Hopeful markets were reassured by Janet Yellen's dovish comments and pushed to make new highs.

Introduction

The global markets rallied in the overnight sessions. The rally in U.S. markets yesterday, driven by the unexpectedly dovish comments from Federal Chair Nominee Janet Yellen, spilled over into Asian and European markets. Asian indexes gained an average +1%, led by the Nikkei's 2.12% gain. In Europe the positive sentiment was a little muted as some weaker than expected data renewed concern over the strength of the current recovery. German GDP was reported as in line with expectations while France's expected return to growth was dashed by a -0.1% drop. While France really isn't that important for us, it is a major part of the EU economy and thereby does have some affect on the global economic picture.


U.S. futures trading was positive this morning and pointed to an open at a new all time intra day high for the S&P. Domestic economic data, in particular unemployment claims, was a little weaker than expected but did not seem to phase bullish sentiment. Neither did a few high profile earnings misses from the the likes of Wal Mart, Cisco and others. All eyes were on Capital Hill, awaiting the start of Yellen's confirmation hearing. Following the release of the data futures trading cooled off a little. The S&P 500, Dow and Nasdaq all opened near to flat from yesterday's closing prices. The first half hour of trading saw the indices bob and weave within a very tight range.

Once the hearings began the tone, statements, questions and answers were very soothing. Yellen supports the economic recovery, she believes a stronger recovery is needed before the taper starts, QE will continue for now until data shows it isn't needed and the markets took it all very well. The S&P and Dow extended gains made yesterday but the Nasdaq struggled to reach break even. A few disappointing earnings statements were the cause but it was able to move into the green.

The Data

We got a few bits of data today, nothing market moving and all in line with current trends. Unemployment claims fell by 2,000 from last week's upwardly revised figure to hit 339,000. Factoring in the revision this is a net gain of 3,000 from last week and within the expected range. The four week moving average was also revised up for last week, this week's figure fell nearly 6,000. This is the sixth week of decline since the California/Nevada spike was reported and well past the government shut down. It looks like neither had any long lasting affect on unemployment and that the slowly improving unemployment situation is still slowly improving. Only two states reported a drop in claims greater than 1,000, Oregon and California, for a net decline of -5,500. Four states reported an increase in claims greater than 1,000; MI, OH, NJ and MA for a net gain around 7,300.


Continuing claims held steady from last weeks mild upward revision. This makes a net increase around 20,000 claims from last weeks reported numbers. Looking at the table it appears as if there is no impact from the October events in the data, it also appears as if longer term unemployment is holding steady around the current level. This could negatively impact November unemployment figures even thought the long term trend is down and claims are near long term lows.


Total claims for unemployment fell this week by nearly 55,000 claims. This is 21.75% lower than last year's rate, in line with the 21-25% rate of decline I have observed over the past year or so. Total claims are retreating from the 4 million level and near to the long term low of 3.86. This figure also, when looking at the table, appears to be holding relatively stable over the past two months. Good because no serious impact from October but potentially bad for November employment figures. However, 3rd quarter GDP was much better than expected and October NFP was also a bit surprising so November could be surprising as well. Keep in mind that the Initial claims is for the week ending 11/9 while the other two figures are from the week prior to that.


Productivity and labor costs were also released today, both in line with expectations. Non Farm Productivity levels rose 1.9% from the previous month versus a gain of 1.8% for that time period. The consensus was around 2%. This increase was bolstered by an unexpected drop in labor costs. The consensus was for cost to increase by 0.5% but the actual was reported as -0.1%. The Trade Gap widened by 8%. This was blamed on the shut down and could negatively impact GDP in the fourth quarter. Tomorrow's calendar has 6 releases scheduled.


The Dollar Strengthens

Several factors combined to help strengthen the dollar. Unemployment data from home, GDP in Europe, Janet Yellen's support of economic recovery, the ECB rate cut last week and an impending meeting of the Bank of Japan to name a few. The EUR/USD dropped from a new resistance level at 1.35000. This level provide support for the pair on the way up to the most recent peak. In the longer term the pair has just crested above a 50% Fibonacci Retracement and now fallen back below it coincident with the ECB rate cut. In the short term weaker than expected data in the EU and semi-strength in the U.S could help to pressure this pair further. My current target is the next Retracement level around the 1.31250.

EUR/USD

The yen lost some ground to the dollar today as well. The USD/JPY pair moved up from just above the short term moving average to test the 100 level. This level has provided significant resistance in the past and could do so again now. Momentum is bullish but weak and stochastic is bullishly crossing over the upper signal line. The short term analysis is cautiously bullish contingent on a solid move above 100. This move could hinge on the BOJ meeting next week (release of policy statement on Thursday). I haven't heard or read anything to the effect but I suspect there may be some expectation the BOJ will make some dovish indication in support of Abenomics behind some of this weeks rise in the pair. Recent changes to fundamentals that could influence the BOJ decision is the lack of tapering by the FOMC and the ECB rate cut. Regardless of the cause the 100 level is the one to watch, at least until after next Thursday.

USD/JPY

The Gold Index

Gold got a big lift from Janet Yellen's statements. Her support of QE while the economic recovery is still so “fragile” added $20 to the spot price. Gold is now trading back up toward the $1300 level which is looking like it might provide some resistance. The bounce in gold prices was enough to keep the Gold Index from breaking down through the lower boundary of the long term pennant formation. Indicators are bearish but weakly so. There is some support for the index along the lower edge of the boundary but it may be fading. I think it is going to take some positive change in the expectation for profits to lift this index out of the pennant and I don't see that happening while gold prices remain at such low levels.

Gold Index

The Oil Index

Oil gained about a quarter percent on renewed hopes driven by Yellen. This is after oil prices hit an intraday low more than 1% below yesterday's closing prices. Oil has now been trading below $95 for over two weeks with a real chance it could go lower. Talks with Iran, although stalling over some key points, is relieving some tensions and helping to take some premium out of the price at the same time increasing supplies are doing the same. The Oil Index traded to the upside today, extending a bounce from the 30 day moving average. The potential short term H&S I pointed out last week did not carry through. Bearish momentum is in decline and the peak analysis suggests support along the current trend line. Lower oil prices may be bad for oil production companies but it is good for the economy, gas consumers, gas retailers and in the end oil producers so it may be a diamond in disguise. Current resistance is around 1,480 with support along the 30 day EMA around 1450.

Oil Index

Earnings Roundup

About 100 or so companies reported today. The biggest news I saw was from the retail sector. Several names such as Wal Mart, Kohls and others reported revenue and earnings misses. Wal Mart reported a small increase in revenue for quarter and $1.14 EPS. This was ahead of the previous quarter's $1.08 but well below the expected $1.35. Guidance for the fourth quarter was projected in a range that includes the average estimate of $1.58. Full year guidance was revised to a dime below the estimated $5.21-$5.31 from the last quarters statement. The quarter included all of October and could have been impacted by the shut down despite the stronger than expected economic data. Comp sales in October were down by 0.3%. The stock fell in early trading, opening more than 1% lower than yesterday's closing price. Shares of WMT quickly found support however and were driven up to make a new 6 month high. Momentum is bullish but weak and the stock is extremely overbought. It is possible that Wal Mart is at the top of a range. Current resistance is just above the current level at $80 with near term support at $77.50.

WMT

Anybody trading yesterday's doji on the Kohl's chart got a happy surprise today indeed. Anyone bullish on that stock did not. Today's release of earnings was far below the general expectation. The company reported a much larger than expected drop in quarterly sales versus the same period last year resulting in a cut to full year guidance. The company says that the fourth quarter will be as expected but reduced the full year range by $0.12 to $4.08-$4.23. The stock lost more than 7% in early trading, gap down at the open. Some buying came in at the low prices but not enough to regain the days losses.

KSS

The Retail Spyder (XRT) is looking rather bullish despite the less than stellar reports from the sector today and this week. There is some speculation that the shopping season could be better than expected already and if the better than expected economic strength from the third quarter carries into this one then I can see it happening. The sector has been trending up over the last 12 months and recently broke out to new highs. Previous resistance was tested as support and then in a text book move the ETF is now bouncing up off the 30 day EMA. Momentum is bullish and comparing the two peaks since the break to new highs is convergent with higher prices. Stochastic is bullish and crossing above the upper signal line. This ETF looks like it is in rally mode and could keep moving higher.

XRT

The S&P 500

The S&P 500 opened just above the flat line today, bobbing over and under for the first half hour of trading. Some stocks were moving, particularly the ones releasing earnings, but for the most part the markets were awaiting Janet Yellen. Her remarks, released to the market yesterday, provided some relief and her performance during the hearing today reinforced that feeling. As soon as she began to speak the markets began to lift, reaching an early high just before 11:30AM. The middle part of the day saw the index, and the other major indices, fall back some before retesting the early high in late afternoon trading. On the short term daily charts the index is indicating a buy. MACD hit zero today and is crossing over to the bullish side at the same time stochastic has pointed up. This signal has resulted in 50-100 points of up side each time it has happened over the last 12 months.

SPX daily

The long term charts of weekly prices echo the bullish signals displayed on the daily charts. Momentum is bullish and on the rise while stochastic is also bullish and crossing above the upper signal line. While at this time the long term divergences we have all been tracking over the past 6 months are still present they may soon be erased. The current long term bull wave is still on the rise and could move another 50-100 points higher in the short term and as much as 100-300 points higher in the longer term provided nothing emerges to reverse the long term trends.

SPX Weekly

Janet Yellen gave the market a soothing balm. Her position was one of support for the economy and continued QE. She want's it to end, but she supports it now and until the “fragile” recovery is strong enough to stand on here own. Perhaps more soothing than here words was here demeanor. She was confident, relaxed and had her answers ready to hand. A much different impression than the one I get from Ben Bernanke and that little waver in his voice. For now QE is still in place and is still data dependent. Targets for unemployment are still around the 6.5% level which, based on the current rates of decline, we will achieve in the early spring. While money is flowing in the markets are likely to flow up. It is possible that only a change to the underlying fundamentals in the form of reduced stimulus can turn the markets now.

Until then, remember the trend!

Thomas Hughes