The market bounced back today on dovish, or hawkish, statements from Fed Chair Yellen.

Introduction

Friday's comments from Fed Chair Yellen reassured the market that rate hikes were on the way, but that the economy was still historically weak. Depending on how you look at it her statements are either dovish or hawkish. What this means exactly in terms of rate hikes is elusive but does not move expectations from the June/September period. It does reaffirm the idea that the pace of rate hikes will be very very slow.

The news helped to lift indices around the world and sent those in Asia and the EU to new highs. Adding support to the market are comments from a People's Bank of China official which have raised the expectations of Chinese QE to new highs. European markets were tempered by the ongoing issues in Greece but nonetheless were able to reach new highs and closed at the highest levels of the day.

Market Statistics

Futures trading indicated a higher open from the start of the electronic session. The S&P was indicated higher by about 0.35% with the indices in similar position. Futures trading remained strong throughout the early pre-market session and were supported by today's economic data. Business confidence remains high and there were surprise gains in personal income and pending home sales.

The bulls took charge as soon as the opening bell sounded. They took the indices more than 1% higher and hit the early peak within the first 30 minutes of trading. At that point the indices pulled back very slightly from the high to trade sideways until noon when buying activity pushed them up to set another intraday high and another until the closing bell. By the end of the day the indices had moved an average 1.20% higher and closed near the highs of the day.

Economic Calendar

The Economy

This is a big week for economic data and today's events are positive. First up is Moody's Survey of Business Confidence. The index retreated by -1.3 points from last weeks all time-high but remains above the previous all-time high. Mark Zandi, Moody's Chief Economist, had this to say.

“Business confidence fell off a bit last week from the record high set the week before. Despite the decline, U.S. sentiment remain notably robust. Businesses remain upbeat about investment and hiring, and demand for office space is strong. Credit is widely available and pricing is firm, despite heightened deflation concerns in much of the developed world.”


Pending Home Sales posted a surprise jump of 3.1% in February, versus an expected flat to negative number. The is the highest level of expected sales since June of 2013 and the first glimmers of the expected uptick in the housing market expected for this spring. The index is now at 106.9, the 6th month of increasing sales and the 10th month of readings above 100, 100 being an average amount of sales traffic. On a year over year basis pending sales are up 12% from this same time last year. Low inventory remains a problem and a factor I think will lead to increased building activity, higher prices and perhaps new sellers entering the market.

Lawrence Yun, NAR chief economist, says “Pending sales showed solid gains last month, driven by a steadily-improving labor market, mortgage rates hovering around 4 percent and the likelihood of more renters looking to hedge against increasing rents....These factors bode well for the prospect of an uptick in sales in coming months. However, the underlying obstacle – especially for first-time buyers – continues to be the depressed level of homes available for sale.” Personal Income also posted a surprising gain. Income rose by 0.4% versus the expected 0.3% but spending only rose by 0.1% which was in line with expectations. The previous months income was revised up to 0.4% as well. The PCE deflator came in at 0.2% for the month and 0.3% year over year. The differential between income and spending can be found in the level of savings, which is at a 2 year high.

There is a lot more data to come out this week. Auto/Truck sales, ISM, construction spending, factory orders and my favorite, the jobs bundle including ADP, Challenger, claims, NFP, unemployment, workweek and earnings. This week is shortened because of the Easter holiday but the NFP data will still be released on Friday. Everything else should be on schedule as well.

According to data from Factset earnings expectations for the first quarter is -4.6%. This is up 0.2% from the -4.8% reported last week. The decline is still being led by the energy sector but all ten S&P sectors have lower expectations now than they did at the start of the quarter. The number of companies with negative guidance remains at 85. So far there have been 16 reports this season, 10 beat on the top and 14 beat on the bottom line.

Looking at expectations ex-energy the projected blended growth rate increased by 0.2% to 1.25%, not huge but a sign that earnings may not be as bad as feared and an example of the importance of looking at the earnings pictures with and without the energy sector. Looking at expectations for the year all-index blended earnings are projected to grow by 2.5% despite a -50% drop in energy sector earnings. Pulling energy out of this projection puts earnings growth in the 7% range for the year, above average. Also, the forward P/E has begun to creep up again indicative of rising expectations of earnings growth relative to the lows set over the past two months.


The Oil Index

Oil prices declined by more than -1.5% today on scuttlebutt Iran could be on the brink of reaching a nuclear agreement with the west. Details are sketchy at best but enough to keep WTI below $48 and Brent below $56 for most of the day. A late day pop driven on rumor put them back near break even. Meanwhile, production in Libya continues to rise but is still only about 50% of capacity and fighting in Yemen drags on.

The Oil Index moved up in today's session, counter to the underlying commodity. The energy sector was one of today's biggest gainers, perhaps on the idea that oil is at or near its bottom. The index gained over 1.75% and regained the upper side of the 30 day moving average but remains weak. Prices have been trending sideways for over a week now and appear to be capped by a Fibonacci Retracement, the 38.2% level of 2009-2014 bull market in oil. The indicators are bullish, but also showing resistance at or just above the current level. MACD is very weak and holding steady just above the zero line while on stochastic %K is horizontal at the upper signal line.

The long term trend is up and the index is bouncing of the trend line but the move is weak and needs confirmation. A break above the retracement, near 1,350, would be bullish but still face resistance near 1,400. Support is currently at the short term moving average, near 1,325, with 1,200 a good target for long term support. This one appears to be making a long term trend bounce but one that may take some more time to develop. Oil prices will likely remain volatile and could lead to another test of the trend line.


The Gold Index

Gold prices retreated over the weekend on Janet Yellen's Friday comments, falling -1.25% and trading near $1185 and possible support. The message, while I'm sure intended to help clarify the rate hike situation, only served to stir speculation on a subject that has been beaten to death for many quarters; when will the first rate hike come, how big will it be and when will the next one be? In any even the near term reaction is a rise in dollar value and a drop in gold prices that could result in another buying opportunity.

The gold miners fell as well, the Gold Miners ETF GDX losing nearly -2%. Today's action opened just above my rising support line near $18.50 and then traded in a tight range around there. The ETF appears to be bouncing off of long term support but the test of that support may not be over. The indicators are bullish now but retreating, in line with the current test of the rising support line, and could easily lead to further downside, particularly if gold prices move lower. If the ETF moves lower it could go as low as $17.50, if it moves higher as high as $20. In either event my long term outlook on this sector remains bullish.


In The News, Story Stocks and Earnings

The Dollar Index got a boost from Janet Yellen's comments and could move up to test the recently set highs. Today the index move up from the short term 30 day moving average and set a new 6 day high. The indicators are still bearish but MACD is retreating from its peak and %K is moving higher so it looks like this bounce could continue to the next likely resistance which happens to be the all time high.


The home builders got a boost from today's housing data. Not only does the data show appetite for buying but supports the need for inventory, which could be new houses just as easily as old. Today the XHB Home Builders ETF gained nearly 2% in a move that brings it just shy of the current 8.5 year high. Both of the indicators are confirming the move providing it can break above $37 which could carry it as high as $39 in the near to short term. If a break does not occur support is between $35 and $36, near the bottom of the 2 month trading range.


Earnings news was quiet today but a name I have traded in the past popped up. Cal-Maine, one of the nations largest shippers of shell and value added eggs, reported earnings in line with expectations on an 11% increase in revenue. The gains were made on declining costs and other favorable conditions. The company expects to see strong volume continue into 2015 and is moving ahead with expansion projects throughout the southeast. The stock moved higher in the pre-market session but sold off during the day closing with a loss near -1.75%. Today's move confirms resistance just below $40 and could keep it range bound into the near term.


Elon Musk announced, through Twitter, that Tesla would be announcing a new product line next week. The only hint is that its not a car. Could be a scooter, moped or bike? Maybe a truck? A personal drone? In any event the stock shot up like it always does when he Tweets, gaining 1.12%.


The Indices

The indices surged at the open and kept moving higher all day. Driving the move was Yellen-speak as well as positive news from China and the EU, positive economic data and expectations of more good data later this week.

Today's move was led by the Dow Jones Industrial Average with a gain of 1.49%. The blue chips created a long white candle that carried it above the short term moving average and fell just short of the 18,000 mark. Today's action moved above 18K for a time but was not able to hold the level. The indicators are mixed but basically neutral and in line with an index moving within a range. MACD is bearish but retreating from a weak peak, consistent with a test of support within a range or uptrend, stochastic is flat in the middle of the range with %K moving higher.

It looks like the index is moving toward the top of the range and the current all time high. This could result in a trend following signal and new all time highs but not without a break above resistance. Until then upside potential is very limited. Resistance is currently 18,000 with additional resistance just above at the current all time high.


The S&P 500 made the next largest gain today, 1.22%. The broad market made a strong move higher with all ten of the component sectors moving into the green. Today's action moved up from the top of the January range, crossed above the 30 day moving average and was then halted by the December 2014 all time high. The indicators are mixed as with the Dow and could be setting up the strong trend following signal but requires a break above resistance, and the signal itself which is yet to appear; MACD is still on the bear side of zero but approaching a bullish crossover while stochastic is flat with %K moving up towards a bullish crossover. Anticipation for data and the data itself may take us up to the all time high but I think it will take earnings to break us above it.


The NASDAQ Composite is second runner up in today's race. The tech heavy index gained 1.15% in a move began above the short term moving average and carried it higher from there. The indicators are set up the same as with the SPX and DJI, mixed but consistent with an impending trend following signal. Like the others it too has resistance just above the current level in the form of the long term high, if broken the index could move as high as 5,250 in the near to short term. If not a move back toward support and the long term trend line near 4,750 could be expected.


The Dow Jones Transportation Average made the smallest move today, only 1.01%. Today's action was a move up from the bottom of the 5 month trading range. The index has been trapped in this range since the fall in oil prices began to impact earnings outlook for the rail carriers and others dependent on energy for income. It could remain so until earnings growth returns, whether from oil or other sources. The indicators are consistent with range bound trading and an index that could be moving toward the top of the range. Stochastic is moving higher and already high in the range which could indicate some underlying strength but that has yet to be seen. Current target is the short term moving average near 8,000 and then the top of the range near 9,250.


The indices bounced back today but I am a little leery of how high they will go. Economic trends are good and the data released today supports the idea of a spring rebound in activity but there is still earnings season to consider. I am not worried about any single piece of data scheduled for release this week and am expecting to see trends upheld. What I am worried about is the expected decline in earnings for the season that starts just next Wednesday. Even with my theory of earnings ex-energy being more important, the trend of blended growth being 2-4% above estimates going into the quarter and the high likelihood that expectations are set too low a quarter of negative earnings growth could keep the market from rallying. At least for a few weeks to a month or more while the market digests the earnings news and assesses the outlook for the rest of the year.

I remain bullish on the economy and the market. I think the S&P 500 could hit its all time high, maybe this week, probably driven on economic data and end of quarter/start of quarter portfolio shuffling. In between all of this market activity are geopolitical events ranging from Saudi Arabia and Iran fighting in Yemen to Iran's nuclear talks with the west and on to Greece/The Grexit and China's talk of QE that could all move the market. What happens then is for another wrap.

Until then, remember the trend!

Thomas Hughes