Introduction

The market struggled for gains this Monday as we wait on the next earnings cycle, and to see which way oil prices are heading. Not much was happening in terms of market moving news today, except a little volatility in the oil patch and a statement from the Fed's Dennis Lockhart. He says the next interest rate hike could come as soon as April; we're closer and closer to full employment with a mid term expectation to hit inflation targets.

While our markets were mostly mixed in today's session, international markets were not. Chinese markets saw big gains driven by newly relaxed margin lending requirements. Margin lending curbs, one of the reasons for China's market melt down last year, have been relaxed by the state run China Securities Finance Corporation which will start offering short term loans to Chinese securities companies. Japan was closed for a holiday. European markets had a seesaw day, first down then up and then down again as oil prices and the news from China wrestled for dominance.

Market Statistics

Futures trading was light in the early morning session. The US indices were indicated to open flat to slightly negative and held steady up to and until the opening bell. There were no economic or market moving earnings releases in the pre-market session to affect trading and even a decline in oil prices had little impact. The open was as expected, flat to mildly negative with a brief test of Friday's closing levels which led to a small pull back during the first few hours of trading.

By noon the early losses were reversed, the indices were back to break even levels and struggling with resistance. The market wrestled with this level for the next hour and by 1PM was breaking out to new highs. Afternoon trading was much the same as the morning, sideways drift, except above break even levels instead of below. No indices made significant gains but gains were made across the board and were held into the close of the day.

Economic Calendar

The Economy

Only one piece of official economic data today, Existing Home Sales, and it was not positive. Existing sales fell -7.1% versus an expected fall of only -2%. The annualized rate is now 5.08 million, down from 5.48 million last month and an expectation for that level to hold fairly steady into this month. Two reasons for the decline are low inventory and rising prices, the median price rose to reach the 2007 high and the highest level since before the housing crunch.

Moody's Survey of Business Confidence declined this week by -0.5%. This is the first decline in 5 weeks but the diffusion index remains near recent lows. According to Mr. Zandi's commentary business sentiment has stabilized since falling off over the winter, expectations for current conditions are the weakest with those for the summer beyond more positive. The US and EU show the brightest expectations while Asia and South American businesses are more negative.


According to FactSet expectations for first quarter 2016 continue to decline. In their statement they say expectations are flat from last week but that means they fell only -0.1% to -8.4%. This is the lowest level of expectations for the first quarter, down from +15% in the middle of last year. Full year 2016 projections also fell, by -0.2%, to -2.5% and the lowest levels we've seen for this figure as well.


Looking further out, to next quarter the 3rd quarter, the 4th quarter and next year changes to expectations are mixed. 2nd quarter projections held steady at -2.2% for the 2nd week running but are at the low of the series. 3rd quarter projections fell -0.2% to 4% and are the low of their series. 4th quarter projections held steady at 9% for the 2nd week, the low of that series. Full year 2017 projections have ticked higher, by 0.1%, and are at the highest level of that series. Looking at them all together it appears as if near term expectations are still weakening, mid term expectations are holding flat and long term expectations are rising.


There is not much on the economic calendar this week. The next major report is the New Homes Sales data on Wednesday, followed by durable good orders and weekly jobless claims on Thursday and then the 3rd estimate for 4th quarter GDP on Friday. Next week however things pick up again, it will be the turn of another month which means monthly job data and a host of other macro economic events.

The Oil Index

Oil prices were a bit volatile today but in the end were mostly steady around $40. Early in the morning saw prices decline bu about 2% on last week's rise in rig counts. The rise breaks nearly 3 months of continuous rig declines but only adds one to the total. Later in the day prices rose by about 2% on a reported draw down at the Cushing storage facility. The draw down, about 560,000 barrels, brings the Cushing supply to about 69.5 million barrles, just shy of 70 million and full capacity at the facility. Neither bit of news is definitive in terms of oil prices or supply/demand outlook which remains biased toward the supply side. Prices may rise further in the near term but the fundamentals remain supportive of lower oil prices so caution is due.

The Oil Index fell about -0.5% in today's session even after oil prices regained their footing. The index created the third of three spinning top candles, at resistance and a two month high. Resistance is near 1115 and if broken would make a 3 month high. The indicators persist in bullishness; momentum continues to rise although the rate of change has fallen off and stochastic is trending in the upper signals zone. Based on these I would expect to see the Oil Index at least test resistance further, a break out may however be dependent on oil prices and/or earnings results for the 1st quarter. The energy sector is expected to post a greater than -90% decline in year over year earnings growth, reason enough to be cautious in this sector over the next month or two.


The Gold Index

Gold prices fell a bit today as the dollar regained some of the ground it lost last week. Aiding this was comments from Lockhart to the effect that an April rate hike was on the table. Lockharts statements are more of the same kind of rhetoric we've been getting all along, neither indicating an official stance nor helping to clarify the situation and only serving to add volatility to an already skittish market. Based on today's home sales data it doesn't look to me like a rate hike is coming next month but we'll have to wait until then to know for sure. In the meantime we have what the FOMC actually did last week, weaken the dollar, and what the ECB did the week before, strengthen to euro, to guide us. In that light it looks like the dollar will remain low or move lower until inflation data is more firmly pointing to FOMC rate hikes which should at least support gold prices near their current levels if not move it higher. Today spot gold fell about -0.75% to trade near $1243.

The gold miners fell in tandem with gold but are also holding near the recent highs. The Gold Miners ETF GDX lost about -1% but remain above the $20 level. The high was driven on a strong wave of momentum but that movement may be coming to an end. Both MACD and stochastic have fallen off since reaching the high, diverging from it, and are now pointing lower. This may not result in a pull back, or a very deep one, but do not support additional upside at this time. If gold prices are able to stage a comeback, move back to their highs or higher, the index will likely follow. If not a correction/profit taking should be expected. Resistance is between $21.00 and $21.50, first target for support is near $19 and the short term moving average.


In The News, Story Stocks and Earnings

The Dollar Index made some small gains from last week's low. The low, driven by dovish fed outlook on inflation targets and the rate hike time line, may hold although I doubt it will not be retested. There is little in the way of economic data this week to provide support or resistance but the outlook, at least for now, is bearish. The indicators are mixed, stochastic is rolling over within the lower signal zone while MACD remains bearish, but are more consistent with a bear market relief rally than not.


Apple was big in the headlines today due to a product release event. The event was rather lack luster in that nothing really new was revealed. They released a smaller version of the iPhone, a cheaper price for the watch, a smaller iPad and a few other non-needle moving items. The news helped to send shares of Apple up to a new 2.5 month high but the lack of a really new and innovative product helped to reverse that gain. By end of day shares of Apple were showing a loss and closed down by about -0.25%.


Starwood Hotels is still in the news as the bidding war to buy the company heats up. The latest development is that Marriot has upped their bid, outbidding Anbang, and is now the superior offer. The newly amended offer values Starwood at $79.53 a share and would deliver $21 and 0.80 shares of Marriot for each share of Starwood. The news sent shares of Starwood up by another 4.25% to trade above $84.


The Indices

Today's action was very lack luster. Action was sideways at best, a little bias to the upside, although gains were made across the board. The biggest gainer was the NASDAQ Composite which posted an increase of only 0.27%. Today's candle is another small white bodied candle, little more than a spinning top, but it did set a new high. The indicators are pointing higher in the near term, momentum is positive and stochastic %K is moving up, although there is growing sign of weakness in the rally. Momentum is fading and stochastic %D is moving lower, both divergent from the new high. The market could continue to move higher on momentum alone, but I think that if a correction begins it could be sharp and fast. Upside target is near 4880 with first target for support near 4750.


The Dow Jones Industrial Average made the 2nd largest gain in today's session, about 0.12%. The blue chips also made a small spinning top type candle and also set a new a new high. The move is driven on a wave of strong momentum that could carry it up to the 18,000 level but like with the techs the move is showing some weakness. MACD momentum, while positive, is slowing and stochastic is showing signs of rolling over, both indicative of potential weakness. If this index should pull back first target for support is near 17,200 and the long term trend line.


The S&P 500 made the third biggest gain in today's session, about 0.08%, and created a small spinning top candle. This index is also riding high on a wave of strong momentum, momentum that could keep carrying it higher, but that momentum is waning with signs of weakness present in the indicators. The index could keep moving higher with targets near 2075 and 2100 but any move beyond that would require a bullish catalyst and I can not think of a possible one at this time. First target for support is near 2025 with next target near 2000 and the short term moving average.


The Dow Jones Transportation Average is today's laggard posting no gain, and no loss, 0.00%. I've been watching the market a long time and this is the only time I can remember in which there was ZERO gain or loss for the day. Today's action created a perfect doji style spinning top with mixed indicators. MACD is pointing higher and on the rise, stochastic is pointing lower and falling beneath the upper signal line; both are diverging from the current high. The index is riding a wave of momentum like the rest of the market that could carry it higher, upside target near 8,350, but this is no time for new positions. Down side target should the index pull back is near 7,700.


Today's action was light and without direction. Following last week's rally this is not to surprising, the market needs time to come to terms with where it is, what is going on and what is expected to happen. Without much in the way of data, earnings or other catalysts there is a good chance that the market could could continue to meander at or near current levels, especially considering that this is a holiday shortened week.

The risk at this time is still the upcoming earnings season. Expectations continue to fall, outlook is the worst it's been for this cycle and for any of the preceding 3 quarters of negative growth, and that could derail the rally. On top of that we have the end of a quarter to contend with. Next week will see the end of the first quarter and could also see some heavy selling as managers seek to lock in whatever gains they have managed to make this quarter and to re-position for the earnings cycle and later in the year.

I remain bullish into the end of the year, earnings are expected to improve in the second half and next year, but am very wary of the market at its current levels and expectant of a correction in the near to short term.

Until then, remember the trend!

Thomas Hughes