For the week ending August 22, 2014, three CI Market Dashboard indicators were bullish, two were bearish and four were neutral. There were two new bullish signals this week as two previously-bearish signals went positive.
Week in Review
The market reacted to a steady stream of geopolitical developments, economic data and comments from central bank officials this week. Investors pushed the markets higher to start the week, as economic data pointed to a “warm but not too hot” environment that would hopefully lead the Fed to put off interest rate hikes until the second half of 2015. However, Janet Yellen’s comments on Friday were noncommittal at best. Also on Friday, Russia sent trucks across the Ukrainian border in what the Ukraine foreign ministry called a “direct invasion.” This marks a clear escalation in tensions between the two countries.
The bulls roared out of the gate on Monday after a weekend of productive talks between Russia and Ukraine. While no ceasefire agreement was reached, foreign ministers from Germany, Russia, Ukraine and France met in Berlin and agreed to a Russian aid convoy crossing the Ukrainian border under the supervision of the International Committee of the Red Cross. The bloodshed continued, however, as the Ukraine military accused pro-Russian rebels of a rocket attack on a convoy of buses killing dozens of refugees. The market also reacted positively to Dollar General’s (DG) formal bid to acquire Family Dollar Stores (FDO). The Family Dollar bid of $78.50 per share tops an existing $74.50-per-share bid from Dollar Tree (DLTR). Late Monday, Israel and Hamas agreed to extend their ceasefire by a day as the two sides continue to negotiate a long-term truce.
News of the extended ceasefire in Gaza propelled the market higher at Tuesday’s open. However, optimism in the region was short-lived, as the ceasefire ended when three rockets were fired from Gaza into southern Israel. In response, Israeli Defense Forces retaliated with airstrikes against militant targets in Gaza and Prime Minister Benjamin Netanyahu recalled the Israeli delegation from Cairo. Countering this disappointment, however, was the launch by the Iraqi military of a major air and ground offensive to reclaim Tikrit from Islamic State militants. This came after the recapturing of the Mosul Dam by Kurdish and Iraqi forces, assisted by U.S. airstrikes. Tame inflation data also helped the market extend its weekly gains on Tuesday, as investors hope this will lead to an extension of the record-low interest rates from the Fed.
On Wednesday, all eyes were on the Fed, as the Federal Open Market Committee (FOMC) meeting minutes were released. The market opened flat as traders awaited the afternoon release, at which point buyers pushed it decisively higher. The notes revealed that FOMC members are not ready to increase interest rates more quickly than anticipated. This news countered the beheading of American journalist James Foley by Islamic State (ISIS) militants and the warning by Hamas of more rocket attacks, naming Israel’s Ben Gurion airport a strategic target. Hamas cautioned international airlines against flying into Israel starting Thursday
Traders and investors alike cheered a plethora of positive economic data and stronger-than-expected earnings results from Hewlett-Packard (HPQ). Jobless claims in the U.S. declined more than forecasted; existing home sales rose for the fourth month in a row; and the Philadelphia Fed index rose to its highest level since March 2011 in July. As a result, buyers pushed the Dow Jones Industrial Average past the 17,000 mark for the first time in nearly a month; the S&P 500 reached a new record closing high; and the Nasdaq Composite hit a new 14-year high. Also on Thursday, citing antitrust concerns, Family Dollar officially rebuffed Dollar General’s takeover offer.
On Friday, the eyes of the investing world were on Jackson Hole, Wyoming, where U.S. Federal Reserve Chairwoman Janet Yellen was speaking at the annual Federal Reserve Bank of Kansas City’s “Economic Symposium.” Investors were looking for indications of when the U.S. plans to increase interest rates. Ahead of her remarks, though, was news that Russian trucks supposedly carrying humanitarian aid crossed into Ukrainian rebel-held territory without being accompanied by the International Committee of the Red Cross, a violation of an agreement between Russia and Ukraine. Kiev had said it would view the movement of the convoy across the border without its permission as a violation of its territory and an act of aggression. NATO also pointed to “an alarming build-up” of Russian forces near the Ukraine border. In her remarks at the Jackson Hole policy conference, Janet Yellen said the economy is getting closer to the Federal Reserve’s objectives, but that the labor market remains hampered by the effects of the Great Recession. As a result, she believes the Fed should move cautiously in determining when to increase interest rates. Yellen said the Fed was now questioning both the degree of remaining slack in the labor market and the timing of rate hikes relative to that slack. Yet she added that it was difficult to gauge the remaining slack in the labor market, and that internal Fed gauges of the labor market suggested the unemployment rate was overstating progress. The market initially turned positive on Yellen’s comments before giving up all those gains and moving lower again before settling for a relatively flat day. Also at the Jackson Hole event, European Central Bank President Mario Draghi said the institution is willing to take more stimulus measures if needed.
Looking at the U.S. equity markets, the Dow Jones industrial average (DJIA) rose 2.03% this week to close at 17,001.22. After retaking the 17,000 mark earlier this week, the blue chip index met resistance around 17,050, as was the case in late-July. I am watching the DJIA very closely, as there is a potential reverse head-and-shoulders pattern developing here, which would be very bullish. Do not expect much support around 17,000 at this point; instead, firmer support exists around 16,900.
The S&P 500 Index (SPX) added 1.71% this week and closed at 1,988.40. On Thursday, the large-cap index set a new all-time high close at 1,992.37. The 1,985 level, which had previously been a resistance point, stands as the first line of support to the downside. Beyond that, 1,950 offers a firmer floor. For the second week in a row, all nine S&P Select Sector SPDR ETFs were up. Industrials (XLI) led the way with a 2.53% gain while consumer staples (XLP) lagged with a 1.1% weekly gain. The technology sector (XLK) posted a 2.06% gain this week.
The broad market Wilshire 5000 (W5000) index rose 1.69% this week to close at 21,054.86. The index blew through the 20,750 level we thought might offer some resistance. The 21,000 level, which had been a formidable resistance level, stands as initial support. If that does not hold, firmer resistance appears around 20,900.
The Nasdaq Composite (COMP) was up 1.65% this week and closed at 4,538.55. This marks a new 14-year high for the tech-laden index. After pushing through former resistance around 4,475, this pivot area now stands as initial support. Firmer support looks to exist around 4,450.
Small-cap stocks, as measured by the Russell 2000 (RUT), gained 1.64% this week as the index closed at 1,160.34. The index has run into resistance at this level, which is also where its 50-day moving average currently rests. To the downside, the first support level looks to be around 1,150, with firmer support around 1,145.
Tech Sector Earnings & News
Earnings reports continue to in from key tech firms (consensus estimates from I/B/E/S):
- Cisco Systems (CSCO), $0.55 per share reported versus $0.525 consensus estimate (+4.8% surprise)
- GameStop Corporation (GME):$0.22 per share reported versus $0.179 consensus estimate (+22.9% surprise)
- Hewlett-Packard Company (HPQ):$0.89 per share reported versus $0.885 consensus estimate (+0.6% surprise)
- Intuit Inc. (INTU):$(0.01) per share reported versus $0.073 consensus estimate (-113.7% surprise)
- Marvell Technology Group (MRVL): $0.34 per share reported versus $0.276 consensus estimate (+23.2% surprise)
- MICROS Systems (MCRS):$0.84 per share reported versus $0.710 consensus estimate (+18.3% surprise)
Economic Data & News
Here is a recap of this week’s key economic data and news:
- Homebuilder confidence rose in July, despite steep drops in new home sales and housing starts from June to July. A monthly index from the National Association of Home Builders rose two points to 55, exceeding expectations that the index would be unchanged. This is the highest level since January. The index has three components: current sales conditions and expectations for future sales each rose two points to 58 and 65, respectively; traffic of prospective buyers increased three points to 42.
- The consumer price index (CPI) and core CPI, which excludes food and energy costs, rose a seasonally adjusted 0.1% in July, the Labor Department reported. This bolstered hopes that the Fed will hold off on raising interest rates until later next year. Food prices rose 0.4%, but energy costs fell 0.3%, the first decline since March.
- Housing starts jumped 15.7% in July from June to an annual rate of 1.093 million units, the Commerce Department reported. This is the highest level of construction since November 2013. Economists had been expecting housing starts to rise to an annual rate of 961,000 units. In addition, July’s building permits rose a higher-than-expected 8.1%.
- The minutes of the Federal Open Market Committee (FOMC) showed that members believe the labor market is improving faster than expected, but the majority are not ready to alter their approach to interest rates anytime soon. At the July 29-30 meeting, the FOMC voted 9-1 to maintain its current policy of slowly withdrawing stimulus from the U.S. economy. All but one of the members believe that the Fed will keep short-term rates below what is considered normal for “some time.” The sole dissenter was Philadelphia Fed President Charles Plosser.
- The August reading of the Philadelphia Fed index surged to 28 from 23.9 in July, its highest level since March 2011, beating economist expectations. Underlying the data, however, was a decline in the new orders index to 14.7 from 34.2 and a drop in the shipments index to 16.5 from 34.2. Any reading above zero indicates improving conditions.
- Existing home sales rose at their fastest level since last September, according to the National Association of Realtors. Sales rose 2.4% to a seasonally adjusted annual rate of 5.15 million, the fourth monthly increase in a row. The homes-for-sale inventory rose 3.5% to 2.4 million, which represents a 5.5-month supply. A six-month supply is considered balanced.
- The U.S. manufacturing sector grew at its fastest pace in four years in August, according to data from Markit. Its preliminary U.S. Manufacturing Purchasing Managers Index rose to 58 in August, its highest level since April 2010, exceeding economists’ expectations. A reading above 50 signals expansion in economic activity. The output sub index climbed to 60.2 from last month’s 59.7. Markit’s gauge of employment in the manufacturing sector rose to 54.6 from 51.2, its highest level since a matching 54.6 in March 2013.
- First-time applications for unemployment benefits fell by 14,000 to 298,000 in the week ended August 16, according to the Labor Department. Economists were forecasting an increase to 303,000. Continuing claims fell to the lowest level in more than seven years. The four-week average of initial claims rose to 300,750 last week from 296,000. The number of people on jobless benefit rolls fell by 49,000 to 2.5 million in the week ended August 9, its lowest level since June 2007.
- In remarks to an annual economic policy summit in Jackson Hole, Wyoming, Fed Chair Janet Yellen said that the U.S. economy is getting closer to the Fed’s targets. However, she added that it is hard to gauge the remaining slack in the jobs market and that the Fed’s barometers could indicate the unemployment rate is inflating progress.
- At the same economic conference, European Central Bank President Mario Draghi said he is “confident” that the June move to cut interest rates to record lows “will indeed provide the intended boost to demand, and we stand ready to adjust our policy further.”
CI Market Dashboard Indicators
In terms of the CI Market Dashboard, the iShares Dow Jones U.S. Index Fund (IYY) gained 1.74% this week to close at $100.54. The ETF powered through resistance around $99 to notch a new all-time high close of $100.66 on Thursday before retreating slightly on Friday. We now look at $99 as offering firm support to the downside.
To see what happened with the individual Dashboard indicators this week, visit the CI Market Dashboard site.