The bulls held their ground in the face of weak earnings, renewed chances of a December rate hike and weak economic growth.

Introduction

The market proved to be somewhat resilient today, holding steady near newly reached two month highs. Trading was light and held within a narrow range as the market digests the FOMC statement, today's 3rd quarter GDP estimate and an ongoing season of weak earnings.

The FOMC meeting was a bit of a surprise, the statement was a little on the hawkish side, and basically told the market not to be surprised if they hike rates in December. Their reason, the economy is gaining strength, international concerns are not that big a deal anymore, and conditions are leading to inflation, if not causing it.

The first estimate for 3rd quarter GDP did nothing to change the FOMC outlook; the US economy is still growing, but growth slowed in the 3rd quarter. The surprise, or silver lining, is that income and spending were both up. In terms of corporate earnings, the season remains weak but also better than expected with growth in the outlook, if not next in the next quarter then in the next year.

Market Statistics

International markets were cautious following the Fed announcement. Asian indices closed mixed and near the one month highs. One notable headline; the Chinese government repealed its one child policy. In Europe trading was less optimistic, indices there posted losses in the range of -0.5%.

Early morning pre-market trading here at home was about the same. The indices were indicated to open flat to negative for most of the morning with little to no effect from today's economic data. The indices opened the day with losses near -0.25% and proceeded to trade in a very narrow range from there. A late day rally took the indices to the intraday high but it did not hold, by close of the day they had retreat to near the midpoint of the day's range. The transports were today's leader and the only major index to trade in positive territory.

Economic Calendar

The Economy

The first estimate for 3rd quarter GDP is 1.5%. This is a hair below consensus of 1.6% and the middle part of the range between 1.6% and 2.5%. This is down more than -2% from the 2nd quarter but still expansionary. The two biggest drags on GDP were imports, up, and inventory investment, down. The surprise was that two of the largest positive contributions were in PCE and personal income. Diposable personal income rose by 4.8% versus 3.4% in first quarter, driven by an acceleration in wages. Gross domestic purchases decline from the 2nd quarter but remain positive at 1.5%.


Initial Claims for unemployment rose by 1,000 from last week's unrevised figure to hit 260,000. The four week moving average of initial claims fell by -4,000 to hit 259,250 and a new low not seen since 12/15/1973. On a not adjusted basis claims rose by 5.3% versus the 5.0% predicted by the seasonal factors. On a year over year basis not adjusted claims are down by -9.6%. South Carolina and Michigan led with increases in claims of 2,156 and 2,117. Pennsylvania and Texas led with decreases in claims of -3,583 and -2,893. Based on this data job losses are at historic lows and not consistent with slowing growth.


Continuing Claims for unemployment, those filing for a second week, fell by -37,000 to hit 2.144 million. This is a new low dating back to 11/4/2000. The four week moving average also fell, shedding -12,750 to hit 2.174 million, also a new low dating back to November of 2000. Continuing claims are also not consistent with slowing economic growth.

Total claims rose this week, contrary to declines in the other two gauges, but remains near its historic lows as well. Total claims rose by 18,694 to reach 1.881 million but remain down -8.07% from last year at this time. Despite the gains in this week's data total claims is also not consistent with slowing economic growth. Next week we will get the monthly bundle of labor macro data including ADP, Challenger, NFP and unemployment, each of which will shed new light on the state of labor. If the economy is indeed slowing labor market could begin to cool off, perhaps foreshadowed by last month's NFP. On the flipside, strong labor market and rising income/spending could lead the economy out its slump.


Pending Home Sales declined unexpectedly by -2.3%. Average expectation was closer to +0.6%. This is now the 2nd month of decline and the 2nd lowest level of pending home sales this year. However, on a year over year basis pending homes sales, a forward indicator, is up 3% from last September and have been in Y-O-Y expansion for 13 months. Lawrence Yun, chief economist for the National Association Of Realtors, low interest rates, rising rents and strong labor markets should continue to drive demand in housing markets.

The Oil Index

Oil prices held flat in today's trade, although trading was a little choppy, after rebounding from the 2 month low yesterday. WTI traded in a range around $46, closing near that level as well. Supply and production are still weighing on prices despite today's gains with no change to the fundamentals in sight. Production remains high on a global scale and today's report from Connoco-Phillips underscores that point. They reported production levels up from last year, above guidance, with 7 new projects scheduled for start-up and next year's forecast shows production growth as well. Tomorrow Exxon and Chevron report.

The energy sector was able to continue a bounce from support begun yesterday. The Oil Index gained 0.75% in today's session, creating a medium bodied white candle moving up from support and the short term moving average. The indicators remain bearish but are showing signs of near term support. The index could be moving up to retest the recent high near 1,235. The strength of this move will depend on oil prices which don't look very strong at this time. Support is at the short term moving average, near 1,150. A fall below this level could take the index down to the lows set last month near 1,025.


The Gold Index

Gold prices fell for the 2nd day, losing about -2.5% in today's session. The hawkish sounding Fed statement has put the fear of rate hikes back in the market, strengthened the dollar and sent gold barreling down to support. Gold is now trading just below $1150 and looking like it will move back down to longer term support levels near $1120 and $1100. Data will continue to drive this trade, so long as economic growth remains steady and inflation expectations remain low gold prices should move lower.

The gold miners took a hit today too, driven by the drop in gold prices and by poor results among the miners. Today the Gold Miners ETF GDX fell more than -5%, breaking through near term support and the short term moving average to reach a new 3 week low. The indicators are bearish in confirmation of the break, which is in line with the underlying bear market in the sector. The ETF looks like it could move down to support levels near $13.


In The News, Story Stocks and Earnings

GoldCorp reported earnings this morning. The North American based miner missed expectatios, reporting a net loss of -$0.05, while hitting record production levels. Production is up 42% from last year but hurt by declining gold prices which hit 6 year lows during the reporting period. Although a net loss was reported the company balance sheet is improving. Revolving credit facilities have been repaid, free cash flow is up, all-in-cost is down and production is rising. Despite the improvements the loss was not received well and sent the stock down by more than 10.5%.


Pfizer hit the news this morning for possible M&A activity, with Allergan. The companies have both confirmed that they are in preliminary talks, initiated by Pfizer, to merge. There are no details availabel yet but the news was enough to cause a halt to trading of Allergan's stock. Shares of Pfizer fell more than -2.5%, shares of Allergan jumped more than 7%. Allegan is now trading near a three month high.


ConnocoPhillips reported before the bell. The company reported a wider than expected loss, accelerated cost reductions and rising production levels. Adjusted loss per share of -$0.38 missed by a penny while production levels are rising and above previously guided levels. At the same time, the company also announced 7 new projects on the verge of start-up which will add to production in the next year. Shares of the stock fell in the pre-market session, tested support below the short term moving average after the open, and then rose to post a small gain on the day.


LinkedIn reported after the bell and blew expectations away. The internet networking social media website reported $0.78 per share, analyst had been expecting near $0.46. Total revenue grew 37% on a 24% increase in premium subscriptions. Along with this the company raised next quarter guidance to $0.74 versus the previous $0.67. Shares of the stock shot up more than 14% on the news.


The Indices

Today was rather quiet, considering the FOMC meeting yesterday, the sheer volume of earnings reports released today and the weak/not weak economic data. Action was led by the Dow Jones Transportation Average which posted a gain of 0.84%. The transports rose from the short term 30 day moving average confirming near term support although the indicators remains bearish. Both MACD and stochastic are pointing lower, suggesting support may be tested further although at this time they may be more indicative of range bound trading than anything else. Support appears to be building near the short term moving average, near 8,000, although the bottom of the range is closer to 7,750. Resistance is near 8,250 with a possible move up to 8,500.


The S&P 500 was runner up in today's action although it closed with a loss. The broad market posted a decline of 0.04%, creating a small doji type spinning top. The index has paused once more in it's climb from the September low although indications remain positive so I don't think the move has exhausted itself quite yet. MACD momentum is declining from its peak, indicative of a slowing market, but the current wave is pretty strong relative to the past 12 months so could easily run a bit further. Stochastic is confirming strength, trending high in the upper sigal zone and producing a bullish crossover. Today's action was just beneath resistance at 2,090, a break above this level could take the index to the all time high near 2,130.


The Dow Jones Industrial Average made the next smallest decline in today's session. The blue chips fell by -0.13% and also created a small doji like spinning top, near the top of the previous days candle and above resistance. The indicators are bullish, if momentum is declining, so a continuation of this move, up to next resistance, looks likely. Next resistance is the underside of the long term trend line near 18,000. Regardless, the current rally is now nearly 15% off of it's bottom and in position for profit taking so caution is warranted.


The NASDAQ Composite made the largest decline in today's session, -0.42%. The tech heavy index opened with a loss, then traded near its opening level, so created a very small bodied doji candle above the mid-point of yesterday's range. The indicators are bullish, and showing some strength if MACD declined with today's session. The index is below potential resistance at 5,100, a break above this level could take it back to the all time high and the underside of the previously broken long term up trend line.


The market held steady today which is remarkable. Not only has a hawkish fed resulted in a rally, weak economic growth and tepid earnigs have helped to support prices. Under different conditions any of these situations could have resulted in market hysteria. Today I think was different because they all lead to one thing, expected positive improvements next quarter and next year. In any event, the rally is on and the near term trend is up. There are signs it is losing some steam so caution is due, along with tight stops.

A thought; If earnings growth is expected to return, and GDP growth is expected to average above 2%, and the FOMC thinks we need a rate hike, then the economy is growing and we are indeed about to come out of a trough in the economic and earnings cycle as suggested by the data and the projections. If this is the case then the bull market is intact and the rally will go on.

Tomorrow, more data and more earnings. On the economic calendar; personal income and spending, the Employment Cost Index, Michigan Sentiment and Chicago PMI. On the earnings front the pace of releases falls off somewhat from today but remains strong; more than 7 dozen names, the most important probably Exxon and Chevron. Next week will be no reprieve. There will be another massive round of earnings reports along with the monthly macro economic data.

Until then, remember the trend!

Thomas Hughes