Market stabilizes on weak data following FOMC minute driven sell-off.


The global markets swooned in the overnight sessions following the FOMC minute release and ensuing U.S. market reversal. Adding to the downward pressure was weaker than expected economic data from both China and the EU. Asian indices closed in the red, led by the Nikkei's more than 2% drop. European indices opened sharply lower but regained some of the lost ground going into the close of their trading day. Our day started in the red with the S&P future indicated lower by about -0.3%. This moderated somewhat following the 8:30AM release of unemployment and CPI data. Both data were in line with expectations, stable in terms of economic recovery and taper positive. After the release the futures trade crept upward until the major indices were near or just above break even right before the opening bell.

After the open trading was mild with the major indices hovering just above yesterday's closing prices. At 10AM Philly Fed and Leading Indicators data caused a brief sell off that took the S&P into the red for a few minutes before it and the other indices bounced back to set a new daily high. The Philly Fed was the big surprise but seemed to be shrugged off due to a history of volatility. Manufacturing in the north east fell to -6.3 versus the expected 6ish and January's 9.4. This is one data point that could have been seriously impacted by weather. The Leading indicators suggest that this month will see some expansion but that may also be affected by the weather.

After lunch the indices continued to rise. The S&P 500 traded as high as +11, reclaiming all of yesterday's losses and then some. Now the index is back within 10 points of the all time high. The Dow Industrials is lagging the broader S&P but appears to be gearing up for a test of resistance. The Nasdaq continues to lead the broad market and the blue chips with indicators that suggest a peak or consolidation may be at hand. Earnings season is almost over so market direction will be driven by economic data and speculation on what the Fed may do. Tomorrow we'll get a look at existing home sales but don't expect too much, consensus is around 4.75 million. Next week the first half of the calendar is dominated by housing data with employment claims mid week and the 2nd estimate for 4th quarter GDP due out on Friday.

The Economy

Consumer Price Index was the first to be released today. Consumer level inflation remains very tame. The current reading gained a tenth while the previous month was revised down a tenth to 0.2%. This is taper positive as inflation is one of the key areas the Fed is watching. So long as inflation remains low they will not have to act to curb it and can remain focused on economic growth.

Unemployment claims are also stable in this weeks data. Initial claims fell by 3,000 from last weeks unrevised number to hit 336,000. This is the second week the data has not been revised, I wonder what's going on? The 4 week moving average climbed a bit, +1,750, to reach 338,000. On a state by state basis claims seem fairly stable as well. There are 6 states reporting a decrease in claims greater than 1,000 for total of about 10,000. Seven states reported an increase in claims more than 1,000 for a total near 13,000. On an unrevised basis first time claims dropped more than 35,000 to 323,151. Discounting the California Computer Glitch in October and seasonal volatility in December/Jan claims have been very steady over the past 6-7 months. If other factors were to improve such as job creation, lay-offs then this figure could drop.

Continuing claims climbed by 37,000 to reach 2.981 million. This is up from last weeks downwardly revised 2.944 million which makes this weeks gain somewhat of a wash. Continuing claims have also been holding fairly steady for the last few months but are up off of the lows we saw last fall. Total claims also held steady from last week. The total number of Americans on unemployment rose by a meager 7,000 to 3.525 million. This is off the recent low but still well below the levels seen just two months ago. The expiration of unemployment benefit extensions is the reason for the drop and its affect on claims data may be stabilizing but I would like to see some more data first. If so it will take another increase in jobs creation to get this number to move lower I think.

Leading indicators, which is a really a current indicator, rose by the expected 0.3% from last months revised 0.0% increase. This suggests that activity in the current month was expected to grow by 0.3% last month. How the weather will impact is yet to be known but judging by January data I would expect to see some effect. Weather hurt the south, where I live, but has passed and things are back to normal so far as I know.

The Philly Fed was the biggest surprise on the economic front and was really not given much weight. The survey of north east manufacturing dropped to -6.3 versus the expected 6 and down sharply from last months 9.4. I suspect that weather had a lot to do with this decline but there may be other factors involved as well.

International data was weaker than expected and part of why Asian and European stocks were depressed. Chinese flash PMI fell again, to a seven month low, and below 50 for the second month. The preliminary reading fell to 48.3 from last months 49.5. In the EU things were a little better. PMI readings for Germany fell more than expected to 54.7 from last months56.5. Analysts had been expecting the numer to remain fairly steady, the drop could be a reflection of weaker data recently seen in China and here at home. Other areas of the EU are still weak, France, but improvements are being seen in previous trouble spots like Greece and Spain.

The Oil Index

The energy markets have been heating up. Oil and Nat Gas prices are both at long term high levels. Weather is to blame for nat gas prices, along with supply and production concerns, but Libya put the fire into oil. Growing unrest between militants and parliament are threatening production. Of course, the weather also shares some blame for the spike oil prices. The premium in prices spurred by the two catalysts has raised some speculation that current prices are unsustainable, particularly in nat gas. On the flipside a huge draw down in supplies helped to drive gas prices to a new high in afternoon trading. At the same time the weak Chinese and EU data has raised the possibility that the current 2014 demand forecasts recently upgraded by both the EIA and OPEC are too high, which could help stop any further advance in oil.

The Oil Index climbed in today's trading but may be at a near term peak. Prices are just beneath a resistance level coincident with the 2008 market reversal that could hold the index in check. This level has been tested twice before in the last four months. The indicators are currently bearish and on the rise but candlestick action, as well as the extended nature of the current bounce, make it look like resistance is still in effect. If oil prices stay high or move higher it could take the index with it. Resistance is in the range between 1480 and 1510. The index is currently sitting on potential support of the previously broken long term trend line with the short term moving average just below.

The Gold Index

Gold fell on profit taking and possible resistance. The data, though not as good as we would like, is in line with Fed out look and taper positive. If the fed keeps up with the taper and increases it I see that as dollar positive and gold negative. In the meantime economic data could have a big impact on day to day trading. The Gold Index moved higher today after falling from resistance yesterday. The recovery in gold prices has helped to lift the gold index which tracks gold prices pretty closely, or vice versa sometimes it's hard to tell. The index is currently about 25% off the lows set at the end of last year and facing resistance at the bottom of a previously broken pennant formation. The indicators are weakly bullish in the short and long term, showing that there is some support around the $90 level. Divergences in both stochastic and MACD suggest that the index is at resistance, at least in the neat to short term. Gold prices and the prospect of gold profits will be a major driver of this index and by extension also economic data.

The Dollar

The Dollar Index bounced off of support and the bottom of its trading range yesterday, today it continued to rise. The indicators are bearish but weak and consistent with the trading range at this time. The FOMC minutes and support of the taper is dollar positive and is helping it to gain strength against the euro and the yen to some degree. Economic data from the EU and the policy changes made by the BOJ earlier this week are also impacting this index and the individual currency pairs. The index could bob along the support line before gaining traction to move higher. Support is the bottom of the range at the $80 line with near term resistance just above at the 30 day EMA and beyond that at the top of the range in the $81-$81.25 range.

The EUR/USD held steady near yesterday's closing prices after a volatile morning. Weak data from China, weak data in the EU, FOMC minutes and OK data in the U.S. all played a roll in the swings. The pair appears to be testing support around the 1.3700 level, just above the short term moving average and a long term support/resistance line. The indicators are bullish on the daily charts but suggest some weakness in the near term. If support holds then the pair may move up to retest the 1.38250 level. Support exists at 1.3700, if that breaks next is 1.3500.

The USD/JPY also held steady today after making a small dip in the early part of the day. This is the fourth day the pair has traded just above the 102.50 level and the seventh day the pair has tested support near the 101.70 level. The indicators are bullish and stochastic is wiggling a buy signal that has yet to produce a move. I stand by my bullish opinion of this pair. Taper + Abenomics only equals stronger dollar and weaker yen in my mental math. Now that the BOJ has extended its loan facility and doubled the amount that banks can borrow the articles I read all suggest the only thing left for them to do is increase QE. If the Japanese data does not improve they could do it.

Story Stocks

The story stocks today are mostly earnings, although Facebook's acquisition of WhatsApp made quite a stir. FB bought the messaging firm for $19 billion dollars in a move that is on one hand good for buidling usefulness of Facebook but on the other a very large purchase that many of the analyst don't think was really worth it. Facebook shares extended their rally and closed at a new all time high today.

Tesla reported earnings last night and surprised on the top line, the bottom line and full year guidance/next year guidance. The company reported revenue only slightly ahead of estimates with earnings per share more than 50% ahead of expectations. The consensus was in the range of $0.21, actual is $0.33. On top of the robust number for last quarter the company expected to make and sell 35,000 Tesla Model S this year, ahead of consensus, and expects to have even better sales of its Model X due out next year. Shares jumped on the news in after hours trading yesterday and held those gains today for the most part. Today's trading formed a potentially bearish candle, depending on where price action takes the stock over the next few days. The indicators are bullish but displaying longer term divergences that suggest a correction is due.

Wal Mart beat on the bottom line by a penny but revenue and guidance fell short. The company warned that current quarter and full year earnings may fall short due to a “variety” of economic factors including bad weather. Wal Mart reported that it saw a decline in same store sales the first part of February due to inclement weather. Ecommerce and competitive discounting environment were listed as additional hurdles. The stock fell more than 1.5% today, approaching the bottom of the 12 month range in the pre-market session. Buyers stepped in and drove prices back up but the shares still closed at a loss to yesterday's close. Look for support around the $72.50 level, just below todays lows.

Hewlett Packard released after the bell but that didn't hold traders back. The stock was up nearly 1.5% today ahead of the announcement. The move confirmed support along the short term moving average but was capped at resistance along the $30 level near the two year high. The companies results beat expectations. Revenue beat, EPS was double the expected $0.02 and guidance for the current quarter is basically in line with the analysts. The stock moved above $30 after the release.

The Indices

The major indices rallied all day today. A bried dip in the morning on release of Philly Fed, a slight pause mid morning for lunch and then new daily highs in the afternoon. The SPX gained over 12 points to come within 8 points of the all-time high. The markets are well supported by the long term trend line, short and long term moving averages along with strong bullish indicators. Resistance is the current all time high which was set only 6 weeks ago. On the daily chartsit looks like the index may move sideways over the next few days but the long term trend is pushing it higher. In the long term a bullish stochastic crossover adds some weight to the near term analysis. The index is firmly within the trading range set during the Holiday season I was tracking before with near term support at the lower range, resistance the upper.

The Dow Industrials are in similar position but not yet above/within the comparable range as described for the SPX. This index is forming a consolidation move just under resistance and could be gearing up to test or break through. Momentum is bullish, stochastic is moving higher but not yet oversold, giving the index room to move up comfortably. If it does break through resistance it could move as high as 700 points in the near term. A failure could bring it back down to around 15,500.

The Nasdaq is above resistance and trading just shy of its 13.5 year high set just two days ago. This index has been leading the broad market and the blue chips since last year and is doing so now. The indicators are bullish and consistent with higher prices along with a consolidation in stock prices that could be a bullish flag. If confirmed this flag would have a target about 250 points above the current level. Based on these three charts it looks like the markets are more interested in growth and technology than the dividends and stability provided by the blue chips.

The markets may already be looking past the current dip in global economic output. Today the market rallied on what I would say at best was tepid data. Perhaps the Fed's defense of the taper and the state of the economy has helped reassure that we are in a dip, and not in a correction or reversal. As always economic data will drive day to day trading but so long as there are no negative surprises I think we can rely on the taper to continue and for the economy to slowly get better. Tomorrow existing home sales data is likely to be less than the consensus which is only slightly below the previous months reported numbers. The way other data has been coming in weaker than expected and with the weather effect hanging over all the data in general as expected would be pretty good in my book. After that next week is full of housing data, unemployment claims and the 2nd estimate of 4th quarter GDP. And tomorrow is options expiration day, could be some volatility from that too.

Until then, rememeber the trend!

Thomas Hughes