Inflationary worry and international hot spots create a perfect storm, sending the indices flying for cover.

Introduction

The international indices fell in overnight trading for a variety of reasons that carried into the US session. Profit taking in Asia led to a decline in European stocks that was amplified by speculation over the impact of new and increased sanctions against Russia. The downward bias carried into the US markets, pushing the futures trade down in the pre opening session. Prior to the release of today's data the SPX was indicated down about 8 or 9 points with the decline increasing post release. Today's pieces of the employment puzzle were not as expected and suggest a dip in economic activity may have occurred in July. This is of course in the face of other more positive data seen throughout the month.

Market Statistics

So what happened? Now that the Fed meeting is over the market was able to turn its attention to other matters. Maybe first and foremost is the ongoing situation in the Ukraine. New sanctions are going into effect and there is speculation they will lead to global slowdown. On top of that the Ukrainian PM made some new comments to the effect that Putin was fomenting war and trying to rewrite the outcome of WWII. After that some weaker than expected inflation data from the EU had the market on edge there and here as it raises concern for deflation in the region. Moving on to our own news some weak earnings and economic data added to concerns the second half may not be as strong as hoped. Other negatives influencing trading include the rising risk of financial meltdown in Portugal as well as a new default by Argentina on its bond debt. The combination of factors resulted in a market that went diving to support.

Economic Calendar

The Economy

First up on the list today was the Challenger, Grey & Christmas report on planned lay offs. The number of lay offs planned in July jumped 49% from last month's long term low. The July number is 46,887 new lay offs, led by Microsoft's announcement of 18,000 job cuts, which alone could account for the gain. This month's lay off's are 25% higher than those planned last July but down a little more than 1% on a year to date basis. So far this year the tech sector leads in job cuts; Hewlett Packard is another company making big cuts this year. Both HP and MSFT are seen as making strategic cuts in order to remain competitive and are not symbolic of the sector or jobs creation as a whole. Within the report one of the analysts is quoted as saying that a “shortage of skilled workers” remains a challenge for the economy.

Initial claims for unemployment rose this week, but not as much as expected. Claims gained 23K from a downwardly revised number to reach 302,000 this week. Last week was revised down by -5,000 for a net gain of 17,000 from last week's report. The consensus expectation for claims was in the range of 310,000. Last week was revised lower to 279,000, a new low. The four week moving average also fell this week, dropping by nearly 4,000 to fall below 300,000 for the first time since April of 2006. On an unadjusted basis claims fell, by -29,839 or -10.4%. The seasonal factors had expected a decline of 17% which could account for the rise in adjusted claims. Looking at the table initial claims have been trending lower since the beginning of the year and are now just off of the lows. This along with other reports that hiring remains steady to strong lead me to believe the NFP tomorrow will still be strong. The ADP number on Wednesday was good, just not as good as hoped which is not unusual for data this year.


Continuing claims also rose this week, by 31,000 to 2.539 million. The previous weeks figure was revised higher by 8,000. The four week moving average of claims fell by -9,000 to a low not seen since early 2007. Continuing claims are also trending lower, today's gain is minute in terms of the decline seen this year and, for now at least, only a blip on the radar. Total claims rose this week as well. The total number of Americans gained by 6,244 to reach 2.618 million. This is up from last week but near the long term low. On a state by state basis increases in claims were led by Kansas with a gain of 867. Decreases in claims were led by NY and PA with declines of -18K and -7K respectively.


The quarterly employment cost index was also released today. The index rose by 0.7% in the 2nd quarter, ahead of the expected 0.5% and the previous quarter's 0.3%. This is the fastest increase in labor costs since the third quarter of 2008. The increase in costs fueled speculation of inflation in the economy. Wages and salaries rose by 0.6% while benefits such as insurance and other items increased by a full 1%. While the increase in costs is a negative in terms of inflation it is a positive in terms of labor market recovery and the consumer. I would like to point out that just about two weeks ago, and I forget exactly who, an analyst on CNBC said the next sign/stage of the recovery will be an increase in wages.

Chicago PMI was a big miss and helped to send the market to the daily low. The number, released at 9:45AM, was a full 10 points below the expectations and last month's reading of 62.6. This is still expansionary but a possible warning sign of economic slow down. The drop was due mainly to declines in production and ordering but, according to those cited in the report, seen as a lull in activity and not the start of a decline. The numbers behind the number also reveal that hiring remains steady in the region, edging higher over last month. This is not the first report to reveal hiring increases this month.


The Oil Index

Oil prices fell today in a move that was hard to predict. A variety of factors including an increase in OPEC supply, high US stockpiles and weaker than expected data overcame news of a major shut down to a mid west refinery and the ongoing geopolitical events that have had oil prices up in recent weeks. WTI had been down about $0.50 in early trading but extended that loss to $0.75, $1.50 and more, settling down by over $2.00 to close just above $98 per barrel.

The Oil Index lost more than one percent, breaking the short term moving average and the support of the previous all time intraday high. The indicators are bearish and point to a possible correction to trend. The index is about 4.75% above my trend line at the current level with shorter term supports before that. Longer term analysis of the indicators still shows there is support for the index so any correction that ensues from here may not be too severe. Further, oil prices are subject to reverse today's declines at the drop of a headline, which could help support index prices. Another factor impacting the Oil Index today is oil sector earnings. Exxon and Conoco Phillips reported today, Chevron reports tomorrow.


Exxon reported earnings that blew away the expectations but nonetheless failed to satisfy the market, at least for today. The company reported adjusted EPS of $2.05, $0.19 above the consensus but it was the production levels that grabbed trader attention. Production in the quarter was down by 5.7% leading to fear future profits would not be as robust and speculation of reserve supply. The stock dropped over 4%, breaking near term support and coming to rest just below the long term 150 day EMA.


The Gold Index

Gold prices fell today, as expected following the GDP and Fed meeting yesterday. The economic data of today, albeit not as strong as expected, is still leading to higher interest rates, and speculation of when those rates will come. The current consensus is starting to move in from mid 2015 to sometime sooner with no real indication given. Today's data, along with the GDP and other fundamental factors, outweighed any flight to safety moves that may have been inspired by the drop in stocks or geopolitical concerns focused on Ukraine, Russia or Argentina. Gold was down about $3 in the early part of the session with that loss extending to more than $13 on an intraday basis with a close near $1285.

The move in gold prices was able to drag the Gold Index back below the short term moving average to what may prove to be a critical level. The index is now sitting just above the 150 day moving average and a potential entry point for longer term traders. The indicators are bearish at this time on the daily with an indication that support along the 150 day EMA could be tested. A break below the 150 day EMA is in line with the underlying trend and could take the index down to support at $95, $90 and $85 in the long term. I see the Gold Index and gold prices closely tied together, if gold continues to decline then I expect the Gold Index to follow.


GoldCorp reported earnings today although most of the major miners report next week. The company reported strong earnings and reversed a loss to share holders experienced in the 2nd quarter of last year. The company reported adjusted earnings per share of $0.22 versus a loss of ($2.38) last year. Shares of the stock opened lower and then traded higher than yesterday's close before falling under today's selling pressure to close near the bottom of the daily range. Earnings this quarter are better than expected but gold prices are down from last quarter and declining, putting third quarter earnings in jeopardy. The stock remains at or near the middle of a longer term trading range with bearish indicators.


The VIX

The VIX moved sharply higher today. The Volatility Index, which measures the value of options relative to the value of the S&P 500, climbed by nearly 27% in today's session. This is the second spike in the VIX of this magnitude this month, and like the previous one, I expect to see a sharp rebound in it tomorrow. Earlier this month the index spiked by 32% on a very similar bundle of global concerns. The very next day the index fell by roughly 20%, as it has done following each such spike over the past couple of years. The pull back does not always come the very next day, but always within a week, depending on how the fear inducing catalysts play out. The market was faced with a handful of items today that may take a few days to sort through, not to mention the fact that the Ukraine situation is likely to be resolved in the foreseeable future, so volatility may persist.


The Indices

Today's decline in stocks was broad. All 30 Dow components and all 10 S&P sectors traded into the red. The broad market S&P 500 index fell -2%, slightly ahead of the Dow Jones Industrial Average's -1.88%. The S&P began it's fall in the pre market session, driven by a number of factors that to me at least were not as bad as today's sell off was worth. However, the decline that began in the early part of the pre opening session extended into the opening and then throughout the day, with the SPX and other major indices finishing at or just off the daily low. A number of near and short term support levels have been broken so the action tomorrow will be very important.

The index is now sitting on the long term trend line. A trend line that has provided numerous profitable entry points for longer term positions over the past two years. So far, nothing appears to be any different. There is a possibility of a further retest of the trend line, but equally a chance for sharp reversal in the next one to two trading days. A break below the long term trend line could take the index down to the 1900 level in the near term. Regardless of short/long term direction I expect the index will be active along the 1930/1940 level and the trend line tomorrow.


The Dow Industrial's fell by -1.86%, coming to rest just below the previous all time high and the 150 day EMA. The near term looks pretty bearish for the index, both indicators are pointing down and today's action created a pretty nasty black candle. In the longer term the index is approaching the long term moving average and an attractive entry point for longer term traders. Over the past 12 months the 150 day EMA has supported the index four times for an average gain of 500 points each. A break below 16,500 could take the index down to the 16,000 level which is still about 1.5% above the long term trend line. However, there is strong support indicated in the 16,250 range. Until a break occurs beneath support and the long term trend line I remain long term bullish. There is risk that the sell off will continue or a consolidation may form but the trends are still up so I am looking to buy the dips.


The Tech's were today's most hardest hit sector. The Nasdaq composite, tech heavy index that it is, fell by -2.09% in today's session. This index also broke its short term 30 day EMA, coming to rest on the support of previously broken long term high levels. The index is sitting on a potentially strong support level here with indicators consistent with that support. Now, that being said, there is now a risk the index may make a short term reversal if any further declines are made. Price action over the past month has created two peaks of equal height, with current support as a baseline. A drop below this level, with a confirming retest of resistance, would constitute a double top with a target about 150-200 points below the current level. A failure to break, or hold a break on a test of support, is bullish and in line with longer trends.


The Tranports were the least affected of the major indices. The trannies fell only -1.63% today, dropping from the short term moving average and coming to rest at support around 8,140. The indicators are bearish in the near term but remain bullish in the longer term. Unless trader sentiment picks up in the next day or two the index could drift modestly lower along the down trending support line until it meets up with the long term up trend line sometime in the next month. However, the NFP will likely be a catalyst for the market to snap back or test current support levels and could have the market moving sharply before the open.


Today's headlines were not that bad on an individual basis but taken together provide a lot of reason for worry. The thing is, most of them are incredibly short term in nature and could disappear as easily as they have appeared. This could lead to an equally large bounce for the indices which are all currently indicated at longer term support.

Starting at the top of the list Portugal and Argentina are non events in my view as they have very little to do with the US marketplace. Their value as a trading catalyst comes as an aggregate of all headlines leaving them the least likely to impact trading on their own. Take for example two, three?, weeks ago when Portugal most recently came into the news, it caused a sell off but only because it was preceded by weak Chinese data and followed by weaker than expected US data. As for Argentian, this isn't the first time they have defaulted and the current default is tied to bond holders who did not swap their holding when they had the chance.

Next up as catalyst for today's drop is the data and the Fed. The economic data, the Fed and the interest rate debate is a damned if you do, damned if you don't scenario. We want better economic data because it means the economy is growing and recovering. Growth and recovery lead to higher interest rates which are seen as both good and bad for the market. We want a better economy, just not too much better and that is what we have, a slow and steadily growing economy. Today the market seemed to be scared the good data = higher rates and that bad data = bad economy. Now the market need to decide what is worse, a good economy and higher rates or a bad economy.

Russia and the Ukraine are a persistent worry. This is an ongoing risk to the market that is now beginning to show up in the market. Until now we have sit back and watched to see what would happen. What has happened is sanctions, and more sanctions that now may have a global impact on recovery and growth.

My thoughts on the NFP are as follows. I think it is going to be strong, somewhere in the 250K-300K range with the possibilities of more. This is because of a two things. First, every report on the economy I have read or covered in the last month has had positive things to say about job creation, hiring and wages. Second, unemployment claims are trending lower and have made new lows on an initial, continuing and total claim basis this month. The ADP number was not as good as expected but that is not too troublesome, it is still above 200K and firm enough to keep us on the slow and steady track. Also, it is not very accurate as an indicator of the NFP so there could be a large difference. As for the Challenger number, the pick up in jobs cuts is almost completely caused by MSFT and not really an indicator of general labor trends. Plus, everywhere I look there are job openings, maybe not the jobs people want but jobs.

The selling today was not a mad rush to get out the exits. It seemed to me to be more of a domino effect of news events that led to a break of near term technical support that may have led to some profit taking that led to additional breaks of support and more selling. Adding to the downward pressure was a lack of active buying as traders wait and see what the NFP will bring. Even though the long term trends are up and the 2nd quarter GDP supports a broad based recovery, not one centered on housing, the market is still susceptible to near term fluctuations in data and in need of lots of affirmation.

There are other important data points being released tomorrow as well. Unemployment, auto/truck sales, construction spending ISM and Michigan sentiment on all on the list too. The market needs affirmation and may get it tomorrow, or not.

Until then, remember the trend!

Thomas Hughes