Introduction

The market continues to churn as we approach the return of earnings growth. The indices are, for the most part, moving sideways within narrow ranges pinpointed on the peak of the coming earnings cycle, as well as the next FOMC meeting and the presidential elections scheduled for early November. It's hard to say which event will break the market out of this trend, or even if they will, but for now those are the most likely catalysts. Today's action was light and to the downside but well within September trading ranges and without much conviction. Earnings news was light, economic data mixed.

International indices were a bit mixed but mostly up in the Monday session. Asian equity markets closed with gains in the range of 1%, a little weaker in the mainland Chinese market, with focus on a new Brexit deadlined issued by the British UK dominating headlines. The news is that there is now a timetable for the Brexit, at least a time by which to expect the invocation of Article 50 of the Lisbon Treaty, the official start of Brexiting. European markets were a little subdued, Germany was closed for a holiday, but largely moved higher, led by a 1.22% move in the FTSE.

Market Statistics

Futures trading indicated a slightly negative open all morning. There was very little new news to move the market this morning so trading was relatively calm. The indices were soft after the opening bell, opening with a loss and moving lower within the first minutes to set the early low before the fires half hour was up. The next hour saw the indices bounce to retest the opening price and then move lower to test the early low and move lower again. A third intrady low soon followed, itself followed by a small bounce that did little to regain the intraday losses, about -0.55%.

Economic Calendar

The Economy

Auto sales data was released intermittently throughout the day, the official sales numbers not released until mid-afternoon. Early indications showed a decline but not one as big as feared. Despite this fear of a sales peak persisted throughout the morning. GM -0.6%, Ford -7.7%, Fiat Chrysler -0.9%, Toyota the only one with gains, +1.5%, and Honday, -0.1%. The good news is that sales topped estimates. The official report shows a 17.76 annualized pace, above expectations and what could become a new record.

ISM and Construction Spending were both released at 10AM. September ISM Manufacturing was another positive for the day, climbing 2.1% to hit 51.5, a half percent better than expected. Gains were made in New Orders, Production and Employment suggesting a pick up of activity could be expected in the fourth quarter. New Order rose 6 points to 55.1, Production jumped 3.2 to 52.8 and Employment gained 1.4 to 49.7. Employment remains slightly contractionary.

Construction Spending fell -0.7% in August versus an expected gain of 0.2%, according to the Census Bureau. The drop brings the year over year total down to -0.3%, the first month of contraction in spending. The monthly decline was mostly due to non-residential spending, -1.1% versus a drop of -0.2% for residential. Year over non-residential spending has been lagging and is now down -1.3% versus a gain of 1.3% in residential spending.

Moody's Survey Of Business Confidence fell by a whopping -0.1% to hit 25.0. This is the lowest level since the end of August. Sentiment appears to be holding steady at current levels but remains well below the all time high set last year. Mr. Zandi says sentiment is consistent with a global economy expanding near its potential. Businesses are cautious about present conditions, as they have been for the past year or so, but remain optimistic about the future.


The blended rate of earnings growth for the S&P 500 in the 3rd quarter is now -2.1%. This is up a tenth from last week. There have been 18 reports so far, 15 have beaten on the EPS side and 11 on the revenue end. Seven more reports are due out this week, the season really gets underway next week with Alcoa and several of the big banks including scandal plagued Wells Fargo. While we can expect to see the blended rate improve over the course of the season how much is in question. Estimates for fully 10 of the now 11 S&P 500 sectors have been revised lower and 80 companies have issued negative guidance.


Looking forward outlook remain positive but continues to soften. Fourth quarter 2016 was revised lower by a tenth to 5.6%, full year 2016 was revised higher by a tenth but remains negative at -0.2% and full year 2017 was revised lower to 13%. The optimistic view is that the 3rd quarter will end with positive growth, leading us into a period of expanding growth beginning with the 4th quarter and extending into the next year. The pessimistic view is that earnings growth will not return this quarter and forward outlook will continue to erode.


Data is going to be on the heavy side this week. It's the turn of the month and the first week of a new quarter so lots of important monthly macro data and the last read in many cases for 2nd quarter activity. The highlight of course is the NFP report on Friday, along with unemployment and earnings figures, but there are many others.

The Dollar Index

The Dollar Index gained a quarter percent today but remains range bound, trading near the center of the range. The index continues to wind up within its narrowing range and will likely continue to do so until the FOMC meeting in just about 5 weeks. There are some other events which will likely drive volatility, the ECB meeting and BOJ meeting, but the FOMC meeting and possibly interest rate hike is the biggest risk to currency markets now. I expect to see the Dollar Index trend near $95.60 in that time. This week's NFP report could spark a move, if it is good/bad enough to truly change FOMC outlook. The CME Fed Watch Tool shows only an 11.4% chance of rate hike at the next meeting.


The Oil Index

Oil prices gained a little more than 1% today on remark between Iran's president and the president of Venezuela, basically to the effect that oil producing nations needed to band together to support prices. While bullish, the news has about as much impact on global oversupply issues as last week's OPEC deal so is likely to only provide support in the nearest of terms. Today's action was able to set a new 1 month high for WTI, just over $48.75, but prices remain below resistance and range bound.

The Oil Index held flat in today's session, despite the gain in oil prices. Today's candle is a small doji, possibly a hanging man, indicative of indecision. With the details of the OPEC deal so questionable, and supply still overshadowing supply, there is quite a lot for the market to consider. The Oil Index remains range bound but may be moving higher to test the upper boundary, near 1,175. A break above this level does not look likely at this time.


The Gold Index

Gold prices slipped today but held above critical support levels. Spot price fell about a quarter percent to hit $1,313 and are holding above $1,300. Gold, like the dollar, is trading in a tightening range that is most likely focused on the next FOMC meeting. Support is just above $1,200, resistance just below $1,350.

The gold miners were not so bouyant, the miners ETF GDX shedding more than -2.6% to trade just below the rising near-term support line I drew last week. The ETF may be breaking out of the current pattern but without a similar break in gold it is more likely testing for support. The indicators remain consistent with range bound trading, if also with a move to support. A break to the downside would be bearish for the sector and could lead the ETF down to $22.50 or lower.


In The News, Story Stocks and Earnings

Tesla made headlines today when it announced record deliveries and its best sales quarter ever. The company reported a roughly 70% increase in deliveries and a 37% increase in production over the previous month but did not raise guidance. Full year guidance was maintained but nonetheless investors were cheered. Shares of the stock rose more than 4.5% to trade at a 1 month high.


Deutsche Bank gave up some of the Friday gains but was able to hold above $12. Negotiations with the DOJ are ongoing, the inside scoop is that progress is being made but a deal is yet to come. Jamie Dimon, in a vote of confidence during a televised interview, said the bank should have no trouble overcoming its problems. Shares of the stock fell just over -1.25%.


Netflix rose more than 4% today on talks it is a takeover target for Disney. There is no official word yet on a deal, proposed deal or interest in a deal but speculation is running wild. Today's action took the stock up to a 4 month high, almost 5, on twice average daily volume.


The Indices

The indices posted declines nearly across the board today but there was one exception, the Dow Jones Transportation Average. The transports gained about 0.30% in a move that stopped short of my resistance line near 8,100 and the top of the 7 month trading range. The index may test, continue to test, resistance into the near term because momentum is still building. Otherwise, the indicators are bullish but still consistent with range bound trading. A break above the range would be bullish but it looks like it will hold for now.


The largest decline was posted by the S&P 500, about -0.33%, but it was not enough to break the index out of its new trading range. The broad market created a very small spinning top candle at the short term moving average, above the middle of the trading range, but it does not look very strong. Both indicators are bullish but also consistent with range bound trading so no break-out is expected tomorrow. Looking to the indicators MACD is only barely above the zero line, a sign of sideways trading, and stochastic is already rolling over to continue its trend through the neutral zone which is also indicative of sideways trading. The top of the range is near 2,180 the bottom is near 2,120 and both may be tested in coming weeks.


The Dow Jones Industrial Average made the next largest decline, just over -0.30%. The blue chips created a very small black candle, nearly a doji and the smallest daily range since volatility returned, under the short term moving average, the mid point of the trading range and my resistance line at the previous all-time high. The indicators remain consistent with range bound trading and may lead to a test of support near the 18,000 level. A break above mid-point resistance, 18,250, would be bullish but might only be near term in nature, the index returning to the top of the range near 18,500.


The NASDAQ Composite posted the smallest decline in today's session, only -0.18%. The tech heavy index was boosted by good news from Tesla and the Netflix rumor but not enough to break it out to new highs. The index created a very small white candle, spinning top in nature, near the top of the September range and above the short term moving average. The indicators are still consistent with range bound trading, but indicating a move lower within the range at this time. First target for support is the short term moving average, near 5,250, next target is just below that at a previous all time high. If these levels are broken a move down to 5,085 and the bottom of the September range is possible.


The indices are range bound and nothing changed about that today. The churn, dare I say sector rotation, is in full swing. The most likely target, time wise, for the range to be be broken for bulls or for bears is early November. That time frame is the peak of earnings seasons, it is when we have the election and its when the next FOMC meeting is scheduled.

What happens then is up for grabs but I think whatever happens, it'll be part of a process setting the market up for long term earnings driven gains going into 2017 and perhaps beyond. Before then, this week, trading ranges are likely to persist until Friday when there is a small chance they could be broken. The NFP report, labor/earnings data in general, could sway FOMC outlook and move the needle in terms of rate hike expectations and by extension the market. I remain cautious, collecting my covered calls and dividends, patiently waiting for the next big move to announce itself.

Until then, remember the trend!

Thomas Hughes