Easing tensions in the world's geopolitical hot spots allowed the market to move higher and the NASDAQ to set a new high.

Introduction

New reports reveal that the stand off between the Ukraine and pr-Russian separatists is as yet unresolved but there has been some easing of tensions. The lack of escalation from either side following the convoy attack last Friday, along with news there has been some progress made in terms of the humanitarian effort, provided enough relief for global markets to shift focus back to fundamentals.

Asian markets started the global rally today but were only barely able to hold any of the gains. European markets were more firmly optimistic about the outcome and rose more than 1% on average with the German DAX leading at 1.68%. The US equity market was firmly higher with futures indicated up from the start of early pre-open trading. The futures trade gained some strength during the morning and carried it into the opening. The SPX was indicated about 11 points higher at the opening bell and quickly extended that gain to +15. Once at the daily high the market stayed within two points of that level until mid afternoon and into the close.

Market Statistics

Early focus was on the Ukraine but it's importance seems to be waning, again. The market response to each new even is waning as well. The risk of something else happening in the region is still present but today at least it did not provide a hindrance to trading. Rising to the forefront is a string of expected economic data topped off by minutes from the latest FOMC meeting. This week we will get CPI, building permits and housing starts on Tuesday followed by FOMC minutes on Wednesday. Thursday the weekly jobless claims are followed up by existing home sales, Philly Fed and the index of leading indicators. Also in focus this week is the annual conference of central bankers in Jackson Hole, Wyoming. There are a number of speeches expected from top bankers such as Janet Yellen, Mario Draghi (ECB) and Haruhiko Kuroda (BOJ).

Each event will be important but I think it will be the week as a whole and not any one data point that proves most important. There is a chance, maybe even a likelihood, that some of the data will be less than expected. That's OK so long as the data as a whole, including Fed outlook, are not too strong and not too weak. Too strong could lead the market to think that interest rates will rise sooner, too weak could lead the market to think the recovery is stalling.

Economic Calendar

The Economy

There was one bit of economic data released today in addition to Moody's weekly Survey of Business Confidence. The National Association Of Home Builders released their monthly report of home builder confidence. The index rose, unexpectedly, by two points to 55 from last months reading of 53. This is above the consensus estimates for the index to hold flat. All three components of the index gained this month, in all regions. This is the third month of gains in the index and the highest reading since January. While not overly strong the reading is expansionary and gaining strength. Tomorrow housing permits and housing starts are both expected to rise modestly but remain below the “critical” 1 million level.

Mr. Zandi is exuberant in his summary of the Survey Of Business Confidence. He says that “business confidence is rock solid”, in line with an economy “expanding above its potential. According to his report businesses are especially optimistic about prospects going into the end of the year and the beginning of next year. In addition, as in past weeks, he notes that hiring intent is strong across the board and supportive of +200K job growth per month. The one area of caution that keeps poking up is that South American and European companies are less upbeat.

The Oil Index

Oil prices took another big dip today, shedding more than a -$1.25 on an intraday basis. Rising storage levels, the end of the summer driving season, increasing supply from areas like Libya and a reduction in fear for areas like Iraq have all combined to bring WTI back below $96 and near the 6 month low set last week. It is possible that prices will remain low in the near to short term unless geopolitical risk or prospect for global demand growth provides catalyst. The good thing is that oil is now cheap for businesses to buy and will likely work its way through to the bottom lines of industries that rely on black gold.

The Oil Index traded flat today. The declining price of oil tugging it lower, the rising tide of stocks pulling it higher. The index has been trading in a tight range for several weeks and is caught inside two long term support/resistance lines based on previous all time closing and intraday highs. The indicators are consistent with support along this level and are in the early stages of a trend following buy signal but one that I think deserves some caution. In the end low oil prices are not good for oil producers but could lead to increased sales volume if not increased revenue. It also means that operating costs for oil services companies will be lower as well. How this will play out in the oil sector is a complicated question and one I think the market has yet to answer. A break outside of the current range between 1625 and 1660 could be the tell. A break below could take the index down to the long term trend line in the 1575-1600 region.


The Gold Index

Gold prices deflated today in response to the news of reduced tensions between Russia and the Ukraine. The move down was not as pronounced as it has been in the past on similar news and could be reflecting a lack of trust in Putin. He's backed down before, sending the price of gold down and the price of stocks up, only to reverse himself and drive gold up and stocks down. It's almost enough to suspect him of rigging the markets. The long term trend is still down although the flight to safety driven by geopolitical tensions have established a potential support zone. Today gold lost about $7 in the early part of the day, dropping below $1300, only to regain it by the close of the session.

The Gold Index opened lower today but rose during the afternoon, posting a small gain by the close. Despite today's rise this is the second day the index is trading below my resistance line and potential reversal point. The indicators remain weak and in line with range bound trading in the short term. Near term support is just below the current level along the short term 30 day moving average with a potential long term support below that along the 150 day EMA. AS it stands it appears as if the index is caught between long term resistance growing long term support. The support is questionable as the index is tied to gold prices and gold prices are elevated on flight to safety, not valuation. Until there is clear direction in gold prices this index may remain trapped between these levels with the possibility of a squeeze forming as long term pressures build from both sides of the trade.


In The News, Story Stocks and Earnings

The dollar store wars heated up today with a bid for Family Dollar from Dollar General. This is on top of the already binding merger agreement Family Dollar has with Dollar Tree which hit the news last month. The deal values outstanding shares of Family Dollar at $78.50 each, a premium over the previous offer. The news sent shares of FDO up more than 5%, surpassing the $78.50 offer. Dollar Tree reports earnings on Thursday.


Earnings season is mostly behind us but there are still a few companies left to report. Out of the 500 S&P companies there were 31 left as of the start of the week this morning. Out of those that have reported so far 73% have beaten earnings estimates while 64% have beaten sales estimates. The average earnings growth rate is 7.6%, well ahead of the expected range of 5-6% going into the season.

This week there are not a whole lot of reports but it is a big week for retail in general and teen retail/home improvement in particular. There are at least 10 big name retailers on the list this week including Home Depot and Lowes on the home improvement front and Cato, American Eagle, Aeropostale, TJ Maxx, Dicks, Target and Petsmart rounding it out. The retail Spyder XRT traded to the upside today in line with the general market. The ETF is still trading near the middle of the long term range but is at a one week high. The indicators are bullish and there is support just below the current level along the short and long term moving averages.


The Consumer Discretionary Spyder XLY also traded up, gaining just shy of 0.90% in today's session. This ETF is trading just below long term resistance and a all time high levels. This ETF is in the process of moving higher following a long term moving average bounce and accompanied by rising indicators. Although indicated higher, it is just below resistance so a break out is needed in order to confirm another move higher. This week could do it provided the retailers give us good news. There are spots of weakness in the sector, some retailers are hitting the nail on the head while others are struggling to keep up.


Urban Outfitters reported today, after the bell. The teen clothing retailer reported earnings that were basically in line with expectations. EPS of $0.49 per share was in line with estimates while revenues were a little better than expected. Forward outlook was not quite as expected and helped to send the stock down in the after hours session. The culprit is declining margins which is hurting bottom line results. The stock had been up during the regular session but fell more than 1% after the bell.


The Indices

The markets made a nice rebound today. The rally started even before the bell and carried through right into the close of trading. Although the Transports led the market today it was the NASDAQ which was the real winner. The tech heavy NASDAQ composite index only gained 0.97%, weak compared to the Dow Transports 1.71%, but managed to set a new 14 year high. This is the first new high for the index since the summer correction began at the beginning of July. The index broke above the 4,500 level and closed at the top of today's range. The indicators are bullish and indicate higher prices are likely on the way. This move is a continuation of the trend following signal that appeared last Thursday and could carry the index another 100 points higher in the short term.


The Dow Jones Transportation Average was today's points leader with a 1.71% gain. The Trannies moved more than 141 points higher and created a long white candle. Today's candle is noticeable larger than any candles dating back for several months and similar to candles that have formed at the start of other trend following movements. Lending weight to the bullish argument today's candle formed above the short term moving average and above the previous all time high. The indicators are also strongly bullish with today's action creating a sharp move up in momentum. Support is currently at 8,250 with resistance just above at 8,500 near the current all time high. The long term trend is up and this move looks good to at least test the all time high if not set a new one in the near term.


The Dow Jones Industrial Average was also one of today's big movers. The blue chip index gained 1.06% in today's session, creating a long white candle and breaking above the short term moving average which is just above the all time high set by the index this spring. The indicators are bullish and showing a strong movement upwards in line with the underlying trends. Previous trend following bounces originating at the long term 150 day EMA have been worth up to 1000 points or more over a short term basis of 2 to 3 months. There is still near term resistance ahead at the 17,000-17,100 level on a technical basis.


The S&P 500 brought up the rear in today's action, posting a modest 0.85% gain. The broad market index gained 16.68 points and closed at the top of today's range. The candle formed was a white one and bullish, just not one that I would call overly large. The index is moving higher and in mid bounce, similar to the other indices. The SPX is approaching resistance with bullish indicators confirming a long term trend line bounce. There could be some consolidation as the index moves up to test resistance but previous bounces of this nature have not lingered long once the movement began. The bounce has already produced about 60 points of movement with that as a potential upside target provided the index can break above resistance. The long term trend is up, the prevailing signal is up and there as of yet there has been no sign of that ending.


It looks like the long term trend has taken control of the market. The Russia/Ukraine stand off will hang over our heads for some time to come I expect but at least for now the technical picture remains undamaged. The July correction found support at long term levels and has now reversed in favor of the long term trend. Today new data showed us that home builder sentiment is on the rise which is a good sign that other areas of the housing sector may be improving as well.

Without the threat of geopolitical risk the market was able to move up on the data in anticipation of what is to come this week. Tomorrow there are two key pieces of forward looking housing data, starts and building permits, with existing home sales later, FOMC minutes and Leading Indicators later in the week. So long as the data supports the steady improvement in the economy we have been experiencing I think the rally will go on. The FOMC minutes may give us some sign of when interest rates will rise but I am not really expecting much out of it except the same old data dependent song.

Until then, remember the trend!

Thomas Hughes