After more than a year of talking the market up Mario Draghi and the ECB have followed through with “additional measures”.

Introduction

To say that all eyes were on the ECB this morning may be an understatement. The central bank has been talking the market up for a long time on hints and teases that there would be “additional measures” to QE programs and today was the day it was expected to come. After meany missed opportunities and months of deteriorating economic data the bank has finally followed through on its talk and added those measures. Today the ECB announced that it would be adding 60 billion euros a month of asset purchases in an open ended attempt to stimulate the European economy. This exceeded market expectations by 10 billion euros and was well received.

Asian indices have yet to feel the benefit of the ECB decision as they closed long before the announcement was made. Anticipation for the expected move had them mostly higher and they are indicated to open higher already. European indices were largely flat ahead of the statements due to fear the bank would not, or only, meet expectations. The surprise helped lift them by an average 1% once the details of the plan were laid out. These include the purchase of sovereign bonds from all EU countries, except maybe Greece, and that the plan would begin in March of this year. The target end is September 2016 but was left open as the bank would like to see a “sustained adjustment of the path of inflation” more in line with their goals.

Market Statistics

US futures were up from the start, boosted by earnings and economic data as well as the ECB. The S&P was indicated to open about 6 points higher and quickly matched that in the first minute following the opening bell. After hitting the early high the indices retreated to test yesterday's closing prices while the market digested the new ECB policies. Around 9:45 bottom was hit and from there the bulls took charge, driving the indices up by more than 1.5% on average. The ECB decision had a wide ranging impact and moved gold and the dollar as well as equities. Buying persisted all day leaving the major market indices at their highest levels of 2015 and very near to recent all time highs.

Economic Calendar

The Economy

Economic data was released with little fanfare today as the ECB press conference began at precisely the same time. First up was the FHFA Housing Price Index with a gain of 0.8%. This is for the November 2014 period so is rear looking at best. On a rolling 12 month basis prices are up 5.3%.

Initial claims fell by 10,000 but is still above 300K. The number of first time claims was reported as 307,000 with a 1,000 claim revision to last week's figures. The four week moving average climbed by 6,500 and is now above the 300K level for the first time since early September. It looks like claims are beginning to trend higher from the lows set in October. This is mildly alarming but is most likely attributable to seasonal employment adjustments rather than a reversal in trend. Whatever the case, claims need to be monitored as a sustained increase in this metric would indicate an increase in the pace of job losses. For now, claims remain near long term lows and at a level consistent with the long term improvement in labor.


Continuing claims rose by 15,000 versus an expected decline of similar proportion. Continuing claims was reported at 2.443 million with a revision of 4,000 to last week. This figure is a less volatile and better indication of underlying conditions and remains near long term lows as well. There has been an increase in this figure post-holiday's but it is not yet as sharp as in initial claims suggesting those being laid off are finding work or returning to work fairly quickly. This idea is supported by other data including Challenger planned layoffs, JOLTs job openings and the quits rate but also bears watching. An increase in jobless claims that persists into the future would not be a good sign.

Total claims is also presenting a red flag. The total number of jobless claims rose by 196,315 to 3.049 million and an eight month high. The total claims were on the rise steadily into the end of the year, as expected due to end of year lay-offs, and could rise further before settling back down. While at a high, the number of claims is still well below the year ago period, -17%, which was the first week of reporting after the expiration of benefits extensions that occurred at the beginning of 2014. Based on the other labor data I expect to see this begin to fall in the next few weeks. If not it will be time to take a new look at whats going on in the labor market.


There are two economic releases tomorrow, Leading indicators and Existing Home Sales, both scheduled for 10AM. Leading Indicators are forecast to have risen 0.5% last month, indicating an increase in activity this month. This is slightly higher than the consensus estimate from just a week ago. Existing Home Sales are expected to have risen in Decmeber to an annualized rate just above 5 million.

The Oil Index

Oil had been holding steady around $47.50 on talk from OPEC about an expected rebound. The bloc thinks a rebound is more likely to occur than a dip to below $40. A build in inventory reported by the EIA did not jibe with that sentiment and sent prices lower. WTI fell 3% from yesterday's settlement price and is now just a few cents above the long term low. It seems as if supply is still on the rise and pressuring prices but signs that production growth may be slowing are also beginning to appear. One such is a drop in the Bakken rig count.

The Oil Index rose in today's session despite the drop in the underlying commodity and is above the down trend line. The break of the short term down trend line is a positive sign for long term oil bulls but is as yet unconfirmed. Today's move was a mild testing of support but I think there could be more. Volatility could persist as oil prices seek and/or find bottom which will have a big impact on index prices. The indicators are currently bullish and pointing up leading me to think it could move up to the 1,350-1,400 level. If not, potential support is along the back of the down trend line and then the longer term up trend line near 1,250.


The Gold Index

Gold continues to rally. The ECB move is fueling the flight out of currency begun last week by the SNB and sent prices up another 1% to above $1,300. This is the first time gold has traded at this level in over 5 months. The way things are going it is hard to say where the end of this rally may be, especially with the FOMC meeting next week. Gold is back in demand with long term outlook bullish but at these levels is looking extended and vulnerable to pullback with $1250 looking like a good target to find support.

The gold miners ETF GDX tried to move higher today but couldn't hold it. The ETF opened with a gain, but traded down from the open all day, unlike the underlying metal which is making new highs. The positive is that today's action appears to confirm support at $22.25 and to be part of consolidation following the gapping move on Tuesday. The indicators are bullish and convergent with higher prices so unless the long term outlook in gold changes any pull backs in price would be a potential entry point. Current support is $22.25 with potential upside targets near $25 and $26. If support fails the ETF could retreat as much as $2.50 to the $20 level.


In The News, Story Stocks and Earnings

Earnings continue to roll in and are beginning to look a lot better than they did earlier this week. The big banks and oil are still a drag but the regional banks and transports are shining. A number of big name transportation companies reported today spanning trucking, airlines and the rails. JBHunt moved as much as 5% higher in today's session after reporting earnings that beat expectations. On a year over year basis earnings for the trucking company are up 21% in the quarter and 10% for the full year. Revenues are also up driven largely by a 6% increase in intermodal shipping, an increase that is emerging as a trend in the sector. Intermodal is big. Shares of JBHunt are now tackling resistance near the current all time high.


Union Pacific reported their 6th year of intermodal growth. This comes along with a 27% increase in EPS and a 20% increase in operating income that were both ahead of expectations. The rail carrier reports that low oil prices are helping the bottom line but may affect carrier volumes next year. The upside is that all the other businesses who are having trouble shipping because the rails are full of oil products may now find relief. Shares of the stock rose 5% in today's session to test resistance just below the all time high set at the end of last year. The indicators are bullish and in line with a trend following entry.


Not all reports were rosy. Sandisk, maker of flash memory storage devices released earnings yesterday after the bell and did not meet expectations. Revenue and earnings both fell short on a decline in sales that sparked a round of down grades today. The stock was hit hard in the pre-opening session and opened more than 12% lower and at a 9 month low. Buyers stepped in however and drove prices back to near break even.


Starbucks reported after the bell today. The coffee giant earned $0.80 per share, in line with expectations, and reported comp store sales increased by more than 5%. The comp sales numbers were above expectations and the 20th straight quarter of increases more than 5%. The stock jumped on the news and gained 2% in after hours trading.


The Indices

The ECB did it, and they did it bigger than expected. The bank allowed the market to think one thing, and then delivered it and more, providing catalyst for markets around the world. Once the news was out, and the details of the new plan discussed, the bulls came out in force and drove the indices up all day and into the close. Our markets began the day with a quick dip to touch base with support but once they began moving higher never looked back.

The Dow Jones Transportation Index led the charge, boosted by strong earnings and outlook from the sector. The index gained nearly 3% in today's action and is fast approaching potential resistance at the current all time high. The indicators are bullish and on the rise, confirming the move. Current upside target is near 9,250 with further targets near 9,500 and 10,000 provided the index can break to new highs.


The NASDAQ Composite made the next largest gain but fell short of the high mark set by the transports. Today's move is another confirmation of the long term trend as it tested support along the short term 30 day moving average confirmed by a bullish crossover on the stochastic and MACD. Support is the moving average with upside target at or near the current high around 4,800 with additional targets near 4,900 and 5000 on a break above resistance.


The S&P 500 and Dow Jones Industrial Average finished the day basically even near a 1.5% gain. The blue chips gained just under1.5% and blasted right through the short term moving average. The index is moving higher following a support/trend bounce and is showing an early buy. Stochastic is forming a bullish crossover but has yet to confirmed by MACD. MACD is very close to making a bullish crossover as well but has not quite made it. Target is now 18,000 with support just below the moving average near 17,500.


The S&P 500 gained just over 1.5% or 31.03 points. The broad market created a long white candle and also confirmed support along the short term moving average. The index is moving higher on a trend line bounce with increasingly bullish indicators and upside targets near the current all time highs. Stochastic has already fired off a trend following bullish crossover and MACD is in the process of confirming that signal. It is now exactly at zero and crossing over to bullishness. Resistance may be met at the all time highs, near 2090, with additional upside possible on a break above it. This could coincide with the FOMC meeting, or the release of 4th quarter GDP both scheduled to be released next week.


The markets are bouncing higher, in line with underlying trends. Economic data is good, outlook is fine and earnings are looking better and better every day. Now that Mario Draghi and the ECB has provided some support for the EU economy we can put to rest one fear, at least for now, and focus on the future of our own economic recovery. The next possible market mover is the FOMC, meeting next week and releasing a statement on Wednesday. After that is the GDP release on Thursday.

Until then, remember the trend!

Thomas Hughes