Introduction

The market hovered at newly set all time highs waiting the first full week of earnings season. Today's action set a new high for the S&P 500 but the range was tight, less than 0.4%, and the gain was only worth half that. Even so the market appears to be resilient following a weekend of geopolitical and domestic violence, looking ahead to earnings. So far earnings have been better than expected, just not enough to reverse year over year declines.

Asian markets were flattish today as well. Japan was closed for a holiday, action was light everywhere else. The coup in Turkey did not appear to have much impact on trading and there was little news otherwise. European markets were choppy and ended the day little changed. Early trading saw them up about a half percent or so only to fall back to flat line or below by the close. Turkey was one reason for jittery markets, a fall in oil prices was another.

Market Statistics

Futures trading indicated a flat to positive open for the US market all morning. The S&P 500 was expected to rise by 2 -3 points and this is what happened. The market held above flat line for the first 10 minutes and then briefly fell into negative territory. The move was without conviction, by 10AM the indices were moving back above flat line and then up to the highs of the day. By 11:15AM the indices had hit those highs and proceeded to trade sideways within a narrow range until late afternoon when another new high was hit, about a tenth above the previous high. The market pulled back slightly from this level going into the close but finished the day very near the high of the session.

Economic Calendar

The Economy

There was no economic data released before the opening bell. The National Association Of Home Builders Home Builder's Confidence Index was released at 10AM. The index shows a decline of 1 point to59 from a downward revision to last month. Over the last 13 months the index has held a range of 58 to 65, median of 61. The present conditions index fell -1 point to 63, 6 month outlook fell -3 points to 66 and traffic fell -1 to 45. Sentiment remains positive but at the lower end of the 13 month range.

Moody's Survey Of Business Confidence fell -0.9 points to hit another new low, 24.9. Mr. Zandi says the US remains strong but most other areas of the world are affected by geopolitical events. Last week the China/Phillipine ruling over the South China Sea stirred up tensions in Asia, compounding issues already present; South America is dealing with political unrest and a growing Zika problem and the Brexit.


This week there are 140 S&P 500 companies expected to report. That is 28% of the index and added to the 7% already reported a fair indication of what to expect the rest of the season and into the end of the year. So far 66% of those reporting have beaten earnings expectations, however earnings growth remains negative. The blended rate of earnings growth for the quarter rose slightly in the last week, up a tenth to -5.5%, but this was offset by declines in forward outlook. The index P/E multiple is also expanding, up to 17.1 and well above the 5 year average.


Looking forward earnings growth is still expected to return with the 3rd quarter but the amount continues to decline. The third quarter estimate fell 0.3% to 0.4%, nearly cutting the previous estimate in half, and setting a new low for the series. At the rate it has been falling it could very easily turn negative in the next week or two. The fourth quarter estimate also fell by 0.3% and is now 6.9%. Full year 2016 estimates fell to 0.3% and very close to turning negative for the year as well. Full year 2017 remains strong in terms of outlook at 13.4%, down a tenth from last week, but so did full year 2016 until it didn't.


The Dollar Index

The Dollar Index lost a little ground today but remains near the top of the 1 month consolidation range. Today's action was light and created a very small black candle moving down from resistance at the top of the range. The indicators are a bit mixed but momentum remains bullish while stochastic fires a weak bullish crossover so resistance could be tested again. Resistance is at the $96.60 level, a move above here would be bullish and could take it up to $97.50 or higher. A failure to break above resistance could send the index down to $95.60, the bottom of the range, or lower to $94 if support is broken. Such a move could come this week, there is a bit of data due out over the next few days and three important central bank meetings on the horizon. One possible catalyst is Thursday when the ECB meets, another next week when the FOMC meets and then another the following week with the BOJ. There is not expected to be much change at any of the meetings, it will come down to what they say and how the data comes in.


The Oil Index

Oil prices fell more than -2% intraday to trade below the $45 level. The price of WTI continues to consolidate above $45 as supply and demand remain out of balance. Moving the market today was news of a build at the Cushing storage depot that raises concerns production remains too high for current demand. Should WTI fall below $45 next downside target is near $40.

The Oil Index continues to trend within its trading range and gives no sign of breaking out. Today the index fell about -0.5% to close with a loss near -0.25% and created a very small spinning top candle near the center of the trading range. The indicators are rolling over and very weak, consistent with range bound trading. First target for support is the short term moving average, below that the middle of the range near 1,120 and then below that near the bottom of the range near 1,080.


The Gold Index

Gold prices held steady near $1,330 today despite widespread global woe. Even so prices remain well above $1300 on safe haven plays. Today's move was small, the market quiet, as traders eye news and wait on the round of central bank meetings that begins this week. Central bank policy over the next 2 weeks will be a big mover of prices but it is possible the correlation with currency isn't working like usual due to the underlying flight-to-safety that has gotten prices up to these levels in the first place. A shift in the value of the dollar may not move gold as expected.

The gold miners continue to trade near their multi-year highs. The Gold Miners ETF GDX just below $30. Today is the 10th trading in a tight range around this level, a consolidation that is looking more and more flag-like. Although the indicators have peaked both MACD and stochastic are convergent with the current highs, indicative of higher prices. If this pattern plays out the miners could move up as much as $5 in the short term to reach a target of $35. This move has potential to be strong, gold prices are 10% higher now than during the preceding quarter inflating profit outlook and possibilities for returning cash to shareholders.


In The News, Story Stocks and Earnings

Bank Of America reported earnings before the bell and became the third of four big banks to beat profit estimates. EPS of $0.36 beat by 3 cents but is down $0.09 or 20% from last year. Revenue also beat but was also down from last year. Company CEO says their responsible growth strategy has been working. Looking forward, he also says that if rates remain low the bank will still be able to make money but will likely have to reduce its work force. Shares of the stock were one of todays' leaders, gaining more than 3.5% but met resistance at the 150 day moving average.


So far JP Morgan, Wells Fargo, Citigroup and Bank Of America have all met or beaten estimates. They also all reported revenue and earnings below that of the same period last year. Shares of the sector have risen on the news, outlook remains stable to positive, but no one of these banks looks like it is on the cusp of breaking out into a major rally. The Financial Sector SPDR XLF is the same. The ETF was able to gain about 0.4% in today's action but is still trading well below resistance targets at the $24 level. The indicators are on the rise so resistance may be reached but they are also showing some signs of rolling over and weakness.


Netflix reported after the bell, beat EPS estimates but failed to please investors. The company reported EPS of $0.09, consensus was $0.02, but shortfalls in subscribers and new subscribers weighed on share prices. According to the CEO the company "is not growing as fast as we would like". Shares of the stock fell -15% in after hours trading.


IBM also reported after the bell. The company reported a top and bottom line beat on strength in the cloud computing business. Despite the beats eps and revenue fell on a year over year basis, the 18th consecutive quarter of falling revenue. Shares gained about 3% on the news.

Yahoo reported revenue ahead of expectations but a miss on earnings. Shares fell -3% on the news.

The Indices

The market drift higher today but not all indices were able to make gains. The Dow Jones Transportation Average was today's laggard and the only to close with a loss. The transports fell about -0.11% in today's session, closing a small gap opened last Thursday. The index appears to be taking a breather mid-rally and the indicators are consistent with this. The current MACD peak is strong and stochastic %D is crossing the upper signal line so a test of resistance at the 7,800 level is likely. A break through is possible, if so next target would be 8,250.


The Dow Jones Industrial Average made the smallest gains in today's session, setting a new all time high. The blue chips drifted higher, creating a very small spinning top candle, in a move that could be signaling the rally is reaching a peak. MACD momentum is weak and retreating from its peak, stochastic is high in the overbought range, both suggestive the rally is vulnerable to correction. A correction could actually be a good thing for the bulls, if it confirms support in the 18,000 to 18,250 range. If not a further fall may follow.


The S&P 500 made the 2nd largest gain in today's session, about 0.30%. The broad market created a small white candle, closing near the high of the day, and set a new all time high. Today's action is a positive for the bulls but should still be approached with caution. The indicators are starting to show some sign of rolling over, suggestive of resistance. If resistance does set in at this level a pull back to 2,120 is likely. If however, earnings impress the market the rally could continue.


The NASDAQ Composite made the largest gains in today's session, about 0.55%. The index did not set a new all time high but it did break above a resistance line and set a new 6 month high. It looks like the index is creeping higher with the all time high in sight although the movement is not too strong at this time. Momentum is falling off as the index breaks resistance which makes stochastic look more overbought at its level than not. Should it continue to move higher next upside target is near 5,200.


Today's action was very light but hopeful. The market is eagerly awaiting earnings and so far it looks like the season will be better than expected. The question is how much better than expected, and will forward outlook every begin to improve. This is going to be a pivotal week, there are a lot of earnings reports on tap, by Friday we know should have a better idea what to expect with the next quarter. Sure, growth is in the forecast but the way estimates are falling I wouldn't count on it for the 3rd quarter just yet. If outlook falls into negative territory the rally could easily fade. I am hopeful but remain cautious, if the rally has legs there will be another chance to get in without chasing prices now.

Until then, remember the trend!

Thomas Hughes