The Fed lowered its 2014 GDP expectations unexpectedly but the move was not surprising for the market which set another new high today.


Yesterday the Fed acted as expected and tapered another $10 billion. The unexpected part, at least by me, was a lower GDP forecast. The thing is, once I heard the news I was not that surprised. The IMF lowered its forecast earlier this month and considering the law of averages if the first quarter is lower than expected, as it was, then naturally the full year average will be lower even if the second, third and fourth quarter come in as expected. The good news is that the Fed also thinks that inflation is rising in line with their expectations and that a rebound in the economy is currently underway. This news sparked a rally to new highs that carried over into the international market and the overnight session. In Asia most markets were up around a half percent or so with the Shanghai one notable exception. The mainland Chinese index ended the session in the red. In Europe markets climbed about 0.75% on average, hindered in small part by the escalating situation in Iraq.

US futures trading was flat to negative in the earliest part of the day but moved into the green following the 8:30AM release of jobless claims data. Claims were a little under the predictions and inline with the long term trends of declining unemployment. At the open the market was flat to weak with the SPX hovering just over the break even line for the first thirty minutes of trading. At 10AM Leading Indicators and Philly Fed sent a ripple through the market that caused the SPX to move down to the low of the morning just below yesterday's closing price. Both indicators were positive, Leading just below expectations and Philly Fed just above. The rest of the day saw the indices drift slowly lower by about a quarter percent or less and then slowly drift higher into the close, regaining positive territory and leaving the SPX at another new high.

The Economy

On the headline initial claims for unemployment dropped more than expected. In reality the number was 1,000 claims lower than expected at 312,000. This is at the low of the 12 month range and at least helps to maintain the status quo in terms of the jobs market. Last weeks claims were revised higher by 1,000 for a net drop of 6,000 from last weeks report. The four week moving average also declined, by -3,750, to 311,750. On an unadjusted basis claims fell by -13,178 to 300,193, or -4.1%. Looking at the table provided by the DOL claims have been at or near the low of the range for most of this quarter. If jobs continue to increase at the rate they have been this figure could drop below the 300,000 level in the near future.

Continuing claims fell by -54,000 and hit a new low not seen since Oct 13, 2007, according to the revised and readjusted data. Last weeks figure was revised up by +1,000 as well. This figure has been in decline for over four months and could be accelerating. In the long term view total claims rose by 32,000 but remains near long term lows. On a state by state basis California led with an increase of 9,935 new initial claims, followed by Florida with 4,050 new claims. New Mexico and Nebraska led with declines of -332 and -162 respectively.

At 10AM Philly Fed and the Index Of Leading Indicators caused the market to turn to the red. Philly Fed was stronger than expected at 17.8, rising more than 2 points from last months 15.4 and 4 points higher from the expected 13.2. This is a strong sign the economy is rebounding. Within the report the employment index rose to 12 from 8 and new orders to 16.8 from 10. The prices paid index was a negative and a sign of inflation rising sharply to 35.

The Index of Leading Indicators rose less than expected, depending on who you listen to. The index gained 0.5%, in line with the consensus of 0.5% and ahead of the 0.3% gain in April and the 0.2% gain in March. The gains in the index were broad based and will likely pick up in the second half of the year according to the report. This is also the fourth month of positive readings and the third consecutive month of increases. The coincident index also rose by 0.3% in May, ahead of the 0.2% gain in April. The lagging index gained 0.4% last month versus the 0.3% in April. According to all three of these indices the current and previous months activity is stronger than expected and in line with the expected economic rebound.

The Dollar

The Fed's stance on the economy was not too surprising but the new speak on interest rates is a little. The economy is still growing enough to taper, strongly enough to expect that a rate hike might come sooner than anticipated but that conditions support the idea of lower rates longer than forecast. I think that this may be a veiled attempt at telling us not to expect too much, such as too much time before the hikes begin or too much of a hike when it comes. Not surprisingly this stance weakened the dollar somewhat causing it to drop below the 30 day moving average and approach support levels near the mid point of the 8 month trading range. The indicators are bearish and could carry the index to test support along the 80 level. There are now several weeks before the next important central bank meeting from the ECB and the BOJ. Until then economic data affecting Fed outlook could impact dollar values.

The Gold Index

Gold prices responded very well to the Fed's new interest rate agenda. Gold prices climbed mildly yesterday and then spiked up by more than $25 in the early part of the day and then as high as $45 in what can be described as a massive short covering rally. Gold prices are now trading around the $1315 level and a potential area for resistance. This move in gold is a little suspicious to me and could be a little knee-jerk in quality; the extent of the rally a little bit of an over reaction. Interest rates are still going to rise, probably sooner rather than later and we can expect they will stay low a long time after that. I think we pretty much knew that already. In the long term the economic trends are up and the rebound is underway which is going to lead us into higher interest rates. Plus, now that the Fed has lowered its GDP expectations they have opened up the possibility they will have to raise them again later if/as the economy strengthens and I don't think that would be a bullish catalyst.

The Gold Index naturally followed gold prices higher and has blown past the resistance level it was trading under last week. Today the index gained about 2.75%, forming a strong and long white candle rising up from the 30 day moving average on bullish indicators. Near term analysis looks pretty bullish for the index with a long term resistance level about 4% higher at $100. While bullish, the indicators, especially the MACD, is on the weak side. The rise in gold and the index is based on Iraq flight to safety with the added momentum of reaction to the new Fed stance either of which could dissipate quickly. The Iraq premium is a little harder to judge because who knows how the uprising will end? The Fed premium is tied to economic data and trader perception, economic trends are good and trader perception fickle.

The Oil Index

Prices for WTI hovered around the $106 level today in a mild session. Prices moved in a range roughly $0.25 above and below yesterday's close. Brent crude climbed higher by near a half percent as Iraq tension and violence raised the possibility of supply disruption. New developments today include increased international dissatisfaction with the Iraqui prime minister and US drones flying surveilance over hot zones. The Oil Index traded higher today as well, breaking the round number resistance of 1,700. The index is currently in an uptrend driven by improving economics and higher oil prices that have been inflated since the start of the Ukraine incursion. The indicators are bullish and supportive of higher prices at this time. 1,700 will be important for the index in the near term with support in the 1,650-1,660 region.

Story Stocks

Starbucks received an upgrade today from neutral to buy at UBS. The upgrade was based on the average analyst target price versus current share price. The upgrade comes with a potential upside of more than 18% of current value. Shares of Starbucks climbed more than 2% on the news coming to a halt just below resistance at $77.50.

It is not earnings season yet but that does not mean that no earnings are coming out. Today several higher profile, bigger name mid-term earnings reports were released led by Blackberry, Oracle and Pier 1. Blackberry reported before the bell, producing less of a loss than expected. Ex-items the company produced a loss of -$0.11 per share versus consensus in the range of -$0.25. Gross margins in the quarter are up to 48% from 43% last quarter on reductions in operating expenses. Total sales of Blackberry devices to end users was ahead of expectations. The stock surged more than 10% following the announcement.

Pier 1 missed its earnings expectations by 4 cents. The company earned $0.16 per share versus a consensus $0.20 on a 6.3% sales growth. The results are better than expected on quarter over quarter basis but still behind last years results for the same period. At the same time the company also lowered full year guidance to the low end of the expected range. The results were not satisfying and sent the stock down by more than 13% in today's trading.

Oracle reported after the bell. The software services company reported only $0.92 versus the expected $0.95. Revenue was light along with new licenses and software renewals. The stock got hit hard after hours dropping more than 7.5%.


The VIX traded up today after a lower opening. The volatility index traded in a tight range around yesterday's closing prices after opening close to a low dating back to 2008. Historically whenever the VIX reaches extreme low levels it usually precedes a sharp snap back. Over the past year that level was near 12.50. Now the VIX is below that level and the current situation does not appear to be the same, at least not yet. The indicators are currently bearish and point to lower VIX values which is coincident with a confirmation of resistance over the last two days precipitated by data and extended by the Fed. This resistance level is the same level that provided support for the VIX and resistance for the SPX all last year as the recovery began to take hold and we were speculating about when tapering would begin. On a purely technical basis the support turned resistance is a potentially strong one and could keep the VIX beneath it for the near to short term.

Before the Housing Bubble and market meltdown the VIX traded around the current level for years. It was not an extreme, it was the norm while the markets were rallying. The market was euphoric then on a rapidly rising housing market and that led to the bubble. I don't think the market is euphoric now; even though the equity market is at all time highs trading volumes are down according to OCC and other data, the housing market is not as robust as we keep expecting and there is still lingering concern for US and global growth. It could be that the market has reached a level of calm signifying that the Housing Bubble and Credit Crisis are behind us; It could be there really is a new normal.

The Indices

Today's laggard was the Nasdaq Composite. It is not surprising the index had a little trouble today as it opened at a new high, a new high coincident with a full retracement of the correction seen earlier this year. Earnings, even though it is still below full season, may be having an impact on this index today. Yesterday open source provider RedHat reported earnings that beat estimates and sent the stock up sharply. Today Oracle's report after the bell may have been a reason for traders to wait. The indicators are bullish but momentum is very weak. Stochastic is making a bullish crossover high in the upper signal zone but again I classify it as a weak one. It looks for now as if the Comp could be contained by resistance but the next few days to a week could reveal more. A break above the current high would provide some more bullish evidence but until then caution is warranted.

The Dow Jones Industrials climbed a mere 0.08% today, coming just short of the all time high set last week. The light action and small bodied candle formed today is not unexpected following the rally yesterday. The index is making a bounce from the short term moving average in line with the long term trend. The indicators are turning bullish in what can be considered a weak trend following signal. MACD momentum has just turned positive with today's candle and stochastic is making a bullish trend following crossover but only %k is pointing up at this time. The index faces resistance just above the current level at the previous all time high, a level the index looks likely to at least test. A break above would be bullish and could lead to another round of new highs.

The Transports closed exactly at break even from yesterday's closing prices after making new intra-day highs during the session. This index is also in mid-moving average bounce but with momentum yet to turn positive. Stochastic is presenting the early and weaker trend following signal but without a break above the current all time high caution is due.

The SPX led the major indices today with a gain of +0.13. This index is also presenting an early trend following signal and perhaps the strongest early signal of the four indices described. Momentum has turned firmly bullish with a trend following moving average bounce and a stochastic that, while not quite pointing all the way up, has a %d line that is flat to uppish. The SPX closed at a new all time high and looks good to produce more into the near to short term.

The Fed seems to have given the market yet another signal to rally with a hint of a reason to be cautious. The taper was continued, a sign the economy is still doing well enough to remove it. They indicated inflation is progressing at a pace in line with their outlook. They reiterated and reinforced that interest rates would rise sooner rather than later and yet stay low a long time. The only thing standing in the way now is economic data and full on earnings season which is only a few weeks away. In the near term, there is no economic data being released tomorrow and only three earnings reports, one of which I've never heard of, the other two being Darden Restaurants and Carmax. Next week the economic calendar is full with a slew of housing related data, durable goods and the final estimate for 1st quarter GDP.

Until then, remember the trend!

Thomas Hughes