Introduction

The market seems mollified by what the FOMC and Janet Yellen had to say but does this mean it's time to rally on? When you dig into the details it's hard to know what it is she and the committee are really saying, each statement carefully hedged by the next, so confusion remains the dominate result of FOMC clarity.

This is what I heard. The case for a rate hike has strengthened because economic activity has picked up but the rate hike time line flattened because economic activity is approaching a peak. My interpretation; there is more chance of a hike than ever but less chance of getting one, much less chance aggressive hiking, because economic activity is expected to remain tepid for the next 2 years.

Three FOMC members say there is no chance of a hike this year, since growth and inflation are expected to be weak there doesn't seem to be any reason to. According to the CME's Fed Watch Tool there is only a 12.5% chance of hike in November but that goes up to at least 50% in December and hovers around that level far into 2017. Risk is skewed toward the no-hike scenario as far out as the March meeting where futures show a 30% of rates will stand pat until then with a 50/50 chance they will hike once and a 15% chance they will have hiked twice.

International markets were pleased, or at least relieved, by what they heard the Fed deliver. Asian indices were led by the Nikkei's 1.9% gain, European markets were led by the French CAC 30 with gains near 2.5%. In both cases gains were broad based with notable strength in miners and energy.

Market Statistics

Futures trading indicated an up open all morning but not an overly strong one. The SPX was showing gains in the range of 0.5% and held them for most of the morning. The open was positive and after a quick dip to test intraday support led to a morning rally and a new intraday all time high for the NASDAQ Composite. By 11AM the market had topped out for the day, the morning rally having run its course. The rest of the day saw the market drift sideways leaving the indices near the highs of the day at the close of trading.

Economic Calendar

The Economy

Lots of economic data today and little of it supporting the need for a rate hike. The one release that does is the weekly jobless claims which fell an unexpected -8,000 from last weeks not revised figure to hit 252,000. This is the lowest levels in nearly 6 months and just above the long term 43 year low, it is also the 81st week of claims below 300,000. The four week moving average fell -2,250 to hit 258,500. On a not adjusted basis claims rose +6.4% versus an expected +10.1% month to month and are down -6% year over year. Virginia and Oklahoma led with increases of +1,051 and 434. California and Illinois led with decreases in claims of -4,627 and -4,389.


Continuing claims fell by -36,000 to hit 2.113 million from last week's upwardly revised figure. Last week's number was revised higher by 6,000 to 2.149 million. The four week moving average of continuing claims fell -8,000 to 2.140 million. Despite revisions continuing claims have fallen to a multi-month low just above the long term 43 year low and are consistent with improvement in the labor market.

Total claims for unemployment made a substantial drop this week, -106,960, to hit 1.905 million. This is the lowest level since October of 2015 and consistent with long term and seasonal trends. Based on those trends we can expect to see total claims continue to fall for the next 4-5 weeks and hit a low below 1.80 million. Today's data is -8% below this same time last year and consistent with ongoing improvement in the labor market.


The FHFA Housing Price Index was released for July. The index shows a 0.5% month to month increase in July home prices and 5.8% in year over year prices. Gains were made across the board but were strongest in the Pacific region.

Existing Home Sales fell for a 2nd month to a seasonally adjusted 5.33 million. August sales fell -0.9% due to a lack of inventory that NAR economists see as concerning. The August data is the 2nd lowest level of sales this year, the July figure was revised lower. Despite the drop however sales remain up year over year, +0.8%, and expected to remain steady at least.

The Index Of Leading Indicators was also released at 10AM. It declined by -0.2% August after rising 0.5% in July and 0.2% in June. The July figure was revised higher by 0.1%, the June lower by 0.1%. The Coincident Index rose by 0.1%, the Lagging Index rose by 0.2%. Conference Board economists say that despite the decline in August readings the index is pointing to ongoing growth into the end of the year. Looking back over the past 12 months the index has been up 6 times and down 6 times with +1.4% growth on balance.


There is little data tomorrow, a flash PMI reading and US rig counts, and the calendar for next week is pretty light. There are a few important releases thought, including housing data, personal income and spending, the 3rd estimate for 2nd quarter GDP and durable goods.

The Dollar Index

The Dollar Index fell today. No rate hike and low expectations of a hike at the next meeting have weakened the dollar but the index remains range bound. Today it fell about a half percent, below the mid-point of the current trading range and the short term moving average. The index may continue to move toward the bottom of the range in the near term on low FOMC expectations and a lack of confidence in the BOJ. Longer term I expect to see it wind up again on data and Fed expectations going into the November and December meetings. The mid point of the range is near $95.50, the lower range boundary/support target is $94.31, the upper boundary/resistance target is $96.60.


The Oil Index

Oil prices rose more then2% after yesterday's surprise draw of US stockpiles. Today's action added a little more than $1 to WTI to leave it trading near $46.50 at the close of the day. It looks like oil prices are winding up too, driven by supply/demand imbalances and any news to that effect. Yesterday's draw appears to show a swing back to rebalance versus the ongoing imbalance but is not definitive by any means. Product levels remain high, storage levels remain high and there have been some significant events in recent weeks which are likely having an effect on the data. Until a clearer picture emerges oil is could remain range bound near current levels into the indefinite future.

The Oil Index was able to make gains today as well but is also otherwise range bound. The index gapped up at the open, above the mid-point of the range and the short term moving average, but sold off during the day erasing a lot of the early advance. The indicators are mixed and consistent with range bound trading. Upper resistance is near 1,180, the mid point is near 1,120 and lower support is near 1,080.


The Gold Index

Gold prices jumped nicely on the FOMC statements but capped by the longer term outlook. Although outlook is weak it is still rate-hike positive which ultimately will be dollar positive and gold negative. In the near term the no-rate hike decision and low level of expectations into the end of the year have weakened the dollar within its range and strengthened gold within its. Spot prices gained more than 1% to trade near $1,345 and are heading up to test resistance at $1,350. A move above $1,350 is likely to continue higher to test the long term highs near $1,380.

The gold miners naturally got a lift from rising gold prices and outlook. The miners ETF GDX gained more than1% intraday but sold off on profit taking later on to close with a gain closer to 0.3%. The ETF appears to have bottomed following a correction and is now poised to move higher. Today's action left it below resistance levels near $28.50 which, if broken, could lead to further upside. Upside target is the recently set all time high, $32 or 10% above today's close. If resistance holds a drop back to support near $26 is likely.


In The News, Story Stocks and Earnings

Redhat, open source software solution provider and competitor to Oracle, released earnings after the bell on Wednesday and sent shares moving higher today. The company reported top and bottom line earnings that beat expectations and led management to raise guidance. Full year guidance was raised to a range above consensus and the previous guidance, driven by strong demand. Two of the strongest segments, infrastructure and applications, saw growth of 18% and 33% respectively with positive forward outlook. Shares of the stock jumped more than 7% in the overnight session, gapped higher at the open at resistance levels, sold off during the day and closed with a gain near 3.5%.


RiteAid also reported before the opening bell, missing on revenue but beating on the EPS end of things. The company reported income of $14.8 million, $0.01 per share, a drop of roughly 30% from this same quarter last year. Total revenue for the quarter rose however, gaining more than 4% over last year. Shares of the stock tried to move higher on the news but were unable to sustain a rally and closed close to flat line.


The Indices

The indices moved higher for a second day, led by the NASDAQ Composite which set another all time closing high. The tech heavy index posted a gain of 0.84% to close at the high of the day. Despite the new all time high the indicators are mixed and reveal ongoing weakness in the market. In the nearer term MACD momentum is on the rise so the move higher may continue but stochastic is rolling over and showing resistance, and both indicators are showing divergences from the new high in the longer term. At current levels, and with recent price action, the index is looking frothy. It is also about 6.5% above a long term up trend line drawn between two previous bottoms.


The S&P 500 made the 2nd largest gain today, about 0.65%. The broad market created a small white bodied candle, extending yesterday's gains, but did not make a new all time high. Today's action closed near, but not at, the the high of the day and fell short of crossing resistance at the current all time high. The indicators remain weak and more consistent with range bound trading than anything else. Resistance is near 2,185, a break above which would be bullish. Support is near the recent low, close to 2,120, and may be tested again. Looking forward this index is also approaching a long term up trend line that will be intercepted in about 6 weeks if recent trading ranges persist.


The Dow Jones Industrial Average made the 3rd largest gain today, a little over 0.5%. The blue chips created a small bodied white candle with visible upper shadow, indicative of resistance to higher prices. Today's action moved up from the short term moving average, potentially bullish, but was capped by resistance well below the current all time high. The indicators remain weak and consistent with range bound trading so it does not look like the move has much strength. A break above resistance would be bullish and could lead to significant upside if new all time highs can be reached.


The Dow Jones Transportation made the smallest gains today, about 0.4%, and looks the least likely to continue higher. The index created a small doji candle with shooting star potential, indicating resistance at the 8,000 level. The indicators remain weak and consistent with range bound trading and do not support higher prices. A break above resistance would be bullish but faces additional resistance at 8,100. While it looks like the chances of a major correction are diminishing there is also little sign of rally. A continuation of the current range looks more likely.


The FOMC meeting, it came and went and left the market in the same place it was before... listlessly trending sideways within long term trading ranges. Looking forward there is a chance that this action may continue for the next 6 weeks or so. All the major indices are approaching long term up-trend lines that, if price action continues to progress as it has, will be intercepted towards the end of October/first part of November.

Looking to the calendar there are a number of important events that coincide with that time line and will likely contribute to another wind-up of the market. These are, not in any particular order, the peak of 3rd quarter earnings season, the November FOMC meeting (11/2) and the presidential election (11/8). I want to get bullish, I think a major rally is on the way (based on earnings growth outlook) but remain cautious in the near term while the market churns it way forward. In the meantime labor markets continue to show signs of health which will eventually lead to stronger economics and stronger corporate earnings.

Until then, remember the trend!

Thomas Hughes