Earnings and GDP are giving a mixed picture of the economy, but one with positive outlook.

Introduction

Earnings and GDP data are painting a bit of a mixed picture but it is one with positive outlook. Earnings growth for the broad market is weak but steady and generally better than expected; GDP growth is positive, with some negative revisions to prior years, and expected to continue expanding.

Today's read on GDP, the first for the 2nd quarter, came in at 2.3%. This is a little below consensus but within the range from which consensus is drawn and comes with a positive revision to the first quarter. First quarter GDP rose to +0.8% from the previous -0.2% and is a pretty decent number considering the negative sentiment and first estimates we saw. The down side to these numbers is negative revisions to the past three years, -0.3% to an average 2.1% for the years 2012-2014. The revision is due to a change in the way GDP is calculated, fixing an error.

Market Statistics

Asian indices closed well before the GDP data was released and ended their day mixed. China indices fell -2%, the Japanese Nikkei rose 1%. Chinese markets are still being roiled by government actions to support the market while the Nikkei was driven higher on strong earnings. In Europe things were much the same. A mixed day of trading left most of the indices in positive territory supported by strong earnings. Greece has retreated from the spotlight but is waiting quietly in the wings to step back into the markets attention.

Despite the rush of positive international earnings our indices were indicated to open lower up to and into the opening bell. After the bell the indices declined to hit their low for the day at 9:50AM. From there a bounce ensued that took them back up to break even levels with the NASDAQ Comp and Russell 2000 pushing into the green by noon. By 3PM the Dow Jones and S&P 500 had reached positive territory as well. Highs were hit mid-afternoon and these levels almost held into the close of trading. The NASDAQ and SPX held some of their gains, the transports closed exactly flat and the industrials posted a slight loss. After hours action was on the heavy side as a slew of earnings reports were released.

Economic Calendar

The Economy

2nd quarter GDP was 2.3%, up form the first quarters 0.8% and slightly below expectations. Positive revision to the previous quarter reflect underlying momentum in the economy, if sluggish, that we have seen over the last year or two. The negative revisions to previous years of data is something to take note of but not that big a deal; it happened a long time ago, where we are and where we are going is much more important. What was perhaps the most notable bit of information within the report is the PCE deflator which rose by a stronger than expected 1.8%. This is still a bit below the Fed's target rate but shows a pick up in quarter to quarter inflation that could push them into a rate hike. On a year over year basis PCE is still running at a tepid 1.3% but this would begin to rise if the quarter to quarter numbers keep rising.

Initial claims rose slightly from a new 15 year low it set last week. Claims gained 12,000 to hit 267,000 and remain at long term lows and consistent with labor market improvement. Last week's figure was unrevised, the four week moving average fell -3,750. On a not adjusted basis claims fell -12.4% versus an expected -16.6%. On a year-over-year basis not adjusted claims are down -10%. California and Rhode Island led with increases of +1,948 and +382, NY led with a decline of -21,082.


Continuing claims rose by 46,000 from an upward revision of 9,000. This metric did not set a new low in recent weeks but is hovering just above the long term 15 year low. Total claims also rose in this weeks data gaining 21,802 to hit 2.300 million. This is -11.5% below last year at this time but also the 6th week of gains since hitting a low last month. All in all claims remain at low levels and recent activity suggests that jobs creation remains strong. We'll get the next round of NFP, ADP and unemployment next week, expectations are good for a decent number at least, upwards of 200,000. A really good number could help cement the idea of a 2015 rate hike.


Tomorrow's data includes the Employment Cost Index, Chicago PMI and Michigain Sentiment. Employment costs are expected to rise about 0.7%, in line with last month's gain. PMI and sentiment are both expected to rise slightly, from 49.4 to 50 for PMI and from 93.3 to 93.5 for sentiment.

The US Senate approved a long term version of a highway funding bill just after lunch. The vote went 65-34 and is not expected to pass the House and brings into focus what will perhaps be the next big hurdle for the market to bear... government spending. The next potential government shut down is scheduled for October 1st and could create a lot of day to day volatility as it approaches.

The Oil Index

Oil was volatile today but basically held steady around $48.75. Today's action was focused on yesterday's unexpectedly large draw on US stockpiles that have raised speculation the recent slide in oil prices is nearing an end. Despite the draw production and supply remain high while global demand is weak. Adding to today's activity is expiration in gasoline and diesel contracts tomorrow as well as strengthening dollar value.

The Oil Index lost about a half percent in today's action, falling from the 50% retracement level mentioned previously. Today's action is a confirmation that resistance is present at the retracement that could result in a retest of the recent low. The indicators are mixed and weak in the near term but remain consistent with support in the short to long term. A break above the retracement, near 1,230, would find the next target for resistance at the bottom of my up trend line near 1,300. Earning and outlook will have an impact on this index over the next day or two specifically. Connoco Phillips reported earnings and revenue above expectations, raised their dividend and raised full year guidance. Royal Dutch Shell was also able to produce better than expected results and sent shares of its stock up by by more than 5%. Shares of Connoco fell -1.57% but remain above the recently set low. Look out for Exxon-Mobil and Chevron tomorrow before the bell. Chevron is expected to post $1.15 per share, Exxon-Mobil $1.06.


The Gold Index

Gold prices fell about -0.5% in today's session. Positive GDP as well as the hint of rising inflation has upped the chances for a September/December rate hike and put the pressure back on gold. The metal is now trading just above the +5 year low and indicated lower in both the short and long term. Strengthening dollar due to FOMC rate hike expectations is going to be negative for gold moving forward. Prices could continue to fall until inflation and/or dollar expectations change.

The gold miners did not fare well today, led by earnings and earnings expectations. The GDX Gold Miners ETF fell close to -3.5% as the senior and junior miners begin to report en masse. The sector has been beaten up over the last two months and is now trading at an all time low. The sector is oversold in the long and short term but bearish momentum is on the rise so it looks like it could go lower. Gold prices will lead, if they continue to decline the sector will as well. One factor that may be helping to depress gold prices is production. Production levels have been on the rise over the past few quarters at least and could keep rising based on today's report from GoldCorp.


In The News, Story Stocks and Earnings

GoldCorp reported before the bell and beat expectations for $0.07 by a penny. The company reported record 2nd quarter production, up 40% form 2Q 2014, and reaffirmed production guidance at the high end of the range. The report, save for the low realized prices for gold, is pretty good. The company is increasing production, getting higher than expected realized quality, reducing costs and expanding into new mines. The bad news is that the fall in gold prices has resulted in a 60% decline in comparable quarter earnings despite the 40% increase in production. With prices now hovering near new long term lows that issue could persist or worsen in coming quarters. Shares of the stock fell over -2% in today's session and are now trading at the long term low and below the full retracement of the 2008-2011 bull market I gold. Indicators are weak and pointing lower although momentum is waning and the stock is oversold. Downside targets exist near $10, another 20% below today's levels.


Insurer Cigna reported before the bell, beating on the top and bottom lines. The company reported $2.55 adjusted, a 23% increase over the same quarter last year. The company also raised guidance for the full year to a range of $8.30 to $8.60 per share. Cigna will be merging Anthem into the fold later this year to create one of the largest health care insurers in the country. The stock lost -1% in today's session and is trading at a one month low, below the short term moving average. The indicators are showing weakness which could carry it as $140 - $137.50.


Mondelez, an international diversified food company, reported top and bottom line beats in its release this morning. The company is parent to brands like Kraft, Oreo and Nabisco. Adjusted EPS is $0.47, 20% above estimates but net revenues fell -9.2% due to currency conversion. Organic net revenue grew 4.3%. Margins also narrowed due to rising input prices. The company raised its full year guidance and increased its share repurchase program by $6 billion. Shares of the stock jumped a little more than 5% to hit a new all time high.


LinkedIn reported a major beat on earnings and sparked a round of volatile after hours trading. The company reported $0.55 per share versus expectations of $0.30 and ahead of this same quarter last year. Revenue also beat. User numbers are on the rise and also came in ahead of expectations. Shares of the stock shot higher in after hours trading gaining more than 11% immediately following the announcement. 30 minutes later price had retreat back to today's low greater than -1% below yesterday's close. 30 minutes after that share price was down more than -8%.


The Indices

The market opened lower and appeared to be heading back to support but an early bounce recovered initial losses and propelled the indices back to break even levels. All were able to poke their head into positive territory but not all were able to hold the gains into the close of trading. Today's action was led by the NASDAQ Composite which traded up over a half percent on an intraday basis and closed with a gain of 0.33%. The index tested support at the short term moving average and confirmed with a close above it. The indicators remain mixed but are set up for a trend following bullish crossover that could take it up to test the recent high near 5,250. The high could provide resistance in the near to shot term as earnings projections for the next quarter remain weak.


The S&P 500 made the next biggest gain, 0.01%, and is set up similarly to the tech heavy NASDAQ Composite. The broad market index tested support at the short term 30 day moving average and confirmed with today's bounce from and close above said level. The indicators are mixed but set up for a trend following bullish crossover supported by economic and earnings trends. The index may find resistance at 2,120 and just above that at the current all time high. It may remain range bound in the near to short term while we move past earnings season but I remain bullish long term.


The Dow Jones Transportation Average closed exactly flat from yesterday's action creating a small bodied spinning top with lower shadow. The index is in a bounce originating from the long term low with bullish indicators. It appears to be reversing from the four month downtrend and 13.5% correction we saw this spring and summer. MACD is strong relative to the past 8 months and gaining strengthe while stochastic is confirming the move with a weak bullish crossover. Upside target is the bottom of the November/May trading range near 8,600 with additional targets near the middle of that range should 8,600 be broken.


The Dow Jones Industrials are the only index to close with a loss today, -0.03%. The blue chips made it into positive territory but had a hard time holding the levels. Afternoon action saw it bob above and below break even several times. The indicators are mixed but consistent with a developing trend line bounce. The trend remains up but there is significant resistance at and just above the current levels that needs to be broken before more upside can happen. A break above the 17,750 support/resistance line and then the short term moving average which is just above it could lead to a test of the all time high near 18,350.


The market seems to be focusing on earnings and economics again even though issues in China and Greece remain. These issues may poke their heads back into the spot light at any time but are likely to be near to short term events as they have been all year. US economic trends remain positive and earnings as a whole are better than expected with positive outlook for both so I remain bullish.

The FOMC is still a wild card but it looks more and more certain a rate hike will come in the Sept/December time frame. This may cause some volatility but in the end will be an affirmation of economic health and bullish in my view. A quarter point rise in rates will only be the first of dozens of incremental increases, not the one that breaks the markets back.

In the near term the indices may remain range bound due to 3rd quarter earnings expectations but the bull market is intact so any dips to support remain buying opportunities.

Until then, remember the trend!

Thomas Hughes