The market correction deepens as profit taking takes control of the market. That's what it has to be, profit taking because economic and earnings outlook remains robust. Today's data shows further expansion in earnings and economics that do little to inspire fear. What I expect to see for the near term is sector rotation as profits are reinvested and new money comes to play, longer term the secular bull market is likely to resume the uptrend. Articles published over the weekend in the Financial Times and Wall Street Journal report equity fund inflows on the rise and hitting all-time highs as forward outlook brightens and investor sentiment improves. With these conditions in play, market reversal doesn't make sense.

Asian markets saw deep declines on their first trading day of the week. The Nikkei led with a drop of -2.5% followed by -1% drops for most others. The move was driven on Friday's Wall Street decline but losses were not universal. The mainland Chinese Shanghai index rose nearly a full percent by the end of the day on optimism for growth. Elsewhere in the region Australia and New Zealand are both preparing for central bank policy statements that are not expected to produce much change.

European markets also fell although the losses were muted relative to Asia and the US. Likely due to their closing time and more specifically because that time coincides with the timing of the US markets test of resistance which occurred mid-morning. The CAC led with a loss near -1.50% with most others close behind.

Market Statistics

Today's trading is brought to us by the letters V, C and the number 5. The V is for volatility, today's action saw the broad market index make several high volume swings of 0.75% (or more). These moves took it down as much as -5% at the low of the day and left it down more than -3.0% at the close and -8% from the recent all-time highs.

The C is for correction as in the market is in the first real correction it has seen in 2 years. This move is not a trend breaker but could result in a period of consolidation and volatility for the market. The 5 is for 5% because that is how deep today's move took the broad market and blue-chip indices.

Economic Calendar

The Economy

Today's single economic release is the ISM Non-Manufacturing Index. The headline index came in at 59.9% and well ahead of expectations. Within the report Activity, New Orders and Employment all saw strong gains in January with growth better than 5 points from the previous month. Activity came in at 59.8, New Orders at 62.7 and Employment at 61.6; all indicative of accelerating growth. Backlogs and delivery times also rose in an indication of growing demand that will help sustain the economy in the coming months.

Moody's Survey of Business Confidence came in at 35 and unchanged from the previous month. The index is trending near long-term highs and well above recent lows, consistent with positive and stable business sentiment. Mr. Zandi says that global businesses are upbeat but there is particular strength in the US which he characterizes as "cheery". The forward outlook remains strong with most businesses saying conditions will be better in 6 months than they are now.

Earnings season is officially half over with reports in from 50% of the broad market S&P 500. Of that, 75 % have beaten EPS estimates and 80% have beaten revenue estimates, both above average. If the percent of companies beating revenue estimates remains unchanged it will be a high dating back more than a decade. The blended rate of growth is 13.4%, down a bit from last week but still quite strong and above any expectation. All 11 sectors are producing earnings growth, 10 of them are beating estimates with the 11th likely to fall in line by the end of the season.

Forward earnings expectations remain robust although a small kink has emerged. Now that tax reform is getting factored into growth estimates are rising but created a situation in which that growth is tilted toward the first three quarters of the year. Estimates for the 1st, 2nd and 3rd quarter have revised up to 16.9%, 18.3%, and 19.8% while the 4th quarter was revised down to 14.2%. It is important to note that these estimates are still heavily skewed by the energy sector which is expected to see earnings growth slow from triple digits to only high double digits this year.

The Dollar Index

The Dollar Index firmed in today's session, gaining about 0.33%, but remains within a narrow near-term range. The near-term range is at a support target that, if broken, could lead to significantly more downside. If however, it is confirmed as support, as it looks like it is, it could easily move back up. Based on this last round of central bank meeting I think the latter scenario is more likely. Nothing has happened to firmly alter current outlook but there has been enough to shift the balance of power into the dollar's favor. The ECB and BOJ were both less hawkish in their tone than what the market was looking for while the FOMC was a bit more. Resistance may be found at $89, a break above there may go to $90.20 and the short term moving average. Short to long-term range-bound trading is likely to persist.

The Gold Index

Gold prices remain under pressure as the dollar firms and the outlook for growth remains stable. The metal has seen some support due to dollar weakness and geopolitics but the conditions that led to that move are evaporating. The dollar looks poised to move up within a long-term trading range while geopolitical hurdles have not led to major fallout. Today's action left spot prices trading flat and below the $1,340/$1,350 resistance zone but also above support at the short-term moving average. The metal appears to be in reversal within its trading range and if so could go as low as $1,280 or $1,260. The indicators are consistent with a fall from resistance and test of support and both are gaining strength. The short-term EMA is the target for support at this time, a break below that would be bearish.

The Gold Miners ETF GDX continues to move lower within its long-term trading range. The ETF created a long red candle shedding more than -1.0% and closing just above support at the midpoint of the range. The indicators are both consistent with a possible move lower although I would expect support to be strong at $22.60. A break below $22.60 would be bearish within the rage with targets near $21 and then $22.00.

The Oil Index

Oil prices fell more than -2.0% as profit taking is spurred on by rising rigs and output. The latest data shows US output rising above 10 million barrels and to levels that offset to a large degree the impact of OPEC's production cut. Add to this the latest rig count data and there is little reason to think supply or capacity is dwindling and that is eroding near-term support. The number of US rigs fell by -1 but that was more than made up for by 4 new rigs in Canada and another 24 elsewhere in the world. Today's action left WTI trading near $64 with a chance of moving lower.

The Oil Index fell more than -3% on oil's decline in price as forward earnings growth and sustainability come into question. The index moved down to my support target at 1,300 where it bounced. The indicators remain bearish so further testing of support is likely in the near term. Longer term, oil prices remain high relative to the past 2 years and at levels fueling earnings growth. If growth outlook remains stable the index should recover from this correction and move back up to test the recent highs. The risk is the oil price outlook, oil prices are expected to fall back to $52mlater this year. When that happens the index is likely to fall with it.

In The News, Story Stocks and Earnings

Wells Fargo made headlines they didn't want. The bank has come under fire from a Federal Reserve which has just today sworn in its new chairperson. The Fed has chosen to curtail Wells' growth outlook and remove four of the current board members. The move comes in the wake of the Fed calls "widespread consumer abuses and compliance breakdowns" and was taken well by the market. The bank, Wells Fargo, once a darling of the market and now fallen from grace, fell more than -8% on the news.

Lululemon announced in the after-hours session that its CEO was stepping down. The move is due to his failure to meet their standards of conduct AKA he used his position for sexual exploit. In the statement, the company's board said it is already looking for a replacement and reiterated current guidance. Shareholders were not reassured, shares fell more than -2.5% on the news.

The VIX made the single largest one day move I think I've ever seen. It moved more than 33%, breaking past all resistance targets and deep into what I would call correctional levels. Price action closed at the high of the day creating a marubozu candle with a shaven top. The move is consistent with a possible reversal but I really have to question the commitment behind it. Based on past price action in this index, and in light of current market outlook, I would say this is a decent time to fade the market. If it doesn't retreat to lower levels we may have a bigger correction brewing.

The Indices

Today was a down day no doubt about it but it wasn't all selling. There were some signs of buying on the way down and a bottom was hit. How strong the bottom is and how long it lasts are yet to be seen. The Dow Jones Industrial Average led in terms of losses. The blue-chip index shed more than 1,500 points at the low, the biggest one day point drop in history, but bounced back to regain some of that loss by the close. Regardless, today's decline surpassed -5% in total depth and closed with a loss near -4.5%. The candle is long and red, come with strong and growing momentum and plenty of room to move lower. Downside target is the long-term moving average and uptrend line which are both near 23,500.

The S&P 500 comes in second with a decline near -4.10%. The broad market index created a large, strong red candle moving down from the short term EMA in confirmation of Friday's crossover. This move is indicative of change within the short term trend with the possibility of moving lower. The indicators are both consistent with lower prices but neither has signaled a reversal. Downside target is the long-term moving average near 2,600.

The NASDAQ Composite posted the 3rd largest decline, just over -3.75% at the close, and created a long strong red candle. Today's move confirms resistance at the short-term moving average and a change in trend that could take it lower in the near to short term. The indicators are both bearish and gaining strength, consistent with today's decline and lower prices to come. A move lower may find support at the long-term uptrend line or the long-term 150 day EMA both of which are near the 6,800 level.

The Dow Jones Transportation Average comes in last with a decline of -3.15%. The transports created a long, strong red candle with shaven bottom indicative of decisive movement. The indicators are bearish and moving lower, consistent with lower prices, although stochastic is reaching oversold condition. A move lower may find support at the long-term moving average near 10,100 or just below along the long-term uptrend line.

The long awaited and hard to predict correction has arrived. It's been two years since the last and is overdue, to say the least. Now that it is here it is time to watch the charts and wait for bottoming and consolidation... when that happens the charts will give us the signals, and that will be the time to act. In the near term expect volatility to persist, the market to reverse on a dime and headlines to instill to fear. So long as forward earnings and economic outlook remain bullish so will I. I am neutral for the near term, bullish for the short and long.

Futures trading hit new lows in the after-hours session, there could be some big declines in the morning.

Until then, remember the trend!

Thomas Hughes