Introduction

U.S. politicians came up with an eleventh hour solution to the current debt ceiling and spending issues by putting it off until next year. The government shut down is over and things are getting back to normal. The news came as a relief to world markets, which traded to the upside, but failed to spark a rally in the index futures arena. S&P futures were down around -5 points with the Dow in the -90 range. Now that we can breathe a sigh of relief because a credit default has been averted we can begin to focus on what kind of damage has been done to the economy and potential fall-out from the next budget battle in just 3 short months. There is growing concern from businesses and economists about the impact to fourth quarter earnings growth, the holiday shopping season and all of 2014. It's amazing how the future out look can change so quickly. Just a month ago the market was concerned that QE was ending and tapering was beginning. Now, tapering is no longer a major concern and may even be pushed back to next year.


Important dates for the end of this year and beginning of next year. December 10th; deadline for budget committee. January 15th; newly passed government spending bill will expire. February 7th; the “soft” debt ceiling will be hit once again. March 2014; the next debt ceiling battle comes to a head. Unless of course the politicians on Capital Hill get it together and pass a budget with corresponding spending limits.

Economic data released today helped to lift the early futures trading. Jobless claims fell and the Philly Fed was better than expected. At the bell the major indices fell roughly 1/2% before catching a bid and moving higher. The Philly Fed report, released at 10 AM, seemed to help as well as the Presidents speech. The Philly Fed reading of 19.8 was above the expected 15. By 11:30 AM the S&P 500 and Nasdaq had entered positive territory for the day. The Dow was the big laggard, trading in a range between -60 and -90 during the morning hours. The Dow was heavily impacted by earnings today, losses in United Health, Goldman Sachs and IBM are mostly to blame. Earnings from all three companies did not meet expectations. Despite the growing fear the fourth quarter may not be as good as expected the markets climbed throughout the day with the S&P making a record close and the Nasdaq a new 13 year high.

The Jobless Claims

The initial claims is still being impacted by California's computer issues. The total number of initial claims fell by -15,000 this week but no states reported a drop in claims bigger than 1,000. 20 states reported an increase bigger than 1,000 with California at the top of the list with over 33,000 new claims logged. The numbers just don't add up in my mind. Anyway, a drop in claims is good. Last weeks figures were also revised lower by 1,000 claims. We'll have to keep an eye on this over the next few weeks to see what level claims stabilize and if the shut down has any lingering effects.


Longer term unemployment is still falling. Continuing claims dropped by -43,000 from a downward revision to last weeks data to 2.859. This is a three week low and very near to the long term lows set last month. Total claims also fell, by -82,725. This is also a three week low and just off the long term lows set last month. Continuing and total claims are still trending lower and point to a decrease in overall unemployment. According to reports today it could be next week before we get any of the data not released such as the most recent NFP and U.S. unemployment figures. Then, a week later, we'll get this months data so I expect some increased Fed speculation over the next couple of weeks.



Crazy Gold

Gold traders are going nuts today. The political solution sent gold prices skyrocketing by roughly $40(3%) during today's session. The shut down's effect on the economy is leading some to speculate that QE would remain in effect, weakening the dollar and strengthening gold. The Gold Index has followed through on the bullish move upward suggested earlier in the week. The index has broken back up into the pennant and over the 30 day moving average. The index appears to still be in the grips of a longer term consolidation pattern. This pattern intersects with the long term down trend in the middle of next month so it could continue to wind sideways for another month. Gold prices are still not stable so I do not put a lot of faith in today's upswing in prices. Gold could just as easily lose $60 tomorrow or next week depending on how economic data and FOMC speculation moves the markets.


Oil Prices Retreat

Increasing supply, decreasing political tensions mainly in Iran and concern of economic impacts from U.S. political fall out have been combining to push oil prices lower. Today benchmark crude fell around 1.5% to just over $100 per barrel. Today's drop in prices brings oil to a four month low. The $100 level is an important support level for oil prices long term. Again, the economic outlook and prospects for GDP growth have been clouded by the uncertain impact of the government shut down and spending will be on the economy. The Oil Index has been performing counter to the price of the underlying commodity, it has been breaking above long term resistance and making new highs even as oil prices have retreated to support. Perhaps this is a sign of expected earnings surprises in the sector. The big oil companies report at the end of the month with Exxon, Conoco Phillips, BP and Oxy all reporting either on the 29th or 31st. A quick glance at charts in the sector reveals just as many trending sideways as there those trending up.


Exxon is one of the worst performers in the sector. The stock has been trading in a range for the last year or more and is now near the bottom of that range. XOM just bounced off of support and may be consolidating for a move up to the top of the range. A return to a more rosy economic outlook, a good earnings report and especially a good future guidance or outlook could be a catalyst for this move. At this time the index is struggling with resistance at $87.50 with bullish indicators.


Fear Drops

The VIX has dropped significantly over the past few days. Today it moved another leg down and is now close to the what is the new “normal” level. 12.50 is the current target level for a calmly trending market. I will be looking for the index to move lower and test this level over the next couple of days but I also think that there could be some more volatility in the volatility index. Fear is up that the economy has been damaged. So far the little data we have gotten has been OK and support the continued trend of slow growth. The next data we get will be the old data we didn't get two weeks ago because of the shut down. It will probably be good, or at least good enough, for back then but how good will it be for now. There is also concern over earnings and earnings growth. Earnings season could also provide a mover for the fear gauge. Also, looking at the chart it is not hard to see that the average daily range for the index has picked up even without the ATR indicator below.


Earnings Round Up

Verizon was perhaps the biggest surprise of the day. The company reported that it had increased subscribers to its wireless services by 40%. This was far above analysts estimates and the driving cause of the earnings results. Verizon report profits of $2.23 billion, $0.78 per share, up from $0.56 from last year. This result builds on the move the company made last month when it purchased the remaining stake in the wireless portion of it's business from Vodaphone. The stock shot up in the premarkets, gapping up at the open. The move has brought the stock above resistance with a strong bullish indicators.


IBM reported a huge miss that has raised fear the tech giant has overstated its future expectations. Thh company missed earnings by nearly $1 billion dollars, blamed on a drop in growth market sales and a 40% drop in hardware sales in China. The company reported earnings of $3.68 versus $3.33 in the same period last year. The problem here isn't that IBM isn't making money, it's just not growing earnings fast enough and analysts fear it can't make up the shortfall. The stock lost over 6% today to hit a two year low.


Goldman Sachs also reported uninspiring earnings. The bank reported revenue and earnings that were basically flat from the same period last year. Revenue in the period fell significantly over last years results; fixed income and stock underwriting both fell more than 40%. The report blamed slow client volume. The company was also able to cut costs by 25%. The stock, which has been treading water for the last 6 months, fell 3% in early trading. After gapping open traders stepped in to drive prices back up but not above yesterday's closing prices.


United Health also reported earnings that were an improvement over last year but not enough to keep investors interested. The company reported in line with expectations, raised guidance to the upper end of the previous range and lost over 5% of shareholder value in today's trading. The stock is now trading just above potential support at the $70 and is a major reason why the Dow was lagging the S&P and Nasdaq today.


The Indices

The S&P 500 continued it's bounce up from the long term trend line and briefly touched the all time intraday high. The index is being carried higher on relief, earnings which are generally positive despite a lack of real earnings growth and the underlying long term trend. Indicators are bullish on the daily charts but still weak and divergent on the weekly charts. It is possible that the markets are approaching a major turning point, one that could result in a correction of 20% or more. However, as ever, there is still no evidence of such a reversal besides the divergences. As mentioned in yesterday's wrap the longer these divergences go on the bigger the chance a correction will follow and the bigger the correction could be. Today the index broke above resistance and reached a new all-time high but there are growing down side risks. Looking back at past divergences similar to the one now it has taken a week or two up to 2-3 months for the correction to start. I remain bullish on the S&P at this time but with caution. The index is likely to pull back and consolidate, at least on a short term basis, while earnings season unfolds and we await some reliable economic information.


The Dow was heavily impacted by earnings disappointments today. IBM, Goldman and United Health were all down more than 3% with heavy volumes. The weight of these giants were enough to overcome gains across the rest of the Dow components. According to Bob Pisani IBM alone was responsible for keeping the index in the red. Regardless, the index remains above the short term 30 day moving average and looks like it is consolidating to move up and test the top of the recent 6 month trading range.


The indices appear to still want to move higher. However, there are now new obstacles ahead for the market to consider. Has the economy slowed, will the shut down affect the 4th quarter/holiday season and what the heck is going to happen in 3 months when all this comes to a boil yet again. As of now the economic trends are still up and the markets are still making new highs. The next data we get will be dated but will also likely support the current trends. Earnings growth is still positive but that may change. Today after the bell earnings from CMG and GOOG among others reported better than expected. Tomorrow could be another big day.

Until then, remember the trend!

Thomas Hughes