Earnings season is officially upon us. Alcoa is the official start but we cannot forget the reports we received in December from the likes of Oracle, Redhat and other semi important issues. Reports in December were fairly rosy with the bulk of those reporting beating estimates for revenue and EPS. Alcoa was not quite as good, it did beat on revenue but failed to beat on EPS. This is opposite the trend I have noted before during the third quarter's season where many companies were able to increase EPS without increasing revenue. Even with these hints at earnings it is still early to predict the outcome of the season but based on the low low level of the VIX traders are not too worried right now.

Today's run up during the final hours of trading is another sign that expectations are for good earnings, particularly from Wells Fargo, who reports tomorrow. This morning futures were elevated on the heels of trade data from China. Our own economic data helped to hold levels implying an open above the previous 5 year high.

The Economic Data

Today was fairly light on economic data. The beginning/end of the month is always heavy with data reported on a longer term basis. Jobless claims was the report of the day and had futures up to their highest levels in early trading. Initial claims were reported as gaining 4,000 but this was on top of a downward revision of 5,000 to last weeks claims so in the end what we got was a drop of 1,000 from last week. What we also got was a slight increase in the moving average of about 6,750 from mildly lower revision of last weeks number. Together the two data points are trending firmly sideways and well within the range, about the mid point discounting the Sandy spike in November, for the last 12 months and longer. So it still looks like things remain the same on the labor front, job creation is still just strong enough to keep the economy growing and initial claims below 400,000.

Continuing and total claims both declined this week. Continuing claims made a sharp drop, falling to 3.1 million, this years lowest level and the lowest level for multiple years. Data from the period is heavily adjusted due to the holidays so there may be some big revisions. That aside this drop may indicate renewed hiring; now that the cliff is past companies that were waiting for the outcome may have moved forward with plans for hiring. This will be a good number to watch over the next three weeks until next months official jobs and unemployment figures. Total claims for unemployment dropped by a smaller 50,000 to 5.35 million. This has been in decline for 5 weeks but still above the years lowest levels. It is important to remember that total claims lags initial claims by 2 weeks and is not revised or adjusted. Compared to last year total claims are more than 27% lower, a gap that has been widening but may soon reverse if total unemployment claims does not begin to decline again.

Wholesale inventories were also reported today. The figure rose by 0.6% in November, far better than the expected gain of 0.3%. Sales at this level also increased by 2.3% in November, climbing the most in over 18 months. These two figures are important factors of GDP and could help to inflate estimates. Currently the consensus is around 2.5-3% but I have seen estimates as low 0.5%.

Later in the day the Federal Reserve released information on its balance sheet. The nations bank stated earnings of over $88.5 billion from interest on notes held and sales of assets. This is a record earning by the Fed and driven by the purchase of securities intended to help support interest rates. This is up more than 17% from last year. This may not seem like such a big number when you factor in the $85 billion in bonds the Fed is buying each month.

China And Europe

Data from China was surprisingly good and is evidence of a rebounding economy. The Chinese trade surplus grew to 31.6 billion from the 19.6 billion reported in November. This was driven by a 14.1% jump in exports which beat expectations by more nearly 10%. The off-setting imports number climbed by a much lower 6% but also beat expectations. Asian shares climbed on the news with the major indexes closing in the green. The huge jump in exports could be a spike related to Christmas and holiday shopping so its long term value is still in question.

European shares began the day mixed and ended the day the same way. Today the ECB released its decision on interest rates and held its corresponding news conference were held steady in the Euro zone and also in the UK, which also made their decision today. In the news conference Draghi's statements were little changed; he is still calling for a return to growth at the end of the year. The euro responded to this by gaining strongly against the dollar, making a long white candle and moving up from long term support and the near term up trend line.

Euro/USD daily

Oil And Gold

Oil traded up today. Expectations for oil demand, bullish Chinese data, reduced Saudi production and an explosion in Yemen drove prices for light crude and Brent crude to four month highs. The price of light crude gained more than 2% in earlier trading but fell from resistance in intra-day trading. The Oil Index also traded up, gaining .67% today, but was also capped at resistance. The index has been halted at this same down trending line before, it connects three previous peaks from 2011 and 2012. This is a potential area of break out or reversal. The indicators on my weekly charts are bullish but on the daily charts are diverging from price. A break above could be a bull trap and should be taken with caution.

Oil Index, daily

Gold gained more than 1% in today's trading. The spot price of the metal has been bouncing off of the $1650 level and even made a nice hammer candle last week. Today the metal created a long white candle on the daily charts and that transferred into a similar white candle on the charts of the Gold Index. The index has retreated back to the $180 support zone set in December and is now bouncing off the long term up trend line for the 4th or 5th time since last spring, depending on which candles you count. A move up from here has resistance at $190, $195 and $200 on the upside and support at $180 and $170 on the downside.

Gold Index, daily

Earnings Season Heats Up

The banks are next up on the list of heavily watched earnings reports. More than a dozen large and regional banks will be reporting over the next 6 trading days. Wells Fargo leads them off tomorrow followed by a big Tuesday for regional banks and followed up by Bank Of America, Citigroup and Morgan Stanley on Thursday. I also should note that JP Morgan reports on Wednesday as well. The recently announced settlement with JP Morgan and ten other top mortgage lenders is reported to impact the company by $700 million in the fourth quarter, another big hit for the company following the London Whale. Wells Fargo is expected to release earnings before the bell, around 8 AM, and follow up with a conference call at 10 AM. The consensus estimates are right around $0.88 per share, in line with the previous quarter. The stock traded in a very tight range today, just under resistance with bullish but divergent indicators. The late afternoon rally was led by financials and helped take WFC to a three month high.

Wells Fargo, daily

American Express released a surprise early earnings statement due to a restructuring. The bank was scheduled to release next week. AXP reported adjusted earnings of $1.09 per share versus an expected $1.06. The gains come on an increase of cardholder spending of 8%. The stock traded up by close to 1% today and jumped another 1% in after hours trading.

The Banking Index broke out to new highs with the start of this year and appears to consolidating above the $52.50 level. At this point MACD and Stochastic are both diverging from price movement and indicating the need for caution. I will be looking into the Wells Fargo report for any signs of strengths and weaknesses going into the first quarter as well as for signs of support around $52.50 in the Bank Index. Any first quarter guidance, projections for business growth/prospects or hints of potential impacts from the Fiscal Cliff could set the tone of trading for tomorrow and going into the weekend.

Banking Index, daily

Story Stocks

Ford made headlines today with the announcement of a dividend hike. The auto maker doubled it's quarterly dividend to a dime from a nickel, raising the annual yield to $0.40 or about 2.8% at today's prices. Ford stock has been trending up since hitting the bottom of its range earlier this year. The move recently hit a peak and pulled back mildly but today's announcement has caused the stock to gap up and hit a new 18 month high. If the market follows through on this move there is a longer term up side target at $15 with nearer term target at $14.

Ford, daily

Nokia shares jumped in early trading on an early report of 4th quarter performance. The company said that sales exceeded their expectations, driven by their new Lumina smart phone. Shares of the stock jumped more than 18%, making a new high since gapping down last April. The news is good for Nokia, who has been struggling and still sees the 2013 outlook as “challenging”. However, it is not a silver bullet for the company; the stock still faces significant technical resistance at $4.50 and higher. The window opened with the gap mentioned before, between $5 and $4.50, accounts for roughly 10% of the pre-gap value of the business.

Nokia, daily

The Indexes

The S&P made a strong open following the release of Chinese and domestic economic data. The markets are also being buoyed by earnings hopes but the fear it may not be as good as hoped has capped trading at the five year highs in the early morning hours. On an intra-day basis the markets did make a new high shortly after the open but the optimism faded throughout the morning. The index traded in a tight range before falling back down through 1465 precisely at 10:30 AM.

S&P 500, 30 minutes

Looking at the charts of 30 minute closing we can see that after the market opening and pullback to the 30 bar ema and 1460 it found enough support to get it back up and over 1465. This held until the afternoon trading began around 2:30 which pushed the index up to new 5 year highs. Whether or not this level will hold is in question. The key will be how the earnings season plays out. If the markets are satisfied with the state of business and earnings prospects the S&P should continue to move higher.

I still have faith in my previous predictions for a season filled with EPS surprises and the late day rally makes me think the markets agree with me. However, one caveat that comes with the market making this new high is that it is driven on expectations and not reality: the reality comes tomorrow with Wells Fargo and later after we get quite a few more earnings reports to prove it.

The MACD and Stochastic on the daily charts are bullish and pointing up but would be divergent at this level if they peaked; the index is moving up but not with the conviction of a strongly trending one. This is not a worry yet as they are lagging indicators and not yet rolled over or even rolling over to the bear side. At this time, unless we get a truly surprising statement from Wells Fargo, the index is moving up. A confirmed break above the current level brings a near term projection of 66 points and could take the S&P 500 index as high as 1530.

S&P 500, daily

The Russell 2K broke out to new high last week and has carried through into this week. However, the candles are not overly bullish at the new highs and may be indicating a pullback.

Russell 2K, daily

The Dow has yet to reach its 5 year high. The blue chip index is still about 0.14% away and could easily reach and surpass the high in a single day. Perhaps the big banks will help to drive this index higher. Indicators on this chart are very similar to the S&P daily chart, they are bullish but diverging from price.

Dow, daily

Tomorrow the economic calendar is light, consisting solely of trade balance and import/export figures. The earnings calendar, save for Wells and one other, is relatively calm. The big storm starts next week and is dominated by the banking sector. Wells Fargo has been a bright spot amongst the big banks and is in the best position to perform well, in my opinion. I am looking for the Wells Fargo report to be a net positive.

Until then, be vigilant and remember the trend!

Thomas Hughes