Introduction

The markets were quiet this morning, tired from the volatile first half of the week. Earnings and data were in the spotlight here at home as more of big banks, semiconductor makers, fast food restaurants and tech companies reported for the calendar first quarter. So far the season has been OK. More companies are beating than missing but not all are meeting estimates for revenues. This is the same thing we saw last quarter.


The Economic Data

Early in the morning the release of unemployment claims figures was met with only passing interest. Expectations weren't high for a big drop in claims so the 352,000 initial claims reported did not make much impact on futures trading. The 352K is 6,000 from last weeks reported figure but still at low levels relative to the past 12 months. The spike in claims we saw 2 weeks ago is beginning to fade and this weeks housing starts figures may renew hope of a housing led jobs recovery. The four week moving average is still being impacted by the spike but its effect will wear off soon. So long as the weekly numbers don't deteriorate the long term trend in initial claims will remain flat to downish. This is good for a mildly growing economy but not a strong or booming one. Initial claims needs to come down a fair bit before I can believe in a real improvement in the unemployment sector.


Continuing and initial claims both fell this week. This is a good sign for the labor markets and could lead us to another drop in the official unemployment rate. Of course this is not taking into account the declining participation rate which has been another big cause for the decline in unemployment figures. Continuing claims dropped -35,000 to 3.068 million. This is a mild drop from last weeks reported number and a large drop from the revised one. In any case it brings the continuing claims numbers down near the long term low and looking like it could trend lower. Of course this too hinges on a pickup in labor and the economy.


Total claims fell by about 125,000 to 5.152 million. This is the 6 month low for total claims. A sustained drop in this number below 5 million would be a great sign for the economy. The drop in continuing and total claims may be a sign that jobs creation is rebounding this month. The housing starts figures lead me to believe there has to be some hiring going on. On side note the rate of decline in total claims is expanding again. This weeks release is 1.6 million(24%) less than last year, this had declined to about 21% in the earlier part of the year.


Leading indicators confirms what we know but it also isn't that bad. It only dropped -0.1% which is a much lower peak than the last four retractions of the index. If the index performs as it has over the past 12 months it will turn positive for next month. The expectations were for a reading of 0% so the release helped the markets reach their morning lows. There are no economic reports tomorrow, just earnings. Next week is a big one for the housing sector with Existing Home Sales, New Home Sales, Price Index and Mortgage Index. Other important releases include Durable Goods, Michigan Sentiment and the advance number for 1st quarter U.S. GDP. From what I can tell expectations for the 1st quarter range from 0.1-0.3% but I think there is a chance for a positive surprise.


Richmond Fed President Lacker did not help sentiments today with his statements. During a CNBC interview he said emphatically that if up to him QE would end. He believes the evidence of it working is “sketchy” and that the FED should begin to taper the purchases soon. He also believes that the unemployment rate will drop into the low 7% range by the end of the year. As for GDP and inflation, he thinks both will remain around 2%. His view, aside from ending QE, is basically in line with market expectations.

Around The World

China's GDP release Monday was a real shock to the system. A slowing China along with signs of inflation and a potential housing/credit bubble are a growing danger to the world economy. Asian markets tanked on the news and now the Hand Seng Index is trading near 6 month lows. The Nikkei suffered this week as well but is still being propped up by BOJ policy. The Nikkei retreated to a near term support but did not make any significant losses. The active devaluation of the yen is only just begun. The yen traded flat versus the dollar today above the near term support of 97.50. The pair is in a bounce from the moving average and looks like it is consolidating for a retest of the 100 level. Longer term targets for this pair remain 110 and 120.

USD/JPY

The European markets ended mixed today after a mild rebound. The DJ Stoxx 600 has now made a lower low and a lower high but is still above a potential long term support level. News of rampant fraud in the EU system was a big blow to confidence. It seems that those in charge are still living well on the backs of the people. The euro rallied versus the dollar but is caught in a tight band of technical support and resistances. Long term sup/resistance lines, the 38% Fibonacci retracement, the 30 day EMA and I'm sure other indicators are bracketing the pair. A stronger U.S. versus a weaker EU may soon tip the balance to the downside. Adding to the pressure are growing talks of an ECB rate cut. An end to QE in here and more QE there would be very bearish for this pair. For now, the previous two candles look suspiciously like a blow-off top that would have at least some near term relevancy. Downside target here is around 1.2750.

EUR/USD

The Oil Index

Oil made a small rebound today and gained about 0.75% during today's session. Even with the bounce oil is still trading well below $90 and beneath significant resistance levels. Early in the day oil did see some weakness and hit a new intraday low. Support kicked in, at least for today, and sent price up to its highs by lunch time. A slowdown in the economy could help oil prices continue to slide, downside projections take price as low as $80 per barrel. However, should the recent round of weak data be a temporary thing the low prices today could be near the bottom. The Oil Index made another long tailed candle, almost a doji, which is a sign of buying. There may be some support coming into the market at this level but it is still too soon to tell. MACD and stochastic both support a further decline in this index with a first target around 1250.

Oil Index

The Gold Index

I can honestly say that even though I was bearish on gold and the gold index I did not expect the declines we saw this week. I expect gold prices to remain highly volatile in the near term as late sellers and early buyers fight over price direction. Gold made a small bounce today but remained sub $1400. The Gold Index made a similar bounce and this is to be expected. The index, and the metal, made huge a huge retreat in just a few days and hit a major technical level. There may be a short term trade here but the long term indications are down at this time. I am looking for a retest and possible break through of support at $115 on the index and $1350 for the metal.

Gold Index

Earnings, Earnings And More Earnings

Earnings are dominating the scene this week. Today was a big one for names in the financial and tech industries. BB&T and Morgan Stanley are the two big banks that reported today with at least nine other smaller regional reporting as well. IBM, Google and Microsoft all reported after the bell. Throughout the day scattered reports from the semiconductor sector were interlaced with reports from the likes of Pepsi, Verizon and others. There are a few rough spots but the general headline shared among them is “earnings beat”. Revenues are coming in a little light and in some cases the earnings growth is being driven by higher prices and fees for consumers.

In the financial sector Morgan Stanley reported profits of $0.50 per share versus a net loss in the year ago quarter. This was above some expectations but also came with a warning sign. The bit of news the markets took hold of was the huge drop in trading revenues. As a brokerage MS relies on trading activity to generate revenue and the 42% drop does not bode well for future expectations. In the statement company executives were upbeat about the future even though the global economy was still experiencing moments of “fragility”. The stock lost 4% today, firmly shutting the window opened last with last quarters release.

Morgan Stanley

Morgan was not the only financial to lose on good news. BB&T also beat the streets expectations for adjusted EPS and lost value in today's trading. JPMorgan has been trading to the downside ever since its release last Friday and Wells Fargo is trading down as well. The Banking Index has been trading lower too and has now made a lower low after making a lower high. The long term trend is still up but the banking sector may be in the beginning of a correction back to trend/support around $52.50. The regional banks are not immune to this retreat. Looking at banks like USB and FITB you can see that the regional banks are trading down toward the lower end of long term ranges. There are still dozens of small banks yet to report over the next 5-6 days so there should be plenty of short term trades in this sector.

Banking Index

Verizon may or may not have surprised the street with a strong earnings report. The company reported gains in all areas with strong growth in sales and services, increases in revenues, earnings and margins. The stock responded by gapping up more than 3% to form what may become a shooting star. Verizon has been making big strides over the last few quarters and has had quite a run up. Shares of VZ have gained more than 24% since the beginning of the year and are diverging from indicators on the daily chart.

Verizon

Pepsico beat estimates for EPS and revenue. The release sent the stock shooting through resistance. Pepsi's earnings release and statement was concise and to the point; Pepsi is committed to growing into the future. The company has been able to streamline operations and improve margins. PEP gained over 3.5% in today's trading. The move took the stock well into all time high territory and sparked a little selling and a long upper candle wick. This area may prove resistance in the near to mid terms should Pepsi continue it's move up.

Pepsico

The semi conductor industry continued to disappoint investors. Cypress, Fairchild and AMD all reported earnings that sent share prices crashing. The Semiconductor Index fell more than 1.5%, stopping just shy of making a new lower low. A support around 415 is forming, a break down from here would be bearish for the index. Outlook from the industry for the second quarter is a little mixed. Estimates for chip sales are down but Fairchild Semi at least says that bookings for the first quarter were “robust”.

Semiconductor Index

The Indexes

The indexes continued to decline today with the S&P 500 losing about a half percent. Earnings reports are not sparking much interest in stocks and the economic reports remained mixed. The thing to remember is that economic data is still trending to the better. This weeks drops have been substantial but they have not come close to breaking the long term trend. It's not surprising the markets picked up some volatility when it crossed into new all time high territory. On the daily charts the S&P has made a new intraday lower low, not surprising with what I've seen in other indexes. This is only a mildly bearish pattern so long as the index remains above trend. A break below 1525 would do that now. Looking at the indicators the momentum is building but it doesn't look too strong now. Stochastic is trending down, relieving overbought conditions but has not yet made any overtly bearish signals.

SPX

The Russel has retreated to a level that could become the neck of a head and shoulders. 900 is going to be significant going into the near term. The indicators are not clear with this one, stochastic is ticking up and MACD is diverging, suggesting a bottom is present or near. A clearer confirmation is required for me to trade on this though. A test and retest of 900 might do it for me.

RUT

There are not any signs of a robustly growing U.S. economy but there are also not any signs of a weak economy. We have gotten a round of disappointing data recently but it can't always be great. The recent weakness, including China GDP and the drop in gold, has certainly caused a correction but not a very deep one I think. There is still some downside potential in the markets but I think they could find support closer to the long term trend.

Until then, remember the trend!

Thomas Hughes