Introduction

This morning we all woke up to a much diminished Nikkei index and the fear that a top was forming. After yesterday's USA Today headline and the +5% drop in Nikkei value overnight you might think that was the case. In fact, U.S. futures trading was pointing the opposite direction. The S&P, DOW and NASDAQ indexes were all pointing to a higher opening this morning with the S&P up as much as 5 points. The release of today's data did little to influence futures traders. Jobless claims rose but remain within “acceptable” levels and GDP 2nd estimates were in line with the expectations.


After making an initial surge at the open stocks traded in a tight, sideways range for most of the morning. Around mid day the S&P and other major indexes trended up to make new highs for the day, eventually reaching the days peak between 2-3pm. In the last half hour selling picked up and pushed the indexes lower. The DOW was hit hardest but still maintained positive levels going into the close. The S&P was next in line and posted a 0.37% gain on the day compared to the DOW's 0.14%. The NASDAQ, due mostly to the tech sector, was today's leader on a percentage basis clocking in with a 0.69% gain.

The markets are showing signs of confusion/consolidation at this time. They, we, are all trying to decipher the myriad mixed signals presented by the economic data, rallying world indexes and future global growth estimates. I have to be honest and say that I was expecting some volatility/sideways trading this week and so far I have not been disappointed. The reason why is because the rally is being fueled by the FED and economic data, this week is light on data and even with the 2nd estimate for GDP not market moving in my opinion. I believe that next week will be much more important in that respect. The month ends tomorrow which means that next week brings the next round of monthly macroeconomic figures including ADP/Challenger/NFP and U.S. unemployment rates.

One Headline Does Not A Bear Market Make

I do not want to discount the importance of the media and USA Today's headline as a contrarian indicator but I do want to issue some words of caution. One headline does not make a bear market. It may signal the end, the beginning of the end, the last leg of the rally and the last wave of “dumb” investors but it definitely does not signal the start of the bear market. Please remember that just the day before all the experts on CNBC were talking about and providing sound arguments for a continued rally, possibly one that goes on for several years. Now all of a sudden all those arguments are moot because USA Today says the rally has traction.

I want to call to mind my favorite trader and book on trading, Jesse Livermore and Reminiscences Of A Stock Market Operator. If you haven't read this yet you must, it is a great read, a great story and provides some of the best insights into trading psychology. Jesse was a well known and highly successful bear. He was not afraid to sell the market and sell it heavy. One of his lessons was not to get into the market too early. He himself lost several fortunes not because his bearishness was misplaced but because he got into the market too soon. USA Today may be signaling the end but I don't think it is here just yet.

Japanese Markets Cashing Nikkei Checks

The Nikkei crash over the last month has been pretty spectacular. The index is now down close to 15% from its highs set just last month. Either a lack of additional easing from the BOJ or the FOMC's hints at a beginning to tapering was the catalyst for this move at the start. Last nights drop was precipated by a sharp strengthening of the yen. The Nikkei has, or rather had, been rallying hard for many months, driven by elections, speculation and loose policy. This rally was fueled by yen printing and a rapidly devaluing yen.

The BOJ did a great job filling the cash machine with yen, now the Japanese markets are cashing their checks. I think now is the time to start looking for the second wave of the Japanese recovery. All this profit must go somewhere. It could go to savings and just sit there but I think it more likely that it will get invested in other places. A reinvestment of the yen printed by Kuroda and Abe could go a long way toward the Japanese economic recovery.

USD/JPY

Even with the volatility we have seen in the USD/JPY over the last 6 days it is still trading above 100. The pair is in what appears to be a consolidation the 100 level looking like support. The pair has been supported at or risen from above the 100 level all 6 of those days, including today. The pair is also still above the 30 day moving average so there is a chance of at least a short term pop from speculative traders. On the daily charts MACD and stochastic are indicating support at the current level. On the weekly charts indicators are highly divergent and point to a possible correction. However, with the support of Abe and Kuroda I do not think a correction will be too severe if it does come. The fiscal/stimulating policies set in force by these two is very long term in nature, I expect this trade to continue for some time. Upside targets for the yen exists at 103.75 and 105 in the near term.

Europe Blows Off The Nikkei

Surprisingly enough and perhaps evidence of the lack of importance of the Nikkei at this time the European indexes did not follow suit. The Nikkei did keep today's trade in check but European eyes were on economic data, not the USA Today or the crazy roller coaster ride that is the Nikkei trade today. Data from Europe included investor sentiment(up), Spanish GDP (unch), UK housing prices (up) and Italian PPI (down). None of these figures points to an improvement in the EU but they all help support the status quo and chances of further recovery. European shares were up around 1% going into the start of U.S. trading and ended their day firmly in the green.

The euro strengthened against the dollar. The pair has been trading to the upside this week and has finally been able to cross above the 1.3000 mark breaking a two week trading range. The move today also brought the pair above the short term moving average. The break above 1.3000 is bullish in the near term with an upside targets at 1.3080 and 1.314.

EUR/USD

Gold Or Fools Gold; Yet To Be Determined

Gold trade responded to yesterday's drop by climbing over $20 to breach $1400. Near term gold prices may reach as high as $1475 but my long term indicators and analysis are still pointing to lower gold prices and a retest of the $1326 lows. The fear of tapering has put some sparkle back into gold but I am also of the opinion that the commencement of tapering is still several months out. Not to mention the fact that tapering does not mean there will be no asset purchases or that current assets will be sold.

The index has been struggling to hold onto the $113 level and 78.6% retracement of the bull market. Today's little pop in gold helped the index to climb above $113 but it is still sitting under significant Fibonacci Resistance. Low gold prices have had a huge impact on earnings outlook for the gold producing stocks. If gold prices do not remain above the $1400 level I see the Gold Index falling below $113 to complete a 100% retracement of the 2008-2011 bull market.

Gold Index

Oil Index Near Long Term Highs

Oil prices traded up today after inventory data showed less build than expected. The Oil Index did not get that big of a boost from the news. In fact, the index lost ground in today's trade. The Oil Index has been trying to hold support above 1400. The index looks like it may be trying to break out to a new long term high. Over the past few weeks the index has poked its head into new three year high territory several times and is indicated up in the long term. Short term the index is facing resistance around 1420 that could keep it contained over the next few weeks. To the downside support exists around 1375, 1350 and 1300.

Oil Index

Today's Data

Today's data did little to truly influence market direction. At best the data is perfectly neutral. Not good enough to lead to an end to QE and not bad enough to cause fear. Unemployment claims, though unexpectedly higher, remain within what I believe to be the “acceptable” range for the current market conditions. Initial claims rose by 10,000 from an upward revision of 4,000 to hit 354,000 in this weeks release. The four week moving average climbed just shy of 7,000. While unexpected this increase is minimal when taken in context with the trend in claims over the last 12 months. Initial claims are still at the low end of the range with a downward bias. Without any significant pick up in jobs creation I do not expect to see this change too much and since it hasn't changed very much I don't expect to see much in the way of jobs increases next week.


Continuing claims also saw a slight rise this week and a small revision to last week. Continuing claims gained 63,000 to hit a two week high of 2.98 million. This level is still below the 3 million mark and trending down, if only slightly. Total claims was the surprise this week. Total claims fell by over 150,000 to hit another multi-year low. Also, the rate of decline in the total claims figure has accelerated . Total claims reported this week are more than 25% lower than the same time last year, a full percentage point more than the previous week. Labor trends seem to be stable throughout most of the country. California remains the one truly crazy area for jobs. Last week CA led in declines for initial claims by more than 15K, this week it leads in increases of initial claims by more than 15K.



Next week we will get the all important ADP/Challenger/NFP/Unemployment bundle. Regardless of what the NFP and ADP numbers show for jobs creation I am looking for a net decline in U.S. unemployment levels. This is mainly due to the ongoing slide in total claims numbers. Current expectations are for U.S total unemployment to hold steady with last months 7.5%. ADP and NFP numbers are predicted to remain steady or post small gains.


First quarter GDP second estimate was released today. Expectations for 2.5% growth were met with a nearly in line 2.4% growth. One reason for the downward revision was the spending sequester. Other data shows that consumer spending was revised up for the quarter while business investment edged down. Consumer spending was revised up to 3.4%, the highest level in over two years. Government spending was revised down to -4.9% from -4.1% do to sequester spending cuts. The final piece of today's economic puzzle was pending home sales. This measure of homes under contract rose by a slim 0.3%. Analysts were expecting this month to match the previous months 1.5% increase. The lack of stronger sales growth was not taken very poorly and was shrugged off by the market fairly quickly.

Story Stocks

There were about 25 or so earnings reports today. Not much of surprise to report in that sector. Costco reported better than expected earnings with a slight miss on the revenue side. The revenue miss should be taken with a grain of salt however because the retail giant was able to increase sales by 8% over last year. Comp sales for the U.S. were up over 6% and up over 4% internationally. High gasoline prices was one reason for the miss. No guidance was offered in the press releases I read. The stock gained about .3% in today's trading but traded down from resistance. The $115 level is proving to be significant for Costco and could be a top in the stock. Long term indicators are still bullish but MACD has peaked and is now receding.

Costco

Joy Global reported a sharp drop in income and earnings but still managed to beat estimates. The mining company has been suffering from a drop in demand for its mining products that resulted in a 12% drop in sales. The silver lining to the news is that the drop in global demand did not cut into JOY's business as much as expected and bookings for equipment into the next quarter are on the rise. The stock opened lower, moved lower and then recovered to test resistance at the short term moving average. The daily chart is very choppy and range bound. Prices are at the low end of the range and may be finding support. Longer term the chart smooths out with additional signs of support at the current levels.

Joy Global

Today's Hot Sectors

Today's rally was fairly broad with advancers leading decliners by around 2 to 1. The hot sector was the financials, led by Bank Of America, Citigroup and Wells Fargo all moving to new highs. The Banking Index followed suit and broke above short term resistance to make a new high as well. The daily charts have strong bullish momentum reinforced by strongly bullish and rising MACD on the weekly charts. Technically speaking this sector and index is indicated higher with no resistance. To maintain this bullish stance the index needs to hold above $62.50.

Banking Index

Technology was another hot sector today. The XLK and QQQ both gained in today's trading and both came close to matching recent closing high prices. Within the sector the semiconductors performed even better, breaking resistance and reaching a new 6 year high. MACD on the daily chart is strong and convergent with higher prices. Longer term the index is bullish as well but may faces long term resistance.

Semiconductors

The Utilities sector was another one of today's hottest sectors but not in the same way as the financials or techs. The utilities have been getting hit pretty hard over the last week as sector rotation from the defensive stocks to cyclical stocks takes place. Today the XLU hit the 50% retracement of the 2013 rally and rebounded sharply. Today's action has created a bearish pin bar set up with a very strong MACD convergence supporting it. The XLU is indicated down with target around $37.60, $37 and $36.

Utilities Spyder

The Transports

The DOW Transportation average has retreated to the short term moving average. Over the last week MACD has turned bearish indicating some weakness but prices have been supported at the short term moving so far. Trend analysis, supported by bullish MACD convergences over the last 6-8 months indicate that there is still long term support and momentum in this market. The recent break out from the bullish triangle is still in play with near term targets of 6,500 and 7,000.

Transports

The S&P 500

The U.S. markets did not give the Nikkei plunge a second glance. The S&P 500 Index began climbing out of the gate. After reaching the morning high the index trended sideways for much of the day, edging higher late in the afternoon. The daily charts show an index that is still trending up. At this time the uptrend has stalled out but indications are that it is going to continue upward into the near term. Long term indications are bullish as well. Tomorrow and the first part of next week could be a continuation of the recent price action. Wednesday the ADP report comes out giving us the first glimpse at the newest jobs creation data.

S&P 500

For now I am chalking up the recent volatility to consolidation and sector rotation. Looking at the charts of XLU and XLK it is not hard to believe it is happening. Utilities are being sold and techs are being bought. Provided the data supports stability without indicating a need for tapering to start soon I see the rally continuing onward after this consolidation concludes. The headlines from USA Today may be the indicator that the end is near but I still haven't seen that sign in the charts. Tomorrow be on the lookout for Personal Income and Spending, Michigan Sentiment and Chicago PMI.

Until then remember the trend!

Thomas Hughes