Steady labor data and positive earnings from Wal Mart helped the bulls reach new highs but weak oil prices pulled them back.

Introduction

Steady labor data and positive earnings helped the bulls reach new highs. Jobless claims and a surprise report from Wal Mart added lift while plunging oil prices pulled lower.

Futures trading was positive all morning despite weaker than expected data from China. Industrial Production and Retail Sales for the country were both good, just not quite as good as forecast. Production rose by 7.7% and retail sales by 11.5%. Asian markets were largely mixed on the news but the Nikkei is surged higher on weak yen and expectations of further easing. European markets were largely unfazed by the Chinese data, trading higher for most of the day, until low oil prices hit the energy sector and caused them to fall back to break even.

Market Statistics

The major indices were indicated higher all morning but moderated to just above break even ahead of and following the 8:30AM data release. At the bell the market opened positive and quickly began to move higher, making new all time highs within the first 10 minutes of trading. Intra-day high was hit about 5 minutes before 11AM at which time the market fell back to break even and lower. Most of the afternoon session was spent testing support as oil prices fell through the floor but a late day rally helped the indices climb back to positive territory.

Economic Calendar

The Economy

Initial claims for unemployment rose by 12,000 this week to 290,000. This is slightly above estimates but still below the 300,000 level. The four week moving average of claims rose 6,000 to 285,000. This is the first up tick in the moving average for two months and still at historic lows. On an not adjusted basis claims rose by 15%, versus an expected 10%, to 306,899. While the down trend in claims appears to have stalled out they are still at long term lows and at levels in line with steady improvement in labor. Michigan and New York led with increases in claims of 1,921 and 1,006 respectively. California and Ohio led with decreases of -3850 and -2,325.

Continuing Claims also rose, by 36,000, to 2.392 million. This is also slightly above expectations and also still near historic low levels. The four week moving average rose marginally but is basically flat for the last four weeks. The downtrend in continuing claims also appears to have stalled but this is not surprising as a seasonal uptick in layoff's is predicted by ADP and jobless claims data. In any event continuing claims are at long term low levels and in line with current labor trends.


Total claims for unemployment fell this week, shedding -36,654, to 2.101 million. This is just off the long term low set two weeks ago and in line with the long term downtrend. This figure may stall in the coming weeks as well but is still at levels conducive to a decline in overall unemployment. Looking back, it is almost 12 months since the unemployment claims extensions expired and total claims shed 1 million overnight. Since then the total claims figures has drifted even lower and is now nearly 50% lower than last year at this time.

JOLTS job opening data was released at 10AM. The Bureau of Labor Statistics reports that the number of job openings fell by 0.2 million to 4.7 million this month. This puts us on pace for 3.3% growth in jobs openings. Hiring and Separations are both up, separations due to an increase in quits. A high rate of quits is seen as a strong sign of worker confidence and a healthy labor market as workers are more likely to seek voluntary separation when they are confident of finding a new/better job or are more confident of retirement prospects.

The positive trends in labor are spurring speculation of when the Fed will raise interest rates. Estimat pushed out to late 2015 and even early 2016 are now being pulled back in. Consensus seems to be back in line with a mid-2015 target with the risk being a possible earlier hike. This is driving a lot of speculation in both the dollar and gold.

The dollar index is trading just beneath four year highs and could move higher if expectations for the ECB and BOJ play out. Both banks are expected to continue with current easing policy if not increase it in the near future, while at the same time we are looking at tightening and rate hike expectations moving closer in rather than farther out.

The newest twists in the Japanese recovery effort, which may also impact the dollar index, is that Prime minister Shinzo Abe may seek a larger mandate through a new vote. The purpose of this would be to enact a second round of stimulus measures and postpone an expected tax rate hike intended to pay for spending measures.


The Oil Index

Oil prices crubmled today, dropping more than 3.5%. WTI and Brent are both trading at four year lows, WTI near $74 and Brent around $78. A number of factors are at play here including the possibility of price wars, market share wars and/or a conspiracy to break the shale oil/gas industry. Another possibility I have thought of is a conspiracy to break OPEC apart because the members sure don't seem to be on the same page. Whatever the case I expect to see more volatility in oil prices in the near future.

The Oil Index fell by 2% as well. The index is now trading at near term support around 1420 with rapidly declining indicators. It looks like the index could continue lower and retest longer term support around 1,350. Oil prices are having a big impact on producer profits and putting big pressure on the sector but at the same time are aiding refining margins which could help with longer term support. Support looks like it could be strong but with future oil price so uncertain, and the OPEC meeting coming up, I'm feeling very cautious about this sector.


The Gold Index

Gold prices held steady around $1160 today. Interest rate speculation, positive US economic data, anticipation for upcoming FOMC minutes and possible action in Japan canceled each other out in today's session. The strong dollar is a primary reason gold has sunk to current long term lows and could send gold even lower while positive economic trends are helping to support gold. Economic trends are pointing to higher interest rates and rising inflation, reasons to get long gold. We know these two events will happen, the question is when, what we don't know for sure is if there will be more QE.

It looks like gold is winding up for something with $1150 as near term support. The minutes from the last FOMC meeting are due out next Tuesday and could be a catalyst.

The Gold Index also appears to be winding up for something. It has been trading in a narrowing band over the past two weeks and is below long term resistance. Low gold prices are driving the trend in this sector and that isn't going to change soon. Even if gold prices were to bottom from current levels it will take a massive increase in gold prices to help earnings and outlook for the miners. The long term trend in the index is down and it appears to be setting up for another leg lower. Resistance is the 100% retracement of the 2008-2012 bull market in gold with near term support around $60. Downside target, on a break of support, is near $50.


In The News, Story Stocks and Earnings

Wal Mart pleased the street today with a top and bottom line beat on earnings. On top of this the company reported the first increase in comp store sales for 7 quarters and was cautiously optimistic about the upcoming holiday season. Comps and sales were driven by strong back to school sales. Net sales increased by 2.8% to $118.1 billion. Company execs narrowed guidance to within the previously reported range and announced the closure of under performing stores in Japan. Shares of the stock surged more than 4% to a new all time high.


Hasbro and Dreamworks made the news when an independent source announced a possible deal for the toy maker to buy the animation studio. The deal would be worth about $30 a share but was met with a lot of skepticism. First, there was no consensus on whether it was a good more or not, or even what the goal was. Second, the validity of the news and the likelihood it would come to fruit are dubious. Hasbro sank on the news but Dreamworks jumped more than 15% to just below long term resistance. The stock gapped open but then sold off throughout the day on high volume.


JC Penny reported a much smaller loss than expected, cutting it by more than 60% from the same quarter last year. The problem is that revenue was also smaller than expected. Analyst had expected a loss of -$0.81 per share, actual was -$0.61. Shares of the stock sank more than 8% to trade along long term support near $7.00.


The Indices

The bulls tried to rally today but couldn't quite hold onto to the gains. Neither did the bears gain the upper hand. At the end of the day most of the indices closed in the green, at new highs, but closer to break even than not. The Dow Jones Transportation was the notable exception, falling by -0.20%.

This is the fourth day of trading above 9,000 and the third day in which 9,000 appears to have been tested. So far the testing is weak but could continue tomorrow. The trend is up and the indicators are bullish but momentum is still declining. This could lead to a stronger test of 9,000 or even lower with the target for support around 8,750.


The Dow Jones Industrial Average was today's biggest gainer, climbing a little more than 0.25% to set new intra-day and all time closing highs. The blue chip index created a small bodied white candle with a long upper wick suggestive of resistance to higher prices. So far the candle signal is very weak but could be indicating a near term top, pause or consolidation. The trend is up but like with the transports is losing momentum. The indicators are bullish but also suggest a near term top could be in place. This isn't a time to reverse position but is one to tighten stops. Support targets are 17,500 and 17,250 on a pullback.


The NASDAQ Composite gained a tenth of a percent today, rising 5.01 points. The tech heavy index made a new all time and intraday high but barely, and created a small doji that could have some mildly bearish implications. The index is moving higher after breaking above a small congestion band but is losing momentum. The combination of declining momentum and doji aren't a bearish signal but provide reason to think the index could move down to test support along 4,600.


The S&P 500 made the smallest gains today but gains it did make. The broad market rose just over 1 point, or 0.05%, to a new all-time closing and intra-day high. Market action was fairly balanced today, after first moving higher and then lower, creating a doji similar to the one on the NASDAQ chart. The length of the upper and lower wicks are nearly even, adding to the appearance of market balance. The indicators are bullish but like with the other three indices also showing declining momentum and suggestive of a near term top or consolidation. Support is about 20 points below today's close around 2020. The longer the index trades at or near current high levels while MACD declines the greater the chance that bullish momentum will return.


The trends are up and the indices are moving higher but there is evidence on the charts a consolidation, test of support or pull back could be in the works. Momentum is waning but that is not surprising given the amount the indices have moved in the last month. I don't see a major correction on the way but this could be a good time to lock in some profits and get ready to buy on the next dip.

Earnings season has past, now it's down to economics and outlook. Tomorrow there is some economic data that could provide catalyst including Retail Sales, Business Inventories, Michigan Sentiment and KC Fed Index of Labor Market Conditions. Next week there is a little more for the market to chew on including the FOMC minutes, housing data and leading indicators.

Until then, remember the trend!

Thomas Hughes