Introduction

Fedspeak helped to drive the indices up down and sideways and we still don't really know what they are going to do. Volatility was the name of the game today. At first indicated to open with losses greater than -1% they later gained more than +1% in an up, down and sideways kind of a day. The driver behind the moves was FOMC uncertainty and a new round of conflicting statements; two Fed officials made a case for a September rate hike before the opening bell while a third made a case later in the day for not raising rates. The funny thing is, with all this Fed transparency we have about as much of clue as we ever did.

International markets were down heavily in the early hours of the morning. Asian indices closed with large losses, led by the Nikkei's -2.5%. The move was largely driven by Friday's US market sell-off. European indices were equally affected but were able to recover much of their earlier losses before the end of trading. The rebound in US stocks and oil both helped to lift prices, leaving the DAX leading with a loss of about -1.4%.

Market Statistics

Early futures trading saw the indices down by more than -1% only to have FedSpeak send them back to near break-even before the opening bell. The broad market opened with a slight loss, about -0.5% for the SPX, and the proceeded to work its way higher from there. The bounce lasted throughout the morning carrying the index to an intraday high about 0.6% above Friday's close. This level held for over an hour and then gains were extended to near 1% on comments from Brainard. She says the case for a rate hike is less compelling than it once was. The Brainard Bounce, as it has been labeled, cut it's gains by roughly 50% by 1:30PM before reestablishing the rally and moving higher once again. By 2:30PM the SPX was up a little more than 1.5% and looking like it would keep moving higher, only it didn't. From that point on the indices held their ground in sideways trading to close near the highs of the day.

Economic Calendar

The Economy

There was no economic data today and there is very little this week until Thursday. Tomorrow is Treasury Budget and Wednesday is the mortgage index, both non-movers. Thursday there are 10 individual reports ranging from weekly jobless data to retail sales, Philly Fed, Empire Manufacturing, Business Inventories and PPI. The next day, Friday, there are another three reports including Michigan Sentiment and the Fed's favorite gauge of inflation, CPI. Both the PPI and CPI could move the needle in terms of the FOMC and the September rate hike.

Moody's Survey of Business Confidence fell -0.1% to 26.1. According to Mr. Zandi the index shows stability in global business sentiment despite the summer's round of geopolitical events. Sentiment is strongest in the US, it is weakest in South American with positive forward outlook. Looking at the table it is possible that sentiment has bottomed, if so the next thing I'd like to see is some improvement.


Second quarter earnings is over, the final growth rate for the S&P 500 is -3.1%. Looking forward, 3rd quarter earnings are still expected to be poor but there are signs we could be emerging, finally, from the earnings recession. Third quarter expectations for growth remain negative but ticked higher to -2.0% from -2.1% and remain positioned to produce a final growth rate of roughly 2.0% if earnings trends persist (trends predict a roughly +4% increase in the projected rate by the end of the reporting season). There are 3 S&P 500 companies reporting earnings this week but the season does not really get underway for about 3 more weeks.


There are additional signs that earnings declines have bottomed. First, the third quarter is expected to see a return to revenue growth, if so this will be the first quarter since Q4 2104 to post positive growth. Second, 4th quarter earning growth is now expected to be 5.8%, up 0.3% from last report. While still well below expectations at the first of the year a return to expanding expectations is positive in my book. Third, full year 2016 expectations have also risen, they are still negative but not as negative as before. If third and fourth quarter expectations come in better than expected, as is what typically happens, full year 2016 could easily turn positive. Fourth, full year 2017 expectations have also risen in the latest report, gaining 0.2% to hit a two month high. So, what we have on tap is the real possibility of snapping the earnings recession with expanding and robust growth to follow.


The Dollar Index

The Dollar Index fell by -0.25% today but the move was negligible. The index is positioned almost exactly in the middle of a recent trading range and wind-up driven by the upcoming FOMC meeting. Today's action was impacted by Fed-Speak and Fed-Speak alone, holding pat waiting to see what REALLY happens. To recap briefly, in the early hours we got some comments from Lockhart and Kashkari. Lockhart asks the question, are current rates still appropriate? And answers by saying that conditions warrant a "serious" discussion of rate hikes at the September meeting because the economy is showing sufficient momentum. Kashkari says fiscal policy can only help so much with growth, it will take legislative action to really get things going. Along with that immigration reform could help as well. Brainard delivered her address shortly after 1PM and made what was describe as a whole-hearted defense of not raising rates.

The Dollar Index direction will come down to what the FOMC does next week. A hike would be bullish and could take it up to $97.50, the top of the range. No hike would be dovish and could take it down to the bottom of the range, near $93. The wild card will be the BOJ which also meets and delivers their policy statement next Wednesday. Early in the day the Fedwatch tool was showing a 24% probability of September rate hike, after the Brainard comments that fell to 14%.


The Oil Index

Oil prices were volatility today. First down by more than -1.5%, then up 1% and then flat on the day. Today's action was driven by a variety of factors starting off with high supply and high production which are what eventually dominated today's trade. WTI finished the day with a small gain, near the $46 level. Volatility may persist, especially if new rumors/headlines come out concerning possible production caps.

The Oil Index opened the day with a loss of about -1.5% but regained it and another 1% early in the day. The rebound in oil prices helped to lift the index up off the 1,120 support line which is the midpoint of the nearly 6 month trading range. This level may be gaining strength as support, this is the third bounce from it since it was crossed in early August, but the indicators do not yet show it. Both MACD and stochastic remain consistent with range bound trading. The 1,120 is the critical one for near term traders, a break below this would likely take the index down to the bottom of the range near 1,080. If support holds a retest of the upper range, near 1,175, is likely. Looking out to the short term, earnings season is just around the corner and this sector is once again expected to lead year over year earnings decline. Longer term though is much brighter, full year 2017 earnings growth is expected to be over 300%.


The Gold Index

Gold prices fell for the fourth day in a row, extending the fall from the $1,250 resistance level, but remain above critical support levels. The move lower has been driven by renewed, increased, FOMC rate hike outlook and will possibly go lower if the rate hike and/or hawkish stance is taken by the Fed. A break below critical support, in the range of $1300 to $1320, would be bearish. Until then the metal remains range bound and driven by headlines.

The gold miners had a bit of a mixed day, the Gold Miners ETF GDX opening with a loss and then regaining it and more. By end of day the miners had moved higher by about 3% and moved above resistance at the $26.50 level. The ETF appears set to move higher, confirming support at a higher level than the previous bounce, at least in the near term. If the bounce is able to move higher first target for resistance is the short term moving average near $28. A break above this could take it up to retest recent highs.


In The News, Story Stocks and Earnings

The VIX saw another major move today, falling nearly -6%. Despite the fall and apparent reversal the indicators remains consistent with higher volatitility, momentum is on the rise and stochastic is ticking higher. At best I think we can expect to see volatility trend sideways and show some volatility of its own, at least until the FOMC meeting. At worst it will continue to rise with a possible upside targets near $22.50 and $25.


On a sector by sector basis the utilities sector is expected to show the best year over year earnings growth for the third quarter, 5.7%. Fourth quarter outlook is better, bringing the full year 2016 estimate up to 6.2%, third best for the year which is a plus. Next year is not so good though, full year estimate is only 2.2% coming in last place of the ten major sectors. Looking at the Utilities ETF XLU the gained more than 1.75% in today's action but remains in downtrend. The caution is that the ETF also created a long white candle and bullish attack pattern so the downtrend may have found a bottom. The indicators suggest that it will continue higher in the near term, short term is less certain due to resistance just above the current levels. Resistance is near $50 and the short term moving average, a break above this level would be bullish with upside target near $52.50.


The Indices

The indices bounced today after support formed in the early pre-market hours. Even so, volatility has entered the market so it wise to be prepared for some large moves either direction over the next week to ten days. Today's leader was the NASDAQ Composite with a gain of 1.68%. The tech heavy index created an significantly large white candle which moved up to and broke above the short term moving average. Despite this move the index remains below potential resistance at the previous all time high. A break above this level is needed to get bullish right now and the indicators don't support it. MACD is bearish, not strong but bearish, and stochastic is rolling over and pointing lower following a bearish crossover. A break above would find next resistance at the current all time high, a move lower may go as deep as 5,050 before finding support.


The S&P 500 made the second largest move today, about 1.5%. The broad market created a significantly long white candle, larger than Friday's (not counting the gap), confirming support at 2,120. The indicators are mixed and consistent with range bound trading so no clear indication is given. Despite today's move the index remains below potential resistance at the short term moving average which has itself begun to peak. A break above the moving average would have to be strong enough to break additional resistance at the current all time high. Until further evidence is presented I think it best to assume that volatility may persist.


The Dow Jones Transportation average made the third largest move today, about 1.32%, and confirmed support along the bottom of a potential trading range. Support is at 7,750, upside target for resistance is near 8,150. The indicators are a bit mixed but more bullish than not, stochastic is weak in the nearer term but moving higher in the longer, basically consistent with range bound trading. A break below support would be bearish, a break above resistance bullish.


The Dow Jones Industrial Average made the same move as the transports, 1.32%. The blue chips also made a large white candle and have also confirmed support levels, this time at the 18,000 level. The index broke through potential resistance at the previous all time high as well and looks set to test next resistance at the short term moving average. The indicators are mixed so the strength of any move is questionable at this time. A move above the short term moving average would find next resistance at the current all time high, failing to break resistance could take it down to retest support at 18,000.


Volatility has returned to the market, a relief to option traders worldwide I'm sure. Today's move recovered much of the losses experienced Friday but it may offer false promise. The indices, despite large gains, remain beneath resistance levels with little reason for bullishness. The most immediate concern is the FOMC with economic data a close second. We'll get quite a bit of data including important reads on inflation between now and the meeting next week so interest rate outlook will likely roller coaster over the next 4 trading days.

If the Fed raises rates it brings us back to the duality of higher rates in that they aren't great for the market but signify health in the economy. In the near term it may spark the correction I have feared coming while in the long term economic health will bring improved corporate earnings and higher index prices. If they don't it's just more of the same. In either event, so long as earnings outlook remains positive and we actually see positive earnings growth come back to the market we should get a rally into the end of the year. I expect to see more volatility in the indices over the next few days and in that movement perhaps a clear signal will emerge. I remain cautious in the near term, waiting for the next great bull market entry.

Until then, remember the trend!

Thomas Hughes