Greek drama pushed the indices down to test recent lows while the world waits on the FOMC.


It's here again, FOMC week. This one, like each one over the past few years, has the market wound up in expectation as we approach the first interest rate hike since before the financial crisis. Global news had an impact but the focus was on the economic data, the Fed and what they are going to do Wednesday.

Asian markets ended their day flat, although Chinese indices fell sharply. Regulators there have enacted new laws outlining requirements and restrictions to margin lending and fueled fear the liquidity driven rally is coming to an end. In Europe markets were roiled by Greece and its failure to come to terms with its lenders. Greece is now closer than ever to defaulting so I am expecting new headlines just about every day. The surprising thing is that some analysts are now looking past a default to potential positive outcomes, for Greece and the EU, if such a case were to arise.

Market Statistics

Our markets were negative from the earliest. The S&P 500 was indicated to open close to -0.5% lower than last week's closing price for most of the morning and that did not change going into the 9:30 time frame. We got some economic data this morning, mixed as usual, but there was little obvious affect to the indices. The market fell sharply once the opening bell sounded, exceeding early indications. Bottom was found within the first 30 minutes, near last week's low, and the market bounced back to regain more than half of the early morning loss. These levels held throughout the remainder of the day and into the close of trading.

Economic Calendar

The Economy

Empire Manufacturing was released at 8:30AM. The consensus expectation was for a slight rise from last month's 3.1 to 6 but instead retreated by to -2.0. This is the second negative reading in the past three months and counter to ongoing labor trends. Within the report new orders and shipments both declined, new order falling below 0, while the employment index showed a slight gain in hiring and hours worked. The prices indices both held steady near last month's readings indicating that input costs and selling prices remain flat. The future expectation index retreated as well falling -4 to 25.8. The future inventory index fell sharply, to -17, indicating an expectation for inventories to decline.

Industrial Production and Capacity Utilization were released at 9:15AM. The report is consistent with the Empire survey showing a -0.2% decline in production for May. This is following a -0.5% decline in April on top of a downward revision to April. The silver lining is that revisions to February and March lifted the overall reading high enough to leave April's number higher than first reported even with the revised decline. On a year-over-year basis production is 1.4% higher at this time than it was last year. This month's decline is due largely to decreasing production in the mining sector, specifically oil. Capacity Utilization fell -0.2% to 78.1% and is 2% below the long term average.

Positive data came from the housing sector. The NAHB Home Builders Sentiment Index showed a surprising jump of 5 points to hit 59, the highest level since September of last year. This is more than double the expected gain of 2. According to the release this month's gain is due to “serious and committed buyers”. Data within the report reveals current sales rose by 7 to 65 and future sales jumped 6 to 69, underscoring the overall surge in sentiment. The only component to remain below 50 is traffic, which rose 5 points to 44.

Moody's Survey Of Business Confidence retreated by -1.1 points but does not reflect the negative sentiment shown in the Empire report. The index reading of 43.0 is near the all-time high, as it has been all year, and indicating healthy confidence among US and global businesses. Judging by this gauge, and Moody's economist Mark Zandi's summary, US business confidence is strong and steady followed by improving sentiment in the rest of the world. He noted yet again strength in business investment and hiring, as well as a recent surge in year-end growth expectations, that are contrary to weak 1st and 2nd quarter growth.

There is a lot of data due out this week aside from the FOMC meeting. Tomorrow is housing starts and building permits, both expected to hold steady from last month. Looking at the NAHB report, and the last round of existing and new home sales, these figures could be above expectations. Wednesday is the FOMC policy announcement. Thursday is jobless claims and CPI, Philly Fed and Leading Indicators. Friday is data free.

According to FactSet the earnings growth expectation for 2nd quarter 2015 S&P 500 is -4.6%. This is down from the March 31st estimate of -2.3% and up from the low estimate of 4.8% we saw a few weeks ago. Since the start of the quarter 7 sectors have lower growth estimates than first thought and 76 companies have issued negative guidance. Healthcare still has the highest expected growth rate, +7.7%, and if last quarter is any indication could go much higher. Healthcare started the first quarter with an expected earnings growth rate near 11% and doubled that to near 22%, most likely driven by Obamacare. The energy sector is expected to have the worst growth rate, -61%.

Earnings trends over the past 4 years leads me to think the 2nd quarter won't be as bad as expected, just like the 1st quarter wasn't. We can expect the the blended rate for earnings growth to improve roughly 4% by the end of the reporting season which could leave it flat to negative. At the same time, looking at earnings ex-energy, S&P 500 earnings could grow by as much as 2-6% (1st quarter ended with a 0.8% gain, one company left to report, and a 6.3% gain ex-energy).

Earnings are expected to be aided by improving margins into the end of the year. 2nd quarter margins are expected to rise to 10.2 and then 10.5 and 10.6 in the 3rd and 4th quarters, all above the 5 year average of 9.6%. Full year 2015 earnings growth is projected to be 1.6% with a jump to over 12% next year and if trends hold true these estimates will rise.

The Oil Index

The big headline in oil today is Yemen. Peace talks began today at the UN and while it is unlikely a peace will be found soon the talks helped to send oil prices lower. WTI moved down below $60 and Brent below $63. When you look at the players involved it is unlikely the Yemen situation will get resolved anytime soon, on one hand are the Arab/gulf states, on the other is Iran and its allies and in between is the Iranian nuclear issue. With this in mind it is a little surprising the conflict is as small as it is. Regardless the outcome I expect to see new headlines in the coming days that could send oil prices swinging either direction.

The Oil Index opened with a loss of about -0.75% and held that level into the close. Today's action created a tiny spinning top just above the recent low and long term support. The index continues to drift lower on bearish momentum but signs persist that support exists along the long term trend line. MACD momentum has declined to near zero and has diverged from prices while stochastic has made a bullish crossover of the lower signal line, consistent with a trend following entry. The signal is still weak but in line with the trend and forward expectations. The index may continue to retreat to and test support but any such would be a potential entry for long term positions.

The Gold Index

Gold prices got a boost from Greek fall-out and today's data: the Greek news sparked a small flight to safety and the manufacturing data weakened the dollar. The news combined to send gold down to test support at $1175, bounce and move up to the $1190 level. This range is tied to dollar value and Fed expectations, focused on the Wednesday policy release. Gold will no doubt be impacted by the FOMC Wednesday afternoon but appears to be settled into a range in the $1175-$1190 region, what happens then is depends on the statement. Iln my view dovish talk weakens dollar, lifts gold while hawkish talk strengthens the dollar, helps confirm inflation presences and at least supports gold. The CPI data is out later this week and could further affect long term outlook for gold. Last week the PPI showed producer level inflation was higher than expected and helped support prices. CPI is already expected to rise by 0.5%, I think it could go higher if the higher cost of eggs is getting passed through to consumers.

The gold miners got a small boost from today's rise in gold. The gold miners ETF GDX gained just over 0.40% after setting a new 8 week low. Today's action is just above a possible support level near $18. Momentum remains bullish but is very weak and slowly retreating to zero while stochastic shows an asset that is oversold within a four month trading range. It still looks like the sector is at a bottom, whether or not it the previous down trend has reversed comes down to the Fed statement and gold prices. Support is possible near $18 and likely near $17.50, resistance is the underside of my recently broken up trend line near $20 and then above that near $21.

In The News, Story Stocks and Earnings

CVS and Target announced a deal in which the former would buy the latter's pharmacy business and then operate them as a business-within-a-business. The deal is worth about $1.9 billion before taxes and could fund share buy backs, according to company CEO. Target expects the move to help them improve their wellness offering and improve customer experience. Shares of both companies moved higher but gains were capped.



Boeing announced several new order for jets today at the Paris Airshow. The company also announced several new technologies that are expected to improve the flying experience, cost of production and efficiency. This news comes just days after the company raised its 20 year demand estimate by 3.5%. Shares of the stock were not supported by the news but may be presenting a buying opportunity. Prices are down near the $140 support level with indicators in line with a trend following entry.

Cigna turned down another offer from Anthem today, the second in only a week. The deal upped the stakes to $175 per share but was rebuffed due to control of the combined company. The news was first reported early this morning and sent shares soaring by nearly 20%. After the deal was turned down share prices moderated but retained much of the days gains. Today's activity sparked activity throughout the sector as many analysts are expecting more consolidations.

Gap gained 1.35% in after hours trading when they announced store closures. The company is planning to close 26%, 175, of its stores over the next few years in a move designed to get the "fleet... to the right size". At the same time the company reaffirmed full year guidance in the range of $2.75-$2.80.

The Indices

The market was not thrilled by the Greece news but at the same time did not use it to start a wild sell-off. The indices fell, sharply, down to recent lows and near term support only to hit bottom and bounce right back. They did not regain all of today's losses but did manage to reclaim at least half in most cases.

Today's drop was led by the Dow Jones Industrial Average which lost -0.60%. Today's drop took the index down to support at the 2 month low, near 17,900. The index has bounced from this level five times now so it appears strong in the near term at least. The indicators are mixed but consistent with support at this level or just below near 17,600. MACD is bearish and ticking stronger but divergent from today's new low; stochastic is pointing lower in the near term and higher in the long term, consistent with a retest of support. This could happen over the next two days as we get more Greek news, economic data and wait for the FOMC announcement.

The transports were the next largest decliner in today's session. The Dow Jones Transportation average losing -0.49% in a move that did not even reach the recent lows before bouncing. Today's candle resembles those of the other indices but is much shorter relative to recent price action and met support well above the recent low. The indicators remain consistent with a bullish trend following entry, MACD is steady to the upside and stochastic %D is trending higher following a bullish crossover of the lower signal line. Current set up is bullish and in line with the underlying trend so I am optimistically bullish, but with caveats.

The index is still below the long term trend line, the FOMC meeting is onl days away and we are still a few weeks out from earnings season, which is not expected to be good... all reasons for caution without the addition of Greece, Iran and Yemen. The index is now in the middle of the near term range with support near 8,250 and resistance near 8,500, a break beyond either could lead to a move of 250-500 points in the near to short term.

The S&P 500 made the third largest decline, -0.46%, in a move that reversed within 1 point of the low set last Tuesday. Today's candle is not overly large but significant in terms of its lower shadow, which reveals support at levels where we have seen a lot of price action over the past few months. The indicators are consistent with emerging support and setting up for a potential trend following entry. MACD is diverging from price and stochastic is flat, possibly rolling over, and still well above the lower signal line. The breach of the long term trend line is a red flag, as is the upcoming Fed announcement, but the overall trend is up so I remain cautiously bullish, waiting on the next rally. Today's support was found near 2,070 and last week's low, resistance is just above the current level in the range of 2,080-2,100.

The NASDAQ Composite made the smallest decline in today's session, only -0.42%, and created a green candle despite the fall. Price action fell below the short term moving average with declining indicators but like the other indices support appears to be present. For one, the longish lower shadow on the candle crosses the 5,000 level, a level which has provided resistance as well as support in recent months. Another is the indicators, they are moving lower in the near term but both MACD and stochastic are consistent with support in a longer term uptrend.

The market looks like it has support, but also that support is timid, cautious and intensely focused on news. Not too surprising considering the impending FOMC meeting and the power it has over the market. Regardless of the speculation anything is possible at this meeting. They, the Fed and Janet Yellen, have given a time line that includes June as a possibility for raising interest rates. Based on the, I think it was the February statement, the hike could come as soon as two meetings after changing the statement, which means now. I'm not trying to say it's going to happen now, just that the window is open and anything is possible. The way the labor and housing data has been going I will be surprised if there is no change to statement.

Until then, remember the trend!

Thomas Hughes