Reports from NATO that 1,000 Russian troops were operating on Ukrainian soil sent the market diving to support.

Introduction

Reports from NATO that include satellite photos have at least 1,000 Russian regulars engaged in military operations within the Ukraine. This, along with statements from the Ukrainian government to the effect Russia had invaded its territory, is what caused today's dive to support. The seemingly positive summit between Putin and the Ukrainian PM turned out to be the usual smoke screen for Putin's real objectives. The market reaction however, was not typical. Instead of moving sharply lower on the flight to safety we moved down only a little, did not break support and made up most of the losses before the close.

It appears as if the Putin effect is wearing off. As for reports of troops inside Ukrainian borders, didn't we already know that, or at least accept it as likely? An additional drag on Europe and early pre open trading here was weaker than expected German inflation data which raises speculation of whether the ECB will act to install new QE measures as hinted in Jackson Hole. The data, coupled with talks of further increased sanctions against Russia and rumors Russia would turn off the flow of natural gas to Europe this winter sent the DAX down by -1.12%.

Market Statistics

In other news, there were some positive developments that helped the market shrug off the newest Russian incursion, at least for now. The 2nd estimate to 2nd quarter GDP was above expectation and along with another good jobless claims report helped to lift futures off their lows during the early session. The markets were indicated down by about -7 points for the SPX and -75 for the Dow ahead of the data, afterward this moderated to about -4 for the SPX and -50 for the Dow and held going into the open. At the bell there was a broad move lower but one that quickly found support. The markets found intraday bottom and begun to move higher by 9:45, bolstered by better than expected pending home sales data. After that the indices moved higher and then tread water the rest of the day with the SPX hovering just shy of 2000.

Economic Calendar

The Economy

The 2nd estimate for 2nd quarter GDP rose by 0.2% to 4.2%. This is better than the expected 4.0% and has already caused a shift in estimates for the third quarter. The improvement is due to increases in corporate profits and spending and was aided by less drag from the trade component. The average estimated for the 3rd quarter was about 3.2% but now may get revised lower.

Initial claims for unemployment fell by -1,000 from an upward revision of 1,000 to hold flat from last weeks reported 298,000. This below the expected gain of 3,000 and the second week of claims below 300,000 since moving back above that level earlier this month. The four week moving average of claims also fell below 300,000 to 299,750 putting the average below 300,000 for the month. Initial claims are basically flat over the past 2 to 3 months but remain at low levels relative to the recovery. On an unadjusted basis claims fell by -841 or -0.3% versus the expectations for them to hold steady from last week. On a state by state basis GA and AL had the biggest increases in claims with 874 and 575. California and Fl had the biggest decreases with -8771 and -1462.


Continuing claims rose by 25,000 to 2.527 on top of a +2,000 revision to last weeks figures. This is just off of the 7 year low set last week and remains in line with the downtrend in claims. The total number of American receiving unemployment fell, by -50,674 to 2.466 million. This is just off the long term low set earlier this summer. Based on these numbers it appears as if the labor market is still improving. The number of claims on a near and long term basis continue to trend lower which points to increased activity in jobs availability and hiring. Next week we will find out the state of the labor market as it is the end of the month and the next round of ADP/Challenger/NFP/Unemployment is due out. The current expectation is for NFP to remain strong, above 200,000, with unemployment holding steady. This may be a low ball estimate considering that every piece of jobs data I have seen suggests that hiring has been steadily on the upswing.


Pending home sales, and index based on the number of contracts signed, was also a positive surprise. The index rose last month 3.3% to 105.9 from the previous 102.5. This makes the 4th out 5 months the index has risen. All regions but one experienced strong growth in pending sales except the mid west which suffered a mild contraction. The July reading is also the highest level since August of last year ad the third month it has been above 100. 100 is accepted as being average pending sales with readings above that showing strength. An analyst quoted within the report says that “favorable conditions” led to the increase including lower interest rates, greater inventory, lower median prices and other improvements in the economy such as jobs.

The Oil Index

Oil prices held steady today as geopolitical risk trumped rising supply. Current estimates have this years supply of crude exceeding demand but with ongoing issues in eastern Europe, Iraq and Libya that could change. Today's catalyst was of course the newest round of headlines centered on the Ukraine and sent oil prices slightly higher. Benchmark WTI crude gained about $0.65 in today's session matched by a -$0.25 decline in Brent.

The Oil Index traded higher today, perhaps because the thought that low oil prices could turn into increased sales and revenues. Regardless, the index gained just over a tenth of a percent in today's session. The index is moving up to the upper boundary of a recent trading range with bullish indicators. MACD is on the rise and so is stochastic, pointing to a retest of resistance around 1,700. Support is located just below the current level at 1,650. The test of 1,700 will be important as a break above would be an indication the longer term uptrend in the index is still in play.


The Gold Index

Gold prices reacted as expected to the news coming out of the Ukraine. The spot price for gold jumped more than $15 immediately following the news but that moderated to about $7.50 by late afternoon. It seems as if gold traders are becoming equally numb to Putin antics as equities traders. Today's action brought gold up to just shy of $1300 but was not able to cross over. Shortly after reaching the high prices fell quickly back to just above $1290. The positive revision to GDP and better than expected unemployment claims are the reason gold prices were not able to hold the highs. Improving US economics are boosting dollar value and is a dead weight for gold prices.

The Gold Index was carried higher with the price of gold but met with resistance. The index is still trapped within the trading range I have been following the last few weeks. This range, between $100 and $105, is coincident with long term support/resistance that has been important many times over the past 16 months. The index is trapped between a long term down trend tied to the price of gold and growing support, support that may be tied to expectations for improvement in the gold sector. In any event, the index has been in this range for two months now and has been churning inside it, driven by volatile gold prices and the Putin effect. The indicators are neutral at this time and without direction, a break out of the range is needed at this time to get bullish or bearish. Gold prices will likely dictate which direction that is. The longer term trend is still down and I don't see reason besides flight to safety for gold prices to go higher so I remain skeptical of any rallies here.


In The News, Story Stocks and Earnings

JP Morgan confirmed this morning that it had experienced a hacker attack and breach of data. The bank, along with four others, was targeted by an as yet unnamed source. JP Morgan said in it's statements that it was not witnessing any increased levels of fraud and that, “unfortunately”, companies of its size experience attacks nearly every day. The stock was negatively impacted by the news, dropping nearly a full percent and falling from a longer term resistance level dating back to March of 2003. The stock has been doing well since releasing earnings and finalizing its settlements with the DOJ and was indicated higher until this newest development. According to data from Factset the banking sector is expected to be one of the earnings leaders this quarter so today's drop may be presenting an opportune time to get in. JPM's next scheduled release is October 14th, about 6 weeks away. Current resistance is at $60 with strong support indicated a few dollar below along the $57.50 level.


Apple announced today, or at least confirmed, that it was holding a special release or announcement on September 9th. Speculation abounds that the company will be releasing it version of the iWatch or some other wearable device. They put up a message on their website that says that the media is invited to a special event 9/9/2014 “wish we could say more”. The news was enough for shares of the stock to buck today's trend and move higher, gaining more than a quarter percent. The stock has been trending higher ever since the split and is still bullish. At $102 per share the stock is highly affordable compared to pre split prices and could be attracting a whole new round of buyers. The product launch will be important for the company as a hot new product could put Apple firmly back at the top of the tech/gadget sector. Sales of a new device will have a positive impact on revenue and earnings. Not to mention that at these levels the dividend is still paying about 1.9%.


Abercrombie & Fitch reported earnings today in the wake of disappointing releases from Guess and Williams Sonoma yesterday. Abercrombie reported earnings of $0.17 per share, basically in line with consensus estimates, on weaker than expected sales. The company earned $12.9 million in the quarter and reaffirmed its current guidance to previously stated range. The expected range is below the current consensus estimates, a detail that helped to send the stock down by 10% in the pre market session. The stock fell only 5% at the open and created a long legged doji on high volume, 4 times the 30 day average. It is not clear where this one is going but it is clear there is interest here and deserves further watching.


The VIX

The VIX spiked today but nothing compared to the beginning of the month when Putin first sent his aid convoy towards the Ukraine. Today the fear index jumped only 3% to test resistance at the 12.50 level, not blow right through it. After the open the index moved higher,crossing above the resistance line only to be halted at the 30 day moving average. The index fell back from this resistance and ended the day below 12.50. It is possible that Putin will do something to increase fear in the market but right now it looks as if fear tested tested the market and failed. Thinking conversely, if a spike in the VIX matches a drop in the SPX a test/confirmation of resistance on the VIX would equate to a test of support in the SPX and that is what looks like happened today.


The Indices

The SPX opened a few points lower in today's action and then proceeded to move even lower, until hitting support. The index found support within 15 minutes of opening and traded above that level the rest of the day. Suppot kicked in right around 1991 and the previous all time high, an all time high the index broke just this week. Volume in the market is still low but the index appears to be moving higher without it. The indicators are bullish in the short term and consistent with higher prices in the long term although there is some weakness in the near term. There may be more testing of support tomorrow and into next week but it looks to me as if the index has reached a consolidation level during a longer upward movement above solid support. Near term resistance is of course Putin but also the fact we are waiting for important monthly macroeconomic data due out next week which is reason enough to wait and see what happens.


The Dow Jones Industrial Average fell -0.25% in today's session. The blue chip index opened just below the current all time high and traded down to near term support along the 17,000 level. The indicators are bullish though showing some near term weakness. However, like the SPX, the indicators are also consistent with higher prices in the short to long term. Current resistance is at 17,062 with near term support at 17,000 and short to long term support below that around the 30 day EMA moving average in the 16,800 region. Resistance may keep the index capped for now but the long term trend is still up and the index is indicated higher.


The Dow Jones Transportation Average also declined today, by -0.27%. Today's action brought the index down from that resistance, if marginally, before finding support. The transports have been trading up against resistance near the current all time high for a week and a half in a series of spinning tops. At best, today's candle is yet another spinning top in the series and not overly indicative of direction. The index appears to be consolidating beneath resistance following the recent trend line bounce and is above strong support. The short term moving average is just below the current level, providing near term support, as is the previous all time high, long term trend line and long term moving average. The Russian incursion and waiting for data will likely keep this index trading in the near term consolidation range but it looks like it is setting up for an additional bounce and break to new highs.


The NASDAQ Composite also fell about a quarter percent, logging in a drop of -0.26%. The tech heavy index, which has been a leader in the recent bounce, has made 8 new highs out of the last 9 sessions and was due for a little pullback. The indicators are bullish but weakening in the near term so there could be some more downside and/or consolidation. In the longer term the trend is up so I will be awaiting the next catalyst.


There is growing risk that the Russian incursion is going to impact the global economy. The build up of sanctions has been growing and is going to get bigger after today's developments. Just how it will affect the US economy is uncertain but one thing is certain, it'not affecting it now.

Volume was very light today and will likely remain so tomorrow and into next week. Monday is the official end of summer and could signal the return of the big money to the market. Also on the horizon is economic data. Tomorrow there are several key reports including personal income/spending, Chicago PMI and Michigan Sentiment but I think it is next weeks data that is more important. On top of the jobs bundle there is also other important macro data that will influence 3rd quarter GDP and prospects for the future.

The markets look like they are in a holding pattern right now, waiting to see what Russia will do, the volume to return and the data to be released.

Until then, remember the trend!

Thomas Hughes