First Quarter GDP was negative, as generally expected, setting the stage for a second quarter rebound.

Introduction

The overnight session was quiet, Asian and European indices tread water awaiting the release of the second estimate for US 1st quarter GDP. The number, -1%, in line with many expectations and yet another confirmation the 1st quarter was a bust. We knew this and the market reacted as expected, without fanfare. Other data released today helped to confirm the current state of the economy. Employment claims fell and pending home sales rose. Futures trading was positive this morning ahead of the 8:30AM releases of data and remained that way up until the open. Also keeping overseas markets in check, an upcoming round of central bank meetings. The ECB meets next week and is expected to enact some form of QE. The BOJ meets the following week and is not expected to change its policy. The following week the FOMC meets and is expected to taper as usual.


The S&P 500 was indicated to open about 4 points higher throughout the morning. At the open trading was mild but in the green. The S&P quickly moved up to roughly +4 and a little higher and held that level right up until pending home sales at 10AM. Pending sales, a measure of contracts signed and a forward looking indicator of potential sales, rose but not by as much as expected. Upon hearing this the markets faltered, but only for a moment. The S&P dipped oh so briefly into the red before quickly moving back up to the high of today's range where it remained until the early afternoon hours. Around 2:30 the afternoon trading picked up and sent the indices a little higher. The SPX moved up to around +9 and another new high. The Dow and Nasdaq were both right behind. Trading remained steady throughout the afternoon and into the close. The last few minutes of trading saw the market gain a little more strength as it moved to the days high just before the close.


The Economy

US 1st quarter GDP was revised lower to -1%. This is more than a full percent below the previous estimate of +0.1% and the first negative month in three years. It was generally expected to be negative but the reported number is double the consensus estimate. The market reacted without much care for the reward looking number in favor of the forward looking expected bounce in 2nd quarter GDP. Analysts are expecting a 3.8-4% rebound in the current quarter. So far the data has been supporting this expectation. The end of the month is this weekend which means that next week we'll get a boat load of economic releases including ADP, Challenger, NFP and Unemployment.

Initial claims for unemployment fell this week by -27,000 to 300,000. The previous weeks figure was revised up by 1,000 for a net drop of -28,000 this week. The drop basically wipes out the gain in claims last week and puts the number back at the low end of the 12 month range. Initial claims remain steady at this time, neither a plus or a minus for the my outlook at this time. More importantly are the longer term numbers that continue to decline. The four week moving average fell by -11,250 to hit another new low not seen since August 11th, 2007, according to the seasonally adjusted and annually revised data. On an unadjusted basis claims fell -5.4% to 271,865. I think going forward a drop below 300K claims or a move above 350,000 claims could be an indicator of strength/weakness in the economy.


Continuing claims fell by -17,000 to 2.631 million, the lowest level since November 17,2007. The previous week was revised lower making the total drop from last weeks report -22,000. Continuing claims continues to downtrend and is suggesting, at least to me, that while turnover in jobs remains steady, finding jobs is becoming easier and easier. At the same time total claims are also in decline. Total claims fell again this week, by -66,969, to another long term low. This could be an indication of job seekers moving out of the market but I suspect not. Jobs creation was strong the past two months and is expected to be strong this time around as well.


Pending home sales, released at 10AM, rose but not by as much as expected. The index of pending sales rose by 0.4 to 97.8, only 0.4% and a far cry from the expected 4.0%. This number gave the markets pause for about 15 or 20 minutes, just long enough to read into the report and get a better glimpse of the future. Economists are quoted within the report as saying they expect the housing market to grow, for sales to “trend higher” over the next few months at least. One reason is a build in inventory and the recent dip in mortgage rates, both expected to attract more buyers.

The Ten Year Treasury

The yield on the ten year treasury fell again today, dropping below 2.5%. Today's decline was met with support around the 2.4% level.


The Dollar

The dollar weakened a little today but remains in an uptrend. The Yen remains range bound and near the lower end of the range, held in place by Abenomics and the current no-more-QE stance of the BOJ. The euro has been moving lower over the past few weeks driven by the expectation of some form of QE from the ECB, which Draghi has said could come as early as the next meeting. Should the ECB follow through the euro could weaken further against the dollar, and perhaps against the yen as well. Until then economic data and expectations will drive the euro. The dollar index is above the midpoint of its 7 month range with bullish indicators, weakly bullish indicators, and a little room to move higher before reaching resistance.


Gold Is Falling

I guess the market finally got the memo I was bearish on the gold sector. Gold prices have fallen close to $50 this week and are approaching the $1250 level. The strengthening of the dollar over the past few weeks, coupled with improving data and the fed/taper outlook have been a big driver of the decline. Gold prices may find some support around $1250 but this will need to be watched closely. I still haven't seen, heard or read a reason to get long on gold. The Gold Index has responded to the sell off in gold by dropping hard, falling from the support turned resistance line I have been tracking over the last month. Low gold prices can only hurt already low earnings expectations for the gold miners and could carry the index even lower. The index made a small bounce today from just above $85 but it was very weak and failed to break above the mid point of yesterday's long black candle. The indicators are strongly bearish and are pointing to a retest of the 2013 lows near $82. This will be an important support level as a break below here could lead to a drop to the $66.50 level, the 2007 low and a full retracement of the 2009-2011 bull market in gold and gold stocks.


Oil Climbs Higher

Oil prices found support today around the $102.50 level. After initially trading to the downside crude prices gained in later trading. Economic data helped to boost oil prices but a drop in gas inventories was what really helped to give prices a lift. A rise in oil inventories was completely offset by a decline in gasoline supplies. The drop signals a strong start to the summer driving season and is a bullish sign for oil over the next few weeks and months. At the same time a near complete disruption of Libyan supply had Brent prices moving higher as well. WTI rose about $0.85 in today's session. The Oil Index, bolstered by higher prices and demand outlook, wrestled with the resistance of a previous all time high. The index gained about a half percent today and was able to move above resistance by the close. I wouldn't call this a confirmed break out by any means but one could be on the way. The indicators are still a little bearish but could be setting up with a weak/early entry signal, it just depends on said confirmed break out. In any event, now is probably a good time to look for possible trades in the oil sector.


Story Stocks

Earnings, and in particular retail earnings, were in the news today. A handful of retailers spanning the sector reported a mixed bag of results. Clothing retailer Abercrombie&Fitch beat expectations while Costco failed to. Popeye's, maker of delicious fried chicken, also beat with an impressive gain in profits and revenue. Abercrombie's results have be taken with a grain of salt though, they beat the expectations of an -$0.18 loss per share with a -$0.17 loss instead. The company also reaffirmed its guidance for full year earnings in the range of $2.15-$2.35. The results were enough to bring share prices back up from yesterday's one month lows but not enough to break the 30 day moving average.


Costco missed expectations but made an actual profit for its investors. Costco reported $1.07, 2 cents shy of estimates, on a 6% gain in comp store sales. Profit for the company is up 3% with a 5.6% increase in membership fee revenues. Total revenue of $25.23 billion was about a half billion short of estimates. Higher costs was one reason cited for the miss. Costco trade to the upside today in a wide range centered on the 30 day EMA.


The Retail Spyder (XRT) traded up today but remains at/near the center of a trading range. The ETF has been hovering around the mid point of that range for the past few months and is trading at that level now. Today's action brought the ETF back above the midpoint and the 30 day moving average with mildly bullish indicators. Over the longer term the indicators are fairly neutral and point to a possible state of near equilibrium and lack of direction for this sector. MACD and stochastic are both near the midpoint of their respective ranges and bobbing along that level. Both are currently bullish but neither are definitive.


The Indices

The SPX is moving higher after breaking through resistance. This move follows a bounce from the long term trend line and is accompanied by bullish indicators. Momentum is on the rise and gaining strength. Stochastic is overbought in the nearer terms and bullish in the short term with plenty of room to move higher. Economic trends are still good, if a little hit or miss still as today's pending sales and GDP reminded us. These trends and the expectation of an economic bounce back should carry the index higher. The market is rallying but the rally is not very strong at this time. There is also risk of divergence in both MACD and Stochastic that bears watching. If the data next week does not inspire confidence then the index could very easily be taken back to longer term support along the trend line. Until then however the index is advancing and supported by indicators.


The Dow's march higher left it a hairs breadth away from new all time closing highs. This move has been foreshadowed repeatedly by the Transportation Average which has made yet another new high today. The Dow is accompanied by indicators that are weakly bullish and exhibiting an early trend following signal. MACD has turned just turned bullish again with today's candle. The stochastic has made a weak bullish crossover; the %K has crossed but %D is flat and not yet fully rolled over. Resistance is currently at 16,750, a break above here could easily take the index up to the 17,000 levels.


The Tranports made yet another new high. This leading index has been leading the markets higher for at least the past 12 months. The index is currently more than 28% higher than 12 months ago (DJI is about 9.5% higher and the SPX is up about 16.5% in the same time). This index is showing strength in the candles and in the indicators. The index has traded up and into the green for the past days along with bullish indicators. MACD is strongly bullish and rising, stochastic is trending higher into the upper signal zone. While we must always be cautious as traders I see no reason to fear reversal in this index tomorrow and into next week. Once the data starts rolling in it's a different story but until then the transports are rallying.


The techs were among today's leaders and helped to power the Nasdaq Composite a half percent higher. The tech heavy index is still about midway between the recent bottom and the long term highs set in early March. Today's action brought the index to a potential resistance area around 4,250 with bullish indicators. MACD and stochastic are both indicating the index higher with a target at or near the current highs.


The markets seem to all be marching higher. The broad S&P is making new highs. The Industrials are tickling new highs and being led higher by the Transports. The Techs and smaller caps are doing their best to get back to high levels and are closing in fast. Next week will be important for the market as it will be filled with monthly macroeconomic events. Tomorrow's trading could subdued, there are only a few economic and earnings releases scheduled and I think all eyes will looking toward next week as a whole and next Friday in particular. Until then the SPX could drift along these new levels, perhaps test support, while the market awaits and gets ready for the NFP. Expectations are high for a rebound in the second quarter, let's see if the data still supports it.

Until then, remember the trend!

Thomas Hughes