The market fell again today as we await the FOMC meeting, but there is more danger ahead than just the FOMC. This is going to be a full week, to say the least. The FOMC will announce their policy decision on Wednesday, we'll get the newest reads of PPI and CPI, the BOE is scheduled to meet, the BOJ is scheduled to meet, the Swiss National Bank is scheduled to meet, the first report for 2nd quarter earnings is scheduled... and the Brexit vote is next week... more than enough to spark some market volatility.

International markets are not immune. Indices from Japan to China and into Europe fell in today's action. In Asia Japanese and Chinese indices fell more than -3% on concern over the BOJ's possible policy changes, a surging yen and weak Chinese data. The BOJ is expected to move in order to further stimulate the economy, but maybe not at this meeting in order to coordinate efforts with a government fiscal package later this year. Chinese data shows slowing in fixed-asset investment growth. European indices fell roughly -1.80% on the latest polling from Britain which shows an increasing number of Britons favoring a Brexit.

Market Statistics

Futures trading reflected global pessimism, down about -0.4% from the earliest part of the electronic session. Without much in the way of economic data or earnings to alter sentiment futures maintained their early levels all morning and into the open of trading. The indices opened as indicated but quickly attempted to regain losses. By 10AM the SPX was flirting with positive territory and by 10:30AM were in the green, but this did not last long. By 11AM the indices were retreating from the early high and moved steadily lower over the next hour. A mid-day low was hit around noon, and then by 2PM the market was moving lower again and didn't stop until the close of the day.

Economic Calendar

The Economy

There was no official economic data for the US today, but there is quite a bit this week. Tomorrow we'll get Import/Export Prices, Retail Sales and Business Inventory. Wednesday is the FOMC announcement, at 2PM, before that PPI, Empire Manufacturing, Industrial Production and Capacity Utilization are all on tap. Thursday is Initial Claims, CPI, Philly Fed and the Home Builder Sentiment. Friday closes out the week with Housing Starts and Building Permits.

Moody's Survey Of Business Confidence gained 0.8%, rebounding from a multi-year low set last week. The index is now sitting at 27.5, slightly below the previous multi-year low set in late February. According to Mark Zandi the index is showing a downturn in global sentiment begun earlier this year with varying conditions from region to region. The US remains the strongest but has also suffered a downturn in sentiment.

There are 2 S&P 500 companies left to report earnings for the 1st quarter; unless they surprise the rate of earnings decline for the quarter will be very close to -6.7%. Looking forward to the 2nd quarter earnings cycle the first company will report earnings this week. As for the 2nd quarter, projections continue to slide. The expected rate of earnings decline fell over the past week to -4.9%, down a tenth from the last estimate. The energy sector is expected to post the largest decline, about -74.5%, but that projection has been ticking upward over the last two weeks. Materials is expected to post the 2nd biggest decline, about -11.6%, with telecom leading positive gains at +8.1%.

Looking beyond the 2nd quarter growth is expected to return in the 3rd. Projections for 3rd quarter growth are holding steady around 1.4% but still in danger of downward revision to negative territory unfortunately. Growth is expected to expand into the 4th quarter, to 7.6%, with that estimate ticking higher by a tenth in this week's report. Full year 2016 estimates are holding steady near 0.9% while full year 2017 estimates have gained 2 tenths to hit 13.6%.

The Dollar Index

The Dollar Index lost some ground today as markets try to handicap this week's round of central bank meetings. The index fell about -0.25% from the short term moving average to test support at the $94.25 level. Support held and may lift the index higher but this will of course depend heavily on the FOMC and other bank policy decisions. The indicators are mixed, bearish but confirming near term support with declining downside momentum and a very weak bullish crossover on the stochastic, but consistent with a bounce from support. The index may hover at or near current levels, between resistance at the short term moving average and support near $94.25, until the FOMC and/or BOJ statements with a break above being bullish and a break below being bearish. The CME tool is showing only a 2% chance of FOMC rate hike at this meeting.

The Oil Index

Oil prices had another day of volatility. Early trading saw price for WTI fall nearly -2% only to rebound and regain positive territory, climbing by more than 0.6%, only to fall again later in the day. By close of session WTI had lost about -1% for the day. Driving today's volatility was last week's US rig count, the 2nd week of gains, and profit taking offset by high refinery demand, a cut to China output and supply/production disruptions in Iraq, Libya and Nigeria. Today's action centered around the $49 level, with a settlement near $48.60.

The oil producers continued their decline from 6 week's highs on today's drop in oil prices. The Oil Index fell for the 4th day in a row, dropping below the short term moving average, and posted a loss near -1%. The index surge to a 6 week high has already fizzled out, with the price of oil so questionable may not reach that level again. The indicators are consistent with a fall from resistance and may be indicating lower prices ahead through bearish crossovers. The stochastic is rolling over, well below the upper signal line and consistent with resistance, while MACD has retreated to the 0 line. This, along with today's move below the short term moving average, do not bode well for near term prices. If today's move is confirmed, and if oil prices remain below $50 and/or move lower, the index could easily retreat to 1,050.

The Gold Index

Gold prices got a lift today on flight to safety, driven by BOJ concerns and the Brexit, as well as a weaker dollar, also driven by BOJ concerns. The spot price rose nearly 1% intra-day, closing with gains near 0.8%, and are approaching resistance levels near $1290. This move is also aided by declining FOMC interest rate fears which, ahead of the meeting, have sent prices up to the top of their range and leave little room for upside movement... unless the FOMC is more dovish about rate hikes than the market expects. Regardless of what they do this meeting they are still expected to raise rates sometime this year and that could keep prices from moving above $1300. Even without the FOMC, there is also the BOJ to consider. They may cut rates, or indicate a willingness to do so, which could also strengthen the dollar and put a lid on gold prices. And there is also CPI/PPI data to consider.

The gold miners have benefited from gold's move higher and are trading near multi-year highs. Today's action took the miners ETF GDX up to the $26.70 resistance target at the open but the candle is not too promising. The abandoned baby possibility I outlined last week did not play out but nonetheless bearish signals continue to appear. Today's candle is long and black, and qualifies as dark cloud cover appearing at resistance levels. The indicators are mixed but generally consistent with resistance, but not yet reversal. If the ETF continues to move lower downside target is near the short term moving average, about $24.15, with next target near $22.50. A break above the $26.70 level would be very bullish and could indicate a continuation of this years bull market in gold.

In The News, Story Stocks and Earnings

The big story of the day, in terms of business news, is Microsoft's announced purchase of LinkedIn. The move came as a big surprise for shareholders of LinkedIn, but welcome in that it created a near 50% surge in share value. The move is worth $26.2 billion and will merge LinkedIn with Microsoft's cloud service. The deal is questionable, the value of LinkedIn to Microsoft's cloud presence is yet to be ascertained. In light of Microsoft's history of non-accretive purchases I am skeptical. Shares of Microsoft fell nearly -3% on the news.

Apple's annual developers conference began today. The company announced a number of changes to systems including the addition of Siri to desktop operating systems, a change to the watch operating system, Apple TV gets an upgrade with Siri and connectivity to phones, Siri and Maps are being opened up to outside developers and a preview of iOS 10. The news was welcomed, but not thought to be substantive in terms of forward earnings and the company's ability to sell its products. Shares of Apple fell more than -1.25%, helping to confirm resistance at the $100 level and falling below the short term moving average.

I haven't touched on the VIX in a while, today's action is noteworthy. The volatility index gained more than 20% in a move extended last week's break above the short term moving action and closed above the 20 level. The index is moving higher on central bank fear, as well as Brexit and perhaps earnings season fear, and confirmed by both indicators. This move could continue into next week, when the Brexit referendum is held, with first upside target near $25 and next target near $30.

The Indices

The indices tried to rebound this morning from a lower opening but were not able to do it. FOMC and central bank fear, along with the Brexit and earnings outlook are weighing on equity prices. By mid-day they were testing the early lows, and only moved lower from there. Today's leader was the Dow Jones Transportation Average which lost -1.14% in a move that brings the index below the short term moving average. Today's action is accompanied by weakening indicators and a possible bearish signal. Stochastic has already rolled over, following a bearish crossover, with MACD sitting on the zero line and in position to confirm. A move lower could go as low as 7,500, first target for strong support.

The next largest decline was posted by the NASDAQ Composite which was hindered by Microsoft and Apple. The tech heavy index fell -0.94% in a move that broke below the short term moving average. The index appears to be moving toward the bottom of a near term range and confirmed by the indicators. Both stochastic and MACD confirm a downward movement with first target for support near 4,800. A break below this level could move down to to 4,600 with possible support targets near 4,700.

The S&P 500 made the third largest decline in today's session, just over -0.80%. The broad market fell beneath the short term moving average and is approaching potential support at 2,075. The indicators confirm the fall from resistance, today confirmed by a MACD crossover, with a possible target of 2,075. A break below this level could go as low as 2,050 in the near term.

The Dow Jones Industrial Average fell the least, but still nearly 0.75%. The blue chips also fell beneath the short term moving average, a move confirmed by stochastic, with downside target near 17,600. MACD reached the zero line today, a crossover to the downside helps confirm downside target and may draw in additional sellers. A break below 17,600 could go as low as 17,250, near the long term up trend line.

I've been very cautious over the past month or so, maybe a little longer, and still see Q2 negative earnings growth as a major hurdle for the market. The reasons for today's sell-off include the FOMC, and the Brexit, as well as earnings and could be the onset of a larger of correction. If so, I'm not of the mind it will be a very deep one, maybe 3-5%, which would bring the indices down to or slightly below the targets I listed today. Even if the FOMC, and the other central banks set to meet this week, do not scare the market there will still be the Brexit to worry about, and the earnings, so I won't be expecting them to cause to much of a bounce. Needless to say this week is likely to be very volatile, and I haven't even mentioned yet the fact that this Friday is OPEX.

What I really want to see before I get bullish again is Q2 earnings better than expected, maybe move into positive growth, with rising expectations for Q3, Q4 and maybe even next year.

Until then, remember the trend!

Thomas Hughes