Global market reach new highs, we may be next.

Introduction

A host of news and developments helped propel the Asian and European markets to new highs while leaving our markets struggling within recent trading ranges. US traders,it seems, are still trying to figure out what to expect from the FOMC, the economy and earnings. Depending on who you listen to, which day of the week it is and the most recent FOMC related headline the market is either on the road to expansion or the cusp of “earnings recession”.

Looking back at just the last ten days alone expectations concerning the FOMC interest rate hikes have gone from a June target, to a September target, to a possible 2016 target and back to June; all because of one weak month of NFP and spurred by comments from several Fed governors indicating both patience and not patience at the same time.

Market Statistics

News impacting early trading includes earnings, Greece, the Bank Of England and economic data, both domestic and foreign. Greece made its loan payment deadline and has staved off near-term default fears. The long term is still in question; an exit from the EU is still an outlier possibility and real reform is yet to be seen. In England the BOE held rates steady, as expected. On the economic front this week's unemployment claims rose less than expected, remain low and are in support of a healthy labor market.

In terms of earnings expectations the outlook for the 1st quarter is still negative. There is still talk of another quarter, or two, of earnings declines yet earnings releases so far this season suggest we may in for more of the same; better than expected with areas of isolated weakness. Futures trading indicatied a flat to lower opening for most of the pre-market session. Individual news bits such as the employment data and earnings reports helped to lift the trade but none were able to sustain the movement. The indices were able to open flat and move higher in the first minutes following the opening bell but like in the early session, were not able to hold the gains. The indices dipped into negative territory by 10AM and proceeded to hover around break-even for the next hour or so.

The afternoon session was a little different. The market tread water just above break even levels for most of the afternoon and then shortly after 2:30 the indices started to catch a bid and began to move higher. A new intraday high was set just after 3:00 and then another around 3:30. From there the market held near those levels into the close of the day.

Economic Calendar

The Economy

Today's unemployment claims figures are still supportive of healthy labor conditions, as were the JOLTs and KC Fed LMCI released earlier this week. On the unemployment front initial claims gained 14,000, less than expected, and reached 281,000. This is on top of a -1,000 revision to last week. The four week moving average fell by -3,000 to 282,500, a 15 year low. On a not adjusted basis claims rose by 5.5% versus the expected 0.2% predicted by the seasonal factors. Oregon posted the biggest increase in claims, +1.044, Pennsylvania the biggest decrease, -2,338. Texas also posted a decrease in claims. Despite the rise in claims initial claims remains near the long term low and at levels suggesting a drop in overall unemployment and decreased labor turnover.


Continuing claims fell -23,000, better than expected, to 2.304 million. This is also a new 15 year low. The previous week was revised up by 2,000 but the 4 week moving average was still able to post a decline. The four week moving average is at a new 14 year high and suggesting that there are plenty of jobs for those who find themselves out of work for a week.

The total number of claims for unemployment also fell, by -141,794. This is not a new 15 year low but it is a new 13 week low and approaching levels not seen since last Nov/Dec. This number is also supportive of a healthy and improving labor market, and with the rest of the data suggests to me there could be significant revisions in both the NFP and unemployment data for March. One thing to consider though is the fact that Easter week is earlier this year than last and may be influencing the March employment claims data.


Just to touch base on the JOLTs figures it is showed job openings was “little changed” in February at +3.5%. The quits rate was also “little changed” at +1.9% indicating a strengthening of confidence among labor market participants.

The Kansas City Federal Reserve Index of Labor Market Conditions, a composite of 24 top labor indicators, is also in support of an improving labor market. Momentum declined in March, not unexpected given the time of year and other factors, but remains near all time highs while conditions continued to improve. The labor market conditions index rose from -0.330 to -0.262, a continuation of the 5 year trend and current labor market recovery. Over the past 6 months the biggest contributor to improving conditions is the increase in hourly earnings. At the current rate of improvement the index could reach the zero line over the summer, an event that can be associated with economic boom.


Wholesale inventories and sales data was released at 10AM. The news is both better and worse than expected, but only marginally so in either direction. Wholesale inventories rose by 0.3% versus an expected 0.2%, wholesale sales fell by -0.2% versus an expected flat reading.

The Oil Index

Oil prices got a lift today despite the massive build in US stockpiles reported yesterday. Today's news includes renewed fear the Iran nuclear deal was falling apart and strong economic data from Germany. On the Iranian front the deal has reached a sticking point on sanctions, which Iran demands be lifted immediately upon signing of any nuclear deal. In Germany strong auto sales helped to lift spirits and put the Iran deal in better perspective.

Both WTI and Brent rose in today's trading, gaining 2.26% and 3.60% respectively. WTI Is now trading above $51.50 and there is new talk of a bottom. I am leery of oil prices at these levels. There seems to be a premium building into the market that is not substantiated by storage levels, Saudi production levels and demand outlook.

The Oil Index got a lift from today's rise in oil prices. The index gained about 1.5% and was one of today's market leaders. Today's move extends the trend line bounce which began last month and is approaching possible resistance at the top of the 4 month trading range near 1,400. The indicators are bullish, in-line with the bounce and suggest that the index will at least test resistance; MACD is on the rise and stochastic is forming a relatively strong bullish crossover, one that is occurring while %D is crossing the upper signal line. This could indicate strength and a possible break to new 4 month highs but could also be indicating over-bought conditions and the top of the range. The index looks bullish but caution is due until it breaks above 1,400, if it can. As mentioned on Monday, the major oil producers report at the end of the month which, along with forward guidance, could produce a catalyst strong enough to move the sector.


The Gold Index

Gold prices fell below $1200 today as dollar values firmed. The FOMC minutes keep the “early” rate hike on the table thereby strengthening the dollar and depressing gold values. On the flip-side, by keeping the early hike on the table the FOMC is also indicating underlying strength in the economy, enough strength to keep them on track for rate hikes and the economy on track for inflationary pressures to build. Dollar strength may continue to pressure gold lower, which is still above $1190 support zone, but long term inflationary outlook will bring the buyers back in. A break below $1190 could take it as far as $1150. Until then it appears as if gold is trying to stabilize around $1200 while the Dollar Index consolidates between $97.50 and $100.

The gold miners fell in tandem with today's drop in the underlying metal. The GDX Gold Miners ETF lost more than -1.25% in today's session and is testing my rising support line near $18.80. This line connects the peaks of the two peaks of the double bottom reversal I described on Monday, the two peaks that in themselves are each a double bottom. Each of these peaks is progressively higher, suggestive of support and confirmed by the indicators.

In the near term the indicators are weak and are pointing to further testing of support, testing which could go on up to and until the miners report earnings later on this month. The rising support line could be broken, taking the index down to $17.50, but will likely be another buying opportunity for investors. Earnings among the miners are likely to show growth from the last quarter simply because gold prices were on average higher this quarter than last.


In The News, Story Stocks and Earnings

There was quite a lot of business news today. M&A activity is still robust and earnings are starting to roll in. On the M&A front LinkedIn is reported to be buying Lynda.com. Lynda.com is an on-line educational service geared toward helping professionals realize their potentials. The deal is worth roughly $1.5 billion and could be a good move for LinkedIn, if they can capitalize on it. The news moved the stock up by 1.25% but failed to cross above the short term moving average.


Shares of Bed Bath & Beyond fell in the pre-opening session after reporting a mixed quarter. Earnings per share rose to $1.80 from $1.60, partially on an increase in revenue but mostly because of share repurchases over the course of the past year. This might have been enough to hold share prices up but guidance for the current quarter is below estimates. Shares of BBBY fell by roughly 3% in the after-hours market and then doubled that loss during today's session.


The Walgreens Boots Alliance reported before the opening bell and gave the market what it wanted, signs the merger was working. The company reported earnings and revenue above expectations and sent the stock shooting higher. Forward guidance is a little weak but the company also announced another $500 million in cost savings through a closure of stores that helped sweeten the bitter pill. Shares of the stock soared nearly 5% higher and closed near the top of the day's range.


PriceSmart reported after the bell. The discount retail change was expected to report quarterly earnings of $1.00 with full year guidance of $3.95. The company reported an 11.6% increase in net sales but failed to meet earnings expectations. The company blamed a massive devaluation of the Columbian peso for a $0.16 impairment that would have brought earnings in line with expectations. Shares of the stock fell sharply on the news.


The Indices

The indices began to simmer today as earnings season unfolds. So far the earnings picture is not as bad as feared, certainly not the -4.6% predicted by FactSet. Of course we still have a lot more earnings to come, and in particular the energy sector, so this could change. In any event today's reports are showing that the first quarter was not as bad as expected, that there is some growth in the marketplace and that the future growth may not be out of the question either.

Today's gains were led by the NASDAQ Composite. The tech heavy index gained 0.48% and is approaching its long term high just above 5,000. Today's move is a continuation of a bounce from support and the long term trend line begun earlier this week. It is accompanied by promising indicators, I say promising because once again the indicators are rolling into a potentially strong trend following signal but it has not yet been confirmed. Stochastic is making a bullish crossover but MACD has not yet made its crossover and resistance still needs to be broken. It looks like resistance is going to be tested with an upside target near 5,040 but beyond that will come down to the earnings.


The Dow Jones Transportation Average made the next biggest gains today, 0.46%. The transports are bouncing up from the bottom of the 6 month trading range and remain range bound. The indicators are rolling over in confirmation of that range but are yet to gain strength. The index is facing several potential resistance level between the current level and the top of the range near 9,250 but the first two that jump out at me are 8,750 and then the short term moving average near 8,825. These levels could be tested over the next few days with support on a pullback found near 8,575.


The S&P 500 made the next largest move, 0.44%. The broad market moved up from the long term trend line and the short term moving average but was not able to move past the 2,090 resistance line. This index, despite being capped by resistance in today's session, is looking the most bullish of the three because the indicators are both confirming the move. Stochastic is making a strong trend following signal and MACD is confirming with a zero-line crossover. This combination is pointing to a test of the all-time high at least and a possible continuation of the long term trend.


The Dow Jones Industrial Average made the smallest gain in today's session, only 0.31%. The blue chips moved up from the short term moving average and look like they may move higher. The indicators are in support of the move with only the resistance of 18,000 standing in the way. Stochastic is making a bullish crossover but only a moderate one, neither weak or strong, while MACD has made its crossover so a test of resistance is likely if not probable. Support is just below the current level in the form of the short term moving average and then below that in a range around 17,500.


The FOMC is confusing the market with patient/impatient double speak but at heart there is no sign of underlying market weakness. Whether they raise rates or not the economy is growing and policy is expected to remain accommodating into the foreseeable future. In my opinion they either need to make the first rate hike or stop talking about it.

On the earnings front expectations are cloudy at best and could lead to a round of positive surprises. Expectations and guidance are set very low, a situation that has led to such surprises in recent quarters. However, even with positive surprise earnings are rear looking. It will be the guidance that leads the market.

The indices are winding up for a move and it very well could be earnings driven. Now that the season has started the next thing to watch is the financial sector. The big banks begin to report earnings early next week and are expected to show some impressive growth in the face of this quarters low expectations. If they deliver, and there are no surprises elsewhere in the market, we very well could see the indices retest the all-time highs if not set new ones.

Until then, remember the trend!

Thomas Hughes