The week began without a bang then the market stealthily set a new record high for the Dow, SPX and Transports.

Introduction

I was a little surprised by how soft the market opened today but only a little. The late day rally on Friday, carrying the S&P 500 to new highs, was one reason for my surprise. I though that could lift trading on Monday. Of course, this week is full of macroeconomic data and that is reason enough for traders to take pause. Not to mention the mixed PMI reports from Asia and Europe over night. In China flash PMI readings were better than expected at a five month high. In Europe flash PMI readings were not as good as hoped and lead to further speculation that the ECB will act in some way at its meeting this week. The Chinese PMI was off set by two separate surveys of home prices which both declined. Regardless, both China and the EU are still in expansion although both are still suffering to various degrees.


Early futures trading was positive. The S&P 500 was indicated up by a point or two followed by the Dow with about a 20 point gain indicated. There was no data or major market moving news released before the bell but after the bell is a different story. The markets opened as indicated, the Dow setting a new intra day high, then drifted quickly down to break even. The indices held this level until 10AM when ISM Index and Construction Spending figures were released. At that time the markets sold off quickly sending the SPX down about -7 points and the other major indices into the red. The reaction and sell off was knee jerk at best and quickly reversed course. The SPX found near term support at 1920, a level that may be important this week as data is revealed piece by piece. By late morning the indices had returned to break even or just about. Late afternoon trading saw the indices tread water above or near break even before a little push just before the close put the Dow at a new closing high.

The economic calendar is the reason for the cautious tone to trading today. The markets want to be bullish but still need the data, and the Fed, to reaffirm that sentiment. Today, ISM and Construction Spending, tomorrow Auto/Truck Sales, Factory Orders and the Fed's Beige Book. Later This week the jobs bundle unfolds with the ADP Employment numbers, Challenger survey of planned lay offs, jobless claims (expected to remain stable) and then on Friday it wraps up with the Non Farm Payrolls report and US Unemployment. Current consensus expects for jobs to moderate from last months surprise surge back to levels we would have been happy to see just 6 months ago. No doubt there will be a revision to last months figures to consider as well.


The Economy

The ISM Index and construction spending numbers were not robust, but they are still in line with economic trends. ISM was an expansionary 53.2. This is below the expected 55-56 range predicted by economists and below the 54.9 posted last month. Later in the day the ISM revised the number, and then revised it again blaming software for the problem. The number was finally set at 55.4, right in line with expectations. Regardless this is the 12th month of expansion according to this index. Within, smaller data points reveal that new orders, employment, productivity and inventory are all on the rise, just not as quickly as last month or as expected. Prices paid also rose which is a negative sign for inflation (coincidentally a Fed chief restated today “no rate hikes until ...inflation...”.

Headline construction spending was less than expected but expansionary. The headline reported spending increased by only 0.2% but since last month was revised upward by 0.4% from 0.2% I would say that spending is on track. Total spending in the US, including government spending, is at a 5 year high. This is also the third month of gains for spending and another good sign for both the labor market but also for GDP in general. While these figures are not directly fed into the GDP calculation it is a sign that GDP is expanding, the question is, how much?

Mark Zandi reports in his weekly survey of business that confidence is strong. Survey participants say that sales, pricing and hiring are strong. Longer term sentiment is upbeat and show optimism through the end of the year. This report is in line with the expectation that the a rebound is happening.

The Gold Index

Gold prices hovered around the $1245 region and Friday's closing prices. The data had initially sent gold prices marginally higher but once traders realized the headlines weren't the news that bid fell out of the market. Gold prices could hover the rest of the week, or at least until the economics lead the market one way or the other. At this time there is no reason to expect the Fed to let off the taper or to put off an interest rate hike much farther than currently expected which I think is still in the May-June 2015 time frame. With this in mind, economic data showing expansion and the equities markets marching higher there still isn't a reason to get long on gold that I can see.

The Gold Index traded lower today and is still in consolidation following the drop from resistance last week. This consolidation may result in a bearish flag and continuation pattern but will need to break current support just above the $84 level. When gold was at $1300 there wasn't a lot of reason to think gold miners would be able to improve profits, gold at $1250 will make any improvements even harder to achieve. My original targets for the near to short term around $80 and $81 are still looking good at this time.


The Banks

The banking sector traded mostly higher today. The Banking Index (BKX) gained about a half percent driven by today's economic data. Construction spending at long term highs with expansion basically pacing expectations along with improving labor conditions can only mean good things for this sector, especially mortgage originators and real estate related business. This index has been range bound for about 7 months and may remain so with resistance around the $72.50 level. Expanding economic data can help raise sentiment and expectations but I think the banks will have to prove they can make profits and grow for the sector to break out. Indicators are bullish in the near term and consistent with a ranging market in the short to long term.


Market News And Story Stocks

As I mentioned earlier, Fed President Evans said that there would be no interest rate hike until inflation data warranted it. Later in the morning the prices paid component of the ISM suggested that inflation was up at least a little.

The EPA unveiled sweeping new legislation aimed at reducing coal emissions. The new laws seek to reduce emissions by up to 25% and are now subject to several years of review by legislators and the states.

Golfer Phil Mickelson made the news for suspected insider trading. Apparently a chain of events starting with Carl Icahn led to Phil playing golf with someone who said something like “that sounds like a good stock to buy, lets go get some” and they did and made some money. Whether or not it was insider trading is still undecided but the general opinion in the news is that it isn't.

Apple made the news not once but twice today. First, today is the date of record for the upcoming 7-for-1 stock split scheduled for Friday. Owners of record at the end of today's trading will receive their new shares at the end of trading on Friday in order for the new stock to trade on Monday. In other news Apple held its World Wide Developers Conference today revealing the name of its next operating system, OS X Yosemite. Today, Apple trade to the downside, losing about -0.6%. I think today's action had more to do with the stock split and less to do with the conference. I would expect to see this stock move lower into Friday as traders take profits from the earlier rally and pre-split run up in prices. The indicators, especially the MACD, are incredibly divergent and support my theory.


The Transports were a leading sector today, led in turn by Delta Airlines. Delta moved higher by nearly 2% today in a continuation of the 12+ month rally in the stock. The indicators are bullish but there is a divergence in momentum that needs to be monitored although current price action suggests the stock is moving higher. Today's candle completes a potentially bullish continuation signal with near term implications at least.


The Indices

Starting with the Transports the markets are looking good. The Dow Jones Transportation average powered to another new high. The indicators are bullish and on the rise suggesting strength in the index. At this time it is well above the trend line and short term 30 day moving average and in danger of near term correction but there is no sign of weakness yet.


The SPX's trading day can be described as a spinning top, a small candle of basically indeterminate direction. This was more or less expected but I still thought there might have been, not strongly, but might have been some more bullish activity at the open. In any event the broad index maintained support even with the knee jerk reaction to the ISM and Construction data. At the end of the day the index closed in the green with bullish indicators, both the MACD and stochastic are on the rise. Stochastic is still below the upper signal line but fast approaching it in a show of potential strength. This week of data could be what gives the market permission to keep on rallying.


The Dow made its first new all time intra-day high this morning and marched its way to an all time closing high by the close of today's trading. The activity I semi-expected at the open didn't materialize, maybe those eager traders waited for the close. Not a bad idea since there was that brief sell off this morning. The indicators here are weak but bullish. Momentum is still weak but stochastic is indicative of buying in the near and short term. The break above all time highs is an important move and one foreshadowed by the Transports for some time. The Transports have been rallying for months, will the Dow do the same? A first target based on past support/resistance levels is about 500 points higher provided the break is sustained. Today's break was kind of stealthy, just like the SPX two weeks ago on Friday.


The tech heavy Nasdaq Composite was the laggard of the big three indices. The indice fell in today's trading and never was able to move into positive territory. Today's action helps to confirm a resistance level set by the Nasdaq on its way up to the long term high and then back down on the way to support. The indicators are positive and indicate strength in the index but it may have some trouble with the 4,250 level. That is of course provided the data unfolds as expected.


A Quick Thought On Volume

Volume today was low again. There aren't a lot of traders in the market at this time but that may be a good thing. I like to attribute low volume to the average trader wising up. Perhaps they, the average trader, have realized trading because because a spunky baby thinks it's cool is not a sound investment strategy. They may have figured you don't have to sit in front of the fancy trade station all day waiting for multiple signals to form in real time on your state of the art option trading platform and money losing machine to profit in the market. If the average trader has wised up then he/she isn't trading their money away and that could be a reason for lower volume.

If this theory is true then volatility in equities and options could or would subside just because of less activity. If that is true then there may be evidence in the VIX and the VIX is now at lows not seen since before the market crash of 2008. These are levels when the stock market was rallying and day trading as a way of life was at a peak. In those days the VIX did not just touch these low levels once, it bounced and bobbed along at these low levels because they were normal.


Like Jim says, low VIX levels are reason for caution because they often signal impending pull backs. The market tip toes down to a low VIX level like a swimmer entering a pool, when the tepid cold market is too shocking the market pulls back. If however, the economic pool begins to heat up, as it appears it is, how deep can the VIX go before the market pulls back again? Economics are changing, demographics are changing and the market could be changing with it. If, and I know there are about a dozen if's in this theory, the times really are changing and we really are in a long term bull market could the VIX return to the pre-2008 levels and a new normal?

It seems as if the market wants to rally. I'm with it but there is still a whole lot of data coming out this week. As a trader I and we need to be prepared for volatility throughout the week. Tomorrow Auto/Truck sales could fall short. How will that affect out look? The Beige Book could be more dovish/hawkish than expected and that could move the. After that the jobs picture could be robust or rust. Until we know for sure and even afterward caution is due.

Until then, remember the trend!

Thomas Hughes