Introduction

I have to admit that after reading Apple's results, and seeing the state of Apple's share value when I got up this morning, I was a little worried about my bullish outlook on the markets. Apple's sharp drop to a 12 month low was nothing short of shocking. The stock has been in bear market territory for a two month now and last weeks early calls for a bottom had me thinking that just might be the case, but more on Apple later. The futures trading was not as I would have expected, with the mega drop in Apples shares. The tech sector and Nasdaq indexes did post some big losses but the broader S&P 500 and the Blue Chip Dow were basically flat and positive respectively.


Economic data in the form of flash PMI from Europe and Asia helped to relieve fears of further global weakness. Shares in both regions regained early losses and closed in the green. Adding to the hopes that the world recovery is still on track, and possibly gaining a wee bit of momentum was our own economic releases. Drops in unemployment claims have reached a new 5 year low and may be indicating a shift in the employment scene. Oil and energy prices trended higher today on the back of the positive data.

Earnings season continued to wear on today as well with close to 200 corporations reporting. The calendar was dominated once again by the financial sector with dozens of small regional operators providing results. Despite the bias toward the financials the day was dominated by well known big name stocks like Apple, Microsoft, Starbucks and Netflix. The reports are tending to be taken in a positive light and helped the the major indexes push on to new highs with the Nasdaq the one exception

The US Data

Today we got a new reading on Leading Indicators. I always think this is a funny indicator because it is last months reading. As an actual leading indicator I don't put much faith in it; as a look at the current month it is OK. In any case, the December reading of the Leading Indicators Index posted a gain of 0.5%. This is nearly a 3/4 point increase from the November reading of -0.2 and an indication that the start of 2013 saw an increase in GDP. However, looking back over the last half year there are as many contractions in the LDI as there are expansions though it does seem as if the bias is to the upside.


On the unemployment front initial claims for unemployment fell to a new 5 year low for the second week in a row. Initial claims fell from 5,000 from last weeks unrevised number and 35,000 from last years period to 330,000. The expectations were for a jump to 360,000. These numbers are still reflecting the heavy adjustments due to the holiday season and should be taken with a note of caution. The four week moving average also fell this week. The average dropped 8,250 to 351,750 and set a near five year low of its own. The last two weeks of declines may be indicating a shift in the unemployment scene or it may simply be seasonal volatility. Any lingering impact that could be associated with Hurricane Sandy and post holiday lay offs may be wearing off. It is also possible that hiring plans paused in the pre-Fiscal Cliff period may have been turned back on. The biggest drops in initial claims were in New York, Georgia, North Carolina and Alabama. If you recall from last week, these were among the states listed as having the biggest gains in claims. The biggest gains this week were in Texas, California and Florida. These states cited losses in service, retail, construction and maintenance jobs.


The downward trend in initial claims is transcribing itself into the continuing and total claims. Continuing claims dropped by 71,000 to 3.16 million from a revised 3.228 million. This is very nearly the second lowest number of continuing claims in several years and only about 30,000 above the low set two weeks ago. This table is showing an ongoing down trend in claims as well, even discounting the volatility present over the last four weeks. This should be seen in the current month's unemployment figures released next Friday.


Total claims fell by 214,000 to 5.66 but remains well above this years low and the above the elevated levels we saw in December. This is the only metric in unemployment that looks as if the trend has reversed. We need to keep in mind though that this number lags the initial claims by two weeks, making it three weeks old today. This could just be a spike related to Hurricane Sandy, Fiscal Cliff issues and the Holiday season. If so, it should continue to tick down in the coming weeks. Total claims may have increased importance next week because of this and the fact that we will also get Challenger, ADP, Non-Farm Payrolls, Unemployment and 4th Quarter GDP figures.


Around The World

The IMF has released a new estimate for 2013 world GDP. The estimate is down 0.1% from the previous 3.5% to 3.4%. They also estimated a 4.1% world GDP for 2014 based on expected improvement in Europe. This is marked improvement from 2012's 3.2% but hinges on continuing improvements in China and Europe.

European shares started the day in negative territory on the heels of Apple's overnight drop. Economic data from the region, coupled with news from China and our own data helped to lift shared into the close. Indexes in the UK, France and Germany all made minimum gains of 0.5%. What spurred the rally today was flash PMI data. The number, though still below the expansionary 50 level did make an improvement of nearly a full point to hit 48.2. Germany was the shining star of the group and posted numbers signifying an acceleration of expansion. The German PMI was reported as 53.6, up the previous report of 50.6. Other stories from the region included a planned September stress test for Eurozone banks and a defense of austerity plans from the UK.

The Euro traded to the upside today versus the dollar, nearly reaching the top of the two week range. The pair is in bullish mode and appears to be waving a flag at us, move signal supported by bullish indicator. I am maintaining my previous upside target of 3.5000 and adding a secondary upside target of 3.675. I derived this target by adding the height of the flagpole, which begins at the 1.3000 level, to today's price. An impending increase in US debt and continuing fiscal improvement in Europe should help to drive this trade.

Eur/USD daily

Asian shared ended mixed today despite a two year high in the flash PMI reading. The reading, 51.9, is expansionary and helps support the idea that the Chinese recovery is on track. On the downside, there is increasing chatter about the possibilities of further weakness in the region associated with housing and industrial production. The Nikkei was the strongest index in the region today, driven in part by the strong Chinese data and a volatile yen trade.

The USD/YEN has entered a period of high volatility. Price targets for the yen, inflation targets from the BOJ and a lack of increased stimulus are all having their affects. The yen trade rebounded today from near term support but was halted at long term resistance. Indicators are still bullish but the trade is definitely in a period of consolidation and will need to break above 90 to confirm this stance. The pair has been in this range for two weeks, ever since it first approached 90. A price pattern is forming but which one is unclear to me at this time. The longer term charts are very bullish but peaking and also suggesting a pause in the trend. If a breakout occurs this trade has long term targets of 95 and 100. Shorter term, support exists around 88.50,88 and 87.50.

USD/Yen daily

The Oil Index

Light Crude and Brent both traded to the upside today. Global GDP expectations, Chinese and European PMI as well as the positive US data helped lend support to the trade. At the same supply concerns in the US were alleviated somewhat with a unexpectedly large build in crude oil. Oil has been trending up for about 7 weeks and broke above the short and long term resistance of $95 a barrel just last week. The Oil Index has broken out of its multi-year, narrowing, trading range on the back of this uptrend in oil prices. ON the long term charts the index is bullish and is making a new high but it still faces long term resistance. Continuing signs of global improvement could help to increase oil demand outlook and support higher prices for the underlying commodity and the index itself.

Oil Index weekly

The Gold Index

Gold experienced some selling today and shed about 1%. This is the second drop from the $1700 level and has caused some of the pundits to speculate more technical selling is on the way. The potential for long term holders of gold to get out and redeploy their cash in other markets is present. If there is no expectation for gold to increase in price then there is no expectation to profit on it as an investment. The gold index is echoing this sentiment and dropping below its support lines. The index dropped below an up trend line to reach the long term support around 176. The technicals are bearish and suggest a drop below support could be on the way.

Gold Index daily

Earnings And Apple

The earnings calendar today, and this week, was very full. There were over 180 corporations reporting today alone. Tomorrow is light for reports considering the time of year but holds a couple of key reports. Next week the calendar is full again with even more companies reporting than this week. Tomorrow be on the look out for earnings from the likes Halliburton, Honeywell and Proctor&Gamble. As for today, aside from Apple, important releases on the list included Netflix, Union Pacific, Starbucks and Microsoft. The last two reporting after the bell. Netflix was able to post a stellar quarter and gave investors plenty of reason to drive the stock up over 40% on high volume. The online movie streamer and mail order video provider improved sales over the holiday and has gained new subscribers for its streaming services. Growth of subscribers is being linked to iPad and other tablets who provide a perfect platform for utilizing the service. Netflix posted EPS of $0.13 versus an expected loss of -$0.13. Today's jump opened quite a large gap in the price action so caution and time are needed to determine the best trade at this level.

Netflix daily

Union Pacific, the nations largest railroad operator, posted EPS of $2.19 and beat expectations. This is a 4% rise in profits and a record quarter for the company. 2012 was also a record year. Despite the improvement and earnings beat the stock still traded to the downside. High volume and a bearish engulfing pattern appeared on the chart today and may be signaling a time for long term investors in the stock to take profits. In the report a strong portfolio of customers plus increased pricing helped to achieve the gains despite weakness in the coal and grain markets. That weakness could be the cause for today's bearish price action.

Union Pacific daily

Starbucks was expected to improve on last quarters earnings of $0.46 and post EPS of $0.57. Judging by the price action today I would say that the markets were expecting a miss, or at least some negative guidance. The stock traded down, losing 0.3%. The actual release posted earnings in line with estimates. The company stands firm on its 2013 guidance which is slightly below estimates. The company also reported that strong sales in China were offsetting other economic issues. The stock trade up in the after hours.

Starbucks daily

Microsoft also reported after the bell. The expectations were for a gain of $0.22 cents over last quarter for an EPS of $0.75. Price action in this stock suggested an expectation of positive results but the move was capped by the resistance of last fall's open window. Actual results were EPS of $0.76 on revenue of $21.46 billion, up from $0.78 per share on revenue of $20.89 billion. Revenue missed estimates and shares fell in the after hours.

Microsoft daily

Apple shares took a beating today after releasing its earnings after the bell yesterday. Despite posting record revenue the company did not meet expectations and failed to inspire confidence with weak guidance. Earnings per share was inline with the general run of expectations but slowing iPhone sales, which account for 56% of revenue, had an impact on overall performance. The company reported sales of iPhones reaching 47.8 million in the quarter, only slightly lower than consensus estimates. The slowing sales and weak guidance caused the stock to drop more than 10% overnight and kept pressure on the stock all day.

We already knew, from a variety of sources, that iPhone sales were on the decline. Sales figures from early in the quarter and the recent reports of a near shut down of parts production are only two of them. Speculation abounds as to whether Apple can reclaim its lost power. One article I read today gives evidence of growing support of the phones and the potential for long term sales and conversions. One fact the article cited was that 20% of iPhone sales in the quarter were users switching from Android, up from 9% in the previous comparable quarter. This, plus the ongoing popularity of iPhone 4's, is leading to new sales of later iPhone editions coming down the pipe. In the statements and conference call Tim Cook said that sales of iPhones 4's remained strong and Verizon said that sales of later models were less than half of all iPhone activations in the quarter. The iPhone is being viewed as an entry vehicle to the iPhone world, one that is expected to lead to future sales for the company. Based on this Apple is still a great long term investment but the near term remains hindered by bear market conditions.

The stock had lost about $60 overnight and that carried through into the start of today's US session. Volumes were incredibly high and, at least in the early part of the day, biased to buyers of the stock. Average daily volume was surpassed in the first 45 minutes of trading and reached twice daily by 2:00 PM. The long term charts show a breakdown of a head and shoulders reversal pattern as well as break below the long term moving average. The stock is oversold at this level and momentum is waning. On the daily charts are painting a similar picture. Today's drop opened a large bearish window and the early rebound was capped at the resistance of the aforesaid up trend line. If buyers don't step in soon this stock could move all the way back down to $400.

Apple daily

The Indexes

The futures trades were mixed this morning, and far better than I would have expected based on the Apple situation. However, the Dow was positive and the S&P was only barely negative. The Nasdaq was the one exception and with good reason. After the opening the markets were able to push higher and the S&P was even able to make a new intraday high. The Nasdaq regained most of its 20 point opening loss and barely made it into positive territory before falling back under the pressure of falling Apples. The tech index still above long term support and long term technicals look good for at least a retest of the ten year highs set in September.

Nasdaq daily

The S&P 500 made some small gains today. Buyers and sellers were basically balanced as the markets digested earnings and economic reports. The index turned positive soon after the open, brushed up against the 1500 round number resistance, broke through and made a new high. Later in the day trading turned negative for a time but regained the positive side of yesterday's close before the bell today. The long upper and lower shadows on today's candle are evidence of the markets indecision. Technicals on the daily charts are showing me a market that is overbought with bullish but divergent momentum. This, plus the near term round number resistance and the long legged lead me to think the market is ready for a short breather and possible pullback to support.

S&P 500 daily

The long term charts are bullish. MACD and Stochastic are both bullish and indicating a rising market. MACD is on the rise and stochastic is extremely overbought. A pullback on the daily charts to 1475 would do a lot to alleviate the overbought conditions and allow the index to move higher. On this chart 1500 looks fairly inconsequential so any resistance at this level will likely be short lived, provided the earnings season and economic data don't do an immediate about face. The next likely spot for significant resistance is at the all time highs around 1565.

S&P 500 weekly

The VIX is still at +5 year lows. The markets, at least in the near term, are not too scared. Earnings are OK, there have been some significant misses that have dominated the news but there have been even more earnings beats. The theme this quarter is not the one of rampant “upside surprises” I thought it could be but it has provided some nice, and reassuring, news from the corporate sector. The strength of the businesses, if not the strength of earnings, is what I believe will be driving the markets higher and help the S&P 500 reach a new all time high.

VIX daily

This week we have seen the markets reach new highs. Price action in the major indexes since the first of the year has been impressive and a consolidation is due. Right now it looks like the 1500 level could be the top of the consolidation range. Next week is reason enough for the markets to take a break. The calendar is stacked so full reports and releases that there is no way to put them in a chart or table that would fit in this posting. On the earnings front there are at least as many releases as we got this week, if not more. As for the economy we have another host of reports,around 40, that range from our regular weekly reportings on unemployment claims to monthly reports from Challenger and ADP as well as non farm payrolls, an FOMC rate decision, Q4 advance GDP figures, auto sales and housing.

Tomorrow is rather light. There are about 2 dozen earnings reports and only one economic release, New Home Sales. I don't expect any of this to have the strength to continue the uptrend, in fact, Microsoft's report may add further pressure to stocks and help with the pullback I have speculated on above.

Until then, remember the trend!

Thomas Hughes