A full slate of earnings reports, economic data and central bank meetings have the bulls and bears jockeying for position.
Today's market action was another roller coaster ride that had the indices testing support once again. A long list of earnings reports, two major central bank meetings and economic data, mostly scheduled for later this week, have bulls ducking for cover and bears seeking shelter.
Asian markets began the trading day with a rally that initially carried over into the European markets. Chinese GDP was the reason, holding steady from the previous quarter and slightly above expectations. European indices were largely higher on this news as well as expectations for tomorrow's ECB meeting but the gains did not hold leaving many flat for the day. The positive sentiment had an effect on early trading here at home with futures indicating an opening 6-8 points above last weeks close.
The big headline impacting early trading was a downgrade of 2015 GDP expectation from the IMF. The new projection is for global growth of only 3.5%, compared to 3.8% in the previous report. They also downgraded 2016 GDP by an equal 0.3% to 3.7%. The report went on to say that there are significant growth factors in play such as low oil prices but these are being offset by â€œpersistent negative forcesâ€.
The bulls were able to keep futures positive up to and after the opening bell but were not able to sustain a rally. The SPX opened with a gain of 1 or 2 points and moved another 4 or 5 points higher before selling in the energy and financial sectors dragged it lower. By 10Am the SPX was down by 8 points and proceeded to trade in negative territory for most of the day. After lunch the markets began to move higher, off of the lows, but did not move into the green until just after 2:30. From that point on market action remained in the green until the close of trading.
Only one economic release today, the National Association of Home Builders Housing Market Index. The index, a gauge of builder sentiment, dropped by one point from an upward revision of one point. The January reading of 57 is one point below expectations but remains near an 8 year high. Other housing data due to be released throughout week includes housing starts, building permits and existing home sales.
Mark Zandi reports that Moody's Survey of Business confidence remains near record highs. The index rose by a tenth of a percent to 38.3 after ending last year at a record high. According to the summary sentiment in the US remains near record highs while business spending, hiring and sales are all strong. Improvement in the credit market also remains and expectations for the current year are strong.
Aside from weekly jobless claims the only other major report this week is the Index of Leading Indicators released on Friday. Jobless claims are expected to decline and the Leading Indicators are expected to show a gain of 0.4%.
The Oil Index
Oil got hit hard again although it did not set a new low. WTI lost as much as 4% in today's trading following the IMF's global GDP down grade followed by a similar drop in Brent. The downgrade, along with signs that production levels remains strong, is not good for oil bulls who need to see supply/demand stability. As of yet there is still no sign that demand is matching supply in a way to support prices that. < p>
The Oil Index fell in today's session but not hard. The index dropped about 2%, compared to 4% for the underlying commodity, but regained most of the loss. Today's action was another test of support for the oil sector as short term and long term trends collide. The index is wedged between a down trend line (short term) and an up trend line (long term) with indicators in line with longer term support. The question is, which line will hold? Oil prices are low and very likely heading lower which is having an effect on earnings outlook and driving the index lower but at the same time low oil prices are good for the economy and by extension oil demand rising oil prices. The indicators are in line with support at this level and rolling into a trend following signal. However, a break above the down trend line near 1280-1300 is required. A drop below the up trend line could take the index as much as 100 points lower.
The Gold Index
Gold moved higher again today, adding another 1.5% or so to last week's prices. Gold is now trading around $1290 supported by long term economic outlook and flight out of currency. The metal is receiving the benefit of recent turmoil in forex trading centered on the Swiss National Bank de-pegging move last week. Momentum is to the upside and could carry prices higher with $1300 the next target for resistance. Regardless of direction I expect to see more volatility in gold and currency once the ECB and BOJ release their policy statements later this week.
The Gold Miners ETF GDX extended its break above resistance. Today the ETF moved over 2.5% higher after creating a small gap at the open. The ETF is moving higher, driven by rising gold prices, with indicators in line with higher prices. At current levels gold is more than 10% off of the lows set last year and in position to boost earnings expectations and outlook among the miners.
According to MACD bullish momentum is strong and on the rise, confirmed by a bullish crossover on the stochastic, and pointing to higher prices. The stochastic crossover is providing an additional sign of strength by forming above the upper signal line. Assuming that the ETF has indeed bottomed price action is confirming the reversal and the indicators are now confirming price action. This move has a target near $26.75, previous resistance and an important retracement level.
In The News, Story Stocks and Earnings
Earnings season is not off to a great start. We came into the season with the energy sector dragging expectations down and now weak reporting from the banking sector has them down even further. According to FactSet the average growth expected for the S&P 500 is now just 0.6%. This is the lowest expectation for over 2 years and down from last week's 1.7%. If trends hold true, and so far it looks like they will, most companies will beat the average estimate. As of last Friday 37 companies have reported and 84% of them reported above the estimate.
Johnson&Johnson reported before the bell, meeting expectations but failing to inspire a rally. The company reported earnings that were basically in line with projections with light revenue and full year guidance slightly above consensus. While in line with estimates the results are significantly down from last year and could be impacted in future quarters by negative currency conversions, this quarter alone saw negative impacts over 7%. Today the stock fell sharply at the open and is now trading near potential support.
Multiple names reported after the bell, all moving their respective stock. Netflix was the first to report and sent its shares skyrocketing more than 10%. The streaming media provider reported earnings of $0.72 versus the consensus estimate of $0.45 and a strong increase in new users. The one negative is that revenue came in a little light so the amount of further improvement remains questionable. The stock had been trading higher today and with after hours action is now near resistance at $395.
IBM also beat earnings expectations but did not spark a rally in its shares. Big Blue reported EPS of $5.81, $0.40 above estimates, but revenue was light and 2015 guidance is low. Shares initially surged on the report but eventually fell on weak expectations and nearly 3 years of continuously declining revenue. At last look shares were down about 2% and trading near the long term low.
Cree, maker of semi-conductors, intensly bright LED lights and other electronics reported a strong quarter with results in line with expectations. Earnings are down on a year over year basis but execs say that demand is strong, especially in the lighting business, and guided full year earnings in a range above the current consensus. Today's announcement sent the stock up by 10% in after hours trading.
Market action was a little volatile today but only a little. One cause was oil. WTI plunged by 4%, but down to test current lows, not new ones, so the market did not react quite the same way it has in the past. Today's action was a slow and measured dip to support that found enough buyers to support prices. The Dow Jones Transportation led today's action with a gain of 0.96% by the close of trading. The transports never really dipped into the red like the other indices and are now trading just below the short term moving average. The index is moving higher from the bottom of a 2 Â½ month range with indicators in line with the move; stochastic is forming a weak bullish crossover and momentum is shifting to the upside. Potential resistance exists at the moving average, near 8,850, but my current target is 9,250 and the upper boundary of the trading range. The longer term trend is up with no sign of reversing at this time but the index could remain range bound in the near to short term while earnings season plays out.
The NASDAQ Composite was able to squeak out a gain of nearly a half percent. The tech heavy index closed 0.44% higher after a strong open and test of support had it down by a half percent. Today's action created a doji and one that may be more important than the average. This one occurred along the long term trend line and as a test of support coincident with earnings season and important central bank meetings. As an individual indication of market direction it is not very strong but along with other factors serves to highlight support along the long term trend line. The trend is up and for now the index appears to be making another bounce along it. The indicators, while bearish at this time, remain consistent with support in the 4,500-4,600 range.
The S&P 500 closed with a gain of 0.15% after dipping nearly a half percent during the day. Today's action was similar to that of the NASDAQ and created a small bodied candle after testing support. Support is the combination of the long term trend line and the September all time high. The indicators are also consistent with long term support and rolling over into a possible trend following entry. First target for resistance is the short term moving average near 2035 with next target near 2050. Support, in the range of 2010-2020, could be tested again while earnings are coming out. A move lower will not be critical until below 2,000 and could take the index down as much as 50 to 100 points.
The Dow Jones Industrial Average brings up the rear today, barely closing with any gains at all, only 0.02%. The Dow, out of all the indices, had the most trouble getting above back above break even today and created a doji in the process. Price action is confirming support below 17,500 with indicators that consistent with support. If support continues to hold possible upside targets exist near the current all time high around 18,000. If not a move below support could take the index down as much as 1,000 points to my next targets near 16,500.
The indices appear to be consolidating along their long term trend lines and support areas. They are at a position on the charts where they could easily go one way or the other; bounce higher in line with trends or break support and move lower. While there are plenty of reasons to fear a broad market decline I don't think one is coming. The market is digesting earnings, getting a read on economics and waiting for a round of central bank meetings to come and pass. So far earnings are ugly, but not bad, and economic trends remain intact. The central banks are the real question now but how much long term effect can the ECB and BOJ have on the US stock market?
What is more important and could keep the market from moving too far in either direction are events next week. The FOMC has their meeting on Wednesday and we get the first read on 4th quarter 2015 GDP.
Until then, remember the trend!