Introduction

The S&P 500 flirted with new all time closing highs as we enter the dog days of August. Today's action was dominated by global PMI data although last week's poor US GDP figures and ongoing decline in earnings expectations are also weighing on sentiment. Data released today was also not too positive and did not help support the market. The ISM Manufacturing index fell more than expected and construction spending came in at a one year low.

PMI data from both China, Britain and the EU fell in the last month, adding to fear of slowing global growth. In Asia indices were mixed. The Japanese and Hong Kong markets were able to post gains but mainland China shares fell as the governments official PMI came in at a contractionary 49.9 versus the expected 50.0. A private read of PMI from Caixin shows that the smaller and mid-sized Chinese business segment is expanding.

In Europe indices closed flat after an initial move higher. PMI in Britain and the EU both fell, Britain into contraction, which added to negative sentiment inspired by lack luster banking stress tests. The tests show that many of the EU's banks will have a hard time dealing with toxic loans in the event of a financial crisis. The major criticism of the tests, and a reason why they may be overly optimistic, is that they do not include provisions for fall-out from the Brexit.

Market Statistics

Trading was light and choppy today. Futures trading was without momentum, indications for a mildly positive open held steady for most of the early morning. At the open traders seemed unsure which way to go, the indices wavered at break even level for about 5 minutes before making a small move lower to test support. This produced a small bounce which lasted about an hour and half and took the S&P 500 up to set a new all-time intraday high. This high was not held, bears quickly stepped in and spent the next hour and half pushing the indices lower to set a new intraday low. From that point forward the indices drift near the bottom of the daily range until the close of trading.

Economic Calendar

The Economy

There were a couple of domestic economic reports today, both out at 10AM. The ISM Manufacturing Index fell more than expected to 52.6 in July. This is down -0.6% from last month, expectations were for the index to remain flat. Within the report new orders, employment and deliveries all fell. New Orders remains expansionary at 56.9 as does deliveries at 51.8. Employment fell below 50 to 49.4. Production and inventories both rose, production to 55.4 while inventories remain in contraction at 49.5. Basically this is a mixed report, consistent with recent trends in manufacturing. The pace of manufacturing is expanding, but that pace is slowing while overall, inventories continue to contract. Prices paid are also falling, reducing the impact of near term increases in inflation.

Construction spending fell in June by -0.6%, analysts had been expecting a gain in spending of 0.7%. The previous month was revised higher though, up 0.7% to to -0.1%. This month's total is a 1 year low but up 0.3% over this same time last year, and up 6.2% year to date.

Moody's Survey Of Business Confidence rebound from last week's low. The index gained 1.7 to hit 25.3, a four week high. Mr. Zandi says confidence is up but remains fragile, the US remains sturdy. Regardless, global sentiment remains near the multi-year low and will take more than one week of rebound to signal reversal.


Earnings growth for the 2nd quarter fell over the last week, the FactSet blended rate dropping -0.1% to hit -3.8%. This is up from the -5.8% expected at the start of the reporting period but negative nonetheless. So far 63% of S&P 500 companies have reported, 71% beat earnings expectations and 57% beat revenue expectations. At this time only 6 of the 10 sectors are beating expectations, down from 8 a week ago. Another 118 or 23.6% of the index will report this week.


Outlook for earnings continues to decline. Looking out to next year, full year 2017 is still expected to see earnings growth of 13.3%. However, in the nearer terms, Q3, Q4 and full year 2016 have fallen again with full year 2016 outlook on the verge of turning negative. The 3rd quarter growth estimate has now fallen deeper into negative territory, -0.6% while 4th quarter outlook remains positive, but lower than last week by -0.3%, at 6.3%. Full year 2016 outlook now stands at 0.1% and could easily turn negative as early as next week.


This is going to be a big week for data. Tomorrow is auto sales, income and spending and PCE prices. Wednesday is ADP Employment and ISM Services. Thursday is weekly jobless claims, Challenger Job Cuts and Factory Order. Friday wraps the week with consumer credit, NFP, unemployment and hourly earnings.

The Dollar Index

The Dollar Index held relatively steady today but did make some small gains. The index gained about 0.29%, rising from last Friday's closing level, but did not make significant gains. The indicators are both bearish and moving lower, suggesting prices will move lower as well. Near term support appears to be at the 61.8% retracement level, a fall from the current level could result in a move down to the next support target near $94.31. This week's data will be important, if it is as weak as today's and last week's GDP it will likely help drive the dollar lower.


The Oil Index

Oil prices tanked today. WTI fell below $40 for the first time in months, shedding more than -4% intraday and closing with a loss near -3.5%. Oversupply concerns are pressuring the market. A weekend report that OPEC output likely increased to a near term high last month as well as rising US rig counts are to blame. On the OPEC side of things Nigerian and Iraq are to blame, coming back on line after spring and early summer outages. On the US front, rig counts are expected to rise again this week as well. Today's move only barely broke $40 however, a level that may prove to become support as it was twice in April. If support holds a move to $45 looks likely, a break below this level is possible though, with downside target near $35. While oil prices are correcting, there is still expectation for a general market rebalance in the next 12 months or so so they may not fall to much further. This week's US storage data and rig counts could be the deciding factor, economic data will also surely have an impact on outlook.

The Oil Index fell -3% on the fall in oil prices. The index broke below the 1,100 level and looks set to test support at the bottom of the almost four month range. The indicators are both bearish and pointing lower, suggesting a move to support is likely, but both are weak and remains consistent with a trading range.


The Gold Index

Gold prices held steady near the one month high. The metal is being supported by safety seekers as well as a falling dollar and weak US economic data. This week's data will likely help push gold higher even if it comes in as expected, provided it does not raise the specter of an FOMC rate hike. Upside target is near $1380 with a chance of going higher if the data is weak. For now, it looks like $1350 could be near term support with $1310 as next target should a deeper pullback occur.

The gold miners are moving higher on higher gold prices and expected strength in earnings. The miners ETF GDX gained about 0.65% to set a near 3 year high. The ETF looks like it could continue higher but it will need to break through resistance first. Resistance is between $30.80 and $31, consistent with a reversal which occurred late August 2013. The indicators are consistent with a test of resistance but not yet showing strength. Stochastic has rolled into a weak signal, MACD has not yet confirmed but may do so this week should the move to test resistance continue. A move above resistance would be bullish and could take the ETF up to $34.50 in the near to short term.


In The News, Story Stocks and Earnings

Tesla announced this morning it had reached an agreement with SolarCity to purchase the solar energy company, both led by Elon Musk. The deal is an all stock transfer valuing SolarCity at $25.83 per share, about $2.6 billion and below previous forecasts. Together, the companies expect to save about $150 million through cost synergies the first year alone. Musk defended the move saying it is based on “really long term thinking” where SolarCity could provide power solutions for Tesla vehicles, among other opportunities. The deal is subject to SEC approval. Shares of both companies fell on the news, Tesla by -1.78% and SolarCity by -8%.


Verizon announced it was making another acquisition, Fleetmatics. Fleetmatics is a global fleet and mobile workforce tracking company with a suite of SaaS applications. The deal is worth $60 a share in cash and is expected to close in the 4th quarter, subject to regulatory approval. This is the second major acquisition in the last few weeks including the deal to buy Yahoo! and following a better than expected earnings report. Shares of Verizon fell -1.5% on the news and set a one month closing low below the short term 30 day moving average.


Texas Roadhouse reported after the bell. The maker of delicious steaks reported revenue below estimates with a $0.02 beat on earnings driven by declining food cost. Comp sales at company owned stores rose more than 4%, gross margins rose more than 300 basis points and forward outlook includes 2.5% to 3% foodcost deflation in the coming year. Shares of the stock fell more than -4% on the news.


The Indices

The indices continue to churn near recent highs, today's action was very light and a little choppy led by the NASDAQ Composite. The tech heavy index was the only to score gains in today's session, about 0.3%, and set a new one year high. The indicators remains bullish I would expect to see the index continue to drift higher, possibly setting a new all time high, although momentum continues to decline. The all time high is next likely target for resistance, only about 30 points above today's close, and should be viewed with caution as a likely spot for profit-taking and potential reversal. A break above this level could be bullish but again, caution is warranted due to seasonality, earnings outlook and low market volume.


The S&P 500 made the smallest decline among the remaining major indices, about -0.13%. The broad market set a new all-time intraday high in today's session, but only by 1.2 points and trending sideways overall. This consolidation is good for the bulls providing another bullish catalyst emerges but without that indications a pull back is on the way continue to grow. MACD momentum created a bearish crossover, confirming a similar crossover in stochastic formed last week. Stochastic is still high in the upper signal zone but moving lower and fast approaching the signal line, a cross of which would indicate some weakness in the market and provide additional bearish confirmation. Near term support is near 2,160, a break below which would be bearish and could lead to additional downside. Next downside target would be the short term moving average near 2,130.


The Dow Jones Industrial Average fell a little more than the SPX, about -0.15%, and appears to be making a quiet retreat to near term support. Today's action created a small spinning top candle, did not make a new high and appears set to continue lower. Both indicators are bearish and moving lower, consistent with a retreat to support, with first target near the previous and recently broken all-time high. This move could be crucial for the next phase of the market as a successful test of resistance turned support would confirm the break out. If confirmed another leg of rally could follow with upside targets of 19,000 in the near to short term. If support fails and prices fall back below 18,300 further downside should be expected with possible targets near 18,000 and 17,750.


The Dow Jones Transportation Average made the largest decline, about -0.3%, and is sitting on support at the short term moving average. Today's action is the third day support has been tested and the indicators suggest it will be tested further, both MACD and stochastic are moving lower following bearish crossovers. If support at the short term moving average fails next support is just below at the 7,750 level. A break below this level would be bearish and could take the index down to the 7,500 level in the near term.


I am beginning to feel like the boy who cried wolf but I remain cautious on the market. There are many reasons why the market could correct in the next month, the number one of which remains declining forward earnings outlook. Earnings growth, for the broad market, is largely predicated on earnings growth in the energy sector. Full year 2016 and 2017 energy sector earnings growth swelled on the back of $50 oil, at $40 those estimates are likely to fall and could bring the entire market down with it. Add to this the seasonality of late summer trading and tepid domestic and global economic data and the chances for an August swoon grow.

I could be wrong, this week's data and earnings reports may come in stronger than expected, or oil could rebound, and fuel the rally but it didn't happen today. Friday's jobs report may be the catalyst to move the market one way or the other but that is still a few days away.

Until then, remember the trend!

Thomas Hughes