Strong earnings, positive data and a dovish ECB propelled the market to new near term highs.

Introduction

A day filled with strong earnings, positive economic data and a very dovish ECB saw the bulls propel the market to new highs. Starting in Asia, markets were mixed but led by gains in the mainland Shang Hai index. The Shang Hai index was driven by a rally in small caps but indices in Hong Kong and Japan both fell as traders were waiting on a policy statement from the ECB. The European markets got a boost from dovish comments made by Mario Draghi. The DAX jumped more than 2.5% on statements to the effect that if there is no significant improvement in the EU economy by December the ECB would be ready to act again, increasing the amount and scope of QE. There was no change to the policy today.

Market Statistics

Futures trading were indicating a positive open for the indices right from the start. Along with the international news a round of decidedly positive earnings releases hit the market. McDonald's may be the most noteworthy, beating estimates by more than a dime. Share prices jumped to a new all time high and added more than 40 points to the Dow Industrial Average on its own. Economic data before and after the bell was also very positive and helped to spur the indices to today's highs.

The SPX was indicated to open with a gain greater than 0.5% and shot past that target within the first 15 minutes of trading. The bulls were out, if not in force, then at least in numbers above recent averages. The rally extended itself through the morning hitting a high just before noon, and then extending again to a new high 45 later. At this point some resistance set in, trimming gains, but the indices remained strong. By end of day the market had once again moved higher, to set a new intraday high, and closed near the high of the session.

Economic Calendar

The Economy

Jobless claims was the only release before the bell, and they at least indicate healthy if not strong labor conditions. Initial Claims rose by 3,000 from an upward revision of 1,000 to hit 259,000, below expectations. On a not adjusted basis claims fell by -9.2% versus an expected -10.3% and are now down -9.1% on a year over year basis. The four week moving average of adjusted claims declined despite this week's small rise in claims, to hit 263,250 and a new 42 year low. The largest increases in claims occurred in Texas and New York, 2,627 and 2,269 respectively. The largest decreases in claims were in Nebraska and Ohio with -290 and -277. Initial claims, on an adjusted and not adjusted basis, continue to trend at historic low levels. Negative labor data in the manufacturing reports is not yet passing through into this figure that I can see.


Continuing Claims rose by 6,000 to hit 2.176 million. Last week's figure was revised up, also by 6,000. The four week moving average of continuing claims fell by -18,500 to 2.184 million and a new 15 year low. Continuing claims are also trending at long term lows and consistent with healthy labor markets.

Total Claims for unemployment dropped by -54,986, reflecting the fall to new lows seen in the initial and continuing claims numbers over the past few weeks. The total number of Americans on unemployment benefits is now 1.861 million, -10.2% from the same time last year. Total claims is also trending at long term/historic lows and consistent with with low unemployment levels and healthy labor market conditions.


Existing Home Sales jumped a surprising 4.7% in September, driven by a small decline in home prices and mortgage rates. The annualized rate of sales is now 5.55 million and makes this the 12th month in a row of year-over-year gains. Sales are now up 8.8% from this same time last year. All regions showed increases, the only negative is a decline in inventory. Inventory fell -2.6% and is down -3.1% on a year over year basis. The bright side is that strong sales and low inventory may continue to drive new home construction.

The Index of Leading Indicators declined by -0.2% but remains expansionary at 123% of 2010 levels. Growth is still expected into the future, although the pace of growth has declined in the current month. Forward outlook is for GDP in the range of 2.5% over the next 2-3 quarters. The Coincident Index rose by 0.2%, the Lagging Index rose by 0.5%.

The Oil Index

Oil prices held steady today, WTI just above $45. Price action was choppy but held in check by rising natural gas supply, as well as yesterday's larger than expected build in US crude supply. Supply/Demand imbalance remains, and may get worse going into next year despite signs of declining production levels. Adding to the imbalance is the IEA's new prediction that demand growth will fall by a third in 2016. $45 looks like a key level for oil, a break below here could see WTI test lows near $40.

The Oil Index gained more than 2.25% in today's action. The index made a move up from near term support levels near 1,175 despite oil's tepid day. Oil outlook is poor, but prices are still expected to average above $50 in 2016, and the energy sector is expected to see a rebound in earnings growth next year, so support could in fact be present. The indicators are mixed, momentum has retreated to near zero, stochastic is moving lower and fallen out of the upper signal zone. A fall below support could take the index back down to long term lows near 1,025. Oil prices, but also earnings and earnings outlook, will play a big role over the next week or so. Exxon, Connoco Phillips and other big name oil companies report next week.


The Gold Index

Gold prices were able to hold steady in a tight range just below $1170 despite a huge surge in dollar value. The ECB meeting and Mario Draghi's comments were extremely dovish and sent the euro to the bottom of the three month range and the Dollar Index to the top of its, the kind of move that would ordinarily have resulted in a sharp drop in the price of gold but with the FOMC meeting next week traders may be waiting. The FOMC is not expected to change policy, but their statement will be just as important and market moving as the ECB's. A dovish statement could reduce the chance of a rate hike in the near future, weaken the dollar and help support gold prices. A hawkish sounding statement could add momentum to the dollar trade and that I think would send gold lower.

The gold miners rallied along with the broader market despite the weak action in gold. Even with today's close near a one week low gold prices are more than 9% off the summer lows and helping to support the sector. Today the Gold Miners ETF GDX gained nearly 2% in a session spent contained between support and resistance levels. The ETF moved higher early this month but is now in a consolidation, awaiting the FOMC meeting and earnings. The indicators are in retreat from bullish peaks and consistent with the pull back to support. If support break this could lead it lower with first support target near $15. For now, support is along the 100% retracement line near $15.70.


In The News, Story Stocks and Earnings

The Dollar Index moved up on euro weakness following the ECB announcement and press conference. The index gained more than 1.3% creating a long white candle in a move up to the top of the recent range. The indicators have both turned bullish with recent crossovers, confirming the move, but a break above resistance is necessary to get really bullish on it. Resistance is near $96.50 and could keep the index contained until the FOMC meeting. At that time it will come down to their tone and the market's outlook on rate hikes. However, regardless of FOMC tone next week, the FOMC is still on track for a rate hike, the ECB on track for more QE, so there is a good chance the dollar could continue to rise into the short term with targets near $97.50 and $100.


McDonald's was the big name in earnings, among a host of positive surprises and earnings beats. The company reported before the bell and beat by $1.41 per share versus the expected $1.27 projected by analysts. The report shows that new initiatives by management, and new CEO, are already bearing fruit and even before the start of all day breakfast. Global comp sales increased 4%, well above expectations with a 5% decrease in revenues. Revenues were impacted by currency conversion, constant currency revenue rose 7%. Investors cheered the news as it drove prices of the stock up by over $8.50 on high volume.


GNC got walloped today after reports about some of its weight loss products led to lawsuits. The Oregon attorney general is behind the move which alleges the company is using illegal and/or potentially harmful substances. The news led to a sharp sell-off which took the stock down to a new 12 month low; shares were halted more than once during an active session of trading. The company responded by saying they would fight the allegations. In unrelated news shares of Valeant continued their slide today as well, shedding more than -11%.


There was a lot of earnings action after the bell. Amazon, Microsoft, Google (Alphabet) and many more. All three beat expectations smartly, for earnings if not revenue, and sent shares soaring in after hours trading. Microsoft gained about 6%, the other two greater than 12%. Google and Amazon both set new all time highs, Microsoft is still trading below the top of a two year range. Tomorrow's action could be hot, these stocks could drive another rally.


The Indices

The indices were strong today, driven by a round of positive news. Moves made are not the largest in recent history but significant nonetheless and extend the rally to new 2 month highs, led by the Dow Jones Industrial Average. The blue chip index gained 1.87% and created a long white candle in what looks like a decisive move above resistance levels. The indicators remain bullish and, judging by the MACD, momentum has begun to increase again. Next target is in the range between 17,600 and 17,700 with a move back to the all time high very possible.


The S&P 500 gained about 1.66% in today's action and also created a long white candle. The index moved up from support levels to resistance, remaining above that resistance by the close of trading. The indicators remain bullish but are softening so there is risk a test of support could come. MACD is slowly winding down and unlike with the blue chips has not yet begun to increase. Stochastic is also a little worrying as it has rolled over into a bearish crossover that could indicate the index is approaching stronger resistance levels than what we have so far seen. That being said the move is in line with the underlying trend and moving higher on a wave of strong momentum, driven by today's good news, so it is likely to continue into the near term at least. Next target is near 2,100.


The NASDAQ Composite was third strongest in today's session, gaining 1.65% and barely setting a new one month closing high. The index appears to be drifting higher like the others but has yet to break through near term resistance levels and move above last month's peak. The indicators are bullish but weakening, consistent with the top of a range so caution is due. A break above 4,950 could take the index up to 5,100, support target should the index pull back are near 4,800 and the short term moving average. Based on today's earnings reports from Amazon, Google and Microsoft I would not be surprised to see this index break resistance tomorrow.


The Dow Jones Transportation Average was today's laggard with a gain of only 1.48%. This index is also still below the one month high and resistance levels with indicators that are either indicative of the top of a range, or gearing up to break above resistance. MACD has retreated from a peak to near zero and is ticking up with today's action so a further test of resistance at least is likely. Stochastic has rolled over into bearishness, consistent with the top of the range, but %K has begun to move back and could easily lead to a bullish crossover. A break above resistance could take the index as high as 8,600 in the near term, with support targets near 7,750 should a break fail.


Today was a great day for the market. There was no bad news, or at least no bad news not construed as good news, and lots of plain old good news. Granted, earnings expectations were not high this quarter but there are being soundly beaten by most companies. Outlook for earnings growth remains positive from this quarter on, as do those for the economy, and with the FOMC not expected to be very hawkish at the next meeting the chances for the rally to continue are very high.

Tomorrow, the earnings onslaught continues, not as heavy as today but there are quite a few names on the list, and several big ones like Proctor & Gamble. On the economic front there are no reports due out so earnings, and headlines, will carry the day.

Until then, remember the trend!

Thomas Hughes