Introduction

Today's market action was light and in a tight range as trader wait on the FOMC once again.

Today's action is a positive sign for us bulls considering the drop in oil prices, but comes with a few caveats; namely the candles formed are indecisive little spinning tops, there is an important FOMC policy announcement in two days and a whole lot of data due out this week.

The international markets were not as indecisive as ours. Asian indices climbed by roughly 1.75% driven by last week's ECB move and positive data from China. China reported over the weekend that industrial production grew by 5.4% and retail sales grew 10.4%. Another positive for China; regulators say they won't relaunch market circuit-breakers for a few years to come. In Europe trading was choppy but left the indices in positive territory, buoyed by last week's ECB move and hurt by falling oil prices. The move was led by the DAX with a gain of about 1.6% which is now trading at 2 month highs.

Market Statistics

Futures trading indicated a flat to slightly negative open for the US indices all morning. There was very little fluctuation in the pre-market, even with the volatility seen in the oil pits. The open was quiet and without much fanfare, indices fell below break even in the first half hour of trading but found their footing by 10AM. Early losses were in the range of -0.5% for all the indices and by noon this was whittled down to -0.25% or less; many of the indices were able to poke their heads into positive territory by this point of the day. Afternoon trading saw the indices drift sideways at or above break-even levels into the close of the day.

Economic Calendar

The Economy

No official economic today but not to worry, there is plenty to move the market later this week. The biggest event on the calendar is the FOMC meeting and policy announcement on Wednesday. As of this morning there is a 0% chance of a rate hike according to the CME's Fed Watch Tool and a 4% chance they will lower it. The probability of rate hikes go up the further out I look, the April meeting has a about a 25% chance of a rate hike and the June meeting about 50%.


Data points to be aware of include PPI and CPI due out tomorrow and Wednesday, before the Fed announces their decision. Signs of inflation will definitely point to rates rising sooner rather than later. Also on tap and important in terms of rate hikes are the Retail Sales figure, due out tomorrow, 5 reads on business/manufacturing, housing starts/building permits, Leading Indicators, Michigan Sentiment and the weekly jobless claims.

Moody's Survey Of Business Confidence gained 1.7% this week, the fourth week of gain since hitting bottom in February. This week's reading is 30.9% and is the highest level in almost 2 months. According to Mr. Zandi's commentary sentiment is firming along with the global financial market rally and that responses to all questions have shown improvement. Forward outlook remains positive with most businesses expecting improvement in conditions into the summer months at least.


According to data from FactSet 4th quarter 2015 S&P 500 earnings growth stands at -3.4% with one company left to report.

The estimated rate of growth for the 1st quarter of 2016 has been revised lower once again, to -8.3% from -8% last week. There are 6 companies scheduled to report this week for the 1st quarter. Since the beginning of the quarter estimates have fallen sharply from +0.3% driven by downward revisions in all 10 sectors, led by the energy sector. The energy sector has seen earnings declines estimates more than double in that time. Ex-energy the index is expected to show earnings decline of only -2%.


Looking out to the end of the year earnings growth continues to be revised lower as does full year expectations. The 2nd, 3rd ad 4th quarters are expected to see earnings growth in the range of -2.2%, +4.2% and +9.0% with the important factor being a return to positive growth in the 2nd half of the year. I'm still looking for the elusive bottom and exit to the ongoing earnings recession; for now it looks like the 2nd quarter is it but if oil prices don't hold up, or some other negative factor emerges, this could quickly change.


The Oil Index

Oil prices fell today, about -5% at the low of the day, on remarks from Iran. Iran says that OPEC and the rest of the world should leave it and its oil production levels be, putting a fly in the ointment for those counting on an OPEC/Russia deal to freeze production levels. Despite the headline there was some support present in the market and stepped in to drive prices back above $37 before the close of the day. WTI closed with a loss near -3.25% and above $37.25. For now oil price is in the hands of speculators, driven by rumor and hope. Fundamentally the outlook is still bearish as indicated by the news issued from Saudi Arabia over the weekend and this morning; they are still producing record amounts of oil and they see 2016 demand lower than previously estimated.

The Oil Index fell about -1% in today's session but is holding near the recent high. Falling oil prices could pull this index lower but so long as they hang at/near current levels should support the energy sector and hopes of improving earnings over the next few quarters. Today's action is supported by bullish indicators, positive momentum is holding steady and stochastic is making a bullish crossover at the upper signal line, and could lead to higher prices but that is dependent on oil prices. If the index is able to move higher next resistance target is near 1,125, support is near 1,025 should it pull back.


The Gold Index

Gold prices pulled back nearly -2% in today's session but remain above $1225. This move is in anticipation of the FOMC meeting and likely profit taking and/or protection seekers getting ready for whatever it is they (the FOMC) is going to do. In my view it will take an overtly hawkish fed and/or hotter than expected data to strengthen the dollar and move gold lower. With the ECB delivering what looks like their last blast, and the FOMC not expected to raise rates until the summer or later, I really don't see the dollar strengthening much, or gold falling much further without some surprise factor coming into play. Downside target for support is near $1225 and then $1200, upside target is near $1280 with a chance that gold will remain range bound at/near current levels until another rate hike becomes more certain.

The Gold Index fell about -4% today but remains above the $19 level. The index has been in consolidation between $19 and $21 for the past two weeks and is waiting on the FOMC to dictate direction. If hawkish sounding the dollar is likely to rise and drive gold and the gold index lower, if dovish the opposite. The real risk is for them to be neither hot nor cold in their statement, as they were at the last meeting, and leave gold prices in limbo at current levels. The indicators have been weakening over the past few weeks and are pointing lower, ordinarily a negative sign, but with the FOMC outcome uncertain are relieving overbought conditions which could allow the index to hold these levels indefinitely.


In The News, Story Stocks and Earnings

The Dollar Index rose about a half percent today but remains weak and indicated lower. Today's action shows support near $96 but this support could evaporate quickly once the FOMC policy statement is released. Another factor in play is the BOJ meeting and their policy statement, due out tomorrow. They may increase QE but are in similar position as the ECB; how much more can they do, how much more can they indicate they will do, without doing more harm than good to the economy. Current support in the DXY is near $96 with next target near $95.50 and then $94. Resistance target is near $97.25 and the underside of the short term moving average.


Starwood Hotels received an unsolicated bid from a consortium of Chinese investors led by Anbang, purchaser of the Waldorf Astoria in 2014. The bid presents a premium to Starwood's closing price last week and is above the price offered by Marriot. The Marriot deal is still in the works although negotiations have begun with Anbang. The consortium has offered to buy all outstanding shares for $76 each, about $13 billion, and Starwood would be responsible to pay a $400 million fee to Marriot if it pulls out of the deal. The news caused a surge in shares of Starwood whiched gapped up at the open and closed with a gain of 7.82%.


The Fresh Market announced it would be purchased by Apollo Group today in a deal worth $1.36 billion. The deal would acquire shares of TFM at $28.50 in cash and effectively ends Krogers bid for the company. The board of directors approved the deal unanimously which is expected to close sometimes next quarter. Shares of TFM surged more than 23% to trade just shy of $28.50.


GW Pharma announced positive results for a cannabinoid drug intended to treat childhood epilepsy. The drug reduced the frequency of seizures among a certain class of patients by 39% in a phase III trial and has opened a path to USDA approval. The news was well received by the market as it may lead to additional uses of medicinal marijuana and drove shares of the stock up by 120%.


The Indices

Today's action was very light, and in light of the fact we have an important FOMC meeting at hand to be expected. Today's candles, across the board, are small and indicative of indecision or pause in the market with no one index closing with more than a 0.1% move in either direction. The biggest loser was the S&P 500. The broad market closed with a loss of -0.13% after trading in a very tight range all day. Despite the loss the index was able to set a new 2.5 month intraday high and close just above the 2018 resistance target. The indicators remain bullish and pointing higher so it looks like, at least for now, that the index wants to continue moving higher. The caveat of course is the FOMC meeting. Next upside target is near 2,050 with first downside target near 1980 should a pull back occur.


The next biggest lose in today's session is the Dow Jones Transportation average although it closed closer to flat than not. The transports finished the day down -0.03% and created a very small spinning top candle. This index is riding a wave of strong momentum that could carry it higher although at the present time declining momentum and weakening stochastic are reason to be cautious. Over the past two weeks it has been inside a consolidation zone with boundaries at 7,500 and 7,750, so long as it remains inside this zone declining indicators are a good thing and could set it up for another move higher. A break below this zone could lead to a pull back to support, possibly as low as 7,000, with an upside target near 8,400 should a break to the upside occur.


The days smallest gainer is the NASDAQ Composite which closed up by 0.04%. The tech heavy index created a very small candle but was able to set a new 2.5 month high which, along with bullish indicators, suggest a test of the 4,800 level could be at hand. The indicators are bullish; MACD is positive and stable, stochastic is flat and high in the upper signal zone but both show signs the rally is running out of steam. At best this is indicative of a pause and consolidation, at worst it will precede a pull back to support. If the index pull back to support first target is near 4,625 and the short term moving average with next target near 4,500. If the index can break above the 4,800 level next target for resistance is near 5,000.


The day's biggest gainer was the Dow Jones Industrial Average. The blue chips were able to move higher by 0.09% and set a new 2.5 month high. Despite setting a new high resistance at the 17,230 level is present and may keep it from moving higher although the indicators are bullish. A break above this level would have a target near 17,650 while a failure to break could find support as soon as 17,000.


The market has been rallying over the past month and looks like it wants to move higher. The rally is losing steam but that is because the market is focused on the FOMC meeting and policy statement scheduled for Wednesday. How the market reacts to the news is hard to say; we need growth for the market to keep moving higher, but we need that growth to be just right in order to keep interest rate hikes at bay.

Aside from the FOMC meeting there are two other factors at play that need to be monitored. One is oil prices. While oil prices are up and the energy sector is up they are helping to support the broader market and the rally. If oil trading reverts to the fundamentals and falls back to retest lows it could derail the rally. Another, and the one I think more important and also affected by oil prices, is earnings outlook.

Earnings outlook continues to weaken. While it is weakening there is little reason to expect a rally in the near term. Longer term growth is in the forecast, giving reason to believe the January/February bottom is solid, but until we enter an actual period in which earnings are expected to grow the market remains vulnerable to correction.

Until then, remember the trend!

Thomas Hughes