Introduction

Today was a day filled with business news, macro economic data and earnings. The shroud of uncertainty caused by the Fiscal Cliff has lifted and the underpinnings of the current market environment is much easier to see, if not to understand. The macro economic data released yesterday, overnight and into today gave us some hope but tempered it with a little fear. Employment in the US is still improving, if somewhat slowly, and the Housing Market is still recovering. Abroad, Mario Draghi and the ECB still expects to see a pickup in Eurozone GDP later in the year and Chinese data suggests that country is recovering faster than previously estimated. The effects of the recent tax changes, which have surprised many Americans are something else. The change has affected many paychecks in America and the repercussions are yet to be seen.


The prices for energy products rose today, driven by wide variety of short and long term factors. The metals ,especially gold, were volatile today while traders made sense of today's events. Earnings season so far has been kind of blah, the big round of upside surprises I thought could be on the way is yet to unfold. It is still early in the season so there is still a chance it could happen. This week, earnings have been dominated by the banks and they have helped to drive the markets higher.

Looking past the headlines I think what I see is a much clearer view of a world economy that is really OK; the world isn't going full-steam-ahead but it is going and looks like it will keep on going. There are still pitfalls and hurdles to overcome but the global economy is still growing. The next hurdle for the US is the Debt Ceiling. The deficit and the Debt Ceiling is yet to be resolved and that could bring some volatility to trading. Personally, I don't think the Debt Ceiling itself is the problem; it's just a number. The problem is the deficit and what they do about that is what will have a big impact on the economy. Raising taxes will be a burden for businesses and individuals, cutting spending will be another...

The Data

Today's economic reports were a net positive. Employment conditions are still improving and the housing market is also still improving. There are a couple of negatives in today's reports but I will get into those a little later. For the good news, initial claims for unemployment fell to a 5 year low of 335,000. This is down 37,000 from last weeks revised figure. The four week moving average is also lower this week, dropping 6,750.


The states with the largest drops in claims cited declines in post holiday lay-offs as well as decreased lay offs in construction, manufacturing, retail and entertainment. On a regional basis the biggest gains in initial claims was in the south, with my own dear NC #3 on the list with a jump of more than 13,000. Looking at the table of the last 12 months or so it is a low number but it is not very extreme. Next week it could get revised higher which should not be unexpected. The trend is still down but it is not coming down very fast.

Continuing claims jumped this week from mild upward revision to last weeks figures. Continuing claims were reported at 3.214 million, basically in line with the last few weeks and the downtrend in continuing claims over the past year or so. The real surprise today was the spike in total unemployment. This number jumped to a 6 month high and poses a real threat to the recent declines in total unemployment. The states with the highest rates of insured unemployed are Alaska, Alabama, Pennsylvania, New Jersey, Wisconsin and Michigan. Overall, the unemployment situation seems fairly stable. I am eagerly awaiting the next round of Challenger, ADP and Jobless data to see what they say.



Housing data was another lift to market spirits today. However, as a note of caution these figures are highly volatile. As an example of what I mean consider this: How accurate is data reported as gaining +13.2% with a margin of error +/-13.4%. This is the actual estimation of housing completions for the month of December that was released today. Housing starts was reported as gaining 12% in December with a much smaller 1.5% margin of error. The total number of starts for the month was 957,000, up more than 36% from last year. Within this number the amount of single family homes started in December rose by +8%. Permits also rose in December but by a mere 0.3%. This number is also up significantly from last year, 28.8%. Based on this it looks a lot like the market is coming back, not in leaps and bounds but on a steady and long term basis. However, the increase in tax burden for “average” Americans may impact their ability to get mortgages this year and put the brakes on this stage of recovery.

The Philly Fed Survey was the real shocker in the data today but it was shrugged off the way Luke Skywalker shrugs off Darth Vader, “I know there is good in you, I can feel it”. Last months reading of 4.6% was expected to be improved upon with a reading of 5.2% this month. The figure came in at a surprising -5.8%. The release came at 10 AM, gave the markets pause and then they extended to new 5 year highs on the S&P and all time highs on the Russel 2K and the Transports.

The World At Large

European shares ended the day largely in the green. Gains of between .5 and 1% were the norm. One driver today was a reported increase in sales by the regions largest retailer, Carrefour. On the macro economic level the IMF released Greece's next round of bail-out money without any fanfare or hiccup. In a statement from the IMF the bail-out is said to be progressing in “the right direction”. So long as no further obstacles present themselves and the long term plans remain intact it is much easier to see an end to the Eurozone recession. There are still some areas of potential weakness and it will take time but it is on the way.

The Euro strengthened versus the dollar in today's trading. The currency pair has been bullish of late and recently broke out above 1.325 to make new ten month highs. Momentum is weakening in the move but technicals are still bullish. The trade is also approaching a long term resistance and my upper price target of 1.3500 where I expect to see another consolidation or other bearish activity. Longer term, the results of the Debt Ceiling debate could help to further weaken the dollar against the Euro.

Euro/USD, daily

In Asia stocks ended mostly lower today with the Nikkei one exception. The index is bouncing a little after its recent USD/JPY driven correction and could continue higher. The slide in Yen value, orchestrated by Prime Minister Shinzo Abe, has helped to drive up the value of Yen based stocks and also helped them to correct this week while the Yen itself corrected. The sharp rise to near 90 yen per dollar was met with profit taking this week and OpEx could continue to add volatility tomorrow. The yen made a big bounce up today, crossing over the 89 level and approaching 90. My target for the USD/Yen trade is +90 right now. Ninety is the target set by Abe and one that I think momentum traders could blow right past, at least in the shorter term. This one will be interesting to watch over the next week or so to see what kind of pattern develops. This trade is due for some consolidation and it could transition from one wave of traders to another.

USD/JPY, daily

The Chinese Beige Book was released yesterday. The report, which is similar to our own Beige Book, shows that the Chinese economy could be growing at a rate faster than previously thought. The new estimations are for growth of 8% in the fourth quarter. However, the backward looking report cited slowdowns in several sectors and gave evidence of slow/sluggish expansion. The data shows that most of the loan growth is in rollovers and increases, not in new loans, which does not support a strong growth environment. The silver lining is that we aren't expecting strong growth in China, just some growth and some expansion and that is what we have.

The Oil Index

Oil traded up today and crossed over the $95 resistance level. The economic data, supply draw downs and a new attack by Algerian militants all helped with the move. The positive data helps to improve demand estimates while lower supply means less supply. That part is easy to understand; Algerian militants taking hostages and threatening supply is less so. Especially ones killing innocent, international, civilians.

Natural gas also traded to the upside, driven in part by supply and also in part by expected cold weather over the next week or so. Cold temperatures have been impacting the South and Mid West all week and are now on their way into the South and North East.

The Oil Index, which has been trading in a range over the last few months, broke out last week and has made a new five month high today. The index gained the 1300 level with weak but bullish momentum and is currently overbought. Positive economic conditions and an expectation for a return to expansion later in the year could keep this trade up but there is also a big chance for profit taking at this level. My upside targets are at 1325, 1350 and longer term 1400. To the downside there is risk going forward that could bring the index back to 1275 or 1250.

The Oil Index

The Gold Index

Gold traded with some volatility today. The metal was up in early trading, above $1685, but then dropped sharply to near $1665 mid session. The drop was met with the enthusiasm as buyers stepped in, driving the price back up and to new highs around $1690. This is a new two week high and new high for 2013 but still under the long term potential resistance of $1700. The Gold Index traded in a fairly tight range in response, touching the long term support line on the downside. This index has been in a congestion range for over a month now, bouncing off this trend line, and could be getting ready for a movement. Long term technicals are weak and shorter term are not showing much sign of strength and a possible breakdown. I am looking for a break either above the short term moving average or below the up trend line, which are squeezing the index.

The Gold Index, daily

Story Stocks And Earnings

There were some story stocks today, mostly Boeing and Apple, but I did not find much interest in them. High on the list though was earnings and specifically the banks. The onslaught of bank earnings continued today with big releases from Bank Of America, Citi, BBT, FifthThird and a handful of others. Bank Of America and Citi both tanked in pre market trading after the releases of their respective reports. Both banks failed to meet expectations and were both heavily impacted by one time charges, legal fees and judgments related to the mortgage crisis. The reports were hard to dig through with revenue and earnings reported in several places ex-this and one-time-that. BAC and C both say that credit margins continue to be a problem for earnings but that they are improving. BAC says their “capital flow and liquidity is strong”. Neither bank gave much in the way of guidance and relied heavily on adjustments in their reporting. On a regional bank basis FifthThird was able to beat its estimates with improvements in underlying business and gains on sale of assets. Investors were pleased with this report at least and sent shares of FITB up by 4.5% to reach a new five year high.

FifthThird Bancorp

BB&T was also able to please investors with its report. BB&T grew profits by 20% in the fourth quarter and posted record earnings,up 27% from the previous year. This is a continuation of a trend in bank earnings I have seen over the past year or two. The big banks still have a lot of headwinds, they are still engaging in accounting hokey pokey and cannot post real growth or earnings. The regionals on the other hand, who had less exposure to international markets and who were better positioned financially going into the financial crisis, are now able to post real improvements and are positioned to take market share from the bigger banks. Shares of BBT were also in favor today and gained 2.3%. The stock has significant technical resistance moving forward due to the open window. The technical indicators are showing an extended market and suggest the stock may have reached the top of a range. This resistance needs to be overcome if the stock is to move upward. The $31 level will prove to be an interesting inflection point for this stock and one to watch for signals.

BB&T, daily

The last two weeks have been a wild one as far as expectation and reality for bank earnings are concerned. If headlines were to be believed the banks are earning far less than actually are. Yes, the big ones are dragging a lot of weight right now but they are still improving and one time items are one time items. Earnings per share are going to be iffy for some of them until all the “one time” items get taken care of but they will be taken care of eventually. The real strength in the sector is coming from the regional banks. These banks are gaining market share, improving performance and making money.

The banking index appears to be building support at the $52.50 level. Momentum is in decline but that is OK, especially since the index is holding above this support at/near 12 month highs. The index is overbought but not extremely so, this sideways action can relieve some of that. This index may tread water for another week or two while the rest of earnings season unfolds. I am neutral/bullish on this one with a target of $55.

Banking Index, daily

The VIX

The VIX is doing weird things. It is at what I will call a ridiculously low level. In fact, it is so low that I have started to look at the possibility of it dropping down to 2007 levels, levels it hit just before the beginning of the end of the housing boom and the start of the US financial crisis. But what does this mean today? Back then the markets were extended and wildly riding a housing boom set to burst. Now the markets are also extended but riding on the back of no boom. In fact, the economy is really just sputtering along. What is also significant about the here and now is that we are approaching the all time highs for the S&P 500 and the top of the range of the Secular Bear Market. This convergence of extremes could be signaling an impending market reversal. When the VIX reaches it's lower extreme and the SPX reaches the extreme of its secular range a reversal of both could occur.

VIX, daily

The S&P 500

The earnings headlines did not stop the futures from moving ahead. The macro economic data and what was inside those reports helped the SPX to open roughly 4 points higher and then later move on to new 5 year highs. Today was the second long white candle since the first of the year and the second time the candle appeared 1) late in the week and 2) broke significant resistance lines connecting previous five year highs to the head&shoulders reversal of 2008. There really isn't any more near term resistance until the index gets up to 1500/1525. As it stands now the index could drift up another 10 to 20 points just waiting to see what else happens during earnings season. Some of the move could be due to options expiration which occurs tomorrow and Saturday.

SPX, daily

The daily charts show a weakening up trend but an up trend it is. The market is heavily overbought at the current levels but this condition could continue indefinitely depending on market strength. Momentum has been diverging from price here as well but today's candle helped it tic back up. Now we'll have to wait and see where it peaks before making any decisions based on that indicator. Long term the index is in an uptrend, indicators are bullish and are also indicating a buy. Long term the index is also extended and diverging from those same indicators in a way that tells me the uptrend is weakening.

SPX, weekly

On the charts of 30 minute closings the index is also overbought. Momentum here is bullish but not overly strong. The index moved above resistance with a strong white candle, echoing the same candle which appeared on the daily charts. Continuation signals throughout the day point to higher markets.

SPX, 30 minute

The bull may run head first into opex tomorrow but the trend is still up. A retest of all time highs for the S&P 500 is looking more and more likely, thought the index still has quite a bit to go. Today's long white candle is a good sign for the bulls and could light the way for others to follow. A consolidation over the next few days or week would be welcome. Tomorrow's trading could be very volatile after a move like this today. Long and short term traders will be in the money and looking to sell their positions. There are also some earnings report's tomorrow that could give deep insights into 2013. GE, Schlumberger and Progressive top the list.

Until then, remember the trend!

Thomas Hughes