Introduction

The broad market sold off again as interest rate worry rocks the market, except today there was evidence of buying. The problem is that the indices have fallen below key support levels and triggered massive electronic selling. The tug of war resulted in a volatile day of trading that left the major indices at multi-month lows on the eve of peak earnings season.

This earnings season is expected to be robust but overshadowed by the specter of "peak earnings." Peak earnings is the end of earnings growth acceleration but not earnings growth so not the end of the bull market. When you dig into the data a little, it's easy to see that the so-called peak of earnings growth isn't all it's cracked up to be.

The broad market S&P 500 is going to see the peak of earnings growth this quarter, but that is due to declines in less than half of the S&P 500 sectors. There are still eight sectors, including energy, expecting to see earnings growth accelerate past the third quarter and into the fourth. The industrial and consumer discretionary sectors are expected to see the biggest increases. The industrials will see earnings growth accelerate from 15% in the third to over 20% in the fourth while the discretionaries will see growth increase from 10.8% to 16.8%.

International Markets

Asian indices were hit hard by the sell-off in US markets. The Shang Hai composite was hit hardest with a loss of -5.52% followed by near -4.0% declines for both the Japanese Nikkei and Hong Kong Heng Seng. In Europe, markets were also hit hard by the sell-off in US markets, but the losses were not as large. The close of EU trading coincided with a midday bounce in the US equities markets that had the EU indices up off the low of the day.

Market Statistics

Futures trading was down in the early hours but volatile throughout the morning. The CPI data was better than expected and relieved some interest fear although the feeling did not last long. The open was lower, but the losses were minimal, less than -0.5% and trading pushed them up to break-even with the first half hour or so. After that, selling resumed and pushed the indices down to a late morning low where it bounced once, and then to another low later in the afternoon. Both lows resulted in significant buying and high volume, but both were also met by renewed selling. Late in the day news that President Trump would meet with President Xi Jinping at the G-20 meeting to talk in private helped to lift stock off their lows where they stayed until the close of the session.

Economic Calendar

The Economy

Initial claims for unemployment rose 7,000 from last week unrevised figure to hit 214,000. The four-week moving average of claims rose 2,500 to hit 209,500. On a not adjusted basis claims rose 20.3% versus an expected 16.5%. The increase in not-adjusted claims may be due to Hurricane Florence; I expect to see a much bigger impact from Hurricane Michael. Regardless, not-adjusted claims are down -13.0% from last year and are consistent with ongoing tightening within the labor market.


Continuing claims rose a mere 4,000 in the last week to hit 1.660, add in the revisions and the rise is closer to 10,000. The four-week moving average fell despite the upward revision and set a new long-term low. This low is consistent with tightening labor market conditions.

The total number of Americans receiving unemployment insurance fell -13,471 to 1.421 million. This low is 14.0% below the same time last year and falling below trend. As an indicator, it is evidence of low and declining unemployment, and the high availability of jobs. This figure should bottom out over the next couple of weeks and begin to bounce higher. My target for total claims is now just below 2.25 million, and it should be reached in early January 2019.


The Consumer Price Index was lower than expected and helped relieve some inflation fear. Headline CPI rose a cool 0.1% in September after rising 0.2% the month before and is up 2.3% YOY. The 2.3% YOY figure is the best part having fallen 40 basis points from 2.70% and evidence the FOMC is on track to contain inflation. At the core level, consumer inflation rose 0.2% MOM and 2.2% YOY.


The Dollar Index

The Dollar Index fell on today's inflation data and may be headed lower. The data shows inflation continues to decelerate and that may weaken the dollar further. The index fell more than -0.4% and closed below the short-term moving average and confirms the $95 is level important in the minds of traders. The indicators are rolling over and showing a weak sell signal consistent with the sideways meandering the DXY has been doing. If it moves lower support is likely at $94, it can move above $95.50 again resistance is likely at $96.00 and $97.00.


The Gold Index

Gold prices spiked today on safe-haven demand. The spot price shot up more than $25 or 2.2% to break above resistance and out of its narrowing range. The candle is long and green and indicates a reversal in prices that may lead to a rally but probably mean gold has entered a new, larger, trading range. The indicators are bullish and on the rise, so a move up in gold prices to $1,240 is possible.


The Gold Miners ETF GDX had a good day today as well. The ETF shot up more than 7.0% to break above resistance, close a price gap that formed in August, and break the neckline of a head & shoulders reversal pattern. The neckline and resistance are near $19.50 and the mid-point of today's candle. The indicators have begun to roll into bullish signals but not are strong, so I would wait on the market to follow-through on the move before getting too bullish.


The Oil Index

Oil prices fell -2.5% on a larger than expected build in US stockpiles. The build shows rising levels of crude and gasoline that are offsetting fear of Iranian sanctions. The price of black gold is now below the short-term moving average and indicated lower, so a move to $70 and $68 is possible.


The Oil Index fell another -3.0% to hit and bounce from the long-term moving average. This moving average, the 150-day EMA, has been strong support several times over the past year and should produce another strong bounce now. The price of the index may fall below the EMA before this correction is through but with earnings growth near 100% this quarter and next, and oil prices still trending above $65, I see no reason to doubt the long-term value of the sector.


In The News, Story Stocks and Earnings

The yield on the ten-year treasury rose fell today shedding nine basis points to approach previous resistance that is likely to produce support now. A test and confirmation of support at the 3.13 level would be bullish. While the CPI does appear to show consumer-level inflation is contained inflation is still on the rise. This is going to lead to more rate hikes from the FOMC, and that is going to lead the TNX higher over the long-term.


The XLF fell -2.5% to test support at a long-term low. The low is consistent with the low-end of a long-term trading range and may keep prices from falling much further. Earnings reports from Wells Fargo, Citigroup, and Wells Fargo are expected Friday morning and will no doubt have an effect on the sector and the broad market. The expectations are high; earnings growth should be in the range of 34% with a positive outlook. Because traders are so fearful now, I see a chance for a relief rally even if the reports aren't quite as good as expected.


The VIX advanced more than 20% with today's sell-off, the good news is that it is beginning to show signs of resistance. The candle has a long upper shadow indicative of sellers. This does not mean fear cannot spike again, but it does mean we are nearing the end of the broad market sell-off. If it moves above $30, the broad market may be in trouble.


The Indices

The Dow Jones Industrial Average posted the largest loss in today's session with a decline near -2.10%. The blue-chip index created a long red candle that extended Wednesday's decline to near another important uptrend line. The candle has a visible lower shadow that is evidence of support and leads me to think the bottom could be close. The indicators are bearish and pointing lower, so a test of the trend-line is likely.


The S&P 500 posted the second largest decline with a loss near -2.05%. The broad market index created a large red candle that confirms resistance at the long-term moving average. The signal is bearish but may be due to technical trading and not true fundamentals as forward outlook remains positive, if cloudy. A move lower is indicated although the candle is also showing early signs of support with the lower shadow. If it does move lower my next target for support is near 2,700.


The Dow Jones Transportation Average posted the third largest decline with its loss of -1.42%. The transport index created a long red candle, but not as long as the previous candle, extending declines to near a long-term uptrend line. The candle is showing signs of support with a visible lower shadow, so a deep decline below the next support target is not expected. If prices continue to move lower during the Friday session support may be at my trend line near 10,300, a move below that could be bearish.


The NASDAQ Composite posted the smallest decline with a loss of -1.25%. The tech heavy index created a medium sized red candle with visible shadows on both ends. The candle is indicative of indecision in the market but indecision that favors the bears. Support may be at the bottom of today's candle but a move lower is indicated, and a stronger target exists near $72 so another fall in prices may be on the way.


The indices are correcting, but this isn't the start of a major bear market. The selling is driven by rotation from growth stocks to less volatile names and may not be over. The caveat is that peak earnings begin tomorrow with the release of earnings from three of the worlds biggest banks and that news may change everything. I remain firmly bullish for the long-term because of economic growth and earnings outlook, but I am neutral/leaning toward bullish for the near-term, waiting to see what the earnings cycle will bring.

Until then, remember the trend!

Thomas Hughes