The FOMC ended QE and the market moved higher.

Introduction

The FOMC ended QE and the market moved higher. It took a moment of pause early in the day for the bulls to get it togehter but then they were able to timidly extended the rally. The strongest move was in the Dow Jones Industrial Average, due largely to Visa, but nearly all the indices were able to claw their above yesterday's close.

Market Statistics

Asian and European markets were mixed today. Both regions closed largely in the green with isolated areas of weakness following the Fed decision yesterday. Our own indices were indicated lower this morning as well. Traders were pondering the meaning of the hawkish changes to the Fed statement and waiting for the release of 3rd quarter GDP numbers.

The SPX and the Dow Jones Industrials were both indicated to open lower by nearly a full percent ahead of the GDP release. Then, a combination of strong economic data and positive earnings helped to halve the loss and more going into the open. By 9:30AM the indices were indicated to open flat. After the opening bell the market was a little volatile for the first half hour. Trading wasn't out of control but there was a quick test of resistance and support that resulted in a slow march higher into the early afternoon.

Economic Calendar

The Economy

The first estimate for 3rd quarter GDP was the focal point for the market today. The estimate is 3.5%, stronger than the 3.1% projected by analysts. This is the second quarter of strong growth since the first quarter of this year and the second quarter of growth above expectations. The economic activity leading to this number is likely a prime cause for the shift in stance taken by the Fed.

There is some speculation that the strong number this quarter may be taking away from 4th quarter GDP but there is equal talk of acceleration into the end of the year. I am in the acceleration camp due largely to improvements in labor. The price index, a measure of prices paid by US residents, only increased by 1.3%, less than the 2.0% expected and a sign low inflation. The report lists personal consumption expenditures, exports, fixed investments and government spending as the primary drivers of GDP growth this time around.

The jobless data remains steady at long term lows. Initial claims for unemployment rose, but by only 3,000, from an upward revision of 1,000. This weeks headline is 287,000, the third week of gains, but remains below 300,000 and in line with long term trends. The four week moving average fell to a new low this week. On an not adjusted basis claims rose by 5.5%, slightly ahead of the expected 4.5%. Even with the slight rise over the past few weeks claims are still at long term lows and holding steady. These levels are contributing to the decline in long term unemployment and should do so as long they continue to decline and/or hold steady. On a state by state basis CA and MI led with gains in claims of 2,754 and 1,609. Pennsylvania and New York led with declines of -3.459 and -2,965. Still no mention of layoffs, or hiring, due to the oil, fracking or shale business.

Continuing claims also rose slightly this week, reported at 2.384 million, a gain of 29,000. Last week's number was revised higher by 4,000 for a net gain of 33,000. The four week moving average fell however, reflecting the low set last week dating back to January of 2001. Continuing claims is still trending lower and in line with an improving labor market.


Total claims for unemployment fell by 12,366. This is another new low in this figure and a continuation of the downtrend in total claims that has been going on all year. Based on this, and the initial and continuing claims figures, I am expecting to see steady to good numbers next week when the NFP and unemployment figures are released. The Fed statement may in fact be foreshadowing it. The new tone, especially the parts about slack in the labor force, are especially leading.

The Oil Index

The Fed move helped to strengthen the dollar and put some pressure on commodities. Oil prices fell about 1% during the day but were able to hold steady around $81. Afternoon trading lifted prices off of the lows but the close was still down from yesterday. The direction oil prices will take in the future is still in question however because several factors are in play. One of the reasons why prices are low, high production levels, may be alleviating as several oil companies have issued lowered production guidance for next year. At the same time there were several headlines detailing the financial pain being felt among oil producing nations. Both are reasons to suspect prices will go up but when is the question. The combination may not be enough to lift prices now, but they are enough to think twice about how low prices may go.

The Oil Index fell today, losing about a half percent, but was able to regain most of the loss before the close of trading. A mix of earnings and the hazy outlook for oil prices contributed to today's action. Earnings from the sector have so far not been as bad as some may have feared but low oil prices are hurting projections for next quarter and next year. The index is now trading below below resistance with bullish indicators but isn't looking very strong. Additionally, I am still anticipating a retest of support down to a possible range between 1,350-1,400.


Earnings from Conoco Phillips were better than expected on increased production, particularly in the Eagle Ford and Bakken Shale. The integrated oil company reported revenue and earnings that beat estimates along with reaffirming the companies projections for growth in 2015. The downside is that revenue and earnings are both down from last year due to lower realized prices for oil. Shares of the stock opened about a half percent lower but quickly regained the loss and moved into the green. By the end of the day COP Was up about 0.75% with rising indicators. Today's move was halted at $72.50, coincident with a long term support/resistance line and the short term moving average.


The Gold Index

Gold fell 2% after the Fed announcement. The end of QE is helping to boost dollar value and pressuring gold prices. Gold lost over $20 today and dipped briefly below $1200 where some buyers stepped in, enough to keep prices just at $1200. The approaching end of QE has pressured gold to the long term low, a move that has been developing for a long time. Now that it is here where can gold go now?

The Gold Index fell today as well. Losing a little of -6.0%, dropping down to $66.59 and a full 100% retracement of the 2008-2011 bull market in gold. I have to say I almost can't believe it actually happened. I have been watching this trade for a couple of years with this retracement as the long term target and I was beginning to think it wasn't going to happen. In any event it did, today's action brought the index down exactly to the 100% retracement level where it proceeded to bounce. The bounce was about as light as it could be but it was there before the index moved lower. The move however is looking very weak and extended and could possibly be a capitulation in the market. The MACD has just crossed below the zero line and stochastic is pointing lower with significant divergences in both. Current support is along the retracement level at $66.59.


GoldCorp reported earnings today and did not inspire much confidence. The company reported earnings that are about half what the street was expecting, due in part to low gold prices but also to one-off items that occurred during the quarter. Additional factors were a surprise increase in all-in costs that are more than 10% above the 1st half average. On the positive side production levels were up from last year despite some problems at currently operational mines. The street was expecting $0.18, the actual was $0.09. Shares of the stock fell more than 12% to a 5 year low.


In The News, Story Stocks and Earnings

Visa reported earnings yesterday after the bell and beat the expectations. The credit card and payment processor reported earnings of $2.18 per share, about ten cents above estimates, with a comparably small beat on the revenue side as well. The really good news was the outlook for earnings which resulted in several upgrades today. Analysts see Visa as well positioned to benefit from the shift to electronic payment from traditional forms and the growing amount of cross-border transactions. Shares of the stock jumped in the after hours and carried that momentum into today's trading, climbing more than 10%. Today's move carried the stock above resistance at the all-time high set earlier this year. The indicators were already bullish and are now showing some strength. MACD has jumped significantly and stochastic is crossing the upper signal line. $235 will be an import price level for this stock into the future and could provide support on a pull back.


Starbucks reported earnings after the bell and will likely affect trading tomorrow. Probably not as much as Visa did today though. The coffee maker extraordinaire reported earnings inline with expectations on a slight shortfall in revenue. One thing hurting profits was a rise in costs that is expected to hurt profits going into the next quarter and year. Along with the miss the company lowered guidance and sent shares of the stock sinking in the after hours trade.


The Indices

The morning started off at a low that we never saw again. This move was led by the Dow Jones Industrial Average and in turn Visa, which is credited for at least 150 points of the Dow move today. The blue chip index gained over 220 points, 1.30%, and broke above potential resistance. Today's move brings the index back above 17,000 but is still short of the current all time high. Resistance broken today is consistent with the all-time set in July which I think is fairly significant. Near term momentum is still to the upside with next target for resistance at the current all time high about 75 points above today's closing price. I am still expecting some kind of a retest of support but it is looking less and less like it will be a major event if and when it does come.


The S&P 500 made the next largest gain today, climbing 0.62%. The broad market moved up by just over 12 points at the close after briefly touching resistance at 2000. Today's move also carried the index above the July all-time highs and was able to stay there. The indicators are bullish and gaining strength although I still see a possibility for a retest of support in the near future. That being said near term momentum is to the upside, in line with the long term trend and economic data, and heading higher. Potential resistance is just above today's close at 2000 and needs to be broken to continue the rally. Support on a pullback will be found around 1950 and 1900.


The NASDAQ Composite made the smallest gains today, only 0.37%. The tech heavy index gained about 17 points and is looking strong into the near term. When I first looked at this chart today I thought to myself, something is happening here and it looks bullish to me. The index is gaining momentum with about 40 points of room before hitting resistance. Earnings could provide the catalyst to take it there. Price action is bullish but has been trading sideways over the past three days, possibly consolidating around the Fed decision. Earnings released after the bell today were positive and could help lift the index tomorrow. Resistance is the current all-time high and could prove to be strong so I would like to see it move above this level. If not broken a pull back could find support around 4,500 or just below that along the long term trend line.


The Dow Jones Transportation Average did not make a gain today. The trannies lost nearly a full percent today as they retreat from the new all time high set earlier this week. Today's move shows there is some resistance to new highs but based on the extent of the move over the last three weeks could simply be profit taking. Momentum is still bullish and stochastic is indicating strength although both are confirming the peak. 8,500 looks good for support at this time. The long term trend is up and I think it is still intact, a pull back to support would be a potential entry.


The Fed gave the all-clear but I think maybe we already knew that. Economic data has been steadily improving and today's GDP confirmed it. The market responded by moving higher but doing so with a couple of quick tag-backs to support.

Now that QE is over market participants can actually begin to look at the economy and earnings. The economy is growing and by all accounts gaining momentum. We'll get a real good look at how the 4th quarter is shaping up next week with the first round of monthly data. If there is reason to be think things are changing we'll find out next week. So far earnings are pretty good on average and the projections for next quarter are shaping up OK as well.

Until then, remember the trend!

Thomas Hughes