The markets experienced another big day riding on the volatility coaster.

Introduction

Volatility is in the house, that is for sure. Today the market experienced yet another huge move and not one to the upside. Markets cooled off in the afterglow of yesterday's rally as traders and investors weigh the Fed Minutes against this mornings data, cautionary words from Mario Draghi, downgraded global growth prospects and earnings expectations to settle more than 2% lower.

Needless to say the Fed remains a mystery despite the transparency they strive for. A year ago the current unemployment rate, 5.9%, would have been seen as a reasonable trigger for the Fed to act on interest rates. Now the "threshold" has been reached but there is still no real indication of when rates will go up. The move is now tied to inflation with no concrete evidence of it rising or when rate hikes will be.

Market Statistics

Asian markets were largely higher this morning following the near 2% move in the US indices yesterday. The Japanese Nikkei was the only notable index to lose ground, due in large part to yen strength and dollar weakness. European indices were more mixed on the raft of central banking news. First off the Bank Of England held rates steady at historic lows. Second ECB chief Mario Draghi made some statements about the state of the EU economy and how no real recovery could happen without structural reforms, a call he has been making for quite some time. EU markets fell to break even following the statements and held those levels into the close.

Our own markets were modestly lower this morning, not too surprising following such a large move as we saw yesterday. The SPX was indicated about 6 points lower before the 8:30AM data release and then moderated that to about -3 afterward. Today's data was positive and in line with the trends. The employment picture continues to brighten and wholesale inventories are on the rise.

The markets remained negative into the open at which time they began a slow and steady decline. Then late morning, at the close of European trading, selling picked up and the market slide reached new lows. The SPX shed more than 40 points at the height of today's decline but as it has over the past week it found support along the long term trend line. The SPX and other indices bounced from support multiple times today before closing on a down beat near the days lows.

Economic Calendar

The Economy

Initial claims for unemployment fell this week versus an expected rise. Claims fell by -1,000 from last weeks upward revision of +1,000 to 287,000. This is now the 6th week that claims have been below 300,000 and trending near long term lows. The four week moving average also fell, by -7,250, to a new low not seen since February, 2006. Economist had been expecting a gain this week, if mild. On an unadjusted basis initial claims rose by just over 30,000, in line with seasonal adjustment factors. On a state by state basis NJ and IN led with increases of 615 and 482 respectively while CA and MI led with declines of -7,715 and -2,082.

I take this as a sign that job turnovers and job losses to the economy continue to decline as suggested by the last round of monthly data. Challenger says job cuts are at long term lows while JOLTs job openings are long term highs and the KC Fed Index Of Labor Market Conditions says improvement is gaining momentum.


The longer term gauges of employment claims, continuing and total claims, both also fell in this weeks data. Continuing claims fell by -21,000 to 2.381 million, a new low dating back to 5/27/2006. The moving average of this figure also fell to a new low. The total number of Americans fell by -44,363, also making a new low and now nearly 50% below last years levels. This is due in large part to benefit extensions that expired at the beginning of the year but also to the down trend in unemployment and uptrend in job creation. In any case, both of these figures are trending lower and setting new lows, in line with other data showing improvements in the labor market.


Wholesale inventories were released at 10AM and helped stop the market's fall, at least for a little while. The headline number showed an increase of +0.7%, about twice the expected growth. This is alongside a drop in wholesale sales of an equal amount, -0.7%. The previous month was also revised higher. On a year over year basis inventories are up 7.9% and sales are up 5.8%.

The Oil Index

Oil prices were under pressure yet again, losing another -1.86% and falling to near $85 a barrel for the first time in a year and half during the open session. After the close prices fell even further, dropping below $85 for the first time in about 2 years. Rising stockpiles and a lack of threat to global infrastructure are competing with a seeming schizophrenic Saudi Arabia and lowered global growth outlook to direct prices.

Low prices will spark moves by big players in the industry as proven by the Saudis. The two headlines focused on the Saudis that I saw today are at odds with each other and lead me to think...I don't know what. Maybe Art Cashin comment that there is an element of James Bond afoot is correct. The first headlined covered the Saudis announced supply cuts and how that is hoped to help stabilize prices while the second went over the Saudi scheme to maintain market share by discounting prices to China. Others in the industry that may be feeling the squeeze from low prices are the shale players. The lower oil prices get the more thier margins get squeezed; the break even point for fracking and shale oil production is roughly $80.

The Oil Index fell today, breaking long term support and setting a new 6 month low. The index has now been in decline for 5 straight weeks and is beginning to look a little extended. The indicators are still bearish but the MACD is spotty and a little divergent. The peaks are reflective of the volatility in the oil pits we've seen over the last few weeks. Today's candle opened just above 1,500, long term support, and moved steadily lower all day. The index is now below support and likely to remain there until oil prices stabilize and/or move higher.


The Gold Index

Gold prices surged yesterday after the FOMC minutes and were able to hold those gains today. The minutes revealed the Fed is bullish on the economy, wary of Europe, and incredibly non-committal on interest rate hikes with the latter most important for gold traders.With today's move gold prices have rebounded nearly 3% since hitting long term support earlier this week. My long term targets have been met so now it's time to look for the next near to short term mover of gold.

Fed policy and outlook for interest is the underlying current with stronger dollar coming in a close second from a long term perspective. Closer in will be inflation data. Of course other data will need to hold to current trends but it is the inflation data that the Fed is watching in terms of interest rates so that is the data I think will move gold. Inflationary data and a sooner hike to rates will likely be bearish while non-inflationary data and later rate hikes likely be bullish. Until then, and until the equities markets calm down, gold prices could remain volatile. Today's action was positive but came to a halt at a potential area of resistance, $1225.

The Gold Index moved lower, counter to today's bounce in the underlying commodity. The index is closely tied to gold prices so this is a little surprising. However, the gold stocks made their move yesterday and today sold off in line with the general market today. Today's move began just below the recently broken long term support which may now become resistance. The index is now just above long term lows set just this week and appears to be consolidating. The index is below resistance at this time but if the bounce in gold holds then I suspect that the index will not move lower. The indicators are the same as before, momentum is bearish but weak and weakening while stochastic shows a market that has been oversold for a month. Divergence in MACD adds to the idea the index is at a turning point but no guarantee of reversal. Current resistance is between $82.50 and $85 with support just below the current levels around $75.


In The News, Story Stocks and Earnings

Alcoa could not buck today's sell-off despite blowing away earnings projections. The aluminum giant and bell-weather of the economy beat on an increase of sales and decrease of costs that overcame a rise in aluminum prices. This sparked a rally in the stock yesterday in the after-hours session that carried into early trading this morning. The stock opened higher but then sold off hard throughout the day along with the broader market. The earnings were good but with the cloud that has grown over future global prospects maybe too good for the market to expect improvement in the near future. Shares are now trading below the long term trend but above short term support. Indicators are bearish but still consistent with support, stochastic in particular shows that there is some accumulation going on at these levels. Current support is at $15 with resistance at $16 and a short term target near $18 on a move higher.


Carl Icahn sent his letter to Apple today and moved the market, a little. He basically kissed Tim Cooks Apple and told him he was a great CEO and that shares of Apple were undervalued. He thinks the shares could be worth twice as much as they are now and spurred a 1% move higher. I sure wish I could do that, move the market in my favor, doesn't everybody think their shares are undervalued? The sell off in the broad market hurt the rally in Apple, which was capped at only 0.37% by the end of the day. Not discounting Mr. Icahn's view the stock looks like it is in a consolidation during an uptrend. The stock has been, split adjusted, trending higher all year and has been in this consolidation since moving above $100 post split. The indicators are neutral to bullish and consistent with a consolidation.


Pepsi reported earnings this morning. The Taste Born In The Carolina's reported organic revenue growth over 3% and delivered an earnings beat that may put critics to rest. The company was expected to report $1.29 on the high end of estimates and surpassed that with EPS of $1.36. The results to date are so good that the board has raised guidance for profit growth to 9% for the year. This may put an end to calls for the company to separate snacks and drinks segments of the company but probably not. Shares of Pepsi gapped at the open, moving nearly 3% higher at one point this morning before selling took over and brought prices below yesterday's close. The stock is in an uptrend and trading at all time highs but it may be at an end. The indicators are highly divergent from the highs and suggestive of a pull back.


The Indices

The indices were not able to hold yesterday's gains and fell hard in today's action. They began to fall and then slowly sank throughout the day until hitting bottom mid afternoon. From that point on the indices, led by the Dow Jones Transportation Average, bounced along support levels until the end of the day. The transports lost nearly -2.5% today, creating a long black candle and the third such in the last two weeks. The index is moving lower in the near term and that is supported by MACD. The momentum indicator is creating larger peaks in tandem with each new low in the transports and indicative of lower prices or at least holding along current lows. The index has broken the long term trend and is now in danger of confirming that move. Support is just below along 8,500 with next support around 7,825.


The S&P 500 fell -2.07%, coming to rest exactly on the long term trend line. Volatility in the broad market is increasing but has yet to break trend. The indicators are bearish but still in line with the underlying trend, unlike those on the trannies. MACD is a little spotty, like on the Oil Index mentioned earlier, no doubt a result of the backing-and-filling the market has been doing this week. Stochastic is meanwhile rolling over in the early stages of the trend following signal and appears to show support. If the index should move lower tomorrow it will break the trend line and could lead to a further correction, perhaps down to 1900 or lower. For now the trend is still in play with indicators that appear to be in line with a trend following entry.


The NASDAQ Composite is next up with a lost just over -2.00% for the day. The techs were hit as hard as any others today and set a new 6 week closing low. The index is now sitting exactly on support, as is the SPX, and is accompanied by indicators suggestive of support and the early stages of a trend following entry signal. Bearish MACD has peaked and is in decline while stochastic is rolling over. This is consistent with the index as it corrects to trend as it appears to be and have done. Support is at the current level, 4370. A break below here, with confirmation, could lead to a deeper correction down to near 4,200.


The Dow Jones Industrial Average was the mildest decliner of the day, losing only -1.97%. The blue chip index also created a long black candle and broke down to set a new low. The index is giving support a real testing but the indicators are still consistent with it holding. MACD is in decline as on the SPX and COMP and stochastic is rolling over, readings consistent with previous tests of support.


This has been a rockier correction than the last few but a correction to trend I think it is. It has been hard to maintain my stance recently but the indicators don't lie. I may not be reading them right but for now they suggest that the market is trading along support following a correction. Long term support could break down but it has not yet. Earnings season has just started and so far, based on Alcoa, things are good. The negative is that now future growth is in question with the blame laying in a couple of places.

China is slowing, but it has been for a couple of years and is still growing over 7%. Europe is slowing and that is a more pressing concern but again, it has been weak for a long time. Sanctions against Putin are in effect with no real indication on how they will affect global GDP. Additionally there are the mid term elections that we have scheduled just next month which could shift power in Congress. All things hanging over the market and that may weigh it down but there is still good in the economy too. We are still growing and there is of yet no sign of it stopping. In fact, based on the labor data, it appears as if the economy could be accelerating. Perhaps earnings season will give us a clue.

Until then, remember the trend!

Thomas Hughes