The post Fed minute rally continued today as data stoked investor hopes for global growth.

Introduction

Yesterday the Fed indicated, through the minutes of the last meeting, that the taper was still on yet the chances of a rate hike are still far off. The rally in US equities inspired by this news carried over into the over night sessions lifting Asian and EU markets. Adding to the positive spin was better than expected data from China and some mixed data from the EU. Chinese flash PMI rose to 49.7 versus the previous final reading of 48.1 in April. This indicates that the pace of contraction in China is slowing and may soon revert to growth as expected. In Europe isolated weakness, France, was overlooked in favor of stronger PMI readings for Germany and the EU as a whole. Flash PMI for the EU is 53.9, in line with expectations.


Early futures trading indicated the markets would open flat to negative ahead of the 8:30 release of jobless claims data. Following the release futures held steady into the open at which time the markets dipped briefly into the red. By 10AM the markets had rebounded from the early lows and moved into positive territory with the S&P 500 tickling current all time high levels. Once the morning highs had been reached the indices tread water going into the lunch hour and held those levels for most of the afternoon. Late afternoon trading saw the indices retreat from their daily highs but remain in positive territory from yesterday's closing prices. The Dow Transports set a new high while the VIX moved down to test a more than one year low.

The Economy

Data started today with the weekly release of unemployment claims. Initial claims for unemployment rose by 28,000 from a mild 1,000 claim revision to last weeks data. Claims were reported at 326,000 in the current data, above the expected range of 310-320,000. The 4 week moving average fell this week, in response to last weeks sharp drop, by -1,000 to 322,500. On an unadjusted basis claims gained 15,638 versus an expected decline of about -1,000. This weeks gain, while not exactly expected, is not too disturbing. Initial claims seem to be bobbing along between 300,000 and 350,000. This may be the new “normal” for this indicator, while other data improves this possibility looks more and more likely. I am beginning to view initial claims as an indication of job turnover more than joblessness. Job turnover can remain elevated provided that job creation and total unemployment are coming down.


Continuing claims and total claims both fell this week. Continuing claims fell by about -13,000 to a new low not seen since December 1, 2007. The previous weeks figure was also revised down by -1,000. This data point is still in decline and suggestive that once someone loses a job it doesn't take too long to find another one. On an unadjusted basis continuing claims fell by more than -50,000. Total claims fell by nearly -85,000 to reach another new low as well. Total claims, which is not revised, was reported at 2.620 million. This indicator of longer term unemployment has been in decline all year, even after the massive drop in claims at the beginning of the year due to expiring benefit extensions.


Existing home sales was reported as expected at +1.3%. The previous months data was unrevised. On a regional basis there were ares of strength and weakness led by gains in the west. This is the first increase in sales this year and are expected to trend upward. Comments within the report noted that inventories were up and prices were down and that the combination would help the home sales market to continue trending up this year.

Leading indicators were also released today. The Index of Leading Indicators gained by 0.4% last month, indicating a gain in activity this month. This is the third month of increases in the index and in line with expectations. The previous 1% increase was unrevised. The Coincident and Lagging Indicators also rose in the current data indicating that last month and the previous month were both a little stronger than expected.


Tomorrow there is only one economic release on the calendar, New Home Sales. Next week Durable Goods is released on Monday followed up by the Case Shiller Index, FHFA Index, Consumer Confidence, 2nd estimate for 1st quarter GDP and Pending Home Sales. There are no earnings reports scheduled for tomorrow.


The Dollar

The Dollar Index strengthened today. The FOMC minutes and mixed EU PMI combined to help this move I think. The minutes are indicative of the taper continuing with the start of interest rate hikes still far off. Mixed EU PMI furthered the speculation the ECB could or would start some form of QE in early June. Today's economic helped as well, adding a little weight to the idea the economy is rebounding as we speak. Regardless, the Dollar Index made a strong move up from support at the 80 level with bullish momentum and stochastic crossing the upper signal line.


The euro fell to a new low versus the dollar. The EUR/USD fell near a three month low in today's session. The next ECB meeting is June 5th, when the governing council has hinted it may begin a Fed style stimulus program. This expectation is being helped by tepid EU data and will likely drive this pair until then.


The Gold Index

Gold prices trade up in the early part of the morning, hovering around $1300 before moving up around $1305 before the open of stock trading. After the bell gold prices fell back below $1300, where it traded the rest of the day. Adding to the pressure on gold are reports of fund outflows. Holdings of gold of the top gold backed funds dropped, led by the Spyder Gold Trust with a drop of 3.3 tons. Although gold price held positive territory following yesterday's FOMC minutes it did not hold above $1300.

The Gold Index traded up from yesterday's close but down from resistance. In the past week the index has fallen beneath the near term support line I have been tracking. Today, prices opened higher, just beneath the line and then traded down from there. This is a possible confirmation of the break of support. The indicators are bearish although momentum is very weak. Stochastic is crossing the lower signal line which can be a sign of impending weakness in some cases. A peek at the longer term chart of weekly closings shows momentum turning bearish and stochastic moving lower as well. With the current set up I would not be surprise to see the Gold Index move lower in the near to short term with my previous targets near the $85 level still in play. Until gold prices firm and move higher there is little reason to expect improving earnings from gold miners.


The Oil Index

Oil prices hovered around $104 for most of the day before falling down near $103.50 in the late afternoon. Reports of violence in the Ukraine mixed with unsubstantiated claims from Putin that his troops have been order to withdraw helped to keep prices higher while better than expected data from China and here at home added downward pressures. Growing unrest in Libya has also helped to boost oil prices over the past week or two. The Oil Index traded to the upside today in a continuation of a moving average bounce begun earlier this week. The expected pullback in the index was very shallow and is bouncing off the short term moving average while capped by resistance at this time. Resistance is right around 1625-1630 at this time and bears close watching. A break above could lead to another move higher for this index. For now, the indicators are still bearish but beginning to roll over. There could be some more consolidation in the near term. Support levels exist near 1600, 30 day EMA, and 1550, previous resistance.


Story Stocks

Retail earnings were in the spot light today. Today, and this week in particular, is heavy with retail earnings. Today Best Buy and others reported what most of the other retailers have as well...less than expected with weak guidance. Best Buy reported a surprise gain in EPS despite missing on revenue and posting a near 2% drop in comp store sales. The company reported $0.33 per share on revenue of $9.04 billion versus an expected $0.20 on revenue of $9.206 billion. Comp store sales fell by -1.9%, analysts had been expecting a drop of -0.8%. Guidance for the next two fiscal quarters includes an expectation for single digit decline of comp store sales as well. The stock, which has been trading in a tight range all year, opened above the 30 day moving average and climbed higher before falling back before the close. This stock has been range bound for months, appears to be range bound now and has little reason to break out now....unless its to the downside. Upper resistance is around $27.50 with support around $22.50.


The Spyder Retail ETF XRT trade to the upside today, moving up by more than 1%. Today's gain was capped by resistance near the $83 level, a level coincident with the middle of a long term trading range. The indicators are incredibly neutral and consistent with a range bound asset. This index may continue to consolidate around the $83 level until the market gets a cleared indication of an improving economy and more importantly an improving consumer.


McDonald's made the news today as the company geared up for its share holder meeting. What made the news was record protests of the company by its workers and fast food employees. Protesters are demanding the right to unionize as well as for a $15 minimum wage. Shares of McDonald's lost about a tenth of a percent in today's session. The stock has been trending up over the past two months and is just off the all time high, supported by the short term moving average.


The Indices

The SPX is still winding up into the point of the current triangle formation. Today's action extended the move from the lower support of the long term trend line up to the resistance of the current all time high begun yesterday, but could not quite break above it. The indicators are once again pointing to an early/weak buy signal but a break above resistance is needed to get bullish on it. In the near term momentum is turning bullish with today's candle but remains weak, stochastic is rolling over and making a weak bullish crossover; Over the longer term both indicators show support along the trend line. At this time I am really just looking for a break of one of these lines. I am still a long term bull and believe the markets are going higher but without that break of support the chances of a correction in the index grow. Resistance 1900, Support 1875 and 1850.


The VIX fell to a new +12 month low today. The so called fear gauge is now at levels only briefly touched in the time since the 2008 financial crisis. This could be seen in two ways. First, it could indicate that the market is extremely calm, fearless and ready to rally. It could also be seen as an extreme of fearlessness in an uncertain time and indicative of an upcoming correction. This certainly goes along with my current analysis of the SPX. The index appears to be at a point of change be it a more up or down and the VIX seems to support it.


The Dow Jones traded to the upside today as well although by a smaller percentage gain. The blue chip index crept up from the short term moving average but remained below resistance. Resistance is the previous all time high with the current all time high just above. Dividend yield could be one thing keeping the index at the current levels; about 2/3's of Dow stocks are yielding about 2.5%, just about what the ten year treasury is yielding. The indicators are weak at this time but rolling over toward bullishness. A break above the current resistance could take the index up to near 17,000 while a failure to break could bring it back to support around 16,250 and 16,000.


The Dow Transports continue to set new highs, which is a bullish indicator in and of itself. The new highs being set by the transports were confirmed, if weakly, by the Dow just last week. Basic Dow theory says that the Transports will often lead the broader markets and that new highs in the Transports should be confirmed by a new high in the Industrials. So far both events have occurred although the indicators on the Transports are divergent. A correction of the up trend could by in the future but for now the index is indicated higher. Support exists around 7600 and 7800 between a longer term trend line and the short term moving average.


The Nasdaq Composite gained a half percent today, leading the big three indices. The tech heavy index moved up from support and the short term moving average today with rising, bullish, indicators. The index is showing support at the current levels following the correction of the past 6 weeks or so and could be gearing up for a move back up to retest the most recent long term highs. Following up from last week's addition of Bollinger â„¢ Bands to the Comp chart I see that they are still narrowing, pointing to further calming of market volatility and echoing the sentiment perceived from the VIX. A break above the upper band would be a bullish signal for me at this time.


Near term fears are still weighing on the market although it appears as if long term trends are still intact and taking back control. Jobless claims remain stable in the near term and are trending lower in the longer term; Leading indicators are positive and show better than expected improvement over the past and current month; home sales are improving and the Trannies are making new highs. There is still resistance for the markets in terms of technical levels and geo politics but I think they are both losing importance.

Tomorrow's trading could be weak due to the 3 day weekend so I wouldn't put much stock into what happens. Next week and the week after will be much more important in terms of the summer outlook for stocks. There will be now reports of earnings tomorrow, only one economic release. There will be no earnings or economic releases on Monday but a few important ones later in the week. Two weeks from now it will be time for new Jobs data.

Until then, remember the trend!

Thomas Hughes