The US markets rebound from last weeks lows as global fears retreat.

Introduction

The US equity market rebound today as global fears retreat in favor of underlying trends. The round of fear experienced last Thursday, not unlike the wave of fear experienced last month, sent the indices to long term support. Today those fears were mostly absent from the market as traders began to scoop up lower priced stocks. The rebound started in the EU, having bypassed Asian markets in the early hours, and carried into the open of trading here at home. Futures trading was indicated higher from the earliest part of the session and led into a positive opening. Trading was hesitant during the first half of the day but gained strength going into the afternoon. During the first half of the trading day stocks held steady but tested support on a number of occasions. The DJI and SPX both dipped into the red at one point but were soon projected back into the green. After lunch the inices were able to break early resistance, 1930 on the SPX, and move to new intraday highs.

What happened, or didn't happen, to make the market rebound? To recap from last week there were 5 or 6 factors blamed for the drop in stocks on Thursday. These were fear of higher interest rates, bank default and financial meltdown fear for Portugal, weaker than expected economic data, Russia/Ukraine, and Argentina. Of these not one was present in a serious way come the start of trading today. The fear of higher interest rates was overblown last week and has now returned to its previous place of importance as a mere brick in the wall of worry. We, the market, have been concerned about higher rates for a long time but higher rates means the economy is doing OK and it will be a long long time, years, before rates are so high as to actually be a threat and not a fear. Portugal solved its banking crisis as surely it would. The bank in question has been bailed out and split into two separate entities. There is some fall out but it is localized and contained. The economic data was not as hot as some expected but when has it been so far this year? Except of course for the GDP number this past quarter. To date, data has in general not been as hot as expected but remains steady; no one sector is booming but all combine to create GDP of near 4%. Russia and the Ukraine were not even mentioned in the news this morning, an absence shared by the Argentine bond default.

Market Statistics

Now, assuming the near term fear factors are out of the way, what happened today? Earnings. Earnings keep rolling in. Today there were about 85 reports with another 700-800 due this week. So far the stats according to Factset are about 75% of S&P 500 companies showing earnings growth with an average gain of roughly 7.5%. In addition, 8 of the 10 S&P 500 sectors have beaten earnings projections, causing growth rate above the previous estimates. So far 75% of companies have reported and on average are above the historical growth rate for earnings.

Economic Calendar

The Economy

There was no economic data released today but we still get to see the weekly survey of business confidence prepared by Moody's and Mark Zandi. This week's summary is much like that in past weeks. The only notable change is that the statement showing concern with overseas business conditions has been removed. The summary is still in line with underlying economic trends and supports the idea of continued growth in jobs and the economy through the end of the year. One other change mentions that the current positive outlook carries into the first part of next year at least.

The full summary: “Businesses remain very upbeat, especially in the U.S. Sentiment has been strong all year, consistent with an economy that is expanding well above its potential. Responses to the survey questions are strong across the board. Expectations regarding prospects into next year remain very positive, and hiring intentions are robust as more than half of respondents to the survey are hiring. There are no indications that price pressures are building”

The rest of the week is pretty light on data as well. The month just started and there just isn't much data to be had. There will still be weekly natural gas and oil inventory reports as well as jobless claims. Other than that Factory Orders and ISM tomorrow along with Wholesale inventories dominate the list.

Even without economic data there is risk of fundamental change this week because there are two major central bank meetings. The ECB and the BOJ. I have not heard of any speculations for policy changes from either bank but that does not rule out a change in speak that could move the market. The ECB is facing stagnation and deflation while at the same time the BOJ is fighting its way out of the same. The ECB is expected to release its statement on Thursday with the BOJ slated for Friday. The ECB usually sticks to their time table while the BOJ is only loosely bound by theirs.

The Oil Index

Oil prices firmed today after dropping below $98 last week. Prices gained 0.45% in a move possibly aided by short covering and profit taking. There is some risk in the current week for geopolitical events to drive prices back up. The ISIS incursion in Iraq has taken a few new towns with at least one in control of a dam and regional water, while two more, located in the Kurdish north, are centered in oil fields. In Libya fighting continues as does a fire at a fuel plant.

The Oil Index climbed today, in line with equities, gaining over 1.8% and coming just shy of resistance at the short term moving average and previous all time high. This level has been broken before and looks likely to break again. Support is indicated along the current level by stochastic and MACD with first target on a break up near 1,700.


The Gold Index

There was not much to impact gold trading today. The fears of last week seem to have been left behind or are at least on the back burner in terms of market focus. Gold prices fell in today's action, dropping below $1290 on what I believe to be the underlying fundamentals of slow steady growth in the economy, an end to taper and the onset of higher interest rates sometime in what is generally accepted as the next 12 months (at the latest).

The Gold Index fell today as well, dropping -1.5% from the short term moving average and coming to rest just above the long term moving average. The index is indicated lower in the near and short terms, in line with the underlying bear trend in the index. However, there is some signs of bottoming in the index over the past 12 months along the $85-$90 level so any drop below the long term average could find support/strong support around these levels. As always gold prices will have a big affect on Gold Index prices, a sustained drop below $1290 would be bearish for index prices.


In The News, Story Stocks and Earnings

Michael Kors made headlines this morning, beating the expectations. The name brand retailer reported results that beat on the top and bottom line, driven by a 24% increase in comp store sales. However, the report also revealed that the sales came on top of heavy mark downs and that those same discounts would impact future performance. The stock climbed initially, in the pre market, but fell before the opening. At the open share prices gapped lower and then fell more than 5% from last week's closing prices. The stock is now sitting on long term support and has fully retraced the gap up/open window created two earnings releases ago in February. Although not good for KORS earnings, the numbers reveal that shoppers are out and buying.


There are a few other big name retailers slated to release earnings this week including Coach with the rest of the group spread out over the next 2 to 3 weeks. The Retail Sector Spyder, XRT, gained over 1.25% today, moving above the long term 150 day moving average. Today's action is a continuation of a bounce indicated by a long legged doji formed Friday. The doji formed while testing my support line, at or near the center of a long term range for the ETF. The indicators are consistent with support at this level and could lead the ETF to the upper end of the range provided a break above the short term moving average can be sustained. Upper targets on a break are $87.50 and $89 with support just below along the $83 level.


AIG reported after the bell. Expectations were high for the insurance giant and it soundly beat them. The company also announced a $2 billion buy back and sent the stock soaring 2.75% in the after hours session. This is a continuation of a long term moving average bounce begun today and takes the stock back over the short term moving average.


The Indices

The VIX fell by over 12% today. Dropping below/into a support a potential support zone. The fear gauge looks good to continue down through this small range just below 15 and down to the 12.50 area. What it does there could be indicative of the future of the rally. I would consider a drop below and back to the “new normal” bullish whereas a hold above may mean longer term fear is moving back into the market but that does not necessarily mean reversal, or even correction, is on the way.


The S&P 500 tied with the NASDAQ Composite for lead today. The broad market and the tech sector both gained 0.72%. The broad S&P 500 index climbed back above the long term trend line in a price action confirmation of the long term trend. This is in line with previous trend line bounces over the past two years, 7 times not counting the initial point from which the line is drawn. The indicators are bearish but indicate an oversold extreme in the near term, also in line with previous trend line bounces. There may be some more action around or below the trend line but providing fear remains at bay I expect to see the index continue on with the trend. There is some technical resistance ahead around 1960 and 1980 but it is near term in nature. Economic data will be the key, we need to see it in the Goldilocks range of slow steady growth, not too hot and not too cold.


The tech heavy NASDAQ Composite also gained 0.72% today regaining an important long term support above the March long term high. The index fell short of the round number 4,400 and the short term moving average which may provide near term resistance. The indicators are bearish but in line with a test of support. There may be some sideways action and/or retest but the longer term trend is intact and seems to be taking back control from near term fear.


The Dow Jones Industrials climbed by 0.46% or or 75 points. The blue chips moved up today from the long term moving average and the 16,500 level in a confirmation of the strong support zone I highlighted in earlier wraps. This zone formed in the early part of the year between 16,250 and 16,500 as the index was moving up to, testing and breaking out to new highs. The indicators are bearish and pointing lower at this time but also consistent with a near term extreme and potential long term bullish entry point. There is some resistance ahead, namely the previous all time high which is just a hair above the current level. This level was broken down by earlier action so may not be that strong now. A break above this level could take the index back up to 17,000 pretty quick while a drop below would find additional support within the zone down to 16,250.


The Dow Transports were the lagging index in today's mix. The trannies only climbed by 0.35% but did confirm short term support along the down sloping top of the previously broken flag pattern. The long term trend is still up but there is some risk the index will continue to bob along this down trending support until it reaches the long term trend line. The indicators are bearish, and like the other indices, consistent with a near term bearish extreme during a bull market. The question is, was today the peak, a peak or merely a stopping off point as the index consolidates over the next week or more? It is possible that there is some rotation out of the transport and into other areas which could keep it moving sideways.


Today was a day in which the indices, the SPX specifically, were at a major technical level and a point in which the long term trend could start to take over or begin to break down. Today's action was a little wishy washy at first and I have to admit I was a little nervous this morning. The open was positive and stayed that way for a while, there was a dip into the red and test of support but buyers were active. The S&P 500 found support and was lifted back in line with the long term trend. Now that the near term fears have subsided the long term fundamentals can shine again. Earnings growth is good, the economy is trending higher and the expectations are still positive. Tomorrow be on the look out for more earnings and economic data in the form of Factory Orders and ISM Services. Both are expected to rise from last month.

Until then, remember the trend!

Thomas Hughes