The broad markets have broken the Tuesday streak and had their first run of three down days in three months. The S&P is also down over 4% from its recent all-time high. With the index sitting just above the long term trend line and showing the early signs a technical buy it is possible the long awaited correction has just come and gone. If so, it was a mild one and leaves the indexes in a position for some more upside. Based on past performance a bounce of this nature, if successful, will take the index higher over the next 6-8 weeks. However, there is significant risk that the index will not hold the trend. Next week is full of economic events and could easily see the end of any more upside.
Yet another uber-important FOMC meeting is upon us. The committee meets next week and releases their decision on interest rates Wednesday. There is little to no expectation of a change in policy, it will be the statements that make event. Tapering is on the table, the markets fear it is coming soon or just it's coming. The statements should reveal some indication of where the Fed stands on the subject and when we can expect it to come. Bernanke has been very clear that he and the Fed would be very transparent about the whole process so I think it unlikely at this time there will be any kind of big negative surprise. Many analyst think that the September meeting is the soonest we could see tapering and I tend to agree with that. It may even be as late as next year.
Even if the index does hold trend now and makes a bounce there is also resistance ahead and the possibility of a top forming. The tapering/no-tapering argument is a double-edged sword. The economic signs that will keep tapering at bay are the ones that could derail a recovery driven market rally. The new all-time high near 1675 is now a resistance level in need of watching. As of today I have erased all my previous analysis and redrawn all my support/resistances and trend lines. I think everything happening before the break above the previous all-time highs around 1570 is of less consequence then what is happening now. This makes 1570-1575 long term support. Near term support on a break below the trend line is 1600, this level is also a potential neck line for reversal patterns.
Today's action shows there is support at the trend line. This is the second bounce from this trend line and is confirmed by technical indicators. The daily charts above show trend line support matched by MACD and stochastic signals. The MACD shows that bearish near-term momentum is weakening as the index brushes up against the trend line. The stochastic has already displayed the early trend following buy signal as labeled, now it looks very likely that the second and stronger signal is on the way. If the index breaks below the trend line this signal may take another week or more to come...if at all. There is a lot going on next week that could derail any further rally.
Futures trading was negative this morning, influenced by yesterday's drop and the follow up fall in the Nikkei. Trading was fairly steady going into today's release of economic data at which time there was an obvious up-tick in sentiment. Trading turned positive shortly before the open, then hovered around break even for the first few minutes. The second round of today's data came out at 10AM, sharping the bullish edge to today's trading and sending the markets up for the rest of the day.
Thursday's usual round of unemployment claims was accompanied by retail sales, import/export prices, business inventories and a downgrade of global GDP expectations by the World Bank. First the jobless claims. Initial claims for unemployment fell by an unexpectedly large number and came close to reaching the five year low. Claims fell by 12,000 from an unrevised previous figure for a total of 334,000 new claims for unemployment insurance. This is the third week of declines since hitting the recent peak above 350,000. The moving average is also now below 350,000 again. Initial claims are not falling as much as needed for a real strong recovery but they are coming down. Coupled with lower lay-off's, semi-strong jobs creation numbers and a higher participation rate I am seeing evidence of an improvement in labor markets. Now it's time to look for sustainability.
Continuing claims and total claims move in opposite directions from each other but both made negligible moves. Continuing claims rose by 2,000 to reach 2.97 million. This is on top of a 20K upward revision to the previous weeks data. Continuing claims are still below the 3 million mark and still near the long term lows and still trending lower if gradually. Total claims fell by close to 130,000 to reach 4.515 million and a new long term low. Based on these two charts it does look like employment is improving. Claims are down over the long term but again it is time now to look for sustainability in these numbers.
Import/export prices were released simultaneously to the claims data. This data was mixed, import and export prices both fell. On the one hand this shows that prices and inflation are tame, providing relief to the consumer, but on the other it also shows that global demand is down. Import prices, ex oil, fell by -0.3% and export prices fell by -0.7% ex autos. Both numbers are slightly larger than the more modest declines expected by the economists. Balancing out these numbers was retail sales, which increased by 0.6% and well ahead of the expectations. The final element of the daily economic round-up is business inventories which rose by the expected 0.3%.
Next week the economic calendar is full again. Not only is there an FOMC meeting but the next wave of real estate data will crash onto the market. Early in the week the data deluge begins with long term tic flows and Empire manufacturing. Later in the week we'll get housing index, mortgage index, housing starts, new home permits and existing sales. Mid week is the FOMC rate decision, Thursday will be jobless claims and the week will round out with the Philly Fed survey and Leading Indicators.
Yen Retreats To Original Target
The USD/JPY has made quite a drop over the last few days. Much more than I first expected. Now it is trading around the original target level Abe announced way back last fall, 95. The pair traded sharply lower early today, breaking that level, and then recovered some of the losses later on. Volatility is likely to persist in this pair but more evidence of a potential bottom is present. Today's candle is hammerish and helps to support the early indications I mentioned Tuesday. It is reasonable to target the 95 area as a potential jumping off point for another leg up to retest the highs over 100 but I am not so sure about the timing. I do not think the yen will move lower, or much more lower. If that happens and the BOJ or Abe do nothing about it then their credibility and the budding Japanese recovery is shot.
Gold Volatility Remains
Gold is still volatile. Today the metal made another $20 swing, this time down after retesting the previous support now turned resistance level of $1390. The gold chart is winding up and the volatility is spilling over into the gold stocks. The Gold Index has been winding up alongside the underlying metal for over two months. It is now sitting back on the bottom of the two month range and the 78.2% retracement of the 2009-2012 bull market with weak and weakening technicals. It is possible that buyers could step in at this level scooping up cheap gold stocks but I don't see any reason for this at this time. I think there is still the possibility of some more downside in gold which could help the index break below support and make a full retracement. Volatility in gold will likely persist into next weeks FOMC decision/statement. Watch $110.42-$111.15 for support.
The Gold Index
Oil Hurt By GDP Downgrade
Oil prices were initially trading to the downside after the World Bank downgraded world GDP estimates. Prices found support early and eventually regained positive territory before the end of today's session. Oil prices remain near the top of the four month range. The downgrade may impact oil demand outlook but I think that impact will be short lived. The Oil Index has been in retreat even while the price of oil has been up. The index is now sitting on support but indicators are dubious. The index may be in a range, may move up, may move down. However, if the general market moves up then I think oil stocks will move up as well.
The Oil Index
Early Earnings Pre-Season Head's Up
I didn't see too much of interest today in the story stock area so I thought I'd expound upon the early earnings outlook I started Tuesday. Next week is what I think of as the start of earnings season. It's the week when Oracle, Micron, Adobe and Redhat report earnings. The companies nor their sector of the technology world is earth shattering or market moving but they are an important part of over-all tech and earnings picture. Plus, it is the first look at what has happened since earnings estimates, guidance and outlook from the previous quarter were released. Tech may also be a little more important this time around since all the talk of sector rotation into cyclicals like techs and financials.
Adobe is sitting on support after correcting from a strong up trend. Adobe reports on Tuesday and is expected to earn $0.21 per share, a penny drop from the last quarter. Technicals are neitral at this time. Look for Adobe to meet or beat expectations but also look for next quarter guidance to be more important. Weak guidance, outlook or anything referring to poor business conditions could send the stock below $42.50 and lower. If the earnings report satisfies investors look for the stock to move up and confirm the early bounce at the end of May.
Micron has had a really nice run up. It seems they have over come the loss of their CEO last year. The stock has doubled since the first of the year but is now showing signs of correction. Divergent MACD and overbought stochastic suggest weakness and lower prices but that is nothing a little consolidation can't fix. Micron reports earnings on Tuesday and is expected to report $0.03 per share, reversing last quarters loss of nearly a quarter. Again look for Micron to either meet or beat expectations but also look to the forward-looking-statements for signs of strengthening demand or outlook. Resistance is at $13, first support at $12 with additional levels in the $10.75-$11.50 region.
The Technology Sector Spyder is showing a strong set up for a stochastic buy signal on the daily charts. This ETF includes both all four of the listed stocks reporting earnings next week. The signal is not quite there yet but next week could trigger the move. The ETF is sitting on support, support is supported by indicators and this coincides with my bullish analysis of the market. There is resistance ahead for technology though, just like the broader market. The $32.50-$32.50 area will need to be breached to maintain a longer term bullish outlook on the sector. A failure here will put the ETF in danger of reversal.
There is also a strong retail presence among the early earnings release's. Kroger, Pier 1, Carmax and Rite Aid make a broad cross-section of the retail sector. You've got food, housewares, autos and everyday necessities. The retail sector as portrayed by the XRK Retail Spyder has been in a consolidation band for the last month. The ETF is now sitting at the lower end of that band and just above the 30 day EMA. This level looks good for support and has the weight of the indicators behind it as well. This sector looks good to move higher and at least retest resistance around $80. A break above is bullish and could carry the ETF as high as $90.
The End Of The Day
At the end of the day my trend line bounce theory for the S&P looks pretty good. But it all hinges on the FOMC, the economic data and earnings. I could be completely wrong which is always possible. The trifecta will come to a full boil next week and could alter the course of the markets. However, at this time there is really no reason for the Fed to stop QE, unless they see some danger to the economy. The unemployment rate, though down, is far from the target level and so is inflation. Until either one of those change tapering is only a debate and not an action about to happen. Of course, the Fed could change it's mind about the health of the economy and the need for QE. This could result in a new plan altogether but if this is the case I also expect a really good heads-up from Bernanke and the crew.
There are signs of continuation in the market everywhere. Every chart I follow is on the verge of showing a strong signal. As of now only weak signals are present with the chance of heavy resistance also present. Next week is going to be a big one I think. The FOMC decision and statements will be the center of attention. Just how the market will react is a mystery but signs are pointing up for now. A break above 1675 is really needed for a long term bullish view.
Until then, remember the trend!