The indices made a nice bounce from support as earnings season gets underway.

Introduction

The indices made a nice bounce from support levels as earnings season gets underway. Global fears, while present, are taking a back burner while traders focus on what is starting out as a better than expected reporting season. Today, JP Morgan beat on the top and bottom lines, tomorrow Wells Fargo and Citigroup may do the same.

Early market action was to the upside despite continued volatility abroad. Asian indices were mixed; the Nikkei shed -2.5%, Shanghai gained nearly 2% in the wake of China's recent actions and a terrorist attack in Jakarta involving at least 6 separate explosions. The news caused indices in Europe to fall, the DAX led with a daily low more than -2.5% but closed with a loss of -1.67%.

Market Statistics

Futures trading were positive all morning, indicating a gain of less than 0.25% for most of the indices. The bombing in Jakarta and sell-off in Europe caused the market to wobble a bit but did not overcome hopes and expectations for a decent earnings season. The market continued to wobble after the opening bell; the indices were up, the down, then up, then down and then up again several time before 10:30AM. After that the bulls took charge and drove them up by nearly 1.5%, many of them from potential support levels. Buying lasted all day, intraday high was hit in late afternoon, with the indices closing near those highs.

Economic Calendar

The Economy

Today was light on data, except for weekly claims the only other release was import/export prices. Both fell. Export prices led with a drop of -1%, import prices followed with -0.6%. This is following declines in both for the previous month as well.

Initial claims for unemployment rose by 7,000 from last week not revised figure. This weeks total, 287,000 is slightly above expectations but remains low and consistent with ongoing labor market health. The four week moving average of claims rose by 3,000 to 278,750 and is also consistent with labor market health. On a not adjusted basis claims rose by 24.3% versus an expected +21.1%. Year over year not adjusted claims are -5%. On a state by state basis NY and GA lead with increases in claims of +15,090 and +12,139 while IL and CA lead with declines of -3,633 and -2,191.


Continuing claims rose by 29,000 from last weeks upward revision of 4,000 to reach 2.263 million and approach a 2 month high. The four week moving average also rose, by 5,250, but is holding steady near 2.200 as it has been the past several months. The rise is expected due to seasonal strength in job losses yet remains low and consistent with over labor market health.

The total number of claims for unemployment 313,000 to reach 2.549 for the first time in 9 months. This jump is also not unexpected due to seasonal factors. Based on the historic data we can expect this number to rise again over the next few weeks before topping out and then falling off going into the spring and summer. So far, the total number of claims remains about 10% below levels seen last year and consistent with a healthy labor market.


The KC Fed's Index of Labor Market Conditions was released yesterday. The index shows gains in both activity and momentum. Activity crossed above 0 for the first time since 2008, an event that is historically associated with the onset of economic boom.


The Fed's Bullard spoke in an interview today. He says another rate hike, in the near term, may be hard to justify due to plunging oil prices. This news no doubt had some effect on today's action, it definitely relieves some fear the FOMC would act again in January. Now it looks like March may be the soonest, possibly further out than that.

The Oil Index

Oil prices bounced back today by nearly 3% but remain at low levels near $31. Today's move may be a sign of profit taking or short covering because the fundamental picture remains bearish. Add to that the Iranian supply which is about to be unleashed on the market and outlook for oil prices remains poor.

The Oil Index climbed more than 4% today in a move that confirms support at the 950 level, at least in the near term. Today's action produced a longish white candle and a bullish attack pattern that may lead to a test of resistance at 1,000. The indicators remain bearish but have begun to rollover, consistent with a bounce from support. Longer term, the indicators are divergent from the latest low, another sign of potential support. This level may hold but it will depend on oil prices, a further fall could take the index to new lows. Even if oil prices bounce earnings expectations for the sector will remain low and may keep the index capped at resistance.


The Gold Index

The flight-to-safety trade may have fled out of gold today. The metal fell more than -1.25%, -$14.50, to hit levels near $1,075 and the lowest levels since the end of last year. Today's action may also be driven by the data; labor markets appear to be resilient with low inflation pointing to a stronger dollar. Add in expectations for additional FOMC rate hikes in 2016 and the outlook for gold remains bearish. Down side target is near $1,050 and the most recent lows so long as global tensions don't rise again.

The gold miners reacted as expected, falling more than -4% to reach previously set support target at $13.00. The ETF is falling hard on gold prices and could easily break below $13 but remains range bound for now. The indicators are pointing lower and suggest further testing of support but are also consistent with a range bound asset. This rang may hold for another week or two, the ECB meets next week and the FOMC the week and either could disrupt dollar/gold valuations.


In The News, Story Stocks and Earnings

The Dollar Index made gains today as risk-on appetite comes back to the market. Today's data, early earnings reports and expectations for the season helped to lift the index by roughly 0.5% intraday but left if below the most recent high near $99.50. Today's move may be short lived, the ECB meets next week and the FOMC the week, either of which could devalue the dollar. The ECB is not expected to increase QE or even allude to further QE and the FOMC is not expected to raise rates again so a chance for the euro to appreciate exists. The index remains range bound at this time with support near $98.25 and resistance just above $100; the indicators are consistent with a range but look a little suspicious to me. A fall below support could take this index down to $97 or lower and back to levels seen last summer.


JP Morgan reported earnings before the bell. The banking giant reported a mild beat on the revenue side that resulted in $1.32 in EPS, 5 cents above expectations. Quarterly profits rose 9% from last quarter, 12% from the same quarter last year, driven on strong core loan growth and consumer banking. Shares of the stock rose 1% in premarket trading and added to that after the opening bell. Today's action confirms support at the $57.50 level with mixed indicators. In the near term the indicators are rolling over, consistent with support, but longer term are weak and consistent with a retest of current lows or a new low. Signs of weakness include convergence in the bearish MACD peak and a bearish crossover of stochastic's lower signal line.


Tomorrow Wells Fargo, Citigroup, US Bancorp and a couple of small, regional banks will report. The general expectation is for growth in the sector and if today's report from JPM is a sign of what's to come this expectation will be met or exceeded. Today the Financial Sector SPDR gained more than 1.25% but remains near the bottom of a 15 month range with bearish indicators. The indicators may be peaking, beginning to rollover, but remain weak relative to the past 3-4 months. The ETF is trading below a potential resistance level near $21 that will likely hold if earnings do meet expectations and/or outlook is not good. A move above this level could take the index up to $23 in the near term.


Intel reported after the bell. The worlds largest computer chip maker reported better than expected earnings, revenue and guidance for the 1 st quarter and yet fell -3% in after hours trading. The move reverses gains made during the day and leaves the stock near the bottom of the three month range. This move is surprising, I'm interested to see how it trades tomorrow.


The Indices

Earnings season has begun and many of the reason to be fearful seem to have evaporated. Most of them are still lurking in the back ground but in light of what looks to be the actual end of a three quarter earnings recession. Today's action began a little shaky, but like any new born bull, after a few false starts got off to a ripping start. The indices all made substantial gains, led by the NASDAQ Composite. The tech heavy index advanced more than 2.5% and confirmed support at 4,550. Today's candle is a strong white candle and piercing pattern that could precede a bounce or reversal. The indicators have crested their bearish peak and are now rolling over, consistent with a bounce from support, but remain weak so caution is due. Upside targets for resistance are near 4,700 and then 4,800 with a retest of support within the near to short term due to to convergences in both MACD and stochastic.


The S&P 500 made the next largest gain in today's session, about 1.75%. The broad market index also created a large white candle with bullish overtones but the upper shadow reveals there are still sellers in the market. Today's action confirms support at 1,900 and the indicators confirm, both MACD and stochastic are both cresting a peak coincident with today's bounce from support. While confirming today's bounce, they are also weak and could easily lead to another test of support regardless of how high said bounce will move. Support target is 1,900, upside target is 1,950-2,000 with a chance for more should earnings season unfold favorably.


The Dow Jones Industrial Average posted a gain just over 1.50% in a move just below resistance. Today's action indicates potential support near 16,000, above target levels near 15,750 and a bullish sign if confirmed. The candle is long bodied and white, nearly engulfing the previous long black candle and in this situation suggestive the market has reached an extreme of bearishness. The indicators remain bearish and weak but also show early signs of reversal and consistent with such an extreme. If a rally continues, perhaps driven on positive earnings reports and diminishing market fear, the index could easily pop back above the long term trend line with a target near 17,250.


The Dow Jones Transportation Average was today's laggard with a gain of only 1.15%. Today's candle is not overly strong but does carry bullish overtones, as well as confirming near term support at the 6,600 level. The strength of this support is yet to be seen but the indicators are also suggestive of support. The MACD for one is showing an obvious divergence, stochastic is too but less obvious. This may signal nothing more than pause in the down trend or switch to range bound trading so it's still a little too soon to get bullish on this one. First target for resistance is 7,700, support is 6,600.


Today could be the day. The day the market revealed the bottom and the first best earliest chance to get into the next up trend. If it is, it is still too soon tell, and if the indicators can be trusted, another chance to get in at these levels will present itself, maybe toward the end of the earnings season.

No matter what else is going on the world earnings drive the stock market. We've had a correction driven on three quarters of weak/negative earnings growth, aided by global turmoil, and now the market is oversold and at support with brighter days on the horizon.

This season is likely to be better than expected, the last quarter of negative earnings growth and the lead-in to a year of expanding earnings growth; three reasons for me to remain bullish and optimistic of the future. Even so I remain ever so cautious.

Near term risks include earnings season, the ECB next week and then the FOMC the week after that.

Until then, remember the trend!

Thomas Hughes

 

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