The major indices make their biggest moves of the year ahead of the NFP report.

Introduction

Futures trading began positive on what turned out to be a pretty good day for the markets. The S&P 500, Dow Industrials and Nasdaq all made their biggest moves since mid-December 2013. positive statements from the BOE and the ECB, economic data and earnings all helped, along with an understated expectation for tomorrow's NFP. The BOE and ECB both held rates steady, maintained their accomodative postures and reaffirmed improving conditions. Here at home a string of semi-positive economic data and better than expected earnings helped the markets gain traction. Futures were steady around +5 for the S&P 500 up into the open of today's trading. After the open the indices opened in the green and then moved steadily higher into the early afternoon. The S&P, Dow and Nasdaq all closed near the highs of the session.


After hours trading was filled with action as well. Numerous earnings reports were released that will impact trading in the morning. Linkedin reported earnings that beat estimates and then guided the full year lower. Shares fell on the news but found support before the the end of trading. Expedia beat on the top and bottom line, sending the stock up about 10% in the after hours. Newscorp really blew away estimates, beating by more than 50% of the consensus regardless of lighter than expected estimates.

The Economy

Lots of data today. First on the list is the Challenger, Grey and Christmas survey of planned lay-offs. The company reported that January planned lay-offs jumped by 47% from December. December's number was a 13 year low. The report cited increased lay-off's in the retail sector driven by the weak December sales. The increases in planned lay-offs due to the post-Holiday lull in retail is not unexpected.

Initial claims for unemployment fell by 20,000, more than expected, to 331,000. The previous weeks number was revised up by 3,000 for a net drop of 23,000 from last weeks report. The four week moving average of claims rose by 750. Claims are at relative low levels but still basically flat for the past year. The spike in claims last week could be attributable to the forecast jump in lay-offs reported by Challenger. I would like to see this number stabilize more and begin to move lower again. Within the report there are 20 states reporting a drop in initial claims for a total near -55,000. Only two states reported an increase in claims greater than 1,000, Indiana and Massachussetts, for a total near +6,500. Declines of lay-offs in retail, contruction, manufacturing and many others were cited by many of the states. Based on this data and the Challenger report it looks as if last weeks spike in initial claims is directly related to post-Holiday lay-offs and that those lay-offs are diminishing or over. Seasonal adjusting is also still weighing heavily on the data as well. I have started to track the unadjusted figures and will be providing them in the near future.


Continuing claims gained 15,000 from a mild lower revision to last weeks figures. The gain puts this weeks number of continuing claims at 2.964, basically flat from last weeks report. This is down from the peak we saw just after the Holiday season but still off the lows seen last fall. If initial claims remain in the 330K range or lower this number could fall as well, until then it bears watching for signs of increases in total unemployment.


Total claims fell once again, due to the expiration of the Emergency Unemployment Compensation program as stated in the report. Claims fell by over 115,000 to reach a new low under 3.5 million. The decline is good in a sense but does not reflect an improvement in the jobs picture. Once we can be assured that declines are not due, or are not only due, to expiring benefites, we can get a better picture of the long term unemployment situation. One question I have concerning this is “How will the drop in claims/expiration of benefits affect the participation rate?”


Tomorrow we will get the “all important” Non-Farm Payrolls report. Last months NFP report was a shock, especially after the ADP report revealed that over 230K new jobs had been added. This month's ADP suggests that job creation is still strong...no guarantee that it the NFP will be the same. Almost as important as the new data will be any revisions. Last months NFP was far off of the ADP figure I am expecting a fairly large revision. A big revision to last months numbers could help the market shake off the near term doldrums it is experiencing but a strong number for this month will be needed as well.


The trade balance widened in December a little more than expected. The deficit expanded by 12% in December but remained at a 5 year low in 2013. Total 2013 trade deficit totalled $471.5 billion, the lowest level since 2009. The gap widened on fewer exports, a fact that has caused some analysts to suggest it could affect 4th quarter GDP negatively.

Non-Farm Productivity climbed by over 3.2% in the fourth quarter. This is ahead of expectations and just off of the previous quarters gain of 3.6%. Unit labor costs fell at the same time, also more than expected. Costs declined by over 1.5%, versus the expected 0.5%.


The Dollar

The Dollar Index fell back below the 81 level today. A policy meeting of the ECB and statements from Mario Draghi helping to boost the euro, driving the euro heavy index lower. The ECB held interests steady at 0.25% as expected, and indicated that further easing or other actions would be taken as needed. The ECB sees inflation low for an extended period of time and that there is no risk of deflation currently. The move and statements helped to boost European stocks as well as the euro. The Dollar Index has been trending sideways around the 81 level for over 3 months now. Short term indicators are without direction at this time. Longer term indicators are currently bullish but also without any hint of clear direction. Currently resistance is around $81.25 with support at the 80 level.


The ECB stance and statements from Mr. Draghi were bullish for the euro, at least for today. The bank sees no signs of deflation at this time and will remain accomodative for as long as neccesary to get the region back on firmer footing. The reassurances the bank would do whatever was needed and would “take action as required” did a lot to support the market in light of weakening data from China. The EUR/USD moved up form support at 1.3500 but was capped at the short term 30 day EMA around the 1.3600 level. These two levels are coincident with longer term support/resistance lines and could keep the pair contianed until the NFP release tomorrow. The pair seems to be gaining some support around the 1.3500 level but indications are still weak and unclear.


The economic data and expectations, hopes maybe, that tomorrow's NFP will be good helped to lift the dollar versus the yen. This pair was able to regain a support level breached earlier in the week but indicators remain bearish. The MACD is only mildly bearish and in decline but that could change if the pair is not able to remain above the 101.60 level. Stochastic is making a bearish cross into oversold territory, which indicates that more weakness could come. I am still a longer term bull on this pair but I think the NFP could have a big impact on the pair tomorrow. Weaker than expected could hurt the dollar versus the yen and bring the pair back below support, possibly triggering a bigger correction back to the 97.50 level.


The Gold Index

Gold prices popped initially this morning but fell back after the open of equities trading. After the initial gain of $10 (0.80%) prices retreated into the red. Expectations for tomorrow's NFP are affecting trader outlook's on the metal. A strong report would put the labor trend back on track which is taper/dollar positive and a possible reason to expect a drop in gold prices. Gold has been trading sideways for over two weeks, testing resistance around the $1265-$1275 region. The Gold Index has also been trading to the side but with a bit of a downward bias. The index is moving down under perceived pressure of the long term down trend and has crossed back under the short term moving average for the first time in nearly a month. Both indicators are bearish and consistent with a downward movement in a down trend. The index is currently trading at a possible support zone with next support around the long term lows near $82.50. Resistance is just above the current level along the long term trend line.


The Oil Index

West Texas Intermediate, Brent and natural gas prices all hit new highs todays amidst a flurry of events. U.S. jobs data, the ECB statements and supply disruptions in Libya helped to lift crude prices while the record cold across the U.S. has led to a shortage of propane and other home heating fuels. Natural gas prices retreated from long term highs set yesterday (over $5.50) but remained above the $5 handle. Supply of natural gas and other products due to the cold snap is hurting prices in the short term. Supply should come back in line as soon as infrastructure catches up, however there is growing chatter about hedge funds betting on a major shortfall in supply. Texas governor Perry has lifted some regulation already in order to prevent delivery delays for the near term at least.

The Oil Index has not been trending up. The prolonged period of low prices, decreased production levels and narrowing margins produced a string of dissapointing earnings reports from the oil sector. The Oil Index moved higher today, but from a new five month low set yesterday. This low is below my previous target for the index, which is now resistance. Momentum is bearish and getting stronger, pointing to at least a retest of the recent low. There is a notable convergence of MACD in the shorter and longer term analysis of the indicator. The current peak consists of three waves, each bigger than first while at the same time the entire peak is larger than the previous bearish peak made in December. Resistance is currently at 1400 with support near 1375 and 1350.


Story Stocks

The wires were buzzing with story stocks today. Earnings, guidance and M&A were all present. GM reported a big earnings miss. The company reported earnings of only $0.67 per share versus the expected $0.88. Europe was a big problem for them, producing a loss for company while restructuring costs for the region are also growing beyond previous expectations. Other reasons for the miss include lower margins, higher tax rates and cold weather. The flipside is that North American operations were up over 40% for the period. The stock opened at a new four month low but buyer quickly stepped in to bring prices back above yesterday's close.


Kohl's cut its earnings outlook to below the expected range. The new target is fourth quarter earnings of $1.53 versus the previous range of $1.59-$1.74 and consensus around $1.62. Guidance was lowered due to weaker than expected January sales which led to a 2% decline in comps. Low traffic was one reason, a lack of clearance merchandise another. The company is scheduled to report earnings on February 27th. Today the stock jumped more than 4% on the news and then created a really nice doji.


Coca Cola announced a $1.3 billion stake in Green Mountain Coffee Roasters. The move is part of a deal that will allow Coke to enter the in-home beverage arena. The plan has a ten year time horizon that will make Coca Cola products available through a Kuerig cold beverage system in development. The stake is worth about 10% of Green Mountain which said it would use the money on a substantial share repurchase program in order to alleviate dillution. The move puts the partnership in direct competition with Soda Stream. Shares of GMCR jumped 25%, COKE only about 1%.


The VIX

The VIX is up near relative high levels but appears to have peaked for now. The next step is to see where the next valley forms. Looking back over the last year the index retreats pretty fast once the long erm up trend in the S&P 500 resumes. That is the question now. The S&P is currently below trend and testing long term support. Tomorrow's NFP report has a lot of importance. It could be the piece of information confirming the bearish outlook provided by the last month of weak data. Or it could provide reassurances that the long term trend in the labor market is still OK. The indicators are currently consistent with a peak in the index; bullish MACD is not overly strong and receding quickly, stochastic is rolling over right at the overbought line. If the index does not fall back to the previous low levels there could be some more volatility ahead.


The Indices

The S&P 500 has corrected to the long term trend line and then some. It broke my line earlier this week but has not confirmed the break with enough force to be definitive. Today the index made a strong upward movement to test the line for resistance. Declining bearish MACD and the oversold stochastic, in light of the long term uptrend, could be pointing to another buy-the-dip opportunity. This does however depend on your outlook and the NFP numbers tomorrow. A good number will mean that the labor market is still firm and that the state of recovery is OK. A bad number could mean the economy may have a bad quarter and the correction continues. I'll be watching this line for a break back above it or not. A failure to regain the trend could lead to more selling or at least a drifting market until something else changes. Support targets if the index continues to fall are around 100 points lower near the 1675-1685 region.


If the markets do continue lower a corresponding move on the Dow would take it very near its long term trend line around 14,750. The Dow also has a corresponding resistance line, the top of the trading range the index broke out of last November. Momentum in the short term is still bearish but is declining, along with the oversold conditions could be indicating the bottom of a dip, but could also lead to further weakness. Dow traders are waiting for the NFP tomorrow too. Even if you discount the debated importance of the number as an indicator of the economy, it is still a high profile monthly indicator with the power to reassure, scare or provoke the market into moving. Near term resistance for the index is around 15,750 with support near the long term tred line about 1,000 points lower.


This correction could be a bigger roller coaster than I previously expected. It may not be over yet. The possible catalyst to reverse or extend the pull back is the Non Farm Payrolls and Unemployment reports released tomorrow before the bell. The numbers, and the revisions to last month, are going to have a big affect on labor market outlook which is already under pressure. There are also quite a few economic releases on the schedule for next week and earnings to consider as well. Earnings for the the past quarter continue to come in, on average, ahead of expectations while guidance is weak, adding downward pressure. For now, the trend is up and the next hurdle to jump is the NFP.

Until then, remember the trend!

Thomas Hughes