Introduction

The rally continues as the first of the big banks report better than expected earnings. JP Morgan beat on the top and bottom line, raising hopes we're coming out of the earnings recession. Along with the news a somewhat expected statement from the Bank Of England and US economic data dominated the headlines. The BOE did not ease policy but they did say it is likely to come in the next couple of weeks. The statement says we can expect a package of measures once they have a chance to assess the effects of Brexit.

Asian markets were relatively quiet, moving higher on balance. Hong Kong led with gains near 1.1%, followed by a 1% rise in the Nikkei and a small decline in mainland Chinese indices. European markets gained more than 1% on the BOE news, aided by the ongoing rally in our market.

Market Statistics

Futures indicated an open about 0.5% above yesterday's close for most of the morning but trading was choppy. News was the biggest driver of trading as one item after another hit the wires including the BOE statement, JPM earnings, jobless claims and PPI. Momentum was strong at the open, driving the indices up by at least a half percent in the first two minutes of trading. After that there was a small retracement before the bulls pushed them up to another intraday high. The second high of the day was reached shortly after 10AM, it proved to be the high of the day and was followed by sidewinding and consolidation into the close of the session.

Economic Calendar

The Economy

Initial jobless claims were unchanged in this weeks report, last week's figure is a not-revised 254,000. This is the 71st week of claims below 300,000 and just off the long term 43 year low. The four week moving average of claims fell -5,750 to hit 259,000, just above its long term 43 year low. On a not adjusted basis claims rose 11.8%, in line with the 11.9% predicted by the seasonal factors. On a year over year basis not adjusted claims are now -13.25% below last year, the widest gap since early spring. Claims continue to trend at low levels, consistent with labor market health.


Continuing claims rose 32,000 to hit 2.149 million. The four week moving average of continuing claims is 2.143 million, a small decline from last week. The down trend in claims has stalled but both figures are trending near long term lows and consistent with labor market health.

Total claims rose by an expected 36,000 to hit 2.083 million. This gain is in line with seasonal trends and down -4.5% from this same time last year, consistent with improvement in unemployment levels and labor market health. We can expect this figure to continue rising for the 3-4 weeks at which point, provided trends remain consistent, we should see another decline in total unemployment claims levels.


The Producer Price Index was released at 8:30AM, a little hotter than expected. Headline PPI came in at 0.5% for June led by goods up 0.8% and services up 0.4%. This is the third month of increasing prices and the rate of change is expanding so these increases may continue. At the core level prices rose by 0.3% and are up 0.9% over the pas 12 months. While both numbers are on the rise neither point to the need of a rate hike yet.


The Dollar Index

The Dollar Index continues to trade within its near term range. Today's action was a move down on strength in the euro in pound, tempered by weakness in the yen. The euro and pound trades were driven by the BOE decision, the yen by a move away from the safe haven trade. The recent consolidation between $95.50 and $96.50 has been driven by economic data and central bank expectations and is likely to continue until the next FOMC meeting. A break to either side of the range could result in a move of a $1 or more to targets near $94 on the downside and $97.50 on the upside. Outlook is bullish, the FOMC is not expected to strengthen the dollar but most other central banks are expected to weaken their respective currencies. The next ECB meeting is 7 days away, the next FOMC meeting is 13 days away, the BOJ's is 15.


The Oil Index

Oil prices bounced today, WTI settling up close to 1.7%. Today's move is a bounce from the $45 support level and not strong. Although a rebalance of the market is still expected bias remains to the supply side. Yesterday's reported draw down of supply was much smaller than expected, gas stock piles rose counter to expectations, floating storage is at all time highs and the IEA says the supply glut is persistent. Prices may break through $45 with this weight, if so next target is $40.

The Oil Index posted a gain near 0.5% on the bounce in oil prices. Despite the gain today's candle is a bearish one although small and weak. The index is now trading just below resistance at the top of its three month range and near levels at which it has reversed in the recent past. The indicators are pointing higher but remain consistent with the trading range so a break above resistance, near 1,175, does not look likely. With oil prices moving lower this index is likely to remain within its range, first target for support is near the short term moving average, 1,130, next target 1,100.


The Gold Index

Spot gold fell about -1% intraday following the BOE policy statement. The decision to hold rates steady with the seeming promise that easing was coming, along with Britain's smooth transition to a new prime minister, helped to sooth fears of Brexit fall-out and deflate support for the safe haven trade. The move brought spot prices down to $1,335 and a two week low. Support is possible at this level, next target is closer to $1,300 if it doesn't hold. With the market calming down a move lower is very possible, add in potential for a stronger dollar and the move looks more likely.

The gold miners opened with losses this morning but buyers stepped in to push prices back up. The Gold Miners ETF GDX opened with a loss greater than -2% and then moved up to within -0.6% before the close. Today's action is the 7th day of trading within a tight consolidation range that may be signaling higher prices are on the way. The indicators are both bullish and although momentum is in decline the MACD and stochastic peaks are convergent with recent highs, consistent with a move to new highs or a retest of current highs should the ETF pull back. A pull back can't be ruled out, gold appears to be correcting and could cause the sector to correct as well.


In The News, Story Stocks and Earnings

Earnings, there weren't a whole lot of reports today, barely more than a dozen, but there were some important names. Top of the list is JP Morgan. The bank reported numbers that beat on the top and bottom lines, driven by strength in nearly every segment of business. EPS of $1.55 beat by $0.12 cents, revenue beat by more slightly more than $1 billion. Commercial banking led with growth of 33% but there was 4% growth in consumer and corporate banking and a 16% gain asset management profits. Outlook is positive. Shares of the stock jumped more than 2% in the pre-market session to open at a 1 month high. Resistance is just above today's intraday high, near $65, and is likely to be tested or broken. The indicators are both pointing higher, consistent with a move higher. A break above $65 would be bullish and could take the stock up to $67.50 in the near to short term.


Delta Airlines reported before the bell and was able to beat at least on the bottom line. Revenue fell short of expectations and fell from last year in the same quarter, cost efficiencies helped produced earnings growth. Looking forward the company sees the revenue environment challenging and has reduced its winter capacity. Currency headwinds and potential for fall-out from the Brexit were mentioned in the statements. Shares of the stock jumped more than 5% on the news to trade at a one month high but price action is sketchy.


Blackrock, one of the largest investment management firms in the business, reported earnings and revenue that fell shy of estimates. The company reported EPS of only $4.73, $0.06 short of consensus, as its clientele faces "unprecedented challenges as they attempt to navigate the current investment environment". Market headwinds and a slow down in client activity were cited as causes for the miss. Shares of the stock fell on the news, opened with a loss, tried to rally but was not able to hold gains.


The Indices

The indices continued to rally today. The promise of QE to support the Brexit and hope for earnings season fueling the move higher. Today's action was led by the Dow Jones Transportation with a gain of 1.07%. The transports created a small bodied white candle with upper shadow just below resistance. Resistance is about 85 points above today's close, near the 8,100 level. The indicators are both on the rise so a test of resistance is looking likely. A break above 8,100 would be bullish and could take the index up to next resistance target of 8,250.


The Dow Jones Industrial Average made the 2nd largest move today, gaining about 0.73%. The blue chips created a medium sized white candle with small amount of upper shadow in a move that set another new all time high. The indicators remain bullish and moving higher so the index may contiue to move higher as well. Risks at this time include weak momentum and overbought stochastic although neither are indicative of imminent reversal. An upside target of 18,900 can be projected based on the bounce from the Brexit Bottom to the old all-time high.


The NASDAQ Composite comes in third today with a gain of 0.57%. Despite today's gains the tech heavy index created a small black spinning top candle. The index is now trading at a 7 month high but remains more than 3.5% below the current all time high. The indicators are bullish and moving higher so some further upside can be expected with next target for resistance near 5,175.


The S&P 500 brings up the rear in today's session. The broad market gained a little more than 0.53% and set another new all-time high. Today's candle is relatively small and has some upper shadow, indicative of a rally that is slowing down or at least taking a breather. The indicators are both pointing higher, bullish and consistent with a rising market, so a test of today's high looks likely in the least.


Despite my misgivings, the risk of slowing global growth, Brexit fall-out and another season of negative earnings growth the market continues to rally. The rally is driven on relief and hope; relief the Brexit is not crushing the market as first feared, hope that earnings season will not be as bad as expected. While it will be some time before we fully understand the scope of the Brexit and what it will mean for the global economy it looks, at least for now, that earnings season will in fact be better than expected. Perhaps much better, but that is yet to be seen. If so, this rally could have legs.

Now is not the time to start chasing prices higher. Now that the indices, the S&P and Dow Jones Industrials, are breaking out and the rally is sustainable we can expect a consolidation at least and maybe a test of support at/near the previous all-time high before a prolonged move higher. When that comes, and confirms support, it will be time to get bullish with an eye positioning for the end of the year and 2017. I'm still cautious but starting to see signs the 2nd half rally I've been waiting for is on the way.

Expect some volatility tomorrow, it's OPEX and there are some key earnings reports from US Bancorp, Wells Fargo and Citigroup. There is also a raft of economic data on tap for tomorrow. Retail sales, CPI, Empire Manufacturing, Industrial Production, Business Inventories and Michigan Sentiment.

Until then, remember the trend!

Thomas Hughes