Introduction

The broad market fell sharply as fear of rising inflation, FOMC interest rates and earnings angst permeate the market. If the chart of the US ten yield treasury yield is any indication it looks like the sell-off in equities will continue because it looks like rates are going to continue rising. The caveat is that rates are rising because the economy is in good shape and that is not a great reason to sell stocks. Earnings growth is still on tap and earnings growth is still in the forecast, so I expect to see this sell-off turn into a buying opportunity as the earnings cycle unfolds.

Asian markets were mostly flat with indices posting gains in the range of 0.15%. Indices in the region were supported by Japanese core machinery orders which beat expectation and raised hopes investment spending was on the rise. The Nikkei advanced 0.16% on the news but was led by the Shang Hai Index's 0.18%. European markets moved lower, the DAX and CAC shedding more than -2.0%, as selling in the US intensified. The FTSE lagged with a loss close to -1.30%.

Market Statistics

Futures trading was negative most of the morning although there was some volatility in the early hours. The S&P 500 and Dow Jones Industrial Average were indicated to open with losses of -0.30% going into the opening bell which put the broad market index below the 2,875 support target. Selling intensified throughout the morning and had the indices down nearly -2.0% by 2:30 PM. Late afternoon saw sellers renew their efforts and push the broad market down more than -3.25% and others, like the NASDAQ and Transportation Average, down more than -4.0%.

Economic Calendar

The Economy

Today's economic data was good with one caveat; it supports the idea of improving US economics and rising interest rates which ultimately helped push the indices lower. The Producer Price Index rose 0.2%, as expected, in a rebound from last month's -0.1% decline, and 2.6% over the same time last year. The news renewed upward pressure in inflation at the producer level but not, I think, so much as to force the FOMC's into aggressively rate hikes. While strong the 2.6% YOY read is down for the second month and evidence rising rates are helping to contain inflation. Most of the increase in headline PPI was due to a 0.3% rise in price for services, offset by a -0.1% decline in prices for goods. At the core level, ex-food and energy, PPI rose 2.9% YOY.


The final read on August Wholesale Inventories was revised up by 0.4% to 1.0%. This is the largest increase in wholesale level inventories since 2013 and will help boost 3rd quarter GDP expectations. The Atlanta Fed's GDPNow tool ticked higher with the data and showed 3rd quarter GDP growth tracking near 4.2%.


The Dollar Index

The Dollar Index fell in today's session, shedding about -0.20% at the close, to test support at the $95.50 level. Today's candle is small and red with visible shadows showing some indecision toward today's prices. The indicators are mixed but consistent with consolidation following last week's move above resistance so long as prices do not fall below support. A move below support may not be bearish but would likely result in a test of the short-term moving average, a move below that would be bearish. A bounce from support at this level would be bullish and trend-following and may result in a move up to the $97 level. Thursday's CPI data could be the trigger for such a move; if consumer-level inflation comes in hotter than expected, it will reinvigorate FOMC interest rate outlook.


The Gold Index

Gold prices edged up about 0.20% on today's dollar weakness. The move is bullish but does not look strong. The metal is moving up from support targets, but the indicators remain bearish so further downside, at least a retest of the $1,180 level, looks likely. If gold prices continue to move higher resistance is at and near the $1,205 level and the short-term moving average.


The Gold Miners ETF GDX rose in today's session, adding more than 1.10%, but failed to move above resistance. The ETF continues to wind up around the $18.75 level and looks like it will persist in this action in the near-term. The indicators are mixed and weak, consistent with range-bound trading, but with a bearish bias. Both indicators are consistent with resistance levels and rolling into a bearish trend-following signal that could take the ETF down to retest support near $17.50. A move up would have to surpass resistance at the short-term moving average before moving up to retest the recent highs near $19.25.


The Oil Index

Oil prices fell nearly -3.0% on worries of slowing global growth, demand fear, and uncertainty over the true impact of Iran sanctions. The price of WTI shed almost $2.00 to create a long red candle with shaven bottom indicative of strong, steady selling right into the close of the session. The candle breaks support at the $74 and set a new two week low but may not go too far. Support targets exist just below today's close, and there is the data to consider. US crude oil data will be released tomorrow because of Monday's bank holiday. If WTI falls below the short term moving average, near $72, a return to $68 is possible.


The Oil Index fell sharply and confirmed resistance at the 1,600 level. The candle is long and red, engulfs two week's worth of candles, broke below the short-term moving average and is indicated lower. While bearish, the move is sparked by fear and profit taking and is not consistent with the fundamental outlook. Yes, global growth was downgraded by 0.2% for 2019 but the 3.7% expected is still quite strong, and earnings outlook is still robust. The energy sector is expected to post 27% earnings growth next year and today's fall in prices does little to hurt that outlook. The XOI may fall to the long-term moving average, and if it does, I will expect to see it bounce as it has several times this year already. A move up in tomorrow's session without a move up in the underlying commodity would be trend-following but could be a dead-cat bounce.


In The News, Story Stocks and Earnings

The yield on the ten year US treasury jumped another 1.0% in today's session to tickle its seven-year high. So far, resistance is holding at this level, but the price action looks bullish. The yield is holding near the high and forming a tight consolidation range that could easily result in a move up. A move up would confirm a bullish flag pattern and likely lead yield up to 3.500 in the near-term. Tomorrow's CPI could be the trigger if it comes in hot.


The financial sector is expected to begin reporting earnings later this week with releases from JP Morgan, Wells Fargo, and Citigroup. The sector is expected to produce robust earnings growth this quarter, next quarter and next year but that was not enough to keep it from moving lower in today's session. The Financial Sector SPDR XLF shed about -3.0% in a move that confirmed resistance at the short-term moving average and broke below support at the long-term moving average. The move is bearish and could take the ETF down to the bottom of the long-term trading range near $26.50, but the indicators don't agree. The indicators are a mixed, consistent with range-bound trading, but also showing signs of support within the market that may result in a snap-back in prices later this week.


The VIX jumped more than 43% in Wednesday trading and has set a new six month high. The fear index is on the rise after confirming support at the $15 level and indicated higher. The indicators are both pointing up and trending higher, consistent with rising prices, and suggest a move to $25 is likely.


The Indices

The indices fell, and fell, and fell in today's action and produced their biggest one-day losses in many moons. The biggest loss was posted by the NASDAQ Composite which fell nearly -4.10%. The tech-heavy index created an extremely long-red candle moving down to break below the long-term uptrend line and moving average. The move is supported by the indicators which are bearish and moving lower. My target for support is near the 10,400 level and lows set earlier this year, and coincidentally, another major uptrend line.


The Dow Jones Transportation Average posted the second largest decline at -4.0%. The transports created an extremely long red candle moving down to break below the long-term EMA and uptrend line. The index is indicated lower and may move down to the 10,400 level and support targets near the February lows and another key uptrend line.


The S&P 500 posted the third largest decline with a loss of -3.25%. The broad market index created a long red candle moving below the long-term moving average, and it is indicated lower. The move confirms resistance at the February all-time high and may take the index down to retest the March lows. However, there are targets near 2,700 which coincide with a pivot set in May and a key long-term uptrend line that are likely to halt prices if only for a time.


The Dow Jones Industrial Average posted the smallest decline with a loss of only -3.14%. The blue-chip index created a long red candle moving down to break a long-term uptrend line, but it is still well above its long-term moving average. The indicators are bearish so further price decline can be expected. My targets for possible support are near 25,500, 25,250 and 25,000 in the near-term and I would not be surprised to see all three of them hit. Longer-term the index remains in an uptrend.


There are lots of reason why the indices sold off today but only one that matters; earnings growth has reached its peak. Although earnings growth is going to be stellar this quarter and expected in double digits for the next five, that growth is slowing, and that means the big growth stocks that have dominated the market are falling out of favor. The selling may continue, but I don't think the indices will fall much further. Growth is still in the forecast, and it will lead to a buying opportunity for stocks if it isn't already here. This time when the signal to buy comes, look for the beaten down names, underappreciated sectors and steady dividend payers to shine. I remain firmly bullish for the long term but have turned cautious for the near-term, watching to see how the secular rotation out of growth names unfolds.

Until then, remember the trend!

Thomas Hughes