Introduction

The market moved higher in the wake of Yellen's hawkish sounding comments of last week, but we're still waiting on more data. Yellen, and other FOMC members, made it clear last week that the September meeting is a live one in terms of the possibility of a rate hike, nothing really new since they've all along that each meeting should be considered so. What is new is that she said, much to my surprise, the economic case for a rate hike has strengthened. What she didn't say is that a hike was likely in September, so we're still waiting on more data. Today's round was good, income and spending numbers show improvement in labor and consumer segments but neither hot enough to seal the deal.

Global markets were more flat than not. The Yellen comments dominated news in most regions although falling oil prices also took their toll. In Asia Japan was the stand out, the Nikkei rose 2.3% on dollar strength/yen weakness. European indices were mostly lower but losses were small, in the range of -0.4%. The UK was closed for a bank holiday.

Market Statistics

Futures trading indicate a flat to slightly negative open for the indices during the earliest part of the electronic session. The trade moved to break-even and then slightly higher following the 8:30AM release of economic data. Action at the opening bell was bullish although without much strength, volume was pretty light. The indices gained a quarter percent in the first half hour of trading and then slowly extended the rally into the early afternoon. Intraday high was hit about 2PM and the market drift sideways from there leaving the indices near the highs at the close of the session.

Economic Calendar

The Economy

Personal Income and Spending data was released today at 8:30AM. This is an important release as it is the Feds preferred tool for watching consumer level inflation. Income rose 0.4%, in line with expectations, and the preceding month was revised higher by a 0.1%. Spending rose 0.3%, also as expected and also with a 0.1% upward revision to the previous month. Personal Consumption Expenditures,a measure of the changes of consumer prices, was unchanged from the previous month but the core PCE, ex food and energy, is up 0.3% month to month and 1.6% year over year. All told, this is a decent report showing increases in earnings and spending with inflation running below the Fed's 2% target.

Moody's Survey Of Business Confidence fell -0.9% to 25.0. This the 2nd week of decline since hitting a peak in early August and the lowest level in 5 weeks. Despite a recent rise in confidence it remains low relative to all time highs set last year at this time. According to Mr. Zandi, survey creator, the data shows a global economy that is expanding and has generally shrugged off the series of potentially damaging geopolitical events that unfolded over the summer. The strongest responses are in the US, the weakest in South America.


The 2nd quarter 2016 reporting season is almost over. According to Factset 98% of the S&P 500 has reported. Of those 71% have beaten EPS estimates and 53% have beaten revenue estimates; the former is above average, the latter below average. The blended rate of earnings growth is -3.2%, steady from last week, with 7 of the 10 S&P sectors beating expectations. Even though earnings are better than expected they are not as much better as expected, and the 5th quarter of negative earnings growth since the earnings recession began.


Looking forward the chances we'll see a 6th quarter of negative earnings growth continue to grow. Third quarter estimates for S&P 500 earnings growth fell by another -0.1% to hit -2.1%. At the current rate of decline this could easily hit -4% by the start of the next cycle virtually assuring the quarter's growth rate will end on a negative note. Longer term, growth is still expected to return in the 4th quarter and expand into 2017.


Lot's of data this week. Auto/truck sales, consumer confidence, ADP employment, Challenger job cuts, labor costs and construction spending only a few of what's on the list. All are important for the big picture but the number one release will be the NFP on Friday. Last month's number was fairly strong at 255,000, this month consensus is only about 185,000. The headline number will be important but beware of revisions. A strong number will likely add fuel to rate hike proponents.

The Dollar Index

The Dollar Index extended its gains today but the move was cut short. The index had broken above $95.50 and appeared to be heading higher until midday when it slowly reversed. The early rise was driven by a hawkish sounding Fed but that support did not last long. While hawkish sounding, Yellen's comments only restated what the FOMC has been saying all along, that each meeting should be considered live and that the data is promising but not quite there yet. The comments that conditions had improved are supportive of the dollar but could set it up for a crash if there is no rate hike in September. The CME's Fedwatch Tool has edged higher, showing a 24% chance of rate hike at the next meeting.

Today's move in the Dollar Index confirms resistance exists at the 61.8% retracement level but its strength is questionable. The indicators are both pointing higher, consistent with higher prices, and the short term moving average is providing support so another test is likely in the least. A break above this level, perhaps driven by better than expected economic data, could take the index up to $96.50 or higher. The near term looks bullish for the dollar, risk being weak data, but this move may be setting the market up for a fall later on if there is no rate hike in September, or this year. Short to long term the index appears to be trading within a range with bottom near $94.30 and top near $97.50.


The Oil Index

Oil prices took a tumble today closing with losses near -1.35% after falling as much as -2% intraday. WTI lost -$0.64 to close at $47 and could move lower in light of growing oversupply concerns. The talk of a possible OPEC production freeze was quieted today as production from the cartel swells. Adding to supply concerns are increasing production in Iraq and other areas. Today's move appears to confirm resistance at $47.50 and could lead to a further drop, next target $45.

The Oil Index was able to post gains today despite the decline in the underlying commodity. The index moved up a half percent from the short term moving average and could go higher but remains range bound. Today's action is in the upper half of the 5 month range and could move up to 1,175 although the indicators suggest growing weakness. Stochastic has already made a bearish crossover, MACD is close behind, and suggests support will be tested again. Even if the moving average is broken next support is just below, near the midpoint of the range, at 1,120. Provided oil prices do not fall too sharply the range should hold.


The Gold Index

Gold prices fell earlier, slightly, but recovered all the losses and more, a little, by the end of the day. Today's trading range was very tight, about 0.25%, but held above support at the $1,320 level. This level is likely to be tested in the coming days on a strengthening dollar and could be broken. Next target for support is near $1,300.

The Gold Miners ETF GDX began the day lower, opening with a loss near -2%, only to move up from support and close with a small gain. Today's action began at the $26.70 support line and moved higher, confirming support at this level. The indicators are moving lower suggesting that support will be tested again, it's strength will be dependent on the data, the dollar and FOMC expectations. A break below this level would be bearish in the near to short term and could result in a move down to $22.50.


In The News, Story Stocks and Earnings

Apple was one of few declining stocks in today's action. The tech giant is the focus of a news story and tax probe that could result in over 1 billion euros in back payments. The EU is set to rule on a case in which Ireland is accused of giving undue favoritism to Apple, an accusation both Ireland and Apple deny. If true, the ruling would equal less than .5% of the cash Apple has on hand. Shares of the stock drifted lower in listless trading on the news.


The information technology sector is the one posting the largest beats to earnings. The sector was expected to post an earnings decline near -7% for the quarter but actual results are closer to -0.7%. Looking forward the sector is expected to post positive earnings growth in the next quarter of 0.9% and could do much better. In terms of growth however, the 0.9% expected leaves the sector in 6th place behind Utilities, Health Care, Materials, Consumer Discretionary and Consumer Materials. Growth is expected to continue into the end of the year, full year 2016 estimates are positive, and expand into next. Shares of the XLK Technology SPDR have been riding high on results and expectations and may be setting up for another extended move higher. A break above the current high, which dates back to the 1999-2000 tech bubble, would be bullish and could as high as $53 or 12.7% in the short to long term.


The Indices

The indices made a move higher today but it was not strong, did not break to a new high and leaves them near the middle of very tight congestion bands formed over the past 3 weeks or so. Today's leader was the Dow Jones Industrial Average with a gain near 0.6%. The blue chips created a small white bodied candle moving up from the short term moving average and looks like it might bounce higher. If so resistance at the current all time high, near 18,636. The indicators continue to show divergences indicative of market weakness so I continue to be cautious with my approach. A break below the moving average would find support just below, near 18,280, a break below that level could lead to further downside.


The S&P 500 made the 2nd largest gain in today's session, about 0.53%. The broad market created a small white bodied candle that closed near but not at the high of the day. This upper wick reveals the presence of resistance however small it may be. Today's action is a bounce from the short term moving average following the test of said level last week. This may be confirming support along the moving average but the indicators have yet to confirm it. Both the indicators are pointing lower, and are showing significant divergences, suggesting a possible correction is building. A break below the moving average would be bearish in the near term and could take the index down to 2,150 or 2,125. If the bounce continues resistance is just above today's close near the most recently set all time high.


The Dow Jones Transportation Average made the third largest gain today, about 0.45%. The transports created a small white candle with close above the moving average although today's action began below it. The move above the moving average suggests support, the indicators suggest that support may be week so further testing is likely. A move below the moving average would find next support just below near 7,750, a break below this level could take the index down to 7,500 or further.


The NASDAQ Composite made the smallest gains in today's session, only 0.26%. Today's candle is a small spinning top doji, another in a long series of spinning tops which formed as the market melted higher and began its sideways drift. The index has been holding near the all time highs, generally a positive occurrence, but signs of weakness persist namely divergent indicators. If the index is able to move up from this level it could rally as much as 700 points in the short to long term. A break above the all time high, near 5,250, would be bullish. Support is along the short term moving average and the previous all time high near 5,230.


The market continues to drift sideways, waiting for something to move it. That something may be this week's data, specifically the NFP, but there is no guarantee. There have been multiple potential catalysts over the past few weeks, including Yellen's speech last Friday, and all have failed to inspire more than cursory buying or selling. There is a lot for the market to consider, earnings, economic data and the FOMC, but in the end today's market action comes down to low volume and seasonality. We may see the indices continue to drift sideways, and we may see them test or even set a new all time high, but I remain cautious until after Labor Day and the summer trading season comes to a close. Don't forget, through it all next quarter earnings outlook is poor, and declining.

Until then, remember the trend!

Thomas Hughes