Monday bulls drove the markets higher for the second week in a row as the market gets ready for the FOMC.

Introduction

Monday trading resulted in a +1% rally for the second week in a row. The markets are gearing up for another FOMC meeting and seem euphoric in the face of a possible change of statement. Today's rally was global, starting in Asia and working its way through Europe and into our markets. Indices in both overseas regions reached new highs; China hit a five year high, Japan closed flat after touching an all time high and Germany closed at an all time high. Our indices did not reach the all time highs but are set to possibly test resistance tomorrow or Wednesday and up to and until the FOMC policy statement is released.

Market Statistics

There was a fair amount of economic data released today. A lot of it was weaker than expected but the gist is that we are still in the winter slump, but expectations for the upcoming spring, summer and 2nd half are positive if not strong. There were also a number of earnings releases but nothing to grab the markets interest. The official “season” is over, there are only 2 S&P companies left to report for the 4th quarter of 2014 and this week will see the first half dozen or so report on the 1st quarter of 2015.

Futures were up right from the start but not overly strong. The pre-opening session was relatively quiet as I think attention is focused on the chance of fundamental change by the FOMC and not on individual data points released today. After the open the bulls moved higher, slowly, until they got their feet under them. Around 9:15 they began a march higher that lasted all day. The indices reached a high around noon that held until 2PM and then reached new highs afterward.

Economic Calendar

The Economy

Empire Manufacturing was reported at 6.9, this is below last month's 7.8 and the expected rise to 8.8. On top of that last month was revised lower to 7.4. Within the report new orders declined -2.4, shipments fell -7.9 and prices paid were down but labor saw “solid increases” in employment levels and hours worked. While down, the number is still positive and shows expansion within the New York area of the Federal Reserve System. The 6th month outlook also remains positive and has rebound from a low set last month.


Industrial Production rose by a tenth in February versus an expected rise of 0.3%. This is below expectations but still positive, and a gain of 0.4% from last month's downward revision. While production rose output declined for the 3rd month in a row, falling -0.2% in February. Capacity utilization also fell in February and is now only 78.9%, 1.2% below the long term average. This isn't a great report but it looks like industry could be getting ready to ramp up production; production is on the rise while at the same time hiring remains strong and capacity utilization is declining, at this point a pick up in utilization would be indicative/symptomatic of a rise in production.

The National Association of Home Builders released their monthly survey of builder sentiment this morning as well. The index fell by 2 to 53, positive but revealing what the association refers to as “supply chain issues”. Shortages of lots and labor, as well as strict underwriting, are hurting current conditions. Within the index current conditions and traffic both fell, to 58 and 37, but the 6 month outlook remained steady at 59. The NAHB also says that it is expecting improvements in the spring and “solid gains” for the year.

Moody's Survey of Business Confidence rebound this week to near record highs. The index gained 1.6 points to hit 39.8. This is a nice surprise in light of last weeks drop and shows that sentiment among businesses who participate remains high. The summary is positive and optimistic about the future but subdued from past weeks. Mr. Zandi, Moody's chief economist, says that -

Business confidence rebounded last week back close to record highs. Confidence is especially strong in the U.S., where businesses are feeling good about sales, hiring and investment. Pricing is holding up well despite heightened deflation concerns in much of the developed world. The survey results are consistent with an economy that is expanding well above its potential.


According to FactSet 498 of the 500 S&P 500 companies have reported for the fourth quarter of 2015 and at least one of the last two is scheduled to report this week. Of those, 75% have beaten the blended average for earnings and 58% have beaten the blended average for revenue. The blended rate for the fourth quarter is going to end up right around 3.7%, above the 1.7% expected at the start of the reporting period and in line with recent trends.

The 1st quarter is not expected to be good; 1st quarter earnings are expected to decline by -4.9%, led by a -63.5% decline in the energy sector. The next largest decline is expected in the utilities sector, -6.3% a tenth of the decline expected for the energy sector, which is why I think that earnings ex-energy will be more important than the overall blended average.

Looking back at the 4th quarter of 2014 the blended rate ex-energy jumps to 7.5%, looking ahead to projections for the 1st quarter of 2015 the blended rate ex-energy jumps from -4.9% to +1.05%. Now think about this; on average, over the past few years, the final S&P 500 blended growth rate has been 3-5% higher than estimated at the beginning of the quarter. This past quarter saw a rise of 2% from the initial estimate, and 3% from the low estimate. With this in mind I think it safe to say that earnings are going to decline, but the overall earnings picture might not be that bad.


Looking beyond 1st quarter earnings to the second half of the year things begin to perk up. The second half is expected to see a return to overall earnings growth and expanding corporate margins.

Tomorrow is light on data, only two releases, housing starts and building permits. These could give indication of rebound in home building but its probably too early for that. Wednesday is FOMC day, the release expected at 2PM. Thursday is the usual jobless claims and the Friday wraps it up with Leading Indicators and the Philly Fed Survey.

The Oil Index

Oil, it fell, again, by more than 2% to a new 6 year low. Whatever you may think about the supply/demand picture there are no buyers for oils right now. Storage remains high and building, supply and production also remains high and so far there is no indication that anybody wants to buy, or even needs to buy. Until this changes oil could continue to move lower and will no doubt influence earnings expectations for the energy sector. It is quite possible that projected earnings decline for the sector and for the broader S&P 500 could move lower before they move higher.

The Oil Index, surprisingly, moved higher today. The index gained nearly a full percent in a move that began at the long term trend line. Today's action confirms support at the trend line following the test of support last Friday. The indicators are still weak but also in the early stages of the trend following signal set up; MACD is retreating from its bearish peak while stochastic is making a weak bullish crossover. This is not a strong signal and if oil prices do not stabilize or rebound could result in a false signal. However, the trend is up and this early signal is in line with that trend so as such will be my signal to start looking deeper into the sector.


The Gold Index

Gold prices held steady today, just above $1150. A swirling combination of economic outlook, FOMC statements, inflation and interest rate speculation has brought gold back to this level after causing it to bounce from this level just a few months ago. Strong dollar is hurting gold value in the near term but the expected FOMC change to statement is a sign inflation is on the horizon. Raising the rates is strong for the dollar, but also indicative of an environment in which inflation needs to be controlled. That expectation is, I think, what caused gold to end it long term down trend in the first place and could cause it to bounce again now. That and an expected increase in physical demand from Asia, aided by a recent cut to the gold tariff in India.

The gold miners ETF GDX gained 0.75% today. Today's action was up but is really just another day of sideways trading, beneath potential resistance and near the long term bottom. This action appears to be a consolidation but whether it is a precursor to a test of the long term low or a bounce from support is yet to be seen. The indicators are retreating from bearish peaks which shows that selling pressure is letting off but those same peaks are convergent with lower prices so a move down to the long term low looks more likely than not. Support target is the long term low, near $16.50, with resistance along my rising trend line near $18.25. A break above resistance could take the index up to the top of the 5 month range near $21. All of this does of course depend on the FOMC and the affect they have on the gold market.


In The News, Story Stocks and Earnings

This is a big central bank week for more than just the United States. The Bank of Japan and the Swiss National Bank are also both meeting but both expected to make no market moving changes. The FOMC on the other hand is expected to make changes and those expectations, along with economic trends, have been driving the dollar higher versus the euro and other currencies as well.

Today the Dollar Index fell from its all time high by -0.75% and created a moderately sized black candle. Today's action is not a full blown Dark Cloud Cover but does appear to be indicating a possible peak. The indicators are strongly bullish but also indicative a peak has been reached; MACD is in retreat from an extreme peak and stochastic is making a bearish crossover. These don't mean there will be reversal but they are a good indication that the rally may be over, at least for a time, and I tend to agree with this assessment. The dollar has been driven to this level on expected QE from the ECB and expectation of a change to the FOMC statement. There is no more additions to QE expected and a change to statement is not a change of policy. Without a change of policy I see no reason for the dollar rally to continue.


Apple will enter the Dow Jones Industrial Average at the end of the week, replacing AT&T. This move will likely spur some serious buying in Apple which in turn could help the index to reach a new high. Today Apple gained close to 1% and moved above the short term moving average. The stock appears to be consolidating just above the previous all time high with indicators rolling into a trend following buy. MACD momentum is retreating from a bearish peak while stochastic is making a weak bullish crossover.


AT&T is being replaced and will remove a drag on the Dow. The telecom giant has been trending in a very choppy range over the past 12 months at least and is now just off the bottom of the range. Today's action carried the stock up by just over 0.9% but leaves it well below the 30 day moving average. This one could be setting up for a test of the 12 month low, near $32.


The Indices

The indices moved higher today, averaging more than 1% and in most cases moving above the 30 day EMA, if not already above it. Today's move was led by the Dow Jones Transportation Average and a 1.69% gain. Today's move created a long white candle and completed a three day continuation pattern that could lead to further upside. The index is moving up from the short term moving average near the middle of the 5 month trading range toward the top of the range at the all time high. The indicators are very weak but about to confirm an bullish trend following signals that could also lead to further upside. Current resistance is the all time high and could be reached before the FOMC meeting on Wednesday.


The S&P 500 made the next largest move today gaining 1.35%. The broad market also created a long white candle and completed a three candle continuation pattern. Today's action carried the index above one resistance line and the short term moving average and looks more bullish because of it. The indicators are weak, but like on the transports, rolling into a trend following buy signal. The MACD is about to make the zero line crossover and stochastic is forming a weak bullish crossover. Resistance is between 2090 and 2100 with next resistance at the all time near 2120. Based on today's action I think it possible resistance is tested in the next two days.


The Dow Jones Industrial Average made the third largest gain today, 1.29%. The blue chips also made a long white candle and crossed above the short term moving average. Today's action has also completed the three day continuation pattern mentioned above and has brought the index to meet possible resistance at 18,000. If the index crosses this level next resistance will be the all time high, about 260 points higher. The indicators are consistent with an early/weak trend following signal that could lead to a test of resistance in the least.


The NASDAQ Composite brings up the rear today with a gain of only 1.19%. The tech heavy index did not form a long white candle but price action is bullish nonetheless. Today's action is a move up from the short term moving average in line with underlying trend. The indicators are similar to the other indices but a little weaker, stochastic is not yet making the bullish crossover but it looks very likely to come. A move up to resistance just above 5,000 is likely with a break above that possible.


Here we go again. We are on the cusp of an FOMC meeting, the indices are recovering from a small correction and the indications are good the rally will continue. The caveat is that this time the risk, if you want to call it that, that the FOMC raises rates will grow and it is unclear exactly what the market is going to do when that happens. Until the market breaks out to new highs there is a chance that the statement could put an end to the rally.

They won't raise the rate this time but there is a very large chance they will change their statements and this means the hike is very very close and could come at any time. According to Janet Yellen the change to statement won't mean the market should expect a rate hike at any specific meeting ie June or September...but that a rate hike could come at any meeting should the data warrant it. In any event, the trends are up, the data is stable and expectations are good; I remain bullish.

Until then, remember the trend!

Thomas Hughes