Introduction

Index futures were up this morning after a round of increases in global stock prices. World markets followed through on yesterday's Fed inspired rally gaining more than 1% on average. The decision to hold tapering off was a big surprise to most market participants and in light of today's economic data may have been misplaced. Jobless claims are still at 6 year lows (with some caveats) and a string of other data released today showed surprising gains that, released last week, would have helped solidify the idea that tapering was going to happen. Perhaps it (tapering) will begin next month but even now that is in question. Some pundits are now speculating that the taper may not begin this year at all.


Bernanke stated several times during the press conference that tapering was data dependent. He also said that the data did not warrant the taper at this time which is in line with statements made earlier in the year. The threshold of 6.5% unemployment has not yet been reached although today's data suggests it could be closer than some think. There is no data scheduled for release tomorrow but it is triple witching day.

After the opening the broad markets traded around the flat line. The S&P opened up by roughly 3 points and traded in a range between +3 and 0 for most of the morning. The release of Philly Fed, Existing Home Sales and Leading Indicators helped to support the markets around 10 AM but that boost was short lived. Following the release the S&P moved up to the top of the morning range (about +3) before falling back into negative territory where it remained the rest of the day.

Today's Data

The big report of the day was the jobless claims numbers. The big revisions I was expecting from last week did not materialize and this weeks numbers are also at long term low levels. However, the two states which did not report in full last week reported similar delays in data processing this week. It will be hard to say for sure what is going on with claims until this issue is resolved. Initial claims from last week were revised up by only 2,000 claims, this weeks figures rose by 15,000 to reach 309,000. The four week moving average fell by 7,000 to reach 314,700. California is one of the states with a back log of claims which accounts for at least some of the -25,000 drop reported this week. There were 8 other states reporting a drop in claims of more than 1,000 (not including Nevada, the other state with a back log). No states reported an increase of more than 1,000 claims.


Continuing claims and total claims both fell this week. Continuing claims fell by 28,000 from last weeks downwardly revised 2.815 million. This is another multi-year low for continuing claims. If the data were more trustworthy this would be a great sign for the economy. However, we still have to wait for California and Nevada to catch up and this could take weeks at best. Total claims fell by over -235,000 to reach 4.037 million. It is unclear at this time how the back log will affect future reports. Will claims from last week be revised or will the claims be included in a future week? I am expecting more revisions and a possible spike in claims once the back log in claims gets worked out.



There was some good data released today that is more trustworthy. Existing home sales is one of them. Existing home sales increased by 1.7% versus an expected decline for the month. The annual rate of sales is now 5.48 million, the expected rate was closer to 5 million. This data came with a caveat though, it is based on contracts signed in June. Buyers were being spurred by higher interest rates at the time. Real estate analysts believe that the rate of sales has diminished since then.

The Philly Fed Survey and the Leading Indicators were also much better than expected. The Philly Fed incredibly so. The expected reading of 8.0 (9.3 in the previous month) was blow away by the actual reading of 22.3. This shows a robust expansion in manufacturing for the Philadelphia region. Within the report the employment and new orders segments showed the biggest gains. Leading indicators were expected to decline mildly from last months 0.6% gains. The actual 0.7% means that this month is should be better than expected for the economy.


Global Markets

Asian markets got a boost from the FOMC statements and policy decision. On average the Asian indexes gained 1.5-2% on the news led by the emerging markets. The Nikkei made the biggest gains of the major Asian indices with 1.8% and the yen made a see saw move against the dollar. The USD/JPY pair fell on the news initially but bounced back today recapturing all of yesterday's losses and more. The fall yesterday brought the pair down to the 23.6% retracement level of the original Abe/Kuroda rally from November 2012 to May 2013. This move seems to confirm support and the recent triangle break out. Looking ahead there is still resistance at 100 to deal with. Without a break above that level I remain cautious longer term. The lack of tapering, economic data and future expectations of tapering will be going head to head with Abenomics for now.


The European markets lifted as well although a little less enthusiastically. European indices gained roughly 0.75-1.25% on the news. Europe has been making steady progress on its own, progress supported in part by improvements in China as well as continued improvement here at home. This is being reflected in index prices which are trading at all time highs, just like ours own. The euro was the real winner in this arena. The euro gained over 1.5% on the news versus the dollar. Today the eur/usd pair is trading just above a long term resistance with bullish technicals.


The Gold Index

Gold made an impressive 5% swing after the Fed announcement. Today the metal increased the gains made yesterday, adding another $10-$15 to the initial $60+ move. $1300 looks like pretty firm support at this time, $1400 for resistance. Tapering is still ahead, we haven't escaped it, and could put some pressure on gold prices moving forward. The Gold Index got a boost yesterday along with gold and the general market. The index rose back to retest the 78.6% Fibonacci level it has been trading around the last few months. On the short term daily charts the index appears to be forming a longer term pennant centered around the retracement level. Today the index fell back from resistance, counter to golds move higher. Indicators are mixed, the stochastic is pointing higher while momentum remains bearish. Added to the other evidence it appears the index could indeed be range bound within the pennant.


Longer term on the weekly charts the index is still in a down trend and the pennant formation is still present. Indicators are still bullish but weak and suggestive of the aforementioned range. Currently resistance is at the retracement, around $111, with the next target the upper edge of the pennant around $118. Support is around the $99-$100 level, coincident with the lower edge of the pennant.


The Oil Index

Oil traded lower today on comments from Iranian President Hassan Rouhani. His new statements concerning Iran's quest for nuclear weapons point to reduced tensions with the west and a possible end or at least easing of sanctions placed on the country's oil exports. If so Iranian oil exports could significantly increase in the not to distant future. Even with the new pledge global tensions in places such as Libya and Egypt are still keeping oil prices high. The Oil Index is still benefiting from the sustained high oil prices. The index has now reached my second resistance line since the last trend line bounce. Momentum is bullish but weak and suggestive of a top/top of a range. Stochastic is also bullish but overbought. The long term trend is still up but the index may be at a short term top. A correction or consolidation is very possible at the current level. A break above the 1425 resistance level would be bullish, until then I see support at the 1,400 level and the long term trend line around 1,375.


Earnings Focus

Last week I began my focus on the upcoming earnings season by touching base with Adobe, Oracle and Redhat. These three tech companies are my signal that earnings are close and include my favorite stock, Redhat. Just to be clear, it's my favorite because it is the first stock I started watching, instigated by a friend losing his inheritance during the tech crash. Back to the point, earnings. Adobe was the first to release, Oracle second and Redhat is scheduled for Monday. Adobe at last glance was near the highs of an uptrend. The earnings reported by the company were not that great but the forward guidance was pretty good. The company is changing to a subscription based model for its software services, a move seen as very good for future revenue and earnings. The stock traded flat Monday and Tuesday, then got a pop yesterday before the opening bell following the announcement. Indicators are bullish but the gap opened yesterday needs to be tested before getting bullish from this point.


Oracle followed up with a better than expected report but dashed the good spirit with weaker than expected guidance. The company made an 8% gain in profits despite the third consecutive quarter of declining sales. Company executive lowered the outlook for current quarter to include the possibility of negative revenue growth and for adjusted earnings below the current consensus estimates. The stock did not gap down as with the previous two earnings reports but today's long legged doji may be just as telling. Indicators are bullish and stochastic has room to move higher. However, there is significant resistance at the $34 level.


Redhat reports on Monday. The open source software company is expected to earn $0.22 per share, a slight decline from last quarters $0.24. Some of the developments driving this stock over the last quarter are advances made in enterprise level open source applications and in cloud computing. The stock is making new four month highs with weakly bullish technicals. Next resistance is around the $55 level, support at $52.50 and $50.


Conagra was the big name reporting today. The food giant reported a shortcoming in profits and cut it's 2014 forecast. The company was expected to earn in the range of $0.40 versus the previous quarters $0.60. The actual results of $0.37 were attributed to softer volumes and significant investments by the company. Management reported that cost reduction plans were already in action and that they expect 2nd half of the year improvements to offset 1st half weakness. Current full year guidance was lowered to $2.34-$2.38, lower than previously offered but in line with the consensus estimates. The stock traded to the downside today, losing about 5% on an intraday basis.


The Indexes

There was not much follow through today in the markets. The indices opened higher after the global markets rallied overnight but could not maintain the gains. Even the better than expected economic data could not inspire more buyers to step in. The Fed relieved us all, I think, by not tapering but tapering is still on the way. Yesterday's rally brought the S&P and other major indices to new highs. The daily chart is breaking out with bullish momentum and rising stochastic which point to higher prices.


On the longer term charts of weekly prices things are looking a little different. Stochastic is making a bullish crossover but at this time is below the upper signal line and divergent from price action. This is cause to raise a red flag of caution, especially since momentum is still bearish in this time frame. The long term MACD also shows a series of divergent bullish peaks starting with the first peak of the rally starting at the beginning of the year.


The long term trend is still up for the S&P. However, the combined long and short term analysis suggest that a correction may be building. Tomorrow is triple witching day and could add a significant amount of volatility to stock trading. Not only that there is no scheduled economic data or earnings releases to help support the market. In addition, the S&P alone is up more than 5% since hitting bottom on the last dip and is in good position for some profit taking. With the improvements to the economy here and abroad I am maintaining my bullish stance on the markets, but with caution. At the current level I think a better buying opportunity will present itself before the market makes another move higher. In the meantime it is still a stock pickers market. Next week we'll get more data including some of the more forward looking housing numbers, jobless claims and the final revision to 2nd quarter GDP.

Until then, remember the trend!

Thomas Hughes