Introduction

Federal Reserve and FOMC members keep telling us that June is a live meeting, the market does not quite believe them. Last week's Fed minutes were a bit of a shock; I don't think anyone was expecting them to say June was a "live meeting". Since then a number of Fed officials, both voting members and non, have come out in support of the sentiment. Many of them are now calling for at least 2, if not 3, rate hikes this year and yet the market still thinks they're blowing wind. According to the CME's Fed Watch Tool there is only a 26% chance of a June hike. This is up from last Monday, 8%, but down from 30% at the end of last week.

CME's Fed Watch Tool

Simply speaking to the idea that June is a live meeting, Janet Yellen has said time and time again, since the end of the Taper, that ALL meetings should be considered "live" so this may just be another case of Fed-Speak spooking the market. When you read into the minutes it is clear that yes, June could see a rate hike, but that decision is mired in the data and highly conditional.

Market Statistics

International markets had a bit of a rough Monday as well. In Asia indices closed flat to negative in the wake of Japanese economic data and a strengthening yen. The data, both last week's GDP figure and this week's trade data, show the Japanese economy doing better than expected and belaying expectations for the BOJ to further QE efforts. In addition, the BOJ may be constrained by political issues, namely the warning from Jack Lew that it was too soon for them to act.

European indices also fell, by about -0.5% on average, on falling oil prices and weaker than expected PMI. The composite PMI, both services and manufacturing, came in at an expansionary 52.9 but was below expectations and a 16 month low.

Futures trading here at home was weak to say the least. The early indications were for a flat to negative open and this held true for most of the morning. There was little drift to the downside pre-opening but this did not hold going into the start of today's session. After the opening bell the indices held very near to flat line. The SPX opened with a loss of about 1 point, moved about 1 point lower, reversed and moved up by 1 or two points, and then proceeded to trade in this tight range until just before lunch time. Shortly after 11:30AM the indices took a turn lower, extending the intraday low to about -3 points, and then returned to its earlier range where it remained until late in the day. The final half hour of trading saw selling pressure increase, if slightly, and pushed the market back to the low of the day.

Economic Calendar

The Economy

Not much in the way of economic today, no official reports for the US, and not too much this week. Tomorrow we'll get New Home Sales, Wednesday will be dominated by oil inventories, Thursday is jobless claims, Durable Goods and Pending Home Sales and then Friday the 2nd estimate for 1st quarter GDP. The consensus is for GDP to be revised up by 0.4% to 0.9%, if it is so it could increase the chances of the June rate hike.

Moody's weekly Survey of Business Confidence gained 0.1% to hit 30.7%. This is the second week of sub-31 reading since hitting a peak two weeks ago. In his summary Mr. Zandi says that business confidence has recovered from the swoon seen at the beginning of the year but I'm not seeing it in the chart. Sentiment remains strongest in the US and weakest in South America, the EU is holding steady and no mention of sentiment in Asia.


According to FactSet 95% of the S&P 500 has reported earnings so far this season, there are 13 due to report this week. Of those that have reported 71% have beaten EPS projections, 53% have beaten on the revenue side. The blended rate for 1st quarter earnings growth now stands at -6.8% with 7 sectors outperforming projections. This week's blended rate is an improvement from last week, and an improvement from the start of the cycle, but is still the largest decline in earnings growth since the earnings recession started.


Looking forward outlook is still mixed. Second quarter projections fell by a tenth to -4.7%, matching a low set 2 weeks ago, as did 3rd quarter projections, down to 1.3% from 1.4%. Fourth quarter projections held steady at 7.5% for the 4th week running, full year 2016 projections also held steady at 0.9%. Full year 2017 projections are also steady at 13.5%. For now, it still looks like the 2nd quarter will be the last one to post negative growth but that is not guaranteed. I'm bullish on earnings into the end of the year but remain cautious and waiting for concrete sign of rising expectations. The way things stand now the 2nd quarter is more than likely to be a 5th quarter of negative growth, and the 3rd quarter could easily become the 6th.


The Dollar Index

The Dollar Index held steady near the 2 month high as FOMC outlook sent the dollar higher versus the euro and BOJ outlook strengthened the Yen. The index created a small doji candle in today's session, just below the 61.8% retracement level, and may have reached a near term top. The indicators are consistent with such a top, MACD is peaking while stochastic enters overbought conditions, but further testing of resistance may be on the way. If the FOMC does indeed raise rates in June and/or the BOJ acts in favor of QE the dollar could easily shoot through this level, if one or the other fails to act the dollar could just as easily fall back to retest support. First target for support is near $94.25-$94.50, a break below this level would be dollar bearish. Resistance is near $95.50, a break above this level would be dollar bullish.


The Oil Index

Oil prices retreat from their 6 month high in today's session. WTI had been down as much as -2% on high storage and production levels but managed to close the session with a loss of only about -1%. Outlook remains tilted to the upside, market balance is projected for sometime in 2017, and that is helping to support prices. In the meantime supply and demand remains skewed to the supply side which may keep prices from advancing much further. Iran has taken production caps off the table so it does seem as if OPEC will continue to pump, regardless of what happens elsewhere in the world.

The Oil Index opened lower today but managed to regain most of the loss. The index closed with a decline of about -0.15% while creating a white bodied candle, but did not managed to move above resistance. Resistance is at the short term moving average and the 61.8% retracement level, near 1,120, and may continue to cap prices into the near term. The indicators are mixed and may be rolling into a bullish signal but a break above resistance will be required for confirmation. Failing to break above resistance could result in a pull back to support. First target for support should the index pull back is near 1,050, if the index is able to break above resistance first upside target is between 1,175 and 1,200.


The Gold Index

Gold traded in a tight range around $1250, driven by the dollar's inability to find direction. The spot price remains above support, at or just below $1250, and may remain there until the FOMC meeting in 3 weeks. However, there is some substantial data due out next week, the NFP/unemployment bundle fo one, that could influence FOMC outlook and by extension the dollar and gold prices. A move below $1250 would be bearish in the near term at least, with downside target in the $1210 to $1220 range. Any weakness in the data, and/or dovish spin to FOMC outlook, could send it back to retest resistance near $1275.

The gold miners managed to trade up despite the lack luster performance in the underlying metal. The miners ETF GDX did not make gains on the day but it was able to confirm near term support along the short term support along the short term moving average. Today's candle is not significant in its size or scope but is the third day in a row in which the moving average has been tested with prices closing above it. The indicators remain weak and indicative of potentially lower prices, at least a testing of support, so today's support level bears close watching. If gold prices are not able to stabilize a break of support may follow with a possible move down to the $21.25 level.


In The News, Story Stocks and Earnings

The Consumer Discretionary sector has been the top performer this cycle in terms of earnings growth. According to FactSet the sector has posted earnings growth of 19.5% for the calendar 1st quarter, slightly more than double the expectation. Within the sector 21 of the 31 sub-sectors are showing positive earnings growth, led by Internet Retail (+143%) and Auto Manufacturers (+101%). The XLY Consumer Discretionary SPDR has gained more than 18% since hitting bottom just prior to the start of the current earnings cycle and fallen roughly 4% since hitting its peak 3 weeks ago. Today the XLY traded flat in a day of low volume to close with a small loss. The ETF appears to be reversing, although forward outlook for earnings growth is positive through the end of the year and next year, as it is now below the short term moving average with bearish indications. If support is not found at the current level, near $77.50, a drop to $75 may be on the way. Since growth is expected to run above 11% for 2016 and 2017 I would expect any pull backs that happen now to provide attractive entry for long term positions into the end of the year and next.


Bayer announced some details of its proposed take-over of Monsanto. The company says the deal is worth $62 billion in cash and stock and values Monsanto at $122. Bayer would finance the deal through Bank of America and other banks but faces regulatory approval that many see not forthcoming. Today Monsanto gained more than 5% after gapping upward for the third time in three weeks, to trade near $110. If the deal goes through as stated today's closing price leaves more than 10% on the table.


Shares of Apple gained nearly 2% to trade above the $95 support/resistance line on a report that the company has requested suppliers make more iPhone 7's than first ordered. The news comes from the Taiwan Economic Daily which reports Apple has requested between 72 and 78 million 7's, roughly 20% more than Wall Street analysts have forecast. Today's action is a positive for the stock, which has been under pressure of late, but does not yet indicate reversal in prices. The candle is small and met resistance at the short term moving average which could keep it from moving higher. Also, the most recent bearish MACD peak is a long term extreme and convergent with the recent low, indicative of a likely retest of support levels near $90.


The Indices

Today's action was very light, and without much direction. The indices traded in very tight ranges, barely moving more than a tenth of a percent in either direction in most cases, and closing very near their opening prices. That being said there was one index which moved a little more than the rest, the Dow Jones Transportation Average, which closed with a loss near -0.4%. Today's candle is small and black, and not too close to either support or resistance, so is more than likely a spinning top and indicative of indecision more than anything else. The indicators are mixed, MACD momentum is consistent with a support bounce but has not turned bullish while stochastic has turned upward but not yet confirming support. Support is near 7,500, resistance near 7,750, and could keep the index range bound into the near term. A break above would be bullish, a break below would be bearish, and either move could take the index as much as 500 points in the direction of the break out.


The next largest decline was made by the S&P 500, about -0.2%. The broad market created a small black bodied candle, closing near the low of the day and below the 2,050 support/resistance line. The index may be building support at this level as evidenced by a slow uptick in stochastic and decline in bearish momentum but without a significant move above 2,050 and break above the short term moving average could just as easily be setting up for further pull back. Should it move lower from here first target for support is near 2,020. Should it break above the moving average first upside target is near 2,080.


The tech heavy NASDAQ Composite made the next largest decline, about -0.08%. The index created a very small candle, doji-like, that shows resistance at the short term moving average and the 4,790 resistance line. Today's action is not definitive for resistance but is suggestive, the indicators however may be telling another tale. MACD is very close to crossing over into bullishness which would confirm rising stochastic providing the index breaks above resistance. IF so upside target would be near 5,000, if not downside target is near 4,650.


Today's smallest decline was posted by the Dow Jones Industrial Average, about -0.05%. The blue chips created a very small candle, a spinning top with very low volume, appearing near the middle of a range demarcated by resistance at the short term moving average and support along the long term up trend line. The index may find support at the long term up trend line but there is little sign of it now. The indicators are weak and trending flat but not yet showing signs of a bounce. This range may hold over the next few days while we wait on the data. A break above resistance, near 17,600, could take it up to retest 18,000. A break below support, near 17,250, could take it down to 17,000 or 16,500 if the move gathers strength.


Today's action is indicative of hesitation, indecision and pause, not too surprising given the issues facing the market today. Top of the list, at least in the nearer term, is the FOMC and the possibility of a June rate hike. A close second is earnings expectations which are still negative for the next quarter, and weak for the quarter beyond that. These two issues alone could keep the market in check over the next few week, and easily spark a sell-off if the market does not like the way things develop. Bottom line, I just can't think of a reason for rally right now. The indicators may be rolling into a signal but without positive catalyst I just don't see them taking the market very high.

I am still very, very cautious in the near term and prepared for, if not expecting, a correction. Longer term, I remain bullish provided the economic data remains consistent with recovery and growth into the end of the year.

Until then, remember the trend!

Thomas Hughes