Introduction

Futures trading was quiet this morning ahead of the open. Tantalizing clues revealed in the unemployment claims data failed to spark a significant rally today. Traders are awaiting the Non-Farm Payrolls and Unemployment releases which come out tomorrow. These releases are yet another milestone in the unfolding job market recovery. There are growing expectations for a surge in job growth later this spring and this report could do a lot to bolster arguments for either side of that debate. Other data released today helps support a stabilizing economy.


The retail sector released same store sales data this morning as well. Retailers were able to make a comeback in February. Several were able to beat expectations for comp store growth and indicated that they expected sales to continue at or about the same pace. The bad news is that only 13 retailers report same store sales so its hard to put much weight on it anymore.

World banking leaders maintained current policies. The BOE, the ECB and the BOJ all held firm on current policy and some even hinted at further easing. Japan is waiting on the confirmation of a new BOJ Governor and an expected aggressive economic stimulus program. The ECB and Mario Draghi reiterated their stance of resumed growth in the second half but downside risks remain. Gold and oil both traded to the upside on that news.

One economic release came after the bell, stress test results from the banking sector. The release did not have much effect on banking stocks during market hours, the sector was one of best performers today. The index broke out and set a new high today. The index formed a strong white candle and looks good for some more upside. The average capitalization ratios for the 18 major U.S. banks was 7.7%, much better then the 5% target. Only one banks was found to be under capitalized.

Bank Index

The Economic Data

The unemployment claims data offers some new hints at the strength of the labor market. Initial claims fell by 7,000 to 340,000, near the 5 year low. The 4 week moving average also dropped by 7,000 and did make a 5 year low. Both of these numbers are great but both are also still basically within an expected range and don't really show that much improvement. The low levels are really good though when you consider the housing recovery that some analysts are predicting will improve this year. A surge in employment in this sector could do a lot to significantly lower these figures. There is also annual spring and Easter hiring to consider. The biggest decrease in claims came from California with a drop of -40K. The biggest increases were in MA, NC and IL with around 7,500 new claims between them.


The continuing claims figures were the most revealing in my opinion. This weeks number rose by 3,000 but is still just off the 5 year low. This figure has been trending downward for a couple of months now. This is suggesting to me that people are getting laid off but are maybe finding a new job faster than before. This drop could also help lower the overall unemployment rate, especially if it passes through to the total number of claims.


Total claims for unemployment did indeed drop this week. This number fell by a fairly large 362,000 to hit a 2 month low. This is nice to see. Total claims have been elevated for a few months, perhaps due to pre-Fiscal Cliff and sequester decisions. A drop in total claims will definitely help lower the unemployment rate. The question is why is it falling? Are people finding work or are they falling off the books? Are they not looking for work anymore or did they take early retirement? There are a lot of reasons for this number to fall that have nothing to do with new job creation.


The ADP number released yesterday and the Challenger survey of planned layoffs both help support the idea of a stable jobs environment. The ADP number was bigger than expected and could lead to a surprise gain in U.S. NFP. The ADP increase isn't huge, or even that strong, but does mark the third month of elevated activity. The Challenger survey rose by 7%, showing an increase in planned layoffs. This is a negative indication but was expected after last months sharp drop of -24%. On a net basis planned layoffs are still down nicely from two months ago. Tomorrow's unemployment rate is expected to remain steady with last months 7.9%. I agree with this but also think there is a small chance for a surprise drop.


The trade deficit grew in January but perhaps has a silver lining. The deficit increase was due to an rise in imports. This is a negative on face value but maybe is a sign that the world economy is improving. Sure, we bought more foreign things but they sold more. We are all looking for signs of improvement in the global economy, this could be one. Another thing to keep in mind is that this is a lagging indicator. January was two months ago, we know it was slowish. The forward view is still hopeful and the employment data is helping to fuel that sentiment.

The Retail Sector

As I mentioned before the retail sector, or a piece of it, reported same store sales data. For the most part results were good and even better than expected. Weakness due to late tax returns and other seasonal factors seen in January has begun to reverse but comps were still muted. Limited Brands, Costco and Stein Mart were all headliners. Coscto posted one of the biggest gains with a 6% jump in sales. Retail stocks responded well to the news and were one of today's best performing sectors. The Retail Spyder XRT popped in early trading and set a new intra-day high. This ETF is currently bouncing off its moving average with bullish technical indicators.


Around The World

The BOJ kicked off the day and left policy unchanged at their monthly meeting. Although nothing was done today bold action is expected soon. The board is currently awaiting the confirmation of Haruhiko Kuroda as the new governor. This action could come as early as next month at the next meeting. There was some discussion of moving up the planned start of the current asset purchase plan but it was voted down. The yen responded by losing ground to the dollar in anticipation of the expected stimulus. The USD/JPY currency pair broke above near term resistance and is indicated higher. This trade has been bullish ever since Abe was elected Prime Minister. Now that it appears his plans are moving forward this trade could get some new legs.

USD/JPY

The ECB followed suit and held its key rate steady as well. The statement released alongside the announcement and Mario Draghi's comments afterward both restate the view of a return to growth in the second half but that downside risks remain. The stance of the bank will remain accomodative and that structural reforms should work their way through the system. The risk present are enough for Citibank and others to predict a rate cut at the next meeting. If this were to happen, and take note that it would be coincident with the “aggressive easing” policies expected next month, it could be a major catalyst for equities and currencies. The euro gained strength versus the dollar today, bouncing off the 1.3000 support line, but was capped at the 1.3150 resistance. The EUR/USD pair is oversold at this time but momentum suggests at least a retest of the 1.3000 level. The euro may be volatile and/or range bound over the next month, especially if the possibility of an ECB rate cut grabs the markets attention.

EUR/USD

The Gold And Oil Indexes

Gold traded up today but remained below the $1600 mark. After an initial jump higher it lost some ground but managed to stay above yesterday's closing price. The news-as-expected releases by the world central banks did not have enough steam to move the market higher. The Gold Index tried to stab its way through the $150 level but was repelled back by resistance. The index is trending down with bearish technicals on weekly and daily charts. Yesterday's bounce was off of the 61.8% Fibonacci retracement so it may provide some support but we'll have to watch it for signs of its strength. A break below this retracement could take the index all the way down to the next level around $110.

Gold Index

Oil and natural gas both traded to the upside today. Signs of a strengthening U.S. and world economy are leading to some speculation on future demand. The Oil Index gained marginally in today's session, just under a long term and important resistance line. The MACD and stochastic are indicating market strength on weekly and daily charts but this resistance, at the $1350 level, could prevent a move up. A break above it would have a target around $1400.

Oil Index

The VIX

The VIX has retreated back below 15 and it is indicated down at this time. This is a sign that traders are not in the market for downside protection. The seeming strengthening of the economy and somewhat expected jobs recovery are definitely urging the bulls on. The NFP release and the Unemployment Rate could have a big impact on this. Good numbers could help lower views of downside risks and send the VIX down further. Bad numbers could cause it to spike as traders ponder the validity of so-called signs of economic strength.

The VIX

The S&P 500

The S&P 500, the DOW and the NASDAQ all made new closing highs today. The rising tide is being supported by what looks at this time to be a strengthening U.S. economy. This strong economy is a house of cards though, and one that could come tumbling down. There are risks to the economy and a lot of speculation over what will happen when the Fed unwinds its policies. A couple of weeks ago I went over the secular range and pointed out how, on a technical basis, I did no think the secular bear market would be broken. Today I want to bring up the possibility of what if it does? The economy could be gaining traction, jobs could be improving and the rest of the world seems to be right behind us.

SPX daily

My projected target for the SPX based on the February-March EMA bounce is 1600 and takes it past the all-time high and top of the secular range. My long and short term charts are both bullish and are indicating such a move is possible. The DOW is already at all time highs, it only makes sense for the S&P to follow it. Tomorrow could bring a little volatility to the market but if it does I don't think it will derail the rally. Looking ahead, if other parts of the world return to growth as well, gaining traction together, the data could take the index much higher than 1600. The downside is the possibility data will deteriorates over the course of the next few weeks and months. The market will could still break out to new highs but it would be a bull trap of colossal proportions.

DOW daily

Keep a watch for any signs from the labor market, official or anecdotal, that could indicate strength or weakness. The economy is ready to expand but we need a catalyst. The housing market could be the support we need to get that going. Tomorrow's big event is the release of Non-Farm Payrolls and the Unemployment Rate, both before the bell.

Until then, remember the trend!

Thomas Hughes