Introduction

Th market drifted higher today as oil prices reached a new high. There was little in the way of market moving data today, aside from a 4.5% gain for WTI, and little due out this week. The biggest mover this week is likely to be the ECB meeting on Thursday when they are expected to increase QE in some form, what they will do and will it meet market expectations is the question.

Asian indices finished their Monday mixed. Japan fell, Shang Hai rose and the Hang Send finished the day flat. Moving those indices, or not, was a new set of data targets issued at the National Peoples Congress over the weekend. New targets for 2016 are GDP in the range of 6.5-7%, CPI of 3% and a budget deficit of 3% of GDP. Analysts seem to think the targets mean that China is not through with its stimulus efforts and expect to see an expansion of current programs in the coming months. Neither the China news nor ECB expectations were able to support the EU markets which closed with loses in the range of -0.25 to -0.45%, led by the German DAX.

Market Statistics

US futures began the day in negative territory and drifted lower up to about the 6AM hour. Losses at the low were in the range of -0.4% (S&P 500) and held relatively steady between 6AM and the opening bell. The open was a bit weak, the indices opened with the indicated losses and then ever so slowly crept higher. The Dow Jones Industrial Average was the first to hit positive territory and by noon the S&P 500 and Nasdaq Composite joined it. Intraday highs were reached in early afternoon, just after 1PM, about 0.25% for the SPX.

Once the highs were hit the market retreat back to the day's opening levels and by 2:30PM were bottoming. Late afternoon trading saw them bounce back to retest resistance at break even levels. By the close most were back in positive territory but did not regain the early highs.

Economic Calendar

The Economy

There was very little economic today and there will be very little this week. The only release aside from the Moody's Survey was consumer credit figures announced at 3PM. The big event of this week will be the ECB meeting, next week heats up with a full calendar including a BOJ meeting and the March FOMC meeting.

The Moody's Survey Of Business Confidence gained 0.7% from last week making this the third week of gains since hitting a multiyear low. This week's reading of 29.2% is an improvement but still very low relative to the high set last summer. According to Mark Zandi the number, even though week, is still indicative of a healthy and expanding economy. In his summary he says that businesses are most concerned about current conditions with outlook for the summer coming in much stronger. It is possible that sentiment has bottomed but whether or not it has reversed is yet to be seen.


The fourth quarter 2015 earnings reporting season is almost over. According to Factset 99% of the S&P 500 has reported earnings with only 2 scheduled to report this week. The blended rate for earnings growth is now -3.4%, slightly worse than what was reported last week and most likely what we will see as the final rate once the season is officially over.

Expectations for the first quarter and every quarter in 2016 have been revised lower from last week. The first quarter is now expected to post an all index earnings growth rate of -8.0%. This is down from 0.3% at the end of December and hurt by downward revisions in all 10 sectors, led by the energy sector. The energy sector is now expected to post an earnings decline of -94.9%, more than double the decline predicted on December 31st.


Projections for the 2nd, 3rd and 4th quarters have also come down in the past week but despite this full year projections gained a tenth to +2.9%. This is likely due to rising oil prices, at least in part, and could signal the bottom in declining projections. Another reason could be the utilities sector. This sector saw a massive increase in expectations for the full year over the past week, jumping to +25.2% from only 2.8% last week, while the other 9 sectors had only marginal downward revisions.


The Oil Index

Oil prices surged another 5.5% today as changing sentiment, fund in-flows and chatter from OPEC producers support prices. The overall supply and demand outlook is still on the bearish side with little expectation of increasing demand but the recent bottom, declining US rig counts, low output from Iraq and the upcoming meeting between Russian and OPEC have raised hopes. It is likely we will see a retest of support but when it may come is not clear. Today WTI climbed to near $38 with the next obvious resistance level at $40. If you have long positions keep your stops tight and ride it out.

The Oil Index climbed on the back of oil prices and has extended its move above resistance. The index has completed a double bottom reversal that appears to be confirmed by the break and extension above resistance at the 1050 level. The indicators are convergent with the break to new highs and consistent with a rising market. Next upside target is near 1115. First target for support on a pull back is 1050 with next target near 1015.


The Gold Index

Gold prices wavered a bit today but held near the $1265 level. In early trading spot prices were able to move higher by a few dollars and then later in the day they fell back to just below last week's closing prices. Spurring the move in early trading was FOMC rate hike and ECB QE expectations, later in the day comments from the Fed's Fischer and Brainard helped to push them lower although even their statements didn't keep them down. The two central bankers both see signs that inflation is on the rise but neither seemed to think that it was necessary to rush into raising rates just yet, Brainard at least argued for patience in the light of risks to economic growth.

The gold miners were able to move higher in today's session although gains were capped by golds late day reversal and Fedspeak. The Gold Miners ETF GDX gained about 3.5%. Today's candle helps to remove the threat posed by Friday's pin-bar/shooting star candle although consolidation or reversal is not out of the question. The indicators are equally indicative of consolidation or potential reversal so caution and tight stops are advisable. This index, and the underlying commodity are still riding a strong wave of upward momentum and could continue higher but with the ECB and FOMC meetings coming up risk of reversal is present, even with a read on expectations there is still no telling what either may do. Resistance is near $21 with first target for support near $18.


In The News, Story Stocks and Earnings

The dollar remains under pressure. The next two weeks is going to be uuuge for the Dollar Index with three central bank meetings on the schedule. The BOJ may be a mover but without doubt the ECB and the FOMC will. The FOMC has a 0% expectation according to Fed Funds Futures to raise rates which should at least keep dollar values down if not weaken it further. Economic data next week could go a long way toward helping that move; Goldilocks data and in particular CPI and PPI will keep rate hikes off the table for the next couple of meetings at least. The real risk, in my opinion, is the ECB. They are expected to enact more QE this week. If the ECB meets or exceeds expectations the euro is likely to fall versus the dollar, if they don't the euro is likely to strengthen. Based on the past few years of watching the ECB I am leaning toward the idea they will do more QE, but it will not be what or as much as the market expects.

Today the Dollar Index fell back to the three week low near $97. The indicators are weakening and, for now, pointing to lower prices. Down side target are $96.50, $96 and $95.50 in the near term, all of course dependent on what the ECB does later this week.


BG Staffing is a micro-cap staffing service that I thought would be interesting to look at in light of economic conditions and the labor market. They released earnings this morning before the bell and, frankly, did pretty good last year. On a quarterly basis the company increased revenue by 55.3% from last year, net income by 207.7%, and adjusted EBITDA by 100.7%. The company operates in three segments had substantial gains in profits for each; Multifamily up 45.9%, Professional up 173% and Commercial up 25.2%. Full year 2015 net income is up 1346.9% and the company sees 2016 easily matching industry expectations of 6% growth. Today's market action was flat, the stock closed with little movement on average volume which is only about 3,000 shares daily.


Shares of Netflix fell -6% today as new research from ITG spooked investors. The new report says current market valuation and expectations for 2016 are high. They expect 1Q new subscribers to track below estimates and for full year subscriptions to fall -10% from last year. This comes as the new season of House Of Cards is released (we watch it but only subscribe each year long enough to do so). The company is expected to spend about $6 billion on original content this year alone.


Shake Shack reported after the bell and did not satisfy investors. The results were good, but only as expected and not good enough for the wannabe star of the growth restaurant scene. Quarterly revenue grew 46% from last year, reversing a loss in the comparable quarter, while sales rose 49% and same store sales increased by 11%. Guidance was also reaffirmed, but only in line with current consensus. Shares fell -7% in after hours trading.


The Indices

The indices tried to make gains today and some of them did. Today's action was led by the Dow Jones Transportation Index which made an advance of 0.45% and set a new two month closing high. The index created a small bodied candle with long lower shadow indicative of support but upside was contained by resistance at the 7,700 level. The index is bouncing and looks like it wants to move higher but this resistance level will need to be overcome. The indicators are both bullish and pointing to higher prices although momentum is waning and the near term is overbought. A little consolidation would be good for the longer term health of the rally and could come over the next week and half up to and until the FOMC meeting. If the index breaks above resistance next upside target is near 8,000 with a possible move up to 8,400. First target for support should the index pull back or enter consolidation is near 7,500.


The Dow Jones Industrial Average gained 0.40% in today's action and set a new 2 month intraday and closing high. The blue chips created a small bodied candle, but slightly larger than the previous three, and looks like it will continue to move higher. The indicators are both bullish and support rising prices although there is risk of consolidation or pull back; stochastic is overbought and momentum is declining. Today's move was halted by resistance near 17,100 and could easily enter a sideways range if no catalyst emerges to drive it higher. A break to the upside could carry 500 or 600 points higher to next resistance target near 17,750. First target for support should the index pull back or enter consolidation is near 16,750.


The S&P 500 made the third biggest gain in today's session, about 0.09%. The broad market tested support at the 2,000 level and it held. The broad market was also able to set a new 2 month closing high. The indicators are both bullish and rising, consistent with a rising market and higher prices. Momentum is not strengthening, but it is not waning either, although stochastic is indicating overbought conditions so it is not unlikely we see a consolidation in the near term. If support fails first target for support is near 1,950 and the long term up trend line. Next target for resistance is near 2,025 with the range between 2,000 and 2,025 as a possible consolidation zone. If 2,025 is broken next upside target is 2,075.


The NASDAQ Composite was the only index to post a loss in today's session although it was able to poke its head into positive territory on an intraday basis. Even with today's loss this index looks like it is moving higher, the indicators are both bullish and consistent with a market in rally. Today's action appears to be part of a consolidation above the 4,650 level, a consolidation that could help alleviate overbought near term conditions and set us up for another leg higher. For now resistance is at the 4,750 level, the tip of Friday's candlestick, with first support target near 4,650. The 4,880 is first upside target on a bullish break out, 4,490 is down side target on a bearish break with possible support at the short term moving average near 4,586.


Today's action is promising if a bit tame; the indices tested support levels and they held with many of them setting new closing highs. This action is welcome in mid rally as it will help the market to digest the news and changes of sentiment that drove it higher as well as to alleviate overbought conditions that are present in all four of the indices I regularly track. This week is a good week for such a move too, there is not much happening other than the ECB meeting giving us 6 full trading days before the FOMC meeting next week.

Final thought; don't forget about oil. Oil prices are one of the major if not the main reason we are in rally mode right now. While oil prices move higher and/or remain at these levels the market should respond favorably, if they reverse and fall back to retest support the market could fall with it. I don't think it's time to sell but a little profit taking, perhaps examining stop loss levels and/or a little protection for bullish positions would not be unwise.

Until then, remember the trend!

Thomas Hughes