The summer melt-up continued today, pushing the NASDAQ to new all time highs. Today's trading was lifted by hopes for earnings in the retail sector and rebounding oil prices despite lackluster economic data.

The earnings season is almost over, a little more than 90% of the S&P 500 has reported, but there are still some important names left on the list. This week the retail sector comes into focus with more than a dozen important names on the list including home improvement retailers Lowe's and Home Depot and discount merchandiser's Wal Mart and Target. Last week retail sales figures were weaker than expected, this week started off with a decline in manufacturing data and only mild growth in the housing sector and do not point to robust earnings.

International markets were generally positive although strength was spotty. In Asia weak Japanese GDP dominated the news, driving the Nikkei down by only -0.30%. Japanese GDP grew at only a 0.2% rate in the 2nd quarter, below forecast and suggest that recent stimulus efforts may not be enough. The mainland Chinese markets were today's leader, gaining nearly 2.5% on expectations the Shenzen-Hong Kong Connect stock exchange would open later this year. European indices were mostly positive at the end of their trading day, if barely so. The UK's FTSE 100 led with gains near 0.35% driven by rising oil prices and apparent stability in the post-Brexit era.

Market Statistics

Futures trading indicated a positive open all morning although gains were tempered by economic data going into the opening bell. The indices opened with small gains, about 2 points for the S&P 500, and were then able to drift higher the rest of the morning. By 12:30 they had made the 4th of 4 morning intraday highs and begun to move sideways. Sideways action persisted the remainder of the day keeping the indices in positive territory and within small daily trading ranges.

Economic Calendar

The Economy

Early data, released at 8:30AM, was not good. The Empire State Manufacturing Survey fell -5 points to -4.2, reversing gains made last month and plunging the New York area manufacturing sector back into contraction. Despite the drop the news was not all bad. New orders and labor both held near 0, prices paid fell and shipments jumped 8 points to 9.0. Also, forward outlook remains positive although it has declined the past two months.

The National Association Of Home Builders released their monthly survey of home builder sentiment at 10AM. This month's read shows a 2 point gain over last month after a -1 point revision which leaves the index at 60. This shows a slight pick-up in activity from last month but is flat and near the low end of the range when looking back over the past year or more. Within the report present conditions improved 2 points to 65, the 6 month outlook improved 1 point to 67 and traffic fell -1 point to 44. A spokesperson for the NAHB said that a shortage of homes and regulatory hurdles were affecting the market.

Moody's Survey Of Business Confidence jumped 1.3 points since last week and is sitting at a 2 month high of 26.9. Mr. Zandi says that global business sentiment has bounced back in the last two weeks and seems to have weathered the recent round of geopolitical events.

Tomorrow CPI data is due. Expectations are for consumer level inflation to remain flat and unchanged from last month; hotter than expected will lead to increased rate hike expectations, cooler than expected keeps rate hikes off the table until maybe mid to late next year. Tuesday is also housing starts and building permits, as well as industrial production and capacity utilization. Wednesday is dominated by FOMC minutes. Thursday rounds out the week with jobless claims, leading indicators and Philly Fed.

According to Factset 91% of the S&P 500 has reported earnings so far this cycle. Of those 70% have beaten EPS estimates while only 54% have beaten revenue estimates. The blended rate for earnings growth in the 2nd quarter now stands at -3.5%, better than expected at the start of the reporting cycle but not as much as historical trends suggest we could expect. Based on the four year average the final rate of earnings growth could improve as much as 4% by the end of the cycle which would put the 2nd quarter near -1.5%.

While the market is moving higher, earnings outlook continues to fall. Estimates are falling across the board but the energy sector is still the leader in terms of declines. The sector is expected to post a decline of -62.5% in the third quarter, worse than the -52.6% predicted two months ago when oil prices were holding near $50. Outlook for the entire index has fallen deeper into negative territory for the 3rd quarter, to -2.0%, while 4th quarter estimates fell to 5.5%. Full year 2016 earnings growth estimates have also turned negative and are now -0.4% and likely to fall further over the next week. Full year 2017 remains strong but has also fallen, shedding 0.3% to hit 13.2%.

The Dollar Index

The Dollar Index is struggling with direction. Economic data and the FOMC are giving mixed signals; job data and FOMC intentions seem to indicate a rate hike is near, inflation data and FOMC actions just the opposite. The CME's Fed Watch Tool shows only about a 13% chance of a rate hike at the next two meetings, and only a 45% chance at the December meeting, and yet expectation of a rate hike this year persist. Tomorrow's CPI could alter this outlook, hotter than expected will surely lead to increased rate hike expectations.

Today the Dollar Index held a fairly flat range, creating a small doji candle, near the mid-point of the two month trading range. It is sitting just below the short and long term moving averages, resistance, but also at potential support, near $95.50-$96.00. Coincidentially, near term support is also the lower boundary of the 6 week trading range. The indicators are a bit mixed, momentum is bearish but support is indicated, so nothing definitive there that I see. If support holds a move higher has a target near the upper end of the range, between $96.50 and $97.50, first target to the downside if support fails is near $95 with a chance of moving lower. In the end it will come down to the FOMC minutes on Wednesday, and possibly CPI data tomorrow. Weak CPI and/or FOMC rate hike outlook could weaken the dollar further and send it back to retest the longer term lows near $93.

The Oil Index

Oil prices moved higher today despite lingering oversupply issues. The Russians and Saudis are one reason, a Russian oil minister telling Saudi press that the two countries were in talks over a way to stabilize oil prices. It could be something to keep an eye on but also likely to result in nothing just like it did earlier this year. Another reason is report of a large drawdown at the Cushing supply depot. WTI gained more than 2.5% to trade above $45.50 and has gained more than 10% in the last 3 sessions. Support for oil is apparent and may drive prices higher but with the past week's gains profit taking is certainly a possibility as well. Most obvious target is $50 but resistance may set in as low as $47.50 if supply issues outweigh optimism.

The energy sector was able to move higher today but remains range bound. Long term outlook for earnings growth, 2017 full year is over 200%, is providing support while nearer term earnings growth is providing resistance. The Oil Index gained about 0.45% in today's session, moving up within its range with the chance of gaining another 2.75% before meeting resistance. Resistance target is near 1,175 and likely to hold provided oil prices do not rise above $50.

The Gold Index

Gold prices held flat as traders eye the FOMC minutes and economic data for cues on rate hikes. The spot price held near $1,345 and near the middle of the 6 week range. This range has been in place since the last FOMC meeting and may hold until the next if the minutes and/or data don't break prices free of it. A dovish Fed and weaker dollar could send gold back to the top of the range, near $1,375. A hawkish Fed could strengthen the dollar and send gold prices down to test support near $1,300.

The gold miners are trading near recently set highs but the up trend is showing some signs of weakness. The miners ETF GDX fell -0.75% in today's session, not much but enough to bring it below a long term resistance level. Additional sign of weakness is in the indicators which are both showing divergence from the rally in the short term and bearish crossovers in the near. These signals may merely be a sign of pause within the rally but with the FOMC minutes and CPI data due out could easily lead to deep correction. First target for support should it continue to fall is near the short term moving average, near $30, with next target near $27.50 should first target fail. If first support is confirmed a move higher may follow, if supported by FOMC/dollar/gold outlook, with upside target near $34.

In The News, Story Stocks and Earnings

With the retail sector on tap this week it is appropriate to take a look at the Retail Sector SPDR, XRT. This ETF is a cross section of the retail sector, many components of which will be reporting earnings this week. The ETF has been bouncing higher from a moving average crossover all month. Today it continued this bounce, gaining near a full percent to set a new intraday 5 month high. The indicators are confirming this move, both making bullish crossovers in recent days, so it looks like it could go higher. If the ETF is able to break to new highs next upside target is near $47.50.

Foodservice supply giant Sysco reported earnings before the bell. The company reported EPS above estimates on revenue that fell slightly short, sending shares up nearly 4% in the pre-opening session. Results were driven by strong year over increases in sales, operating income and profits. Shares of the stock opened at a new all time high but sold off during the day, closing with a small loss on high volume. Even so, shares of Sysco remain near all time highs set since the deal to buy US Foods fell apart.

Home Depot reports tomorrow. The home improvement company is expected to post comparable store sales increases of 4.8% and earnings in excess of the consensus due to regional strength in housing markets in which Home Depot has a concentration of stores. Today the stock gained about a half percent while trading within a recent consolidation band. This band is just below the all time high with support near $135. If earnings push share prices below support next downside target is near $130.

The Indices

The indices moved higher today but were not able to close at the highs of the day. Today's leader, and the only index to not set a new all time high, was the Dow Jones Transportation Average. The Transports gained about 0.65% and created a small bodied candle despite being today's leader. Today's candle not only is small bodied, it has a long upper shadow indicative of resistance and warning of potential pull back to support. Support is near 7,750, just below today's close, along the short term moving average. The indicators are mixed, consistent with the 6 month trading range, and do not suggest strength in recent price action.

The NASDAQ Composite comes in a close second with a gain near 0.56%. The tech heavy index did however make a new all time high today although price action was not very strong. Today's candle is a smallish white bodied candle without much meaning in and of itself. Today's action moved up from the previous all time high, set during the tech bubble, and confirms to some extent support near the 5,225 level. The indicators are bullish but showing a growing divergence with price that indicates a growing weakness in the rally, if not an impending correction. While caution is due, the rally is moving higher with next upside target near 5,400.

The Dow Jones Industrial Average made the third largest gain, about 0.32%. The blue chips created a small bodied candle with visible upper shadow while setting another new all time high. Today's action could lead to additional upside for the index but glaring divergence in the indicators give reason for caution. Upside target should the index continue to drift higher is near 19,000. If the index decides to pull back and test for support first target is near the short term moving average and then just below that near 18,250.

The S&P 500 brings up the rear in today's session, posting a gain of only 0.28%. The broad market is drifting higher along with the other indices and like them, is also showing warning signs of weakness. Divergence in both the MACD and stochastic show underlying weakness in the market that can lead to significant correction in the right conditions. Currently, the market is rising on low volume and extended far beyond the moving averages. First target for support is near the short term moving average, about 1.5% below today's close, longer term target is near the 150 day moving average which is about 5% below today's close.

The market is moving higher and you can't argue about that, 3 of the 4 major indices set all time closing highs today. What you can argue about is whether the market should be moving higher, and I still don't think it should be. The reasons are twofold; economic data has yet to show strength in recovery and earnings growth has yet to return to the market. These two factors are the drivers of market value and are as yet absent from this rally. Until they return any move higher runs the risk of moving to far and over extending itself. The further it runs only increases the chances of correction, and the possible depth of that correction once it occurs. I may be over cautious, but protecting capital is never a bad idea.

There are several possible catalysts this week. Tomorrow CPI data will play into FOMC outlook, and how the FOMC minutes will be interpreted when they are released on Wednesday. Retail earnings will also play a role, they could be better than expected but likely not good enough to significantly impact forward outlook in a positive manner. I remain cautious in the near term, the indices still look ripe for profit taking, but following my own advice and trading with the trend.

Until then, remember the trend!

Thomas Hughes

PS. the new momma and baby Parker Mary Hughes are doing fine.