Introduction

Janet Yellen testified before congress in what could be her last appearance, and what she said surprised the market. Her testimony in a nutshell; the balance sheet should begin to shrink this year, regardless it will remain larger than it was pre-crisis, inflation is sluggish due to one-off events, the Fed is near its equilibrium rate and we may not need too much more in the way of interest rate hikes.

Asian markets down ahead of the news, closing well before she made her way to Capitol Hill. Austalia led with a loss near -1.0% but other markets saw much smaller declines. European indices were lower early but closed with Yellen driven gains. Most indices gained more than 1% with many in the range of 1.5%.

Market Statistics

Futures trading was positive all morning and gained some strength going into the open. The open was bullish. The SPX gained 10 points at the get-go and moved up from there. Intraday high was hit just before 10:30 with the SPX rising nearly 20 points or 0.75%. This top held for the better part of the day with the index trending in a tight range just below it. The Beige Book release at 2PM was good and helped support the market but was not able to push it to new intraday highs. The market held near the highs all day, where they remained until the close.

Economic Calendar

The Economy

Very little economic data today but it was bullish. The Fed's Beige Book shows growth in all 12 regions,modest to moderate growth in 11. The Pennsylvania district was the weakest with only slight growth. The report also shows that labor markets are tightening and contributing to wage growth. Inflationary pressure is present but not enough to warrant rate hikes.

The Dollar Index

The dollar was mixed today. The Dollar Index moved both higher and lower to create a small doji candle. The candle is sitting just above $95.50 and a confirmation of near term support. Janet Yellen's comments were largely to blame as they seemed to support strengthening economic conditions and quash interest rate expectations at the same time. The indicators are bearish but also mixed. Bearish MACD is in retreat and fast approaching the zero line, consistent with support, while stochastic is pointing lower but also showing evidence of support at this level. A bounce from here would be bullish but not likely to go very far without some tailwind to push it. A break below this level would be bearish and trend following with targets near $95 and $94. Longer term it looks like the index is going to remain range bound. Positive data will be bullish for the dollar but it will need to be strong, and stronger than European data, in order to overcome the strengthening euro.


The Gold Index

Gold prices were equally mixed. The spot price fell a few dollar in early trading and then reversed to gain nearly a half percent by settlement. First target for resistance was near $1,220 and broken today. If the metal is able to move higher next target is near $1,235. For the next few weeks, until the July FOMC meeting, gold prices are likely to drift on economic data and political risk.

The Gold Miners ETF GDX gained about a half percent on the news but the move does not look overly bullish. The ETF gapped up at the open to begin trading near the short-term moving average. Resistance selling took over from there and drove prices lower creating a red bodied candle falling from resistance. The indicators do not agree and may in fact be indicating a buy, the caveat is that the ETF has been trading in a narrowing range for more than 6 months and they are more consistent with that than anything else. The next potential catalysts for break-out are PPI and CPI released tomorrow and Friday. Support is near $21, resistance near $22, a break of either will be significant and bring short term moves of $2.50 to $.300. Downside target is near $18.50, upside target is near $25.00.


The Oil Index

Oil prices spiked on inventory data. Today's data shows a larger than expected draw of US stockpiles which drove WTI up more than 1.5%. While bullish today the news does not alter underlying fundamental conditions. Oil may continue to percolate to the upside but supply, production and capacity will continue to overshadow the market into the long term.

The Oil Index spiked today as well only it did not hold the gains. The index gained more than 1.25% intraday only to fall back from resistance. Resistance is at the short term moving average, just below 1,120, and confirmed by today's candle. The candle is a tombstone type doji and possible shooting star and if so, is consistent with the current trend. A move lower would be trend following with downside target near 1,090. A move below that will depend on earnings and forward outlook. With oil prices down forward outlook will take a hit. So long as it remains positive my longer term outlook will remain bullish, near and short term will depend on how positive the outlook is.


In The News, Story Stocks and Earnings

Amazon is expected to break records with Prime Day. According to a press release from the company sales grew 60% over last year. The number of Prime members making a purchase increased more than 50% to total in the tens of millions and the number of new Prime registrations was the largest in history. And the stock rose by nearly 1.25% to move above the $1,000 to close just below the current all time high.


Fastenal, supplier of screws blades and other bits of construction related sundries, reported earnings this morning. The company beat on the top and bottom lines but the stock closed with a loss of nearly -2.0%. Earnings grew by more than 15% over last year on improving sales across all product lines. The bad news, and not really bad considering business in general is improving, is that they are closing stores. My thought is if the stores aren't making money then why keep them open? Shares opened with a nice gap of nearly 6% but selling took over and drove shares lower throughout the day. On a side note the company was also upgraded to Outperform at Baird.


The VIX fell more than -5% to fall below the $11 and close near $10.25. This action is consistent with a return to rally and a very positive sign as we approach the onset of earnings season. The indicators remains consistent with sideways trading at current levels with a bias to the downside. Downside target is $10 and just below at the current long term low.


The Indices

The indices moved higher. The move was led by the Dow Jones Transportation Average. It gained 1.21.% and set a new all time high. This is a bullish event but I have some reservations. While stochastic is showing strength with a crossover of the upper signal line MACD momentum is diverging from the high. This may be nothing but is a red flag to be wary of. The signal is bullish but I would not be surprised to see the index hit a near term top in the near future. Upside target is near 10,000 in the near term, support is at the previous all time high.


The NASDAQ Composite made the second largest gain today. The tech heavy index gapped up at the open by roughly 0.5% and extended the gain to 1.09%. The indicators confirm the move with today's MACD crossover with an upside target at the current all time high near 6,350.


The S&P 500 comes in third today with a gain of 0.73%. The broad market index made a small gap up at the open and moved higher from there to create a medium sized green candle. The move is confirmed by stochastic but not MACD, the MACD crossover is imminent but not guaranteed. Upside target is the current all time high near 2,450. Resistance at this level may be strong as it is coincident with the underside of my long term up trend line. A break to new highs would be additionally bullish.


The Dow Jones Industrial Average also made a small gap up at the open. The blue chips are on the rise and confirmed by stochastic with a strong buy. This signal is yet to be confirmed by MACD but that signal is at hand. Today's action set new all time closing and intraday highs capped by technical resistance. Resistance is just above today's close at my long term up trend line. A break above the trend line would be bullish. Upside target is near 22,500 in the short term, 22,000 in the nearer.


The market is on the move driven by earnings, earnings expectations and earnings outlook. Today's comments from Janet Yellen went a long way toward paving a smooth path for the rally to roll forward on. From where I sit it sounded a lot to me like the Fed thinks economy is OK, that policy is nearly normalized and we can expect things to remain as they are for some time to come. This may mean the Fed is finally exiting center stage so the market can focus on what the market is all about, the economy business and earnings. All we have to worry about now is The Great Unwind and whatever that brings us. Until then I am cautiously bullish in the near term and still firmly bullish for the long.

Until then, remember the trend!

Thomas Hughes