Global woe, tepid earnings, low oil, mixed data and FOMC speculation has been weighing the market down, today it may have capitulated.


Many factors have been weighing on the market. Global woe, mixed data, Chinese currency manipulation, low oil prices, Greece and weak earnings growth have each played their part. A confused market began to sell off last week, the sell off turned into a correction and today may have reached the point of capitulation.

Futures on the major indices had been negative in early trading but nothing like what we saw going into the opening bell. A major sell-off in China was today's primary news, there were no economic releases and no earnings reports of note. The Shang Hai index fell more than -8% and closed at those levels, driven no doubt by ongoing market skittishness and government intervention. Other indices in Asia fell as well, but in the range of -4% to -5%.

Market Statistics

European markets were equally affected by the sell-off in Asia and our market last Friday. They lost -3% to -4% and were able to move up off of the lows before the end of the day. Futures trading here are home indicated an open -2.5% - 3% lower in the early part of the pre-market session. This deepened to greater than -5% by the opening bell. The open saw a rush to get out of the market with the indices gapping lower and moving down to reach indicated levels and lower within the first 5 minutes of trading. The move sparked support, as often happens on days like this, and was able to generate a bounce back rally that more than halved the initial decline.

By 10:30 the indices were hovering with losses near -2.75% and held these levels for the next hour. By early afternoon they had regained nearly all of the losses, coming within a percentage point in most cases. This level held for an hour so but eventually began to falter. Later afternoon saw the indices fall back to roughly -4.5%, nearly to the early lows but not quite, where they managed to find some buyers. A few minutes of consolidation led to another rally that sent the indices back up to close with losses of only 3.7%-3.9%.

Economic Calendar

The Economy

There was no official economic data today. There is some important data due out this week, and next week will probably be even more significant. Tomorrow we get the Case Shiller 20, Housing Price Index, New Home Sales and Consumer Confidence. Wednesday is Durable Goods, Thursday is jobless claims, Pending Home Sales and the 2nd Estimate For 2nd Quarter GDP. Friday is Personal Income and Spending, and Michigan Sentiment. GDP is expected to rise from 2.3% to 3.1%. A miss here would not help sentiment. Next week is the turn of the month, which means lots of macro data including the jobs bundle; ADP, Challenger, Claims, NFP and Unemployment.

There is no new earnings data from FactSet this week. At last report 2nd quarter earnings growth was -1% with 81% of the S&P 500 reporting. By next week another 15% or more will have reported so I expect the blended rate to go up. Ex-energy earnings growth was 5.5% with 73% of all companies beating earnings expectations. Third quarter growth was still expected to be negative, but with the likelihood of it reaching positive levels based on recent earnings trends. 2016 S&P 500 earnings growth is expected in the range of 10-12%.

Moody's Survey Of Business Confidence declined slightly but remains near the all-time high. This week's reading is 44.2, -0.3 from last week's 44.5. In his summary Moody's economist and survey creator Mark Zandi said market volatility had not yet made an impact on results and that global businesses remain upbeat. US business lead, Asian lag but all are positive. US businesses are characterized as reporting robust sales, sturdy pricing and ample credit.

The Oil Index

Oil prices sank to new lows. China has taken the fore front in the eyes of energy traders. Fear of slow down is fueling concern for demand outlook while supply and production remain high. WTI and Brent both fell more than 5% in today's action hitting new lows. No sign of a bottom is present here and without a change in supply/demand perspective oil could go much lower. At this time price outlook for 2016 has WTI trading near $50 on average.

The Oil Index gapped more than -8% lower at the open but managed to regain some of the loss before the close. Despite the drop, the index was able to make a white candle with long upper shadow and looks poised to snap back and retest my recently broken resistance line near 1,180. I say this because today's move leaves the index extremely extended, well below the short term moving average and far out side their deviation bands with only weakly bearish momentum and stochastic consistent with longer term support and highly divergent from prices. Upside targets are near 1110, 1180 and 1200. Support target is near the bottom of today's candle just above the 1,000 level.

The Gold Index

Gold prices fell about $5 but are basically holding steady above $1150. Price has snapped back on a recent rapid decline in dollar value driven primarily on FOMC outlook. Weakness in China is adding to fear of a US slowdown sparked by some of last week's data. Together they are spurring speculation of a later rather than sooner rate hike, weakening the dollar and lifting gold. Add in the volatility of global markets and the flight to safety and gold trades near a two month high. If the rate hike does get pushed back significantly then gold could trade much higher with $1180, $1200 and $1215 as targets. Data will continue to be important, so long as it remains strong we can not rule out a rate hike.

The gold miners ETF GDX fell a little over -7% in today's action. The ETF created a long black candle and broke the short term moving average with mixed indicators. The indicators are mixed but stochastic is showing a bearish cross with bullish momentum on the decline so it is possible we could see another move down to support. Regardless of today's action in gold, with it trading near $1150 and oil below $40 the miners profitability potential increases making them buy. It looks like $13.00 is support with upside resistance in the range between $15.50 and $16.50.

In The News, Story Stocks and Earnings

The dollar was a big mover in today's session. The Dollar Index DXY fell more than -2% to test recent support levels and bounced back from them. Support was met at $92.50 with a move back above the previous 7 month low a positive sign. However, both indicators are weak and weakening, supportive of at least a retest of the new low if not new lower prices. Data and FOMC outlook will be the biggest factors over the next few weeks but global woes and their possible affect on the US economy will take their toll as well.

No significant earnings reports today but there are a few to take note of this week, man of which in the retail sector. One of which is Best Buy. The consumer electronics company is expected to report $0.34 per share, down 3 cents from the previous quarter and ten cents from the comparable quarter last year. Expectations for next quarter are flat from this quarter and last year. The company has been struggling to maintain relevancy in the era of internet shopping so any signs of improvement and/or positive surprise will be welcome. Today the stock gapped lower at the open, dropping more than -5%, but regained all of the loss by end of day. This could be a sign of optimism going into tomorrow's earnings report but a new 12 month intra-day low was set and volume was light.

Toll Brothers is reporting its earnings tomorrow as well. The home builder is expected to report $.50 per share, 35% higher than last quarter and 10% above the comparable quarter last year. Based on recent housing data estimates could be light. Existing home sales was better than expected and Home Builder Confidence is at long term highs. New Home Sales data is due out tomorrow as well. Today the stock gapped lower and tested support but did not quite regain as much as the broader market. The short term moving average provided resistance and capped gains at $39.25 and left it with a loss near $38.50 at the close.

Intel was one of only a handful of S&P stocks to trade in positive territory today. At least half of those that were are tech stocks, and at least marginally connected to the semiconductor industry. Intel and others in the space have been under pressure over the past few quarters as sluggish growth and a rapidly changing environment has weighed on earnings. Today Intel opened at a new 12 month low but found support and regained all of the loss and more, on an intra-day basis at least. Intra-day volatility saw the stock up as much as it was down, leaving it with a loss more than -1% at the close of day.

The Indices

The indices moved lower right from the start and nearly just as fast were bouncing back. The bears were definitely in control but the bulls held their ground once they got into the fray. Today's action was led by the S&P 500 which closed with a loss of -3.92%. The broad market created the largest candle I've seen and broke through numerous support levels. Today's action found support above 1,850 and the low set by the correction last October. The indicators are bearish and consistent with low prices so a test of the low set today is very likely.

The NASDAQ Composite was the next biggest loser in today's action. If not for the rebound in chip makers it would have been today's loss leader. The tech heavy index created a long white candle, after gapping nearly -8% lower, with long upper and lower shadows. The upper shadow is very pronounced, revealing that selling pressure is still present, but also revealing that buying pressure is present as well. The indicators are moving lower with strong momentum convergent with prices so a retest of the lows is likely.

The Dow Jones Industrial Average shed only -3.58%, about -588 points, after falling more than 1000 points at the low of the day. Price action created a long bodied candle, black, with long lower shadow indicative of support. The indicators are bearish and pointing lower so a retest of the day's low, near 15,500, is likely. Volume is on the rise here as well, nearly triple the past 30 days average, adding weight to any signals given. Support appears to be present near 15,800, just above the low set last October.

The Dow Jones Transportation Average made the smallest decline, only -3.52%, but did not close above support levels set last fall. Some support is indicated though by the long lower shadow and rising volume levels but it may not have been reached yet. The indicators are bearish and moving lower so the new low set by the indicator could be retested in the least. So far the transports have been leading the broader market lower, if this keeps up today's action could be an ominous sign.

It was a volatile day of trading and there was not really a cause for it. Sure, there are lots of reasons to have caution but no real reason for the market to correct. The economy isn't tanking, earnings aren't in the toilet. The economy is trending higher, earnings are flat this time around but expected to grow in the next quarter or so. Too many near term and peripheral issues got the market wound up and now it is unwinding. It is no coincidence that this is happening now, we just had an expiration Friday and we are on the cups of the fall trading season and September FOMC meeting/rate hike lift off, but it is surprising how deep the correction is.

Today's move may have been sparked by capitulation. If so we could see them begin to bounce back as early as tomorrow but that may be wishful thinking. A positive sign is the level of today's volume. Volume, using the SPY S&P 500 index tracking stock as a proxy volume has been on the rise over the past three days and 4 times the previous 30 days average.

Today's move had cause. There reasons to fear. However, today's move also look over blown. Near term fears and news have caused volatility but long term trends are positive. There could be more down side but I really don't see a reason for reversal. This is most likely just another dip, a really big dip, but another dip, it'll play out and the bull market will carry on. There is a lot of data this week, GDP top of the list, with even more due out next week, including the Fed's Beige Book.

The really ominous sign is the Dow Transports. They set a new low today. The transports have been in correction for two months and led the broader market there as well. If this leadership continues we could see lower prices on the indices as well.

Until then, remember the trend!

Thomas Hughes