Once again, a slew of strong earnings trump fear

Introduction

Although international markets began the day weak, a slew of strong earnings from some major US companies spurred US markets higher. Companies including GM, ComCast, 3M, United Airlines and maybe most importantly Caterpillar all reported strong earnings, top and bottom line. The reports, coupled with the forward looking statements, helped propel today's rally. Economic data also played a part. Jobless claims rose, but only slightly, in the near term but continue to decline in the longer term. Also, the Leading Indicators suggest that the pace of growth increased in October.

Market Statistics

The day started with Asian indices flat to negative on a mixed CPI reading. The headline, 50.4, is expansionary and at a 3 month high but within the data factory orders have fallen to a 5 month low. This data had a mild affect on European markets as well but was eventually shrugged off in favor of other positive factors.

Index futures were indicated higher from the earliest part of the morning aided by a lack of bad news. Once earnings began to come out the indices all began to drift higher, reaching a peak just before the 8:30AM release of data. The SPX was indicated higher by about 17 points and then added to that following the data and going into the open of trading. Market breadth was high, with over 90% of S&P companies trading higher, after the opening bell.

The market was up more than 1% in the first 15 minutes and added to that gain into the first of hour of trading. Rally mode was in full effect today, the market marched higher all day until hitting a peak around 2:30, just before reports a Dr. in New York was being tested for Ebola. This news was shrugged off but could emerge as a headwind if the test is positive. The market retreated from the high on the news but held onto to most of today's gains.

Economic Calendar

The Economy

Today's data was dominated by jobless claims. Initial claims for unemployment rose by 17,000 from a 2,000 claims upward revision to last weeks data. This week initial claims were reported at 283,000, still well below the 300,000 level I have been watching all year. The four week moving average continued to decline, showing the underlying trend in the numbers. This week's average of 281,000 is the lowest level since May,6, 2014. The jump in claims this week is mild and does not break the trend. Overall, initial claims are in decline and have been doing so ever since dropping below 300K. This is evident in the continuing and total claims numbers.

Continuing claims fell by 38,000 from last weeks un-revised number. This is the lowest level of continuing claims since December 23, 2000. The four week moving average also declined, setting a new low. Total claims fell by 15,056 to 2.073 million. This is also a new low and an extension of the down trend in total unemployment claims we have seen all year. Based on these numbers I have to say I think that NFP will be steady to strong when it comes out in two weeks, and that unemployment should fall. I also think this has positive spin for GDP estimates which are due out next Friday.


On a not-adjusted basis claims fell -6.7% this week, about half of the expected decline. On a year over year basis claims are down more than -18%. Pennsylvania, Michigan and Texas led with increases in claims of +4,000, 3,210, and 1,615 respectively. Pennsylvania reported the increase is due to administrative and support positions, waste management and remediation, construction and food service. No mention of oil industry or affiliated jobs. I bring this up because of the drop in oil prices and speculation of the impact on US shale oil businesses. Iowa and Florida had the biggest declines, -781 and -640.

The Conference Board released their reading of the Index of Leading Economic Indicators at 10AM. The index rose by 0.8%, ahead of last month's un-revised reading of 0.0% and July's increase of 1.1%. The Coincident Index rose by 0.4% and the Lagging Index rose by 0.1%. The reading shows an increase in strength and could lead to a stronger than expected GDP number next week. “The outlook for improving employment and further income growth are expected to support the moderate expansion in the U.S economy for the remainder of the year.” said Ataman Ozyildirim, Economist at The Conference Board.

Tomorrow the only release is New Home Sales. This could be a positive surprise, based on the better than expected existing home sales figures. Next week is when things could get really hot, on the economic front at least. The FOMC meeting is on Monday/Tuesday and the 3rd Quarter GDP 1st estimate is Friday. Current estimates are between 2.5% and 3.0%, depending on the source.

The Oil Index

Oil prices moved higher today, climbing by more than 1%. Better than expected economic data and earnings are largely the cause. WTI moved higher but Brent was the star of the day, gaining nearly 2%. Additional factor affecting oil today are new signs of division between OPEC members. The Libya OPEC minister is the latest member calling for cuts to production, counter to the stance apparently being taken by Saudi Arabia. Today's move up confirms near term support but does not represent a long term base just yet. OPEC meets in two weeks, beginning November 6th, and could very well reduce production.

The oil sector got a lift from stabilizing oil prices and then moved higher along with the broader market. Today's move brought the Oil Index up by roughly 1.85% but did not break yesterday's high. The index is moving higher in the near term but the bounce may be losing some steam. It is trading below a potentially strong resistance level near the 1480-1500 level and is ripe for profit taking. I'm still anticipating a retest of support, based on convergence with MACD, which could take it down to 1,425 or 1,400. The big oil companies begin to report next week so there may be sideways trading until then.


The Gold Index

Gold prices fell today. Strong economic data put to rest, I think, any lingering thought that the Fed would extend QE next week. This, along with stronger dollar and a lack of safety-seekers, helped to drag gold down by just over -1.25%. Spot prices finished the session just below $1230, after briefly touching $1250 two days ago. I think gold prices may now hover near this level, perhaps in a range between $1200 and $1250, because of two reasons. First, the end of taper and QE. This will/has been strengthening the dollar and should continue to do so. Stronger dollar typically leads to weaker gold. Second, interest rates are bound to come up soon. Strong data that leads to the end of QE and stronger dollar also leads to inflation and that leads to investment in gold; gold as a hedge against inflation. Unless one side or the other gets a clear indication of future direction prices are likely to remain volatile

The gold sector fell today, along with the underlying commodity, and could be leading the way lower. The Gold Index broke below the lower boundary of its near term triangle consolidation pattern and dropped below $75. The index is moving lower, in line with the long term down trend, with targets around $70 and $65. Both stochastic and MACD are consistent with this signal. Near term risks include the FOMC meeting and how they impact gold prices along with earnings due out next week. I suspect that the reported quarter will not be as bad as feared but outlook for the current quarter and next could be diminished.


In The News, Story Stocks and Earnings

Earnings stoked the rally before and after the bell. At least a dozen important names reported today, including GM, Caterpillar and 3M before the open and Microsoft, Pandora and Amazon after the close. Aside from isolated areas of weakness, earnings continue to be good, if not great. GM, Comcast, 3M, United Airlines, Microsoft and Caterpillar all reported above expectations, Caterpillar probably being the most impressive. The international equipment company reported earnings of $1.72, about 21% above expectations. The company reported strong sales as well as improvements to operations and margins. The gains were made on a large improvement in mining as well as oil service equipment. Shares of the stock jumped in the pre-market session and extended the move to over 5% during the day. The stock is now trading just below potential resistance at $100.


United Airlines also reported a substantial improvement to earnings. The airline earned $2.75 in the quarter, $0.07 above expectations. The gains are due to increases in traffic and revenues along with reduced costs. Ancillary revenue per passenger increased by 10% while cargo revenue increased nearly 20%. The increase in cargo is interesting in light of UPS recent announcement that they expect to see record volumes this holiday season. If so United Airlines could see a similar increase of traffic into the end of the year, further boosting revenues. Shares of the stock fell during the pre-market but regained the loss during the day. Shares moved into the green and gained nearly 2% by the end of trading. Today's move brought the stock up to potential resistance at $50. Near term momentum is still to the upside with a target for more substantial resistance near $52.50.


Microsoft traded higher during the open session but was capped at resistance. The stock tried to move above $45 but was pushed back while traders waited for earnings to be released. Wall Street expected earnings in the range of $0.48, about a dime less than last quarter. Actual results were much better than expected though and helped to boost shares above $45. Revenue of $23.20 billion is more than $1B, roughly 5%, ahead of estimates and expected to remain strong into the end of the year.


Amazon was expected to report a much larger loss than last quarter and yet another quarter without a profit. Amazon did not disappoint, in fact, it did not disappoint too much. The online retail giant fell short on revenue and earnings, earning less and losing more than expected. Forward guidance is also short of expectations, based largely on shortfalls in media revenue.The stock has been under pressure for several months, ever since raising the price on the Prime service, and will likely remain so. Today's action kept share price just above break even until after the release at which time it dropped -5% instantly, then extended that to -10%. I would expect to see more downside in this name tomorrow.


The Indices

The market started higher today, was boosted by earnings and kept on moving. The only thing to stand in the way today was a new Ebola headline. As of yet there is no word if the Dr. has Ebola or not but the important thing is that the market did not go running for the hills. Today's move was led by the Dow Jones Transportation Average. This is not surprising given the strong earnings from UAL today along with other reports so far this season. The outlook for the transportation is good and only getting better. Everything I see, read and hear points to improving traffic flow, revenues and earnings.

The Trannies moved more than 2% today, piercing resistance at 8,500 and creating another long white candle. The index has been marching steadily higher since hitting bottom two weeks ago and is indicated higher. It is beneath resistance at the moment and in possible consolidation but the indicators are strong. I'm gonna be watching the range between 8,250 and 8,500 over the next few days with the thought it could break to the upside. If so, this would be an upside target on the index about 750 points above the current level.


The NASDAQ Composite was another strong index among a day of strong movement. The tech heavy index climbed 1.60% today, moving above one resistance line only to come a little short of the next. Regardless, today's move extends the move above the recently regained long term trend line and is accompanied by bullish indicators. Stochastic is currently moving higher while confirming long term support and MACD momentum is on the rise. Upside target for next potential resistance is around 4,490-4,500 with support expected along the trend line around 4,400. Tomorrow could be volatile as traders move in and out of Microsoft, Amazon and Pandora which all released after the bell.


The Dow Jones Industrial Average powered 1.32% higher today. The blue chip index moved above yesterday's high and met resistance at 16,750. Today's action turned the indicators bullish so it looks likely the index will be testing resistance again. MACD made the bullish zero line crossover and stochastic %D is moving higher following the early signal. It is possible this resistance level could hold tomorrow, going into the weekend ahead of the FOMC meeting, but I think the market is going higher in the short to long term.


The SPX brought up the rear today with a gain of only 1.23%. Despite this shortcoming the broad market was able to move back above the long term trend line before meeting resistance. The index touched my resistance near 1965 and then fell back, but was able to hold above the long term trend line. The indicators are bullish and pointing higher so I am expecting a test of resistance at least. Longer term there is still a chance, even a likelihood, for the index to retest long term support but it just isn't happening yet that I can tell.


The market moved steadily higher today, driven by earnings and economic trends. Earnings are coming in ahead of expectations and labor market trends continue to improve. Tomorrow there will be more earnings and more economic data so the upward trend in equity prices could continue. The only economic data expected is new home sales and there is a chance for positive surprise.

Earnings reports delivered today after the bell will affect early trading tomorrow along with others from names like Bristol Meyers and Ford. Poor reports could stall the rally but there are other hurdles as well. The FOMC is on Tuesday and that may keep short term traders out of the market over the weekend.

Until then, remember the trend!

Thomas Hughes