Introduction

The market fell ahead of a busy week, the busiest week of the earnings season, but did not fall hard. So far the season is better than expected, the bad news is that forward outlook continues to decline. Along with earnings there is quite a bit of data, a meeting of the FOMC Wednesday and a BOJ meeting on Friday, both giving plenty of reason for caution.

International markets were a bit mixed. Asian indices were mostly flat for the session, barely moving on better than expected Japanese trade data and news from Nintendo it would see little material impact from the success of Pokemon Go. It, Nintendo, owns only about 30% of the Pokemon Company which itself will receive only a licensing fee. Most of the profits will go to game creator Niantic. European indices began the day with gains near 1% but pared those back to break even or lower on weakness in the US market and another drop in global oil prices.

Market Statistics

Futures trading was indecisive in the early hours, mostly indicating a flat to slightly lower open. Nothing in the way of economic data was released pre-opening to affect trading, earning news was dominated by Sprint's beat and Yahoo!'s sale to Verizon. Oil prices did have an affect on early trading and weighed on prices going into the open and early hours of today's session. Spot prices for WTI and Brent hit new 3 month lows on rising fear of over-supply and negative demand outlook. The S&P 500 opened with a loss just over 1 point and then steadily fell to hit a mid-day low near 2,162, about -0.57% below last week's close. This low held while the market bobbed along for most of the remainder of the day. Around 3:30PM the bulls tried to mount a rally and were able to recover some but not all of the day's losses.

Economic Calendar

The Economy

No economic data on the calendar for today but the week is pretty full. Topping the list is the FOMC meeting and policy statement Wednesday afternoon. Tomorrow the Case Shiller 20 city index, consumer confidence and new home sales data will be released. Wednesday is the FOMC, durable goods and pending home sales. Thursday is just jobless claims, Friday closes out the week with the BOJ statement, the 1st estimate for US 2nd quarter GDP, PMI, and Michigan Sentiment. After the FOMC the BOJ and GDP are close seconds. Housing data will also be crucial for the general economic outlook and FOMC rate hike timeline.

Moody's Survey Of Business Confidence continues to fall, shedding -0.6 to hit 23.6. This is the 14th week of near continual decline and the 10th month of downtrend in global business confidence. Mr. Zandi says that geopolitics is driving sentiment and noted the China/Philippines issues again, as well as the Brexit and regional political unrest in South America. US sentiment remains intact and consistent with an expanding economy.


So far this cycle 25% of the S&P 500 has reported earnings with another 20% is due to report this week. Of those who have reported 68% have beaten earnings expectations and 57% have beaten revenue expectations, both above average. The blended rate of earnings has risen in the last week to -3.7%, still deep in negative territory, from last week's -5.5%. The week to week increase is not unexpected, the blended rate tends to rise about 4% from the start of the reporting season to the end making this years final target about -1.5%. The industrials and info tech sectors are leading 5 other sectors in earnings and revenue beats, this week should see the blended rate come up again.


The forward outlook remains muddy. On the positive side, full year 2016 earnings expectations remain positive and steady over the last week at 0.3%. The bad news is that while 2nd quarter earnings growth is not as bad as expected, 3rd and 4th quarter growth have both been revised lower again. Third quarter earnings growth is now negative, as feared, and is likely to go lower over the next week. This makes the 6th quarter of negative growth. Fourth quarter growth is projected at 6.6%, full year 2017 at 13.1%.


The Dollar Index

The Dollar Index held near its 4 month highs while we wait on the FOMC and BOJ decisions. Both are expected to do something, at a meeting in the future, but there is little expectations either will make a move now. Those moves, easing/stimulus in Japan and tightening/rate-hiking in the US are bound to drive the dollar higher in the longer term. In the nearer term the index is trading at a resistance target with divergence in MACD which suggest a move higher may not be coming. Depending on what it is exactly they say, the news may not be enough to move the index above resistance. Resistance is near $97.50, a break to the upside could go as high as $98.65 before hitting next resistance. If the index pulls back from the current levels first target for support is $96.60.


The Oil Index

Oil prices fell again today, dropping more than -2%, to settle near the low of the day. WTI fell about -2.42% to trade just above $43 and a 4 month low. Prices are falling on over-supply worry fueled by rising rig counts in the US and no sign of significant production decreases around the world. This sentiment could persist into the short term or longer if global conditions do not improve. Now that WTI is moving below $45 next target for support is near $40.

The Oil Index moved lower today as well, dropping further beneath the short term moving average and breaking below the mid-point of the three month range. The index looks set to test the bottom of this range, near 1,075, and the indicators are consistent with this. There is little sign of underlying strength in the move, a break beneath the bottom of the range does not look likely.


The Gold Index

Gold prices had a choppy session but held steady near last week's closing prices. Spot gold traded as low as $1,313 but was able to regain most of that loss to settle near $1,320. Gold is testing support, just above $1,300, and this is likely to continue tomorrow at least, an while the Dollar Index is pushing up against resistance. This week may see the metal make another large swing, up or down, depending on the FOMC and how the dollar reacts. First downside target is $1,300, a break below this taking price down to $1,280. First upside target is near $1,350 with $1,375 next target after that.

The gold miners were not able to hold their ground in today's session. The Gold Miners ETF GDX fell about -3.5% in a move that broke below the short term moving average. This move may be a test of support, but if confirmed could lead to significant downside for the sector. The indicators are both bearish and consistent with a test of support but neither are showing unusual strength or indication a break of support is likely. If it holds, based on convergence with MACD, a test of the recent high is likely. Support is near $27.50, possibly as low as $26.85 and dependent on gold prices.


In The News, Story Stocks and Earnings

Yahoo! made headlines today but not for earnings. The company announced that Verizon was the highest bidder and will be taking it over at a cost of $4.8 billion. Verizon plans to merge the business with AOL in effort to make it a top global media company. The deal separates the Yahoo! core business from the Asian equities, Alibaba, it's cash and non-core patents which will be held in a new publicly traded company. Shares of Yahoo! Fell -2.25% on the news, Verizon only about -0.5%.


Sprint was the one earnings report to stand out in the pre-opening session. The company's report was a bit mixed but was enough to send shares skyrocketing 25% after the open. Earnings and revenue fell from last year, earnings more than expected, but a few key statistics helped to erase the sting. Revenue fell less than expected on better than expected increases in post-paid subscriber additions. Post-paid is the largest revenue stream for the company and came in at a 9 year high with churn at historic low levels as well. Forward guidance was maintained at previous levels. Today's action took share prices to a 20+ month high and closed a gap opened October 2014.


Texas Instruments reported earnings after the bell. The chip and circuit maker reported revenue in-line and earnings that came in a nickel above expectations. Results were driven by strength in the automotive, industrial and communication device segments. Forward outlook was reaffirmed in a range above consensus and helped to send the stock up by more than 6% in after hours trading.


The Indices

The indices fell from the recently set highs but did not sell-off hard. Today's action appears more like a move within a small consolidation range and possibly setting up for a pull-back, with this week's schedule of events not surprising. The day's loss leader is the Dow Jones Transportation Average with a decline near -1%. The transports created a medium size black candle moving down from and confirming resistance at the 8,000 level. The indicators remain bullish so this level may get tested again. Declining MACD momentum and a stochastic crossover confirm the presence of resistance at this level, a break above which would be bullish. Upside target should resistance be broken is near 8,250, first target for support should the index pull back is near 7,750. A break below 7,750 would be bearish and could go as low as 7,500 in the short term.


The Dow Jones Industrial Average made the second largest decline in today's session, about -0.42%. The blue chips created a small black candle within a tight consolidation range just below the recently set all time high. Today's action appears to be consolidation, but consolidation for what is the question. On one hand the indicators remain bullish so near term weakness may be entry for bullish positions, on the other near term weakness could be an early sign of correction. A break from the consolidation/congestion band, between 18,490 and 18,510, could move the index as much as 1,000 in either direction. However, should the index break to the downside significant support targets exist well within the 1,000 point range at 18,275 and 18,000.


The third largest decliner in today's session was the S&P 500. The broad market created a smallish black candle with visible lower shadow. The candle is within the 8 day range and gives little sign support is breaking down although the indicators both suggest support could be tested. A break below the bottom of the range, about 2,150, would be bearish in the near term at least and could take the index down to the short term moving average, near 2,030. A break to the upside of this range could lead to a continuation of the Brexit Bounce with upper targets near 2,250 and 2,300.


The NASDAQ Composite made the smallest decline in today's session, only -0.05%. The tech heavy index created a small spinning top type doji just shy of its recently set high and may be cresting a peak. The indicators are still bullish but declining momentum and a crossover in stochastic are consistent with resistance and possible consolidation or correction. If the index is able to move higher upside target is near 5,150, if not first target for support is just below current levels near 5,050.


The indices are in a near term consolidation/congestion pattern following the massive rally from the Brexit Bottom. Better than expected earnings have helped to support the rally and may continue to do so into the near term. The risk is that support for the rally could fade along with forward outlook which persists in year over year declines.

The FOMC may reinvigorate the bulls with their policy statement but that is a wild card, they are largely expected to do nothing except talk so volatility is the most likely result of that event. More important than the FOMC will be the data and any clues it gives to when the next rate hike will be.

If this week's round of releases brings us more of what we've already seen I see little reason for the market to move higher in the short term without some kind other catalyst, such as the data or the FOMC. Longer term outlook for earnings remains positive, strong even, but until we can say for sure that growth is at hand the market is more likely to continue trending sideways than it is to rally on to new highs.

I remain cautious for the near term with an eye on 3rd quarter earnings and the FOMC.

Until then, remember the trend!

Thomas Hughes