The market tread water today, hanging just below the highs set last week as we await another FOMC minutes release .


The market tread water today, just below the long term highs set last week. Contrasting economic trends giving the market yet another reason to pause, ahead of the FOMC minutes released later this week. Our own data trends remain positive but the rest of the world is in question. It looks more than ever like there could be additional QE in Japan and maybe in Europe but as yet, no moves have been made.

First up this morning was weaker than expected GDP numbers from Japan. The decline, -1.6%, is far below the 2% increase expected by economists as well as the nations leadership. It also puts Japan in recession and Abeonomics in the spotlight as well as under the hammer. His plan is not working as hoped leading to speculation of possible additional moves in the coming weeks and months. The first likely a postponement of the second scheduled tax hike, the first tax hike(from the past spring) being the most likely reason for the GDP miss. The Nikkei lost over 3% on the news.

Chinese markets were less fazed by the news but traded mixed nonetheless. One positive development in China is the opening of the new trade connect between Shanghai and Hong Kong which will allow foreign investment in Chinese stocks. European markets were mixed as well, in early trading, but rose later in the day. New comments from Mario Draghi sparked buying in EU markets; He said that the ECB may indeed purchase government issued bonds. He didn't say when, or that there was a plan in the works, just that it was a possibility and so could be yet another smoke screen. The message was well received in the EU and even helped to send our indices higher for a little while as well.

Market Statistics

Futures trading was negative from the earliest but not sharply. The S&P 500 was indicated lower by about -0.25% when I first checked and fluctuated between that and break even throughout the early morning.

There was a little economic data released today, on a whole it was positive but not as good as predicted. It was enough to help lift trading but not enough to get a rally going. At the bell the indices opened lower, by only a few points, and then proceeded to trade just beneath break even until Mario Draghi's comments. At that time traders sent them higher and into positive territory. The surge did not last long, the market fell back, below break even, to retest support by lunch time. Afternoon trading was much the same. The indices held the day's range, closing near the top.

Economic Calendar

The Economy

Empire Manufacturing was released at 8AM. The gauge of New York region manufacturing came in at 10.2 versus the consensus of 12. This is weaker than expected but still expansionary and much better than last month's reading of 6. New Orders, Shipments and Employment were all positive but the employment component slipped to 8.5,the other two rose to 9.1 and 11.8 respectively. While the number of employed rose, the rate of rise slowed somewhat as did the number of hours work. This could be bad if the economy slows, but good if it continues to expand. The forward looking component of the survey were “generally higher and conveyed a strong degree of optimism about future business conditions”. Prices paid and received remained flat.

Industrial Production and Capacity Utilization were released at 9:15AM, both weaker than expected. Production fell by -0.1% versus an expected gain of +0.20% and a gain of +0.8% last month. The October reading is 104.9% of its long running average indicating production is trending higher at nearly 5% gain on a 12 month basis.

Output rose by 0.2%, the second month of equal gain. Capacity Utilization fell by -0.3% versus an expected unchanged reading. Although production levels declined this month they are trending higher with output rising and available capacity for new production. There is notable change in Moody's Survey Of Business Confidence. Mark Zandi reports that there is no sign that “business enthusiasm is waning” and that hiring intentions have risen to new highs in the past few weeks. The most noteworthy addition to this week's summary is that investment in equipment is on the rise.

The FHA announced that it was back in the black. The federal insurer of home loans reported it would no longer need emergency cash to remain afloat. The achievement was made on tighter credit standards and back ground checks as well as a crack downs on substandard lenders. Two moves that helped the improvement are higher credit score requirements and increased rates for premiums, two things that are also likely contributors to a sluggish housing market. The FHA went on to say they would not be relaxing standards now.

Along with the Fed minutes there are also two important reads on inflation this week. PPI tomorrow and CPI on Friday, both expected to remain flat or decline.

The Oil Index

Oil prices saw some volatility again today. Prices for WTI and Brent tanked when Japanese GDP was released but reports of increased tension between OPEC members helped to lift them later in the day. WTI fell from $76 to $75 and climbed back to $75.50 by the close of today's session, Brent traded in a range between $78 and $79.50. This is just off of the long term low but no sign of reversal even though there is growing talk of the possibility. On a fundamental basis weak global demand growth and rising supply are pressuring prices lower, but with each new low the pressure on OPEC to cut its production grows and with it speculation of a snap back rally in oil. There is no sign of a rally yet, the OPEC meeting is November 27th.

Looking at the Oil Index it appears that some traders are betting on a rally in oil, or at least in oil producing stocks. The index traded down today, but was halted by support at 1,430, the fourth time the index has tested support since the October low. This level is consistent with the 26.3% retracement of the July-October correction and beginning to look strong. The indicators are still in decline but so long as support holds will begin to roll over this week. If not the index will likely fall back to 1,400 and 1,350. Oil prices will have a lot to do with direction in the sector and they will likely remain volatile at least until the OPEC meeting so be careful.

The Gold Index

Gold traded flat to today, just beneath $1190 and a two week high. This is following the Friday short covering rally, the second day of strong buying originating from the $1150 region. It looks like gold could be bottoming but if so, I still don't think it is moving much higher in the near term. The Friday rally and today's action both fell short of resistance set by the October low in gold, just above $1190, and is not yet an entry signal.

My outlook for gold is mixed because I see the chance for a stronger dollar and for rising interest rates/inflation. A stronger dollar due to potential policy changes at the ECB and BOJ, both of which might come in the next month or two. The possibility of these moves will be amplified by any hawkish comments in the FOMC minutes. I also see an upcoming move by the FOMC to raise interest rates, this move is just farther out on the calendar.

My thinking that gold may be bottoming is because interest rates and inflation is coming, that is a guarantee, but 8 months away or so. My thinking that gold will not move much higher now is because the chance of a stronger dollar is much nearer than the chance of higher interest rates and inflation.

The Gold Index traded to the upside today after breaking above resistance on Friday. The move above $66.60 is tied directly to the short covering rally in gold and as of yet has not convinced me of a reversal in trend. The index is above support but this could be a whipsaw, I say this because gold prices themselves have not broken above what I consider to be comparable resistance at $1190. It looks like there is be additional resistance for the index around $68.75-$69.00 that the it will meet this week, coincidentally the same week as the FOMC minutes. The indicators are up but there is a lot of work for this index to do before I reverse my bearish stance. At the same time I don't think it is the right time to start any new bearish positions either.

In The News, Story Stocks and Earnings

Haliburton and Baker Hughes shocked the market today by announcing an agreement for the former to buy the later. This is contrary to reports released as late as Friday afternoon/Saturday morning but in the end not too surprising. Once they started the talks there were only two outcomes; they were either going to announce they didn't work it out or they did. The buy out is valued at $36.4 billion in cash and stock and set to close in the second half of next year. Shares of Haliburton fell by -5% but Baker Hughes International jumped 10%.

The news of the Haliburton/Baker Hughes deal spawned a lot of talk of possible mergers among other oil field services providers. The Oil Services Holder ETF (OIH) did not get a lot of activity though. The ETF traded in a tight range, like the broader market, but did not move into the green. The ETF has been trading in a narrowing range over the past month and could be winding up for a move. The indicators are pointing to lower prices but long term support is just below today's range, between $40 and $42.50, so if goes lower it may not go very far.

Tyson Foods reported earnings this morning along with positive forward guidance. The food packaging company reported $0.86 per share versus the expected $0.74 predicted by analyst. This is on revenue in line with estimates and in the face of higher input costs. Regardless of the estimates, earnings and revenue were company records and helped to send the stock higher. Shares of Tyson climbed during the pre market session and gapped up at the open by more than 3%. The move didn't stop there, taking Tyson up over 5% by the close of trading. Prices are now approaching long term resistance around $43.50.

Urban Outfitters reported after the bell today. The teen retailer reported earnings and revenue below estimates along with a miss on comp store sales. Shares of the stock traded flat during the open session but then fell 5% after the bell.

The Indices

The indices finished the day flat after a narrow day of trading. Flat describes them all, but some were up, some were down. The Down Jones Transportation Index was the leading loser, drifting down about a half percent. Today's action brought the index down near 9,000 but did not cross it, making this the 6th day of trading above 9,000.

The index looks like it could be cresting a peak, the question is, what kind of peak. Is it the kind that leads to a higher peak, or to a dip, and if it leads to a dip before a higher peak, how deep of a dip. The index is currently in a strong uptrend and based on my previous targets still has about 750 points to go. The indicators are in decline but so long as price action remain at the current levels is a good sign of consolidation mid-rally. This could continue until the next catalyst, which could be the FOMC minutes later this week.

The NASDAQ Composite also fell today, but not quite as far as the transports. The techs lost -0.37% and created the third of three spinning tops. This is a sign of market indecision or pause and not surprising ahead of this week's data. The index is trending up with strong indicators although they are also in decline, as with the transportation index. This could be an indication of impending bearishness but just as possible be setting the index up for another rally.

The S&P 500 drifted today,like the rest of the indices, but managed to close in the green. The broad market also managed to make a new all time closing high if not a new all time intra-day high. This index has been trading in a near horizontal line, and very tight range, over the past 6 trading days in what is looking to me like a flag pattern.

The current pattern is a narrow congestion/consolidation band, at all-time highs, during an uptrend, with economic tail-winds and ahead of expected economic data and FOMC minutes. The indicators are in decline but no reversal is yet indicated or confirmed so I am looking at this like a setup for trend following entry, at least until the FOMC minutes get released.

The Dow Jones Industrial Average matched the SPX for gains today, adding 0.07% but falling short of a new closing high. Today's action is the third day of trading at the current levels and looking a little extended. That being said, with current trends in place, outlook for next year improving and the FOMC minutes just two days away it also looks like this index could be consolidating in mid-rally as well.

The market seems to be holding its breath, waiting for the signal, a signal or permission, whatever it needs. The point is it looks like it is waiting. If there is one signal I can read well it's that one

It's no coincidence that the market corrected last month, and then bounced back only to pause here, just before the minutes are released. This same pattern has happened before, last month if I am not mistaken. The funny thing is, we already know what the Fed did at the meeting so I don't know why the minutes matter but they do. Maybe the market needs to synch up the meeting, the minutes and the current data...especially the inflation data.

My view; the trends are up, the economy is recovering and the outlook is good with low expectations of inflation. With this in mind I see rally and blue skies ahead, until some fear creeps up, which could be geopolitical or fundamental. Any dips, when they come, are still buying opportunities in my opinion but I am not so sure a dip is on the way right now.

Until then, remember the trend!

Thomas Hughes