The major indices had a case of the blues on the first day of trading in 2014.

Introduction

The day, and the year, began with mixed data. Data that support the current global recovery but not robust expansion. First, Chinese official PMI fell to 51.0, weaker than expected but still expansionary. This was balanced by the HSBC China PMI reading which came in as expected at 50.5. In Europe PMI also came in as expected but there was some isolated weakness. France being the notable one. Greece and Spain both performed slightly better than expected, not a big deal for us but definitely a piece of the global puzzle worth being aware of. Asian market closed mostly in positive territory while the European indices gave up ground nearly across the board.


Data here at home was not much more inspiring, it certainly did not help to support the markets on an intraday basis. Unemployment claims have moderated from the peak seen last month but remains a spot of worry. At the same time construction spending rose at a faster 1% rate than expected for November while October figures were also revised higher. ISM manufacturing data cooled slightly from last months 57.3 to an even 57 for the current month. This is just off of a two and a half year high set last month. Within the report one of the best performing segments was employment. Early trading saw futures hover just under break even from the last closing prices before the end of the year. After the release of data there was a little weakening to the trade but only 2-3 points on the S&P. At the open the markets held their ground for a brief time before they began to sink to the early morning lows.


Oil and gold both made big moves today as well. Oil prices were hit hard by the expected reopening of Libyan oil facilities. The country has been rocked by tribal and civil war that has reduced production and delivery to roughly 10% of levels seen earlier this year. At this time rebel leaders and the Libyan government are targeting an opening later this month. As for gold, the metal gained about 2% in today's trading. The first of the year and low low gold prices could be attracting some investors to begin rebuilding positions. Other news of interest today was a series of up and down grades on some notable stocks.

The Employment Data

Unemployment was first up on the economic calendar today. Claims fell by 2,000 from an upwardly revised 341,000 to hit 339,000. The upward revision is 3,000 claims from last weeks reported number for a net gain of +1,000 for the current week. Initial claims appears to be moderating from the spike last month, the cause of which is still unclear. It may have been merely an affect of seasonal adjusting or have some other more sinister cause. However, at this time it does appear that if there was any downtrend in initial claims developing it has been negated. Initial claims may not have an impact on overall unemployment in terms of an increase but I don't think it is doing anything to help in terms of a decrease either.


Continuing claims looks a little better. This week continuing claims fell by nearly 100,000 to hit a 5 week low just off the long term low set in November. The downtrend in continuing claims is in better shape and could help in terms of overall employment numbers provided that it keeps coming down and doesn't bottom at the current levels. The real danger for overall unemployment now is the elevated levels of total claims. This figure has increased to an alarming extent and could lead to an increase in unemployment. An increase in unemployment will surely lead to speculation over the taper and possible a pause at the next FOMC meeting later this month. Non-Farm Payrolls, ADP and U.S. Unemployment figures are being released next week amid a host of other important data. The current expectation is for job growth to moderate to around 185K from the previous months +200K and for unemployment to rise mildly to 7.1% from 7.0% last month.



Oil Retreats From $100

Oil prices had been flirting with the $100 level but today fell back sharply. The weak, but expected, Chinese data gave cause for concern demand weakness while at the same time the expected to opening of Libyan oil facilities has eased supply concerns. Oil prices fell by over 2% in today's session. The Oil Index is likewise retreating from a longer term resistance zone around the 1500 level. This level held the index at bay in November and could do it again now. Momentum is peaking and the index is approaching overbought levels at the same time, adding weight to resistance at this time. The long term trend is still up but a correction looks possible with support zones at 1475, 1450 and 1425.


Gold Jumps 2%

Gold prices jumped roughly 2% today. This could be the start of a bounce but that is still question. Today's gain came with very light volume and could easily be a short term swing. The long term trend in gold is still down. The spot price encountered resistance at the $1225-30 level, an area of previous support just prior to the fall below $1200. The Gold Index has been able to maintain prices in the face of gold reaching new lows. The index has been trading sideways over the past month and has just now reached and retouched the 30 day EMA. There is evidence of a potential bottom forming in the stochastic on the daily chart but it is still very weak and not something to trade on. Looking at the longer term chart of weekly prices the index is not showing signs of bottoming and looks as if it could drift even lower. The key will be gold prices and gold profits. If gold prices bottom then I would expect to see the index bottom as well. I have been hearing and reading more and more about the possible bear market in gold for 2014 so I am still bearish but with the new contrarian idea a bottom could be coming soon.


Currencies Mixed

The currency markets were a bit mixed today. The dollar gained against the euro and fell versus the yen. The EUR/USD fell from retesting resistance at the 1.38250 level confirming it as a longer term resistance and its potential as the upper boundary of a trading range. The indicators are bearish and moving lower, adding to the argument a top, if only short term, has been reached. The current pro taper stance of the FOMC could continue to strengthen the dollar against the euro provided the ECB makes no changes to their policy. The ECB will hold their monthly meeting next week on the 9th. The pair is currently sitting on an equally important support level, a break below this range could bring the pair as low as 1.3500 or 1.33750.


The dollar weakened versus the yen in today's trading. This could be simple profit taking as the pair has been moving higher over the past two months. At this time the indicators are bullish and pointing to higher prices for this pair. At this time the Fed Taper and the BOJ QE program have these two currencies moving apart in value. This could continue on into the future provided the Fed does not need to pause or reverse the taper. The BOJ still has a year to go in it's plan so I do not see them reducing their efforts any time soon. The pair could consolidate at or above the 103.75 level before making any move higher as data rolls in and traders assess the taper situation. A break below this level would be bearish for the pair and could lead the BOJ to act sooner than expected to re-stimulate the Japanese economy. The next BOJ meeting is January 21st.


Story Stocks

A flurry of up and down grades had individual stocks moving in the early trade. Apple received a downgrade from Outperform to MarketPerform at Wells Fargo. The investment banks says that higher margins are already being priced in to the stock. Apple shed 1.5% today but was able to maintain support above $550. This level is coincident with the short term 30 day EMA and previous support/resistance. Indicators also suggest there is support for the stock at the current levels. Don't forget that Apple just significantly increased its potential customer base with a deal to sell iPhones to China mobile customers.


U.S. Steel got an upgrade with an increased 2014 earnings outlook. KeyBanc upgraded the company from hold to buy citing a benefit from higher steel prices and a break on the cost of raw materials. The bank increased its earnings outlook by 25% and sent the share price up on what was a down day for nearly every other stock. U.S. Steel has been in an uptrend since early September. Indicators are currently bullish but suggest a peak may have been reached. Today's shooting star/pin bar type candle stick echoes that possibility. $30 is first support but $27.50 looks more likly to hold, if a pull back does occur.


Urban Outfitters was also upgraded from hold to buy at Jeffries, who called it a top pick for 2014. Jeffries thinks that Urban has potential to benefit from a better position and improved margins over the next year. The stock jumped in the early trading and was able to post gains for today, although it sold off from the early high. The stock has been trading sideways for over a year now and is currently below a strong resistance zone.


The Indices

This year did not start off with a bang, at least not the bang many bulls had been hoping for. The markets began the day with a little whimper, moved lower and then kept moving lower into the end of the day. The sell off was not wild, not driven by fear and did not come with a lot of hooplah. This leads me to think it is nothing to be too worried about, at least for now. There is the possibility that a little selling could lead to a little more selling and to a little more selling until we're in a bear market but that is not likely. Today I think was a mixture of profit taking and wait-and-see. The S&P, Dow and Nasdaq closed out last year with gains in the 25%-30% range, a very attractive place for some to book profits.

The S&P opened with a loss of -2 points and slowly moved lower throughout the day. The early mornings saw near term support at the 1835 level hold for a few hours until it broke down. Once broken the index moved to test the 1830 levels. Both levels are above the closing levels of December 20th (1818 S&P)the last day of trading before the two week holiday period. Late afternoon saw some support kick in around 1830 that helped to keep the index from closing off of the daily low.


On the daily charts the S&p 500 is trending up and above support. The index has bullish indicators but may be at a near to short term peak. The MACD momentum is in decline and stochastic is overbought. The 1818 level will be important to watch over the next few days to a week as the market volume steps back in from the holiday. Likewise, the longer term weekly charts are also bullish but suggest a shorter term peak may have been reached. This peak could be a consolidation, a small pullback or a full blown correction. It will be important to watch support levels for break-throughs and/or confirmations. Data, starting tomorrow and continuing through the end of next week, will be incredibly important for market direction. The data will need to be in the sweet spot that means the economy is growing just fast enough to be strong and need the taper but not strong enough that tapering is sped up. Until broken or confirmed, the 1818 level is the one to watch for me.


The Dow also had a bad first day of the year. The blue chip index fell by 0.75% with indicators suggesting a near term peak has been reached. The index is well above support, about 2% above the short term moving average, and ripe for profit taking and short term selling. The longer term trends are still up at this time with support around 16,215, 16,100 and 16,000.


The Nasdaq was not immune to today's sell off. The tech heavy index came closer to testing the December 20th closing prices than the other two indices but still remains above that level. This index is also trending up with indication a near term peak may have been reached. Current near term support levels exist around the 4,100 and 4,050 levels with longer term support around 4,000.


The indices are still trending up and I think so long as the economy continues to improve the indices will continue to move up. Data is an important factor in this theory, if the data is good the economy is good and the market will be good. The economic data will need to show that the economy is improving, resilient and able to stand on its own two feet. The next two weeks are packed with data and could present another buy-the-dip opportunity.

The monthly releases of auto and truck sales is on tap for tomorrow. Monday, factory orders and ISM followed by FOMC minutes, trade balance, mortgage index and the all important monthly employment bundle; ADP, Challenger, NFP and U.S. Unemployment rates. No one data will reverse the market but the group as a whole could negatively impact outlook if it is less than expected. Until then, expectations are for a slight moderation in growth from the previous month but nothing alarming. Volume was light across the markets, adding to today's volatility, and could remain that way until next week.

Also on the horizon, earnings season. It is that time again. Alcoa reports earnings next Thursday and is followed the next week by the big banks.

Until then, remember the trend!

Thomas Hughes