Stocks rally on Fed minutes despite a terrible earnings start

Thursday, October 8, 2015 -

U.S. stocks climbed after minutes from September’s Federal Reserve meeting indicated the central bank wants to see more inflation before raising interest rates.

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After moving in opposite directions in early trading, stocks moved higher in reaction to the minutes of the latest Federal Reserve meeting. The gains helped the Dow and the S&P 500 reach their best levels in well over a month, despite a horrible earnings start from Alcoa after the markets closed.

The indexes closed firmly positive but off their highs of the day. The Dow climbed 138 points (+0.8%) to 17,051, the Nasdaq rose 20 points (+0.4%) to 4,811 and the S&P 500 advanced 18 points (+0.9%) to 2,013. The NYSE finished at +1.0% and the small cap Russell 2000 at +0.92%.

Overseas, Japan’s Nikkei 225 Index slumped by 1 percent, while China’s Shanghai Composite Index surged up by 3 percent. Meanwhile, the major European markets all moved higher on the day. While the U.K.’s FTSE 100 Index advanced by 0.6 percent, the German DAX Index and the French CAC 40 Index both edged up by 0.2 percent.

The higher close on Wall Street came as traders reacted positively to the minutes of the Fed’s September meeting, which further offset recent uncertainty about the outlook for interest rates.

BUT . . .  that was before Alcoa’s earnings disappointed greatly in an aftermarket earnings release. I suspect there will be many disappointments over the next few weeks.


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Energy leads . . . Fed Minutes finish!

Initially, stocks chopped sideways for a god part of the day as crude oil made another test at the intermediate-term or weekly middle Bollinger band line (at $50.12) with oil prices stopping at $49.43. We have to watch this development because the recent test of the middle BB line has strengthened the energy laden indexes in the first part of October, so the Dow, NYSE and the S&P 500 all had an initial good start today, following energy.

Then later in the morning, Republican prospective speaker of the House Kevin McCarthy removed his name from consideration and stocks essentially lost their small gains until the release of the Fed minutes and then the stock market got another ramp into the finish, as the minutes revealed a Fed willing to remain on pause.

Regarding speaker of the house, John Boehner agreed to stay on as speaker until the Republicans can come up with 218 votes to elect a new speaker to take the gavel from him. It looks like both parties are governed by Democrats until the Republicans can force a change.

In the release of the Fed’s minutes were written rationalizations of why the Fed decided to not raise interest rates – a weak stock market and worries over a hard landing in China’s economy spilling over to other economies! The Fed is still very worried about a collapsing economy, so the stock market naturally rallies? They obviously think the Fed will “always” help the markets.

Terrible Earnings Start

After the close, Alcoa was the first company to report earnings. It was a huge miss. Alcoa posted quarterly earnings well below Wall Street’s expectations, as high-growth aerospace and automotive materials segments could not soften the effects of low commodity prices. The aluminum maker posted adjusted third-quarter earnings of 7 cents per share on $5.57 billion in revenue. Sales dropped about 11 percent from the previous year.

Analysts expected Alcoa to post earnings of 13 cents per share on $5.65 billion in revenue, according to a consensus estimate from Thomson Reuters. The stock dropped about 5 percent in extended trading.

Again what we seen is the “buy the rumor, but sell the fact” scenario about to play out with earnings.

Oil Key to Technical Direction, Here

Still we have got to watch oil prices. This is the key.


The middle Bollinger Band line is now key resistance. A break above the middle BB line at $50.12 would mean the new resistance would be at the February highs at $54.24 a barrel and a break above this resistance would allow oil prices to test the May highs of $62.58. Stocks will largely follow oil’s prices lead.

On the other hand, I want you to see how incredibly overbought the NYSE McClellan Oscillator has quickly become as a result of this early October rally in oil prices from $43.97 to a high today of $50.07 a barrel.


With the McClellan Oscillator for the NYSE at 95.36, it is the highest we have seen it spike in such a short period of time in years. This is more oversold than almost any day covering the long 6-year plus bull market, following the 2008 crash. This extreme spike in the oscillator in such a quick time is related to oil prices but I also want to point out in yesterday’s hotline message the history making reverse repo in the last half of September could also be providing much of the energy to this countercyclical rally. We have never seen a short term reverse repo that large in history, i.e., short-term liquidity given to financial institutions. It smacks of extreme weakness, not strength.

Still, these massive short term reverse repos have to be paid back and should earnings as disappointing as Alcoa continue, as I suspect they will – then another down leg is coming soon.

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