Introduction

The market rebound today following news Warren Buffet bought a $1 billion stake in Apple, rising oil prices helped too. The new stake, about 10 million shares, was purchased during the first quarter and is already showing a near $200 million loss, helped restore confidence in the tech giant which gained over 4% in today's session. Aiding the bounce was bullishness in the oil pits, renewed by output disruptions in Nigeria and a slightly bullish tone from Goldman Sachs concerning the ongoing supply/demand imbalance.

Global indices did not take part in today's rally. Asian indices closed higher but gains were not strong. Weak data from China increased hopes for QE but also raised the specter of continued slowing of the economy. European indices were much the same. The German DAX was closed for Whit Monday but other indices in the region were not, closing mixed in a low-volume session.

Market Statistics

Futures trading was mixed in the early part of the electronic session, first slightly up, the slightly down as economic data and surging oil prices vied for dominance. Going into the opening bell the indices were indicated to open flat, and did, but proceeded to march higher for just about the remainder of the day. Intraday high was hit just after 3PM, at which time gains were trimmed. Despite the late day pull back the indices were able to close near the high of the day, more than 1% higher than Friday's close.

Economic Calendar

The Economy

First on the economic calendar today was Empire Manufacturing, released at 8:30AM. The survey came in at -9.0, -19 points lower than last months reading of +9.6, and well below forecast of 7.5. Within the report New Orders fell into negative territory, -5.5, as did Shipments and Inventories, -7.3, while prices paid edged marginally higher. Prices received also fell. On the employment front the Employment Index remained unchanged but hours work fell to -9.3. The forward looking Future index remains in positive territory but fell as well.


The NAHB Housing Market Index was released at 10AM. The index shows home builder confidence held steady at 58 for the 4th month running. Within the report sales are unchanged at 63, future expectation rose 3 to 65 and traffic remains unchanged. On a region by region basis confidence fell by -5 in the Northeast, rose by 3 in the Midwest, rose by 2 in the South and was unchanged in the West.

Moody's Survey of Business Confidence mad a surprise drop this week, down -2.7 to 30.6 and the lowest level since March 21st. Mr. Zandi makes note of this week's drop but says it is too early to make much of it. This is true but no less concerning as sentiment has weakened considerably from last year and has yet to stage a significant comeback. According to the data confidence varies greatly worldwide and is the strongest in the US, weakest in South American due to ongoing political upheaval in Brazil and Venezuela. Sentiment in the EU deteriorated somewhat over the last week, possibly due to the upcoming British referendum on EU membership.


According to FactSet 91% of the S&P 500 has reported earnings so far this season. The blended rate for earnings growth is now -7.1%, unchanged from last week, better than the -8.7% predicted as the season began but still the worst quarter of growth since the earnings recession began. Of those who've reported 71% have beaten EPS projections, above average, while only 53% have beaten revenue projections, below average. Of the 10 sectors tracked, 7 have beaten expectations led by Consumer Discretionary.


Looking forward earnings projections for the rest year held steady from last week but projections for 2017 fell by a tenth. The 2nd quarter is still expected to show negative growth, about -4.6%, with growth returning in the 3rd quarter, about 1.4%. Growth is expected to improve going into the 4th quarter, about 7.5%, and into the following year. Full year 2016 growth projection now stands at 0.9%, flat from last week, with growth in 2017 expanding to 13.5%, down a tenth form last week.


The Dollar Index

The dollar tried to extend gains made on Friday but was not able to hold them. The Dollar Index gained less than a tenth intraday only to give it all up by the close, trading in a very tight range and creating a small doji candle. Last week the index broke above potential resistance on talk from the BOJ and may continue to move higher in the near term. The BOJ is warning it will add to QE in some form come the next meeting, July at the latest, if yen strength persists. However, given the fact that the yen has fallen on that news and may keep falling could preclude the need for such action. In the near term, upside target appears to be $95 or $95.50 provided the index can remain above $94.25 and the short term moving average. Risks this week include the FOMC minutes due out on Wednesday which could fuel rate hike speculation and dollar strength/weakness. As yet the BOJ talk is just that, talk, so the minutes could easily spark a movement, as could tomorrow's CPI data.


The Oil Index

Oil prices surged today on two things. First, a new report from oil bear Goldman Sachs sees supply/demand imbalance coming back into line quicker than they had expected. Second, supply disruptions in Nigeria, Canada and Libya helped to bolster this sentiment. However, there are some off-setting factors that should not be dismissed, namely that OPEC production rose again in the last month and that Canadian supply disruption is not as bad as feared. WTI gained more than 3.5% and set a new high dating back to November of last year and appears to be moving higher. The caveat is that supply and demand balance is still skewed to the supply side leaving oil prices vulnerable to whatever bearish news may hit the market. Additionally, with WTI trading above $47 it is likely that the shale producers will come back on line and further add to supply side imbalance.

The Oil Index gained only about 1.8% in today's action and did not set a new high. Today's action was the fifth day of consolidation around the short term moving average and closed near the middle of that range, if above the moving average and just above 61.8% retracement level. The indicators remain mixed, more bearish than not but showing signs of some support at this level, so there is no clear indication of direction at this time. If oil can maintain these levels earnings expectations for the sector should begin to rise and if so could carry the index back to retest it's recent high near 1,200. If not a retreat to 1,000 is also possible.


The Gold Index

Gold prices shot higher in early trading only to fall back to break even as the equities rally sapped demand. Spot price for gold jumped nearly 1.5% in the first half of the day, approaching resistance in the $1285 to $1290 region, and then fell back to erase all the gains by close of day. Fundamentals still support gold prices and potentially higher prices, given declining expectation for FOMC rate hiking, but danger exists in the form of the BOJ. BOJ talk to weaken the yen could prop the dollar up and send gold lower despite any action or inaction from the FOMC. Despite today's wild swing the candle formed is small and weak, near the middle of the three week range between $1250 and $1300. Volatility may increase in the coming weeks as we get a little more data, and wait on the next round of central bank meetings.

The gold miners got a pop from gold prices even though they, gold prices, were not able to hold the early gains. The Gold Miners ETF GDX gained 0.12% to trade near the top of it's three week consolidation range but the move was without conviction. Today's candle is a small doji and accompanied by mix indicators so it is likely the consolidation will continue. The indicators are mixed, MACD momentum is very weak, if to the downside, while stochastic continues to move lower, suggesting that a move back to retest support is likely. Support is near the short term moving average, near $23.25, with potential resistance just above today's close near $26.


In The News, Story Stocks and Earnings

Apple was a big name in the news today. The stock got a big pop from a Berkshire Hathaway filing which revealed a near $1 billion stake in the company. This news was tempered by another SEC filing, from hedge fund Tiger Management, which revealed it had sold off it's position in the company during the same period. Adding to the confusion, Leon Coopermans Omega Advisors also revealed they had purchased a stake in the company during the first quarter, but had already dissolved it. After the bell Greenlight Capital announced it had upped it's position in Apple. Regardless, the vote of confidence by Warren Buffet was enough to send the stock up by 3.7% to approach $95 and the recently broken line now turned potential resistance. The indicators are consistent with a rebound, bearish MACD and stochastic are rolling into a bullish crossover following the recent low, but also show confirmed weakness through extreme peaks (MACD) and a likely retest of that same low.


There were no earnings reports on the schedule today but this does not mean the season is over. There are on expected 21 S&P companies reporting this week, most of which are in the retail sector. The sector took a beating last week on a number of misses and reduced guidance, there is not much expectation for that to be any different this week. The Retail Sector SPDR XRT gained nearly a full percent today but was not able to reverse losses experienced on Friday, or to regain the support level broken with Friday's action. The indicators are showing sign of peaking at this level, but no indication of reversal is yet present. A move back above $41.50, support now turned resistance, would be bullish but will require better than expected earnings and more likely better than expected guidance. A failure to break above this level along with more weakness in the sector could take the XRT down to $40 or lower before support begins to kick in. Tomorrow Home Depot and TJ Maxx are on tap.


Home Depot may be able to surprise the market as it, as a retailer, is more exposed to housing trends than to factors driving the broader the retail sector. Today's action saw the stock rise by more than 1.75% intraday, confirming support along the short term moving average and approaching the all-time high set just last week. The indicators are mixed but more neutral than anything else, MACD is holding near the zero line, stochastic is trending near the middle of the range and both appear to imply a move is on the way, depending on how results are. Positive results could take the stock to another new high, a break above $125 very bullish, while negative results could drag the stock back to support levels between $125 and $130.


The Indices

It did not look like a bullish day in the early hours, pre-opening, and there really wasn't a major bullish catalyst to drive the market but the market rallied nevertheless. Today's action was led by the NASDAQ Composite which gained 1.22%, led by Apple. The tech heavy index recovered losses incurred Thursday and Friday of last week but was not able to regain the 4,800 resistance line or move above the short term moving average, both of which provided resistance, curbing today's gains. The indicators are rolling over into a bullish signal, stochastic is already firing what could be a strong signal, but MACD has yet to confirm. A break above the moving average and resistance would help confirm this move and if so could take it back to retest highs set last month. If not move to retest support near 4,675 is likely.


The next largest move in today's session was made by the Dow Jones Industrial Average with a gain of 1.00%. The blue chips created a long white candle, confirming the existence of support near 17,500, but the move was capped at the short term moving average. The indicators are mixed, showing some sign of support at this level and early signs of rolling over but no sign of strength. If the index is able to keep moving higher a break above the short term moving average would be bullish and could take it up to retest the 18,000 level. If not a retest of 17,500 with possible move down to the long term trend line near 17,250 is likely.


The next biggest winner in today's session was the S&P 500 with a gain of 0.98%. The broad market created a large but not overly strong white candle, was able to move back above the short term moving average but gains were capped just shy of the 2,075 resistance target. The indicators are mixed as with the other indices, stochastic is possibly rolling into a strong bullish signal, but this signal is not yet confirmed by MACD. Today's move appears to confirm support at 2,050 but again, the indicators are mixed so I am very cautious about it. If the index can continue to move higher and break resistance a test of recent highs near 2,100 is likely to find additional resistance. If the index moves lower first target for support is 2,050, a break below here could take it down to the 2,025 level or lower.


The Dow Jones Transportation Average brings up the rear in today's action and by doing so, assuming the transports are leading the market, lend weakness to today's analysis. The transports gained only 0.74% and created only a smallish, medium bodied white candle with upper shadow. This candle shows potential support at the 7,500 level but also resistance to a bounce from this support that when combined with the indicators is not promising. The indicators are weak and weakening with today's move, MACD is bearish and holding steady while stochastic moves below the lower signal line, suggesting that further testing of support is likely. Support is currently at the 7,500 level with possible upside target near 7,750. A break below support would be bearish and could take the index down to 7,250 or 7,000 in the near term.


The indices bounced today and the bounce could be good. Today's catalyst was a combination of Warren Buffet activity and oil prices, neither to be disregarded but also neither reason to be overly bullish. With earnings as poor as they are, expectations for earnings growth still poor, tepid and weak economic data, and the central banks still in focus (not to mention the fact we're on the verge of the summer season) I see little reason to expect much follow through. I am still very cautious, borderline bearish, for the near term and expecting further weakness in the market. I could be wrong, but I think it better to be cautious now and get into a rally late rather than wishing for one and losing. Longer term I see the bull market continuing, earnings and the economy will return to growth soon, it's just a matter of when.

Until then, remember the trend!

Thomas Hughes