Introduction

As if the we did not have enough to worry about with the weeks schedule of earnings, economic data and the FOMC meeting, Hillary's emails have reemerged to disrupt the market. The latest; as many as 650,000 new emails have been discovered, possibly the 33,000 deleted emails, and the FBI has gotten the warrant to investigate them. They belong to Hillary's advisor, Huma Abedin, and were found hidden on her husband's computer. What they contain is yet to be revealed but the rumors are flying.

In other news more closely related to the market; this will be the biggest week of the earnings season, we've a raft of major macro-economic data on tap and the FOMC meeting/policy statement on Wednesday. Today's action was understandably muted in light of all that is going on; data, earnings and the FOMC all have the power to change the underlying fundamental outlook of the market while we wait for the another email-bomb to drop.

International market were just as stunned as we at the revelation the FBI had discovered new emails. Asian and European indices both lost ground in choppy trading but losses were minimal.

Market Statistics

Futures trading indicated a flat to positive open all morning and this was strengthened somewhat following the release of Personal Income & Spending data. The open was quiet, not much action to speak of, the SPX opened with a gain of about 3 points and held that level for the first hour of trading. Around 11:30AM the index pulled back to test break-even for support and made a small bounce, up to about +6.5 points, before falling back to retest for support. The rest of the day saw the indices trade between early lows and mid day highs, closing near the lows of the day.

Economic Calendar

The Economy

Personal Income & Spending data was released at 8:30AM, the data is for September, and shows a continued and steady increase in both income, spending and consumer level inflation. Personal Income rose by 0.3% to the highest level in 3 months. This is slightly off the 0.4% predicted by analysts but is made up for by an upward revision to the previous month. Personal Spending rose by a more robust 0.5%, slightly ahead of expectations, but is offset by a downward revision of -0.1% to the previous month. Disposable Personal Income rose by 0.3%, Real DPI rose by a more modest 0.1%. Headline PCE, a Fed favored indicator of inflation, rose by 0.5% while Real PCE rose by a more robust 1.2%. Ex-food PCE was up 0.1%, ex-food and energy up 1.7%.

Chicago PMI was released at 10AM. This gauge of manufacturing fell by -3.6 to 50.6, the lowest level in more than 6 months, indicating a slowdown in expansion. The 3 month average of CPMI is 52.1 which is consistent with a moderately growing manufacturing sector. The decline was led by drops in production and new orders but not limited to them. Employment and inventory levels fell as well.

Moody's Survey Of Business Confidence jumped 1.1 points to 30.4, the highest level since early May. The index has made a notable increase over the last few weeks but I suspect with the weekend's email news that could change next week. Mr. Zandi says that US business sentiment is consistent with an expanding economy, the rest of the world less so but still positive, and that sentiment in South America may be bottoming.


So far 58% of the S&P 500 has reported earnings and the scorecard looks just like it has the past few quarters. Of those that have reported so far 74% have beaten EPS estimates, above average, while only 58% have beaten revenue estimates, below average. The good news is that the blended rate of earnings growth has turned positive which means we have emerged from the earning recession; this week's blended rate is up nearly +2% to 1.6%, snapping a 5 quarter losing streak. So far all 11 sectors have delivered better than expected results, led by the real estate sector. Looking forward, the Forward Looking 12 month EPS outlook has finally broken out of its range and hit a new high.


Looking to the next quarter, the full year and next year earnings outlook remains positive but estimates continue to shift. Fourth quarter 2016 is now expected to see growth in the range of 4.6%, down -0.9% from last week, while full year estimates have risen to 0.2%, up 0.1%. If the trends hold up and next quarter is as much better than expected as the average tell us earnings growth for the quarter could be as high as 9% or 10%, full year growth in the 1% to 2% range. Next year, full year 2017 estimates fell by -0.4% but remain strong at 12%.


The Dollar Index

The Dollar Index firmed a bit in today's action and remains in near term uptrend. The index gained about 0.25% on steady growth in wages and spending but gains were capped by the 78.6% retracement level. This level has been the point of consolidation over the past two weeks and the likely starting point of the next move. The indicators are bearish and pointing lower at this time,suggesting near term support could be tested, but consistent with consolidation within an uptrend so I wouldn't read to much into them just yet. A move higher has a target near the $100.50 level and last years high, a move lower could go as low as $97.20 before hitting the next strong support level. If I had to put my finger on a day these moves might start it would have to be Wednesday afternoon with the release of the FOMC statement. The Fed Watch Tool shows a 6% chance of November rate hike and a 78% chance of December hike. We likely won't get a hike this week but we could get hawkish statements.


The Oil Index

Oil prices tanked today, falling more than -3%, as the OPEC and hope driven rally evaporates. There is growing concern that OPEC and non-OPEC members alike will not comply or cooperate with proposed production capping. This, along with rampant production, high supply levels and tepid demand add up to one thing, a continuation of the already years long supply glut. WTI fell just over $1.50 to hit a four week low. If they continue to fall first target for support is in the $45 to $46 range.

The Oil Index came under pressure today as oil prices fell and 2017 earnings outlook comes into question. Next year the oil sector is expected to see earnings growth in the range of 300%, but all based on $50+ oil. If oil prices remain low outlook will fall, the silver lining is that there will be growth, just not 300%. Today the Oil Index fell a little more than -0.90% to close below the short term moving average. The index remains range bound and now looks like it could move down to the bottom of the range. The indicators are consistent with range bound trading and showing a bearish crossover, consistent with lower prices. Target for support is the bottom of the range, near 1,120.


The Gold Index

Gold prices held steady in today's action, falling about $3 or -0.25%, to trade just above $1270. Spot prices have been edging higher over the past two weeks but remain near the recent low and below potential resistance areas near $1285 and $1,300. Prices may continue to tread water near this level for the next day or two, up to and until the FOMC meeting. At that time it will depend on them and what they do to the dollar. A move down may find support near $1,250, a move higher may find resistance near $1,300.

The gold miners remain in limbo while we await the Fed's next move but today's move was to the upside. The miners ETF GDX rose in today's session, counter to the underlying commodity but remains below resistance. Resistance is the short term moving average, near $22.25. The indicators are a bit mixed, bullish but in decline and generally consistent with the one month trading range. A move up above resistance could go as high as $27.23, a move down to next support could go as low as $22.50.


In The News, Story Stocks and Earnings

Even with all the earnings on tap for the week the number one story today was M&A related. GE and Baker Hughes announced the merger of their oil & gas operations in a deal that will make a company to compete with the likes of Schlumberger. Combined revenues are expected to be in the range of $32 to $33 billion annually. GE will put up all of its oil and gas resources along with a special $7.4 billion cash dividend for owners of BHI and end up owning 62.5% of the new company. GE opened the day higher but sold off to close near break even, BHI also opened the day higher and sold off but closed with a much greater loss, near 7.25%.


Cardinal Health reported earnings before the bell. The maker/provider of medical products and services reported earnings and revenue ahead of expectations. GAAP EPS of $0.96 is down 10% from last year, adjusted EPS of $1.24 beat by a nickel. Revenue grew 14% year over year but was not enough to overcome rising costs. The company went on to lower full year guidance to a range matching consensus. Shares of the stock gained a little more than 2% on the news but the move barely recovers losses experienced at the end of last week.


Williams Companies Incs reported before the bell. Williams Companies Inc is an integrated energy company delivering a range of services and products from the "wellhead to the burner tip" including but not limited to oil, natural gas and electricity. The company delivered relatively strong results but just not enough to move the market higher. The good news is that cash flow from operations increased by 2%, net income turned positive, adjusted ebidta rose 8% and there is plenty of cash available for dividends. The bad news is that full year GAAP earnings are still negative and outlook is tepid. Shares of the stock tried to rally but failed, capped at the short term moving average, and confirmed resistance at the short term moving average.


The Indices

The indices did a whole of nothing again today. A little up, a little down, a lot sideways and all on below average volume. The only index to move more than a very marginal amount was the Dow Jones Transportation Index which gained a little more than 0.50%. The transports, despite the gains, remain trapped within their long term range and do not appear like it will break out in tomorrow's session. The indicators are rolling into a bullish signal but it's not a strong one and are, overall, still consistent with range bound trading. There may be a test of resistance at the 8,150 level, a break above that will be suspect unless driven by positive catalyst and/or a high volume market day.


The other indicators all closed with moves of less than a tenth of a percent, the Dow Jones Industrial Average in negative territory. The blue chips lost -0.10% in today's session, creating a very small spinning top doji candle. This is the 38th day the index has traded within the current, very narrow, trading range. The indicators remain consistent with this range if biased toward the downside and suggestive a test of support may come.


The S&P 500 closed with a loss of 0.01% and created a very small doji like candle, near the bottom of its trading range. The index remains range bound with indicators consistent with this assessment. The current indication is down so there may be a test of support, near 2,120, with a possible move down to 2,100 but not much further, at least for tomorrow.


The NASDAQ Composite posted a loss of -0.02% at the close. The tech heavy index created a small black bodied candle, spinning top-ish, near the bottom of the 6 week consolidation range. Today's action appears to be confirming a drop below support targets at the previous all time high and the indicators support it but a move below the bottom of the range, near 5,150, does not seem likely at this time, at least not for tomorrow. If so it would be bearish and could take the index down as low as 5,025.


The only thing for certain in the market right now is uncertainty. Earnings outlook is good but uncertain due to the FOMC, the election and the economy. The FOMC meeting brings uncertainty because of rate hikes and their affect on the market, the dollar and the economy. The election, and the email scandal, bring uncertainty of such enormous proportion it is hard to quantify. Needless to say I am very cautious this week. I still the signs a prolonged rally is on the way, we just have to get past the next 9 days and see what happens. Don't forget; we've got the FOMC on Wednesday, the NFP/Unemployment on Friday, the Election next Tuesday and the emails hanging over it all.

Until then, remember the trend!

Thomas Hughes


SAVE $50 on your EOY Subscription - ONE WEEK ONLY!

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 19 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. Once the special actually begins on Black Friday the price will revert to normal.

CLICK HERE FOR ADDITIONAL $50 OFF EOY SPECIAL