Introduction

There was no deal in Doha, oil prices fell and the market rallied. The fact that the Doha meeting fell apart is no surprise, neither is the drop in oil prices. What is a surprise is that the market rallied on the news, a move that perhaps confirms the notion the market had little confidence the Doha meeting would bear fruit.

Asian indices mostly fell on the news, led by the Japanese Nikkei. The Nikkei was down nearly -3.5% on the close due to a second earthquake on the Island of Kyushu. The quake led to a disruption of infrastructure for companies like Toyota, Honda and Sony which shut down operations until later in the week. European indices began the day lower, about -3%, but moved higher throughout the day. The DAX was trading near break even at the open of our markets and moved into the green by the close of the day.

Market Statistics

Early trading indicated a lower open for the US indices all morning. The futures were down by a half percent at the start of the electronic session but moderated to about half that by 8:30AM. Earnings reports, a cut to US growth outlook from Citigroup and comments from several Fed presidents all had some affect on early trading, as did a fall in oil prices, but none enough to really drive the market. At the open the indices fell as expected but unexpectedly found support within the first 7 minutes of trading. From that point until about 12:30 the market rose, the SPX gaining nearly 12 points, until settling into a trading range that lasted 2 hours. A little after 2:30PM the bulls gathered their strength, broke above resistance and set a new highs in many of the indices. Rally persisted into the end of the day, leaving the indices at or near their highs at the close of trading.

Economic Calendar

The Economy

Only one economic release today, Home Builder Sentiment, and it remained unchanged from last month. Sentiment came in at 58, the third month of unchanged data, positive but mild and characterized as optimistically cautious. Within the report sales fell by 2 points while traffic and future activity each gained 1. Analyst had expected home builder sentiment to gain a point to 59.

Moody's Survey Of Business Confidence jumped 2 points to hit 33.7 this week. This is the largest gain in a year and the highest level in 4 months. Within the report responses to all 9 questions are seeing improvement with emphasis on sales, financing and pricing. According to Mark Zandi the strongest responses are to sales and the availability of financing.


Despite the banks mostly beating expectations earnings for the broader market are coming in worse than estimated. According to FactSet the blended rate for Q1 2016 earnings is now -9.3%, down -0.2% from last week due to lower estimates in 6 sectors. To date, only 7% of the index has reported with 71% of those beating earnings estimates and 60% beating revenue estimates.


Full year 2016 projections have fallen as well. 2016 is now expected to see earnings growth of only 2.0%, down a tenth, as all three remaining quarters are revised lower. The silver lining is that earnings are expected to return to growth in the 3rd quarter and expand into the 4th, followed by more robust growth in 2017. Full year 2017 estimates continue to rise, gaining a tenth to 13.60%.


This week is fairly light on data but still important. Throughout the week will be housing data including starts, permits and existing home sales. Later in the week is the Philly Fed and Leading Indicators and of course the weekly jobless claims.

The Oil Index

No deal in Doha was a headline from more than one news service. The deal fell apart apparently on a shady shift in terms perpetrated, allegedly, by the Saudi's. According to reports terms of the agreement were not dependent on Iran's involvement Saturday night, and then on Sunday morning they were. The news caused an expected decline in oil prices, about -5% for WTI, but did not spark a massive reversal in prices, at least not yet. Fundamentals remain skewed to the supply side but signs persist the balance is coming back into line naturally, if very slowly, which is helping provide some support. WTI fell below $38 in early trading but closed $2 higher, just shy of $40. Where it is going next is hard to say but we may get a clue this week.

The Oil Index fell more than -3% in the pre-market and opened with a gap lower, just above the short term moving average. It then proceeded to move higher all day and close with a gain of nearly 1.65%. Despite the gain the index remains below resistance at the 1,120 level with weak, if bullish, indicators. The index may continue to test resistance and may break through with next resistance near 1,150. Support appears to be along the short term moving average, near 1,070.


The Gold Index

Gold prices were up in early trading on the Doha news but fell back to break even by late in the day. Spot price held near $1235, near the middle of recent ranges, likely tied to economic data, and a meeting of the ECB later this week. The bank is not expected to make any changes to policy but the comments could sway sentiment. At the last meeting Draghi indicated that there would likely be no additional QE in Europe, if he holds this line again the euro will likely strengthen, weaken the dollar and support gold.

The gold miners tried to move higher but were not able to hold the gains. The miners ETF GDX opened with a gain near 1% but closed with a loss. The index is trying to extend a bounce from support but so far has made little progress. The move is likely tied to central bank activity and economic data which means gains/losses could muted until the FOMC meeting next week. Resistance is likely at the recent high, near $23, with support at the top of the recently broken trading range near $21.25.


In The News, Story Stocks and Earnings

The dollar lost a little ground today, about -0.25%, on the Doha deal and risk off appetite. The Dollar Index fell back to potential support at the 78.6% retracement level, near $94.45, and may fall through. The drop to support and potential break down are in line with 4.5 month trend and consistent with central bank outlook. The ECB is not expected to expand QE, the FOMC is not expected to tighten policy, the theoretical effect being stronger euro and weaker dollar. If support is broken the index will likely retest the recent low, just below $94, with a chance of moving down for a full retracement of the trading range.


Disney helped to lift the market today, gaining more than 3%. The stock got a boost from much better than expected results from the release of the new Jungle Book movie. The movie's success helped to alleviate fears the movie pipeline had already been priced into the stock and sent it up to a new three month high. Disney is scheduled to report earning May 10th.


Toy maker Hasbro released earnings this morning and beat on the top and bottom lines. The company increased sales and earnings on all fronts, boosted by brands such as Play Doh and Nerf. Licensed merchandise for Star Wars and Frozen also contributed. Earnings grew 83% from last quarter, revenue only 16%, with positive outlook for the rest of the year. Shares of the stock jumped more than 5% on the news and is now trading at a new all time high.


Morgan Stanley reported earnings before the bell. The investment bank beat on the top line, revenue fell short, but nevertheless posted a year over year decline in both. EPS of $0.55 was $0.09 better than expected, but down more than 50% from last year. Revenue was $7.8 billion, down 21% from previous. Shares of the stock tried to move higher at the open but couldn't. Sellers took charge and drove prices below break-even to close with a loss near -0.5% and below resistance.


Netflix and IBM both reported after the bell, and both beat bottom line expectations. Netflix fell short on revenue expectations, IBM did not, but was able to increase revenues by 24%. Netflix also provided weaker than expected outlook, primarily on 2nd quarter projections, sending shares lower in after hours trading. IBM reaffirmed guidance and sent shares of its stock higher.

The Indices

The Doha deal fell apart, oil prices tanked and yet the market moved higher. Today's rally was broad, led by the S&P 500, but not overly strong. The candle is long and white but only of average size so nothing worth special note. The move does appear to confirm near term support at 2,075 although the indicators persists in weakness. Both MACD and stochastic are divergent from the new high and highly suspicious. The divergence has been growing for weeks, as the index approaches record highs, and does not instill much confidence in the strength of the rally. Despite this it appears as if the index will move up to test resistance near 2,120.


The Dow Jones Industrial Average made the 2nd largest gain in today's session. The blue chips added 0.60% in a light session and managed to move above 18,000 for the first time in 9 months. Today's move is not very strong and accompanied by divergent indicators so caution is due. Upside target is near 18,315 but beyond that is highly questionable.


The NASDAQ Composite gained 0.44% in today's session. The move is weakly bullish, with glaring divergences, but does manage to break above resistance. Resistance is at 4,950, the move above marginal at best, with next target near 5,035 should the the index continue to drift higher. The indicators are divergent and indicate a weakening and extended rally, vulnerable to correction.


The Dow Jones Transportation Average made the smallest gain, only 0.31%. The move is very weak for this index, considering it led us higher the first three months of the year. This index did not make a new high with today's action and is still below potential resistance near 8,050. The indicators are bearish but may cross into a bullish signal any day. A break above resistance would be bullish, with a first target near 8,250.


The market moved higher once again and seems to want to keep moving up, possibly to test the current all time highs. The caveat is that the move also appears to be a little heady and is certainly losing momentum. We could easily get a test of the highs, there is still no sign the rally is stopping. The question is, what will happen then? Will the market break out or will it correct? A break to new highs would be nice but what will drive it, weak earnings, unstable oil prices or slow growth?

The longer term outlook is much brighter and lending support but near term the indices appear to be overextending and ripe for a correction. I remain bullish for the long term and very cautious in the near.

Until then, remember the trend!

Thomas Hughes