U.S. equity futures markets moved higher in pre-market trading after a lackluster overnight trade, bolstered by news that earnings from J.P. Morgan exceeded analyst estimates. The company reported a net profit per share of $1.09, compared with the analysts' consensus forecast of 67 cents.
The company said that the gain was attributed to "solid performance" in most of its business units and lower credit costs. Stock futures gained ground on the news but upside movement may have been limited by comments from CEO Jamie Dimon who said "Although we are gratified to see consumer-lending net charge-offs and delinquencies decline, they remain at extremely high levels and therefore returns in our consumer-lending businesses are still unacceptable."
This morning's rally in the equity markets and the lack of selling interest overnight is a strong sign that investors are still mainly concerned about earnings rather than the economy. Late Wednesday, the Fed reported that the pace of the economic recovery was slowing, forecasting smaller than expected growth in the GDP and a sluggish jobs outlook. In addition, the majority of policymakers on the Federal Open Market Committee agreed that it may take up to 5 or 6 years before the economy reaches the Fed's goal of maximum employment and low inflation.
The inflation outlook by the Fed suggests that the central bank has the evidence to keep interest rates lower for a prolonged period of time. With interest rates expected to remain low and corporate earnings beating estimates, investor optimism is high, leading to strong buying interest in stocks.
The stronger Euro and British Pound is also contributing to this morning's firmer tone, but the decline in higher risk currencies is helping to limit equity market gains. Based on this scenario, equity market gains may be limited today as traders try to decide whether to satisfy their appetite for risk or shift to a more risk averse sentiment.
With equity futures posting gains for seven consecutive sessions, technical factors may also be signaling that the market is nearing a short-term top and setting up for a near-term correction. Some oscillators are indicating that conditions have reached overbought status, but pattern watchers are waiting for a closing price reversal top to signal the start of a possible 2 to 3 day correction.
Technically, all three major futures indices are poised to test major 50% levels today. Based on the main range of 1211.25 to 1002.75, the September E-mini S&P 500 could run into selling pressure at 1107.00. The September E-mini NASDAQ has an upside target at 1875.75. The September E-mini Dow is already testing its 50% retracement level at 10323. Traders should watch the reaction when these levels are tested to see if selling pressure is detected. Intraday charts should offer the first clue as to whether the indices are getting ready to top. The best signal to watch for is a closing price reversal top on either the 60 minute or 15 minute charts.
Wednesday's strong reversal to the upside in the September Treasury Bonds was in reaction to the dovish outlook for the economy by the Fed. Overnight this market followed through to the upside, but quickly fell back to unchanged following the rally in the equity markets. At some point today, stocks and T-Bonds are going to move opposite each other. If stocks rally further, then expect a setback in the T-Bonds. If stocks falter and begin to sell off, then assume this is a sign that investors are shifting their focus to the economy, thereby renewing interest in the long side of the fixed income market.
