The market held steady as traders focus on tomorrow's NFP and unemployment data.

Introduction

There was quite a lot of news to move the market today but it held steady. Starting things off in Asia, markets there were mixed after a surprise GDP revision from China. The worlds third largest economy lowered its 2015 growth target to 7%, down from 7.4% in 2014. The news is not good but only seemed to affect Chinese indices. The Shang Hai and Heng Seng indices lost about 1% each while those in Japan and elsewhere in the region were able to post gains.

The news did not spook European markets either, their focus being on the ECB and Mario Draghi. The ECB held their rate policy meeting this week and decided to hold rates steady. They also announced a few more details of the bond purchasing plan set to begin on Monday. In his statements Draghi got bullish and predicted stronger growth for the EU than previously expected for 2015. European indices gained about 1% on average.

Market Statistics

Our indices were indicated to open higher from the earliest of the electronic sessions. Futures held steady throughout the morning, just above break even levels, with a little weakening after today's employment data was released; jobless claims jumped more than expected but not so much as to alter recent trends and lay-offs remain high. Other news affecting early trading includes positive comp store sales data from the retail sector and positive earnings from Costco. While there are few companies left which report comp store sales on a monthly basis those that did were generally better than expected, led by Costco which reported better than expected earnings as well.

The market opened higher as expected. After the opening the bell the indices moved down to test support at yesterdays closing levels and bounced from there. The bounce carried them to the early high, about a quarter percent higher, where they tread water for the next hour. Just before 11AM sellers stepped in and drove the indices back down to the morning low. Support held and another bounce ensued, taking the market back to the top of what became the daily range. After lunch the morning lows were retested, and broken, but buyers once again stepped in to bring prices back above break even. They held steady for the remainder of the day.

Economic Calendar

The Economy

Today was a big day of economic data today. Starting things off is the Challenger Gray&Christmas report on planned lay-offs. In February, planned lay-offs declined slightly to 50,579, a drop of 5% and just off of the high set last month. The large number of planned lay-offs for February is attributed primarily to retail losses, which are in line with last year's figure, and to low oil prices which added 16,339 job losses for the past month alone. On a year-to-date basis job losses in 2015 are trending 19% higher than 2014, due largely to oil. Oil alone accounts for 38% of this years job losses, totaling just over 39,000 for this year, followed by restructuring. Based on estimates I have read this is about half of the expected losses to be expected from the oil sector, not counting any peripheral losses that may occur. These are largely expected, and looking at the data ex-oil impact, job losses are relatively low.

Challenger Gray & Christmas

Initial claims for unemployment jumped this week, versus an expected drop. Claims jumped by 7,000 to 320,000 from last weeks not revised figure, versus an expected decline of about 20,000. The four week moving average rose and is now above 300,000. This weeks rise in claims is not great but still within recent trends and the four week moving average is still hovering around 300,000. The gain may be reflecting the high number of lay-offs reported by Challenger and not a big concern providing initial claims do not rise further. There has been a lot of volatility in the initial claims data lately so they could easily dip next week. Over the long term they are still trending at low levels and in-line the of rising employment.

On an not adjusted basis claims rose by just over 10%, slightly more than the 8% predicted by seasonal factors. Massachusetts, Kentucky and Illinois led with gains of 3,807, 2,916 and 2,777 respectively, followed by Pennsylvania. No mention of oil was given as a reason for increases of job losses by any of these states. Pennsylvania says that trucking, warehousing and construction were to blame, partly due to the weather.


Continuing claims for unemployment also rose this week, gaining 17,000 to reach 2.421 million. This is from an upward revision of 3,000. The four week moving average climbed 3,750 to 2.403 million and is now above the 2.4 million level. The gain this week is marginal, this figure is holding steady right around 2.4 million as it has for the last 2-3 months. This statistic is seen as a less volatile indication of labor trends and it looks to me to be settling down around the long-term-low-level of 2.4 million. Over the next couple of weeks we'll need to watch the initial claims for further gains, and to see if the relatively high level of initial claims spills over into the longer term and less volatile continuing claims.

The total number of American filing for unemployment fell by -59,912 to 2.806 million. This is a slight decline from last week, the 5th week of relatively stable numbers and the 7th week of retreat from the peak set in early January. Claims are elevated from the low set last fall but still trending near that low and at levels consistent with the long term labor trends. On a year over year basis total claims are more than 18% lower than last year at this time.


Revisions to Q4 productivity and labor costs were also released at 8:30AM. Productivity was revised lower to -2.2% from the previous estimate of -1.8%. While revised lower, it was not revised as low as expected and reflects an increase in the number of hours worked. The decline in productivity is due to an imbalance in the amount of output, which increased 2.6%, and the number of hours worked, which rose by 4.9%.

unit labor cost also increased in revision to +4.1%. This quite a bit more than the previous estimate of 2.7%, the expected revision to 2.9% and the previous quarters 2.6%. The reason for the rise in costs is due to an increase in wages of 1.9% and hours worked, offset by the drop in productivity. My take is that labor is improving as evidenced by increases in hours worked and wages, and that capacity is expanding to point of increased excess. Because of this we may see a decline in capacity utilization in the next release.

Factory orders data was released at 10AM. Orders fell by -0.2% versus an expected gain of 0.1%. This is on top of a downward revision to the previous month and the 6th month of decline. X-Transportation the number is worse, -1.8%. Shipments, unfilled orders and inventory all declined as well with weather a leading cause. It seems like the weather effect is in effect, although still nothing to compare with last year.

Tomorrow the big economic event will be the NFP number. Current estimates are in the 240K range but I think it may be a little low. There is volatility in initial claims but steadiness in the longer-term continuing and total claims belies any weakness that volatility may indicate. At the same time high levels of lay-offs are being matched by high levels of job openings, unfilled positions and a decent ADP number. Not only was the ADP OK, it is still indicating underlying momentum though positive revisions.

The Oil Index

Oil prices tried to rally again but failed. The price of WTI hung just over $51 for most of the day with a spike up to $51.50 early in the morning. However, by late afternoon sellers overpowered buyers and sent prices back down below yesterday's close. Competing GDP expectations may have been a cause of today's turnaround; on one hand China says it's growth is slowing, on the other Mario Draghi says EU growth is picking up, in between we have rising stockpiles, tepid demand and spreading ISIS conflicts throughout the Middle East. I think it needless to say that we should expect volatility in oil to continue, with an eye on $48 as near term support.

The Oil Index also traded lower today. The index traded in a very tight range, just beneath the 38.8% Fibonacci Retracement. This level could act as resistance now and the indicators are bearish so a drop is very possible. A move below the low set yesterday would be further bearish in my view. A drop below here could take it down to next support along the the long term up trend line near 1,250.


The Gold Index

Gold traded in a tight range during a choppy session. Prices held steady around $1,200 for most of the day but like oil, spiked higher mid-day and then fell sharply in the late afternoon. At that time gold fell below $1,200 bit and was not able to regain that level before before the end of the day. Gold prices continue to hold around $1,200 while the market tries to decide when the Fed will begin to move. The jobs number could help sway the market one way or the other but I still think any dip below this level will find buyers. A drop below $1,200 would find support between $1,175 and $1,190. a price region that saw a lot of bullish activity towards the end of last year.

The Gold Miners ETF GDX gained in today's action but traded down from the opening price. The ETF opened with a small gap and moved up to test resistance, then retreated to set a new two month low. The ETF is now below my support line at $20.50 and in danger of moving lower. If gold prices don't maintain support around $1,200 the possibility will grow. A move below $20 could take it down as far as $17.50. The indicators are bearish but beginning to show stronger signs of support at the current level so I'm not too sure of a break just yet. MACD is showing a nice divergence from prices as they set the new low and the stochastic is setting up into what could become a strong trend following signal.... assuming a bottom was set during during the Nov/Dec time period.


In The News, Story Stocks and Earnings

I haven't touched base on the dollar in a while but today is a good day to do it. The Dollar Index has been in consolidation for the last two months, basically since the ECB announced they would do QE bond purchases, and today's announcements helped send it shooting to a new high. The Dollar Index, which is euro heavy, continued its move above resistance with a gain of nearly 0.5%. Mario Draghi's dovish comments are likely to send the USD/EUR pair lower and this index higher in the near to short term as well. This is great for dollar bulls but will no doubt have an adverse affect on companies who have already be reporting the negative effects of currency conversion.


Costco reported earnings before the bell and beat street estimates on the top and bottom lines. The discount club retailer reported EPS of $1.35, a 29% increase over the comparable quarter last year. This is driven by an increase in traffic, sales and reduction in costs. Comparable store sales were strong, up in the high single digits for the US and the international segments of business, and expected to remain so. This is good news and helped by the recent switch to Citigroup and Visa sponsored credit cards,a move which should help to reduce cost even more. Today's news was well received and sent the stock up by 3% to approach the all time high set last month.


Bank stress test results were released after the closing bell and all 31 cleared their capital requirements. The Banking Index traded choppy today, first moving lower to test support along the short term 30 day moving average and then bouncing higher. By the end of the day price action had returned to near break even where it held into the close. The index is trading near the top of the 12 month trading range and does not look like it is about to break out but this news could lead to some buying and/or short covering tomorrow. The indicators are very weak bu could easily reverse if the bulls decide to buy into the banks who “passed” their tests.


Grocer chain Kroger reported earnings today and may have revealed one place where the consumer is spending money saved from low gas price. The chain reported earnings of $1.04, $0.23 (28%) above last year at this time. The gains are driven by higher sales, traffic and improved margins due to lower fuel costs. Company execs expect to see these trends continue into the current year and have raised guidance. The new target is full year EPS in the range of $3.80-$3.90 per share, a full ten cents above the previous guidance. Shares jumped more than 6% in today's action to reach another new all time high.


The Indices

Today's action was a little mixed, but largely to the upside. Trading ranges were very tight and lead me to think that the market is waiting for tomorrow's data before committing to one direction over the other. Most of the indices were able close in the green but not the Dow Jones Transportation Index. The transportation average was able to poke its head above break even but spent most of the day underwater and closed with a loss of -0.15%. Today's action was light and tested support along the short term moving average. The indicators are bearish and point to lower prices in the near term but I would not bet on that until after the NFP is released. Each time support was tested today buyers stepped in. A move below the moving average could keep the index range bound into the near to short term, with a downside target near 8,600. A bounce from this level would be in line with the long term trend and likely take it to test the all time high.


The S&P 500 made the smallest gain of the day, only 0.12%. This is after moving as high as 0.25% above yesterday's close and as low as -0.25%, creating a small spinning top floating just above support, support at the previous all-time high. Today's action is indicative, I think, of a wait-and-see attitude that could be focused on the NFP release. The indicators are moving lower, in line with this weeks move down to support, but not strong and still consistent with a naturally occurring pull-back to support. If support should break down the index could find support at the short term moving average and then below that near 2,050. If support holds upside targets remain near 2,200 or higher.


The Dow Jones Industrial Average made the next biggest gain, just over 0.21%. The blue chip index is situated similarly to the SPX in that it too is sitting just above the support of previous all-time highs and has created a small spinning top with today's action. The indicators are bearish, in line with the pull back to support, and could be indicating further testing of support along 18,000. If this breaks the short term moving average is just below and may provide additional support.


The NASDAQ Composite is today's leader in terms of percent gain. The tech heavy index climbed 0.32% in today's session but still created a spinning top, perhaps the most indecisive one of the lot as it is also a doji. The index is not sitting at support like the others so with the indicators the way they are looks especially vulnerable to sell-off. A pull back from here could take the index down to the 30 day moving average, about 130 points below today's closing price.


The market is waiting for the NFP number like it always does. Regardless of what the rest of the economic tells us, this one number is the what the market likes to pin its hopes too. I think it will be strong but even if it is not the trends are still positive and one month of data does not break a trend. Employment is improving and everybody (almost) is benefiting from low oil prices. This combination should add up to a nice surge in growth at some time in the foreseeable future if I am not totally off base. There could be a correction sparked by tomorrow's release but if so will likely be another buying opportunity for long term investors.

Until then, remember the trend!

Thomas Hughes