Recap And Commentary

After faltering early in the week U.S. indices recovered and rallied to new highs. European indices rallied steadily into the week as well. Relief over the U.S. debt ceiling, earnings and economic data helped to drive both sectors. Earnings in the EU were mixed, like here at home, but the general spin was positive. Adding to the vibe were reports from Ford and a few others that indicated the European sector was improving, if only a little. On the economic front PMI readings and UK GDP also helped to elevate stock prices. Flash PMI suggests that the EU is still expanding and on track for continued recovery, provided unseen hurdles do not emerge. The EU is still not in great shape but it is recovering and the second half rebound predicted by Mario Draghi appears to be in effect.

News from the Asian sector was similar. Earnings are OK but not a real sweet spot. On the economic front flash PMI readings and other data show the region to be on track for growth. China's PMI reading expanded unexpectedly to a seven month high, this is only the most recent positive reading from this country. In Japan inflation rose again and helped put to rest fears the country's recovery was not taking hold. This month's reading of +0.7% is lower than last months by a tenth but the fourth month of gains. Both countries economic expansion bodes well for global economic recovery over the longer terms.

We received a lot of economic data here at home as well this week. About evenly split between data held back by the shut down and regularly scheduled releases. For the most part the data is all from before the shut down and does not reflect any damage it may have caused. The NFP report on Tuesday may have been the most important release of the week. The data was weaker than the expected 180,000 jobs. The expectation for 180K new jobs was about as dated as the data itself. In the time between the beginning and ending of the two week shut down expectations for job growth had weakened significantly. The actual report of 148,000 jobs turned out to be good enough to support near term bullishness and resulted in a rally that carried into the end of the week. The unemployment claims numbers fell from the recent California induced spike but remained at elevated levels. Reports indicate that the back log of claims caused by California and Nevada's compueter issues is still trickling through the system. Taking that into consideration the longer term trends of declining unemployment still hold.

We can expect a lot of data next week as well. Most importantly the Fed meeting, policy announcement and statements. The taper will be the primary focus for the markets. If tapering gets pushed out to next spring as some are suggesting then the liquidity driven rally could continue moving higher. If tapering is indicated to be coming sooner than that then the markets could sell off. This weeks data, and likely the data the Fed will rely on, is going to be incomplete. It is unclear just how data collection has been affected by the shut down and the speculation is leading me to think it may not be until December before that affect passes. ADP and Challenger figures on employment should be OK as they are provided by private companies and not the government. Jobless claims should also be OK, this data is collected by the states. We won't get the next NFP report until the next week.

Gold prices remain volatile. The price of gold shot up close to $45 on an intraday basis with most of that gain happening Tuesday. When the NFP numbers came out weaker than expected it pushed the idea of tapering back several months, weakening the dollar and boosting the price of gold. Gold prices are now trading just under a long term resistance level and forming a rising wedge. The Gold Index, on the heels of higher gold prices, moved back into its pennant formation in a continuation of it's long term consolidation. Higher gold prices may lead to higher gold profits and higher prices for gold stocks. The caveat is that gold prices are heavily influenced by QE, the Fed and tapering. The Gold Index may remain trapped inside this range until after the Fed meeting or longer. At this time the index is indicated higher and will likely move up toward the top of the range.

Oil prices fell hard this week. Declining tensions with Iran, new discoveries and rising supply are combining to help pressure oil prices lower. This is good for the economy and the consumer but has different implications for oil stocks, especially shale gas producers. As the price of oil falls it squeezes tight margins and may cause some to shut down production or else go out of business. The $80 level for oil is one target for such an event. For oil companies not directly involved with production it will reduce operating costs and for those producing oil, gas and derivatives it could lead to increased sales volume. The Oil Index fell at the beginning of the week but then bounced back to regain most of the losses. On the long term charts of weekly prices the index is moving up from the long term trend line, above support with bullish indicators. The index recently broke out of a trading and looks as if it will continue higher to sideways over near to short term.

Earnings will be in focus again this week. There are another 500+ reports due out this week. There has been some concern over fourth quarter earnings growth but it appears to be limited to only a few companies. Despite the headlines trumpeting the high profile misses and disappointments more companies than not are meeting or beating estimates. A lot of this is also coming with lower than expected revenue, a trend we have seen for the last several quarters. Business continues to improve the balance sheets and operations getting ready for the consumer. If, when, the consumer does step back in there could be a quarter dominated by really great earnings reports.

The Charts

The S&P set a series of new all-time highs this week. At the same time breaking out of a rising wedge pattern with bearish implications. The pattern is coincident with a series of divergent indicators. In the time since this index broke above the 2008 all time high earlier this year and then retested that level for support momentum has been strong. The first wave after the bounce was very strong and set an extreme 12 month peak. The next was a little smaller, and the next and current wave a little smaller yet. The divergences are a cause for caution but not necessarily an indication that a decline will start this week. The current MACD peak is not yet over and could still produce another ripple or two before settling back down.

The stochastic is also a sign of warning but not of immediate correction. The indicator is overbought in the near and short term but both %K and %D are pointing up. For now buyers are still in control and could remain in control for the nearer terms. I added Bollinger bands to my usual analysis to get a look at how the index is moving in relation to that indicator. The B Bands show a market that is trending up near and short term with a little room to keep going. The index was pushing up against the upper band over the last couple of weeks but this week was able to get a little breathing room. For now, it appears as if the S&P is still trending up in the short to near term but I am cautious ahead of the FOMC and next round of data.

The Dow has finally begun to break out of the trading range it has been in the last 6 months. Momentum is bullish but not too strong when compared to the most recent peak, a 12 month extreme. This divergence calls the break out into question and could produce a whip saw. The last two tests of the upper range produced such an occurrence. Stochastic is similar to the SPX, overbought in the near and short terms but pointing bullish in both time frames. The SPX does not have any real resistance ahead of it, just the upper Bollinger Band at this time. The Dow is in much a different situation. The blue chip index broke it's long term trend during it's stay within the range and faces resistance from that line as well, about 125 points above the current value. This index is indicated higher on the daily charts but faces resistance which it could reach coincidentally with the Fed meeting this week.

The Nasdaq has been making new highs like hippie on pay day. Earnings report from major players like Microsoft, Amazon and Google may be the catalyst that sends the index even higher. However, there are some signs of weakness in the near to short term that are a little more ominous than either the S&P or the Dow. The tech heavy index is also diverging from it's indicators on the daily chart. The current MACD peak is bigger than the previous but not very strong and much smaller than the first peak in the series since the beginning of this year. The MACD is not too concerning by itself but the stochastic, candle and Bollinger Bands are pointing to near term weakness. Stochastic is overbought but has made a short term bearish crossover while in the upper range. This does not mean the index is reversing long term but it does mean that the Dark Cloud Cover candlestick that formed during Friday's rally could lead to more selling this week. The current levels of the Nasdaq are pretty high and could be attracting folks to begin taking profits.

The Russell 2K looks has some characteristics of all three of the previous indices. This index is making new highs while at the same time Friday's rally produced a bearish candle formation. The index is well above the long term trend and diverging from MACD. Stochastic is overbought in the short term but a near term bearish crossover could carry into the first part of next week. The B Bands also indicate a rising market with some room to move up to the upper limit or down to the mid line. The index is still trending up but a real possibility of it returning to the long term trend line is growing. The FOMC and/or the data could be a trigger for this move.

The Dow Transports are the best looking of the bunch and could be pointing to higher index prices across the board at some time in the future. This index is trending up, breaking out to new highs in a nearly vertical movement and converging with indicators. The current rally is a bounce of the long term trend line and the top of a 6 month trading range very similar to the one the Dow Industrials is trying to break out of. The current MACD peak is higher than the previous and also a 12 month extreme. Stochastic is in overbought territory with both % lines pointing up. MACD is peaking and Friday's candle shows the rally is slowing but I expect to see this index either remain near the current levels or to at least retest them after a short correction based on the current analysis.

Moving out to a longer term view(weekly data) and back to the S&P. This index is trending up and above the long term trend line. However, the longer term divergence from the indicators is more pronounced in this time frame. Momentum is currently bullish but very weak, with the index so far above trend and the daily analysis suggesting correction a correction looks likely here too. In this time frame the stochastic is also diverging. Looking back over the past few years the last time stochastic has performed in this manner, making news lows while the index makes new highs, it preceded a correction to the primary trend. That level is currently 300 points below the current value of the S&P. This correction is by no means a guarantee, just a possibility. It is possible that the divergences forming over the long term are the result of taper fear, debt ceiling garbage, government shut down and general fear of global slowing. It is also possible that the FOMC and/or the data could alleviate that fear. If that were the case the current low level of the stochastic indicates that there is plenty of room for the index to move up. Once again the FOMC seems to guarding the gates and blocking the path for a bull run. The long term trend is still up, the primary trend is still up but the short and near terms are providing plenty of reason for caution.

The Dow looks a little different in the longer term. This index is in what looks like a consolidation pattern. The index, during the last 6 months of sideways movement, has been able to alleviate long term overbought conditions and move the stochastic down into the middle part of the range. The bearish momentum that has kept the index inside the range is diminishing, nearing to zero, and could provide a burst of bullish activity if it does manage to crossover. The stochastic may be indicating a growing amount of support for the blue chips. The longer term %D is flattening, not really bullish, but the short term %K has traced out a pattern suggesting that buyers are interested in the stock. Maybe enough to break it out the upside. If the Transports can be relied upon to indicate future movement in the industrials the Dow break out I suggested above could be a reality. However, once again the FOMC is standing in the way for now.

The Nasdaq is indicated higher in the longer term but may have reached a temporary stalling point. The MACD is bullish and rising, but also kind of weak and divergent. Stochastic is pointing up in the short and long term but the index has also been brushing up against the upper B Band. At this point in the commentary, after reviewing the indexes, I have had the idea...and dare I say it, that there could be a small sector rotation from techs to blue chips? We know that the techs have been hot, it also looks like the Nasdaq Composite is ready for week or two to cool off. At the same time the Dow Industrials appear to be breaking out of a 6 month trading range, led by the Transports. Only time will tell but I will be keeping up with this new theory over the next few weeks.

The Russell 2K has some mixed indications over the longer term. The index is trending up but way way above the long term and primary trend lines, like all the indicators. MACD is bullish and rising, yet highly divergent over the past 9 months since the 2013 rally kicked off. Stochastic is pointing up, yet overbought in the short and longer term, and divergent. The index is also brushing up against the upper B Band and could easily make a near to short term correction, if not longer. I think it will come down to the Fed, the data and the impact of the shut down on small business.

The Transport Average is yet again the index that looks the best. This index is bullish in the long term and indicated up as in the shorter term. MACD is bullish and rising, and since this is the first peak after a break out comparing it for divergences at this time are not effective. Stochastic is pointing up in both the %K and %D, with plenty of room for longer term buying to drive it up. The %D is in the middle portion of the range with a series of troughs in both lines suggesting support. At the same time the index is breaking above the upper B Band, an indication of strong buying sentiment and the possibility it could run higher for the next couple of weeks.

Next Week

Next week could be a volatile one. The index look poised to make a move, lower in most cases although that is not a guarantee. The Dow Transports are looking might bullish in the long and short term and could be indicating that the FOMC, tapering and the data are already baked into the cake. This week could be a good one for standing on the sidelines and evaluating positions. It may be a good time to tighten stops or to even take profits. The FOMC meeting is top on my list of market movers for the week so I will wait until after that to make any kind of long term decisions.

Besides the FOMC there is a lot economic data. ADP, Challenger and jobless claims next in importance after the Fed in my opinion. The regularly scheduled release of NFP won't come until a week later due to the after effects of government shut down. In any case, this round of data is suspect, also because of the shut down. It may or may not be completely accurate and the speculation on the street is that it may not be completely reliable until December.

Until then, remember the trend!

Thomas Hughes