A massive round of data hit the markets overnight and this morning, shaking the bulls and sending indices back to support on options expiration eve.

Introduction

To say that today's deluge of economic data was massive may be an understatement. Today is one of those rare days that happens every couple of months or so when the day (Thursday) coincides with the date (15th) to provide us with the regular weekly releases and the mid-month macro releases such as CPI, TIC flows and Philly Fed along many many others. Not to mention that tomorrow is options expiration.

Setting the stage for the early futures trade were GDP releases from Japan and the EU. Japanese GDP rose by 5.9%, ahead of expectations and the fastest pace since the 3rd quarter of 2011. Analysts see increased consumer demand, driven by monetary policy, as a major reason for the gain. In the EU GDP was not as robust, with the expected areas of strength and weakness. As a whole the EU gained by 0.2%, below the expected 0.4%, led by Germany with an increase of 0.8%. German strength was off-set by countries such as France and Greece which both experienced declines.


As for the domestic data I can divide that into two categories, the 8:30/pre-opening releases and the 10:00AM/post-opening releases. On a pre-opening basis the data was really OK. Jobless claims fell across the board to new lows while inflation data came in as expected and regional manufacturing data showed an unexpected jump. Post-opening data was not so rosy. Homebuilder confidence slipped which was I think the straw that broke the camels back in terms of what really sparked today's declines. Tomorrow's calendar is not so full with releases, only three, but they are no less important. Expect to see Housing Starts and Building Permits before the bell and Michigan Sentiment after. Next week FOMC minutes top the list followed by jobless claims, Leading Indicators and Existing/New Homes sales on Thursday.


Futures trading was flattish to negative during the earliest part of the morning. Then as data and earnings from Wal Mart and others was released the markets began to slide lower. Going into the open the S&P 500 was indicated down by about 3-5 points and opened weak. The indices held this ground for the first half hour or so with 1800 appearing to be support for the SPX. Then around 10AM the indices began to slide further into the red with the SPX doubling, then tripling and quadrupling its earlier losses dropping to near -24 before lunch time. Afternoon trading saw the indices tread water just above the daily lows and going into the close.

The Economy

Starting with initial claims, released at 8:30 AM, the data was good. Claims had been expected to increase about 3,000 but unexpectedly fell by -24,000 to a new low not seen since May of 2007. Last weeks claims were also revised higher, by 2,000, for a net drop of -26,000 taking adjusted initial claims to 297,000. The four week moving average also fell this week, to 323,250 from a mild upward revision of 500. On an unadjusted basis claims fell by -19,059 or -6.6%, to 269,689. On a state by state basis PA, TX and IL led with gains in claims totaling about +3,200. NY, CA and NJ led with a total decline near -26,500. This is a good sign for the labor market so long as it means people are finding jobs and staying employed.

Adjusted Claims

Continuing claims and total claims both fell this week as well. Continuing claims fell by -9,000 to 2.67 million, the lowest level since December 2007. Last weeks figures were revised lower by -9,000 for a net decline of -18,000 from last weeks reported number. Looking at the tables it appears as if claims could continue to decline. The total number of people on unemployment fell by -127,674 to 2.705 and another long term low. With these three data points all in decline I would not be surprised to see another round of strong NFP and unemployment numbers at the end of the moth.

Unadjusted Claims

Also at 8:30 were released Empire State Manufacturing survey and CPI figures. Empire State Manufacturing rose to 19.01 in May, versus the expected 5.0 and the previous 1.29 in April. The jump shows a rebound in activity hampered in part by weather. This figure, along with the unemployment data, helped to lift futures trading slightly until other data was added into the mix.

CPI data came in as expected at +0.3%. This level is very tame and in line with longer term expectations such as the end of the taper and potential interest rate hikes next year. Ex food and energy consumer prices rose by a smaller 0.2%, also as expected and in line with the previous months 0.2% rise.

Futures trading began to slip a little at 9AM with the release of TIC flow data. The total amount of foreign money into American investments and banking was an outflow of -$126.1 billion. On a securities basis net TIC flows totaled about +$4 billion. This is well below the roughly $90 billion of inflows seen last month. Foreign residents increased their holdings of securities by $9.3 billion while US investment in foreign assets increased by $5.3 billion.

At 9:15 when industrial production data was released futures trading took a noted turn for the worse with the S&P dropping slowly from -3ish to -6ish. Industrial production fell by -0.6% versus the expected -0.2% drop. March production numbers were revised up by 0.2% to 0.9%. The decline in production was blamed mostly on a drop in utilities output, a drop no doubt associated with the change in the weather from the winter cold to spring thaw. Capacity Utilization also fell, dropping nearly a full percent to 78.6%.

The NAHB Housing Market Index and Philly Fed data, primarily the NAHB I believe, sent the markets down sharply. Philly Fed, while above the consensus expectations, declined slightly from last month. This months reading was 15.4 versus the expected 14.3 and last months 16.6. While a decline in manufacturing is not good in general we have to keep in mind that last months reading of 16.6 was an 84.4% jump from the March reading of 9 and so not unexpected.

The Housing Market Index revealed that home builder confidence was declining, putting a damper on expectations of a housing led recovery. The index fell by one point to 45 and a 12 month low. The consensus estimate was for a gain of +2 to 48. The builder confidence component of the index fell sharply but was offset by increases in expected buyer traffic and higher sales expectations. The indices had been moving steadily lower for the first half hour of trading. Following this release the SPX moved down to the lowest levels of the morning.

The Ten Year

I don't typically mention the 10 Year Treasury Bill in my wraps but today is one to take note of. The mix of economic data sent yields on the ten year down below 2.5%, the lowest levels since October of last year.


The Dollar

The Dollar Index surged in early trading but was pushed back down by resistance found along the 30 day EMA. International GDP data is impacting dollar values across a number of currencies. In Japan better than expected GDP helps to cement the idea that the BOJ really isn't going to add to its already massive stimulus plan. The data also helps to allay fears that the recent usage tax hike would curb consumer spending and keep growth stagnant. Fear of stagnation is one of the things moving the euro. Lackluster growth data in the EU region helps to support the idea that the ECB would be moving toward QE as Mario Draghis mentioned last week. He said that the ECB could move as soon as next month. The index is currently above the 80 level and potential support but below the short term 30 day EMA.


The Dollar softened versus the yen. The positive Japanese GDP strengthening the yen due to reduced expectations for increase BOJ stimulus. The pair has been trading along the bottom edge of a 6 month trading range that may be breaking down. The position of the BOJ on not needing to increase stimulus, plus the better than expected GDP could be signaling a break down in the underlying fundamentals that drove the USD/JPY up to its current levels. The 101.50 level is going to be an important one to watch in the near future. A break below this level could bring the USD/JPY down to 100 or lower. Going forward data will continue to be important for this pair. Anything suggesting that the April usage tax hike is having a negative impact on the Japanese economy or consumer could renew hopes of increased BOJ stimulus.


The Gold Index

Gold prices initially traded to the upside today, above $1300 and near to $1305. That is until the data started to come out. The data wasn't good enough to inspire buying off stocks but it was good enough to support taper and interest rate expectations. Gold prices tanked right at 8:30 with a near vertical decline from the morning highs of about $12 dollars. Throughout the day prices tried to regain $1300 but failed each time before moving back to the bottom of today's range before the close.

The Gold Index has bobbed along the near term support I marked since last week. Today the index traded back down to the support level and broke through. The indicators, which had been showing a bearish crossover and preliminary sell signal are now confirming that signal along with today's break of support. While the evidence is supportive of lower prices the break of support today is still weak, I would like to see a more definitive breach before getting too bearish in the near term. However, on such a break, this index could retreat as far as $80 provided that the outlook for gold prices and profits for gold miners does not improve.


The Oil Index

Oil prices trade to the down side today on fear of economic slow down while persisting Ukrainian worries ( I thought I might go a whole wrap without mentioning that) and supply concern helped to limit the losses. WTI lost about $0.80 today following the release of data which suggests that the recovery may not be improving as we had hoped. At the same time the Ukrainian situation along with other region specific disruptions are keeping supply concern fresh. The Oil Index traded to the down side today as well, losing about 1.25% in a drop confirming upper resistance. In the last week the index has retreated from a new high, retested resistance and is now falling from that resistance. This fall was foreshadowed by a bearish crossover in momentum and stochastic that are both accelerating. The possibility of a further correction in this index is growing with down side targets near 1575 and 1550 in the near term.


Earnings/Story Stocks

Today was not just about economic data. There were also some earnings stories and other headlines to take note of. For one, the FCC was holding its talks on internet neutrality today and could have been one cause for the declines seen in tech. The FCC is considering a number of new proposal aimed at equalizing the internet for business and users. Among the proposals are an end to fast/slow connection speeds which would mean that businesses offering connectivity would not be able to charge premium prices for premium services. Another item under consideration is the possibility of making the internet a public utility but that is not widely expected.

GM announced that it would take a $200 million dollar charge for recalls in the 2nd quarter. I could not tell if this included costs for a new recall announced today that affects up to 3 million vehicles. The new recall includes 5 different fixes for things ranging from brakes to wipers, lights and steering. GM shares lost 2% in today's trading but is still above the $34 support level.


Wal Mart was an early mover this morning after reporting earnings below expectations. This was not the only retailer to miss on earnings as Kohl's also missed. Wal Mart was expected to report $1.15 but missed by a nickel. The company blamed the miss on bad weather that not only impacted traffic and sales but also had an affect on costs such as clearing snow and other weather related maintenance issues. Guidance for the current quarter was also below expectations. The company reported lower than forecast comparable store sales continuing the trend of the past few quarters. Shares of Wal Mart lost over 2% in today's session.


Cisco was one of few stocks bucking today's sell off. Cisco reported earnings yesterday after the bell and gave its investors good news. The company reported earnings above expectations on weaker than expected revenue with positive forward guidance. The stock gapped up at the open by around 6% and traded up from there. The stock is now trading between support and resistance set during its decline last year. Indicators are turning bullish with high volume but there is significant technical resistance above.


JC Penny reported earnings after the bell and pleased investors. The company reported earnings slightly better than expected with positive guidance. The retailer was expected to lose about $1.25 per share but actually reported a loss of only -$1.16. Guidance included an expected increase in comp sales in the high single digits in the next quarter. The company also reported an increase in its credit facility which should help it in its efforts to rebuild. Shares of the stock surged more than $1 or over 12% in the after hours session.

Also after the bell, Berkshire Hathaway announced a stake in Verizon which sent shares up over 1.25% in late trading.

The Indices

The S&P traded very mildly to the down side in the early morning hours but as the data rolled in began to steadily move lower. At first it looked like 1880 would be intraday support but that level failed very quickly. After breaching 1880 the SPX retreated down to the long term trend line and the 1870 levels. The index made an attempt at breaking the trend line but found support and was able to maintain levels above the 30 day moving EMA going into the close. The index appears to still be winding up between my long term up trend line and the current resistance line around 1900. The index made a new high this week but it was a head line only, the index did not manage to move significantly above the previous all-time high resistance level or to even close above it more than once. The new high is a good sign but without a firm move above this level is still questionable.

Today's action, although troubling, was held at the long term trend line which is still intact. Looking at the indicators momentum ticked into bearishness today but is really near equilibrium. The peaks above and below the zero line have been very weak over the past month as the index has been funneled into the current pattern. Without a break of the long term trend line I have to remain bullish and view the current situation as a potential trend line bounce. A break below the trend line would find support along the 1850 level, a previous all time high, and below that along the 150 day EMA near the 1800-1825 level. Keep in mind that tomorrow is options expiration and that could also have played a part in todays declines.


The Dow actually did make a new high this week which may also be a cause for today's selling. Investors focusing on Dow stocks could see a new high as a good time to reallocate funds to maximize returns, or just to take some profits. Today the index moved back beneath the support/resistance line of the previous all time high and into the long term trading range. Indicators here are similar to the SPX and suggest that the index could retreat a little more. Next support is along the 16,250 level which is just above the current position of the 150 day EMA. A drop in the Dow, plus a drop in yield on the ten year, could combine to attract investors back into the Dow so the decline may not be to severe.


The Nasdaq also fell today, finding support at the 150 day moving average. Today's candle action confirms the line as a support and is the fourth such signal over the past month. The indicators here are also similar to the SPX and DJI but are even more suggestive of equilibrium or market calm to me at least. The stochastic is right in the middle of the range, showing support over the last two months but not really indicative of direction. At the same time MACD momentum has been weakly bobbing above and below zero with a bias to the bullish side. I threw up a Bollinger Band â„¢ on this chart to check into my theory of market calm and was rewarded by a narrow band. This is a potential time for a strong movement in the index and break of support or resistance. At this time it looks as if the longer term traders are stronger but a break above the 30 day EMA and resistance line at 4100 is needed now for confirmation.


The indices sold off pretty hard today on tepid data. The data suggests that the economy did not grow or recover from the winter months quite as strongly as we would have liked last month but that is the thing. Most of the data today, the less than good data, was rear looking. The more forward items such as jobless claims, Empire Manufacturing and Philly Fed all suggest that the economy is chugging right along. Next week the Leading Indicators will be out and then we'll get a look at how things are expected to be this month. Data tomorrow will also play a part in the near term market direction; housing starts and building permits may indicate a pick up in current and near term activity, or not. Regardless, I would expect to see some more weakness tomorrow as near term and long term traders shuffle positions going into options expiration.

Until then, remember the trend!

Thomas Hughes