Introduction

Futures trading was positive this morning ahead of jobless claims data. There isn't much talk about it, and maybe it doesn't really matter, but tomorrow is the first look at first quarter GDP. Today's data was the last chance for the economy to impress the markets before tomorrow. The data seemed to be just what the market needed because soon after the open the major indexes had all gained about a half percent. Data, while still very important, has faded a bit in importance with earnings season in full swing. So far the second quarter data has been lack luster to say the least. The good news is that the quarter is only half over and there is still plenty of time for it to improve.


Earnings have been a little mixed but definitely have a positive bias. Some companies are missing on the top line but a large portion of those who have already reported are at least beating on the top line. Revenue growth would be a great sign of an improving economy but improved EPS is also a great sign, of improved operations. Improved operations make corporations better positioned for profits when the economy does begin to expand more robustly. Today more than 100 S&P 500 companies are reporting, making it one of the busiest and most important days of the season. Early reports included UPS, 3M, XOM, DOW and Harley Davidson. The theme of the day; better than expected EPS on light revenue.

Internationally things may be settling down. Maybe, we'll have to see. European shares ended the day mixed after UK data showed the island nation had escaped the dreaded triple dip recession. Political turmoil in Italy may also be coming to an end soon. The current president has nominated a prime minister who is expected to be able to form a coalition government and get them back on track. The bad news is that he is not in favor of austerity and could add to the financial tangles emanating from that region. Asian indexes ended their day in the green. Recent positive economic data from China, Korea and Australia helped. Another boost is the expected policy decision and target rate announcements expected out of the BOJ tomorrow.

The Economic Data

I was a little surprised, pleasantly so, by the 339,000 initial jobless claims reported this morning. I think if pressed I would have predicted something in the 350,000 range. Today's drop was a decline of 16,000 from the previous weeks mildly revised figures. This drop has brought the number of initial claims down near the five year low. At face value it looks like initial claims is trending downward but the over all decline is very shallow. The four week moving average also fell this week, losing 4,500. It is still above 350K but should fall beneath that level next week when the March spike falls out of the calculations. I am still looking to housing data to lead the jobs market. More than 8 states had a decline in claims greater than 1,000. This list was topped by NY and MI with drops of -14K and -5K respectively. There were 7 states with increases in claims more than 1K. CA and TX topped this list with +24K and +3K.


Continuing claims fell by over 90,000 to reach a new five year low. The level of American filing for a second week or more of unemployment dropped to 3 million from a revised 3.09 million. Total claims also fell but are still above long term low levels. Total claims came in at 5.071 million, roughly 24.5% lower than the same time last year. Total claims are still over 5 million but based on the trends I am seeing in initial and continuing claims leads me to think that total claims could drop below 5 million in the near future. We don't even need a pick up in hiring for this to happen, just a pick up in people not getting fired.



Tomorrow there are two economic events; First look at U.S. 1st quarter GDP and the Michigan Sentiment index. GDP is expected in a range around 3% and there is a good possibility the actual could come out on the high side. First quarter data was strong, not to mention the positive to revisions to much of the data. Michigan sentiment is expected to be around 73.5, slightly higher than the previous estimates.

The Global Markets

Asian shares ended the day in the green and with the Nikkei reaching a new high. In China the Hang Seng index closed at a six week high. Eyes are on earnings, the U.S. and the BOJ. The BOJ is in the midst of it's second meeting with new governor Haruhiko Kuroda. There is not much expectation of any new change to policy but there is a lot of expectations for new target rates of inflation. This meeting comes not even a month after the last meeting in which the “aggressive” easing policies of Shinzo Abe were enacted. The G20 is still supportive, or at least not objecting, to Japan's devaluation plans. The new targets and any statements concerning the ongoing devaluation will be market movers for the yen based pairs. The USD/JPY and the EUR/JPY have both been trending up against the yen since last fall and the election of Abe. Both pairs are now trading at historic high levels and apparently consolidating for upside breaks. The USD/JPY has been hitting resistance just under 100 for the last week. This is the second time the pair has been up at this level in the last month, the price pattern forming is not yet totally clear. I am leaning to the bullish side and a triangle formation but a break above 100 is required for that. A failure to clear the 100 level could result in a reversal and retest of the 92.50 level.


European shares ended the day mostly in the green. New GDP data from the UK, U.S. data and earnings combined to boost stocks for the day. UK GDP came in at 0.3%, ahead of the 0.1% expected and confirmed no triple dip recession for them. This does not mean the UK, or the EU, is out of the woods yet, there is still much debate as to whether austerity is working for them or not. However, the new data helped boost confidence in the greater EU region. Moves in Italy may also be helping calm the European markets. The Italian president nominated a new prime minister with a good chance of success. The candidate has ties to all parties and is expected to be able to form a working government. Today's rally brought the major European indexes to multi-week highs and a potential area of resistance. The EUR/USD pair was volatile today. The pair first climbed, touching an important retracement, before falling to end the day lower. The pair is still above a support line I have drawn but is below the short term moving average. We'll need to see some convincing data from the greater EU to get bullish on this pair again. At this time there is still speculation the ECB could lower its target rate or some other form of QE at the next meeting.


The Oil Index

Oil traded fairly flat for most of the day before news sent it higher. Reports of Syrian use of sarin gas had only a mild impact on prices, apparent weakness in the dollar and signs of potential growth were given most of the blame. Oil prices have rebounded nicely after falling to 10 month lows last week. The Oil Index has also made a nice bounce since last week, climbing more than 7% since last Thursday's doji candle. This index is making a formation I have been seeing in other indexes, a widening pattern. This a sign of a thin, weak market and a potential trading range or market reversal. Upside resistance exists around 1365, down side support around 1,300-1,275.


The Gold Index

Oil is not the only commodity rebounding today. Gold extended its bounce today, adding more than $35 per ounce by the end of today's session. This makes a near $150 (about 12%) gain from last weeks lows near $1320. Likewise, the Gold Index has also made a nice little bounce since hitting the 78% retracement of the 2008-2011 bull market. The drop from the 61% to the 78% lines was pretty sudden so I drew a Fibonacci on it as well. The 38% line of this retracement is coincident with an intra-day resistance level I have drawn, making this a likely place for the bounce to end or at least be halted. Long and short term indicators are bearish on this index, pointing to a retest of the previous low.


Earnings Spotlight

Today is one of the busiest days of earnings season, in the middle of the busiest week. Today there are over 300 corporations are reporting today. The lions share of that number are also S&P 500 stocks making it a big day for this index. The general trend in earnings is much like we saw last season and the one before. Most businesses have been able to beat estimates for EPS but are coming in light on the revenue. I can't go over them all but there are a few that caught my attention.

UPS released early this morning and inspired investors to retest last month's high. Estimates of $1.01 per share were beat by 3 cents but revenue came in a little short of the consensus. UPS reported a better than expected post holiday season driven by its e-commerce solutions. UPS went on to reaffirm full the year guidance which brackets the consensus of $4.98. The stock jumped in today's trading but was capped at resistance. This stock shows the same type of widening pattern mentioned before.$86 is the level to watch at this time.


3M was one of few companies to miss estimates. The company increased earnings and revenue from the same period last year, they just did not meet expectations for this quarter. The company also lowered its guidance but the new lower number is still in line with the general run of estimates. The fact that this was 3M record first quarter for revenue and earnings escaped the attention of most of the media. However, it looks like long term investors were not swayed by the headlines and stepped in when shares fell below $104. The spike in volume is a positive sign for the bulls, especially in the short term.


Exxon beat Street forecasts for $2.05 by 7 cents, increasing 1st quarter EPS by about 6%. The increase in earnings was not enough to convince investors of Exxon's long term potential to increase profits. The drop in oil and questionable nature of the over all economy overshadowed profit growth. The stock, which has been trading in a channel for a few month, fell on the news. Volume was light but the stock failed to hold the short the level of the short term moving average. Indicators are weak and show no signs of direction in this market. This chart looks good for possible covered call or other spread type trading.


Harley Davidson beat earnings with a more than 30% improvement in 1st quarter earnings over last year. This improvement comes on increased shipments of bikes as well as improvements in operations and efficiency. Harley has been performing well as a business for several years. This improvement is the result of years of work and planning on their part. Harley could see this jump in earnings continue into the current and future quarters. Not only have they improved operations, they are also improving sales and delivery of vehicles. The report and performance of Harley led the stock to reach a new 6 year high. Provided investors believe Harley can continue on this path the new highs could lead to a break out for this stock. The $55 level will be important to watch over the next few days. A break above could lead to a rally to $60, about 10% higher than the current level.


Dow Chemical was yet another company to to beat estimates. This one posted EPS of $0.69 per share versus an estimated $0.61. Gains were offset by weakness in Feedstocks and Energy segments of the business. The company is still expecting a volatile and uncertain business environment for 2013. The stock jumped more than 6% from yesterday's close on only moderate volume. Price was halted by a long term resistance line but bullish indicators are pointing to a test of that resistance. This resistance also marks the top of the 12 month range.


The S&P 500

Several incidents occurred during the day that would, you would think, have impacted the markets more. First, the CBOE had a delayed opening for trading SPX, VIX and other index options products. This was not reported at first but became common knowledge by lunchtime. Another was a report of sarin gas being used by Syria. Yes, toxic gas. The report I saw was a small side note stating that Syria may have used sarin on a small basis. Neither seemed to have any effect. Later in the day statements by old Ben Bernanke trimmed gains. By close of day the S&P had gained more than 6 points, less than have of the days total advance.


Bernanke said that vulnerabilities remain for the market. I sit here and wonder how to respond to that. I think I/we knew that already, didn't we? I don't think those statements are anything knew. What may have caused the late day sell off is the call to regulators to be “vigilant”. Irrational fear of new regulation may be to blame. Regardless of the late day dip the S&P made a higher close. On an intra-day basis the index came within a hairs breadth of the all time closing high before falling back. On the daily chart the index looks like it will continue the march up to retest those same all time highs. Tomorrow is a potentially important turning point because of the 1st quarter GDP numbers. Whether or not this rear looking figure has any relevance on future stock performance is not the question. What is the question is what the market does with the number and the accompanying report. At this time the all-time high remains as resistance.


Long term the index is still bullish. Momentum is declining and the market is in overbought condition but above long term trend. The last few weekly candles have formed a small congestion band and may be indicating a consolidation or rotation. Based on this on this view I am still bullish long term but not in the way that I want to initiate any new long positions. The index is in a long term up trend but moving sideways in the nearer term as it consolidates all-time high prices. There is a chance the index could retest support or even just retreat if data or earnings get too scary. However, I do not think that tomorrows release will the kind to completely reverse the market.

The market is still trending up but as we all know this bull is long in the tooth. At some point it will have to reverse, the trick is judging when it will happen. At this time there is no indication of market reversal in the S&P 500 that I can see. Other indexes, such as the RUT, have been forming a widening pattern that includes lower lows and lower highs. This pattern could be the beginning of reversal but I think it more likely a trading range as the RUT returns to trend. The S&P 500 has not made that pattern yet but I think it is a good possibility.


Tomorrow is another big day for the markets. Earnings, earnings and GDP numbers will dominate. Look for GDP to reflect the strength of the first quarter. Corporate earnings should also reflect this. Second quarter earnings are still in question. If weakness persists revenues could fall even more. This quarter is still going strong with after the bell reports from Amazon and others beating estimates and climbing in after trading.

Until then, remember the trend!

Thomas Hughes