Introduction

The market floundered all morning, waiting on a speech from Janet Yellen, and then shot higher on here dovish stance. Yellen was today's headliner for sure, speaking on monetary policy before the Economic Club Of New York, but she was not the only Fed member to speak today and not the only one this week.

San Francisco Fed president Williams made some comments on TV early this morning to the effect that the FOMC should stay on track (referencing a gradual pace of rate increases as has been telegraphed time and time again), that the US economy was on track and that international growth or lack of growth should not be a driver of future policy decisions. Also on tap today were not one, but two, speeches from Fed President Kaplan with additional speeches from other members scheduled for tomorrow and Thursday.

Market Statistics

International markets appear to be hanging on every word from the FOMC and its members, just like we are. Asia and European markets were all flat ahead of Yellen's speech despite another decline in oil prices.

Futures trading on the US indices was also flat and unaffected by data or earnings. When the opening bell sounded the indices made a quick dive, the SPX lost about 5 points, only to have near term support step in. Most indices held near break even up to the lunch time hour, the odd man out was the NASDAQ Composite which got a boost from Apple. Shares of Apple rose 1.5% in the wake of the DOJ dropping the case against it after the FBI was able to unlock Farook's phone on its own.

The market seemed to like what Yellen had to say, which was basically a reiteration of the FOMC policy statement of two weeks ago; as she took the podium indices began to move higher. She basically toed the line of gradual increases, citing research supporting the use of slower increases and the ability of the FOMC to increase the pace if the economy needs it. Following the speech the indices took a half hour or so to digest the statements and then began a steady march higher.

Economic Calendar

The Economy

Not much in the way of economic data today, just the Case-Shiller real estate price index and Consumer Confidence. The Case-Shiller 20 City Index shows that, on a not-adjusted basis, prices for homes in the 20 largest metropolitan areas rose 5.7% on a year over year basis. On an adjusted basis prices rose only 0.7% (not sure how seasonal adjusting affects housing prices but apparently it does). The central cause of rising home prices is a lack of inventory, according to the report there is only about 4.5 months of supply available at this time.

Consumer Confidence was released at 10AM and gained 2.2% from last month's reading. Confidence rose to 96.2% in March, reversing a similar drop last month. Confidence in present conditions fell -1.5% while expectations for the future rose 5.8%. The change in confidence is due, according to the report, to a decrease in financial market turmoil, consistent with evidence provided by the Moody's Survey Of Business Confidence.

According to the CME's Fed watch tool there is still only a 7% chance of a rate hike at the April meeting. The chances only rise to 31% in June, 46% in July and only barely move above 50% in September.

The Oil Index

Oil prices took a dive today, falling more than -3.5% at the days low. Over supply, low demand, high storage and a lack of certainty over the upcoming meeting to supposedly cap production combined to pressure prices lower. There was a slight rebound late in the day, due to a weakening dollar in response to Yellen's comments, but not enough to regain today's losses. WTI broke below $38.50 today and is now trading at the lowest level in two weeks. Oil prices may consolidate near this level into the near term unless another catalyst emerges. This could be renewed interest in production caps, Iran joining the fight to prop up prices or other; without reason to move higher supply and demand outlook may push prices back to $35 or lower.

The Oil Index fell about -1% to test support near 1,050 and the short term moving average before bouncing and moving higher on Yellen's comments. The index is still tied to oil prices but today's action was a little different as a weaker dollar helped to support the sector, if not the underlying commodity. The indicators continue to weaken and point lower, suggesting additional testing of support and/or a break below the moving average. Support is along the 1,050 level at this time, a break below here could take the index down to 1,025 or 950 depending on how far, or if, oil prices continue to fall.


The Gold Index

Gold prices got a nice little boost from Ms. Yellen. Her stance, that of the FOMC, that policy changes would be gradual at best, that growth targets were falling and that there was still "scope for accommodation" served to weaken the dollar and drive spot gold higher. Today gold prices rose by about 1.75% on her comments and appears to be heading back to the top of the recent range. First upside target is $1250 with a chance of moving up to $1280.

The Gold Miners ETF GDX also moved higher on Yellen's comments. The ETF gained nearly 5.5% in a move that confirms support along the short term moving average and appears set to retest recent highs near $21. The risk at this time is that the indicators remain weak and could lead to further correction should the data, and there is still a lot due out this week, lead the market to fear a rate hike despite what the FOMC is indicating.


In The News, Story Stocks and Earnings

The dollar continued to fall today as Yellen's speech backed up what the FOMC said two week's ago. The pace of rate hikes will be gradual, more gradual than first thought, targets for growth and inflation have fallen and there are still risks to the economy. The Dollar Index itself fell more than -0.8% in a trend following move that appears set to retest recent lows near $94.50. The indicators are rolling over into what could become a bearish trend following signal but have not yet completed the move. Regardless, the dollar is likely to remain weak relative to the December high up to and until a shift in fundamentals occurs.


Homebuilder Lennar reported before the bell and delivered better than expected results. EPS was $0.63, $0.11 better than expected and up 26% from last year. Deliveries of homes rose 12%, new orders are up 10%, back log orders are up 13% and revenue is up 21%. The market like the news and sent the stock up by more than 2% to trade at a near 3 month high. Based on today's Case-Shiller report, yesterday's Pending Sales and other housing data that blames low inventory on weak sales and high prices it looks like strong performance can be expected from this and other home builders into the next few quarters at least.


Specialty food maker McCormick reported earnings this morning as well. The company reported earnings better than expected and guided full-year 2016 results in-line with estimates. Sales in the first quarter were reported up 2%, 7% discounting the impact of currency conversion, resulting in EPS of $0.74. This is up $0.04 from this same time last year and a nickel ahead of analyst estimates. The stock responded favorably to the news, and comments to the effect that currency conversion would have less impact this year, and climbed to a new all-time high. The indicators are rolling into a bullish trend following signal, the stock looks set to continue its move higher.


The VIX made a nice move lower today, shedding close to -9% in today's session. The volatility index is now trading near its recent low and below the $14 level and heading for a 5 month low. Today's statements from Janet Yellen have gone a long way toward relieving fear in the market, fear of rate hikes anyway, but leave the door open for other fears... namely reduced growth expectations and inflation targets which are the cause for FOMC dovishness.


The Indices

Today was a tale of two markets. Early trading, pre-Yellen speech, was a wash. Trading was flat, lack luster and without much volume. Trading post-speech was much different. The indices moved higher, consolidated and moved higher still, all on increased volume. The day's leader was the NASDAQ Composite which got a boost from Apple as well as from Yellen's speech. The tech heavy index gained more than 1.65% in a move up from near term support. Today's candle is long and white, an indication of some strength, although the indicators remain mixed; momentum has ticked higher with today's action, stochastic is still strong in the upper signal zone but pointing lower. The index also set a new high for the rally and looks like it will continue higher, at least until reaching next resistance target near 4,880. A break above this level could take it up to 5,000.


The next strongest move in today's session was in the transports. The Dow Jones Transportation Average made a gain just over 1.18%, made a medium bodied white candle with lower shadow, and erased all of yesterday's losses. The move appears to confirm support below yesterday's close and could lead to further upside. The indicators remain strong but persist in showing signs of reversal, namely bearish crossovers, that could limit the amount of upside we get. First upside target is near 8,100, a break above this level could take it up to 8,400. Support remains below today's low, near 7,725.


The S&P 500 was the third biggest gainer in today's session, rising about 0.9% by end of day. The broad market created a long white candle, moving up from support, and set a new high for 2016. The indicators are mixed, both are showing near term weakness, but consistent with a rising market. Toda's moves appears to be the start of another move higher with upside target near 2,075.


Today's laggard was the Dow Jones Industrial Average which gained a little more than 0.55%. The index created a medium bodied white candle with lower shadow present, confirming support at the 17,500 level. Today's move is bullish and set a new high but just barely. The indicators are mixed in that momentum is waning but are still showing strength by trending high in overbought territory. This move could continue higher with upside target near 18,000 but I remain wary.


Janet Yellen, the FOMC, did it again. A fed induced rally driven by easy money policy has sparked a rally and taken the market higher. In the near term this is good news but the signals are mixed. While easy money policy is still the name of the game, and rate hikes are still the plan, the economy has weakened since the December meeting and have raised concerns over growth and inflation going forward. Not only that, it seems as if the committee is less on the same-page than ever before, not something to inspire confidence in our regulators ability to keep the economy on track.

Hopefully today's speech has taken some fear out of the market, it certainly seems so based on the VIX, but risks for equities remain. Not only is there a lot of data due out between now and the next FOMC meeting we are on the cusp of a fourth quarter of earnings declines. I can't help but fear a correction driven by poor earnings and remain cautious in my stance because of it. As for the data, I expect to see it continue to support the idea of slow recovery, healthy labor markets and the path of normalized fiscal policy, no matter how gradual it may be.

Do not forget about this week's data. Tomorrow is ADP employment but Friday will be the big market mover with NFP, unemployment and hourly earnings.

Until then, remember the trend!

Thomas Hughes