The week started with relative calm as the market digests last weeks jobs numbers, enters earnings season and waits on FOMC minutes.

Introduction

The week started off with relative calm following the three day holiday. International markets began the week mixed as traders contemplated the upcoming earnings season and weaker than expected data from Europe. In Germany industrial production fell -1.8%, the second month in a row of decline and below the expected rise of 0.3%. Asian and EU equity indices fell about a half percent on on the news with earnings and GDP growth in focus.

Early trading on the US market was muted. The futures trade indicated an open about 5 points below last weeks close for the SPX with the other major indices on similar footing. There was no economic data today to impact the early trading but comments from the IMF's Lagarde made over the weekend was the talk of the morning. She expects the US economy to improve over the next 18 months although momentum has declined. She also hinted at possible lower GDP estimates for 2014 based on some weakness in Europe and China.


There was no economic data today and the calendar is pretty light for the week. Tomorrow we'll get the JOLTs number, expected job openings, and consumer credit. JOLTs is released at 10AM while consumer credit is scheduled for 3PM. On Wednesday the FOMC minutes are released for the prior meeting. Traders will be looking for clues into the Fed's view on the economy, when the taper will end and more importantly when interest rates may begin to rise. After that the economic front is dominated by the weekly jobless claims on Thursday along with wholesale inventories, followed up by the Treasury Budget on Friday.


Trading was weak at the open as expected. In the first few minutes the SPX dipped down by about -6 points before finding early support around 1980. The index made a small bounce bringing it up to about -3 ish until just before 11AM. Right aroud 10:52AM the market began to sell off, bringing the index down about a half percent to just above 1975. The SPX held near this level for the mid part of the day with the Nasdaq down about 30 points and the Dow Jones Industrials about 45. Intraday bottom was hit about 2:30PM with the SPX down about 0.5%. The day's low levels held for the better part of the afternoon with a slight pick in action going into the close leaving the SPX at -0.39% for the day.

The Economy

No economic reports were released today except Moody's Survey of Business Confidence. Mark Zandi reports that business remain upbeat and “sunny” about the economy. He continues to add that the report is consistent with an economy growing faster than anticipated and that June hiring was strong. Personally, I have noticed that quite a few of my local stops have hired and are training new staff.

Earnings Season Starts Tomorrow

Earnings season gets underway tomorrow with Alcoa. The aluminum giant is expected to report earnings of $0.13 per share, up $0.07 from the previous quarter and well ahead of earlier estimates for the second quarter. Analysts forecast for Alcoa earnings have been on the rise and are nearly double what they were at the first of the year. There is an expectation for revenue to decline somewhat on weak aluminum prices but the foreward guidance will be of more importance, especially after the recent acquisition of Firth Rixson last month. Alcoa is currently up over 85% for the last 12 months and currently testing resistance at the $15 level. $15 has been a pivotal level for this stock over the past 5 years in the wake of the 2008 market crash. The long term trend is up but the indicators suggest a return to the trend line could be on the way. Today shares of Alcoa fell more than 1.5% from the current high and long term resistance.


The next significant earnings report will come from Wells Fargo on Friday. The bank is the second big report of the season and the lead off for the banking sector. Monday Citigroup reports followed by JPMorgan and Goldman Sachs on Tuesday. Wells Fargo is expected to report earnings slightly lower than the previous quarter but remain in line with full year projections. To date Wells Fargo remains one of the strongest of the big banks. Today the stock lost about -.95% but remains above the long term resistance turned support level of $52.50. The stock has been trending up for about 9 months and is within a percent or so of the high set within the last two weeks. Indicators are bullish but a growing divergence in the stochastic and weak momentum suggest a pull back or correction is likely. Near and short term support exists at the current level near $52.50, just below along the 30 day EMA and then longer term support a little further down along the $50 level. This week could see the stock consolidate or pull back ahead of the earnings report on Friday.


The Banking Index also fell today, dropping from resistance set earlier this year. In the near term momentum is bearish but extremely weak while stochastic indicates the sector is neither overbought nor oversold. While being consistent with a trading range the indicators also leave open the possibility of a break out, providing what little economic we will get this week is positive, bank earnings do not disappoint and future guidance is acceptable. Current resistance is $72.50 with an upside target, on a break out, near $77.50. Near term support is just below the current level near $71.50 with short and longer term support below that around $71, $70 and $67.50.


The Oil Index

Oil prices continued to fall today as Iraq fear exits the market and Libyan oil ports prepare to reopen. WTI fell by roughly $0.75 today with Brent dropping about $0.30 per barrel. The insurgent uprising in Iraq has yet to have an impact on Iraqi oil production or supply which is allowing the fear premium to subside while at the same time the stand off in Libya which has had oil shipping ports shut down for over a year is near an end. Rebels and officials have reached some agreement which could lead to ports reopening in the near future. If so Libyan supply could more than double to nearly 1.5 million barrels per day. This has been on the table before and failed to come to fruit so there is still risk up to and until the ports are actually opened. In the meantime the Oil Index also traded down today, losing about three quarters of a percent. The index remains above long term support along the 1650-1675 level. The indicators are bearish at this time, in line with the current pull back from the recent all time high, but not to troubling at this time so long as support holds. The prolonged run of high oil prices this spring should convert into higher revenue and potential earnings for the big oil companies, the bulk of which will report earnings in the first week of next month. Until then watch support levels and developments in Iraq and Libya.


Sector Watch

Fourth of July box office revenue was reported today and is down 44% from last year. The top box office title this year was Transformers which actually opened the week before. Total holiday weekend revenue was just over $130 million, about $13 million less than last years single top income producer Despicable Me 2 which brought in over $143 million on its own. This years top three hopefuls were only able to produce about $33 in revenue together. Industry insiders blame the drop in sales on a lack of big blockbusters and no animated family titles. Today the Consumer Discretionary Spyder (XLY) fell from last weeks new high to drop back below resistance. The ETF, which includes names like 21st Century FOX, Disney and Time Warner, fell about a half percent to trade just below the previous all time high set this past march. Both MACD and stochastic are weak and divergent, consistent with resistance and a potential trading range. Most of these names, in particular Walt Disney and Time Warner, do not report until the first week of next month so there could easily be some consolidation or pull back until then. The longer term trend in the sector is up so I expect to see some discretionary spending somewhere, it just isn't in the movie theaters at this time. Other top names held by this ETF include Amazon which never makes money, Home Depot, which has been doing well and benefiting from the slowly rebounding housing market, and Priceline, darling of the market.


Apple Does It Again

Apple made a move this weekend that sent the newly split stock to a new high. The company hired Tag Heuer executive director of sales, according to Reuters. The news fueled speculation of the upcoming iWatch and along with reported strong June sales sent the stock up by over 1.5%. Apple made no comment on the report. The move up in the stock is accompanied by bullish indicators and could carry the it higher. In the nearer term stochastic is overbought but momentum has just turned bullish so the current move may have only just begun. Apple is scheduled to release earnings in two weeks on July 22nd and is expected to report EPS of $1.22 or 40% less than the previous quarter.


The Indices

The Dow Transports once again led the indices into the red. The Trannies fell by more than a full percent today, falling from all time highs set last week. The indicators have just turned bearish with MACD and stochastic both indicating near term weakness. The long term trend is still up so I don't think this is much to worry about, just another chance to buy on the dip unless earnings from the sector don't pan out. Higher oil prices are a concern for this sector and could hurt the bottom line for many. Guidance will be an important factor as always and of course, if oil prices continue lower then that burden will lighten for the transports.


The Nasdaq Composite was second up in terms of today's loss. The tech heavy index fell by more than -0.80% today on light volume. Today's decline is a retreat from new highs set in the previous trading session and not unexpected in light of the index position relative to support, the short term moving etc. The index has been making a push higher on economics and earnings hope and, even with today's drop, is still 2.5% above the 30 day EMA. The long term trend is bullish but the upcoming earnings season may provide reason enough for traders to wait for news and cause the index to consolidate or correct. At this time MACD momentum is bullish but divergent and stochastic is entering a bearish crossover high in the range. This is not a reversal signal but one that could lead to a consolidation, pullback or correction. A potential catalyst for this index will be Intel earnings next Tuesday. Current support is about 100 points below the current level, around 4350.


The SPX lost about a half percent in today's trading. The broad market also fell from a new all time high set last week with weak indicators. Although still bullish, the indicators are both divergent at this time. With the index extended 1.5% beyond the moving average it is not unwise to expect some form of a pull back. On the longer term charts of weekly prices the index is still bullish and advancing, but also appears to be quite extended. I don't think any major correction is in the offing but some consolidation ahead of and into earnings season is not out of the question. After that it will come down to the earnings themselves and guidance into the end of the year.


The Dow Industrial Average was today's strongest index. At the end of the day the blue chips had lost only about a quarter percent, falling less than 50 points. The index managed to close above the all important psychological level of 17,000 with divergent and weak indicators. If the index does not hold onto 17,000 going into earnings season then a pull back to 16,750 is likely with further support indicated just below that around 16,500. Tomorrow will be a big day for the Dow even though Alcoa is no longer a Dow Component. Earnings from the Aluminum giant will surely be taken as an indication of what is to come for the actual Dow components.


Today's the markets fell, but from all time or at least new highs. Highs driven by the rising economic tide and the much better than expected jobs data released last week. The much better than expected ADP, Challenger and NFP numbers, if not one time events, could be pointing to the jobs rebound we have all been expecting to come.If so, then the data should continue to improve into the summer and that could lead to improved earnings, GDP growth a quick end to the taper.

Earnings season this time around may not be as good as we might like, simply because of all the down ward revisions to past data we have had, so it will be the forward looking guidance that trumps all. In that vein the companies reporting earlier will be more of a backward looking indicator versus those reporting next month who's current quarter is more in line with the calendar year. What will companies say in their reports? According to Mark Zandi and Moody's Survey of Business Confidence “Business' sunny disposition remains firmly in place”. If this is true and the earnings and data show it then the market could rally on into the summer. Between then and now there are FOMC minutes on Wednesday and an FOMC meeting next week.

Until then, remember the trend!

Thomas Hughes