Some less than expected data sent the markets back down to support.

Introduction

Lower than expected personal spending data sent the markets seeking support today. Asian markets ended up on the rebound in US stocks seen Wednesday while the EU indices felt some of the impact of today's economic data. In the pre-opening session US futures were indicated flat to positive until the 8:30AM time frame when the trade turned slightly negative. The reason, personal spending, a sign of the consumer strength, rose but only by 0.2% versus the expected 0.4%.


Just before the opening bell index futures strengthened to the point it seemed as if we might have a positive day but that did not last long. Soon after the start of open trading the indices began to drift into the red and then made a quick drop down to retest near term support. The SPX was down -3.5 in the first minutes, -9 by 9:45AM and by 9:50 had hit intraday bottom near -13. The index briefly touched 1945 then began bouncing higher. The remainder of the day saw the index tread water just above support and hold that level into the close. Although the spending data was today's excuse to sell it only takes a look at the calendar to see why the markets are treading water this week. Next week is the end of the month and the end of the 2nd quarter. This means there will be a massive wave of macroeconomic data that will affect 2nd quarter GDP estimates and outlook for the next quarter. And on top of that earnings season begins the week after that.


Another reason may be comments from Fed President Bullard. In comments today he said that the economy was likely much closer to “normal” than most people realize. He expects to hit 2% inflation and sub 6% unemployment later this year. He doesn't believe the market or policy makers understand that the economy is as close as it is to being normal. Further comments included things like the Fed is not as dovish as the market thinks and that interest rates could rise as soon as the end of Q1 2015. His projection for economic growth over the next four quarters averages 3% which means that, if correct, this quarter isn't going to be that bad even with the massive revision to the first quarter.

The Economy

First up, Personal Income and Spending. Personal income rose as expected by 0.4% but spending only rose by 0.2%, half the expected rise. This is now the second month of weaker than expected spending. This is concerning because it may have a drag on GDP in this quarter. On the flip side it may also mean that households are saving, which is good, either for summer vacations or other more long term reasons.

On the employment front initial claims for unemployment fell by -2,000 from an upward revision of 2,000 for a net gain of 0 from last weeks report. Claims this week were reported as 312,000. The four week moving average rose by 2,000 to 314,000. On a non adjusted basis claims rose by 2,832 to 304,169. Claims are holding steady and are near the bottom of the 7 month range. Based on this figure and chart it does not look as if the labor market is holding steady but has not significantly improved. Pennsylvania and California led with increases in claims of +7,120 and +670. Georgia ad Missouri led with declines of -2,245 and -2,130.


Continuing claims rose slightly this week as well. Claims for a second week of unemployment climbed by 12,000 to 2.571 million. Last week was revised lower by -2,000. The four week moving average of continuing claims fell to a new low not seen since November 3rd, 2007. This figure is looking better in terms of the labor market. Continuing claims is still trending lower and could be leading total unemployment lower as well. Total claims for unemployment this week fell by -37,990 to hit 2.441. This is just off the long term low for this figure.


There is only one economic indicator being released tomorrow, Michigan Sentiment. The expectation is for the final reading for the month of June to be revised higher by about one point to just above 82. Next week however is a different story and will provide a lot of information for the market to chew on. There are a total of 21 economic releases including auto/truck sales, pending home sales, ISM, factory orders, ADP, Challenger and the all important NFP. My calendar shows NFP on Thursday this time around which will make the Wednesday/Thursday time span full of employment data.

The Gold Index

Gold prices fell today but not as much as I might have guessed given the nature of the Bullard comments. Gold prices lost about $15 in the early part of the day but tapered that down to about -$6 or so at the close of trading. On top of the hawkish spin to Bullard's comments there was also some bearish news for gold including low demand among physical buyers as well as ETF and other fund buyers. China is also reported to be consuming less as imports fell more than 17% last month. Last weeks massive rally was driven by short covering which leaves gold in a very precarious position. If no one sees gold as bullish at this level there is no place for it to go but down. Bullard's comments are certainly no reason to get bullish on gold for me.

The Gold Index traded to the upside today but I am not too bullish on it. The drop from my resistance line just two days ago is a confirmation that there are still long term bears in this market. There is some sign of bottoming in the index on the longer term weekly charts but that bottom, if it is one and I am not calling it, is down around the $85 level. In view of the long term down trend in the Gold Index this is looking a lot like a trend following entry, possible near the end of the trend, but still trend following. The MACD is bullish and peaked at the resistance level simultaneously with a strong bearish stochastic crossover. There is long term resistance at the $100 level with support levels around the $95, $92.50, $90 and $85 levels. I took a stroll through the list of gold stocks, indices and funds I know to see what I could see. Every single one ( GOLD, GLD, GG, RGLD, ABX) shows price action confirming a longer term resistance level.


The Oil Index

Oil traders finally realized what the news reports have been saying all along. The oil infrastructure in Iraq is not under any more threat than it normally is. The ISIS uprising is not impacting Iraqi oil delivery, refining or production...yet. The possibility is still there but the need to drive up oil prices because of the possibility lessened somewhat today. WTI fell by nearly a dollar by the late afternoon with Brent down an equal amount. The Oil Index also traded lower today but appears to be confirming support. The index corrected hard this week after reaching its peak on Monday but is still above long term support and the short term 30 day moving average. Today's price action just above yesterday's close and then moved lower to test that support and then form a hammer doji. Even with the Iraq premium deflating oil prices are still at long term high levels and should have a positive impact on the bottom line of oil producers. The long term trend in the index is up and support is in play at the previous all time high at 1660.


In The News

There were quite a lot of names in the news today. Camera maker GoPro was a hot topic today. The company rang the opening bell and IPO'd. The stock was priced at $24 per share even though it was oversubscribed by about 20X. The opening went without a hitch and the stock quickly rose an additional $7 making many of the participants near instant millionaires.

Barclay's is the subject of a new investigation and allegations pertaining to dark pools and high frequency trading. The charges allege that Barclay's favored high frequency traders through its dark pool. The company naturally is cooperative. Barclay's ended plans for a new bond offering in the wake of the investigation and some of the brokers using the dark pool have dropped their connections. Shares of the stock dropped more than 7%.


GM halted all sales of its top selling Cruze vehicle due to an air bag malfunction. Not all cars are affected but the company decided to stop all sales until they can recall the bad parts. The talk on TV was how this was a bad sign for GM but there may be a positive in it. Yes GM's sales are going to be affected but the stance of taking no chances could stand out in the eyes of consumers once this issue is in the past. Until then, Ford may be the better pick in the auto sector.


Alcoa hit the news today and not because of earnings. The aluminum giant purchased Firthe Rickson, a maker of airplane parts for jet engines. Company execs say the move is to enhance their offering of air line related products. Alcoa reports earnings in less than two weeks. The stock has been trending up steadily for the last 9 months and looks as if it could continue. Today's announcement caused the stock to gap up and get ahead of the market so there may be some consolidation going into next week and earnings season.


Big Lots instituted a dividend. The dividend is $0.17 per share quarterly, or $0.64 annually or about 1.5% of current stock prices. Shares of Big Lots fell more than 1.25% on the news.

After the closing bell Dupont lowered its full year guidance on slow sales of corn seeds. Stronger sales in soy beans off set some of the difference but not enough to maintain projections.

The Indices

The market traded to the downside today after a fair opening and never could quite get back to break even. The Nasdaq posted the least amount of loss today and is trading closest to a new high of the big three. Today the index opened above the long term resistance of the previous 14 year high, tested that level and moved back above to close very near to the opening price. The Nasdaq made a new high and so far resistance has not pushed it back down. The indicators are consistent with a range bound stock so I am not over bullish on this index without a firmer break of resistance and move into new highs. A failure to do so could result in a return to support at 4,250 or 4,100.


The SPX traded lower to test support at 1,950. The early move lower took the index down to just below 1,945 before it made a sharp bounce back to the 1,950 level. Late day trading nearly took the index into the green but not quite. This is now the 7th day of trading above 1,950 and the indicators have softened to a point where buyers could step back into the market. Momentum is bearish but very very weak. The stochastic is in the mid part of the range, neither over bought or over sold, and has already given a weaker early trend following signal.


The Dow Jones Industrials fell about -0.13 % today but may get a boost tomorrow from Nike, which reported earnings after the bell. Nike beat on the top and bottom lines with solid guidance for the future. The stock popped more than 3% after the bell. As for the Dow itself it is sitting on a solid support level marked by a previous all time high and the short term moving average. The indicators are bearish but weak and consistent with consolidation at this time. The stochastic is similar to that of the SPX and is setting up for a potential second/stronger trend following signal. Support is currently at 16,750 with the next level just below at 16,500.


The Transports were today's loss leader with a -0.18% decline. This index also tested support at the short term moving average and is trading in a rapidly narrowing range that began about three weeks ago. This range/consolidation is beginning to look like a possible flag/triangle continuation and bears close watching. The indicators are little mixed as MACD is still bearish but the peaks show support at the current level. Stochastic is pointing to a trend following buy. A move above 8,250 on this index could lead to another prolonged up swing with a target at 8,500.


The markets are consolidating and getting ready for next week. There is a lot of data coming out and a lot of reasons for the market to get high or get spooked. The entire week will be important but Thursday and the NFP will be the focus I believe and that will quickly move on to earnings the very next week. There is not much on the schedule tomorrow save Michigan Sentiment and four earnings reports including KB Homes. The trends are still up but for now the markets are waiting for data and earnings. Unless something surprising comes out tomorrow could be more of the same we saw today.

Until then, remember the trend!

Thomas Hughes