Better than expected economic data failed to boost the market as traders await the NFP and once again ponder the taper.

Introduction

Global markets were fairly quiet in the overnight session. Asian may simply have been awaiting ECB announcements and U.S. economic data. European indices lost a little ground, ECB and Mario Draghi to blame. The ECB held it's monthly policy meeting today and held rates steady as expected. Unexpected was a lack of comment on future easing. The ECB has indicated recently that it would take steps as needed, following last months semi-unexpected rate cut, which led to this months expectation of QE related talk. Futures trading on the U.S. indices was positive, ahead of today's releases of economic data. GDP and employment claims both delivered big positive surprises. The data added a little fuel to the taper speculation and put futures trading in the negative.


The SPX opened about -3.5 points lower and held it's ground for the first 10 minutes or so. After that the index drifted slowly lower to about -5 before bouncing back up to break even for a brief time. By mid-morning the index had drifted back to retest the earlier bottom and move slightly lower. The other indices traded in similar fashion, drifting in a range just under or slightly above yesterday's closing prices for most of the day. Despite all the positive data the markets appear to awaiting the NFP numbers, as if that one data point could alter all the other positive data we have been receiving. I think at this juncture it's what the market thinks is going to happen that is driving the markets. The NFP could change the markets mind or leave it guessing until the FOMC meets again later this month.

The Data

The first piece of the economic pie, and perhaps the biggest surprise, was the 2nd estimate for 3rd quarter GDP, 3.6%. This is nearly a full percent higher than the previous estimate and more than a half percent higher than the expectations. This number shows the U.S. economy gaining momentum in the third quarter, momentum that could carry into the 4th quarter. However, some of the analysts reports following the announcement have lowered their estimates for the 4th quarter on the basis that expected growth may have already occurred. Estimates given today indicate an expectation for GDP growth to remain flat this quarter. This is the 17th consecutive quarter of growth, if the 4th quarter does come in around the expected level it would full year growth at the high end of the consensus range.

The Conference Board released its reading on the Leading Indicators last week. The index rose by 0.2%, not great, but this follows two months of more robust growth. According to their data the current 6 month period is currently expanding at 5.1% versus 3.1% in the previous period. This expansion led them to increase their forecast for 2014 growth to 2.3%.


Unemployment data was also surprising. Initial claims fell by -23,000 to 298,000 from a revised 321,000. This is nearly 40K lower than the expected 335,000 and very near the long term low. Considering the previous low was caused in part by the California back log it may be appropriate to consider today's number the 5 year low. Initial claims are still trending down; remember that the average number of claims during the time California/Nevada were disrupting the data is around 326,000.


Continuing claims also fell, shedding -23,000 to reach 2.744 million from a revised 3.21 million. This is a new 5 year low, something the news agencies seemed to skip over. The 18 month trend in longer term unemployment is still down and moving lower. If this continues over the next few weeks total unemployment could dip below the 7% level in the next month or so. One thing to note is that the rate of change has begun to pick up over the past 2 months.


Total claims bucked the trend and gained in this weeks data. Claims jumped by over 180,000 to reach 4.096 million. This brings the total number of American on unemployment back over the 4 million mark for the first time in over two months.


Other data released today includes Factory Orders. Orders fell by -0.9%, but this was better than the expected -1.0. Adding to that small bit of good news is an additional +0.1% revision to the previous months data. Tomorrow the much anticipated Non Farm Payrolls report comes out. The expectation is for about 187,000 new jobs to have been added over the past month. Based on the low levels of unemployment claims, the surprising level of ADP jobs yesterday and the run of generally better than expected data this month there is good chance that the NFP could be better than expected as well. A number above 200,000 would be bullish for the economy but could volatility due to taper fears. At the same time unemployment levels could come in lower than the expected 7.2% which is already a drop from last month's 7.3%. This could put the market into a spin. Good data, good economy and growth should be bullish for the markets. The caveat is that it raises the taper question. Regardless of the data I do not have much expectation for the taper to begin before the current consensus of spring 2014.

Oil Moves Higher

Oil prices moved higher today by roughly 0.5%. Strong U.S. data helped to support prices. There is some concern over supply at this time but the longer term outlook is still good. International tensions are easing at this point but regional disruptions remain. Libya is expecting to be back on line soon but a lot can happen in two weeks. The Oil Index has retreated over the past two weeks from a 6 year high and a long term resistance set during the 2008 top. The index is still bullish in the longer term but the short term weakness could persist. Indicators are currently bearish and moving lower. The index is at the support of the 30 day EMA. The next support levels are around the 1450-1425 levels with short term resistance just above the current level at 1480. Long term resistance is at the 1500 and will be important for the longer term direction of this index. A break above 1500 could carry the index up to 1600 or higher.

Oil Index

Gold Sinks Again Gold lost over $28 at one point during today's session, setting a new low below $1320. Yesterday's rally has been attributed to short covering and it looks like that may indeed be the case. At this time there has been no catalyst to begin moving into gold that I can think of. The metal is indicated lower and could easily reach and retest the long term lows set earlier this year. Meanwhile, the Gold Index has broken below the pennant formation, set a new low for the current bear market and is heading lower. My current target remains near the $65 level and a full retracement of the 2009-2011 bull market. Indicators on the short term daily charts are bearish. Long term MACD is currently crossing the zero line into bear territory. This could attract momentum based sellers, especially if there were a pull back or consolidation in the short to near term.

Gold Index

The Dollar The dollar lost ground against the euro and the yen. The euro surged against the dollar following the EBC meeting this morning. The lack of dovish comment from Mario Draghi helped to firm the currency. The pair has broken back above the 1.3650 level with bullish indicators. This pair may remain at elevated levels until the FOMC meeting later this month.

Euro/USD

The USD/JPY fell today, dropping below the 102 level. Economic data and taper speculation could be the cause of weakness in this pair. MACD and stochastic indicate near term weakness but the long term trend is still up. Current speculation puts the possibility of further easing from the BOJ at their meeting in two weeks. Previously, the BOJ has stated that it would not consider adding to QE until the spring of 2014 but has recently indicated they could act sooner than expected. Options laid out by BOJ governor Kuroda include increasing the current bond purchasing program and/or including the purchases of riskier assets as well. This pair could remain weak or enter a consolidation over the next two weeks ahead of the BOJ and FOMC meetings which occur nearly simultaneously this month. The FOMC will reveal their plans on Wednesday the 18th and the BOJ will do the same the following day. Until then support is at the short term moving average around the 100.50 level with resistance near 103.75.

USD/JPY

The Indices

The markets opened very quietly this morning. It was kind of eerie, the SPX made nearly no movement for at least the first ten minutes of active trading. The quiet could even be felt through the TV as I watched CNBC. The background noise coming through the microphones was very subdued, I mention this because some days you can hear the hustle and bustle (I watch a lot of CNBC, it may be a sickness). By 10am the indices had begun to drift, the SPX moving down to make an early low about -5 points lower than yesterday's close. The morning and early afternoon saw the indices drift up and down within the range set early in the day with some bias to the lower end. Later in the afternoon the SPX moved down to make a new intra-day low just above the short term moving average before closing just off of that low.

SPX Hourly

The markets appear to be in a wait and see mode. The data has raised, again, speculation that tapering is coming and maybe this month. I personally don't see it happening this month because the data doesn't support it based on what the Fed has been telling us all along. This isn't the first time that the taper has caused a correction to trend and it may not be the last. Since hitting the peak in mid-May of this year the taper has caused three and now four such corrections. So far, this correction seems to be much shallower than the previous ones. At the present time the SPX has corrected back to the short term 30 day EMA. The indicators are bearish and moving lower but the candles suggest that there is some support at this level. I expect to see some form of confirmation in tomorrow's trading after the NFP release.

SPX Daily

In the longer term the SPX is still bullish but momentum is in decline. The support indicated on the short term daily chart could hold tomorrow but if not additional support levels exist at the top of the rising wedge pattern around 1750 and the long term up trend line around 1725.

SPX Weekly

Price action over the past five trading days has brought the Dow Jones Industrial Average down to retest support. This support is the top of the previous 6 month trading range that was broken early last month. The Transports led the Industrials to make the break out and if this indication is still reliable we can expect them to continue higher. Of course, there is the NFP and what it means for the taper to get past first. If the index holds support upside targets exist around 16,500 and higher. If support fails downside targets exists at the 150 day EMA and the bottom of the previous trading range.

Dow Daily

The Transports made a much milder than the either the DJI or the SPX. This index is also sitting just above the short term 30 day EMA and showing some signs of support at this level. This index has made three new highs since breaking out of its comparable range. If this holds true for the Industrials there are still two more highs to come. However, as I said before, we have to get past the NFP. A strong number could mean taper sooner, an OK number could mean taper in the spring and a bad number could leave the markets scratching their heads wondering about the recovery.

Dow Transports

The taper seems to be a bit of a Catch 22. Quantitative easing is meant to help the markets and according to the data it is. Good data means strong economy and strong markets and that means higher stock prices. The catch is that good data also means a beginning of the end to FOMC support of the market (tapering), which some still view as bad. The thing is, tapering means the economy is on stable footing and expanding on its own which is a good thing. What it doesn't mean is that QE is over, just lesser. If the economy is improving and QE of any amount is still in place the market has a tail wind to push it higher over the longer term. In the shorter term it looks like we might get an indication of where the market wants to go tomorrow at 8:30AM when the NFP is released. At least we may not have to deal with another round of debt ceiling posturing. Moves are being made to pen a deal to fund the government for up to two years instead of just months like the last time.

Until then, remember the trend!

Thomas Hughes

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