Introduction

The S&P 500 broke out to new all time highs today. The question now, will these new highs hold or is this a market fake out? Aside from geo-political risk and slow global growth there are at least 2 major hurdles for the US market; earnings season and central bank policy. Earnings season began in earnest today with the release of Alcoa's report after the bell and it doesn't look good, Q2 and full year 2016 estimates continue to fall. Central bank speculation is going to heat up over the next 2 weeks as we await the next FOMC meeting. Between then and now are numerous opportunities for Fed related speakers to move the market, 14 scheduled events featuring a Fed speaker this week alone.

International markets were mostly higher. In Asia trading was dominated the results of the Japanese election to reaffirm Prime Minister Shinzo Abe's ruling party. The landslide victory is expected to make it easier for an additional round of Abenomic stimulus for the country, expected to be roughly 2% of GDP. The Nikkei rose nearly 4% on the news, indices in China and elsewhere were positive but gains were much smaller.

European indices closed with gains in the range of 1.5% to 2.11% on a combination of factors including the Japanese vote, receding Brexit fears, US markets hitting new all-time highs and the selection of a new British Prime Minister. The selection of a new PM was a bit surprising, this move was not expected until later this summer or fall at the earliest. Theresa May is the choice, the only remaining candidate following the drop-out of rival Andrea Leadsom. The switch is expected to take place Wednesday night and paves the way for untangling Britain from the EU.

Market Statistics

Futures trading indicated a positive open all morning, an open that would put the SPX at a new all time high. After the bell the indices began to move higher, pushed up against resistance and drifted across all within the first few minutes of trading. The next hour saw them drift sideways, move down to retest early support, and then bounce to make another new high for the day. Today's highest level was hit just before 1PM, after that the indices drifted sideways/down to end the session near the middle of today's range.

Economic Calendar

The Economy

No official economic data today. There are quite a few reports this week, mostly coming on Friday. Tomorrow we'll get Wholesale Inventories. Wednesday Import/Export prices and the Fed's Beige Book top the list. Thursday is weekly jobless claims and PPI. Friday brings us CPI, Empire Manufacturing, Retail Sales, Industrial Production, Business Inventories and Michigan Sentiment.

Moody's Survey Of Business Confidence fell to another new low. The diffusion index fell -1.2 points to hit 25.1, the lowest level in more than 3 years. Mr. Zandi notes a sharp drop in post-Brexit sentiment, most visible in responses from EU businesses, and a possible stall in the EU economy. US and Pacific Rim business remains upbeat but has also seen some decline. South America is the weakest.


Earnings expectations continue to fall as we approach the peak of the Q2 earnings cycle. So far 23 of the 500 S&P 500 companies have reported, 14 have beaten earnings estimates and 11 have beaten revenue estimates. The Q2 blended rate is now -5.6%, a drop of -0.4% over the past two weeks alone. While the lower bar may make it easier for more companies to beat estimates it will not alter the fact we are facing a 5th quarter of earnings decline and may indicate forward expectations will continue to fall as well. The 12 month forward looking EPS remains flat and does not indicate growth as is predicted for the end of the year.


Looking out to the 2nd half of the year, full year 2016 and next years estimates expectations have also fallen in the past week. Growth is expected to return next quarter but that growth is now only 0.7%, down a half percent over the past 2 weeks. Growth is expected to expand into the 4th quarter but that growth is now only expected to be 7.2%, down -0.3% since last report. Full year 2016 earnings growth is only expected to be 0.5%, down -0.2%, and full year 2017 growth lost a tenth to hit 13.5%. Outlook remains very bullish for next year but I remain wary of near to short term growth while we are in an environment of falling expectations.


The Dollar Index

The Dollar Index moved higher to set a new 4 month intraday high. The index moved as high as $96.79, above the 50% retracement level, but was not able to hold the level by the close of trading. The 50% retracement level held as resistance for today but may be breaking down. The index has been consolidating just below this level for about 3 weeks now and looks like it will be moving higher. The indicators are bullish and support a move higher although at this time momentum is in decline. That being said there is some strength in stochastic, it is making a bullish crossover of the upper signal line. Should the index continue to move higher and break above resistance a move to next target at $97.50 is likely with a move to $98.65 possible. It's two week's to the FOMC, they are not expected to make any changes to policy to expected easing from the BOJ, the BOE and the ECB are all possible catalysts to move the index higher.


The Oil Index

Oil prices were a bit volatile today, nothing new there. The price of WTI began the day in negative territory, down about -1.50%, only to move higher later in the morning. By 9:30AM WTI was trading as high as +1.25% only to fall back to break even soon after. By the end of the session price had fallen back below flat-line to close with a loss of -1.37%. Driving today's move was ongoing supply/demand imbalance and outlook for the future. The latest news shows Canadian production is rebounding from wildfire related outages in the oil sands region and the US rig count is rising, both offsetting hopes that demand would begin to chip away at already high global supply. WTI is now trading below $44.75 and at a new 2 month low.

The Oil Index remains range bound, moving higher in today's session despite the drop in oil prices. The index gained a little more than a half percent making a small bounce from the short term moving average. The moving average is just above the mid-point of the range, near 1,120, and poining higher although there is little indication the index will move higher. The indicators are both consistent with range bound trading, trending near the middle of their respective ranges. It looks like the index is treading water waiting for an indication of which way to go. This may come down to earnings and expectations and, of course, oil prices.


The Gold Index

Gold prices drifted lower in today's session but remain near $1350. Spot prices lost about $2 in a quiet session as investors shift focus to the central banks. The Brexit and potential fall-out is helping to support prices but a strengthening dollar could limit further upside, if not cause correction. A dovish fed could help fuel a rally in gold, should the dollar weaken, but this is not a guarantee in light of expected easing from the other central banks. $1350 appears to be near term support, a move below this level could send gold down to test $1310 or $1300. Resistance is near $1375, a break to the upside will like go to $1400 or higher.

The Gold Miners ETF opened with a loss today but was able to move up off of the early lows and close with a small gain. Today's action is the fourth day of trading within a tight range at/near the 3 year high. The indicators are bullish and point to higher prices although there may be some more consolidating before then. Momentum is falling off a bit, one indication of potential consolidation, but stochastic is showing strength through crossover of the upper signal line so a deep correction does not look likely. Should the ETF pullback first target for support s near $27.50. If it moves higher next target for resistance is near $31.35.


In The News, Story Stocks and Earnings

Shares of Nintendo, traded on the Japanese exchange, shot up nearly 25% on the success of the new Pokemon Go game. The game is just another play on the wildly popular franchise but has sparked a new avenue for gaming and tech companies to pursue, augmented reality. Unlike virtual reality which immerses users in a digital world, augmented reality superimposes digital characters (in the case of Pokemon Go) on top of real life video. Microsoft CEO Satya Nadella says it could signal a new goldmine for tech companies, such as his own.

Microsoft is currently working on an augmented reality device called the HoloLens. To put the popularity of Pokemon Go in perspective, in 6 days it has surpassed Tinder's count of active daily users and is fast approaching Twitter, numbers that no business involved with handhelds, VR or gaming should ignore. Also in the news today, Microsoft announced a partnership with GE for cloud computing. The deal will bring GE's Predix platform to Microsoft's Azure cloud, available to industrial businesses. Microsoft moved up about 0.75% but remains below resistance at the $53 level.


WalMart is offering free shipping for all online purchases this week, an attempt at competing with Amazon's Prime Day. Prime Day is a 24 hour period in which Amazon will offer spectacular deals to its Prime customers. Anyone who is not a Prime customer can get a free 30 day trial in order to take advantage of the deals. This is the 2nd Prime Day Amazon has held, last years was fairly successful as a boost to summer sales slump. Shares of WalMart gained about 0.35% to trade at a level -18.5% below the all time high. Shares of Amazon gained more than 1% to trade at a new all time high.


Alcoa reported after the bell and surprised with a beat on earnings and revenue. The company was able to produce $0.15 per share of EPS, $0.09 was expected, on revenue of $5.3 billion. On a year over year basis revenue is down about -10% on lower aluminum and alumina pricing despite a 4% increase in organic sales, earnings are also down year-over-year. Looking forward the company is expected to complete the split into two companies, up- and down-stream segments, later this year and has issued guidance for double digit growth in 2017. Shares of the stock gained about 7% on the news are headed to test resistance at the top of the range, near $11.25.


Seagate Technology, maker of disc drives and other memory hardware, pre-announced results today after the bell. The company says it expects to report revenue well above the previous range, beating expectations, along with an increase in margins and additional lay-offs planned for later this year. The news sent the stock shooting up by more than 12.5%.


The Indices

The indices moved higher today and one at least, the S&P 500, set a new all time high. Despite setting that new high however the broad market made the smallest gains of the day, only 0.34%. Today's candle is not very strong, more of a spinning top than anything else, and come with a bit of upper shadow so there is some resistance present. The indicators are bullish so higher prices or testing of new resistance should be expected in the near term. The break to new highs is a good sign but I remain skeptical, a few more days trading at this level would go a long way toward helping my confidence in the market. Should the index continue higher from this point next upside target is about 130 points higher, near the 2,260 level.


The next largest gain in today's session was made by the Dow Jones Transportation Average. The transports gained 0.37% but did not come close to setting a new all time high, that level is still about 12% above today's close. Today's action created a small spinning top type doji candle that was held in check by the 7,750 resistance level. The indicators are bullish and moving higher so a test or break of this level is very possible. Next target to the upside is just below the 8,000 level.


The Dow Jones Industrial Average made the 2nd largest gain in today's session, about 0.45%. The blue chips created a small white bodied candle with notable upper shadow, just below resistance at 18,250 and within 0.7% of the all time high. The indicators are pointing higher so a further test or break of resistance is likely, based on Alcoa's results it could come tomorrow. A confirmed break above the all time high could take it up to 19,000 should the seasons earnings and forward outlook support.


The largest move in today's session was made by the NASDAQ Composite. The tech heavy index gained just shy of 0.65% in a move that falls well short of the all time high. Today's move was able to break above one resistance level, 4,950, but the 5,000 level held. The indicators are pointing higher so a test of 5,000 is likely, along with a possible a break through to test next upside target near 5,040.


The market seems to want to move higher and today's action is promising. A break to new highs may attract new money to the market and drive it higher but I remain skeptical. Alcoa's and Seagate's earnings are a nice surprise but by no means a guarantee the season will produce positive growth, or that forward outlook will remain positive. Until we know for sure, as sure as we can, that Q3 earnings outlook will not turn negative I think there is sufficient risk of reversal to keep me on the sidelines. And there is still the upcoming FOMC meeting, potential Brexit fall-out and a rising dollar to weigh on the market and impact earnings. Don't forget, there are 14 scheduled speeches from Fed officials this week, enough to cause quite a bit of market volatility.

Until then, remember the trend!

Thomas Hughes

 

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