Headlines from Spain and economic data continue to make the market's head spin. There is good news and some bad news but as usual nothing seems to match up. Spain was expected to release its new budget and bail-out requirements this morning but by 11:08:00 AM EDT they still had not uttered a peep. Our own economic calendar was full with about a half dozen key metrics released today. Declining unemployment and declining GDP, while at odds with each other helped the S&P maintain its most recent near term support levels.

Market breadth was fairly strong in early trading. At 10Am advancers were leading decliners by just about 2 : 1. By the end of the day the tide rolled on and advancers increased their advantage to a ration of 3 : 1.

Futures trading indicated a strong opening despite the wishy washy economic data. Jobless claims fell sharply but so did some other metrics that are not so rosy. Initial claims for unemployment fell 26,000 to a seasonally adjusted 359,000 for the week ending 9/21. This was well below analysts forecasts and includes and upward revision of 3,000 claims to the previous weeks data. The consensus forecast was for a much smaller decline to 375,000. The drop in claims has also brought down the 4 week moving average of initial claims which shed 4,000 and fell to 374,000.

It seems that both the initial data and the average have made a new lower peak, at least in the short term, and could be considered to be down trending. The labor market data also appears to show a fairly stable jobs environment (as in the way it is now is the way it is) and supports the Feds recent statements concerning high unemployment persisting through 2013.

Continuing and total jobless claims both fell by marginal amounts and remained virtually unchanged. Continuing claims held steady around 3.27 million and total claims around 5.17 million. Both data points have been in decline this year but continuing claims bottomed over the summer. Longer term unemployment is still in decline but the near and mid term numbers remain steady. Could it be that people are finding work? New jobs creation and unemployment figures are due out next week.

The US second quarter GDP final number was released this morning as well and revealed “near recessionary levels” according to Art Cashin on CNBC. This should have come as a big shock to the markets but I think it was more or less expected. The way that expectations and results have been diminishing over the last quarter it would be hard to expect that the previous GDP estimate would stand. Two major portions of the loss were in consumer spending and business investment. The lower GDP number does raise speculation over whether or not we will enter recession again next year. The fiscal cliff still looms over the nation and won't help the already low expectations for Q3, Q4 and 2013.

Durable goods orders became a drag on the third quarter today, dropping -13% from last month. This marks the biggest decline in 3 years and is a reverse of the previous months gain. Housing data was also a mixed bag this week. Yesterday revealed that while home prices are rising sales are in decline. Today pending home sales numbers also showed a decline, dropping 2.6%. The drop was more than expected but still more than 10% higher than last year. The housing market certainly has recovered somewhat but is still no where near as robust as it once was or even where economist think it should be now.

The European markets ended the generally up. The heavily anticipated announcement of Spain's 2013 budget, delayed to coincide with the market close, was received well by the markets. After hours trading overseas left their indexes in the green. The Spanish budget is aimed at cutting spending, primarily in social areas, instead of raising taxes. They are choosing to spend less rather than pay more, which is probably best. There were also some reports that one of Spain's regions, Castilla-La Mancha, was going to need 800 million euros but I never did hear the resolution of that. Hopefully this new plan for Spain will put a stop to the violence going on in Madrid over the austerity measures.

The Asian markets also ended the day up. The uneasiness over Europe may be abating there for a while. Asia needs a strong Europe and Eurozone so anything good that happens in Europe is good for China. Other headlines from China reported that industrial profits in the nation had dropped 6% on a year-to-date basis and that the People's Bank Of China had made a record cash injection into the system in efforts to stimulate the nations growth. A board member of the Bank Of Japan made statements echoing the move of the PBOC. He said that the the Japanese central bank “stands ready” to provide more stimulus because they are concerned about Japan meeting its economic targets for 2012.

All the talk of available money sent the price of gold up today. Gold climbed more than 1.5% and made a new closing 6 month high. The Gold Index responded in kind and gained nearly 2%. The index is confirming the breakout and setting a new upward trend line. Momentum looks good for at least a retest of the recent highs at $220. A break above that level could take the index to $235-$240. If there is any more stimulus, especially from the FOMC, gold could set more new highs.

The Gold Index, daily

Oil gained +2% today on mid-east tensions, refinery issues and stimulus driven hope. The gain only recovers a small portion of the 10% drop in oil prices this month. The drop in prices is good for business, lowering costs and inflationary pressure but it is hurting the oil industries profit outlook and has halted the advance of the oil index.

The index has dropped from its downward trending upper range boundary and is now sitting on the short term moving average. The long term charts show a range bound index with a narrowing channel, oil prices are likely to drift sideways while the global economy is still hiccuping and the oil index will likely follow.

The Oil Index, weekly

The yield on US debt climbed today but remains near two month lows. The yield on the ten year note remains well below the short term moving average and the recently formed gap. While we should expect the gap to be filled when is always in question.

The Ten Year Yield, daily

Turning to earnings, which are starting to trickle in again, there are three notable names in the news today. Micron Technologies, Nike and Research In Motion all reported after the bell today. Micron, which is still recovering from the tragic loss of its CEO last year, was expected to in widen its quarterly loss by 50%. The actual results were worse than expected and sent shares tumbling in the after markets.

Micron Technologies, weekly

Nike's profits were expected to drop by a consensus of $0.24 per share but surprised analysts with a much smaller decline. The stock, which has recovered most of its share value after gapping down in July, traded up today but under resistance. Weakness in Europe offset gains in other areas and sent the shares down in after hours trading. The stock is showing some support in the region between $85 and $95 and will probably trend sideways into that range.

Nike, daily

Research in Motion topped analysts forecasts for profits and revenue. The stock jumped in after hours trading and gained more than 10%.

Research In Motion, daily

Two of today's leading sectors were the financials and the energy sector. Not surprising, these are two great sectors for dividends and there are great plays in both for long term investment. The small and regional banks as well as the regional power providers have been performing well over the last 2-3 years, due to improving profits, operations and the steady return of cash dividends. The Bank Index, which is a blend of the large and medium/small US banks made a new high just this month before retreating to lower levels. The index is now looking for support at the short term moving average.

Bank Index, daily

The Utilities Sector Spyder has had a nice run up over the last three years reaching a peak this past August. The ETF has since retreated to support at $36 where it appears to be stabilizing.

The Utility Spyder(XLU), weekly

The VIX fell back today, dropping +1%. The index is back below 15 and near all time lows once again. Thinking about the fact that the VIX is a measure of the relationship of the price of options to the price of the index makes me think that the VIX is so low because people are selling options. When I checked the OptionsXpress put/call ratio the long ratio was very low at 0.38 suggesting that few traders were buying puts for protection. The short ration was very high at 0.98 which suggests that traders are also overly optimistic and selling a high number of short puts. These two extremes lend weight to my theories on the VIX and the spike in volatility I expect is on the way.

VIX, daily

Stocks drifted into positive territory after the open with the S&P fluctuating around +5. The drop yesterday and over the last couple of days has brought the S&P down to previous resistance that has now turned into support. It was good to see the S&P remain above the 1430 level today. This mornings data should have sent the markets lower but there has been a disconnect from reality for some time in my opinion.

Our markets, like the European exchanges, were awaiting the Spanish budget announcement. Following the statements, which had been scheduled for earlier in the morning, were taken as a green light by US traders. The S&P quickly tripling the days gains to +15. The index is still in-line with its “break out” trend and is also supported by the 30 day moving average. Momentum indicators are still divergent but not giving any kind of a definite signal at this point on the daily charts.

S&P 500,daily

On the weekly charts momentum is also divergent but still bullish. The trend is still bullish as well so that is the stance I have to take despite, once again, that the evidence is against a rally. The next resistance that I can determine is at the all time highs around 1570.

S&P 500, weekly

I expect volatility to begin to increase any time now. There are just too many reasons for stocks not to go up. Earnings are weak, expectations are lower, the worlds largest economies are still slowing and costs are rising. I have started to think of this rally not so much as a rally but as a time when stocks were simply allowed to go up. There are bears out there somewhere just waiting to take a swipe out of the markets. I thought that time was when the S&P hit the 1380-1420 level but I was wrong. Not the index has moved beyond that level and is establishing support along a new trend line.

Data, earnings and news will drive the market as always. October is upon us a new round of monthly figures and estimates is due. Next week look out for the next round of unemployment and jobs creation figures as well the FOMC minutes.

Economic Calendar

Remain watchful and be wary but remember the trend. Trade well.

Thomas Hughes