Introduction

Weak earnings and another FOMC meeting have the market moving lower. The FOMC meeting starts tomorrow with a policy announcement on Wednesday; there is no expectation for change, the statement and what it says about the state of the economy and future rate hikes will have far reaching affect. Adding to today's instability in equity prices are a raft of expected economic data, a meeting of the BOJ and instability in the oil market.

International markets were equally cautious in today's trading. Asian indices fell across the board as traders in that region wait on both the FOMC and the BOJ, led by a -0.76% drop in the Nikkei 225. The BOJ is feared to increase QE in the form of additional negative rates on loans. European indices began the day lower, driven by weakness in global sentiment. The FTSE 100 led the European market lower with a loss of -0.76%.

Market Statistics

Early trading in the futures market indicated a lower open for US indices although not a major decline. Global sentiment along with weak earnings, declining earnings projections and the FOMC gave plenty of reason for pause. There was no economic data before the bell, and very little in the way of earnings, to move futures so trading held fairly steady into the opening bell. At the bell the indices did indeed open lower, about 3 points for the SPX, and then proceeded to move lower, not hitting bottom until shortly after 11AM. At that point a narrow trading, near the early low, was entered and lasted until early afternoon. Around 1PM the indices moved up off the low to trade near the middle of the day's range and held that level into the closing bell.

Economic Calendar

The Economy

Very little economic data today other than the weekly Moody's Survey and earnings insight from FactSet. The data we did get, New Home Sales, was negative on the headline but comes with a bit of a silver lining. Home sales fell by -1.5% from last month to an annualized rate of 511,000. This is slightly below the analysts estimates of 519,000 but mitigated by last months upward revision. February New Home Sales were revised up to 519,000 from 512,000, wiping out most of the losses posted for this month. Within the report sales in the west were weakest suggesting that the market remains healthy and expanding in the rest of the country. On a year over year basis New Home Sales are up 5.4%.

Moody's Survey Of Business Confidence gain 0.2% this week, the 11th week of upwardly trending sentiment. This week's reading is another positive sign for the economy moving forward although the index is still -25% below last years high. Mr. Zandi says the reading reveals an economy expanding above potential and that global markets, US and Europe in particular, have been able to shrug off market volatility seen earlier in the year.


Earnings continue to roll in, this week will be the biggest of the season with more than 37% of S&P 500 companies scheduled to report. The blended rate for the 1st quarter improved slightly over the past week, to -8.9% from -9.3%, but projections for the rest of the year and the full year fell. To date, 26% of the index has reported with 76% beating on EPS and only 55% beating on the revenue end.


Full year 2016 projections have fallen to 1.1%, the lowest of the series, shedding nearly a full percent from last week. All three forward quarters have had their projections cut in the last week although growth is still expected to return by the 3rd quarter. The 2nd quarter was revised down by nearly a full percent, the 3rd quarter by -0.4% and the 4th quarter by a whopping -2.4%. The only good news in earnings this week is that 2017 projections gained a tenth but I'll not put too much trust in that number until much later in the year.


Data will be light tomorrow, only Consumer Confidence and Durable Goods, but the next day we will get the FOMC decisions, and then on Thursday 1st quarter GDP and the BOJ. Earnings reports were relatively light today, only about 60 or so, but tomorrow the schedule heats up with over 125 reports including Apple, AT&T, Barrick Gold, Ebay, Fiat-Chrylser, JetBlue, Proctor & Gamble and Chipotle Mexican Grill.

The Dollar Index

The Dollar Index fell today, dropping about -0.5% from last week's peak. The index has met resistance, ahead of the FOMC and the BOJ, at the short term moving average and remains in downtrend. The FOMC is not expected to raise rates, the CME Fed Watch Tool shows a 0% expectation for rate hike at this meeting (only 25% for June) so it will be the statements, data and whatever it is the BOJ does, which will move markets this week. A dovish Fed will likely weaken the dollar although risks lie in the BOJ which could weaken the yen more. Resistance is at the short term moving average, about $95, with first target for support near $94. A break of either line could cause a quick move in the index with downside target near $93 and upside target near $96.


The Oil Index

Oil prices fell in a volatile session driven by supply/demand imbalance and profit taking. WTI fell from near a 5 month high to trade near $43. There are signs of rebalance in the market, helping to support prices, while short to long term fundamentals remains skewed to the supply side. Another factor affecting oil markets today may have been the announced reforms Saudi Arabi expects will alleviate the kingdoms dependence on oil. The reforms include regulatory, policy and economic changes intended to increase non-oil GDP from 16% to 50%. Regardless, global production remains high and outpaces demand so until this changes the risk in oil is to the downside.

The Oil Index fell -1.5% from a 4.5 month high and the 1170 resistance target. The index has been trending higher for just over 3 months, driven by the production-cap-rumor, expectations for 2017 market rebalance and little else. The indicators remain bullish, consistent with this trend, but are showing signs of weakness not limited to the oil market. MACD momentum is highly divergent from the new highs while stochastic is high in overbought territory with both showing nearer term weakness. MACD is moving lower, off of its peak, and stochastic is making a bearish crossover high in the upper signal zone, a set up consistent with potential correction. A move lower would likely find near term support between 1,100 and 1,120, a break below this level could take it down to 1,000. If some other bullish catalyst emerges and is able to move oil prices higher, above 1,170 resistance targets, 1,235 becomes next upside target.


The Gold Index

Gold prices moved up by 1% in anticipation of the FOMC meeting, and today's move lower for the dollar. This move is consistent with recent price action and the 3 month trading range. This range could be broken this week; between the FOMC the BOJ and the data there are quite a few potential catalysts for the dollar. A weakened dollar should lend additional support for gold and push it above $1250, perhaps to the top of the range near $1270. A stronger dollar will push gold back to the low end of the range near $1220.

The gold miners continue to consolidate near 1.5 year highs while gold prices hover within the trading range. Today's action saw the miners ETF GDX move lower to briefly test the $22.50 level before finding support. The ETF lost about 0.5% on the day and is above support levels although the indicators have been weakening. Both MACD and stochastic indicate further testing of support which may occur over the next couple of days. A break below $22.50 could take the index down to $21.25 or lower, depending heavily on the FOMC/BOJ, dollar value and gold prices. Regardless of the exact price of gold, prices are well above the 2015 levels and conducive to improved balance sheets, earnings and dividend health among the miners which could lend support to the group.


In The News, Story Stocks and Earnings

Apple hit the news today in two separate articles focused on China. In one, Chinese billionaire Jia Yueting CEO of LeEco, says Apple is outdated and losing momentum in China. At a conference in China Jia said Apple's innovation is slowing, a sentiment echoed by many analysts and evidenced by the recent product release where new models of the same old products launched. The other article suggests that Apple may be shut out of the Chinese market, a move that would greatly diminish the companies current earnings and hopes for future growth. In both cases the news has little bearing on the company today but raises additional hurdles the company may have to jump in order to maintain its dominance. Shares of the stock fell about a half percent to trade at $105, near the middle of the 5 month trading range. Apple is expected to post earnings of $2.00 tomorrow, after the close, a decline of 15% from last year at this same time. A miss on earnings could take the stock back to the low end of the range, near $95.


Xerox reported earnings before the bell. The document technology company reported GAAP earnings of $0.03, down from $0.19 last year, and adjusted earnings of $0.22, just shy of expectations. The company reports it is on track to complete the split into two publicly traded companies by end of year and has made significant process on its 3year restructuring program. The services segment of business was able to post year over gains in revenue and earnings, the document technology side was not and posted a -10% decline in year over year revenue, due primarily to weakness in the emerging markets. Company execs reaffirmed full year guidance but this was not enough to support prices. Shares of the stock fell more than 13% on the news to trade at a 2 month low.


The Container Store released earnings after the bell and, though results were on the weak side with only marginally better guidance, the stock shot higher in after hours trading. Earnings per share were in line with expectations on slightly lower than expected revenue, the silver lining is that comp store sales increased more than expected. Comps were expected to fall by nearly -2% but surprised the market with growth of 0.2%, which is what led investors to shrug off guidance. Guidance for revenue came in under consensus but EPS is now expected in the range of $0.20 to $0.30, above the consensus expected $0.21. Shares of the stock gained more than 20% in the after hours session to trade above $7.10.


The Indices

Today's action was to the downside but with the exception of the Dow Jones Transportation Average was relatively light. The transports fell nearly -1.2%, a full percent more than the other major indices, but remains near the recent high. Today's move is additional sign of market weakness but, with the week so full of events, not to alarming yet. The index is hanging near a 5 month high, above the short term moving average, and could easily continue to move higher if earnings results improve or the FOMC pleases, the data looks good or oil prices rise. The indicators are consistent with a possible top and pull back to stronger support, MACD and stochastic are both divergent while stochastic is moving toward a bearish crossover, so extreme caution is necessary when considering bullish positions. A move lower may find support along the short term moving average, near 7,775, but if not next support target is just below this level near 7,750.


The next largest loss in today's action was posted by the the NASDAQ Composite. The tech heavy index fell a little more than-0.20% and created a small spinning top candle, just above the support of the short term moving average. Today's action is a sign of wariness in the market, a wariness that could turn into outright selling should the week's news fail to inspire confidence. The indicators continue to weaken however, and are suggesting a decline in index value is at least very possible, if not likely. Both MACD and stochastic have diverged from the recent high, as I have been noting over the past few weeks, and are now confirming this divergence with bearish crossovers. A break below near term support, near 4,890, could take the index down to 4,800 or 4,650 in the near term.


The broad market S&P 500 made the third largest decline today, about -0.18%. Today's action created a very small spinning top candle just above the 2,075 support line. Today's candle has a small amount of lower shadow, consistent with support, but not enough to market this line as strong support at this time. The indicators persist in diverging from the latest high and are now confirming that divergence with bearish crossovers. At the least we can expect to see support at 2,075 tested again, at worst a pull-back to stronger support is on the way. A break below 2,075 could take the index down to 2,050, near the short term moving average, or lower if the moving average is broken. Strong resistance, should the index move higher, is just above last week's high near the 2130 level.


The Dow Jones Industrial Average made the smallest decline in today's session, only -0.14%. The blue chips created a very small spinning top candle just below the 18,000 resistance line and above the short term moving average. The index appears to be at a top with growing sign of market weakness, the indicators remain divergent with bearish crossovers now confirming. A failure to regain the 18,000 level could take the index down to the short term moving average, about -1.5% below today's close. A break below this level could take it down to the long term up trend line near 17,250, about -3% from today's close. Upside potential remains, this week's news could surprise, but the market remains weak with next resistance target only about 1.5% above today's close, near 18,300.


Today's action was weak and without direction, basically indicating a market waiting on big news and there is big news due out this week. Not only is there a large amount of data, including Q1 GDP, it is the biggest week of earnings for the season and there are central banks to consider.

In terms of central banks the BOJ is a wildcard, there is no telling what they may do or how the market will react. The FOMC a little less so, it is not expected to raise rates and so far the data is not compelling enough to expect one at the next meeting either. A dovish sounding Fed is likely to weaken the dollar, a hawkish sounding one to strengthen it; a dovish Fed may support the equities and a hawkish one not. The data is a concern but more so in light of FOMC expectations than anything else at this time; trends support continued slow growth so any deviation of that will play into FOMC speculation.

The real risk, in my opinion, remains earnings. Earnings outlook for this year has dimmed to new lows and is not likely to inspire a lot of buying across the broad market. If we don't see earnings and revenue come in better than expected and/or a brightening of forward outlook into the end of the year, there will be little reason for buyers to step into the market at today's levels. I remain bullish for the long term, earnings growth is coming, but increasingly wary of the near term and prepared for market correction.

Until then, remember the trend!

Thomas Hughes