Introduction

Earnings season is underway and expectations are falling, there could be some turbulence ahead. Monday trading posted gains for the major indices but market action was light and largely without direction. Hopes for earnings growth later in the year is helping to support trading while we wait for reports from the big banks later this week, and a long list of economic releases that are sure to affect FOMC and GDP outlook. If either disappoint the market could be in for a fall.

Asian markets were mixed in Monday trading. The Japanese Nikkei fell as the yen strengthened further versus the dollar, a move that spurred comments from the BOJ. Kuroda and colleagues say they are ready to act should the yen strengthen further, no targets were mentioned. Chinese indices managed to move higher. No news came from that quarter. In Europe stocks were up driven on earnings from the banking sector and a rise in oil prices. The DAX led with gains greater than 0.6%.

Market Statistics

Futures trading indicated a positive open from the earliest portion of the electronic session. The US indices were shown with gains in the range of +0.35 to +45%, these levels held throughout the morning. There was little in the way of pre-opening news to more the market however anticipation of this week's events is high. The open was as expected, the indices posted small gains and then moved marginally higher before hitting today's resistance. Oil prices were able to make a move back above $40 but were unable to spark a major rally on their own.

After hitting intraday high, about 10:10AM, the indices fell back to break even levels and then wallowed into the afternoon. A little after 2:30PM it looked like a rally might form but it didn't, resistance was met again, this time much lower, gains were capped only a few points above the day's open. Shortly after the second attempt at rally the market took a decided turn lower, quickly shedding the day's remaining gains and moving into negative territory where it remained until the close of trading.

Economic Calendar

The Economy

No economic data today but the calendar is full this week. Tomorrow is light again, only import/export prices, but Wednesday things get more interesting. Wednesday is the release of the Fed's Beige Book, business inventory, retail sales and the Producer Price Index. Thursday is jobless claims and the Consumer Price Index. Friday wraps it up with Empire Manufacturing, Michigan Sentiment, Industrial Production and Capacity Utilization. In my opinion the CPI and PPI will be the most heavily watched, as will the Beige Book, all three having the most effect on FOMC rate hike outlook.

Moody's Survey Of Business Confidence gained another half point this week. The index put on 0.5 to hit 31.7, the highest level January 11th. The index has been slowly rising since hitting bottom, indicating some improvement in responses, but still near recent lows and well off the euphoric levels seen last summer. Mr. Zandi says there has been steady recovery in business sentiment as global tensions subside. According to him the most notable improvement has been in responses to questions about business conditions. Conditions are seen to be improving.


According to data from FactSet expectations for 1st quarter earnings growth are still in decline. The blended rate (includes projected and actual data from companies that have reported earnings) is now -9.1%, the lowest level of the series and down from near +15% last summer. The decline is due to revisions in all 10 sectors, so far the bulk of those reporting have beaten earnings estimates at a rate of 85%. There have been 22 reports so far this season.


Looking further out, expectations in the short term is still in decline as well although there is growing sign of stabilization and expansion of expectations in the long term. Projections for the 2nd quarter have shed a tenth to -2.7%, 3rd quarter projections gained a tenth and have been steady for three weeks near 3.8%, 4th quarter projections held steady for the 2nd week at 13.5%. On an annualized basis 2016 is expected to see growth of 2.1%, down a tenth, while 2017 is expected to see growth of 13.5%, up a tenth. It is still early but positive improvement in forward earnings expectations is very bullish in my view and will lead the market higher once nearer term declines have been weathered.


The Oil Index

Oil prices proved their volatility and connection to near term news events with today's action. In early trading fundamental supply/demand issues weighed on prices, driving them down by about a half percent. Later in the day a report that Russia would likely have flat production growth in 2017, following an increase in 2016, sent prices up by 1.75% to trade above $40. The news is not exactly bullish but was enough to draw in support for prices, the caveat is that flat 2017 production in Russia does nothing to alleviate the +1 MILLION barrel per day over supply situation. Oil prices may rise, a weaker dollar is also helping, but until supply/demand come back into line the risk in oil prices is to the down side.

The Oil Index moved higher on the rise in oil prices but is showing signs the move does not have much support. The index closed the day with gains near +0.10% after moving up by more than a full percent, creating a small bodied spinning top with upper wick in indication of resistance. The indicators are beginning to roll into a bullish signal so this move could continue higher to potentially test resistance. Resistance is near the 1,125 and the recent high although a shift in oil prices could bring it sooner.


The Gold Index

Gold prices saw their biggest gain in about 2 weeks today, rising more than 1.16%, to trade just shy of $1260. The move is driven by a weaker dollar and expectation of slow Fed rate hikes. It looks like gold is on the way to test recent highs near $1280, a move that could be affected by this week's data. PPI, Beige Book and/or CPI could be catalyst for additional upside or provide resistance.

The gold miners are in favor with the market. Gold prices may not be at their high but they are high enough to inflate earnings expectations for the miners, and maybe expectations for special dividends, increased dividends, buy backs or other value enhancing maneuvers. Today the miners ETF GDX gained more than 6.2% to trade at a 16 month high. The move extends a break above resistance which began last week and is supported by the indicators. Both indicators are moving higher following bullish crossovers, in line with the reversal confirmed in January. Based on technical projections this new break out could go as high as $29 in the long term.


In The News, Story Stocks and Earnings

The Dollar Index fell to a new low today, shedding another -0.28%. The index has now broken through support targets at $94.30 and appears to be heading for a full retracement of the 2015 FOMC/ECB/BOJ driven rally.


Hertz issued an earnings warning for the 1st quarter and full year 2016. The company warned that excess global supply is hurting business and may impact revenue and earnings. Despite the warning the company also reaffirmed full year earnings and revenue guidance. In the report execs also stated that they believe pricing pressures will improve going into the peak US season. The worry is that, along with a saturated market, ride sharing companies like Uber are providing competitions and cutting into demand. Shares of the stock fell more than -10% in today's session.


The big banks are the biggest hurdle on the earnings front this week. The schedule is relatively light, if packed with three of the largest most influential banks in the US; JPMorgan, Wells Fargo and Citigroup. JPM reports on Wednesday, WFC on Thursday and C on Friday; expectations are high and so are fears. Weak economic growth and global financial turmoil may have taken their toll on the banks earnings in the first quarter. Poor first quarter earnings will not be good, more important however is outlook for the coming quarters. The XLF Financial Sector SPDR managed to eek out a gain in today's session but only barely. The ETF closed with a gain of 0.5% but does not appear to be moving higher. The indicators have both rolled over into bearish signals, are moving lower, and pointing to lower prices. Support appears to be $22, a break below here could take it down to $21.


Rail carrier CSX reports earnings tomorrow. The company is expected to report $0.37, in line with previous, and could have more impact on the market than the banks. An uptick in earnings among the rail carriers would boost the transports and by extension the broader market, a downtick in earnings or expectations the opposite. Today the stock lost about -1%, creating a spinning top at the one month low. Support is just below today's levels, near $24, a break below here bearish for the stock.


Alcoa reported earnings after the bell. The company was expected to report earnings of $0.02 per share and beat with $0.07. Although the company beat on the EPS end, revenue was short. Aluminum pricing played a role in revenue but outlook for a 2016 aluminum deficit should help that down the road. Plans for the split into two aluminum companies are still in place. Shares of the stock fell more than -3.5% after the release.


The Indices

The bulls tried to rally today but were not able to hold their ground. Earnings season is at hand, hopes are high and so is the potential for disappointment. It is no surprise the market was indecisive, it will likely remain so until we get a good look at how the earnings cycle is actually going to play out. Today's big loser was the Dow Jones Transportation Average which lost only -0.48%. The candle is small, the third in a small consolidation pattern that appears to indicate resistance at he 7,700 level. The indicators are both bearish and moving lower, consistent with an index moving below resistance. A break below this level could take it down to 7,500 with next target just below 7,250.


The NASDAQ Composite posted a small loss but created a slightly more ominous candle stick. The tech heavy index shed -0.36% and appears to be confirming resistance at 4,900. The fall from resistance is confirmed by the indicators, both of which have rolled into bearish signals. Stochastic %D has also fallen below the upper signal line, a sign of market weakness. If the index continues to fall next downside target is near 4,750, a break below that level could take it down to 4,650.


The next largest loss was posted by the S&P 500. The SPX fell -0.27% in a move that looks set to retest support. The indicators are moving lower after confirming resistance, consistent with a test of support if not a move lower. Resistance is near 2,050, support is near 2,020 consistent with the neck line of a possible H&S reversal and the short term moving average. If 2,020 is broken a move to 1,950 is likely. A bounce from 2,020 is likely to find resistance at 2,050.


The Dow Jones Industrial Average made the smallest decline in today's session. The blue chips fell -0.12% creating a spinning top candle with long upper shadow indicative of resistance. The indicators continue to weaken as the index approaches support, consistent with a test of that support, and may lead to a more pronounced correction. A move below support, near 17,400, would be bearish and could carry the index lower with downside targets near 17,250 and lower. A bounce from support may find resistance near 17,750.


The indices are winding up for a move but it is still unclear what, exactly, that move will be. With earnings expectations for the 1st quarter so low, and economic growth still so tepid, it looks to me like a move lower is on the way, in the near term at least. This quarter will be the largest decline in year over year earnings growth the S&P 500 has seen for many years, and the deepest decline since the earnings recession began, so there is little reason to think a rally is at hand. The bright side and mitigating factors include the chance for a better than expected earnings season and positive outlook for longer term earnings growth.

Alcoa's report was promising, it showed earnings growth and bullish outlook, but the warning from Hertz and a few others gives reason for concern, not to mention that shares of Alcoa fell in the face of positive results. Even if earnings don't cause a major correction, a simple reshuffling of portfolios in response to earnings trends could cause the indices to move lower and retest support levels. Regardless, earnings season is likely to cause some turbulence in the weeks to come. I remain bullish in the long term but incredibly wary of the near.

Until then, remember the trend!

Thomas Hughes