The US markets quietly bubbled on Iraq speculation...and the FOMC meeting starting tomorrow.


The major markets were fairly quiet today as events in Iraq drew attention from economics and an impending FOMC meeting. Al Quaeda linked militants have taken control of more of Iraq since last week and are closing in on new targets. According to speculation the drive to retake parts of Iraq by the sunni forces may result in a three way split of the country. Also according to reports, 90% of Iraqi oil production remains unaffected centered as it is in the Kurdish north. Asian and European markets were quiet in the overnight session as traders there awaited the outcome of the current Iraq situation as well as a new development in the Ukraine. New reports have it that Russia has stopped shipments of natural gas and other products to the Ukraine and is now requiring prepayment.

Futures trading was indicated mildly lower in the earliest part of the day, the S&P 500 at -4.5 around 8AM. At 8:30AM a round of better than expected economic data helped to lift the futures trade a little bringing the S&P up to around -2 going into the open. At the bell the markets opened as expected with the SPX around -2 points. This held for the first few minutes of trading until the IMF released its latest report on the state of the US economy. The IMF lowered its outlook for 2014 GDP to 2% and suggested that we should raise the minimum wage. The market drifted lower for about 15 seconds and then quickly found today's support and bounced back and then into the green by 9:40AM. The SPX hit its intraday high around 10:20 and then spent the rest of the day ranging between the early low and high with the Friday close very near the mid point of today's price action and closing levels.

Another reason the market seemed to pause today is the FOMC meeting scheduled to start tomorrow. The meeting is expected to produce no changes to the taper but may (probably) will provide some insight into when interest rates may begin to rise. There is also some other key data out this week that may help the market find some support such as the Housing Starts, Building Permits and CPI tomorrow and then Jobless Claims, Leading Indicators and Philly Fed on Thursday. Yet another reason the market may have entered this week so timidly is triple witching. This week is triple witching options expiration and may come with additional volatility that is completely unrelated to geo political situations.

The Economy

There were a few notable economic events today besides the IMF report, which turned out to be a non event based on market reaction. First up this morning was Empire State Manufacturing. The index rose more than expected to 19.28, ahead of the previous months 19. Analysts had expected a drop to 15. This months reading is the highest level of Empire region manufacturing since June of 2010. There were areas of strength and weakness within the report but all segments showed growth. New orders jumped to 18.36 from 10.44 last month. Shipments, inventory and employment all dipped but remain positive and expansionary. Empire is one of the earliest gauges of manufacturing on a month to month basis and could foreshadow strength in other regions.

Net Long Term TIC flows was reported as -24.2 billion. The previous month saw a gain of roughly $4 billion. TIC flows measures the net inflow/outflow of foreign investment in the US. TIC flows is also a lagging indicator by 2 months.

Industrial production rose in May by 0.6%. This is in line with expectations and better than the previous month. April production was revised lower to -0.3%. Capacity utilization was also better than expected, rising to 79.1% versus the expected 79% and the previous 78.9%.

The National Association of Homebuilders Housing Market Index also rose more than expected. The index rose to 49 from 45 and 3 points better than the expected reading of 46. Any reading above 50 is expansionary for this index. This is the first significant up tick in the index for several months and shows that builder sentiment may be thawing with the summer season. There are still some reasons for caution within the report such as “limited availability of labor” which makes no sense to me...unless they mean labor in the local market and/or skilled and qualified labor. The three components that make up the index all rose as well; the current conditions to 56, the current expectations to 59 and buyer traffic to 36. Buyer traffic being the notable area of weakness.

Moody's survey of Business Confidence, which has been strong all year, is even more upbeat than usual. The survey is conducted by noted economist Mark Zandi. The summary kicks off with the statement “Strong business confidence shows no sign of wavering” and goes on to report that there were few negative responses and for the third week no business says that present conditions are bad. Business still report that sales, pricing and employment are strong. Mr. Zandi's conclusion; the survey represents an economy growing above its potential.

Merger Monday

Today was another Monday filled with M&A activity. There were at least a half dozen deals in the news today with tax inversion the topic of choice. Medtronic is buying Covidien for $42.9 billion in cash and stock, $93.22 per share. The merger will result in Medtronic moving its headquarters to Ireland and possible receiving tax benefit from the move. The deal is a significant premium to Friday's close and precipitated a 21% move in Covidien. Shares of Medtronic opened higher but sold off during the day and eventually closed down more than 1%.

The Gold Index

Gold trading hovered around Friday's closing prices just like the equities market. The flight to safety trade is faltering just like the fear driven sell off in equities. Traders and investors are trying to figure out just what the Iraq situation means for the global situation. Gold traded around $1275 all day with very little fluctuations. Early trading saw prices up near $1280 but that did not last long. The Gold Index trade in similar fashion, making a tight range with today's action. The index is above resistance but not looking to strong at this time. The index is overbought in the near term with weak momentum that may be peaking. Long term fundamentals do not support higher gold prices so I think direction for gold and the index may come down to Iraq. If the situation escalates gold prices will likely move higher and the index with it. However, Iraq is still near term for now, the FOMC and the data are both long term effectors of the market. Economic data supports the taper and the taper is supportive of the dollar and lower gold prices.

The Oil Index

Oil trading was really mild today considering the large gain in prices last week and the Iraq violence. The thing is, the violence is still not impacting actual oil production yet so far as I have heard. The major portion of the Iraq oil infrastructure in the Kurdish north west of the country and is at this time safe from the uprising. In fact, CNBC's own reporter on the scene said that she herself was “safe in Kurdistan”. WTI and Brent both traded within about a half percent of last weeks close with WTI trending toward the lower end of the daily range. The fear factor that drove oil prices to the current levels could come out of the market really fast if traders start to think that there will not be a significant threat or disruption to Iraqi oil. On the flip side Boone Pickens said that oil could go to $150 if the situation spins out of control and nothing is done about it.

The Oil Index traded to a new high today but without much strength. The index made a tight range and a very weak candle suggesting a near term top may have been reached. In the near term this view is subject to events in Iraq; a jump in oil could help send the Oil Index higher while at the same time a drop in oil prices could bring the index back to support. In the longer term the oil sector is in an uptrend and making new highs driven in part on geo politics but also on steadily improving economic data and the expected 2nd quarter rebound. The indicators are bullish and on the rise with plenty of room to move up provided hopes for increased oil profits remains high. In the near term it appears as if a correction or consolidation could be at hand with support at 1660, 1650 and 16250 on a break of the short term moving average.

Sector Watch

The Home Builders were one of today's leaders. The XHB Homebuilders Spyder gained more than .5% in today's session. The ETF made this move up from the short term moving average and helps to confirm support around the $31.50 level. The indicators are bearish in the near term but longer term analysis shows growing support along this level. Regardless, the ETF has been trading choppy in a range over the past 12 months at least and faces plenty of technical resistance. Today's NAHB data was enough to help bring in support but not enough to convince anyone that the housing market is truly strong. Tomorrow's data may help. First resistance I see will is at $33 and extends up to the $34 level.

The Utilities Spyder XLU gained more than 75% in today's session. This sector ETF made a fairly strong move higher in the early part of the day but met with resistance after lunch. A possible reason for this sectors attraction today is dividend. The utilities sector is a good one for finding decent returns. This sector hit a top in early May following a four month rally that has resulted in a 6 week sideways movement. This consolidation is beginning to look like a potentially bullish triangle, definitely one worth watching. The top of the range at $43.50 is current resistance, indicators are bearish at this time but rolling over into a potential buy signal. A break above resistance could result in a near to short term rally in utilities. Support at this time is along the lower edge of the triangle around $41.50-$42.00.

The Indices

The major indices basically tread water today. They all opened marginally lower, moved a little lower, then bounced into the green only to find resistance and then move back down to close very near to opening prices. Intraday ranges were very tight and volumes were low, supposedly caused by Iraq but probably more by the FOMC. Iraq is a serious situation but for now is still only a near term fear. The FOMC, their outlook, the economy, corporate profits, the taper and rising interest rates are long term.

The SPX traded in the aforementioned tight range, slightly above the 30 day moving average. The indicators have just turned bearish and look to be indicating a test of support. Support is along the moving average about 20 points lower and the trend line close to 1900-1910. High oil prices and Iraq headlines could help to bring the index down to support, especially ahead of the fed meeting. The long term trend is up so for now I am still buying on the dips.

The Dow Industrials also traded in a tight range, just above the short term moving average. Unlike the SPX, the blue chips are trading just above a much stronger looking support level. Just below the moving average is the previous all time high and a zone that I consider to be strong support. Like the SPX the indicators are turning bearish but are very weak. The MACD is barely in the red, a break below support would of course increase that. Stochastic is pointing down but still high in the range. There may be some more down side in the next couple of days but I also think that the Dow will find support when and if it does. Current support level is 16,750 with next at 16,680 and 16,600.

The Nasdaq Composite was today's leader with a whopping 0.24% gain. The tech heavy index suffered the least during last weeks Iraq sell off and is now nearest to making new highs. The indicators here are weakening but still bullish. MACD is still above the zero line and stochastic, although pointing down, is still high above the upper signal line. Price action in the index appears to be consolidating in the short term for a push up to test the long term high but is subject to Iraq news in the very near term.

The Dow Transports were the worst performing of the major indices today and the only one closing in the red. The Trannies lost close to a quarter percent. The indicators are firmly bearish and pointing to a test of support and possible return to the long term trend line. The index is sitting on the short term moving average which is good for near term bulls but a break below that could easily see the index move to the trend line about 250 points below.

Tomorrow look out for new developments in Iraq and economic data. Iraq is more likely to drive short term direction while the data will give a hint to the long term direction. After that the Fed and what they say will be the important market mover of the week.And don't forget about options expiration.

Until then, remember the trend!

Thomas Hughes