A tidal wave of market moving events pushed the major US indices to new highs although caution took hold late in the day reversing the early gains.

Introduction

Today was one of the biggest days for market moving events, actual fundamental events, that I have witnessed in some time. No only were there 2 central bank meetings to contend with there was a hefty dose of labor and other macroeconomic data.

Setting the back drop for today's action is a possible cease fire in the Ukraine. I say possible because details I have read are sketchy and I semi-expect that it could be a ruse on the part of Putin and Russian. In any event, the news helped to lift the market. Now on to non-geopolitical market movers. First up, the BOJ held their monthly policy meeting and left current stimulus measures in place. The bank is still purchasing asset backed securities and is on track to increase the monetary base in the country as planned. The bank says its view of the Japanese economy still stands and that it expects to see a rebound in recovery starting this quarter. This decision is in the face of poor data that suggests the April usage-tax hike has had a deeper impact than forecast. Market reaction in the region was mixed with most indices trading flat to slightly negative.

Moving on, the ECB also held their policy meeting and released their decision this morning around 7:30AM ET. The ECB lowered it's three key interest rates by 0.1% each. This is an unexpected move and in addition to other QE measures announced later during the press conference. Mario Draghi revealed that the ECB will be engaging in the purchase of asset backed securities and covered bonds in an attempt to stimulate the EU economy. The exact nature of the purchases is still not clear but they are planned to begin next month. Mr.Draghi says the purchases will have a “sizable” impact on the ECB's balance sheet and that additional measures could be taken if the members deemed it necessary. The news was met with approval and EU indices were able to move up into positive territory.

Market Statistics

All of this news had our own markets trading higher in the early hours. Futures were indicated higher from the earliest part of the day with the SPX up about 5 or 6 points along with a 40ish point gain the DOW and 10 for the NASDAQ. These levels held firm through the morning and gained strength as each piece of data was released. The day started pretty early with the 7:30 release of the Challenger survey, followed by ADP at 8:15AM, jobless claims and productivity at 8:30 and then finally services sector ISM at 10AM. As a whole the data today was better than expected and suggest that tomorrows NFP could be another decent number. Current expectations are for non-farm private payrolls in a range around 225,000.

Between 8:30 and 9:00 futures spiked up to the high of the morning before moderating into the open of today's session. At the open advancers led decliners by about 2:1 in a fairly broad rally and that held through the morning. The SPX opened with a gain of only 3 points and did not seem to want to move higher but by 9:45 had extended that to 8 points and then to 10 points by 10:30AM. The move took the index and others to new all time/long term highs that coincidentally were reached exactly one year after the 52 week low. After reaching the intraday high the markets drifted slowly lower until reaching break even and then even lower. The SPX and Dow Jones Industrials both tested near term support before making a small bounce and closing near flat for the day. Although today's data was very good, trading is still light and very cautious which had a lot to do with overall market action.

Economic Calendar

The Economy

One reason today was so action packed is because of the Labor Day Holiday. Some, but not all, economic releases were pushed back by a day. Two of these were the Challenger, Gray&Christmas survey of planned layoffs and ADP which are typically released on Wendesday. According to Challenger the number of planned layoffs fell by -20.7% from last year at the same time and -15% from last month. The number of expected layoffs came in at just over 40,000 and is the fourth time that planned lay off were below last years levels. However, on a year to date basis, job cuts are only down about -4%. The heaviest sector for cuts this month was the tech/electronics sector led by Cisco Systems. Tech also leads for the year due in part to large cuts from Hewlett Packard and Microsoft. An important take away here is that the pace of job cuts are holding steady from last year if not trending lower. Another is that the cuts would be even lower if not for restructuring in two very large tech firms.

ADP was released next, at 8:15, just before the weekly jobless claims. The number of new non-farm jobs, as estimated by ADP, created in August is 204,000. This is below the expected 218,000 but still strong, or at least steady, enough to maintain current trends. July's number was revised down by -6,000 to 212,000. Despite being below expectation there were gains across the board, particularly in manufacturing and construction. Small business led in job creation among the three business sizes tracked, adding more than 78,000 new jobs. Mark Zandi from Moody's made some comments this morning to the effect that the numbers were "broad", "good" and revealed creation of “quality” jobs.

Initial claims for unemployment rose by 4,000 to 302,000. This is slightly above expectations but still at low levels. The number of initial claims has been holding steady at or near the bottom of the 12 month range for nearly two months in line with the idea that firing and job turnover is slowing. The four week moving average of claims also rose, by 3,000, to 302,750. The average, which smooths out some of the noise present in the data, has also been hanging right around 300,000 for a number of weeks, lending weight to the initial claims data. On an unadjusted basis there were 248,570 new claims, about 20,000, or 7.5%, less than last year at this same time. The seasonal factors had expected a slightly larger drop this month which accounts for the small rise we saw in the adjusted data.


Continuing claims fell by -64,000 to a new low seen last on June 16, 2007. This weeks tally of those receiving extended unemployment benefits fell to 2.464 million. Last weeks figure was revised higher, but only by 1,000. The four week moving average of continuing claims also hit a low not seen since summer of 2007. This drop in continuing claims continues the downtrend in longer term unemployment claims that stalled during the previous month. Considering that the data lags by two weeks it helps support estimates for strong August NFP and Unemployment numbers tomorrow. Another sign that tomorrows data will be strong is the total claims data. Total claims fell by -11,387 to 2.455 million. This is just off the long term low set earlier this year.


Some other data was released simultaneously to the claims data; final revision for 2nd quarter productivity, unit labor costs and the July trade balance. 2nd quarter productivity was revised slightly lower, against the expectations, to 2.3%. This is the final revision for this data point and while not as good as expected, is still positive and supportive of growth. Labor cost for the quarter were also revised lower, counter to expectations. Labor costs were revised down to -0.10% from +0.6% and below the expected +0.5%. This data shows that there may be even less job based inflation in the system than we thought.

The trade balance for July is -$40.5 billion, slightly better than expected. The previous month was revised to show a smaller deficit.

The final piece of data released today, and the one that propelled the market to its intraday high, was the services sector ISM figures. The gauge of the non-manufacturing industry expanded more than expected on top of an unrevised number for last month. The expectation was for 58, previous is 58.7, August ISM is 59.6, the highest level since the index inception. Within the report the new orders, business activity and employment indices all showed strong growth, with only the employment index below 60. All components of the non manufacturing ISM were above the expansionary 50 level.

The Oil Index

Oil prices have been volatile of late and today was no different. The price of black gold has swung in moves greater than 1% for each of the past 5 days as supply, geopolitics and economic trends play havoc with short and long term expectations. These moves have been testing support in the low $90's and resistance at $95 with no clear direction for the short to long term. Today's action had WTI begin trading even with yesterday's closing prices near $95 but that level did not hold with WTI losing more than -1.25% by the end of the session.

The Oil Index also fell in today's session. The index dropped just over -1%, coming to rest on the 30 day moving average and the long term support of a previous all time high. The index is still trending sideways while oil prices correct but has not suffered the way you might think. The index is well supported by technical levels and rising moving averages along with bullish indicators. There is still some near term weakness which could keep the index trapped within a range but it looks like the trend is still up. Low oil prices are not necessarily good in terms of revenue per barrel but could lead to increased sales volume, which could increase overall revenues. Low oil prices are good for the economy in general, and could help increase economic activity, which could lead to increased demand for oil and increased sales ….. Current support is 1,662, roughly the middle of the three month range. The indicators are bullish but also consistent with a range bound index that could persist into the short term.


The Gold Index

Gold prices were flat in early trading but once trading began in earnest could not hold up. Gold lost another $6 today, falling below $1265 for the first time in over two months. Today's move confirms the $1275-$1270 area as resistance, an area of previous support. The moves by the ECB along with our own economic data are dollar positive and will pressure gold going forward so this resistance could be strong. The long term low in gold is below $1200 and this is a real target for the metal at this time although there is additional support in the $1225 region.

The Gold Index broke out of the tight range it has been trading in over the past two months confirming my bearish analysis. Today's drop in the underlying commodity was the straw that broke the camels back. Gold prices are now at levels significantly below those of the previous quarter and will have a serious impact on the earnings ability of the gold miners. This is evidenced in the Gold Index which dropped close to 3% in today's session, falling from the 30 day moving average, breaking support and the 150 day moving average. The indicators are bearish and pointing lower with a near term target around $95. The candles formed this week, in particular Tuesday, Wednesday and today, are particularly bearish and could be indicative of strength in this move.


In The News, Story Stocks and Earnings

The dollar strengthened significantly today. The moves by both the BOJ and the ECB are undermining the value of their respective currencies and boosting the dollar. The Dollar Index, which is euro heavy, gained more than 1% today extending the 4 month rally. The index is now trading near long term 14 month highs on rising indicators. Both the MACD and stochastic are bullish and gaining strength.


The euro made a big move today as well and was the biggest mover of the Dollar Index. The announcement from the ECB was even more than the market expected. Today's action dropped the EUR/USD more than two handles, below what had been support and even lower to below long term support at 1.3000. The pair is oversold in the short and log terms but that may not matter as it is also gaining momentum. Downside target is currently 1.2750 with risk being EU economic data and any comments from the ECB or its members. Resistance is now at 1.3000.


The yen weakened today as well even though the BOJ did not increase it's stimulus. That may not matter for several reasons including but not limited to the following; the move by the ECB is boosting dollar value relative to the euro and other currencies, US economic data is strengthening while both EU and Japanese data remains weak, the Fed is on track to end US QE and the BOJ is still increasing its monetary base at a rate of billions of yen per year. The dollar set a new 8 month high versus the yen today, briefly touching long term resistance. The USD/JPY has been near resistance for three days now, following a 6 week rally. The indicators are bullish but divergent so it looks like resistance is going to hold for now.


The VIX

The afternoon turnaround in the equities market sent the VIX moving higher today. The fear index had opened near yesterday's close, just under support, and traded lower during the morning but the late day sell off pushed it above my 12.50 resistance line. The move broke one resistance but was capped at the short and long term moving averages. It still looks like the VIX is testing resistance but now that it is above 12.50 there is a chance for it to spike. There are still geopolitical risks in the market as well as important data to be released tomorrow.


The Indices

The S&P 500 traded in a wide range today despite closing near flat for the session. The broad market lost -0.15% at the end of the day after posting as much as a half percent gain and near that amount of loss at different time during the day. The action was broad, but volume was light, which may have accounted for the late day turnaround.

There has been quite a bit of data out this week and today, all pointing to continued economic recovery, but the market still likes to wait for the official NFP and unemployment numbers before getting too excited about it. Today's action dropped below 2,000 but is still above long term support. The candle formed by today's action is doji-ish but not overly big, more of a serious spinning top than anything else. The indicators are bullish but displaying some near term weakness. The MACD, for example, is in decline and approaching the zero line. This is not a problem while the index consolidates above support but will gain importance if it drops below support. Stochastic is strongly bullish, high in the upper signal zone, but currently moving lower. Also not a problem while the index is consolidating and is actually good for the index, relieving near term overbought conditions. The trend is up and the index is bullish but I think it's time to wait for the next signal, tomorrow the NFP could be it.


The NASDAQ Composite was today's leader in terms of losses. The tech heavy index fell -0.22%, or -10.28 in today's session. This is the second day of declines in the index since it hit a new intraday high yesterday. The indicators are still bullish but like with the SPX, are showing some near term weakness. There is some near term support at the current level with short and long term support not far below around 4,500. The long term trends are up but it looks like the index could drift down to 4,500 if the NFP is not to the market's liking and maybe even if it is.


The Dow Jones Industrial Average only lost -0.05% in today's session. The blue chip index fell less than 10 points at the close, trading just beneath long term resistance all day. The index has been trading just under this resistance for nearly two full weeks in a consolidation move and appears to be setting up for an attempt at new highs. A break above resistance at 17,150 could carry the index as much as 750 points higher in the near to short term while a failure to break out could keep the index range bound until market direction is decided.


The Dow Jones Transportation Average is the one index that was able to hang on to the early highs. The transports broke above resistance to gain 0.62% and set a new all time high. The index set this new high with rising, bullish indicators that point to more new highs. The only caveat at this time is a possible divergence in the near to short term MACD. The long term trend is up and the long term indications are for this continue so the divergence is not a major concern just yet, just something to take note of. The transportation stocks have been on a tear ever since oil prices dropped and I don't think this is over yet. Thinking about this index in terms of Dow theory and the Transports as a leading indicator. The transports are breaking to new highs with the industrials setting up for potential break out so it looks like the industrials could break out too.


Today's market action was little confusing. The data and events were rally worthy, sent the markets higher and yet they did not stay high. In fact, you could say they reversed, at least on an intraday basis. What happened to cause this? I think the market is waiting for the NFP. Regardless of the state of the economy, regardless of the additional data we received just today, the market still wants to wait for the NFP. I guess nothing else matters if there aren't jobs, and that is true in a sense. There has to be jobs to provide pay checks to fuel the economy.

What to expect in the number? I think it's going to be strong, over 200,000. Estimates are for it to be around 220,000. This is not out of the question and there is even a chance for it to be higher. How the market will react is the question. What is a Goldilocks number? Will just “strong” be enough to keep the market interested, as has been the case in the past, or will it need to be “surprisingly strong” to catalyze the rally. We will find out tomorrow at 8:30AM.

Until then, remember the trend!

Thomas Hughes