Fear of global weakness weigh on markets.


Fear of global slow down grew today in the wake of last weeks FOMC meeting and Friday's triple witching expiration. Starting in Asia, China is expecting the September reading of flash PMI tomorrow with most anticipating a decline. Asian market moved lower by 1.5% on average with EU markets slightly less negative around -0.5% on average. Fears of an Asian slowdown are also to blame for much of the EU's decline with comments from ECB chief Mario Draghi adding to the sentiment. He told the EU committee of economic affairs that the EU economy was losing momentum and that he expected inflation to remain low into the end of 2015 and possibly into 2016. The negative vibe carried into the open of early trading here at home with the major indices indicated lower by about a quarter percent.

Market Statistics

The opening was a little weak with the SPX down about -0.40%. This held for the first half hour or so until the existing home sales data was released. The data was a little less than expected but still above the critically watched 1 million level. Trading picked up slightly at that time, lifting the SPX off the morning low but this did not last long. Soon after, the indices started to drift lower, quickly gaining momentum, carrying them down to new intraday lows. By noon the SPX was close to -1% off Friday's close with the NASDAQ Composite off more than -1.25%. The low levels held for the day as the indices traded along support with a slight rise in prices going into the open.

Economic Calendar

The Economy

Today was pretty light on economic as most Monday's are. Aside from Moody's Survey Of Business Confidence there was but one report; Existing home sales. Existing home sales dropped -1.8% versus an expected gain of 0.4%, not too surprising since last week's permits and starts were also down and below expectations. On an annualized basis the rate of sales is 5.05 million, cool but above the 5 million level viewed by economists as showing strength. The previous month was also revised lower. This is the first month in the last five in which sales have declined and remain at the second highest level of the year, although still below last years levels. Within the report Lawrence Yun, chief economist for the National Association of Realtors, says that sales remain strong and that last months drop is due in large part to a decline in cash purchases. He also says that the market is becoming better for first time buyers and that “they have a better chance of purchasing a home now...”.

Moody's Survey of Business Confidence remains strong. The summary, prepared by Mark Zandi, remains positive. He says that “US businesses remain upbeat”, “hiring intentions remain strong” and are at an all time high for the survey. He also says that lay off's also remain low and that expectations into the end of the year and next are strong.

Data remains light the rest of the week. Tomorrow is the FHFA Housing Price Index, Wednesday is New Home Sales, Thursday is jobless claims and durable goods with the 3rd revision to 2nd quarter GDP and Michigan Sentiment on Friday. Housing data will be very important but I expect to see some small misses based on today's existing home sales and last weeks starts/permits data.

The big mover for the week will probably be GDP on Friday. The current expectations are for it to be revised higher, again, by 0.40% to over 4.6%. The upward revision is bullish, in retrospect, but will lead to speculation of how much growth to expect this quarter. The higher 2nd quarter GDP is, the harder it will be for the 3rd quarter to show significant growth on a comparative basis. Surely the 3rd quarter grew, but it is not likely that it accelerated significantly from the 2nd. The most current estimate I could find for the 3rd quarter is calling for 3.5% and then 3.0% in the fourth, which would put full year GDP right around 2.25% and in line with general expectations.

Additional economic news, or news affecting the economy, included the announced planned retirement of Federal Reserve President Charles Plosser. Plosser is one of the more hawkish members of the reserve and a frequent dissenter of the current QE and low interest rate FOMC policies. His retirement is scheduled for March of next year.

The Oil Index

Oil prices fell again today on rising supply and a lack of market moving news over the weekend. Last week's knee jerk move higher was caused by the Saudi's announcing they had cut some of their production and fears that OPEC may cut more in an attempt to raise prices. While this is still a possibility words from OPEC put the event off until sometime next year. WTI fell more than -0.75% in early trading and extended that loss to over -1.0% later in the day.

The Oil Index also traded lower and broke through the long term trend line for the second time in two weeks. Out of ten S&P sectors nine were in the red today, led by the energy sector. The Oil Index is suffering from the fall in the underlying commodity but has so far found support along the 1,600 level. This level is coincident with the bottom of the flag pattern the index broke out of in the early part of the summer but today's move calls it into question.

Even though the index broke through the line it is still exhibiting some sign of support. There is some lower wick, not much but some, and there is divergence in near term momentum consistent with a pull back to support. Oil prices will continue to affect index direction but it still looks as if the longer term uptrend wants to hold and the next few days could provide more technical clues. Watch for support between 1590 and 1,600 with a break below that possibly taking the index as low as 1,550-1,525 in the near to short term.

The Gold Index

Gold prices began the day in negative territory but reversed to move higher by a dollar or two mid day. The reverse was due in part to the decline in stocks but also to the weaker than expected data, as well as possible profit taking on the steep decline in prices over the past two months. Gold prices are now more than -9% off their mid-summer highs and only 2.5% above the long term low of $1285 ( this was an intraday low, the closing low that day was $1206). There may be a near to short term pause but Gold prices are moving lower with the long term low in sight.

The Gold Index is also moving lower and also has the long term low in sight. The index fell another +2% today and is approaching the $85 level. The indicators are bearish and momentum is building although divergence persists in the MACD. This suggest that the move is losing steam and the long term low could provide support once it is reached. $85 is the first target for possible support with $82.50 and the long term low the next target once that is broken. A break below $82.50 wouldn't find support until reaching the $65-$70 range and a full 100% retracement of the 2008-2011 bull market in gold/gold index

Not to say that we are approaching the bottom in gold, or that this is the bottom in the gold index, but it is a highly likely place for a short term to long term bounce to begin, based on the two previous bounces. However, gold prices and/or hopes for gold company profits could continue to drag the index down while the economy is recovering and rising interest rates are coming down the pipe. A question I have now is, just how discounted is the impending rate hike and how will it really affect gold prices once it is here? Not to mention that in the near to short term lower oil prices will help improve margins for gold miners offsetting revenue lost to low gold prices. Earnings aren't going to be great but they might not be that bad.

In The News, Story Stocks and Earnings

Earnings reports are light for the week although we are approaching the next earnings season. Alcoa is scheduled to report three weeks from now, heralding the official season. This week there are about 125 or so reports with a few of note. Tuesday Carmax, Wednesday KB Home, Thursday Micron and Nike followed up by BlackBerry on Friday. Carmax will be indicative of the secondary auto market and the consumer.

KB Home of course will represent the housing sector, and based on last week's report from Lennar could be a positive surprise. KB Home constructs single family homes and condominiums in the metropolitan areas of several western states. The company is expected to report $0.38 per share, a 40% increase over the previous quarter. Shares of the stock sold off today on the existing home sales news, as did the sector. Shares of the stock lost -2.5% in today's session but are basically flat for the year. The indicators show some support at this level but there is no real signs of bullishness yet.

Apple releases sales figures for the new iPhone 6. Sales set a record, topping 10 million units sold in the first weekend. This, plus the added revenue from the Pay service will surely have a positive impact on the bottom line that won't be fully appreciated for several quarters at least. However, the larger iPhone 6+ may weigh on sales of the smaller iPad models in the near term. The iWatch I have yet to form an opinion on. Personally, the only use I can see wanting it for is using it for GPS and tracking my bike rides. Shares of the stock fell today, after opening higher, to lose about a quarter percent. Today's action brings the stock down to just above long term support in the form of the previous all-time split-adjusted high. The indicators are consistent with support at this level with some near term weakness present.

Autozone reported today, beating EPS estimates but falling short on revenue. The company reported a 2.1% increase in same store sales that resulted in revenue growth of only 0.6%. EPS beat by a nickel or 0.4%. Shares of the stock fell -4.25% today, dropping to an 8 month low. The fall today was stopped by long term support set last February on a break to new highs. Since then the stock has been trading in a range between $550 and $500, today's low. The indicators are weak and look like the market could keep this one down at support, if not test or break it.

After energy, consumer discretionary was the hardest hit of the sectors today. The S&P Consumer Discretionary Spyder XLY fell by -1.5% today, hurt by the home builders among others. According to FactSet earnings growth for Q3 is estimated to be 6.2% with consumer discretionary the only sector projected to produce a decline, led by the home builders and Pulte Group. Today's decline has brought the ETF down to longer term support with weak indicators. Near term indications are bearish but longer term the ETF is trending up with the potential for a bounce from support. The stochastic has produced an early, weak, trend following signal already but yet to confirmed by MACD. Today's move set's it up for a follow up, provided support levels hold. A break below the current level could take the index down as far as the long term moving average around $67.50. A bounce from support could find some near term resistance around $69-$69.50.

The Indices

The market fell today in the wake of triple witching and last week's Fed meeting. The Dow Jones Transportation Average leading the fall, dropping -1.38 in today's session. The drop was steady throughout the day, closing at today's low and potential support consistent with the all time high set in July and then broken above at the start of September.

The divergence I noted last week panned out and has been confirmed by a bearish crossover in the MACD and a drop below the upper signal line on the stochastic. There is likely going to be a further test of support but I think it, support, will be fairly strong. A drop below the current level could take the index down to the long term trend line, about 250 points below this level, and set us up for another possible trend bounce.

The NASDAQ Composite was runner up in the race to support today. The tech heavy index fell -1.14% today after hitting a new high on Friday. It too is sitting on support formed by the July highs showing support over the short to long term. In the near term the indicators are still weak and point to a further test of support over the next few days to a week. 4,500 looks good for support right now with a break taking the index down to 4,400 in the near term. If support holds and the index moves higher there is resistance around 4,600 with a target around 4,700 on the break.

The S&P 500 is next up with a loss of -0.80% in today's session. The broad market index fell 16 points at the close, with today's candle resting firmly on support. Support is consistent with the previous all time highs as well as the 30 day short term EMA. Today's action brought the index right down to the 1990-1995 region, indicated as support, where it then proceeded to trade sideways the rest of the day. The indicators are weak and pointing to further testing of support at this time but also consistent with the set up leading to the 2nd and stronger trend following signal. If the 1990-1995 level doesn't hold stronger support is around 1950 and 1925.

The Dow Jones Industrial Average was the laggard today, falling only -0.61%. This index is also sitting on support in the form of the previous all time high set in July and then broken this month. The indicators are weak in the near term but still bullish short term, contrary to the rest. Support, however, will likely be tested along with the rest regardless of how the indicators look now. A break below 17,170 could take the blue chips down to 17,000 in the near term with strong, long term support, above 16,750.

The indices pulled back to support today and as a group are sitting on the highs set at the peak of the summer rally. This I guess is not surprising in hindsight as this is the level the market was holding before the summer trading holiday and the level at which protective positions would have been based on at that time; and expiration for those positions, a triple witching expiration, was just this past Friday. What this means now, in my view, is that the market is sitting on support with economic growth in the forecast and a whole lot of data, not this week but next.

This could be a challenging week. The candles from Friday and today are not pretty, unless you're a bear, and could lead to some more testing of support. Adding to this is data that I expect to be a little weak. Tomorrow and particularly Wednesday's New Home sales could be less than expected and help push the indices lower. However, on the flip side Thursday's unemployment claims could be more good news and then the GDP on Friday, expected to be revised higher, could also be good.

Next week is the end of the month which means there will be a tidal wave of economic data. ADP employment, Challenger Job Cuts, NFP, Unemployment top the list.

Until then, remember the trend!

Thomas Hughes