Rising violence in Iraq gripped the market sending oil prices climbing and equities into retreat.

Introduction

The newly revised global GDP estimate released yesterday along with the rising tide of violence in Iraq kept the global markets in check during the overnight session. Asian markets closed in the red while EU marketplaces were able to hold closer to break even as Al Quaeda linked militants marched on the major cities of Iraq, threatening oil infrastructure and supply. The violence was also the cause for today's more than $2 spike in WTI and Brent crude. Here at home the futures trade indicated a flat to negative opening for most of the major indices up until the release of economic data at 8:30AM. After the release the indices began to drift marginally lower up into the open. The data was more of the same, growth but not as much as expected, but it was the situation in Iraq that gripped the markets once trading began.


Current reports show that the forces have already taken control of several of Iraq's key cities. The rebels say they are going to march on Baghdad in order to settle “scores” against the government. Iraq's own protective forces are also reported to have abandoned their posts, throwing down their weapons and taking off their uniforms. A mid-day press conference from President Obama did little to bolster confidence in the markets. The S&P had been trading down about -5 points after a morning spent bobbing between 1935 and 1940, after the presidents statements that there was “no ruling out” American involvement the S&P moved back down and set a new intraday low. Later in the afternoon Iran put out a statement that it would attack rebels if they came to close to their territory and the market sank even lower.


The Economy

There was a bit more data today than the usual jobless claims. Top of the list is Business Inventories which climbed by 0.6%. This is ahead of the expected 0.3% and the previous month's unrevised 0.4%. Ex-auto's inventories climbed by a smaller 0.2%. Business Inventories is a component of GDP and will be a factor in the amount of rebound we get from the first quarter. In the first quarter business inventories was a negative impact on GDP. Business sales increased at a rate of 0.7%.

Import and export prices both rose marginally in the current data. Import and export prices both rose by 0.1%. For the 12 month period ending in May import prices are up only 0.4%. At this time inflation from imported goods is still very low.

Retail was the big disappointment of the day and indicates that the consumer my not be bouncing back as strongly as expected. Sales increased by 0.3%, less than the expected 0.7%. Ex-Autos sales increased only 0.1%. Analysts had expected a much larger gain on the headline for one due to the strong sales numbers reported by the auto-makers.

Initial claims for unemployment rose by 4,000 to 317,000. This is in line with expectations and still at the lower end of the 12 month range. The previous week's figure was revised up by 1,000 for a total gain of 5,000 over the last reported numbers. The four week moving average rose as well, to 315,250, just above the 7 year low. On an unadjusted basis claims rose by near 50,000 or 18.2%. On a state by state basis no state had an increase in claims more than 1,000. Tennessee, Puerto Rico and Connecticut all reported increases in the range of 600-700 while California, New Jersey and Pennsylvania all reported decreases greater than -1,500.


Continuing claims rose by 11,000 to 2.614 million from last weeks unrevised figure. This number is also just above the 7 year low set in the last few weeks. Continuing claims still appears to be trending lower. Total claims is the only number that declined this week. Total claims fell by -66,000 to a new low of -2.44 million.


The Gold Index

A flight to safety took place in the gold market today as the details of the Iraq situation percolated through the market. Gold prices climbed more than $10 to hover around the $1270 level for most of the day. A slightly weaker dollar also had some impact on gold prices. In terms of the trends this new crisis in Iraq will likely be short lived but may keep gold trading higher in the near term. In the short to long term economic trends are still pointing to continued, if sluggish, growth which is a negative for gold.

The Gold Index moved higher today but was halted by resistance at the $93 level, the previously broken support level from last month. While Iraq has gold prices up the Gold Index could continue to rebound. The $93 level will be important to watch over the next few days as well. In the nearer term the index is already overbought so $93 may hold into the weekend. On the long term horizon the FOMC meeting next week has the most chance of changing the fundamental picture on gold but that is not likely. Even though the world bank has lowered its global forecast the economic trends are still up which means that interest rates are going to rise sooner rather than later and that will keep gold prices down. Another though I just had concerns potentials for profits among gold miners. High oil prices will only further pressure margins that the miners have been struggling to improve. Earnings in this sector may be disappointing.


The Oil Index

Oil was the obvious winner in today's session. Prices for WTI and Brent both rose by more than $2 as the violence escalated. This is a day after OPEC statements led traders and speculator to wonder if OPEC was even able to increase production if they wanted to, a subject much debated in oil circles. What did they say? That the oil markets are stable and that OPEC would be maintaining current production levels. The Oil Index surged on the rise in oil prices to a new all time closing and all time intra-day high, the first all time intraday day high since 2008. The break above resistance looks to have some potential strength as bullish momentum is on the rise and stochastic is crossing the upper signal line.


The Dollar and the Yen

The Dollar weakened some today on the data and somewhat on flight to safety moves into the yen. At the same time the yen may also be strengthening on expectation the BOJ will make no move to increase QE at the meeting being held today. The bank is expected to release its statement sometime overnight tonight but there is no time scheduled. Bank Governor Kuroda and other bank members have held a firm stance that Abenomics was working, the Japanese economy is getting better and that no QE was needed. The recent upward revision to Japanese 1st quarter GDP supports that stance and helps to confirm in my mind that the bank will keep sticking with it. The Dollar Index lost about a quarter percent today in a move that may be confirming the resistance at the top of the 9 month range. Momentum turned bearish with today's actions and stochastic is already pointing down suggesting a test of support near the moving average and the mid point of the range could be at hand.


The USD/JPY also fell today, by about a half percent from the opening tic. The momentum in this pair has just turned bearish and the stochastic is also pointing lower. The recent peak in stochastic makes it look like 102.50 may be emerging as a new resistance level. So long as there as no chance of more QE from the BOJ and the taper is well discounted by now I think there is little chance for the pair to move any higher. The flight to safety trade may take the pair down to support along the 100.50 level if the BOJ statements don't.


Story Stocks

First up, a little reminder that the “official” earnings season starts in less than a month. Alcoa is set to report on Tuesday July the 8th.

Elon Musk went on record today opening up the patents on Tesla's electric car technology so that other companies can help build charging stations and advance electric car technology.

After hours Intel boosted 2nd quarter guidance. The company increase revenue and margin outlook. Revenue for Intel has been flat for some time. The stock popped in the after market to a 52 week high.

Lululemon Athletica reported earnings today. The company reported earnings per share that beat estimates but failed to deliver positive guidance. The company earned $0.34 per share versus estimates of $0.32. Guidance was set as a range between $1.71 -$1.76 for the year which is more than a dime short of consensus at best. The company also issued a stock buy back but this did not provide enough support for the stock today. Shares of Lulu fell more than 15% in today action. I would not be surprised to see Lulu continue to fall short on future sales as discounting becomes more and more a part of their model. They have high levels of inventory to move and, lets face it, why would anyone pay full price for Lulu when you can get something else for much less? Lulu is now at a fresh 3+ year low.


Sector Watch

The transportation stocks, in particular the airlines, were hit hard today as high oil prices raised concerns over the future. Delta alone fell close to 5.5%, dropping below the short term moving average on high volume and a shift in momentum. Today's move, along with high oil prices, may have ended, or at least paused, the rally in airlines that has been going on over the past 12 months or so. Delta is still above trend but looks as though support will be tested.


The Indices

Let's start with the Transports, recent market leaders and today's loss leader. The Dow Transportation Average lost nearly -2% today compared to -0.79, -0.71 and -0.65 for the Nasdaq Composite, SPX and Dow Jones Industrials. Among the transports the airlines were hit particularly hard but higher oil is bad news for any transportation related industry. The thing to keep in mind that many of them hedge their oil use and may be taking the opportunity to do just that while oil prices are so high. Today's action has brought the index down to the short term moving average with bearish momentum and a downward pointing stochastic. This is not indicative of reversal but does suggest a retest of support, perhaps as far down as the long term trend line around the 7,750 level, could be at hand.


The Nasdaq was the next big loser of the day but not half so bad as the Trannies. The candle formed is not even that bad looking compared to the selling that occurred in this index during the March/April correction. Today's action confirms resistance exists at the previous high but bullish momentum and strong stochastic suggest that at least a test of the actual resistance line, about 75 above the current level, is likely. In the near term support exists about 50 points lower around 4,250.


The SPX is next in terms of loss for today. The broad market fell by -0.71% in a move that looks more like normal profit taking at a high level than any major fear inspired move I have seen before. I don't want to make light of what going on but I don't think, at this time yet, that the Iraq situation is market reversing material. The index is still well above the short term moving average and the long term trend line so there is still solid short and long term support for the market. A test of that support looks likely and could easily come over the next few days.


The Dow Jones Industrials were the laggard in terms of today's run for cover. Perhaps because of dividends, the Dow 30 are still averaging a better return than the 10 Year Treasury. The Dow fell -0.65%, halting just above the 30 day EMA. The indicators are rolling over into bearishness similar to the other indices and is expected to test support over the next couple of days. The moving average is currently at 11667 with more significant support just below that level in the 16,250-16,500 range.


The long term trends are up but recent economic data is not supporting the rebound as strongly as we would like. This has called into question the strength of the current economic rebound and may keep stocks range bound until more data is revealed. On one hand the first quarter looks worse and worse with each revision or addition to the data which could make the rebound stronger than originally estimated. On the other hand if the current data isn't as strong as expected that may put a cap on expectations and lower GDP. I think the answer to the question of how the economy is really doing is what was really behind today's sell off.

Next week the FOMC may clear things up for us but I think it more likely they raise as many questions as they answer. Anticipation of the meeting will also have an impact on trading and could help keep stock prices lower up until the meeting. Afterward depends on what they say.

Earnings season is also coming up. Even if economic data starts to show better improvement the market may wait for the earnings before resuming the rally.

The Iraq violence is significant but more of an excuse than a real catalyst. Just look at Ukraine, it was a serious threat to the market for about 6-8 weeks. Just long enough for the market to correct to trend and/or long term support in order to bounce back to a new high. This could be the same situation but as always, vigilance is due on both the technical and fundamental levels. Eventually we will be able to look back and know for sure.

Until then, remember the trend!

Thomas Hughes