Introduction

Today was a surprisingly calm Monday after last week's selling but there is a storm of data and earnings on the horizon that could bring volatility back. This week's calendar is full of potential market movers that will no doubt fuel FOMC/rate hike speculation and earnings outlook. There are more than 120 earnings reports on tap and a dozen important macroeconomic announcements that will give color to weak GDP readings and the potential for growth in the 2nd quarter. As it stands, indications for growth remain weak, and those for earnings growth continue to weaken.

Asian markets took a big hit in today's action in a delayed reaction to the sell-off in US markets last Friday. The Japanese Nikkei led with a drop of -3.10%, compared to a drop of only -1.5% for the Heng Seng, that was amplified by a stronger yen. The yen fell to a new low versus the dollar and the euro, raising the question of what the BOJ may be able to do, and if they will do it, at the next meeting. In Europe trading was mixed and basically flat. The DAX meandered for most of the day, closing with a gain of about 0.85%.

Market Statistics

Futures trading indicated a lower open during the earliest portion of the electronic session. They slowly crept higher during the morning as it became obvious Asian selling was focused in Asia, and specifically Japan. By 9AM the market was indicated to open flat and by the opening bell were slightly higher. The market moved higher when the open sounded, the SPX gaining an immediate 2 points and then slowly drifting higher. By 10:15 the index was testing resistance near 2,075, failing to break it, and by 11:15 had retested it and failed again. By 12:15 the market was moving lower and near the midpoint of the daily range. This level turned out to be the trigger for buying and sparked a rally. Afternoon trading saw the indices move back to test the high of the day, break it, move higher and close near the highest level of the session.

Economic Calendar

The Economy

Two economic releases today, both consistent with slow sluggish recovery but recovery nonetheless. The ISM Manufacturing Index fell 1% to 50.8%, the 2nd month of expansion after 5 months of contraction but weaker than expected. Analysts had been expecting a smaller drop of only -0.4% to 51.4. This signals the manufacturing economy is expanding, the report says 11 of the 18 sub sectors are reporting growth. Within the report indications are mixed with positive bias. I say positive bias because most sub-components are either positive but shrank from last month or are negative but on the rise and close to the expansionary 50 level; New Orders fell -2.5% to 55.8, Production fell -1.1% to 54.2 and Employment rose 1.1% to 49.2. The only exception is Inventory which contracted to 45.5 from 47.

Construction spending rose by 0.3%, half the expected 0.6% expected by economists. Growth was weaker than expected but positive upward revision, the highest level of spending and an 8% year over year growth rate but a little bullish spin on it. Not all sectors are showing growth, public spending fell nearly -2%, and a few are doing very well. Office construction spending is up more than 25% year over year.

Tomorrow, auto sales will dominate the economic front. Wednesday will be the ADP Employment report, Productivity, ISM Services and Factory Orders. Thursday is weekly jobless claims, the Challenger report on planned lay off's and then on Friday the much anticipated Non-Farm Payrolls, Unemployment and Hourly Wages release.

Moody's Survey of Business Confidence continues to rise. The index gained 0.2% to hit 34.1, the highest reading since November. The index shows that business confidence continues to recover in the wake of global financial market instability at the beginning of the year. According to Mr. Zandi the US is the strongest and the EU is firm. South America is the weakest due to political instability. Despite the gain sentiment remains well below all time highs set last year.


According to FactSet 62% of the S&P 500 has reported earnings with another 124 expected this week. Of those 74% have reported EPS above expectations and 55% have beaten revenue expectations. The blended rate of earnings growth for the 1st quarter is now -7.6%, better than last week's -8.9% and the lowest level decline since late February. This is due to better than expected performance in 6 sectors, led by consumer discretionary. Energy remains the laggard, currently posting a -107.7% year over year earnings decline.


First quarter earnings are better than expected but that was expected. The bar is set very low and there is an historical +4% rise in the blended rate between the start and end to the season. That being said we could expect to see 1st quarter earnings in the range of -4% to -5%, the 4th quarter of decline and the largest decline since the earnings recession began. Looking forward growth is still expected to return in the 3rd quarter but even that is now in question. All three remaining 2016 quarters have been revised lower; the 2nd to -4.4%, the 3rd to 1.6% and the 4th to 7.5%. Full year 2016 projection is now only 0.8%. Projection for 2017 remains stable at 13.7%.


The Dollar Index

The dollar continues to weaken versus the major world currencies. The Dollar Index fell a half percent today to touch the $96.62 support target and complete a full retracement of the 18 month trading range. Today's action leaves the index moving lower toward support with bearish indicators, suggesting that support will be tested and new lows may be seen. A break below the $96.62 level would mark a major shift in fundamental outlook and could take the index much lower. This shift could be underway as the FOMC shifts into rate hiking mode and other central banks are at the end or nearing the end of loosening. The Treasury Department issued a statement outlining how 5 countries including Germany and Japan that were being watched for potential currency manipulation.


The Oil Index

Oil prices took a hit today as a new report shows that OPEC and non-OPEC production is on the rise. According to the report OPEC production reached 32.64 million BPD, near the recent record, and Russian production also rose. This is even after the so-called effort to curb production and only adds fuel to my personal conspiracy theory; that the Saudi/OPEC/Russia intentionally talked up the price of oil on speculation of production curbs. The output increase overshadowed another drop in the active US rig count and caused WTI and Brent to both fall about -3%. WTI ended the day below $45.

The Oil Index fell about -1% intraday, the third day of declines since hitting a peak last week. Today's action helps to confirm resistance at the 1,175 level but does not indicate reversal. The indicators are also consistent with resistance, rolling over into bearish crossovers, but support is still present as well. It looks like a move down to support may be coming, dependent on oil prices, with a target near 1,120. This is a previous support line that is now confirmed by the short term moving average. A break below this level would be bearish for the near to short term and could take the index down to 1,000


The Gold Index

Gold prices surged on dollar weakness and hit a new 16 month high, touching above $1300 intraday. The move was met by some resistance which held the advance at bay. Weak GDP and economic data in general, along with today's Treasury Department statements and recent inaction from the ECB/BOJ has left the door open to gold's advance. A floor in easing in EU and Japanese markets with a pause to tightening in ours means weaker dollar and stronger gold. The risk this week is the economic data, if it is just like Goldilocks likes, not to hot and not too cold, gold could continue higher.

The gold miners opened higher along with gold but soon fell prey to profit taking. The index crested the $26 level for the first time in over a year, and has risen more than 100% in the last three and a half years, creating an attractive opportunity for profit taking. Today's action is a sign that more selling should be expected, the question now is whether the market will consolidate at this new high or retreat. If gold prices do not hold current levels and the index retreats first target for support is near $22.50. However, if the ETF remains at this level and consolidates above $25 a move up to $27.50 is very likely.


In The News, Story Stocks and Earnings

Sysco reported earnings before the bell and proved they don't need US Foodservice to grow. The company beat top and bottom line expectations on improved margins and organic case growth. Execs see favorable trends in the industry and expect momentum to continue into the coming quarters. Shares of the sock jumped more than 5% on strong volume and are now trading at a new all time high.


Texas Roadhouse reported earnings after the bell. The restaurant chain reported EPS of $0.50, slightly below consensus, but was able to produce decent results. Comp sales are up more than 4%, margin is up 116 bps and earnings are up nearly 10% from last year. Shares of the stock had been rallying all day, gaining about 3% in the open session, and then move higher in after hours trading.


AIG also reported after the bell. The long troubled insurance giant reported $0.65, well below the expected $1.00, and sent the stock crashing in after hours trading. Results are roughly half what the company earned in the first quarter of last year driven by volatility in investment portfolio, normalized ROE increased by 110 bps. Shares of the stock fell more than -3% on the news.


The Indices

The bulls started off a little shaky but eventually built up a head of steam, enough to move the market higher. Volume was low, perhaps due to the avalanche of data due out this week, so how far the move will go is questionable. Today's action was led by the NASDAQ Composite which closed with a gain of 0.88%, near the high of the day. The tech heavy index created a medium sized white candle, not overly strong or weak, with little to no shadows. Price action helps confirm support at 4,750 but with the short term moving average just overhead support may be tested again. The indicators are weak, bearish and consistent with a test of support. If the index continues to bounce the short term moving average is first target for resistance.


The S&P 500 made the second largest gain in today's session, about 0.78%. The broad market created a medium bodied white candle, moving up from the short term moving average, that met resistance at the 2,080 level. The indicators are consistent with a test of support within an uptrend so this bounce could continue although they persist in divergence and show a weakening market. If the bounce continues first target for resistance is 2,100 with a possible break to the upside. If so next resistance is just above 2,100 so the run will likely be short.


The Dow Jones Transportation Average gained 0.66% coming in just ahead of the blue chips. The transports created a very small white bodied candle, more a spinning top than anything else, sitting directly on the short term moving average. While the first two indices appear to be bouncing from support this one appears to be pondering a move lower. The indicators support such a move, both divergent from the latest high bearish and pointing lower. A move below support could take the index down to 7,750 or 7,500 in the near term.


The Dow Jones Industrial Average gained a little shy of 0.66% in a move that appears to be a bounce from support. Today's action continues a bounce which began last Friday but there is little strength in the move. Volume was low, adding to weakness, and the indicators persist in divergence. Both MACD and stochastic are pointing lower suggesting a further testing of support is likely. Support appears to be just below today's opening level, near 17,600. If the bounce continues first target for resistance is 18,000, only 110 points higher.


Earnings outlook has not bottomed, it is in fact sill in decline and could continue to do so. First quarter earnings are negative and will stay negative, we know this. Second quarter projections were supposed to be positive, as recently as December, but they have declined to the point they are likely to remain negative through the end of the next season. Third quarter projections are falling and could easily turn negative within the next few weeks, dragging the earnings recession on to a fifth and possibly sixth quarter. Even if the fourth quarter sees earnings growth, growth for the year could be negative.

Between declining earnings expectations, weaker than expected data and weakness in the charts I can't help but maintain a near term bearish stance. Long term trends remain positive, there is growth in the economy and it growth will return to earnings, but the near and short term trends are troubling. I remain bullish for the long term, into the end of the year, but as cautious and wary as ever for the near. I expect a correction, it may not come, but better to be safe than sorry.

Until then, remember the trend!

Thomas Hughes