Earnings and data are the words of the day. Earnings from companies like Wal Mart and Cisco spooked investors while mixed economic data renewed taper fears. Both Wal Mart and Cisco were able to meet Wall Street expectations on EPS but both also provided weak guidance. Wal Mart's revenue for the quarter fell short and led to a reduction in full year guidance. Cisco also warned that the 3rd quarter may not be as good as previously stated. The tech giant also announced that it is cutting 4,000 jobs in a restructuring effort. There were about 3 dozen reports in all today with quite a few retailers in the mix. The trend; some are doing well, others are not. For every negative report there was a positive match.
Economic data was another big driver of today's market. There were 8 major bundles of data starting with jobless claims and ending with Homebuilder sentiment. The data was mixed at best. Some reports were better than expected, other worse. No clear direction for the economy was revealed. What was revealed is that short term traders are still caught up in taper fear. The futures trade was deeply impacted by today's turn of events. The S&P 500 futures were trading around -15 throughout the morning and going into the open. Once the bell sounded prices opened (S&P 500) at the 30 day moving average and moved lower from there. By 10AM the S&P was -20 and by 11AM had dipped down to -25ish.
During the day the index, along with the other major indexes, flirted with support. The S&P ranged from about -26 to -18 until late in the day when lack of buying resulted in the index closing near the days lows. Today's move lower broke two support lines, including the short term 30 day moving average. Renewed taper fears may be the blame or just an excuse.
The first piece of the economic jigsaw puzzle released today was the Consumer Price Index. The index came in as expected at 0.2%. Core CPI was also the expected 0.2%. This is a much slower rate than last month's 0.5% gain. For the moment consumer level inflation is stable and should not influence FOMC decisions. Jobless claims were released simultaneously to the CPI data and was much lower than expected. The consensus was for a gain in claims but the actual figure was -15,000 from last weeks mild upward revision. Initial claims for the week ending August 10 were 320,000, an 8 year low. The four week moving average also dropped, shedding 4,000 to reach 336,000. Initial claims seem to be falling off but are still pretty close to the 350,000. I have been expecting to see a drop in claims for two reasons; first, if the economy is improving and jobs are improving then initial claims should fall. Second, the auto industry has suspended all or most of it's collective seasonal lay-offs in order to build inventory. One or both of these reasons could be affecting data today. If this number remains at this low level it could indicate a lower unemployment rate for August.
Continuing claims fell back below 3 million to 2.96 million. This is a drop of -54,000 from last weeks slight upward revision. This figure may be on the brink of falling off as well. It has been drifting lower over the last 12 months and is near the 5 year low. The total number of claims for unemployment rose by just over 65,000 to 4.586 million. This is just off the 5 year low. Only 4 states had a gain or drop in claims of over 1,000 which I am taking as a sign of stability in jobs at the current time. There may be some shifting over the next few weeks as the summer comes to an end .
Moving on to other data points Long Term TIC Flows decreased by -$66.9 billion. TIC Flows, which measures the flow of foreign investment in U.S. securities, was expected to rise by nearly $30 billion. This is of concern but may also have a silver lining. Money's diverted from U.S. securities could be invested in other global markets. Global investment is good.
Industrial production remained unchanged in July. This is well below expectations. The analysts had been expecting production to expand by 1%. At the same time Capacity Utilization fell too. Capacity Utilization fell by 0.1% to 77.6% and 0.3% below expectations. The Philadelphia Federal Survey was also a big disappointment for the markets. This number was reported at 9.3, analysts expected 10. Both the actual and the expected are way below the previous reading of 18.
Two reports bucked the negative trend to this months economic reports. The Empire Manufacturing reading came in above the expected 5 at 8.6. This reading shows that while manufacturing contracted in one area of the country it expanded in another. The other report that was better than expected was the Homebuilder Sentiment which rose for the fourth straight month. Sentiment reached an 8 year high, rising 3 points to 59. This is an expansionary number and in line with expected gains in the housing sector. Together, today's economic reports served to muddle the water a little. Tapering is expected by many to come in September, some of the data supports that but some does not. So far, the â€œthresh holdâ€ for tapering has not been met but there is still an entire months worth of data to come out before the FOMC meets again.
The Ten Year Treasury
I don't often remark on the ten year but today is one to mark. The ten year treasury, sparked by taper fears I presume, spiked above 2.800 in intra-day trading. Bonds have been selling off with yields rising since May. Today's spike comes after a 6 week consolidation between 2.500 and 2.750 and breaks the yield above long term resistance. The thought that the Fed may begin to buy less bonds and provide less support for the market will lead to higher rates, at least in the short term. Today's candle suggests that there is some resistance to that idea. The doji may indicate a top or turning point for bond rates.
The Oil Index
The price of oil jumped today, rising above the $107 per barrel level. Violence in Egypt is escalating throughout the country and raising fear of supply disruption. Oil is now trading near the recent highs near $109 a barrel. The Oil Index fell in today's trade, counter to oil prices. The index has dropped from the short term moving average and is approaching long term support. The index appears to be in a trading range at this time with an upward bias. The index is also near to the longer term up trend line and approaching over sold levels. This long term up trend line has provided three long term bounces in the current 12 month period.
The Gold Index
Gold made another big gain today, putting on over $30. The price of gold broker above the $1350 level and may have snapped the longer term bear trend in the metal. However, moving forward the price of gold still faces heavy resistance. Economic data, the FOMC and tapering are going to be affecting dollar value which in turn will affect gold value. The Gold Index has also broken above resistance, pushing through the Fibonacci level I have been watching. At the same time stochastic is confirming the move with a turn up at the level I marked earlier in the week as a possible area of support. Next resistance is around $125 followed by the next Fibonacci level at $144.82.
The USD/JPY remains in the middle of its tightening range. The pair are caught between the power of Abe's economic plans and taper speculation. Recent GDP figures from Japan suggest that the economic reform is not taking hold as quickly as planned, leading to speculation more is needed before the next phase is implemented. There is a tax hike scheduled for the near future that is planned to raise more money for more public works type spending. There is fear that the economy of Japan is not yet strong enough to implement the hike. The pair initially spiked up in today's session,crossing above the short term moving average. The move up was met by sellers who pushed the pair back down below Fibonacci support. At this time the indicators are weak but show long term support for higher prices.
Apple got another word of encouragement today. Investor George Soros announced that he had doubled his stake in the iPhone maker. This comes just days after Carl Icahn tweeted something to the same effect. Adding to bullish sentiment in the company and stock is the planned release of the next iPhone next month. Today Apple traded in a tight range just under the $500 level. Indicators on the daily charts are bullish, pointing to higher prices. A break above $500 could take the stock as high as $550 in the nearer term.
Three sectors that hit my radar this morning were the retailers, computer technology and the financials. The retailers were big today because of the number of them reporting earnings. Many of them failed to meet expectations but just as many were able to match them. The weakness seemed to be centered on teen retail and discount goods while strength was seen in some of the higher end names like Estee Lauder. Perrigo, maker of generic consumer products beat earnings as well on a very narrow revenue miss. The retail sector as a whole traded to the downside today. The XRT moved below the 30 day moving average and came to rest on a recent support level. The trend is still up but indicators are bearish at this time. A break below the current level could be a buying opportunity but also puts the ETF at risk of reversing.
The computer technology sector was also in focus due to earnings. Cisco's earnings report yesterday was not one to inspire confidence and along with the announced cutting of 4,000 jobs helped to send the stock lower today. Another big name in the tech sector, Micron, announced 1,500 lay-offs as well. Cisco went on to say that the â€œinconsistent business environmentâ€ could negatively impact the 3rd quarter. As with the retailers, not all was bad news in this sector either. Chip maker Lenovo posted strong gains in the quarter. The Technology Sector Spyder XLK retreated from resistance today to fall beneath the short term moving average. The ETF is now between the resistance of recent high levels and previous long term high levels with bearish indicators. Previous strength in the sector may have reached a turning point but the jury is still out on that. After the bell Dell reported earnings that beat estimates by a penny. Unlike most other companies reporting earnings the last couple of quarter Dell actually beat on the revenue line as well.
The Financials came to my attention today because of the Berkshire Hathaway filings released today. The SEC documents show that Berkshire has reduced its holdings in many of the big name banks like Wells Fargo and Bank Of America. The BKX Banking Index retreated below the 30 day moving average and a near term support level. At the current time the BKX is in breaking below a potential bearish Head&Shoulder, the $64.50 level needs to be watched for confirmation. Longer term the index is still bullish though momentum is in decline. MACD and stochastic are both consistent with higher prices so if the BKX is reversing on the daily charts it may only be short term in nature. Next support is around $62.50.
The S&P 500
The S&P fell by over 25 on an intra-day basis today. This move pierced three of my shorter term support levels, leaving only the long term trend line. Fear of tapering, economic data and earnings are driving the near term trade lower. This morning the index broke 1670 within the first minutes of active trading, it was -20 by 10AM. The longer term outlook of increased growth in the second half may coincide with my current long term trend line, it may not. An increasing bearish peak in MACD and down trending stochastic indicate lower prices in the nearer term. Looking farther out both indicators still show support at the current level for the index in the short to mid term.
Drilling down to the charts of 60 minute bars we can see that the index fell below support early in the day. It then retested for resistance and fell back from the 1667. Bearish momentum in very strong in the near term trade but it is also extremely oversold. There could be some more downside in the near to short term but the long term trend line around 1650 should provide some support if not an actual bounce.
It is possible the index is making a corrective dip that will coincide with the FOMC meeting in September. Taper fears are driving the near term trade lower but long term trends suggest that higher prices are on the way. Today's data did little to determine just what is going to happen in September and maybe even clouded the waters a little. At this time the threshold needed, according to Bernanke himself, has not been reached. What we also must consider is the Debt Ceiling. That debate will heat up in September as well and could impact the longer term outlook. What we need to consider is if tapering will not start in September. No one on the FOMC has indicated that tapering is definitely happening in September, in fact, the door is still open for additional asset purchases should the economy need it. What the Fed will or will not do is still four weeks away. For now we must sit back and let the data roll in so we can continue to adjust our trading stance.
Until then, remember the trend!