The FOMC minutes and dovish comments from Ben Bernanke set the stage for a massive world rally. Asian markets shrugged off recent economic weakness from China in the hopes that loose monetary policy here in the states would continue. Likewise, simmering issues in the EU were also ignored in favor of Ben's comments on continuing accommodative fiscal policy. Asia markets gained by nearly 2% while European indexes climbed by a smaller margin. U.S. futures trading was up sharply ahead of economic data at 8:30AM and held their ground into the open. Our own markets followed suit, climbing more than 1% in early morning trading.
What did Ben really say? As I sit here thinking about it I am a little confused. Yesterday's comments, delivered after the markets closed, stated that the Fed was not in a hurry to end QE. The dovish stance helped to relieve some of the taper angst but is also counter to other statements delivered just a week or to ago. During the FOMC rate decision and press conference Bernanke was a little hawkish. He clearly said that tapering would begin soon, as early as the end of the year in his opinion. He also clearly said that low interest rates would continue on into the foreseeable future even after bond purchasing ended and that accommodative policy would be needed for some time. He also said that economic indicators would be a thresh hold, not a signal.
I think what Ben is trying to tell us is that â€œhighly accommodating fiscal policyâ€ does not neccesarily mean that asset/bond purchases won't soon come to an end. Low interests rates, a highly accommodative fiscal policy, is indicated by the Fed to be on the table well into next year. We need to be on the lookout for tapering to begin this fall sometime. Data will be key as the Fed will be looking to the same numbers for more â€œreassuranceâ€ that the recovery is taking hold. Where does that leave us now? Pretty much in the same place we were in yesterday, waiting for a clear sign. Until then we will be at the mercy of weekly and monthly data points, earnings and guidance.
Today's release of unemployment claims was a little worse than expected but nothing to get the markets in a twist. Although a tad high, the initial claims is still at the lower end of the 12 month range. Claims were reported this week as jumping 16,000 from a mild revision to last weeks numbers. This puts the number of first time claims at 360,000. The four week moving average also gained, adding over 6,000 to reach 351,750. This is above the closely watched 350,000 level but may just be one-off spike. Longer term the initial claims is holding steady at least. I am halfway expecting to see a sharp drop in this figure sometime soon. Expanding housing and the planned suspension of the auto-industry summer break (GM, Ford and Chrysler are all suspending July/August seasonal lay-offs in order to boost inventories) are leading me to this idea. If the recovery is picking up and if jobs are picking up I think a drop in initial claims is a reasonable expectation.
Continuing claims also gained this week, climbing by 24,000 hit 2.977 million. This is a small increase and still under the 3 million mark. Total claims fell from last weeks mild gains. This number is at long term lows and could easily decline further. Looking back at last year we can see that a June/July bounce preceded a multi-month slide.
Other economic data today included import/export prices. Both fell by smaller margins than in the previous month. Import prices declined -0.2% in June versus a -0.7% decline in May. Export prices fell be a slightly smaller -0.1% versus a -0.5% decline in the prior month. Tomorrow's data includes PPI/core PPI and Michigan Sentiment. Next week is a big one for housing with starts, permits and mortgage index readings. There is also retail sales, CPI, tic flows, Philly Fed and the Leading Indicators.
Bank Of Japan Holds Rates Steady
The dovish comments from Bernanke helped the yen to find strength after the BOJ announced no change to interest rates. After an initially volatile trade the yen firmed up and moved lower versus the dollar. This may just be a short term move, the Abe/Kuroda plan is very long term and there is no indication of an end to their QE programs yet. An end to U.S. QE is firmly on the table even if when tapering will start is still questionable. The USD/JPY fell more than one handle in overnight trading before finding some intra-support around the 98 level and the 23.6% retracement level. This will be a key area to watch over the next couple of days. A break below here now could take the pair down to 95 very quickly.
Euro Rebounds On Dovish Bernanke Comments
The Bernanke comments also helped the euro to strengthen versus the dollar. This pair jumped close to 2% intra-day before falling back under heavy selling pressure. The comments, I think, were taken as a sign that fundamentals were changing but in fact they did not. Today's jump in euro value took the pair up to the higher end of the recent range I have been watching, the sharp pullback and resulting pin bar appears to confirm the range. Unless the FOMC or the ECB makes an actual change to policy, interest rate, bond purchases or some other factor under their control this pair will likely remain in that range. Longer term analysis is also supportive of range bound trading for this pair. At this time it looks like strong resistance exists at the 1.3200 level and support at 1.2750.
Gold Jumps On Weaker Dollar
The price of gold jumped again, on dollar weakness sparked by Bernanke's comments. The gains are impressive but have failed so far to penetrate $1300. This level is emerging as a likely area of longer term resistance in gold prices. Regardless, I do not view it as a good time to get bullish on gold at this time. There is too much chance for volatility over the next few weeks and months. Earnings, data, FOMC meetings, tapering, QE and the global recovery are all still in flux. Gold could easily be swayed by impressive economic indicators that point to tapering and retest the news lows around $1200. The Gold Index climbed today in response to gold's gain but is still below the new long term resistance of $100. The indicators have turned bullish but in the face of the prolonged down trend in this index this bullishness looks more like an early signal for bearish trades than an area for reversal. Longer term the bearish indicators are weakening but there is not really any sign of a bottom or support at this time. Plummeting gold prices are not going to be good for the gold miners, not to mention the rising cost of extracting gold from the ground. The next area of long term support exists around $75.
Oil Prices Hit By IEA Report
Oil prices fell by about $2 during today's trading, hurt by a new report from IEA. The report shows how the U.S. shale oil boom could add the most non-OPEC supply to the international market in years. Enough to eat into OPEC's market share. This is viewed by the IEA as â€œcause for concernâ€ for oil bulls. Even with the large drop in today's trading prices still held above $104. The Oil Index has used the recent jump in oil prices as an excuse to bounce from the long term trend line and break back above resistance. Today's action took the index to a new high that sold off during the day. Daily indicators are bullish at this time with resistance around 1,400 and support at 1,350. Other activity in this sector included a warning from Chevron and an increase in dividend from Conoco-Phillips. Chevron is warning of production weakness in some of its key areas. Chevron reports earnings August 2nd but the warning may be moot. Chevron produced over 97% of the total 2nd quarter production last year in just May and June this year.
Big Bank Earnings On Tap
Earnings season comes to a boil tomorrow with the release of Wells Fargo and JP Morgan. These two bell weathers of the financial sector are supposed to show improved results in capital management, deposits, fees and mortgage loan origination. This expectation may be summed up in the recent break out of the Banking Index. The index broke above long term resistance two weeks ago, well ahead of the general markets. Today, the sector was one of few trading to the downside, perhaps providing another good entry into the sector. Next will be full as well, the rest of the big banks report with at least one per day. Not only that there will also be several dozen reports from the smaller regional banks who are also expected to show big improvements (I also want to remind everyone that the regional banks are a great place to look for dividends as well).
Wells Fargo is expected to report about $0.93 per share versus the $0.92 last quarter. Wells Fargo is the nations largest mortgage loan originator and will also be looked to as a sign of the housing recovery. Shares of WFC sold off today in tandem with the sector. The downward move looks like backing and filling, it closed off a gap opened at the beginning of the week. Indicators are bullish with plenty of room to move up.
JP Morgan is expected to report earnings of $1.44 versus the $1.59 from last quarter. JP Morgan is more of an investment bank and is expected to show improvements in capital markets, trading volumes and trading revenues. The report will also be carefully scrutinized for any signs of trouble related to Jamie Dimon's dual role of CEO and Chairman. The stock has had some trouble over the last few months due to the negative press but has managed to sustain a strong up-trend. Future out look and guidance will also carry a lot of weight here and with the rest of the sector.
Commerce Bancshares reported earnings of $0.72 per share today versus $0.76 last year and $0.67 last quarter. Analysts had been expecting $0.72. Net income is down from last year but up from the previous quarter. The gains come on improved loan activity, interest income and fees. The bank is expecting these trends to continue into the foreseeable future. Loan growth demand is increasing in the commercial and residential markets at a 10% annualized rate. The stock popped on the announcement but fell back with the rest of the sector later in the day. At this time CBSH stock pays a dividend around 2% of current share prices.
The indexes have reached new all-time highs to one extent or another. The SPX has reached a new all-time closing high but not a new all-time trading high. That level could be reached tomorrow with only a 12 point rally. Today's move has brought the SPX back above the longer term trend line, the trend line broken only 3 weeks ago on taper fears. Bernanke's comments, which are seeming to be more of the same old thing the more I think about it, may have spurred this rally but I think maybe the market was moving higher on earnings hopes. We already knew what I think Mr. Bernanke was trying to say last night. Tapering is coming but low interest rates are staying.
The SPX looks bullish on the daily charts. Stochastic and MACD are both moving higher. Stochastic is overbought in the near term but has plenty of room to move up into the short to mid terms. MACD is strong and making an extreme peak for the last 12 months. This chart looks good to keep moving higher, provided that earnings are not disappointing and that upper resistance does not repel the advancing bulls. There could be some volatility associated with the converging up trend line and impending resistance line. A firm break above resistance could lead to significantly more upside in this index.
The Dow Jones Average is also nearing resistance. It will take a much smaller percentage move for this index to cross the line into uncharted territory. The Dow is also bullish of indicator, making an extreme MACD peak for the 12 month period.
The Transports are also trading up to resistance of all-time intra-day highs. This index is not quite as close as the other two but is making what appears to be a strong bounce from the short term moving average with strongly bullish technicals. The index looks strong but still faces a significant resistance barrier. Caution is needed, especially for longer term positions.
The NASDAQ has reached a new high. Discounting the tech bubble the NASDAQ would be above the comparable resistance level identified in the prior three indexes. This index is also strongly bullish, though not to the extreme level seen previously. The rotation into tech earlier this spring has proven to be a good move, at least for now. This index is extremely elevated and in need of some correction or consolidation.
The RUT has already broached new uncharted territory, setting another new high today. The broad small cap market has traded to the upside 12 of the last 13 days and indicated strongly bullish. MACD is making an extreme peak
The markets are moving. Up is the direction, how far is the question. The techs and small caps have already entered into uncharted territories, the broader SPX, the blue chip Dow and the transports look ready to follow suit. However, there is resistance ahead. The SPX and Dow are very close, but not quite, breaking through their respective resistance levels. At this time the risk is in big bank earnings. If these reports don't come through with the goods then earnings season may be a bust. The longer term analysis of the SPX is not as bullish as the shorter term daily charts. The weekly charts may be winding up into a continuation of the range set between the previous and current all-time highs. Earnings tomorrow may tell the tale. A break above resistance for the SPX and the Dow could result in another leg up for the general markets.
The big thing to watch for tomorrow is earnings from Wells Fargo and and JPMorgan. Both companies are expected to report before the bell. JP Morgan's Jamie Dimon will be on CNBC early talking to Cramer so that might be interesting to watch.
Until then, remember the trend!