The world markets have seemingly been holding their breath in anticipation of the FOMC rate decision and possible QE3. Today Big Ben Bernanke and his band of federal bank regulators came through with a new round of monetary stimulus that pleased traders and lifted stocks. The S&P 500 has made a move up and away from the resistance/support zone and looks like it has room to proceed. This exhale of relief is driven on hopes and the support of the FOMC, not on any real growth figures. Today's data confirms the ongoing trend of sluggish job growth and job market stability.

S&P 500, daily with MACD

Market breadth was very weak before the FOMC announcement with advancers lagging decliners by a small margin. Following the announcement bullish participation increased to a margin of nearly 2 : 1 of advancing stock over declining. By the end of the day the advance/decline ratio was more like 4 : 1 across the major markets.

The Asian markets were quiet over night. The much anticipated FOMC meeting kept the lid on activity. The FOMC decision and U.S. market reaction has a lot of bearing on how China's own stimulus will affect economic growth. China announced a renewed effort to help support its struggling export sector by increasing the speed in which tax rebates and other incentives are delivered to exporters.

The Australian economy came into the spot light again this week. The Pacific nation has been one area of growth in the world, driven by a robust and growing mining sector. However, the global slowdown has begun to affect this area too, causing the first dip in Australian mining employment in over 3 years. Asian markets ended mixed today. The Nikkei Average gained a small 0.39%, the Shanghai Composite shed -0.14% and the Australian ASX dropped an even -0.5%.

. The European markets were equally quiet despite their own reason to rally. Approval of the ECB's bail-out plans helped keep the European indexes at four month highs but again, they were waiting to see what happened here first before moving much higher. The Spanish government continued to drag its feet over requesting bail-out money from the ECB. The recent strength in the European equities markets and the Euro has led some in the Spanish administration to think that Spain is OK but many analysts agree Spain will need assistance, the question is just when. The broad European FTSE Index gained 0.65% today while the German DAX and the Spanish Ibex lost -0.45% and -0.7% respectively.

Futures on the U.S. equity indexes were slightly lower today ahead of the economic releases and market opening. The new unemployment data, though surprising, failed to increase bearish sentiment and supported the growing expectation of increased QE. Initial jobless claims made a surprising jump of 15,000 to a new two month high of 382,000. Analyst had been expecting a smaller gain to 370,000 but an unexpected 9,000 people displaced by hurricane Isaac helped to inflate the data. This gain is also on top of upwardly revised data from the previous week, which added an additional 2,000 people to the unemployment lines. The loss of jobs due to hurricane Isaac is an unnecessary blow to the already stagnant job market and it is uncertain how many of these jobs will be recovered. The four week moving average of initial claims also climbed this week, also making a new two month high.

Continuing and total claims for unemployment both dropped in this weeks report. Both of these figures lag the initial claims number but are less subject to revision. Continuing claims has been holding steady for several months, suggesting that it is taking folks more than one or two weeks to find new work. The total claims has actually been able to make a nice downtrend, but it is still unclear if it is because of people finding work or just getting tired of looking. Last weeks jobs data was mixed, as has been the case with all the economic data. The drop in unemployment from 8.3% to 8.1% was divergent from weak job creation numbers and revealed a diminishing job pool.

Jobs and job creation is what I need to see to really believe in an economic recovery. The economy is based on consumerism; people can not buy stuff if they don't have a job and if people are not buying stuff there is not going to be any job growth. Job creation has been below the threshold level of a “strong” economy for most of the year, discounting the spike in July.

The Producer Price Index rose 1.7% in August, mostly on higher food and fuel prices. The core number, ex food and fuel, rose a much smaller 0.2%. On a year-over-year basis the core PPI has gained 2.5%, driven by the increasing costs of food and fuel. Energy prices gained 6% in August, followed by a near 1% jump in food. Eggs and dairy, one of the earliest segments to be hit by the surge in corn prices, led the way. Cal-Maine, the U.S. leading producer of shell eggs, has performed strongly over the past few years but has been in a trading range this year. The stock encountered an early sell-off this morning but recovered post-FOMC. The stock is trading up near the top of the range and is a potential candidate for a break-out. The company has had robust revenue and earnings growth to-date and is actively growing organically and through acquisitions.

Cal Maine, daily

The oil trad was volatile today ahead of the Fed announcement. The price jumped sharply in early trading and then settled slowly back down to near even just before the release. Afterward the price jumped right back up to near $99 and a key resistance level. The Oil index traded sharply upward on the Fed announcement and hopes of increased demand, in line with oil's gain and the general market. On the long term charts the index is making a move up from the 150 day moving average and trading very near a down trend line. The index looks ripe for a breakout to upside of the trend line but still faces heavy resistance once clear.

Oil Index, weekly

Big Ben and the FOMC gave the markets what they wanted. The Fed kept its key interest rate unchanged at 0.25% and extended its pledge to keep rates low until the mid 2015. What really made the markets happy today was an increase in monetary support of the financial markets. The Fed announced an increase of MBS purchases each month of $40 billion. This brings the monthly total of Federal Reserve backed long-term bonds to $85 billion each month until the end of the year. In the statement the Fed said that additional support was needed and that the current conditions may not be enough to support job growth without further easing. The total increase in MBS purchases totals $480 billion over the next 12 months and is intended to help support the housing markets and job growth.

One thing that has really surprised me about this rally is that it is built on weaker and weaker data. The economy is getting worse and the market is going up. The fact that the FOMC decided to increase its support only proves the point that the economy is getting worse. In fact, in Bernanke's statements following the release he lowers the Fed outlook for 2012 growth, again, and said that unemployment would remain high for several years. The expectation is for the unemployment to stay elevated and slowly retreat to near 7% by mid to late 2014. Now if we could only get the politicians to act instead of making us wait until the last minute for a decision on the “fiscal cliff”.

Gold prices skyrocketed after the FOMC announced its new MBS purchasing plan. Gold climbed an impressive $37, or 2%, at first writing and ended the day near the session highs. The Gold Index, which I have been watching closely for a completion of two one of two potential patterns, has confirmed its bullish break out and double bottom reversal. The Gold Index moved in sync with the base metal and added a substantial 4.5% to yesterday's closing price. The next resistance is $225 and could be reached by November.

Gold Index, daily

Yields on the ten and thirty year U.S. treasuries climbed today but were held back by resistance. The thirty year yield is making a possible short term double top and the ten year has made a lower high.

Thirty Year U.S. Treasury

Ten Year U.S. Treasury

The market turned decidedly positive in the afternoon trading. The leading sectors were materials, consumer staples and financials. The Materials Spyder (XLB) made a break above it resistance line at $37.50. This follows a leg up and consolidation just last week and into this one. The current move could take the index up to resistance at $40.

Materials Spyder, daily

The Consumer Staples Spyder made a nice move up from its short term moving average. This index has been consolidating after a long term move upward over the last year. Today's move bring the index right up to short term resistance.

Consumer Staples, daily

The XLF made a nice break above its resistance line, accompanied by a respectable spike in volume. A look at the short term charts shows that the volume spike begins with the release of the FOMC decisions at noon and carried the index all the way through resistance. This break out could carry the XLF to $17-$18 dollar range should it prove to hold strong.

Financial Spyder, daily

The chip-makers received a downgrade today from Citi. The downgrade is based on weakened and diminishing demand and expectations for demand of PC's. Shares of Intel, the leading chip-maker, traded up today but have been in decline for the last couple of months. Intel has dropped below support and confirmed a downtrend earlier this month, following a similar move led by AMD which has hit new long term lows within the last week.

Intel, daily

AMD, daily

The semiconductor index traded up today, above its short term moving average. This one is hard to read, by itself the index looks trapped in a range and moving up to the top. Add in the performance of Intel and some others I have seen the index is high and moving contrary to them. Others in the sector have charts very similar to the SOX, stock like Texas Instruments and Applied Materials are versions of a theme. Does this mean that Intel is under-performing or leading? Is Texas Instruments the new leader in semiconductors and semiconductor sales? I think the former is true. All signs point to a slow, slowing and sluggish world and U.S. economy over the next 24 months, not good conditions for PC and chip sales.

Semiconductor Index, daily

The markets, though seemingly quiet in early trading, were actually chomping on the bit and ready to go. Traders just needed a signal and the FOMC waved a huge flag in the bull's face. The initial reaction to the news was a quick jump from flat-line to +7 on the S&P. It seemed for about 20-30 minutes the gain wasn't going to hold. After fluctuating up and down a bit trading stabilized and continued upward for the rest of the day. In spite of, and I have to say it again, diminishing outlook on 2012 and 2013 the S&P has made a text book bullish candle stick formation. The corresponding move in the SPY index tracking stock shows only a mild increase in volume, the spike is double the past thirty days average volume but only a little above average for the last year.

S&P 500, daily

The VIX has moved down to extreme low levels and has made my inner contrarian shiver. I know we like volatility to be low so the market can rally and options are cheap but this just means that a spike is on the way. A look back over the last five years shows that the VIX does not like to stay this low for long. Now the VIX has hit 14 twice within two months; I would not be surprised to see a spike up to the 25-30 range but I don't think its coming just yet. The rally has a little steam left in it but just how much is always the gamble. The long term charts of the S&P are mildly bullish and support another leg up at this time. The VIX could bob along at this low level for a few more weeks or months depending on how data and the FOMC play out.

VIX, daily

S&P 500, weekly

There is more data on the horizon, as always, and the possibilities of trading opportunities. Tomorrow CPI and core numbers come out and some important metrics on real estate are due next week. These will each provide insights into the struggling economy. Yes we know its struggling. I and you all have been hearing about it for months, quarters and years. But it is still growing some and that is what the markets are clinging to, trying to eke whatever they can out of a world with high unemployment, high sovereign debt and relaxed fiscal policies.

Economic Calendar

The adage of “trade with the trend” is an old and good one. Right now the trend is up. They call it the “the most hated rally of all time” on TV and they may be right. It is hard find a reason for the market to rally and lots of reasons not to but rally it does. Beware of pitfalls and traps and watch out for that VIX spike that is surely on the way.

Thomas Hughes