The 2nd quarter comes to an end while the market quietly awaits on this week's data.

Introduction

Today is the end of June, the end of the month, the end of the quarter and the end of the half. The markets opened with a whimper but were able to drag themselves higher, at least for a while. The same was basically true around the world during the overnight session. Asian market began the week in the green ahead of a big round of data including official Chinese PMI tomorrow and US data later in the week. European markets were mixed but basically flat on average with the ECB meeting on the table in that arena. The ECB is having their regular monthly policy meeting is largely unexpected to do anything after last months round of stimulating actions. Although recent data including today's EU CPI readings suggest that deflation is still a risk for the region it is likely the ECB will wait at least another month before making further moves if they do anything at all. EU CPI was reported at 0.5%, in line with expectations but well below the target rate of 2.0% which could lead to some speculation.


Futures trading was essentially flat this morning as well. Early trading had the S&P 500 down about 2 points but going into the close there was a pick up in activity. All the major indices moved close to flat line and even poked into the green ahead of the 9:30AM opening. After that trading was weak with the indices tread water once again around the 1960 level; this is now the 9th day of trading above 1950 for the SPX. The first 30 minutes of trading had the index under water but the 9:45AM release of PMI and then the 10AM release of pending home sales provided enough support to keep the index in the green for most of the rest of the day. There was a brief dip back below break even that hit bottom at 11:08AM just above 1959 and then later, during a press conference at the White House, the index also touched into the red along with the Dow. Late afternoon saw the market struggle and the SPX fall to about -2 before moving back up to close just shy of break even. The Nasdaq Composite was able to hold onto positive territory for the day and set a new high along with Transports.


Traders and the market are waiting for what this week will bring. It's just another week of data but this data could have a domino affect in terms of how this month turns out, this quarter and this half of the year not to mention the state of the economy going into the summer and the second half. The big focus of the week will be the NFP as usual but as always I put more faith in the data as a whole than in any one piece. This week, because of the July 4th holiday, there is no trading on Friday so the NFP data will be released on Thursday. Tomorrow there is auto/truck sales, ISM, and construction spending. Wednesday is the ADP employment change, Challenger Gray & Christmas survey of planned job cuts and factory orders. Thursday the usual jobless claims numbers plus the addition of NFP, unemployment, trade balance and ISM services index. And the ECB meeting/announcement on Thursday. And earnings season starts next week. What didn't seem to affect the market today was news of increased ISIS control in Iraq.

The Economy

Chicago PMI was reported at 9:45AM. This forward looking gauge of manufacturing declined, but less than expected, depending on which estimate you look at. Basically the reported 62.6 is in line with expectation but less than last month's 65. New orders did not expand as much as last month but the production component surged to 70. All in all the report points to rebound in the 2nd quarter that is carrying over into the third.

Pending home sales jumped more than expected. Analysts had been looking for a gain of about 1% but the actual 6.1% is the biggest gain since June of 2010. Pending home sales is a gauge of signed contracts that could lead to an increase in existing and new home sales in for June and more likely July. All four regions showed increases in pending sales but on a year over year basis we're still down 5.2%.

I really like the first sentence of Moody's weekly survey of business confidence created by Mark Zandi. It starts of with “Businesses couldn't be more upbeat”. The verbiage of the survey changed significantly for the first time weeks noting how current sentiment is in “stark contrast” to the revised first quarter GDP. Most importantly I think is that the hiring component of his survey has risen to a record high with more than half of respondents reporting they are intending to hire more employees.

In The News

The Supreme Court handed out two decisions on the eve of the summer break. The first to be announced was a 5 to 4 decision to prevent unions from forcing home based workers to join. This is in response to an Illinois case in which home based care workers were being forced to join a union against their will.

The second was concerning the Hobby Lobby case against Obamacare. Again in a 5-4 decision the justices ruled in favor of Hobby Lobby in saying that the corporation could in fact opt out of paying for certain benefits under Obamacare due to religious freedoms.

GM made the news all day, more or less. Early in the day the compensation plan was revealed by Kevin Feinberg. In his plan any previous settlements are still included in the new plan which could pay approved claims in as little as 180 days. Expected payouts range from $2 million to $8 million depending on the individual case. Later in the day shares of GM were halted pending a news announcement at 2:30PM. GM announced another 6 recalls affecting 8.6 million vehicles on top of all the other recalls they have already announced. This brings the 2nd quarter total for recall charges up to $1.2 billion and $2.5 billion for the first half of the year. Shares of GM traded down today but were supported at the 30 day EMA. The indicators are weak and turning bearish so a retest of longer term support around $35 and $33.50 is not out of the question. It looks like GM will weather this scandal, they are certainly trying to stay ahead of the curve with all the recalls.


Obama held a press conference at 3PM today announcing an order to Homeland Security and the Attorney General to send interior assets to the borders to help strengthen border patrols. The focus is to be focuses on preventing the influx being experienced along the southern borders. During his statements the markets dipped back down to break even and into the red.

US Steel is being dropped from the S&P 500 tomorrow afternoon. The steel maker is being replaced by a crushed stone and gravel producer from NC, my home state. US Steel is being moved to the S&P Mid Cap 400. Shares of X opened lower and then regained break even by the close of the day.


The Gold Index

Gold lost a few dollars in the early morning session but regained that lost ground after the open. Gold trading was fairly stable throughout the day, holding around $1315 for most of the day. Then, during the Obama press conference gold prices spiked up to trade above $1325. I guess this move was based on Obama sending more forces to help along the border.... Any way, gold has been testing $1320 for about 2 weeks now and has not been able to hold above that level yet.

The Gold Index opened the week down from the Friday close but moved higher throughout the day. Resistance was met once again at the $100 with deteriorating technicals. The index is at long resistance, in a long term down trend with indicators that are setting up for a bearish trend following signal. I may be wrong and reading this from the wrong side of the action but I just don't see a reason to get long on gold, or much reason to expect significant earnings growth from the gold miners. If the index were to break through $100 it could easily carry to about $110 on momentum. If the index fails to break then a near to short term double top could form with a potential target as low as $85 with supports at $95, $92.50 and $90 along the way.


The Oil Index

Oil prices fell today as the Iraq premium lost a little more value. There was more news of ISIS and the insurgency in Iraq but the oil infrastructure remains as yet unharmed and traders are slowly beginning to believe it. I think now there may be risk of an actual threat to oil which could cause oil to spike even higher than before but that is just a random thought. WTI fell about a quarter percent with Brent shedding just a little more. The Oil Index lost about -0.15% in today's trading but held above long term resistance turned support at the previous all time intraday high. The indicators are bearish now but so long as the index holds this level then that is OK. High oil prices will lead to higher oil earnings, lets wait to see how the oil companies, and the oil services companies, fare this time around. The big oil companies report about a month in to the season so we should see those around the first week of August.


The Indices

The Transports led the market higher today, gaining more about 0.33% in today's session. The index is still inside what looks to be a potentially bully flag/triangle formation that could send the index higher provided it can break above resistance. I think the only thing holding it back right now is the week ahead, the data could help or hinder the rally providing catalyst for correction or bricks in the wall of worry. Momentum is still a little bearish but declining and very nearly at zero while stochastic is still showing the strong trend following signal.


The Nasdaq continues to be a market leader and set a new 14 year high today. The tech heavy index climbed by 10 points or roughly 0.23% extending its reach above previous resistance. Momentum is mildly bullish but basically neutral while stochastic is producing a decent trend following signal but one that usually appears later in a rally. The indicator is overbought in the longer term as %D is high in the range and has been so for almost a month. This doesn't mean a rally can't follow, just that the market has already rallied some already. In a protracted rally the market can remain overbought or near overbought with dips to or below the upper signal line for many months. 4370 and 4250 are potential areas of support with the 30 day moving average wedged in between.


The SPX was first loser in today's action with a loss of -0.04. The broad market is trading just beneath the current all time highs with mildly bearish momentum and a stochastic that is wiggling right at the upper signal line. Both %K and %D lines are together at the signal line and overlapping. The indicator is in mid signal but not quite and this index, like the transports and the Nasdaq, is still beneath resistance and in need of break out for confirmation. What we need to keep in mind through all this near term consolidation is that the SPX just had the 6th straight quarter of gains and the best 2nd quarter since 2009.


The Dow Jones Industrials led the losers today with a drop of -0.15. The blue chips traded down but were supported by the 30 day moving average which is a good sign for the bulls going into this big week of data. The indicators here are not so rosy with momentum a little more bearish than the rest and stochastic doing something weird pointing higher in the longer term but also indicating near term weakness. Current support is the 30 day EMA and just below that level around 16,750.


This week will be a big one for economic data and the market. The data is nothing unusual, just monthly data. In terms of the rally, the first quarter revisions, the expected 2nd quarter rally and how the third quarter projections the data is huge. This week, and even today with the CPI and Pending Home Sales, will be a glimpse into the final numbers revealing how much the economy rebounded during the quarter. Today's data was better than expected and that is what I expect tomorrow and the rest of the week. The indices closed the quarter at another high while longer term economic indicators are pointing to more of the same. There is some concern that the second quarter won't be as strong as projected and that is likely to be right given the revision to 1st quarter numbers. Just how strong was the bounce, and how strong relative to the 1st quarter is the question to be answered.

Until then, remember the trend!

Thomas Hughes