ECB actions, economic data and comments from David Tepper helped spur the rally to new highs.

Introduction

Today started quietly as traders around the world awaited the results of the most recent ECB meeting. The ECB and Mario Draghi gave the market what it wanted but it was comments from hedge fund manager David Tepper that are credited for today's new highs. Mr. Tepper says he sees market concerns alleviating and that he is not as worried about market conditions today as he was just a month ago. Following his comments indices that had been simmering near yesterdays close began a steady march to new highs.


Early trading was positive. Index futures were indicated a few points higher across the board. The steady release of news and data before the bell did little to move the markets more than a point or two in either direction. The ECB statement was met with relief but not surprise as the moves were largely expected and our own economic data was also unable to move the market. Challenger reports that planned job cuts increased while the weekly jobless claims figures show that unemployment claims continue to trend lower.

The S&P 500 was indicated about 4 points higher throughout the morning and went into the open about +2. The first hour of trading was steady but without direction. The indices drifted from the opening highs, the SPX and DJI both opening at new all time highs, back to near break even and then briefly into the red. Although eyes are on the NFP report tomorrow it appears as if the results, whatever they may be, have been discounted by the markets already. After touching near term support, just above 1920 for the SPX, the indices bounced back into the green and then were propelled to new all time highs.


The Economy

Today's economic calendar started early with the release of the Challenger, Grey & Christmas survey of planned lay off's. Planned lay off's in May totalled over 52,000, the highest level in 15 months and a 31% increase over the last month. This is the second month of increase since the sharp drop in claims seen in March. To date, the total number of lay offs this year is 214,600, -2.3% from last year at this time. The bulk of the cuts were in the tech sector led by HP's planned 16,000 job cuts which accounts for nearly a third of this months gains. Tech's and computer in particular are the leading sector for jobs cuts this year. The report went on the project labor condition for the rest of the year saying that job cuts should decline and that job growth will continue into the end of the second half.

Initial claims for unemployment rose by 8,000 to 312,000 which is basically as expected. Last weeks figure was revised up by 4,000 making this weeks figures 12,000 higher than last weeks report. The four week moving average fell to 310,250, the lowest level since June 2,2007. On an unadjusted basis claims fell -4.5% or -12,481. Initial claims remain within and near the bottom of the 12 month range between 300K and 350K. Near term unemployment and job turnover remains steady at this time. Claims were steady on a region to region basis led by an increase in claims from NY of +1,327 and MI with a decline of -6,083.


Continuing claims fell by -20,000 to 2.603 million. This is the lowest level for this figure since October 27,2007. The previous week was revised lower by -8,000 for a net drop of -28,000. Continuing claims is declining rapidly and suggesting that something big is shifting in the labor markets. Assuming people are finding jobs and not giving up on work this could be indicative of strong(ish) NFP numbers tomorrow. Adding to this theory is the decline in total claims. Total claims for unemployment fell by over -40,000 to 2.513 million and yet another new low. Annecdotal evidence; I have a group of friends who are all involved in building/construction in some form and all agreed last night that if you can't find work you aren't looking.


Net worth in America grew by $1.5 trillion in the firs quarter to $81.76 trillion. The gain comes mostly on increases in home values and stocks.

Going into tomorrow the most important economic event will be the Non Farm Payroll report. Expectations are for claims to decline from last month to a level around 200,000 to 220,000 but it may not matter. Earlier in the week the ADP report revealed that private payrolls had increased by less than expected which raises some concern the NFP will also fail to meet expectations and yet the market rallies. On the other hand strong home and auto sales data combined with declining levels of employments claims suggest that job creation could be strong.

The Dollar Index

The Dollar gained and lost ground against the euro today in the build up to and aftermath of the ECB statement. The index surged to a near 5 month high just over $91 and the top of the recent trading range before heavy selling sent it back down into negative territory. The index made such a wild move because of fluctuating euro values due to speculation over what the ECB may still do in its effort to raise inflation and weaken the euro.

On top of the new interest rates and LTRO facility Draghi pledged to “do more” to help stimulate the economy as and when needed. Today the ECB lowered its deposit rate to -0.1% which effectively charges banks for leaving capital unused. This move is meant to push banks into lending money to the public sector rather than let it sit in the central banking system. The lending rates were also cut to new lows but there were no asset purchases made. The statements following the announcement did include hints of preparations for some form of purchases in the future. Today's price action created a bearish candle for the Dollar Index confirming the top of the current 5-6 month range between $79 and $81. The indicators are bullish at this time but overbought and convergent with the trading range.


The EUR/USD made a near mirror image move to the Dollar Index. The pair traded lower in the early part of today's session, briefly touched support and then reversed. The pair is at the lower end of a near 8 month trading range with bearish indicators. The indicators are oversold and in line with the range bottom theory. The pair could trend upward to retest resistance near 1.38870. In the near term economic data from us tomorrow (NFP), BOJ policy next week and the FOMC meeting the week after will be drivers of this trade. Strong US data should strengthen the dollar and could return the pair to support. Support is currently at the bottom of the range around 1.3500.


The Oil Index

Oil prices fell by about a percent during the early part of the day until the ECB decision sent the dollar plunging versus the euro. The lower dollar helped to support oil prices, along with a smaller than expected build in natural gas, and by the end of the day WTI was trading back near $102.50. The Oil Index has been in turn supported by the relatively high prices for oil and other product along with the rising economic trends. The index traded to the upside today, breaking above the long term resistance line, but is still contained within the current chart pattern. The index has been trending sideways for about 6 weeks now, since hitting the current resistance level, and is forming a potentially bullish triangle. In that time prices have bounced from the 30 day EMA twice, stochastic has fired off the stronger trend following signal and bearish momentum has retreated to near 0; all that is left now is for prices to break out to new highs. Tomorrow's NFP report could be the catalyst that does it. If not, and the index fails to break resistance, support exists just below the current level at 1,600 and then next at 1,550.


The Gold Index

Gold prices rebounded today in part on a weaker dollar as well as simple rebounding from the recent precipitous drop. Gold traded up about $10 for most of the day, hovering around the $1252-$1255 level. The move in gold is rooted in the ECB's efforts to add inflation which have in turn affected dollar values. This is I think only a short term shift and not a reason to change stance on gold prices. The Gold Index also traded higher today but is still well below the recently broken support level. The rebound in gold is helping to support index prices but I don't know if this will last. Until some reason to expect gold prices to improve or earnings for gold miners to improve I am treating any pull backs to resistance as selling opportunities in this sector. Tomorrow's NFP could return the dollar to strength and put pressure on gold.


Sector Snap

I found it interesting today when I read into the Challenger report that technology and computers were leaders in job cuts. The technology sector was the leader in jobs cuts last month and to date is the leader for the year. This was interesting to me because the tech heavy Nasdaq was today's market leader among the big three indices with a more than 1% gain and the XLK (technology sector Spyder) broke out to a new high. The new high in the XLK was also aided by a string of upgrades for tech companies like Microsoft and Broadcom, Microsoft being the #2 holding of the XLK.


The Semi Conductor Index also traded higher today and is looking quite bullish. Today's action created the third of Three White Soldiers ( a weak one but one none the less) and is accompanied by bullish indicators. Momentum is strong, on the rise and approaching long term high levels. Stochastic is also on the rise and looking strong.


The Indices

The Nasdaq was today's leader with a more than 1% gain, followed by the SPX and the DJI with 0.65% and 0.59% respectively. The Nasdaq Composite made a strong move up, from previous short term resistance, with rising bullish indicators. The bounce from long term support that began a few weeks ago looks good to continue up to long term resistance at or near the current long term highs. Tomorrow's NFP could help or hinder the move but it looks like it may be discounted already.


The SPX also made a strong move up today, creating a long white candle, with rising indicators. Momentum is strong in the near to short term and supportive of higher prices in the near future. Stochastic is on the rise but now very high in the range. This is indicative of an overbought market but also one of strength during times of rally. This index looks like it is in the middle stages of a short term rally that could keep it trending higher for another 80 or 90 points putting my target around 2020. Of course, there is the NFP to keep an eye on so caution is due until we can see what is going on in the morning.


The Dow Jones Industrial Average moved above the round number resistance area of 16,750 today. Today's action created a strong white candle in this index as well, one that is also accompanied by bullish indicators. Momentum is weak at this time but stochastic is showing some strength as it is about to cross the upper signal line. This index is also looking like it is in the early to mid-stage of a short term rally with a target near 17,000-17,250.


The transports traded to the upside, approaching, but not making a new high today. The index has been consolidating for the past 4 or 5 trading sessions and is forming a potentially bullish flag. The indicators are bullish but weakening. The index at this level certainly looks like an decent spot to take some profits I don't think the move upward is quite over yet. The Trannies have been leading the markets higher for over a year and I see no reason for that to end now.


All eyes are on the NFP tomorrow, or are they? At the beginning of the week I think most would have agreed with that statement. Today's rally might make you think the number, whatever it is, is already factored into the mix. Of course most would not have guessed comments from a respected hedge fund manager would give traders permission to rally either. I think the early action in today's market was in line with the thought that the NFP was the most important thing on the schedule this week and it probably still is. David Tepper's comments did not change economic trends or the importance of the data but it did give the market an excuse to stop worrying about it and I think that is what led to today's new highs. Tomorrow will still be big day and an important one.

Until then, remember the trend!

Thomas Hughes