Introduction

The market floundered for another day, just below the recently set all time high. There was very little to move the market today, and little this week, so listless sideways trading could persist into the near term. Earnings season is largely over and economic data is very light all week so the market will struggle for direction and focus on what it can, oil prices and the Jackson Hole conference. Oil prices seemed to have topped out again, WTI fell more than 3% today. The Jackson Hole conference promises at least more Fed Speak, Janet Yellen is scheduled to deliver her address on Friday.

International markets were mixed, anticipation for the Jackson Hole conference and Yellen's speech dominating sentiment. Asian indices were mostly flat, where one index fell a quarter percent another rose a quarter percent. In Europe trading was little more dour, indices made small losses across the board. The slide in oil prices helped EU markets fall and will likely have an impact on the Asian trade when it opens in the overnight session.

Market Statistics

Futures trading indicated a mildly negative open all morning, about -0.25%. The operative word though was mildly as that word could be used to describe trading for the rest of the day. At the open the indices were mildly lower, they then mildly rallied, and then mildly sold off again... mildly trending sideways all day and into the close of the session leaving them with little to no change.

Economic Calendar

The Economy

There was no economic data released today and there will be very little released this week. In all, there are about 8 reports worth tracking including weekly jobless claims. The important, most important, are new and existing homes sales, durable goods orders and the 2nd estimate for 2nd quarter GDP. The estimate is expected to be revised lower by a tenth. Next week is the turn of the another month, if you can believe it, which means a whopping dose of monthly macro-economic data including NFP and unemployment.

Stanley Fischer spoke to a conference in Aspen, CO Sunday and says that a rate hike is near and that the economy has nearly reached the Fed's goals in terms of employment and inflation. His comments fueled rate hike speculation and drove the dollar higher despite the fact they seem to contradict the FOMC's official stance. Regardless, Fed Speak could continue to support the dollar into the near term with next week's data deluge a potential catalyst to affirm or refute Fisher's take on the economy. The CME's Fed Watch Tool rose on the news, but only slightly, to 18% chance of rate hike next month and 22% chance the month after that.

My take; they've (The FOMC together and by it's individual members) been saying a rate hike is close for a long, long time and employment data has been at healthy levels for just about as long . . . inflation on the other hand has not yet risen to target levels and doesn't look like it will soon so it's hard to argue for a rate hike. I think this is evident in conflicting viewpoints expressed by the individual members, they never seem to agree and one of them always seems to be in the news. Fischer is hawkish today, one of them will be dovish tomorrow. Yellen is set to speak later this week, be sure every nuance of her words will be studied for meaning.

Moody's Survey Business Confidence fell by a full point last week to 25.9. Based on Mr. Zandi's remarks it seems as if global business is cautious in the wake of a number of global events including Zika, Brazil and Venuzuelan politics, Brexit and the Turkish coups. Sentiment is also generally positive and consistent with an expanding economy. South America is worst, North America is best (go USA!) and improvement is expected in 2017.


Earnings season is just about over and, as expected, is better than expected at the beginning of the cycle but not as much better than expected which might be a problem. Let me put it like this. Over the course of the past 4 years the average amount of change between the expected rate of growth at the beginning of the reporting season and the actual amount of growth at the end of the reporting season has been about +4%. The week Alcoa reported, regarded as the start of the earnings cycle, the expected rate of earnings growth for the entire S&P 500 was -5.6%. which makes -1.6% the end-of-cycle target rate for earnings growth, give or take. So, -3.2% is better than expected, but it's not as good as it should be.


Looking forward earnings growth outlook held steady over the past week. The bad news is that 3rd quarter outlook held steady at -2%. If this is as low as it gets we can expect the final amount of 3rd quarter growth to be at least positive, if not above 1%. The 4th quarter projection held steady at 5.5%. Full year 2016 earnings growth estimate came in at -0.4%, unchanged from last week and the third week of negative reading. Next year is still expected to see strong growth, 13.3%, but that's still a long way off.


The Dollar Index

The dollar strengthened in early trading, driven by Stanley Fischer's comment's, but was not able to hold the gains. Today's action created a pinbar doji/shooting star and shows a market that may have made a knee jerk reaction to comments and then decided the news may not be as important as first thought. It also shows a market with some support at the $94.31 level, near the 78.6% retracement level, although the move is tentative and faces at least a little resistance. The indicators are bearish, near term trend is down, but they also suggest some support is present at current levels. A break below support would be bearish, downside target near $93. A bounce, or a continuation of this bounce, would be bullish with upside target between $95.60 and $96.50. Tomorrow's New Home Sales data could move the needle, or more Fed speak.


The Oil Index

Oil prices fell hard today, more than -3%. The rumors surrounding a possible OPEC production freeze are evaporating, and support for oil along with it, while increased expectation for renewed output from Nigeria and disputed fields in Iraq add to over supply worry. One analyst says the OPEC comments were "well timed", hinting as I've suspected that they are merely trying to talk the market higher. WTI fell below $37 and looks like it is headed back to $45 or lower. Today was the expiration of the front month contract which may have added to volatility, tomorrow the new contract begins trading as the front month.

The Oil Index fell in today's action, pulling back from the top of its 5 month trading range. The index shed -1.16% but found support at the short term moving average, near the middle of the trading range. The indicators are rolling over, consistent with the top of a trading range, and suggest a move lower is coming. If support is broken a move to the bottom of the range, near 1,075, is likely. Support is in the range of 1,120 to 1,150.


The Gold Index

Gold prices wobbled a bit as the dollar moved on Fischer's comments. Spot price fell about a half percent to $1,338 but recovered most of the loss. Despite the narrow daily range gold hit a two week low today, but remains above near term support levels. Prices could move down to $1,320 before hitting critical support and may do so if data and/or Fed speak points to rate hike.

The gold miners fell in today's session. The miners ETF GDX fell more than -1.5%, trading beneath the short term moving average with bearish indicators. The move shows a bit of choppiness in the market that has been growing over the past few months. This is the 5th time the ETF has traded below the short term moving average since the uptrend began 7 months ago, the first 4 times provided nice trend following entries. This may do the same but as yet there are no confirmations of support. Both indicators are bearish and gaining strength so I would expect to see a test of support at these levels, near $29.50, before any move higher occurs. A break below support would be bearish and could take it down to $27.50 before hitting next support. If support at/near $29.50 is confirmed the bounce could take the ETF to new highs above the $31 long term resistance line.


In The News, Story Stocks and Earnings

Pfizer announced it was buying Medivation this morning before the opening bell. The deal is worth $81.50 per share, $14 billion, and brings a portfolio of drugs that Pfizer says will add at least $0.05 to earnings in the first year. Deal price is a 20% premium to Medivation share prices, which saw substantial gains in today's session. Pfizer however lost about -0.40% to trade near a two month low.


Shake up at the Williams Companies continues. Management company Corvex says it plans to nominate 10 of its own employees to the board at the next shareholder meeting, Williams Companies calls this an unfortunate event. Shares of Williams Companies fell nearly -1.0% on the news and is trading just below a 9 month high.


Valeant Pharmaceutical announced the appointment of a new CFO. Paul Herendeen, formerly of Zoetis, was tapped for the position. This is the second major executive suite change this year as the company tries to recover from recent lows. Shares of Valeant gained more than 8% on the news to close at a 3 month high.


The Indices

The market really didn't do much today, just another day trading in a tight range below recent highs. For the most part the indices closed flat on the day, most in negative territory but one was able to pull off a small gain. The NASDAQ Composite gained 0.12% in a move that created a very small white candle. Today's action did not set a new high but is very close to the current all time high, and sitting on support at the previous all time high. The index could be consolidating for a move higher but bearish and weakening indicators suggest a test of support at least should be expected. A break below support, near 5,220, would be bearish in the near term and could take the index down to the short term moving average near 5,150 or lower.


The index with the biggest loss was the Dow Jones Transportation Average. The transports fell -0.45% in a move that created a very small black candle testing for support just above the short term moving average. The index is drifting sideways, just below the upper end of a 6 month trading range, with indicators consistent with range bound trading. Support is just below today's level, near the short term moving average, and then just below that near the mid-point of the trading range at 7,750. If the index is able to stage a rally resistance is just above today's close near 8,000.


The S&P 500 made the smallest loss in today's session, about -0.06%. The broad market created a very small doji like candle within the two week consolidation band. It is above the short term moving average, closest support, and could be preparing to move higher but divergences in the indicators continue to persist. These divergences, particularly in the stochastic, are pronounced and typically lead to some kind of market weakness. A break below support, near 2,165, would be bearish in the near term at least and could take the index down to 2,120 or lower. I know I've been harping on potential market weakness for months, I have to because the charts show it. The caveat is that chart weakness doesn't always equate to correction.


The Dow Jones Industrial Average fell -0.12% and created a very small doji candle, below support, and looks set to pull back. The indicators have rolled into a bearish signal in the near term, confirming a significant divergence from prices in the short. First target for support is the short term moving average, near 18,400, with next target just below that near 18,300. A break below 18,300 could lead to a deeper correction down to 18,000 or lower.


The market melt-up may have run its course. It pushed the indices up to new highs, in most cases, but hasn't been able to do much since. There is optimism for the future, earnings growth is expected to return next year, but plenty of reason in the near term to be cautious. My number one concern is earnings growth and outlook into the end of the year but there are others, the FOMC and rate hikes, longer term impact of the Brexit, volatile oil prices and generally tepid global growth to name a few. These may just be bricks in the wall of worry but maybe not, without a catalyst to drive the market higher they may provide enough resistance to keep the market from moving higher. The near term trend is up, but I have to remain cautious until divergences in the charts play out, and the market quits floundering around.

Until then, remember the trend!

Thomas Hughes