Introduction

The early morning hours brought a glimmer of hope that the budget battle was beginning to cool down. There was no evidence of a deal but at least sides were talking. The hope helped to drive index futures significantly higher. The S&P 500 was indicated to open about 1% higher with the Dow and Nasdaq in similar standing. The talk on TV was about evenly split between the budget debate and actual business news. Earnings season started this week and will begin to heat up tomorrow when Wells Fargo and JP Morgan report. After the open the major indices built on the early gains seen in the futures markets and continued higher throughout the day. The evolving story surrounding the budget stand-off centers around Speaker Boehner new attempt to get a temporary debt-ceiling increase passed so that the two sides could sit down and talk. The markets got a boost each time a new detail emerged until the S&P 500 hit today's high just over 1692. The made the biggest one day gain of the year today, the S&P the second biggest.


Asian stocks closed in mixed territory because they did not get the news from Washington in time. European markets were lifted on the hopes of a deal to raise the debt limit. The major European indices gained between 1 and 2% in today's trade. International economic data was pretty light today. The Bank Of England held rates steady. In Japan machinery orders rose more than 5%, well above expectations and the first rise in three months. This is a sign that Abenomics is working at least a little. Here at home jobless claims number made a surprising jump but the numbers were blamed on California's computer malfunctions last month.

Leading the U.S. markets today were the banks. Wells Fargo was up a little over 1% just after the open, JP Morgan about 1.5%, both closing up more than 2.5%, JPM more than 3.5%. The talk is not so much that the banks are expected to report great earnings but that the future outlook and guidance should see improvements. Regardless of what the earnings expectations are today's rally in the banking sector was mostly due to the apparent progress made in the debt ceiling battle. The solution is short term but would grant a short term but increases hopes that a quick and painless budget can be passed soon. By the days end the Banking Index was up nearly 3%.

Unemployment Claims Spike

Initial claims were released today despite the government shut-down. Initial claims were reported to have jumped 66,000 in the last week, but the gains are blamed primarily on lingering issues and back logs related to California's computer glitches. Looking deeper into the report only three states reported an increase of more than 1,000 in the last week, including California. Gains in those three states totaled less than 4,000. That leaves over 60,000 claims unaccounted for and less than 50 states to account for them...it doesn't add up to me unless I add in those claims attributed to California and the computer problems. This weeks initial claims hit 374,000, the highest level since March of this year. The moving average of claims gained 20,000 reaching 325,000. I halfway expected to see a spike like this, now we have to wait and see if it lingers. The government shut-down could lead to an increase in claims over the next few weeks.


Continuing claims fell this week by 16,000. Claims fell to 2.905 million from a mild revision to last weeks data. This is still well below the 3 million mark and in line with the longer term trend of declining unemployment. The question now though is how will the California issue affect continuing and even the total claims figures. How many of these people are still on the books and how many more claims are still back logged in California? There could be some volatility in this and all the unemployment figures until the government shut down and the California affect work through the system. Total claims rose slightly to 4.02 million. This is just above the long term lows for total claims and in line with the longer term trend in claims.



Import and export prices were scheduled for release today but not due to the shut down.

The Gold Index

Gold fell in today's trading session. A stronger dollar helped to push gold below $1,300 on an intraday basis. Gold has been flirting with $1,300 for a couple of weeks now and has now fallen through. Gold lost over 1.5% today, driven lower by the move forward in the budget debate, falling below $1,300 to reach a session low of $1287. The Gold Index initially traded to the upside today along with the rest of the market but eventually turned lower before the close. It is still trading below the lower boundary of a long term triangle pattern with mixed indicators. On the short term daily charts MACD is bearish but declining and near zero, stochastic is oversold and beginning to turn up. Long term momentum is still bullish but in decline and stochastic is in the middle of the range pointing down. In the short term this index is indicated lower but the longer term consolidation may still be in effect. If so this index may be producing a whip saw at this time and could remain trapped within the triangle until a strong catalyst emerges to drive prices one direction or the other. Based strictly on my trend lines the Gold Index could trade sideways within my triangle for up to 2 months. I am wary of the break-out without some form of stronger signal than what is now being displayed. Today's drop in gold prices could also provide a catalyst for the Gold Index to move lower.

The Gold Index

The Banking Index

The banking sector was one of today's top movers. The Banking Index gained nearly 3% during today's session. Although there is little hope of robust earnings growth among the banks there is growing expectation for increased profitability in banks ranging from the regional operators up to the big names like Wells and JP Morgan. Factors like improved economic conditions, credit risk and M&A activity are being cited by analysts as reasons to expect signs of improving profits for the banking sector. Looking at the Banking Index it appears as if support is emerging around the $62.50 level. Today's rise brought the index back up above that level and above the 30 day moving average. Bullish divergences in the MACD and the stochastic also show support at the current levels. If the banking sector delivers the kind of earnings reports the market is looking for this index could continue to move higher with next resistance at the $65 level. Today's action produced bullish stochastic and MACD crossovers.

The Banking Index

Wells Fargo is also making a bounce from an indicated support level. This stock moved more than 2% higher as well but is still well below the short term moving average. Wells is expected to earn about $0.97 per share, slightly lower than the previous quarter and in line with current full year expectations. The bank has already warned that refinancing volume is down significantly, just how badly this impacts the current quarter and what they say about future loan growth and profit centers will be under careful scrutiny. Support is currently at $40, just under the 150 day moving average, with a possible upside target of $42.50 and $44.

Wells Fargo

JP Morgan is in the spotlight for more than just it's earnings and future potential. The company is being dogged by lingering legal issues and possible fines related to the Whale and the mortgage crisis. The recent meeting between Jamie Dimon and the federal authorities resulted in very little news on the outcome and impact to JPM's bottom line. Speculation puts a settlement at $11 billion dollars, the exact amount and details around such a settlement will be a top priority for traders of this stock. Today's price action is a continuation of a bounce from support. A support similar in nature to both WFC and BKX. MACD and stochastic both indicate support at the current level and price is trading above the 150 day moving average. There are also bullish stochastic and MACD signals emerging on this chart. Tomorrow's report could make or break this trade, a break above $52.50 could carry this stock higher. Currently support exists around $50 with resistance near $52.50. A break below support could take JPM down to $47.50 or $45. A break above resistance has a target over $55. After the bell JPM announced several new actions aimed at raising cash. Wells and JPM both report before the bell.

JP Morgan

The Dollar

The dollar strengthened on the news of a potential short term increase to the debt ceiling. The index gained about 0.15%, extending yesterday's move up from the $80 support level. The index is currently indicated up with a target near the $81 resistance pierced just a few weeks ago. If the budget debate/debt ceiling can move forward the dollar could strengthen further.

The Dollar Index

The euro held firm against the dollar in today's trading. The pair moved slightly lower to retest support before moving back up to the break even level. Indicators have just turned bearish, MACD has just crossed into bearish territory and stochastic is pointing down and moving lower. The 1.3500 level is currently providing support, if it holds the pair could test long term resistance up around the 1.3750 level. If support for the euro fails and the dollar continues to strengthen the pair could move lower to support levels around the 1.3375 level or lower.

The EUR/USD

The yen weakened significantly against the dollar in today's trading. The better than expected machinery orders helps to solidify faith in Abenomics and the long term success of his and BOJ Governor Kuroda's plans for Japanese recovery. The pair had fallen back beneath the upper boundary of a triangle pattern but today re-broke that pattern. At the same time the pair has also broken back above an important Fibonacci retracement level with an early stochastic signal. If current conditions hold true this pair could easily retest the 100 resistance level over the near term. Other factors impacting this trade, the EUR/USD and the dollar index beside the debt ceiling/budget debate are economic trends, the possibility of FOMC tapering and the possibility of increased stimulus from the BOJ.

USD/JPY

The Dow

The Dow gained 2%. today. The blue chip index made a strong move up from a support level that has been tested now for the third time since May of this year. Indicators are bearish on the short term daily charts but peaking out and coincident with the bottom of a possible trading range. Looking back over the past 5 months we can see that the index has been indeed trading in such a range between support at 14,775 and resistance around 15,550. If the five month trend holds we can expect the index to move back up to the top of the range over the near term. The relief of a debt ceiling resolution could be what carries the index up to the top the range. At that point I think it will be economic data, the FOMC and the earnings outlook that takes over market sentiments.

The Dow

The Nasdaq

The Nasdaq Composite gained over 2% in today's trading, leading the major indices. This index has been a leader all year, making steady gains even as the Dow has been treading water. Improving economic conditions raised hopes of profit growth in the sector that has helped it to reach the current high levels. This index is still well above the long term trend line and trending up. There divergences between the index and the indicators but there are no signs of reversal at this time. The recent weakness , driven by the political situation, is short term in nature so far as I can tell. Currently potential resistance exists at 3,750 and at the recent 13 year highs near 3,819.

Nasdaq

The S&P 500

The S&P has been trending up over the last year as well. Not quite as sharply as the Nasdaq but definitely better than the range bound Dow. The debt ceiling/budget battle brought the index down from an all time high over the last few weeks and it is now bouncing back higher. Early this week the index broke below the trend line but today I think relief overcame the nearer term fear and allowed the market to return to trend. Not much really happened today except that the market got a sign that there would be an end to the current stand off, which I don't think anyone really believed wouldn't happen. Relief was the catalyst for today's rally and it may carry the index even higher, a resolution to the stand off even higher until the index reaches the next resistance level around the current all-time high of 1725.50.

The S&P 500

Just the idea that the two sides in the budget battle were mellowing toward each other caused futures to gain more than 15 points in the pre market hours. Throughout the day as the story developed the index continued to gain, ratcheting 5-10 points higher with each new sign that the impasse was coming to a close. Tomorrow could another big move in the market, especially if a stop-gap measure to increase the debt ceiling is passed. Not to mention earnings, earnings and the long term trend. The political battle will impact prices in the near term but it will be earnings, the economy and the FOMC that impact the long term trend.

Until then, remember the trend!

Thomas Hughes