The Fed reveals that all is as expected.

Introduction

Better than expected earnings from Alcoa lifted the markets early but failed to spark a major bounce. The FOMC minutes were in the market's sights and held trading in check until after their release at 2PM. Early trading was muted and saw the US indices post mild gains after yesterday's sell off. The weakness yesterday was not unexpected as we are on the brink of what could be a very important earnings season. The S&P is expected to post earnings growth of over 6% this quarter and if Alcoa is still the indicator it once was could be pointing to even better results than that. Alcoa's reported adjusted earnings are 50% better than expected and came with reaffirmed full year guidance and a promising outlook. On top of that economic conditions are still in question even though last week's jobs numbers were much better than expected.


Early futures trading had the indices down a few points but by 9AM were in the green. The SPX and other major indices made a rebound at that lasted for all of about 5 minutes before trading settled down to a calm level for the rest of the day, up until 2PM at which time the FOMC minutes took over. Other news affecting early trading is a growing round of violence in the mid East between Israel and Hammas militants. Israel has fired missles and made airstrikes into Gaza in an attempt to stave off a new round of attacks from the group. So far no accord has been reached. Also in the news was a warning from the Container Store. The company reported a wider than expected loss and lowered its full year guidance due to weak sales.


Once the minutes were released the bulls made a little head fake toward support that quickly reversed, sending the indices to new intraday highs. The minutes were largely as expected and did not indicate anything other than what we already knew, or though we knew. The economy is growing, the taper is going to end, most likely in October with the last $15 billion, interest rates are going to rise next year and it's all based on the data. Maybe now earnings can start to take over. Friday Wells Fargo reports before the bell.

One Minute Chart

The Economy

Contrary to what the media may have you thinking the FOMC minutes were not the only piece of data released today. The mortgage index was also released today and came out better than expected. The Mortgage Brokers adjusted index of mortgage application activity rose by 1.9% this week after several weeks of declines. On a non adjusted basis applications rose by just over 4%. The Fed Minutes revealed that members were generally in favor of ending the taper in October with a final $15 billion reduction. This was contingent on the data supporting, as it has been, their expected improvement in the labor market. They were surprised at the rate of decline in the 1st quarter but see rebound in the 2nd quarter and growth moving forward. On the interest rate front there was little conviction among members to increase rates sooner than expected with the current target of mid 2015 still standing.

The trend in jobs has been up in recent months. The NFP and ADP have both been strong with the last round very strong. Yesterday the JOLT's numbers revealed that job openings have increased in June more than expected which also supports that trend. Tomorrow the jobless claims, expected to show a mild drop from last week, will be watched for additional sign of improvements. The next FOMC meeting is at the end of the month, July 29 and 30th.

The Oil Index

Not everything was affected by Fed Watch. The price of oil fell sharply today with WTI losing more than 1%. Brent was not far behind with a -0.75% drop followed by a -0.25 fall in natural gas. This is due in part to a reduction in fear of supply disruption in Iraq but more specifically with another positive report from Libya. Not only are the two main oil ports close to opening the largest oil field, Sharara, is close to resuming production as well. For now this is just a headline but if/when either of these two facilities come online for certain there could be another dip in oil prices.

The Oil Index fell today as well, but only by about a tenth of a percent, before picking back up in the afternoon portion of the session. Oil prices were at premium levels for all of the calendar 2nd quarter which has led the market to expect good earnings this season. However, now that oil prices are falling the hopes of future earnings growth may be dimming. This is perhaps why the industry has begun to receive some down grades. Today BP was downgraded to hold from buy at Deutsche Bank today, another in a series of downgrades for the company since the beginning of last month. The index is still supported by the short term moving average and long term resistance turned support just above 1,650. Bearish momentum is growing so I would expect the index to at least continue to test that support. If support holds until the big oil companies can report earnings and give us a peak at the future the long term up trend could resume. Until then a break down of support could bring it down to 1625 or 1600 in the near term and still leave the long term trend intact.


Gold Pops On Fed Minutes

Gold rallied on the Fed minutes and the view that rates would rise later rather than sooner. Current consensus has it around the end of the 2nd quarter 2015. Some speculation had rates going up as early as the end of the first quarter and I think I may still lean toward that camp. Data is improving steadily and if/when the sectors of the economy start to move in synch with each other there could be real jump in GDP output. Of course there could not be as well. I'm still on the fence with gold and the Gold Index and fear this could be a bull trap.

The Gold Index responded appropriately and moved higher as well. The index climbed close to three percent but is still showing some serious divergence. I'm willing to concede that gold is moving higher and the gold index with it, obviously, but the index is still within a longer term down trend pattern so I'm not getting too bullish yet.


Alcoa

Just to touch base with Alcoa. The aluminum producer produced golden earnings based largely on value added products. I can believe it...I don't think they make bikes but the one I just bought, made from aluminum, was not inexpensive and I can only imagine what the costs are for the high quality widgets being used by and for the growing number of adult millenials there are in America today. Shares of Alcoa surged 2% in the after hours sessions and continued its climb today. The stock broke out to new highs on strong volume accompanied by trend following stochastic and MACD signals. This may be a good one to get into on a consolidation or dip.


In The News

Sofware maker Gigamon lowered its revenue outlook for the 2nd quarter based on problems with closing deals in the pipeline. The lowered revenue guidance puts the firms at the lower end of the expected range and has caused several down grades. One analyst said the downgraded status was due to lack of confidence in the companies management. Shares of the stock fell 32% today are down close to 60% for the past 12 months.


Today's hot sector was consumer discretionary. The Consumer Discretionary Spyder (XLY) gained more than one percent today after falling from a new high earlier in the week. The ETF has been moving higher over the short term but is capped by resistance at this time. The indicators are bullish but weak and consistent with a potential range. If resistance is broken the ETF could carry as high as $72.50 or $75.00. Earnings for the big names in the fund don't begin to come out for about two weeks and stretch until the end of the season. Data, particularly earnings data such as tomorrows jobless claims, could help keep the ETF testing resistance until then provided it supports improvement.


The Indices

The Nasdaq Composite led the major indices in their bounce higher today. The tech heavy index climbed more than a half percent following the release of the Fed minutes. The index is above support but weak indicators suggest that support may be tested in the coming days. Momentum has turned bearish in the near term but longer term analysis shows that the trend is still up. Stochastic is pointing down but in light of the underlying up trend in stocks this is more of a chance for the index to cool down some rather than an indication of reversal. The index may experience more weakness until traders grab onto a reason to start buying again. This could be data or earnings. If earnings and data fail to support the trends and the index breaks near term support at 4400 longer term support exists around 4300, 4200 and 4100 with the long term trend line just below that around 4,000. While a long term correction is always possible I'm not seeing it in the charts right now.


The Transports were also favored today. The Dow Jones Transportation Average climbed about 0.54% in today's session. The index is bouncing after a mild correction that seems to be finding at least near term support above the short term moving average. It also appears as if the index is confirming the break above a bull flag pattern that could take it higher by 250 points or more. Tempering this assessment are weak indicators that have yet to confirm the move. The upcoming earnings season and next weeks round of macro economic data could be the catalyst.


The Dow Jones Industrial Average edged out the S&P 500 by a tenth today. The Blue Chips gained 0.47%, climbing from the short term 30 day moving average. The index is sitting near the all time high with indicators that may be more accurately describing the current market sentiment. Neutral. MACD momentum has been at or just above the zero line for several days with a stochastic that is trending firmly through the middle of the range. This I think shows a market waiting for the next sign of what to do. At the current high level it would be easy to run for cover and take money off the table but at the same time what's going to happen with the market and the economy in the next month and quarter if economic trends continue the way they are?


The broad market was the laggard today. The S&P 500 climbed 0.46% today flirting with near term resistance at 1975. Despite today's gain the indicators remain bearish with momentum on the rise, if still weak, and stochastic crossing under the upper signal line. Although the trend is up there is room for the index to come down and the indicators support the possibility. There may at least be a little more sideways trading and consolidation until the earnings trend is set. Near term support today kicked in around 1965, if that does not hold next support is around 1950 with the trend line not far below that around 1925.


It all comes down to earnings now. And data. And the Fed. Well, earnings first. Tomorrow earnings season really gets started with Wells Fargo. Other than there is not much on the calendar until Monday and Citigroup, then Tuesday with JPMorgan and a few other of the major bankers. Once the earnings trends are set, and there is wide expectation for earnings growth the time around, the next thing in focus will be the data. Next week is pretty big for data as it is the mid point of the month and includes several key points of housing information. Following that another big week of earnings and then the next week an FOMC meeting.

Until then, remember the trend!

Thomas Hughes