The major indexes traded higher in today's session following an early boost in the futures market. The economic data released today helped to support other recent signs of strength and drove the rally to new highs. The employment picture continued to brighten and so far there is no sign of increased inflationary pressure. Further reports this morning showed that the current account deficit narrowed unexpectedly on exports and income earned abroad. Until the data or fundamentals change the rally is still on.

All the signs are pointing to an increase in jobs, an increase in housing and an increase in GDP. This should also be pointing to an end of QE which leads me to suspect we may here more about it next week at the FOMC meeting. Next week also brings the next round of housing figures ranging from the Housing Index through starts, permits, mortgage index and existing home sales. These will all be very important due to the heavy expectation on housing to rebound and help drive job and GDP growth. Tomorrow is also fairly important on the economic data front. CPI, Empire Manufacturing and Michigan Sentiment on only a few of the releases on the list.

European stocks were able to close in the green as well. This was due in part on our trade deficit numbers and a stronger dollar. The EU summit begins today, also driving hopes for a return to growth. Despite this hope there are some signs of worry emerging in this region that could derail the global recovery. Asian stocks ended their session mixed and did not really have much impact on today's trading. There is some growing speculation that China is in a dangerous credit bubble and fear of fiscal tightening. Chinese shares ended the day down. Japan however continued to rally. This market is drunk on yen, or at least the expectation of yen, being driven by the impending confirmation of their new central bank governor.

The Economic Data

Starting with what I think is the most important of the Thursday releases initial claims for unemployment fell for the third straight week. While still within the long term range this graph is starting to show some downward bias. Claims were revised up for last week by 2,000 making this weeks reading 332,000 a drop of 10,000. To put things in perspective the number last year was 363,000. Today is better but not significantly. A real improvement would be a drop below the current range sustained for several weeks at least. Taken with last weeks NFP and unemployment numbers this is still a good sign. If things keep going as they appear to be at this time we could see a more significant drop in initial claims. The four week average also fell, but from a much smaller revision. The average is now 346,750, a new five year low. Hiring continues to spotty in places but based on the report it looks like for the most part labor markets are stabilizing in most parts of the country. The largest decreases in claims came from MA and NC with decreased lay offs in transportation, construction and education. The biggest increases in claims came from CA (+11,000) and NY (+7,000).

Continuing claims also fell to a new five year low. This chart is definitely showing downward bias. This figure has trended down by over a half million claims over the last year alone. The dip in initial claims should affect continuing claims over the next week or two. If initial claims continues to decline I think we could see another significant drop in continuing claims. Total claims is still a little troubling. This number has been a little volatile over the last few months and spiked up today. Total claims jumped over 215,000 to total 5.619 million. This is still well above the 5 year lows we saw in the middle of last year but appears to be trending back down to those levels. I think any real improvement on the overall unemployment figures will be for total claims to break below the 5 year low. Near term hiring could help keep initial and continuing claims trending down which could help bring total claims to the 5 year low. The question is if hiring and economic momentum will be enough to really drive unemployment lower or if we hit another roadblock. At this time the employment sector seems likes its improving but there are still a whole lot of if's.

The Producer Price Index rose to a five month high but was within expectations. The core number was also in line with the expectations and the previous months figures. The headline number rose by 0.7%, driven mostly be the higher price of gas. Stripping this out the core number rose by only 0.2%, exactly in line with estimates and last months gain. The current account deficit dropped unexpectedly. Analysts had been expecting the figure to remain near unchanged but it fell by $2 billion to $110 billion. Exports of services and other income earned abroad helped with the drop. This could be sign of increased activity in overseas markets and a potential plus to the global recovery argument.

Europe And The Euro

European stocks closed the day in anticipation of the EU summit. The German DAX lead with a gain of more than 1%. Germany is also expected to lead the EU recovery and could show a sharp rebound in GDP as early as this quarter. Germany announced today that it was taking bold budget measures and would be able to reach balance as early as next year. This is a full year ahead of schedule and could cause unrest among other EU countries chafing under austerity. There has been some speculation that the ECB would cut it's target rate next month but it does not seem as if Germany is on board with that sentiment.

There are some hiccups in the EU recovery, the risks to the economy Mario Draghi spoke of last month. These extend beyond the recent Italian elections and could be the loose threads that unravel the house of cards that is the EU recovery. Italians are balking at another round of elections which could prolong the establishment of a stable new administration. This in itself is not a major problem but adding to that is the lingering weakness in supposedly stronger EU nations like France. Now, new disagreements in Greece are emerging and threaten the next round of funding for that country. One article I read this week suggested the Greek bail out and recovery was already off course. Again, Greece, France and Italy are not that important by themselves. What is important is the EU which is a major world economy. If it gets sick the rest of the world is in danger as well.

All of this helped to put pressure on the euro. The Eur/USD has been trending down over the last month as signs of U.S. strength have mounted. The pair made a new intra-day low beneath 1.3000 before bouncing back in the afternoon hours. Long term charts are still showing bearish indicators, the daily charts are bearish but extended with a chance of a pullback. The 1.3000 level will be significant for this pair and a break or bounce could last for several weeks.


Asia, Japan And The Yen

Asian markets were mixed. Data from China is pointing, or at least leading people to suggest it is pointing, to fiscal tightening. Fears of a credit/housing bubble and some early signs of inflation are what's prompting this speculation. The recent restrictions on housing put into place last week are another reason to cause this fear, despite statements from the government to the contrary. China could be another loose thread in the global economic fabric. Even if its economy is OK now weakness in Europe could impact it to the negative.

Japan kept on rallying, drunk on yen. The Nikkei gained over 1% on the expected confirmation of Kuroda to BOJ chief and what he is expected to do. Some words I can use to describe market expectations for this man are easing, aggressive and quick. These are words he himself used when talking about his stance on the Japanese economy and what he would do to help it. Once confirmed many of the easy fiscal policies put forth by Prime Minister Abe can move forward. Yen devaluation is only one of them, boosting the value of Japanese stocks is another. To some extent those two goals are intertwined.

The yen has traded in a fairly stable range versus the dollar since last week. The candles are all spinning tops, a sign of the market waiting for the expected announcement tomorrow. The magic eight ball says that all signs point to yes in term of Kuroda. Unless the confirmation does not go through I am looking for a strong move upward in the USD/JPY. Of course, there is the possibility of dollar bears waiting to sell into this rally but I think the conviction of the current government to devalue the yen carries a lot weight. A long term price projection puts an upside target on the yen at 110.


The Oil Index

Crude, natural gas and Brent crude all trade to the upside today despite a gloomy outlook for demand. New expectations for demand are not as high as before due to lowered outlook in the U.S. and China. So far U.S. economic data supports a stabilizing economy with a chance for a growth spurt and may boost demand. Europe and China may be the weak links in the chain of oil demand. Oil has traded up since last week but has been capped at $92.50 for several days. The oil index has moved up above the 1350 resistance since last week as well. Today the index started to move up from that level. Possible upside targets exist around 1375 and 1400. A break in oil prices to the upside of $92.50 would be a bullish sign for this trade.


The Gold Index

The strengthening economy is helping to boost the dollar and put pressure on gold. Spot prices rose in the last week but met resistance at $1600. More signs of stability can only put more pressure on the metal. The Gold Index appears to be finding some support around the $145 level and the 61.8% retracement. This bounce has broken the Jan-Feb downtrend and may signify a consolidation period. Long term indicators are bearish for this index, continued to U.S. and dollar strength could keep gold prices and this index down.


Earnings And Retail

There were earnings from about 90 companies today. No one in particular jumped out at me as particularly important as an indicator. The list was spread fairly evenly across the industries but one did pop out, retail. Not just clothing or goods but also some services and discretionary items as well. There were at least 8 reporting today including Aeropostale, Perry Ellis, Carmike, Kirklands, Krispy Kreme and Ulta. Again, among these reports there was nothing much that caught my eye. The usual modest expectations, the usual numbers meeting expectations and the usual cautions about uncertain times.

Looking at the charts of the S&P Retail Spyder (XRT) and S&P Consumer Discretionary Spyder (XLY) I can see a few different things. The XRT for one looks extended and maybe a little frothy. Today's action created a weak candle and a small gap, leaving the little guy exposed to reversal. There is also currently a divergence from MACD which could be hinting at some weakness.


The XLY daily chart doesn't look much better. The divergence is less and the market is not quite as extended. On the weekly chart the MACD is divergent over a long period of time and the market is overbought. Keep in my mind that the up trends in both ETF's is still intact. These both rely on the strength of the consumer. Improvements in labor should lead to improvements in spending which could help these two sectors move higher. However, if expectations aren't met it could signal a potential turn around in these market. All eyes are on the economy, jobs and what the FOMC will do and say next week.


The S&P 500

The S&P and other major indexes made new highs within minutes of opening today. Trading was subdued but kept the SPX up around 5-6 points throughout the day. The 1560 level proved to be today's line in the sand for the SPX, it traded most of the day in a tight range just under and above it. A late afternoon push put the SPX up by 8.68 points and within 2 points of the all time high closing price. It is likely tomorrow's trading could at least break through to the other side.

The weekly chart is bullish. The index is in an uptrend with MACD and stochastic both pointing up. Both %k and %d are pointing up on the stochastic, adding to that signal's significance. This chart is also showing the wall of resistance that exists at the all time high. The question is just how strong will that resistance be and how soon will it kick in. Until something major changes I am still bullish long term. I see the up trend declining but there is still no sign of a reversal on the charts.

SPX weekly

The daily charts are also still bullish but with divergent signals. The MACD and stochastic are both pointing on this chart as well. The all time high could bring a short term time of volatility as traders and investors adjust positions. A pause or pull back is not a given or even required by the market it just looks like one could come, or the market could keep on drifting up. I think next week's FOMC meeting will is a good target date to watch for longer term signals. In the near term the index has support at 1550 and 1525. I have my resistance line drawn at 1572.73, just shy of the all time intra-day high.

SPX daily

Current data shows growth and strength. Last weeks jobs and unemployment data was so good it was a little shocking. I thought there was a chance for a little surprise but the actual was almost too good to believe. If the data keeps on leading the way like that the S&P will probably break above the all time highs and trade above the secular range. The bad news is that there are signs of weakness emerging that could eventually put a cap on equities.

The EU is trying hard to rebuild its economy but is having a hard time. Any one of a half dozen countries in that region could be the bump that derails recovery efforts. China is another worry. Its always hard to know exactly whats going on over there but its been kinda quiet in that sector for a while. A few hints point to potential housing and credit bubbles, reports of hawkish moves increasing requirements for home purchases and statements from the government claiming no plans to change policy.

The second round of bank stress tests came out after the bell today. The results were mixed. Some banks passed and others must restructure their plans and resubmit. American Express is one bank that passed, shortly after the announcement they followed up with a dividend increase. There is also a bundle of data tomorrow. CPI, Empire Manufacturing, TIC Flows, Industrial Production, Capacity Utilization and Michigan Sentiment are all on the list. No one of these is likely to be a market mover but together are important insights into the state of the economy. Next week there are 7 separate housing related releases scattered through the week. The highlight of the week will be the FOMC meeting and rate decision, more importantly the statement since there is no expectation of a rate change.

Don't forget about quadruple witching tomorrow, it could add its own bit of volatility to the market.

Until then, remember the trend!

Thomas Hughes