Weak economic data stalls rally as traders await FOMC minutes tomorrow afternoon.

Introduction

The early morning hours were relatively quiet following last weeks huge rally in U.S. equities. The trading week started today due to the Presidents Day bank holiday yesterday. Futures trading was mildly positive, lifted in part by dovish policy changes made by the BOJ at their meeting yesterday. The bank doubled its already $3.5 trillion yen loan facility and extended the window on that facility by a full year. Asian stocks, except for the Nikkei which rallied more than 3%, were mostly mixed on the news. European were also mixed after data showed that forward looking sentiment in Germany had fallen below expectations. Adding to the mix of overseas data was UK inflation levels had fallen below the target 2% to the lowest level since 2009.


Our own markets were able to maintain positive territory, at least until the release of economic data here at home. Empire State Manufacturing, released at 8:30AM, was well below expectations and caused futures to fall sharply before bouncing back to break even. Other data released later in the morning was also below expectations but did not seem to impact trading in quite the same way as Empire State. At the open the major indices were slightly negative but after the first hour of trading had at least moved above break even. The rest of the day saw equities tread water and hover around the break even point. Techs led the markets today, setting a new 13.5 year high with the aid of Tesla and Apple. The FOMC minutes, scheduled for release tomorrow at 2:00PM may be what kept the markets in check today.

The Economy

The economic dip that began with the first of the year is not quite over, at least according to today's data. Empire State Manufacturing, released at 8:30AM, fell nearly 8 points from the previous months unrevised 12.51. This is double the expected drop, consensus estimates were for a reading in the range of 8-10. After the release S&P futures quickly lost about 8 points only to bounce back within minutes. There is speculation of the effect of the weather in January and how it is impacting the data and will impact data going into the February readings.

Long Term TIC flows fell to -$45.9 billion in December. This is more than double the expected -$22 billion and almost double Novembers -$28 billion. TIC flows measure the amount of foreign investment dollars coming into U.S. treasury and equities markets. This is the second month of major declines in foreign investment in the U.S. TIC flow data was released at 9AM and did not make an impact on trading that I could see.

The National Association of Home Builders released their index of builder sentiment at 10AM. The data, also much worse than expected, sent the indices back into the red for just a minute but they soon recovered. The index dropped by 10 points, the largest drop on record, to 46 from the previous months 56. This is the first negative reading since spring of last year. As expected, the weather was blamed on some of the drop but surprisingly, so was a lack of labor and a shortage of lots. The NAHB reported that builders are not sure they will be able to fill current need due to the lack of labor and lots.


Oil Climbs

WTI benchmark crude gained over 2% in today's session to hit an intraday high near $103. This is a fresh 4 month high for WTI. Supply, mostly in the form of derivatives and distillates, is a concern due to the ongoing winter weather being experienced across the country. Brent and Nat Gas also reached new highs. Nat Gas topped the $5.50 mark and is now trading near the all time intraday high just over $5.75. The Oil Index traded to the upside today, crossing back above the previously broken up trend line. Momentum is strongly bullish and stochastic is rising but the index may have reached a peak. Today's action has formed a small pin bar which could indicate a small pullback or sideways consolidation may form at the current level. Near term support is the trend line with longer term support just below at the 1430 level with resistance just above at the 1485 level. The resistance level, which has repelled Oil Index prices twice in the last three months, is coincident with resistance set during the 2008 market reversal and could provide continued resistance into the future. Higher oil prices will mean higher revenue and could mean higher profits for oil producers.


The Gold Index

Gold prices held steady today around the $1320 level after profit taking yesterday and in the overnight session. Weak data continues to pressure the dollar and lift gold. This could continue until U.S. economic growth returns sometime this spring. Current GDP estimates have the first quarter around 2.5%, dropping from the fourth quarters 4.1%, and then expanding back to around 3.5% by the second quarter. The Gold Index is receiving a benefit from higher gold prices and has been moving higher as well. The index traded lower today however, as it reached a resistance level at the close of last week. Indicators are bullish at this time but not overly strong. The index could keep moving higher, especially if gold prices keep moving up, but a break above the $105 level is needed. If not the index could remain range bound in the near to short term. Stochastics indicates support around the $90 level,


The Dollar

The dollar retreated today to reach the bottom of a four month trading range. Weaker data has helped to weaken the dollar versus other world currencies, especially the euro. This may continue if the data does not begin to pick back up soon. The FOMC minutes released tomorrow could help. If the Fed sees the current dip as tolerable and stands by their forward view it could help to support dollar value. There is other data this week that could either help or hinder the dollar as well. Tomorrow Mortgage Index, Housing Starts and Building Permits then employment claims on Thursday and then the Philly Fed and Leading Indicators on Friday. The indicators are bearish but very weak at this time with oversold conditions in the near term.


The euro gained against the dollar today, approaching long term resistance around the 1.3800 level. The indicators are bullish and consistent with support around the 1.3500 and 1.36250 levels. Weak data or the FOMC minutes could help this pair to reach resistance over the next few days.


The BOJ surprised the markets today by increasing their loan facilities. The consensus expectations was for no move by the bank but the doubling and extension of government lending facilities was a positive surprise for yen bears. The BOJ doubled the amount of the lending facility to ¥7 trillion, doubled the amount that individual banks could borrow and extended the program for a full year. Even with the expansion the potential affect is seen as limited since Japanese companies are already flush with cash. Analysts expect the bank to increase QE sometime this spring to combat the weaker than expected GDP numbers released last week. Japanese GDP was expected to be 2.8% but was actually only 1%. Adding to the speculation that the bank will increase QE this spring is the planned start of a usage tax hike from 5% to 8% intended to curb debt. In its statement the BOJ remained positive about the current state of the stimulus program and their targeted 2% inflation.

The USD/JPY moved higher on the news but met some resistance at the short term 30 day moving average. Today's move is a possible confirmation of support that is coincident with a similar confirmation signal in the stochastic indicator. Momentum is still weak but above the zero line. I expect to see the pair move up to test resistance around 103.75 after breaking past the moving average. U.S. economic data and the FOMC could impair this trade.


Story Stocks

Filings for Q4 position changes for the major hedge funds and activists investors was released this morning. Warren Buffet's Berkshire Hathaway sold its stakes in both Dish Network and Glaxo Smith Kline. Looks like Dish is losing out to DirecTV. Berkshire added positions in Goldman Sachs and Liberty Mutual. GreenLight Capital added a stake in Micron Technologies. George Soros added positions in JPMorgan, Citi, trimmed it's position in Herbalife and doubled a short position on the S&P 500.

Aluminum giant Alcoa announced that it was closing some of it's operations in Australia. The miner will be shutting down one smelter and two other production facilities. The company said that the facilities were no longer competitive and were not financially viable going into the future. The shut downs are planned for later this year and will cost Australia 1,000 jobs.

Coca Cola reported earnings today that barely met expectations. Top line revenue was slightly short of estimates while bottom line earnings per share were in line with the expected $0.46 per share. Slower sales of carbonated beverages was one reason for the weak results along with “macroeconomic problems”. The company expects to regain momentum later this year. The stock lost over 3% in today's trading to approach long term support at the $37 level.


Actavis announced that it would buy Forest Labs in a deal worth $25 billion in cash and stock. Forest Laboratories surged nearly 30% on the news while Actavis shares jumped about 9%.

Tesla shares climbed to a new record high. A report today suggests that Tesla and Apple are in possible talks but the purpose of those talks is as yet unclear. The reported meeting took place over a year ago and has led to speculation of iCars and other possible collaborations. The stock also received an upgrade today from Baird with a price target of $215. Tesla is scheduled to report earnings tomorrow. The stock climbed 3% today with bullish indicators. Momentum is divergent over the long term and stochastic is a little weak so caution is in order.


The Indices

The major indices tread water today. The weak economic data was troubling but largely brushed off in favor of what the FOMC might say tomorrow. The SPX's total range was barely a quarter point for the whole day today, forming a small white candle just below resistance. The indicators are bullish and rising so the index will likely test resistance at least however headwinds may keep it moving in more of a sideways range over the near to short term. I think it will come down to whether the FOMC minutes show the Fed is more positive over the future than the data is about the present. The next possible resistance is just a few points higher at the current all-time high.


The Nasdaq Composite actually made a new 13.5 year high today. The index gained over a half percent to cross above the 4270 level. Momentum is very strong at this time and points to higher prices sometime in the future. Stochastic, while overbought in the nearer terms still has plenty of room to move higher in the short to long term. The last momentum peak of this magnitude occurred last May and led to 7 months of rally.


The Transports moved lower today. This index is wrestling with resistance and still 4.5% below the most recent high. The indicators are bullish but weak and momentum looks to have peaked. The index may retest support along the long term trend line around the 7,150 level. This level will be important to watch over the next few days as the FOMC minutes and other data is released. If the transports breaks the trend line it could lead the rest of the market with it.


The Dow traded to the negative today as well. The blue chips also in a tight range similar to the SPX. Indicators are bullish and on the rise but the index is still below a significant resistance level. This level is coincident with the bottom of the range set just after Christmas and into the first part of the current year. Momentum could carry the index up to retest this level but a break above it is needed for a more bullish stance. The FOMC outlook as revealed by the minutes as well as economic data could provide the catalyst for rally or resistance.


Some traders and investors at least are anticipating a return to economic growth. The rally in equities over the past two weeks is evidence of that. The question is, when will it happen. Perhaps the FOMC minutes will give us a clue. So far the economic data this year has not been great. Not bad, just not as good as expected and that has helped the markets to correct. The dip in economic activity was expected but the possible weather effect is clouding our ability to view it and may prolong it, which I think could hold the markets back. Or we may see a sharp snap back in growth once the weather clears, which is eminent.

Tomorrow the FOMC minutes may be more important for what they say about the state of the economy and the next 3-6 months than what they say about the taper, although the two issues will be closely tied together. Looking at the charts of the Comp, SPX DJI and DJT I see a mixed market. One index is making new highs, one is about to, another is approaching resistance and the last looks about to retest support. If the Transports (DJT) are the leaders then there may be more weakness in the coming weeks, if the Nasdaq (Comp) is leading then the markets may all reach new highs soon. Tomorrow be on the look out for Housing Starts and Permits data as well as earnings from Tesla Motors.

Until then, remember the trend!

Thomas Hughes