Introduction

Monday traders were quiet and cautious in the wake of last week's weak jobs data. Also affecting today's sentiment; the Saudi cabinet shake up, a warning from Japanese officials and weaker than expected Chinese trade data. The removal of Al-Naimi as the Saudi oil minister was a shock to the market but did not seem to have much affect on oil prices. It's affect on the greater oil market is yet to be established. As for China, weaker than expected traded data renewed fear of a slowing China and one growing slower than data suggests. In Japan the finance minister says Tokyo is ready to intervene to stop the yens recent strengthening.

These new developments, coupled with ongoing weakness in corporate earnings, poor earnings growth outlook gave market participants more than reason to be cautious. In Asia trading was mixed; Chinese indices fell on weak economic data, the Japanese Nikkei gained about 0.7% on quantitative easing hopes. European indices were equally mixed, driven by global uncertainty and late day declines in both oil and gold prices.

Market Statistics

Futures trading indicated a higher open for our markets right from the start. Gains were not large but they were positive, moderating to near flat-line by the open of the day's session. There was no official economic data released today and little in the way of high profile earnings before the bell although today's list of earnings reports is quite large. Trading at the open was very lethargic to say the least. The indices opened with little to no gains on incredibly light volume and then proceeded to trade sideways from there, up to and into the close of the session. Today's SPX trading range is the second smallest in nearly 6 months, further evidence of the lack of action in today's action.

Economic Calendar

The Economy

No official economic data from the US today and the calendar for the week is on the light side. Tomorrow we'll get the JOLTs report and wholesale inventories. On Wednesday we'll get the treasury budget. Thursday will be weekly jobless claims and import/export prices and then on Friday the week rounds out with PPI, retail sales, business inventories and Michigan Sentiment. Needless to say, the big day this wee, in terms of data, will be Friday.

Moody's Survey Of Business Confidence shows that global business sentiment fell -0.8% from last week, the first decline in two months. The index is now reading 33.3, high by historic standards but well below the highs set last summer. According to Mr. Zandi sentiment is mixed throughout the world; it is strongest in the US and Europe but on shaky ground in South American where political upheaval is still rampant. Just today the apparent impeachment of Brazil's corrupt leader was postponed due to political wrangling within the government.


We are through the bulk of the earnings season but there are still quite a few left to report. According to FactSet 87% of the S&P 500 has reported so far, 20 are expected to report this week. Of those who have reported 71% have beaten EPS projections (above average) while only 53% have beaten revenue estimates (below average). The blended rate of earnings growth for the 1st quarter of 2016 rose slightly in the last week, rising a half percent to -7.1%. The improvement is a plus, but leaves this quarter's earnings decline deep in negative territory for the 4th quarter in a row and is the deepest decline since the earnings recession began.


Looking out to the next quarter and beyond earnings growth outlook improves, but continues to weaken. Full year 2016 earnings growth estimates have risen by a tenth, due solely to better than expected Q1 results, but Q2, Q3 and Q4 remain weak. Projections for Q2 sank deeper into the red and are now -4.7%, Q3 projections are little better having fallen -0.2% to only 1.4%. Fourth quarter growth remains stable at 7.5% with the caveat that this is less than half what had been expected at the start of the year. Looking further out 2017 earnings growth projections remain strong at 13.6%, but they too were revised down this week.


While it looks like earnings growth will return to the market, and maybe even this year, I don't believe forward outlook will have positive effect on the market until after the next earnings cycle at the earliest. Until then negative expectations in the 2nd quarter and declining expectations for the 3rd and 4th quarter are likely to weigh on the market. At the rate expectations are declining it is very possible that the 3rd quarter projections will turn negative in the next few weeks.

The Dollar Index

The Dollar Index surged in today's session driven by comments from Japan. Japan's finance minister says Tokyo is ready to act to weaken the yen if needed, a comment that helped to weaken the yen and send it to a 2 week low versus the dollar. The Dollar Index itself rose about 0.3% in a move that is fast approaching resistance targets near $94.30. This level was previous support, now broken, and should be viewed as potentially strong resistance at this time. This level is consistent with the 78.6% retracement level and the short term moving average, a combination that, if broken, would end the 5.5 month downtrend in dollar value we've seen since the start of the year. A break above $94.30 could take the index up to $95.60, a failure to break would likely see the index retreat back to the recent low near $92.50. Since today's move was driven by talk and not a change to fundamentals I think it more likely to see the DXY halted at resistance than for it to break through. The next meetings of the BOJ and FOMC are not until June with no expectation of a US rate hike.


The Oil Index

Oil prices were quite volatile. They started the day in positive territory, rising 2.8% in the early session and then giving up all those gains and more later in the day. By close of trading WTI was down -2.8% as the immediate affect of Al-Naimi's removal and the wildfires raging in Canada were debated. The fire did not expand as much as feared over the weekend, reducing fear of supply disruptions, which was the major cause of today's turnaround. Even with a possible 1 million BPD disruption global supply remains high, production remains high and demand remains tepid. Today's action may be sign of growing resistance to higher prices, resistance target near $45, with a potential decline to $40 if no bullish catalyst emerge.

The Oil Index fell hard today too, dropping more than -3% intraday and extending the decline which began 2 weeks ago. Today's candle is not overly strong but does help confirm resistance in the 1,100 1,120 range. The indicators are also weakening, bearish MACD momentum is on the rise while stochastic moves lower, suggesting further decline is on the way. Next down side target is near 1,020.


The Gold Index

Gold prices got walloped today, falling nearly -2.25%, to trade near $1265. Today's move was driven by the Japan comments and helps to confirm resistance at $1300. Today's candle was long and black but not overly strong. We may see a continuation of this sell-off in the near term with a possible support target near $1250. Even with today's news gold is more likely in a consolidation than reversing. Consolidation may continue over the next month while we wait on data the next round of central bank meetings.

The gold miners took a hit on gold's fall. The miners ETF GDX fell more than -6% in today's action to trade near the bottom of the 2 week trading range. The ETF appears to be in consolidation, between $23.25 and $26, with a chance this will continue into the near term. The indicators are pointing lower at this time, suggestive of a test of support, but consistent with consolidation over the past few weeks. With so much time until the next central bank meetings economic data will be closely watched and will drive day to day action. Gold and the miners could could continue to fall on the Japan news but could just as easily rebound if no follow through comes from that quarter.


In The News, Story Stocks and Earnings

Lending Club, one of many on line lenders who have been experiencing trouble over the past few months, announced the ousting of its CEO this morning and the market took it very hard. The CEO exceeded his authority on a number of items, including re-dating applications and selling bundles of loans that did not meet investor requirements, and was forced to resign. The news shook investor confidence in the on-line lending model and sent shares of the stock down more than -30%.


Teva Pharmaceuticals reported earnings before the bell and pleased investors even though forward guidance is a little light. The company reported EPS of $1.36, flat year over year and better than the $1.13 expected by analysts. The results were driven by strength in generics and negatively affected by currency conversion. Revenue was down -3% year over year, -1% when considering forex impact. Guidance was weak, but came with the caveat it did not include the addition of revenue from an upcoming acquisition that is expected to bolster the company's presence in the generic market. Shares of the stock gained more than 5% but did not recover all of Friday's losses.


Krispy Kreme, maker of oh so delicious frosted doughnuts and OK coffee, reported that it was being bought out by JAB Beech, INC, a subsidiary of JAB Holding Company. The move is worth $21 per share to holders of KKD, a 25% premium to last week's closing price, and is expected to close by the 3rd quarter of this year.

Tyson Food's also reported earnings before the bell. The iconic processor of poultry and poultry products delivered EPS of $1.10, well ahead of the $0.96 expected, and raised full year guidance. Results were driven by record sales, record revenue and growth in key retail brands. Shares of the stock jumped more than 5% premarket and gapped open to a new all time high.


The Indices

The market moved very little today despite the flurry of news. Trading ranges were tight, resistance was tested more than once, and little to no gains were made. Today's leader was the NASDAQ Composite Index with a rise of only 0.3%. The tech heavy index tried to complete a small bodied white candle but was not able to close near the high of the day, leaving some upper shadow in evidence of resistance. Resistance is just above the high of the day, near 4,790, with the short term moving average just above that. The indicators remain weak and pointing to lower prices, as suggested by stochastic's crossing of the lower signal line, although bearish momentum is slackening in the near term. A break above resistance would be bullish, failing to do so could see the index return to firmer support. First target for support is near 4,650.


The next biggest gainer, the only other gainer in today's action, was the S&P 500 which posted a gain of only 0.8%. The broad market created a very small spinning top doji, wedged tightly between the short term moving average (resistance) and the 2,050 support target. The indicators remain weak but there is a little sign of support at this level in the MACD; bearish momentum has made a peak in the near term consistent with possible support. That being said stochastic is not showing signs of support at this time and suggest lower prices are on the way. A break below 2,050 could take the index as low as 2,020 or 2,000 in the near term while a break above the moving average could find next resistance just above it, in the range of 2,075.


The Dow Jones Transportation Average made the smallest decline in today's session, only -0.01%, basically unchanged to last Friday's close. The move created a very small spinning top doji, confirming possible resistance at the 7,750 level. The indicators remain weak, as with the other indices, with mixed signals. MACD is bearish and strong, but has peaked, stochastic is moving lower in the longer term but showing signs of support in the nearer; both consistent with a bounce or rebound but one not showing much strength. A break above resistance would be bullish and comes with an upside target near the short term moving average, only about 100 points above today's close. First support target is near 7,600 and the low set on Friday. A break below this level would be bearish and could carry the index down to 7,500.


The Dow Jones Industrial Average made the largest decline in today's session, -0.2%. The blue chips created a very small spinning top candle that tried to break above the short term moving average and failed. Today's move may confirm resistance at the moving average, and could signify lower prices to come. The indicators are mixed but more bearish than not; MACD is bearish but momentum is waning, stochastic %D is moving lower but %K is bouncing. Together the indicators are consistent with rebound or support although neither are confirmed. A break above the short term moving average would be bullish and has an upside target near 18,000. A break below 17,615 would be bearish and could carry the index down to the long term uptrend line near 17,000.


The market is waiting. Today's action is classic wait and see activity but waiting for what is the question. The next round of central bank meetings aren't for another month, earnings season is mostly over, economic data is on tap but nothing truly market moving is on the schedule for this week. With so little to grab attention the market may fall back on the fundamentals, fundamentals that show slowing, tepid, spotty growth and declining earnings expectations.

The long term is still bright, but that brightness is still in the future and a long way off. Between now and then we've got at least one more quarter of earnings decline before coming out of the earnings recession, tepid economics, uncertainty over the Fed and the summer season fast approaching. It may not be time to sell-in-May-and-go-away but it doesn't look like we're on the cusp of a rally either. I remain bullish for the long term but increasingly bearish for the near term, looking forward to the next big dip.

Until then, remember the trend!

Thomas Hughes