The market followed through and set another new high for the Dow Jones Industrials and Transports in the wake of yesterday's FOMC meeting.

Introduction

The market followed through with yesterday's bullish move in the wake of the September FOMC meeting. The Dow Jones Industrials confirmed the rally by setting another new high, led by the Transportation Average. Today's rally actually began early this morning with the open of the Asian markets and carried through into the European market and then our own. Asia was up across the board and so was Europe, despite the hotly debated Scottish vote for independence. I thought there may be some sign of how it was going this morning but so far nothing has been said. The first reports are expected in tonight around 9PM but the read I get is that it will be no.

Market Statistics

US futures were higher from the start with the major indices indicated about a quarter point higher. This strengthened a little after the 8:30AM release of economic data that showed a surprise drop in jobless claims and continued steadiness in the housing sector. Stocks moved higher at the open and strengthened somewhat into the first hour. Mid morning the indices pushed a little higher and the SPX set a new intraday all time high. Afternoon trading saw the indices wrestle with a little near term resistance before closing at new highs.

Economic Calendar

The Economy

We got a few releases today besides the weekly jobless claims. Housing starts and building permits were both released at 8:30AM along with the claims data. Starts and permits both fell this month but revisions to last month make the drops a wash. Housing starts fell 14% to an annualized rate of 956,000 units. This is below the expected drop to 1.04 million but the previous data was revised up to 1.12 million from 1.09. This puts the two month average above the 1 million mark, much better than the headlines would lead you to believe. These numbers are not robust but are steady enough to maintain current economic trends and expectations. Building permits fell less, 5.6%, to an annualized rate of 998,000. The previous month was revised slightly higher to 1.06 million from 1.055 million.

The big surprise today was jobless claims which did not get as much attention as the drop in housing starts/permits. Initial claims for unemployment fell by 36,000 to 280,000, the lowest level of claims since May of 2007. Last weeks number was revised higher by 1,000 making the net drop from last week 35,000. The four week moving average also fell, dropping back below the 300,000 level. On a non adjusted basis claims rose by just over 6,000 or 2.7% while seasonal factors had expected a jump of more than 15%. New Jersey and Illinois lead with increases of +2,918 and +912 while California and New York led those with declines posting drops of -10,968 and -2,811.

The drop in claims is in line with other employment gauges which shows that the labor market is making further improvements. The data, along with the other gauges I mentioned, are also not in line with the most recent jobs report. As I have suggested before, in the current environment robust jobs creation is less important on a single month basis when less jobs are being lost at the same time and I think this is evident in the decline of overall unemployment.


Longer term metrics of labor conditions, continuing and total claims, both fell as well. Continuing claims fell by 63,000 to a new 14 year low of 2.429 million while total claims fell by over 110,000 to set a new long term low of 2.264 million. Based on these numbers it does indeed appear as if longer term unemployment is on the decline. Of course the participation rate is going to be called into question but I am not too worried about that as we are still in the middle of huge demographic shift from the Boomers to the Gen X'rs and Millenials.


At 10AM the Philly Fed reinforced the trend in labor conditions. The diffusion index fell from last month's long term high to a still strong reading of 22.5. This is a 5.5 drop from last month's 28. Despite the drop in the headline number the numbers within the number were good. The employment index rose 9.1 to 22, new order rose to 15.5 and the future employment index rose to 37.6 from 24.7, all showing optimism for the future with the employment components at 4 year highs. Prices paid and received both rose moderately but remain tame.

The Oil Index

Oil prices slid close to 1.5% today as high US supply outweighed the threat of potential production cuts from OPEC. Yesterday's spike up was driven on reports that Saudi Arabia had already made some cuts to production. The report, along with the shut down of Libya's Sharara oil field, underpinned the market despite the unexpected build in US stockpiles. OPEC ministers responded by saying to the effect that production cuts could come in 2015 but did not make any moves toward cutting levels now even, though the Saudis already have. Sharara, only recently reopened and brought to full production, represents about 1/3 of Libyan production and was shut down because of an attack on an attached refinery.

The Oil Index also fell today but remains above the long term trend line. Today's move brought the index down 0.64% to sit just above the trend line. The indicators are still weak but inline with the trend following bounce that appears to be unfolding. Price action today is as expected following the weak stochastic signals that I highlighted yesterday. Oil prices will have a big impact on the sector moving forward but for now it is still trending higher. There is strong support between 1600 and 1625 along the trend line; a confirmed break below this level could take it down as much as 50 to 100 points in the near to short term.


The Gold Index

Gold continues to fall. This morning spot gold was down as much as $17-$18 trading around the $1215 level. Later in the day that moderated to -$10 or so with a close on the US session below $1225 for the 2nd day in a row. The fundamental picture of strengthening dollar, strengthening US economy, expected end of taper and rise of interest have all pushed gold down to long term low levels. Today's action, while not a bottom, shows that there are some buyers for gold at this level. Prices could decline further, the actual low is near $1190 I think, but there is are a lot of possible support levels between $1190 and $1225 that prices could bounce from now that Fed expectations have been met.

The Gold Index also fell today, dropping below the lower boundary of the potential near term support I described yesterday. The index is moving lower on the fall in the underlying commodity but is also fast approaching an area of long term support, an area where it has bounced from before. The long term trend is down and the current move is down so I am still bearish, definitely in the near to short term, but there is other evidence that the index is approaching what could be long term support. Not only was there some buying along the $90 level today, the market is oversold and there is a divergence in the MACD. These do not mean the index is or even will find support, they are just warning signs to take note of. Down side targets remain at $90 (reached today), $85 and $80.


In The News, Story Stocks and Earnings

The dollar continues to surge on strong US developments. Upward trending data, the end of taper, rising interest rates, BOJ and EU stimulus of their respective countries, have all driven values of euros and yen down in relation to dollars. The Dollar Index, which is euro heavy, jumped at the open to begin trading at the 12 month high set last year. During the day the index sold off, creating a pretty nasty black candle but the indicators are strong so I would not count this rally out just yet,especially considering that we are emerging from QE while the EU is only really just entering it. Both stochastic and MADC peaks are convergent with the rally, indicative of underlying strength, and pointing to higher prices. There could be a consolidation or correction but I would be surprised if there wasn't at least a retest of the $85 level in the near to short term. On a pullback $84 is looking good for potential support.


ConAgra Food reported earnings this morning. The very large supplier of consumer and commercial food products reported earnings that were above estimates and triple the previous quarter. Consumer sales were flat while commercial sales increased but it was lower expenses that provided the lift to earnings. The company continues to expect growth in the upper single digits and was able to reaffirm guidance for the next quarter and full year slightly above consensus estimates. The stock jumped close to 5% today and is now approaching the top of the 12 month range.


Oracle reported earnings after the bell. Among other things in the report CEO Larry Ellison is stepping down in favor of current co-presidents taking the role. The company reported earnings and revenues basically in line with estimates but did not impress the markets. The stock was down more than 3% in the after hours market and will likely open lower tomorrow. It is not unusual for this stock to gap up or down following the earnings.


The VIX

The VIX fell today, dropping below support at 12 and moving down to close at the low end of today's range. The index is moving lower and that move is now confirmed by the indicators. The MACD is making the zero line cross with today's candle and stochastic has rolled over following the bearish cross two days ago. Now, on a technical basis this index is moving lower but tomorrow is quadruple witching day for options so there is really no telling what it may do between the open and the close of trading.


The Indices

The markets quietly moved up to set new all time closing highs ahead of quadruple witching day tomorrow. The new high set by the Dow Transports yesterday was followed by another one today and confirmed by a new high in the Dow Industrials. Yesterday, while the other major indices were held to support the transports were able to rise nearly 1%. Today things were reversed, the other indices all moved more than a half percent while the trannies were held to just a quarter point. Today's candle is very small and not unusual following a large move like yesterday's. The indicators are bullish and on the rise although divergence is still present. However, if you consider that MACD retreated all the way to zero, held there, and then returned to bullishness this new peak could be considered a new signal. With that in mind it is possible that the indicators are pointing to another short term movement to the upside. Support is around 175 points below the current level,around 8,500, should the divergence produce a pull back or correction.


The SPX made the next smallest move today, just under a half percent at 0.49%. The broad market tentatively crept up to the all time high, pushed up against it, fell back a little, pushed back against it and then crept across, fell back, crept across and finally was able to close above. Today's rally was broad with all ten S&P sectors on the rise. Volume is also on the rise, at least when I look at the chart of the S&P 500 Index Tracking Stock SPY. Today's move was not real strong but it was broad and helped to strengthen the signal that began to form yesterday. MACD hasn't quite reached the zero line yet but stochastic is rolling over in line with the trend. The index looks to be making a trend following bounce from the short term 30 day moving average with a target above 2050 in the near to short term.


The Dow Jones Industrial Average moved up by 0.64% and set a new all time high. Now the blue chips are confirming Dow Theory and the new highs set by the transports yesterday and today. Today's price action looks a little stronger as well, creating a much larger candle and completing a three day continuation pattern of long white candle, spinning top, long white candle all while breaking out to the new high. The indicators are also stronger here. MACD is confirming the weak stochastic signal while the stochastic has finished rolling over and is now pointing higher. This index also appears to be bouncing from support in line with the long term trend. Upside targets start about 250 points higher for the near term provided no unseen hurdles unseat the rally.


The NASDAQ Composite, which has been lagging the other indices in terms of setting new highs, climbed the most today. The tech heavy index, hampered this week by tomorrows Alibaba IPO, climbed 0.68% higher coming just short of matching the current 14+ year high. The indicators are also weaker here as well, the MACD persists in bearishness though weakly while the stochastic has at least produced the weak and early trend following crossover. This index also appears to be making a trend following bounce, just a step behind the rest. Targets on a break to new highs are between 4,700 and 4,800 in the near to short term. Oracle may weigh on the index tomorrow, as might Alibaba but it isn't listed on the NASDAQ and any pre-IPO selling should be over so it's hard to say. Of course, Yahoo is part of the NASDAQ and they are quite closely tied to Alibaba.


The markets followed through on yesterday's FOMC bounce and set new highs today. The indicators are in line with a trend following bounce and the economic data supports the same. Housing is still steady, the jobs market is still improving, long term unemployment is coming down and the Fed is progressing just as expected. Tomorrow could be a volatile one for many reasons but my long term outlook remains positive. The Scottish referendum will be either a boon or a blessing, Alibaba may or may not say open-sesame to profits and triple witching is just triple witching so watch out. Oh, and the leading indicators will be released as well.

Until then, remember the trend!

Thomas Hughes