Janet Yellen failed to reassure the markets but data points to increased economic growth in the second quarter.

Introduction

Janet Yellen failed to reassure the markets yesterday. Her statements and answers to question were at odds with each other and with current Fed stance. But did she really say what the markets think she did? When asked about the taper, the end of the taper and the future of interest rates she was pressed, or allowed herself to be pressed, into giving an answer. Her response, that the first increase in interest rates could come as soon as 6 months after the end of the taper. The thing is, her response was just as wishy washy as the previous verbiage she was trying to explain. She was trying to clarify what an “extended period” meant in reference to the end of taper and the 1st rake hike. When responding she was having, to me at least, an obviously hard time settling on an answer. It seemed to be more of an educated speculation rather than a concrete belief in that happening. She went on to qualify her response with comments to the effect that whatever happened, it would be data dependent and that 6 months was not set in stone.


The markets sold off yesterday but not as hard as I might have expected given the nature of Yellen's testimony. On an international basis the response was a little more severe. The Asian indices fell on average by -1.5% in the overnight sessions. The European indices were only a little better, posting a 1% drop on average at the open of our own markets. In the early hours the S&P 500 futures indicated a negative open by roughly -4 points. After the release of unemployment claims this number weakened a little and remained soft into the open. Going into the 9:30 hour the S&P 500 was indicated down about -6 with the Dow indicated lower by about -50. At the open trading was cautious and muted, the indices were negative but by a much smaller amount than futures trading suggested. After the open the markets tread water just below the flat line until 10AM when economic data reassured the markets that long term trends are still up. At that time the S&P reversed earlier losses and climbed into the green extending gains on into the close of the day.


Even with the new twist to the FOMC stance we can expect at least a year before we get an interest rate hike. There will be at least 6 more months of tapering, unless the Fed decides to increase or delay it, and then maybe 6 months or more before the first rate hike. Since there are 6 weeks between Fed meetings if they taper at the current rate it will be sometime next year before the taper is actually over, pushing my one year estimate back a little more. I think that this is what is on the minds of traders today, what does the Yellen Effect have on the markets and interest rate expectations. The data is starting to firm and point to the expected spring up tick in economic activity, if it continues to improve the taper may get increased at an upcoming Fed meeting but until then things remain in an as-is condition and that is one of slow but continuing economic growth.

The Economy

First up on the economic calendar today is initial claims for unemployment. First time claims increased by a smaller than expected 5,000 to 320,000. This is about 10K below expectations. Last weeks figure was unrevised at 315,000. The four week moving average fell by -3,500 to 327,000. On an unadjusted basis first time claims fell by nearly -17,000 to hit 285,316. Initial claims remain low compared to past year but still basically flat for the period. The positive side of the coin is that claims did not experience an increase over the past 2.5 months as the economy cooled off. If this holds, and other glimmers of life I have started to see hold up, then we may see another decline in first time claims sometime this spring. Only one state reported an increase in claims greater than 1,000, PA with +1,961. Four states reported declines greater than 1,000 for a total just under -22,000.


Continuing claims climbed in this weeks report by 41,000 to reach 2.889 million. Last weeks figures were revised slightly lower. Claims for a second week of benefits are also off of the lows set late last year but still moving lower over the long term. If the economy picks up this spring as expected, if jobs creation stays strong as indicated in the last report then this number should begin to come down again this spring as well.


Total claims fell this week, signaling that longer term unemployment is still on the decline. Whether that is jobs creation based or not is still to be seen. I think it safe to assume that expired long term benefits have worked their way out of the data at this point but a new vote scheduled for later this month could reverse that.


Democrat Harry Reid has gained the support of enough republicans to pass a bill reauthorizing long term benefit extensions, if all the democrats vote yes. The new bill would retroactively pay over $9.5 billion in missed benefits to over 2 million Americans. The bill would be paid for with pension smoothing and a 2024 tax hike. Support amongst democrats is incomplete at this time making the future of the bill uncertain but you never know. If it does pass then the last 2.5 months of claims data is total garbage. The question at that time would be; how many people who lost benefits found jobs and won't go back and how many didn't?

The markets firmed a little around the 10AM hour after the release of Leading Indicators, Philly Fed and Existing Home Sales. The data was better than expected and lends a bit of support to my view of increased economic activity in the spring quarter and even this month. Existing Home sales declined by -0.4% to an annualized rate of 4.6 million homes. This is in line with current expectations but in light of the past 2 months of housing data may be considered to be better than expected. Yesterday's housing data was similar and also point to a rebound in housing/economy. The rear looking housing starts was a decline yet the forward looking building permits was better than expected.

The Philadelphia Fed Survey of manufacturing climbed to 9.0 from last months -6.3. This is much better than the expected reading of 2. The larger than expected snap back could be the result of post-winter weather rebounding so a bit of caution is needed here, but it still looks good.

The Leading Indicators, which is really a coincident indicator (it's a backward looking read of a forward looking indicator), climbed nearly twice the expected gain. The consensus for March was an increase of 0.3%, the actual is 0.5%. This means that the expected increase in activity for March is actually higher than previously thought. If true we can expect the data to continue to firm up over the next month.


The Oil Index

Oil prices were a little volatile overnight and into the morning hours. The Yellen Effect sent prices up in the afternoon yesterday, testing resistance above the $100 level. Then overnight they came crashing back down through the $100 barrier only to regain it following the release of the 10AM economic data. Global oil demand outlook has been a little nuts over the past two weeks as the Ukraine situation, economic data and Fed expectations wrestle for dominance in the minds of traders. The Oil Index has been wrestling with long term resistance while the markets try to decide where the price of oil is going. In the last week the index has bounced from the short term 30 day EMA and tested resistance again. It also failed to break it and is now retesting support along the moving average. If the index can maintain these levels long enough to gain some more support it could break through but at this time looks more range bound than anything else. I think a firmer global outlook is needed to get bullish here, not saying it won't come, I just don't see it yet. Resistance is around 1,500, support around the 1,465 level. If support doesn't hold then a decline to around the 1,425 could be expected.

 


The Gold Index

I wasn't bullish on gold but neither did I expect the +4% decline seen this week. Firming economic data and Yellen's comments on interest rates were dollar positive and gold negative. Today the metal more than $20 on an intra-day basis testing the support levels near the $1325 area before closing around the $1330 level. The Gold Index has also fallen this week, actually beginning it's declines as early as Monday. Interestingly enough, the index touched, retested, the 78.6% Fibonacci retracement of the 2009-2012 bull market in the Gold Index before making the fall. I think it no coincidence that this event occurred just prior to the FOMC meeting and a sign that the longer term downtrend in the index may still be intact. Today the index traded to the upside but met resistance at the short term moving average. The index is currently sitting just above the $100 level which could be support but I am not confident of that. A break below the $100 level could result in a retest of the recent lows near the $82.50 level.


The Dollar

The Yellen Effect firmed the dollar. The dollar index moved up over 1% in the last two days, regaining previous support. However, the same comments that helped to firm the dollar also point to a recovering world economy which could lead investors into risk on currencies such as the euro. Until then the dollar index and it's indicators appear to be bullish but they have looked that way before so caution is due. If the index keeps moving higher it will reach next resistance and the top of a trading range near the 81 level.


The EUR/USD fell sharply in tandem with the Dollar Index's gain. The EUR/USD pair fell back from long term highs/resistance with indicators that suggest the top of range and more weakness in the future. However, this pair, like the Dollar Index, has exhibited this behavior before so I remain cautious on this trade.


The Yellen Effect helped to catalyze the USD/JPY pair but lingering fear kept it in check. The pair is being driven by Abenomics (weaker yen) and Fed Taper (stronger dollar) and influenced by the Ukraine (flight to safety) and the upcoming Japanese Usage Tax Hike (lack of confidence in BOJ/expectations of more QE). Regardless of where your stance is at this time the 101.50 level is emerging as strong support. The pair has had several chances to break support and yet has not done so. I am still betting on the longer term uptrend in the pair and a break above resistance at 102.50. Until then conflicting economics and the uncertain Ukraine situation could keep this pair range bound.


Story Stocks

A couple of names hit the headlines today. For one, Starbucks revealed an endorsement of a new line of tea products by Oprah Winfrey. The endorsement was announced during the Starbucks investor event and is expected to do well. A previous endorsement from Oprah for Uggs shoes helped to drive that stock four times higher. This is on top of the recent announcement from Starbucks they were seeking ways to circumvent traditional credit card service provides who charge as much as 2-3% for merchant services. Shares of Starbucks traded higher in the early morning hours, gapped open and then traded in a wide range before moving higher during the afternoon. The stock is indicated higher at this time but is still well below highs set last year with resistance just above the current levels.


Lennar Corporation, home builders, reported earnings above expectations. The company was expected to report earnings in the range of $0.28, basically in line with the year ago period. The actual results of $0.35 per share were positively impacted by rising home prices and a 13% surge in deliveries of homes. In the report company executives were positive on the spring quarter as the underlying fundamentals driving the gains were still in place. Executives say we're still in the “early stages of housing recovery”. This is on top of KB Homes reported swing to profit from the previous quarter citing rising prices and increased sales. Shares of Lennar of surged in the pre-market, gapped open strongly and then sold off to the short term moving average intra-day. The candles are a little scary looking on this chart so caution is due but the home builder segment could be on the verge of further improvement.


The Banks

The banks were a hot sector today. The most recent stress test results were released after the bell. Before the bell the BKX was a leading index with a 2.25% gain. The results of the test showed that 29 of 30 banks passed. The average tier 1 capital ratio among the banks was 8.2%, above the 5% target. The only bank to fail was Zion Bank, a first timer who has already refiled. The BKX closed the day at a new high with bullish indicators. After the bell the banks traded to the upside or at least held their closing prices.


The Indices

After a fresh dose of economic data the markets were able to shake off the confusion caused by Janet Yellen. When the economic picture brightened the thought of taper and higher interest rates seemed more like a boon than a bust. The S&P climbed quickly into the green after the 10AM release of leading indicators, existing home sales and Philly Fed. Today's move confirmed near term support along the short term moving average, support coincident with the January all-time high. This bounce is in line with the long term and short term trend and could be the prelude to another round of new all-time highs. The indicators are still weak but suggestive of another bounce as well. The MACD is negative at this time but in decline and approaching a bullish crossover. Stochastic is making a weak bullish cross and indicating an early buy. There is technical resistance in the form of the current all time high but trends are up at this time. A failure to break above current resistance could lead to a pullback to the long term trend line.


The Dow also made a strong recovery after yesterday's Yellen driven sell-off. The indicators are very similar to the S&P 500 but the index itself is lagging in terms of it's most recent all-time high and current position relative to it. It is possible that traders and investors are less interested in the mega-corps and dividends at this time than they are in growth. The Dow is above support and moving higher at this time but faces resistance over the next 200-300 points until it reaches and possibly breaks to a new all-time high. The long term trend is up and with data improving I think retesting resistance is more likely than retesting support.


The Nasdaq looks much like the S&P if a little less choppy. The techs have been market leaders for months if not quarters and still look strong today. The Nasdaq is also bouncing from the short term moving average, in an uptrend, just under the technical resistance of current 14 year high. In terms of the long term trend it looks like another buy-the-dip opportunity for the tech sector provided the index can get past near term resistance.


The cold war also heated up today. President Obama announced not only that they were increasing sanctions under the current executive order he added another one to it. Now there are increased sanctions against Russian officials and now the avenue to sanction individual sectors of the Russian economy. Russia responded by banning 9 of our officials from entering the country. At that same time Russian forces are reported massing along the Ukrainian border. Later in the day Standard & Poors lowered the credit rating for the Russian Federation to near junk level. This story may be the biggest impact on trading tomorrow. There are no scheduled economic releases and earnings are light. There are only 13 releases scheduled with Darden Restaurants at the top of the list. Also, tomorrow is options expiration day so that may add a bit of volatility as well.

Until then, remember the trend!

Thomas Hughes