The world market got a big lift in overnight trading. The reassuring words of Big Ben Bernanke helped to sooth some fears and spur investor appetites. The euphoria did not carry over into the U.S. markets though they did manage to sustain the big gains we saw yesterday. On an intra-day basis the Dow Jones Average made a new 5 year high and speculation is rampant over when and if it will make a new all time high. The S&P 500 still has a little further to go in order to hit its all-time high. Today the index managed to hold yesterday's rebound but was capped at 1525.
The big news from around the world was the nomination of Kuroda for Bank of Japan Governor. This move has been expected and failed to make much of an impact on the yen. It did help the Nikkei to lead Asian markets with a 2.7% gain. The apparent success of the Italian bond auction yesterday was another plus on the international scene. It helped to ease fears even though Italy remains a wild card. The global rebound in stock continued in Europe with individual indexes gaining and average around 0.75%.
Economic data here at home was positive and supports the expectation and possibility of GDP growth in the next few quarters. Unemployment claims continued to trend lower, GDP in the fourth quarter was revised up, the housing sector got yet another positive reading and Chicago PMI grew stronger than expected. You'd think that with all that the markets would have been screaming higher, maybe the sequester isn't a non-event after all. The markets may be expecting a last minute deal to stave off the near term effects. I have to admit I am, why wouldn't they, we got one for the Cliff and we got one each time a budget issue has come up before that. It seems to be status quo. We saw a similar sharp pull-back just before the Fiscal Cliff blah blah blah that turned out to be a nice entry point. This could be the same but we need to see a break above 1430 on the S&P 500.
Early morning releases included the 4th quarter GDP revision and weekly unemployment claims figures. GDP was revised up to 0.1% from the previous -0.1%, a good sign but not as good as the expected 0.5% economists were looking for. This seems to be in line with other GDP reports we have seen over the last few weeks namely from the EU and Germany. Both of those reports also showed that things were a little weaker than expected but that expectations for rebound, especially in Germany, were at least as good if not better than before. Within the report there were some interesting details. Much of the difference between the expected number and the actual was laid at the feet of inventory increases and military spending. These two drags are both expected to reverse in the first quarter which could help boost GDP along with other factors. Consumer spending, which accounts for about 70% of our economy, rose by a bigger than expected 2.1%. This is another positive for GDP growth in the longer term providing the consumer can shrug off the effects of tax increase and spending cuts. Excluding the volatile inventory number the GDP rose by 1.7%, in line with expectations and hotter than the previous estimate of 1.1%.
Jobless claims seems to be trending down. There is some regional volatility but in general initial claims is near the bottom of its 12 month range and continuing claims reached a new low. Total claims are still lingering at relatively high levels but could begin to tick down if housing keeps gaining strength. Initial claims dropped by 22,000 to hit 344,000, only 14,000 higher than the 5 year low. The four week moving average also moved lower, dropping by 6,750 to hit 355,000. This is also approaching its five year low 350,000. A drop below either one of these levels could be the signal that hiring is gaining the upper hand over firing. This week 16 states reported drops of more than 1,000 claims and 5 with drops bigger than 2,000. California was the only state listed with a gain in claims larger than 1,000 and blew that limit away with over 26,000.
Continuing claims made a big drop. This number fell 91,000 to 3.07 million, the lowest level since June 2008. This chart is in decline, even taking into account its volatile nature over the past few months. This is a possible indication the labor market is picking up in some areas but I would like to see improvement in initial claims, total claims and the overall unemployment levels.
Total claims for unemployment is one area of concern. This number ticked up this week, approaching but not hitting, recent highs. This number has been elevated for several months, counter to the delining trend we saw in the first half of last year. It is the increase in total claims that I see as having the most influence on total unemployment. Comparing total claims to unemployment there is a bottom in total claims around Oct-Nov 2012 coincident with a bottom in unemployment. Based on the data so far I won't be expecting to see much, if any, improvement in unemployment levels when they are released next Friday.
I won't rehash all the housing data we have received over the last two weeks but I will highlight the news of today. Growth in home building was revised up to an annualized rate of 17.5%. This is good news for housing bulls and in line with the expectations. Housing is also expected to be a leader in a jobs recovery that could begin as early as this spring. The sector has been experiencing slow and steady growth for nearly a year, if that continues as expected we could see the unemployment data begin to decline again. Other data such as new home sales, existing home sales and housing inventory figures support an increase in building later this year. There is concern that the housing recovery is one sided and being driven by investment purchases and flippers but today's new home sales numbers may put some of that to rest.
The final piece of the economic puzzle revealed today was Chicago PMI with a reading of 56.8. This was much better than expected, ahead of the previous 55.6 and expected 54.0. This marks an eleventh month high and helped to lift the major indexes. It also marks the 2nd month of increase. The new orders portion of the report in combination with inventory levels with suggests that manufacturers will need to start increasing production in the near future. This could lead to an increase in hiring as well. If manufacturing gains traction at the same time as housing there could be a bigger than expected surge in the economy.
Japan and the Yen
Asian markets got a big lift following Bernanke's testimony and QA session this week. He gave one answer in particular that I thought would have had more impact on the USD/JPY pair than it did. He stated in a firm manner that he supported the Japanese policies and their efforts to devalue the yen. It is no secret that Japan is actively devaluing its currency and it based on reaction by the G7 and now Bernanke's endorsement those plans can move ahead full steam. These efforts also moved one step further into aggressive mode with the nomination of Haruhiko Kuroda to be BOJ Governor. He is an advocate of the policies put forth by Prime Minister Shinzo Abe and expected to help. The pair found support at the short term moving average after falling sharply on Monday. Today it regained the support/resistance level of 92.50. The longer outlook for the yen is more weakness, nearer term there could still be some volatility as other currencies adjust.
Europe And The Euro
Europe traded to the positive today and rallied right into the close of trading. I think they expect the sequester and Italian worries to be blips on the radar and quickly put behind us. The reassurances from Bernanke that QE would not come to an end soon helped to ease fears in European and Asian markets. Draghi followed up today with remarks to the effect that there is no reason to unwind ECB policy at this time and that there may even be another rate cut in the offing. These statements did not help the EUR/USD pair. The Euro lost some ground to the dollar, falling from the 1.315 resistance line. The uptrend started last summer is broken and will provide resistance should the pair advance. It is oversold at this level but bearish momentum is still strong. Next support exists at 1.3000, a break below this would be bearish.
The Oil Index
Oil traded below $95 a barrel for the seventh day today. The assurances from Bernanke and Draghi that the central banks would keep supporting the economy should have been good news for crude and brent. Crude hovered around flatline before falling off into the close. This could just be near term blahs, if housing and manufacturing pick up and lead to employment then oil will most likely go up as well. The Oil Index has been one of the more volatile ones this week. It dropped over 3% on Monday and is looking kinda bearish right now. However, if this is a precursor to economic growth later in the year then this is a potential entry area. MACD analysis of the previous peak suggests that it will be at least retested. This supported by a buy signal on the Stochastic indicator. Longer term bullishness requires a break above resistance at 1350 and the recent peak at 1375.
Oil Index daily
The Gold Index
Gold retreated below 1600 again today. The metal dropped sharply to to approach the recent lows near $1550. Economic strengths and technical selling are pressuring this trade and could send it even lower. The Gold Index looks like it is in free fall. It is approaching the 68.8% retracement of the previous bull market but the technicals are so weak I don't think it will even matter. At this time I can't see any technical reason for the Gold Index to find support here. Indicators on the daily charts are bearish with no signs of support or bottom and are just plain bearish on the weekly charts.
Gold Index daily
Earnings are still making headlines with over 150 companies reporting today. Of course, this isn't counting all the hoopla over the Dow flirting with all time highs. JC Penny and Groupon both made big misses. JC Penny reported a net loss in the fourth quarter that totals more than 43% of losses for the full year. This was far more worse than expected and has caused CEO Ron Johnson to reverse the no discounting policy. The stock lost more than 15% in trading today, coming close to the 3 year low set a few months ago.
JC Penny daily
Groupon was another disaster and I am not surprised. Sales and revenue increases matched expectations but their guidance fell short. They expect 2013 revenue to be about 6.5% below the consensus and fueled speculation about the online discount sites viability. The stock lost about 25% in today's trading. After hours the company announced a change in leadership, the current CEO will be replaced with a team of two.
Herbalife made headlines again with the addition of two new board members provided by Carl Icahn. The announcement also included an allowance for Icahn to increase his position up to 25%. The stock jumped on the announcement but is still in the middle of the recent range. The stock appears to be winding up for a break out. There is lots of pressure mounting from Icahn and the two hedge funds currently battling over the companies value.
You have probably already noticed that volatility is back in the market. Albeit still at very low levels. The spike took the index almost all the way to the top of calm range but quickly fell back down. This move close the gap the VIX opened January 1st when the trading year started. This move was semi expected and raised the question of which volatility is moving now. The index is currently sitting on an important support level, one that bears close watching. The thing is, even if the market keep rallying it doesn't mean the VIX will fall. Speculation and fear of a reversal could lead to higher prices for options relative to the index and that will equal a higher value for the VIX.
The VIX daily
The S&P 500
The index started the day out fairly quiet considering the last few days. Regardless of what Art Cashin said about it being a non-event the Sequester is hanging heavy over the markets. News of failed attempts to pass bills from both sides of the Senate helped to put a damper on gains made during the middle part of the day. Near term resistance capped the index at 1525 that resulted in a pullback to 1520 in the late afternoon. The pullback extended into the close with the index dropping down to the 1515 level.
SPX 60 minute
On the daily charts there is an early signal forming, not so much a buy signal as a signal that a signal may be coming. MACD is not as clear. It is bearish and declining from a peak but not giving any firm signal. The 1525 resistance could keep the index in check until the sequester deadline blows over. It could also be a potential top so a break above it and then 1530 is really needed. The pullback of the last week did not even come close to breaking my up trend line so I am still bullish on the daily chart for now but I need to see that break above 1430.
The longer term charts have not been improving. The trend is still up but it is also still weakening as it approaches the top of the secular bear market range. The most recent peak in MACD is smaller than the last and currently declining making the third consecutive divergence in the indicator since the market hit bottom in 2011. Based on this chart it looks like there may not be much life left in the rally. Hopes of a housing recovery may be enough to help the index make one last push to the all time highs but it will take real hard evidence to keep it there.
Tomorrow starts a new round of important monthly economic figures. Personal Income and Spending, PCE and Michigan Sentiment top the list. Resuming next week ISM, Construction Spending, the Fed's Beige Book and the all important ADP/Challenger/NFP bundle dominating the scene. Look for signs of improvement in hiring and unemployment to help boost the markets. Tomorrow could bring us some more volatility so be ready.
Until then, remember the trend!