Introduction

The market is wound up on FOMC speculation with less than 48 hours until the next meeting. There market is fairly confident that there will be no rate hike at this meeting there are risks. One of them is that they will produce a surprise rate hike, labor data at least supports it. Another is that they will make a significant change to the policy statement, hawkish or dovish, that sends the market reeling. Yet another is the press conference following the meeting, a rare chance for Ms. Yellen to speak officially as the head of the Federal Open Market Committee. The CME Fed Watch Tool shows a 12% chance of rate hike at this meeting, steady from last look.

International markets were up just about across the board. Asian indices made gains in the range of 0.75% save Australia which had to shut down early due to technical glitches. Traders in the region are eyeing the BOJ, scheduled to release a policy statement Wednesday ahead of the FOMC, who may drive interest rates further into negative territory. European indices made more substantial gains, in the range of 1% to 1.5% aided by some intraday strength in oil.

Market Statistics

Futures trading indicated a positive open all morning. There was little in the way of domestic news to move the market except for a speculative headline in oil, and of course anticipation for the FOMC meeting on Wednesday. The open was positive but not strong although there was enough Monday morning momentum to carry the indices higher for the first half hour or so of trading. Intraday high was hit just after 10AM and from that point until mid-afternoon the indices drift lower, giving up all the early gains and more in some cases. The rest of the day saw the indices languish near their lows where they remained into the close of the day.

Economic Calendar

The Economy

The National Association Of Home Builders released their sentiment survey results today at 10AM. The index made a surprise jump of 6 points to hit 65, better than the expected reading of 61. Present Conditions and Future Sales both jumped to a 10+ month high of 71 from their previous readings of 65 and 66. Traffic Of Prospective Buyers remains contractionary at 48 but has improved 4 points from a 4 month low to match 12 month high levels. Economist within the NAHB cite ongoing improvements in jobs and income as the driving forces behind the August improvement. August is notoriously a month for weak home sales and traffic.

Moody's weekly Survey Of Business Sentiment, also released at 10AM, fell -0.5 to 25.6. The index fell this week but is holding steady in the 25 to 26 range and has been so for about 2 months. According to Mr. Zandi's overview sentiment dipped over the past week but has weathered a round of geopolitical shake-ups notably well. Even so, sentiment is well off of its highs set a year or so ago and has some room to improve.


The Q3 earnings cycle is getting underway. A few companies have already reported, another 10 are due out this week, but the bulk of the action won't come for another month or so. Alcoa is set to report October 10th, the big banks within the week following. To date, the blended rate of Q3 earnings growth is -2.1%. This is a tenth lower than last week and equal to the lowest levels expected so far. The important thing to note is that at -2.1% the S&P 500 is still in position to achieve positive growth by the end of the cycle. On average most companies report better than expected and this will lead to an expected improvement of about +4% to the blended rate by the end of the cycle.


Looking forward outlook remains positive. Fourth quarter earnings growth is expected to be 5.8%, steady from last week and up off the low set a month or so ago. Full year 2016 expectations remain negative at -0.2% but are likely to turn positive as the 3rd quarter season wears on. Beyond that 2017 expectations are robust and holding steady near 13.4%. Based on this outlook the secular bull market should remain healthy into the second half of 2017 at least.


The Dollar Index

The Dollar Index gave up some of Friday's gains but remains above the $95.60 level. This level is the mid-point of a recent trading range leading up to the Wednesday FOMC meeting. Friday's move higher looks bullish and may be but the indicators do not yet show strength or support a move higher, and the FOMC meeting is a limiting factor on any signals that may be firing now. If the index is able to move higher next target for resistance is $96.50 and then $97.50. A break below the 95.60 level would be bearish in the near term and could go as low as $94 before finding support.


The Oil Index

Oil prices got a boost from two sources today, Libya and Venezuela. In Libya rebel forces are clashing again threatening to disrupt supply that was only announced to come back online as recently as last week. In Venezuela oil ministers are agreeable to and predict a successful output deal at the upcoming OPEC meeting. In both cases support is driven by fear which, in one case at least, is little more than speculation. We've heard positive talk about OPEC production caps before. Regardless, WTI rose about 1.75% intrady to settle with a gain closer to 0.75% after the knee-jerk rally wore off.

The Oil Index was able to make gains today but they were limited. The index opened with an initial gain greater than 1% but this was still below resistance levels and further advance was denied. By end of day the index had given up at least half of the early gains, consistent with resistance at the 1,120 level. The 1,120 level is the mid-point of a near 7 month trading range and could provide the starting off point for a deeper move lower should oil prices fail to hold current levels. A move down from here has a target at the bottom of the trading range, near 1,075. If the index is able to move above the mid-point of the range next resistance is just above along the short term moving average.


The Gold Index

Gold gained about a half percent today to trade above $1,315 but remains under pressure. Rising dollar value has gold trading near critical support levels, about $1,300, and could send it down to test that support or break it if the FOMC is overly hawkish in their policy stance. A break below $1,300 would be bearish and could take gold down to $1,250 or lower. The caveat is that if they are overly cautious, as they have been over the past few years, and give little to indication of rate hikes beyond what we've seen the dollar could tank and send gold back up to retest resistance levels in the $1,350 to $1,375 range.

The gold miners were able to make some gains today as well but they were muted. The Gold Miners ETF GDX opened with a gain near 1.5% but gave up about half of it during the day. The ETF is trading just above potential support along the $25 level and may be on the way to retesting that support. The indicators are consistent with potential support, a test of which would confirm. A move below $25 would be bearish and likely lead to further downside with targets near $22.50.


In The News, Story Stocks and Earnings

Sarepta Pharmaceuticals was a big winner today. The FDA finally approved its muscular dystrophy drug after delays left investors uncertain of what to expect. The drug is used to treat a fatal form of the disease. News of the approval sent shares of Sarepta up by more than 90% to trade at a 3 year high.


Mattel got an upgrade today from Moness Crespi Hardt on expected growth and turnarounds in core brands. The company is seen to be suffering from an overdose of bearish sentiment driven by negative impacts of currency conversion, the loss of a major Disney license and declining interest in the Monster High segment. Despite the negatives Mattel is expected to see +5% growth this year and next as ongoing turnaround efforts take effect. The new price target is now $37, a 17% premium to today's prices. Mattel is slotted to report earnings on 10/20.


Volatility has settled down some from last week but remains elevated relative to previous low levels. The volatility index has retreat back to the $15 level but may find support along the short term moving average. It is not unlikely to see the index surge higher again at least one more time before this round is over. The indicators are mixed but momentum at least is convergent with a retest of recent highs. This move could be sparked by the FOMC meeting.


The Indices

The indices began the day with gains near 0.75% but ended flat. The only one to buck the trend and not give up all the early advance was the Dow Jones Transportation Average. The transports closed with a gain of 0.28% but does not look like it wants to go higher at this time. Today's candle is a small spinning top type candle but one that appears to confirm resistance at the underside of the short term moving average, equal to today's highest price. If so this may signal additional downside and a possible break down of support. Support is just below today's close, near 7,750, with next downside target near a long term up trend line in the 7,500 region.


The SPX posted the smallest loss today, about 0.02 points or 0.00%. The broad market created a small black bodied candle that appears to confirm resistance at/near the underside of the short term moving average. This signal could indicate further downside and is supported by the other indicators. MACD is bearish and stochastic is pointing lower, both consistent with lower prices, but neither are overly strong at this time. Support may kick in around the 2,120 level, if broken next targets are near 1,950 and 1,900. Resistance is the short term moving average, near 2,050.


The next smallest loss, -0.02%, was posted by the Dow Jones Industrial Average. The blue chips created a small doji type candle with longer upper shadow, indicative of resistance but not overly strong. Today's action occurred just below resistance levels and the short term moving average, near 18,250. The indicators are both bearish but again, not overly strong. Support is 18,000 and may be tested again if not broken. If broken next support target is 17,500.


The NASDAQ Composite made the largest decline today, about -0.18%. The tech heavy index created a small black candle confirming resistance at the current and recently set all time high. This index may be bouncing higher, it may break to new all time highs, but there is little technical evidence to support such a move at this time. The indicators are mixed, consistent with a bounce from support but not showing strength or even upside momentum; the MACD peaks, if weakly, suggest that the index will retest the 5,100 level. In terms of the short term moving average it is still above it but the average itself is showing signs of hitting resistance, trending sideways below resistance, so is another warning sign of market weakness.


The market continues to churn although volatility has subsided. The churn has gotten the indices wound up, set up for a move, and waiting for the catalyst to break them out of their doldrums. That catalyst is very likely the FOMC meeting, where it sends the market will be entirely based on what they say. Once the market gets over that shock it will be able to turn its eyes on earnings season and the prospects of a return to growth, and expanding growth. Near term risks are abating, once we get past the FOMC meeting and into earnings season I'll be ready to get bullish. Until then I remain cautious but eagerly awaiting Wednesday's announcement.

Until then, remember the trend!

Thomas Hughes