The market is waiting to hear from Fed Chair Janet Yellen who is scheduled to testify before Congress on Tuesday.

Introduction

Global markets surged to new highs this morning but testimony from Janet Yellen, scheduled to begin tomorrow, kept US bulls quietly biding their time. International markets were buoyed by the apparent deal between Greece and the EU but that news was not enough inspire a rally here. There was no economic data to affect premarket action and only one released today, existing home sales. The data was weaker than expected but shrugged off as was the massive amount of earnings reports. The bulk of the S&P has already reported, more than 85%, but there are still hundreds if not thousands of small and mid caps on the list this week.

Market Statistics

The S&P 500 was indicated to open about 5 points lower than last week's closing price and quickly moved to that level once the opening bell sounded. The low of the day was hit soon after at which time the market bounced and began to trend sideways. Today's action was very light and without direction as traders are waiting on what Janet Yellen might say. This seems to be more important than every since the FOMC minutes reveal the Fed is less firm in it's outlook than the market might want. The indices were able to hold today's levels and even moved up to the high of the day before the close. The NASDAQ at least was able to move into the green and close at a new high.

Economic Calendar

The Economy

Existing home sales dropped by -4.9% in January, more than double the expected drop, but remain at levels above those seen a year ago. This is the fourth straight months sales have been higher than at the comparable time last year but still a 9 month low. Weather may be to blame in part of the country but limited supply is taking its toll on traffic as well. There is more housing data due out this week as well including the more forward looking pending home sales scheduled for Friday. Between then and now new home sales, the Case Shiller Index and the housing price index are also due for release.

Moody's Survey of Business Confidence fell by -1.6 points to 40.1. This is the second week of decline but confidence remains near the all time high. Mark Zandi reports that the economy is still expanding and that hiring is strong. According to his analysis the strength in hiring is supported by the absorption of office space, which is at a record high.


According to Factset 443 S&P 500 companies have reported as of last Friday. Of those more than 75% are reporting above the blended estimate for earnings and 58% are beating the blending estimate for sales. The estimated earnings growth for the fourth quarter is now up to 3.5%, double what it was at the end of the year, led by telecom and health care. Seven of the ten S&P sectors are beating estimates with energy the laggard. Forward P/E for the index is also on the rise and is now 17.1, the highest level in 10 years, despite an expectation for net earnings decline in the next quarter.


There is some other data due out this week as well. Aside from the housing data there is CPI, durable goods, PMI, Michigan Sentiment and the 2nd estimate for 4th quarter GDP. The previous estimate was 2.6% growth, current estimates are closer to 2.0% and could go a little lower. However, there was a lot of strength in labor last quarter so I think it might not go as low as expected.

The Oil Index

Oil traded in another 3% move today, to the downside. The price of WTI fell more than 3.5% in early trading only to spike back to break even later in the day. The spike was caused by a new story stating Nigeria thinks OPEC could hold a meeting very soon to discuss oil prices and to possibly move to support falling prices. The spike in prices did not last long as traders recognized the headline for what it was, a verbal speculation from Nigeria's oil minister, and prices returned to the lows of the day. On the fundamental side of things new reports say that Libya's Sharara field is back on line so that will have an impact on supply and prices. WTI closed below $50 near $49.25.

The Oil Index lost ground today as well, but only -0.08%. The index opened lower on the drop in oil and then traded up from there but never regained break even. Today's action keeps prices above the short term moving average and below resistance at the top of the three month range. The indicators are still bullish but are weakening and could lead to a break down of support. If price moves below the short term moving average it could go as low as 1,300 or 1,250. This will of course have a lot to do with the price of oil. If oil prices fall back to their lows I would expect to see the Oil Index test its lows as well. If prices can hold on to levels above or near $50 the bulls in this market could regroup and make another test of resistance.


The Gold Index

Gold fell in the overnight sessions and broke below $1200. This move did not last long, prices crept back up to above $1200 just before the open of equity trading. Prices peaked close to $1210 before settling near $1202. Today's action leaves gold at a 7 week low but also show, I think, support at or just below $1200 and the previous support level of $1190. There is not a pressing reason to get long gold at this time or level but long term buyers have been in the market at this level before. Gold may break below $1200 again and test support at $1190 or lower but I will be surprised if such a dip does not result in a buying opportunity.

The miners ETF GDX opened lower on the drop in gold but was able to recover the loss. The index gained just under 0.5% after testing support below $20.50. This support line is the top of the reversal pattern formed during December/January and could be important for near term direction. A break down of support could take the index down to the bottom of the range, a confirmation could take it back to $22.50 or higher. The indicators are currently bearish, in line with the pull back of the last two weeks, but so far consistent with support. One warning sign that support may be breaking down is found in the stochastic, which is moving below the lower signal line. This is an indication of weakness but not an entry signal in and of itself.


In The News, Story Stocks and Earnings

Dish Network reported before the bell. The company reported earnings that blew away estimates but revealed that subscriber numbers were falling. Much of the beat reported today was due to increases in broadband subscriptions and fees related to new and current pay TV users. The company also announced that CEO Joseph Clayton will be retiring. Investors cheered the report at first but the later announcement the CEO was leaving caused a mid-day reversal. Shares of DISH fell -1.17% today after testing resistance, indicators are in line with resistance and suggest a return to $75 or $70 is likely.


Steak chain Texas Roadhouse reported earnings after the bell. The company reported earnings of $0.26 per share, in line with estimates, on revenue that is also in line. This is a 10% increase over the comparable quarter and overcomes a near 0.5% decrease in operating margins. The decline in margin is due to food cost inflation and is not expected to abate. The company also reported opening 9 new stores under 2 brands. Shares of the stock gained 2.5% in today's session to reach a new all time high and traded up in the after hours.


Valeant Pharma hit the news today with a double shot of good news. First the company raised its guidance to $0.03 above consensus and is now $2.30 for the full year. Second, Valeant announced the purchase of Salix Pharma. Salix is a maker of gastrointestinal drugs with several promising money makers in the pipeline. The deal is worth $10.1 billion and is expected to go through without any trouble. Shares of Valeant popped in the pre market session, gapped open by about 10% and moved higher from there. Total gain for the day was nearly 15%.


Homebuilder Toll Brothers is scheduled to report tomorrow. Current estimates are for earnings of $.30 per share, down from $0.70 in the previous quarter. Today the stock lost over -1.25%, possible driven down by the weaker than expected existing home sales. If so the selling could be misplaced as Toll Brothers is a builder of new homes and not a seller of old homes, and the lack of inventory of existing homes could cause an increase in new home sales. The stock is currently trading near a 12 month high and resistance at $37.50.


The Indices

Today's action was very mellow. The market moved lower but was able to hold near long term highs despite a shaky Greece deal, plunging oil prices and weaker than expected housing data. The market may be looking past the near term noise of Greece and volatility in oil, but is still cautious in respect to the FOMC and Janet Yellen. It is her testimony I think that is really the cause for today's action. We've reached a point where there is a reasonable expectation of an interest rate hike sometime before October and the minutes of the last meeting were not firm in support of this. Now there is confusion and the market is looking to Chairman Yellen for direction.

Today's action had a downward bias but left the indices at or above their respective highs. The move was led by the Dow Jones Transportation Average which gained 0.14%. Today's action left the index at a new high for the year but so far it has not been able to break out to a new all time high. The index also has yet to break above the doji formed last week, making 9,150 look like possible resistance. The indicators remain bullish so further testing could ensue with a move to challenge the all time very possible. A break above 9,250 would be consistent with moves already made by the other indices and could lead to further upside for all.


The NASDAQ Composite also finished in the green, making a gain of 0.10%. The tech heavy index was aided in part by the massive move put forth by Valeant but also by Apple which set another new high. The index is moving higher with bullish indicators but momentum has peaked and stochastic is overbought so it is possible the rally has peaked too. This does not mean a reversal is coming tomorrow but it is cautionary and should be watched. The trend remains up with current price action in line with that trend so the index could easily keep running until it hits the all time high.


The S&P 500 nearly recovered all of its early losses but fell short by -0.03%. The broad market created a very small spinning top just under the all time high and above previous resistance. The index has been moving up for the last three weeks, after bouncing off of the 1990 level, and may be peaking out. The indicators are bullish but momentum is weak and declining while stochastic is high in the upper signal zone and overbought. These conditions can sometimes go on indefinitely while the market rallies but support needs to be watched and stops should remain tight. A break below 2,100 could take the index down to 2,050 or lower while a confirmation of support could lead to additional upside. If a bounce from 2,100 occurs next upside target is above 2,200.


The Dow Jones Industrial Average brings up the rear with a loss of -0.13%. The blue chips fell from the current high to test support at the previous high, near 18,050. The index is trending higher, but like the others, could be at a peak. The indicators are bullish but momentum is weak and stochastic is in overbought territory.


The indices are hanging at or near all time highs and look like they could be going higher. The thing is, they also look like they could be at a peak. What is mostly likely happening is a near term consolidation that will lead to a move one direction or the other, depending on what Janet Yellen says over the next two days. The economic trends are up and expectations for future growth remain strong, the question faced now is what to think to about rate hikes. . . and first quarter earnings. Rate hikes are baked into the cake as far as I'm concerned, they have been on the table a long time. First quarter earnings are a concern but as I mentioned last week so long as the market ex-energy shows growth the rally should be able to continue.

Until then, remember the trend!

Thomas Hughes