prices will undoubtedly help stall declines in earnings and earnings projections. This week's data could help move oil but I think it is going to come down to demand. Supply and production are still very high, demand is only tepid and the OPEC/Russia curb won't change that situation.

The Oil Index fell in today's session, counter to the rise in oil prices. The index remains range bound between 950 and 1000 with little sign of impending break out. The indicators are bullish but with waning momentum and stochastic looking like it is about to rollover the range appears to be confirmed. A break to the upside is unlikely without some strong catalyst, a move lower more likely with a possible break below 950 to retest support near 900.


The Gold Index

Gold prices rose more than 1.59% or nearly $20 in today's session to trade near $1240. Gold continues to consolidate between $1200 and $1250 with a bias to the upside. Safety seekers, fund inflows, physical buying and low expectations for an FOMC rate hike are all providing support. It looks like gold is prepping for a big move, most likely centered on the FOMC meeting, that could take it $200 in either direction. Spot price is now $200 off of its lows, if gold breaks to the downside it could easily retest lows, if it breaks to the upside $1450 is a potential target. This weeks data could move gold prices, if too strong data will lead to FOMC rate hike speculation, rising dollar value and lower gold.

The gold miners continue to benefit from higher prices and lower oil prices. The Gold Miners ETF gained more than 3.5% and is trading near its 8 month high. The ETF has been trading around the $19 level for over 10 days on a wave of strong momentum. MACD is in decline at this time, from its extreme peak, but as yet has not led to a decline in prices. Stochastic remains strong above the upper signal line. Upside target is near $21 at this time with risk present in the economic data, the ECB meeting next week and the FOMC next week. First target for support should the sector pull back is $18 with next target near $17.


In The News, Story Stocks and Earnings

The Dollar index tried to add to Friday's GDP driven rally but couldn't hold today's gains. The index created a doji candle midway between the 38.8% and 23.6% retracement levels and may be more supported by ECB expectations than FOMC. The ECB is meeting next week and there is some hope they will increase QE, weaken the Euro and strengthen the dollar although hopes are not that strong. According to the CME's Fed watch futures are pricing in an 8% chance of rate hike at the next meeting, up from 6% last week, giving little reason to expect the dollar to strengthen much in the near term.Adding to this idea is the fact that the yen keeps gaining against the dollar on flight to safety trades, a move that sent the USD/JPY down by 1% today. If the ECB fails to meet expectations the DXY could sink back below $97.50.


Valeant Pharmaceuticals had another rough day today. First off, their CEO came back to work after months spent recuperating from pneumonia, that was good news. Other than that the company is suffering from a delayed earnings reporting and withdrawn guidance, in order to fix accounting errors, and an announced investigation by the SEC. No details into this new investigation are available yet. Shares of Valeant fell more than -16% in today's session.


Taser delivered a stunning report, beating on the top and bottom line with record revenues, up 19.7% over this same time last year. The performance was driven by improving sales and improving margins and is expected to continue into the coming year. The news was well received and helped send the stock up by more than 10%.


Lumber Liquidators reported a much bigger loss than expected. The company's sales have not recovered from the laminate flooring scandal and the latest news from the CDC are not going to help. Much of the loss is due to decreased margin in relation to the write-off of Chinese sourced laminate flooring. Shares tested support and set a new intraday low in today's trading but finished the day with a gain near 2%.


The Indices

The indices tried to hold at Friday's closing levels but were not able to. Today's action was bearish, but not too strong, and not overly concerning considering the amount of data due out this week. Today's action was also fairly broad, no one index made significantly more than another, led by a -0.81% decline in both the S&P 500 and the Dow Jones Transportation Average. The trasnsports created a small bodied black candle just below resistance at the 7,500 level. Momentum is declining but strong, and stochastic is strong and moving higher within the upper signal zone so it looks like resistance could be tested again. A break above this level would be a bullish sign and could lead to a move up to 8,000 in the near term. Support is near the moving average.


The S&P 500 made a slightly larger black candle but also moving down from resistance. Resistance is at the 1950 level and if broken, could precipitate a move up to 1980 or higher. The indicators are bullish although MACD appears to have peaked, consistent with resistance. Stochastic is showing some strength crossing the upper signal line with today's action and suggesting a retest of resistance.


The Dow Jones Industrial Average made the next biggest decline, about -0.74%. The blue chips created a medium bodied black candle with a bit of upper shadow, falling from resistance. Resistance is near 16,700 and may hold the index back in the near term although the short term moving average appears to be giving support. Support may be tested over the next couple of days but the indicators are bullish, stochastic is showing strength, so I would expect to see resistance tested again, if not broken.


The NASDAQ Composite made the smallest decline in today's session. The tech heavy index fell only -0.71% creating a small black candle with moderately sized upper shadow. The candle is indicative of resistance near 4,600 although its strength is yet to be seen. The indicators are bullish and indicate a rising index so I think we can count on resistance being tested again. Further, the index is supported by the short term moving average and the 4,550 support line so any pull back is likely to be muted provided no bad or badly perceived news hits the market. A break above resistance could take it up to 4,750, a break below support may find next support near 4,500.


The indices bounced from their lows and have moved higher. They are supported by rising oil prices, rising gold prices, better than expected earnings (not good earnings) and low expectation of an FOMC rate hike. They are now at resistance waiting on economic data and two central bank meetings. This week is going to be about the data.

Today's round of data shows that the economy has cooled off a bit from December, yet remains steady to positive from year ago levels. I think what we need to see the rest of the week is confirmation that the economy is still growing, but not growing so fast as to push the FOMC into raising rates. Basically, Goldilocks numbers. The most important piece, at least the piece with the most attention paid to it, will be the NFP.

Until then, remember the trend!

Thomas Hughes