Introduction

Positive earnings surprises drive the market higher. Earnings season is delivering better than expected results and that is supporting prices. Today's action took the S&P 500 and Dow Jones Industrial Average to new all time closing highs and both look set to run higher.

International markets were mixed. Asian indices closed the day flat following the flat day we had yesterday. The biggest story came from Japan, the company behind Pokemon Go delayed the games launch in Japan due to a snafu with some leaked information. Nintendo's shares fell more than -12% on the news, the Nikkei about -0.25%. In Europe trading was dominated by earnings, led by the tech sector, and some positive data from the UK. Unemployment has fallen to the lowest levels since 2005, PM May says the country is open for business. Indices in the region gained 1% to 1.5%.

Market Statistics

Futures indicated a positive open for the US indices all morning, about 0.25%. This strengthened into the open, resulting in initial gains near 0.5% for most. A brief dip to test support was followed by a sustained rally which took the indices up to an early high around 10:30 and then another just after 11. Volume was light in general although some individual stocks saw some notable increases. From 11:30 to 2:30 the market trend sideways, eventually retesting the early high but not breaking through it.

Economic Calendar

The Economy

Not much economic data today. Mortgage applications fell -1.3% on a seasonally adjusted basis, up 24% on a not adjusted basis. The not adjusted gains are largely due to the previous week having one lss day but are still up year over year. Refi's also fell, -1%, as did new purchases, -2%. On a not adjusted basis new purchases are up 23% for the week and up 16% year over year.

Tomorrow will be a big day for data. Perhaps the most important item will be the ECB meeting and statement. They are not expected to make any changes but may hint at it, or the need for it, or their willingness to do what is necessary, remains easy for a long time etc. Also on tap are 6 important US data points including jobless claims, Philly Fed, Housing Index, Existing Home Sales, Leading Indicators and natural gas inventories. All points are expected to remain consistent with recent trends which, in the mid to long term, are going to lead to an interest rate hike.

The Dollar Index

The Dollar Index gained strength today but gave up most of the gains before the close. The index is being supported by strong US data, renewed expectation a rate hike will come this year and dovish expectations for the ECB and BOJ. Tomorrow could help propel the index higher, especially if the data is strong or better than expected and/or the ECB is more dovish than expected. Risks include weaker than expected data and a hawkish ECB. There is some near resistance near $97.25, a move past that could go as high as $98 or $98.50. $96.50 is first target for support, a break below here could go to $95.60 or lower.


The Oil Index

Oil prices fell in early trading, by about -1.7%, only to regain all the loss and more later in the day. Prices were down earlier in the day due to bearish expectations for today's inventory data. The actual news was better than expected but still not that great. US stockpiles fell by -2.3 million barrels, about 0.2 million barrels more than forecast, but gasoline levels increased by nearly 1 million barrels. WTI moved up to +0.5% after the news to trade just shy of $45. Today's action sets a new 2.5 month low for WTI, below previous support target of $45, and may be the beginning of another leg lower. If $45 cannot be regained and held next downside target is $40.

The oil sector fell in the morning hours but was able to regain its footing before lunch. The Oil Index fell about -1% early and was later to move up to break even and slightly into positive territory before the close of the day. Today's action confirms support along the short term moving average, near the middle of the 3 month trading range, but bias within the range remains bearish. The indicators are both moving lower, MACD crossing the 0 line today, indicative of a test of support, perhaps as low as 1,120. Regardless, the index remains range bound and is likely to continue within the range into the near term at least. Earnings could be a catalyst but it is more likely economic data and to a greater extent oil prices and future earnings outlook will drive the sector.


The Gold Index

Gold prices fell in today's session, pressured by a stronger dollar and a bit more risk on sentiment. The spot price of gold fell more than -1% to trade just about $1315. Today's move sets a new 1 month low and looks like it could move down to test for firmer support near $1300. With the ECB and so much data on tap this move could come tomorrow. Strong data and a dovish ECB could go a long way towards strengthening the dollar further and driving gold lower. The risk is that the ECB is already priced into the equation, news as expected may result in a weakening dollar.

The gold miners sold off on today's dip in gold prices, the miners ETF GDX losing about -5.0%. Today's move is a break of the flag formation I pointed out over the past week, counter to the prevailing trend, and looks like a major test of support is at hand. The indicators have both rolled over into bearish signals so this move may continue to test support over the next few days to a week, up to and until the FOMC meeting. Support levels are just below today's close, near the short term moving average at $28 and then below that near $26. The ETF may be in reversal but it is too early to tell, based on the 6 month trend and convergences in the indicators I expect to see it at least retest recent highs.


In The News, Story Stocks and Earnings

Today was all about earnings. There were less than a hundred reports today but the ratio of important companies was high. Microsoft, reporting after the bell yesterday, was up more than 6%. Strength in the cloud and better than expected results in PC's driving results. A year over year decline in revenue was shrugged off in favor of forward outlook and expected success in the company's shift to cloud services. Margins are also expected to have bottomed, helping to firm future expectations. Today's move higher was halted just below the 16 year high near $56.85.


Morgan Stanley reported before the bell. The investment bank reported a year over year decline in revenue and earnings but, but not as bad as expected. Revenue declined by just over -8%, earnings by -11% although EPS beat expectations by 25%. Along with the results the bank upped the dividend by 33% and announced a share buy back plan worth $3.5 billion over the course of the next year. CEO James Gorman says the business environment is improved but fragile. Shares of the stock jumped more than 3% in the pre-opening session to trade at a 6 month high, gapped up at the open but gave up about half those gains by the close.


Abbot Labs also reported before the bell. The company reported a 3.2% increase in global sales and earnings above expectations. Adjusted EPS of $0.55 beat by 2 cents and led the company to reaffirm full year guidance near the mid-point of analysts targets. According to CEO Miles D. White “it was a good quarter”. Several FDA approvals and the acquisition of St. Jude are setting the company up for future growth. Shares of the stock jumped 2.5% in today's session but have yet to close a window opened with the previous earnings report.


After hours action was heavy as earnings from Intel, American Express and many others hit the market. Intel was the first to report, EPS of $0.59 beat estimates by $0.06 but revenue fell short. The company was able to raise guidance but outlook still falls short of estimates. Shares of the stock fell more than -3% after the news was released . American Express beat on the top and bottom lines. EPS of $2.05 beat by $0.15, net income up 27%, on revenue flat from last year. Shares of the stock rose 6% on the news. Ebay reported a beat as well, sending the stock up by 10% in the after hours session.

The Indices

The indices moved higher today, driven by earnings, but the move was not overly strong. Volume remains light, price action reserved. Today's leader was the NASDAQ Composite with a gain just over 1.1%. The tech heavy index was boosted by Microsoft and likely to move higher in tomorrow's session if the after hours reports from Qualcom and Ebay can be used as a frame of reference. Today's candle is long and white but not overly strong, setting a new 7 month and 2016 high and coming within 1.5% of the all-time high. The indicators are bullish so a continuation of the rally looks likely, with a test to long term support at the all-time high. A break above that level is questionable but not impossible. MACD momentum has fallen off a bit over the past week and stochastic is high in the overbought range, suggesting resistance is near but not guaranteeing a reversal.


The S&P 500 made the next largest gain today, about 0.5%. The broad market created a medium sized white bodied candle, moving up from a brief consolidation, and set a new all-time high. The index looks set to move higher although the indicators are weakening. Bullish MACD momentum is declining and stochastic is showing overbought, a combination that could lead to correction or reversal. Until then upside target is near 2,200.


The third biggest gainer in today's session was the Dow Jones Industrial Average. The blue chips gained a little more than 0.25% in a move that created a small spinning top candle. Today's move may lead to further upside but there is weakness present. Aside from the frothy look to today's candle the indicators suggest the market is overbought and losing momentum. Upside targets exist near 18,750 and 19,000.


The Dow Jones Transportation Average made the smallest move today and was the only index to close with a loss. The transports fell about 0.05%, after an initial move higher, to create a small spinning top type doji candle just beneath resistance. This index remains the laggard, below potentially strong resistance and well below the all time high. The indicators are consistent with resistance within an uptrend and may be signaling a correction or reversal at hand. A break above resistance, near 8,000, would be bullish and could take it up to 8,250 or higher. A failure to break resistance could result in a pull back to the 7,500 level in the near term.


The indices moved higher today, supported by earnings, and will likely continue to move higher tomorrow. Risks for tomorrow include earnings, but also the ECB and the data. So long as the bank appears willing to support the EU economy, the US data remains steady and the earnings surprises are more positive than not the rally is likely to move higher into the near term.

The rally appears to have legs,the question now is how much leg and how high will it take us. I am still concerned about declining 3rd quarter earnings growth, if that trend continues the rally will likely fizzle out fairly soon. If forward outlook for earnings growth begins to improve we could see the market enter another sustained bull market.

Until then, remember the trend!

Thomas Hughes