Introduction

The equities market struggle for gains amid data, the Fed, the start of a new quarter and the onset of another earnings cycle. Last week's surge to 2016 highs, driven by a somewhat strong jobs report, did not see follow through today as a number of factors combined to weigh on sentiment. New economic data in the form of factory orders seems to point to ongoing weakness in the manufacturing sector and support a less aggressive rate hike timeline while comments from Fed president Rosengren seem to contradict that thought; according to him the market is miss-pricing the trajectory of rate hikes.

International markets were mixed. Japan's Nikkei was the largest decliner on the day, falling more than -0.25% on a strengthening yen despite the surge in dollar value we saw last Friday. New data shows that businesses are not confident the BOJ's use of negative rates will spur the economy and inflation. Chinese markets were closed due a holiday and will reopen tomorrow.

European indices ended the day positive, but well off the highs of the day. Early euphoria, likely driven by strong US labor data, was hindered by volatility in the oil markets and leaked documents suggesting that the IMF would try to push Greece into defaulting on bail-out terms.

Market Statistics

Futures trading was very light in the early part of the session, indicating a flat open for the major US indices. There was little to move the market in the pre-opening session so futures held steady up to and into the opening bell. After the open indices moved lower by a few tenths of a point until finding some support around 9:45AM and reversing the initial losses. By 10:15AM the indices had moved into positive territory, and reached the highs of the morning, at which time sellers stepped back into the market and drove them back to the initial low and then lower.

Another bottom was reached by 11:15AM, resulting in another bounce and move up to retest for resistance near break even levels. The bounce did not last long; falling oil prices, weak data, Rosengren's comments and concerns over the upcoming earnings cycle all helped to drive the indices back to the earlier lows and lower. However, even with the late day selling the indices only shed about a half percent on average and are holding very near to the highs set on Friday.

Economic Calendar

The Economy

Not much in the way of official economic data today and what we did get is fairly old. The final report on February factory orders showed a -1.7% decline, in line with expectations and erasing the +1.2% gain reported for January. Within the report shipments, unfilled orders, inventory and new orders all declined.

Moody's Survey of Business Confidence gained 0.5 to hit 31.2 in this week's report, the highest level since January. According to Mr. Zandi's commentary the survey shows business confidence is firming following the slump we saw at the end of last year/beginning of this year. Responses to all 9 of the questions asked by the survey are improving and many of the respondents say they see conditions on the mend. Despite the gains however sentiment remains low relative to last years peak, the data barely showing reversal.


According to data from FactSet the blended rate of earnings growth for the S&P 500 in the 1st quarter of 2016 is now -8.5%. This is slightly better than the -8.7% reported last week but still near the low of the cycle. So far 15 companies have reported, 13 have beaten earnings expectations and 9 have beaten revenue expectations; 7 are expected to report this week. On a sector by sector basis the telecoms are expected to lead with growth of 13.1%, followed by 10% among the consumer discretionary sector, while energy remains the laggard with expected earnings growth decline of -101.8%. Alcoa officially kicks off the season next Monday.


Looking forward nearer term expectations continue to decline but there is a brightening of sentiment the farther out you go. Projections for the 2nd and 3rd quarters all fell this week while those for the 4th quarter saw a noteworthy increase. Estimates are now -2.5%, 3.7% and 11% respectively, the 4th quarter upgraded by 2%. Full year 2016 expectations also fell, dropping two tenths to -2.2%, and full year 2017 expectations remain steady at 13.4%.


There is not much data due out the rest of the week either. Tomorrow we'll get Trade Balance and ISM Services, Wednesday is the FOMC minutes, Thursday is Consumer Credit and weekly Jobless Claims with Wholesale Inventories rounding out the week on Friday.

The Oil Index

Oil prices were volatile again today. Early action had prices down by about -1.25%, followed by a spike to about +1.25%, followed by a late day decline to -2.75% (at settlement) and then to -3.5% in after hours trading. Hope that oil producers will reach some agreement about capping production is still lending support but with the Saudi's now saying they won't agree unless Iran and other do as well the supply/demand picture is likely to take over. Supply, production and storage remain high and above demand levels so without additional catalyst a return to retest support near $35 or lower is very possible.

The Oil Index fell about -0.9% in today's action. The index is sitting on support levels near 1050 and the short term moving average and looks like it will continue, if not break through. The indicators are pointing lower, with bearish momentum on the rise, with nothing to provide support should oil prices continue to fall. A break below 1050 could take the index to 1015 or lower provided no bullish news/rumors hit the market. The risk remains with global producers, and in particular those countries who rely on oil for their budgets, any one of them could make a statement that may prop up prices regardless of fundamentals or reality.


The Gold Index

Gold prices held fairly steady today around $1220. Spot prices fell last week after the NFP report which increased the chances of a rate hike despite comments from Yellen earlier in the week. Today's data helped to alleviate some of that concern, weakening the dollar a bit, but did not provide enough support to send gold prices higher. This week there is little in the way of data to move gold but the FOMC minutes on Wednesday could do it; a hawkish tone could send gold lower, a dovish tone higher.

The gold miners continue to consolidate near recent highs despite today's weakness in gold. The miners ETF GDX fell about -2.9% but found support above $19.50 along the short term moving average. The indicators continue to weaken but with the ETF consolidating at relative high levels this appears to be setting up for another move higher rather than for correction. Over the past two weeks the 30 day EMA has been providing support, this may continue, however a break of this support would find next support near $19, a break below $19 could be bearish for the near to short term. Resistance is near $21.


In The News, Story Stocks and Earnings

The dollar moved lower on today's economic data. Data shows that the manufacturing economy is still struggling and helped to alleviate rate hike fears stirred up by the NFP. The Dollar Index fell about a tenth of a percent to close at a near 6 month low. The index is now sitting on potential support, near $94.25, with hints of confirmation from the indicators. Both MACD and stochastic are diverging from this low although there is no guarantee this is the bottom. This week the FOMC minutes could affect forward looking sentiment, as will CPI and PPI data next week. Regardless, the dollar is -6% below the December high and trading near the bottom of the 2 year range which should take some pressure off of companies whose earnings are suffering from currency conversion.


Alaska Airlines announced this morning that it would be buying Virgin America. The deal is worth about $2.6 billion, $57 per share, in cash and creates an airline with 280 aircraft servicing from hubs located in LA, San Francisco, Seattle, Portland and Anchorage. The deal was unanimously approved by both boards, the CEO of Virgin America was pleased with the deal but Richard Branson made a statement to the effect he tried to stop the deal. Shares of Alaska Airlines fell a little more than -4%.


Tesla announced more than a quarter million pre-orders for its yet to be released Model 3. The model is Tesla's mass market vehicle with a price tag in the range of $30K to $40K. Each registered pre-order comes with a refundable $1000 deposit. The demand for the model is so strong that now the speculation is whether or not Tesla will be able to produce the cars in a timely manner, first shipments are not expected until late next year. Shares of Tesla jumped more than 5% on the news and traded 11% off the all-time high. . . until after the bell and Q1 deliveries were announced. The company announced delivery of 14,820 vehicles, shy of expectations, sending the stock down in after hours trading.


The Indices

The indices basically held flat in today's trading. News and data gave reason for pause but not so much for full blown reversal. Today's leader was the Dow Jones Transportation Average which fell about -0.9%, more than double the other indices. Price action brought the index down to support just above the short term moving average, a support level that could prove to be fairly strong as it is also coincident with a previous support line near 7,800. The indicators have rolled over into a bearish signal so support is likely to be reached and tested as we move into earnings season next week. Earnings for this cycle are likely to be lack luster at best, it will be the forward guidance I think that provides catalyst for the index to move higher or lower.


The next largest decliner in today's session was the NASDAQ Composite. The tech heavy index did not get much help from Tesla's big move, dropping to near term support level near 4,890. The index has been riding high on a wave of momentum that may have run its course. It is now within a potentially strong resistance zone between 4,890 and 5,000, with weakening indicators. The indicators remain bullish but have been diverging from the new highs for at least two weeks, a sign of growing weakness in the market. These divergences may simply be a sign of a quieting market, ahead of earnings season, but may also indicate a growing possibility of correction with earnings season as catalyst.


The next largest decliner was the S&P 500 with a drop of -0.32%. The broad market created a small bodied candle, more of a spinning top than anything else, that closed near the low of the day. The indicators are bullish but like with the NASDAQ are showing divergences that may indicate a growing weakness in the market. The wave of momentum that has brought the index to current levels is petering out and with a weak earnings season on tap there is little reason to expect it or the market to move much higher, unless of course earnings are much better than expected. If it continues higher next target for strong resistance is near 2,100, first target for support is near 2,050.


The smallest drop was posted by the Dow Jones Industrial Average, about -0.31%. The blue chips created a small bodied white candle that, like the other indices, appears to be approaching the end of a run. The indicators here too remain bullish but are showing divergences from the rally indicative of slowing momentum and a weakening market. This could lead to a period of consolidation as easily as a correction but will be dependent on earnings. Near term support is between 17,500 and 17,650 with next target for resistance near 18,000.


Today's action was very mild, especially when considering the amount of volatility that a -3.5% in drop in oil would have caused only a month ago. The rally from January/February lows is not over yet, although there is reason to suspect the end may be near, but it is also not time to begin entering new bullish positions. This week may see the indices continue their march higher, with a possible test of resistance at or near precious long term/all-time highs. The FOMC minutes on Wednesday is a possible catalyst for such a move but with the earnings season set to start next week I am very leery of just how high the market can go before profit taking, re-positioning or outright selling begins to set in.

This earnings season is not likely to be very good. S&P 500 companies will have to blow away the projections to even post a 0% gain over the last quarter and that is far from likely. The best we can hope for is that businesses and analysts will start to be a little more upbeat about forward earnings. That being said I think we may be in for another earnings driven decline in the indices, but one that will set us up for a strong rally into the end of the year as the broader market returns to earnings growth.

I remain bullish for the long term, cautious in the near, waiting for the next entry.

Until then, remember the trend!

Thomas Hughes