The market struggled to make new highs as new data suggest upward momentum in the economy.

Introduction

The debate rages on over the trajectory of the US economy and FOMC rate hike timeline. Today's data was another mixed basket of results that both supports ongoing economic trends and leaves the timing of Fed policy changes “data dependent”.

Early trading was affected by events in overseas markets, notably PMI readings. China's flash PMI reading came in at 49.1, weaker than expected and the third month of contraction. The silver lining is that it is an increase from last month, albeit a small one. The reading spurred hopes for additional QE from the Peoples Bank and helped to move indices across the region, although not all in the same direction. The Heng Seng lost -0.22, the Nikkei gained 0.03% after both put in half percent moves in early trading.

Market Statistics

In Europe PMI reveals the region is still expanding but at a slightly slower pace than last month. Composite flash PMI reading for the Eurozone fell to 53.4 from 53.9 in April. This was no surprise in light of comments made by the ECB earlier this week. European indices were largely lower in early trading but moved up by end of day to close in the green.

Jobless claims data was the only economic data released before the opening bell. Claims remain low and helped to lift futures from mixed to mixed with a positive bias. After the open trading remained mixed. The indices hovered around break even level until a little after 10Am. At 10AM a raft of housing and manufacturing data hit the market that took a minute to digest. Once the market had a chance to dig into the numbers the market was able to move higher. The broad market was able to rally to what would become a new all-time closing high but was not able to set a new all-time intraday high.

Economic Calendar

The Economy

Jobless claims remain low although there was a slight rise this week. Initial claims gained 10,000 from last weeks not revised figure to hit 274,000. This is the third weak of mild gains and puts claims above the four week moving average for the first time in about a month. The four week moving average of claims continues to trend lower however. It fell -5,500 this week and hit a new 15 year low.

Initial claims may not be setting new lows but at this level are historically low and consistent with a healthy labor market. On a not adjusted basis claims fell by -88, or less than -0.1%, versus an expected drop closer to -4%. No states had significant changes in claims. Georgia had the biggest increase at 1,480, New York had the biggest decline, -1696.


Continuing claims fell -12,000 from a downward revision to last weeks number for a net decline of -18,000. This is a new 15+ year low for this figure. The 4 week moving average also fell, -29,000 from a downward revision, setting a new low of its own. Continuing claims is moving lower, indicative of lower job turnover rates and lower long term unemployment, but may level off or rebound in the coming weeks based on the steady levels of initial claims. Regardless, claims are at historic lows and consistent with the ongoing labor market recovery.

Total claims for unemployment also fell, shedding -58,933, to hit a new low. Total claims are now 2.195 million, the lowest level since October of last year. Total claims have been in rapid decline over the past two months and may continue to fall further. Claims are now 16.2% lower on a year over year basis and have been trending lower for several years. This decline, both near term and long term, is supportive of ongoing labor market recovery and suggest that jobs creation is still steady and unemployment is still declining.


Three market moving pieces of data were released simultaneously at 10AM. Existing home sales, leading indicators and the Philly Fed Manufacturing Business Outlook Survey. Existing home sales was the rotten egg in the basket but may in fact be an ugly duckling.

Existing Home Sales fell by -3.3%, much lower than the +1% expected by the market. The reason why it may turn out to be a positive for the market is because the drop is due to lack of inventory. Traffic volumes are high but lack of inventory is leading to an overall decline in sales, which is expected to add upward momentum to home building in the coming months. Despite the drop sales remain over the 5 million mark and have been so for 3 months. Sales are also up on a year over year basis, +6.1%, and have been positive for the past 7 months.

The Philly Fed Survey declined, falling -0.7 in May from a reading of 7.5. This is below expectations for a slight rise in activity but still expansionary. Within the report new orders and current shipments both rose by 3 points while the employment component fell by 5. The future activity index remains strong at 33.9 showing only a small drop from the April reading of 35.5. Of those surveyed, 32% of respondents expect their businesses to expand in the coming months.

Leading Indicators was a positive surprise, rising by 0.7% and well ahead of expectations. This shows a moderate increase in activity from last month, +0.4%, and is the second month of increased expansion following the winter economic decline. The coincident and lagging indicators both rose as well, gaining 0.2% and 0.1% respectively.

Tomorrow only one release, CPI, and I think it could be a real market mover. The read on consumer level inflation is expected to remain unchanged from last months slight rise. Any deviation from that is going to be heavily watched as sign of when the FOMC will move on raising interest rates. If it is light then rate hikes expectations get pushed back, if it's hot then those expectations get moved up.

The Oil Index

Oil prices climbed today as tensions flare across the middle east. ISIS militants continue to gain ground and dig in around Ramadi, coalition attacks on rebels continue in Yemen and Iranian propaganda keeps the nuclear deal in the spotlight. On top of this, another draw down of US stockpiles has added to speculation oversupply is easing, helping to support prices. WTI gained 2.9%, Brent 2.26% but there is still no sign of declining production.

The Oil Index rose in tandem with the underlying commodity. The index gained about 0.75% in a move creating a small bodied candle just under the short term moving average. The index has been drifting lower since dropping below 1,400 and may have found near term support. The indicators remain bearish but are consistent with a near term bottom. The long term trend is up so this could develop into a trend following buy signal but we are far from that yet. Near term trend is down with resistance at 1,400.


The Gold Index

Gold prices drifted lower in today's action but remain above $1200. Today's move is in response to the dollar's rebound from support, a move which may already be over; the index fell from support today and if the CPI is as weak as the PPI could easily fall further and lift gold. Gold prices are now trading just above $1200 which is now my target for support. A break below $1200 could take the metal down to test longer term support near $1,175, a bounce could go as high as $1250.

The gold miners ETF GDX is now trading near the short term moving average, along the rising support line, after falling back to support earlier this week. The sector still looks strong for longer term trades but is having trouble holding significant gains in the short term. The indicators are consistent with support along my line and suggestive that prices will continue to find higher levels of support on each dip. Higher gold prices are helping to support the index, so long as they remain supported so should the gold miners sector. A break below the rising trend line could see the ETF fall to $17.50, a break above resistance, near $21.15, has a target between $22.50 and $25.


In The News, Story Stocks and Earnings

Lumber Liquidators plunged today on reports the CEO quit. This is the second surprise exodus from the plagued company and could be the signal this company is on the skids. Now that the CFO and CEO have both quit, in the wake of the Chinese formaldehyde scandal, there is little hope the company can make a substantial recovery in the foreseeable future. Shares of the stock dropped more than 15% on the news, gapping lower and hitting a new three year low. The stock is now trading near a long term support level that may add volatility to prices.


Best Buy beat on the top and bottom line as traffic and sales in smart phones and TV's were stronger that expected. Despite the beat earnings and revenue are down more than 70% from the comparable quarter last year and not enough to sustain the early pop. The stock jumped more than 10% in the early pre-open session, gapping above resistance at the open and the sold off during the day. Volume was high and left prices below the short term moving average and the $35.25 support line.


Gap Stores reported mediocre results after the bell. The clothing store met expectations for earnings but fell short on revenue. Full year guidance was reaffirmed in a range around consensus expectations, largely due to performance at Old Navy; Gap comp sales fell 4%, Old Navy grew by 3%. Shares of the stock were little changed in after hours trading.


Ross Stores delivered a double dose of positive surprise in its report. The company beat on the top and bottom lines, and raised guidance. Full year guidance is now in line with consensus estimates near $4.80 per share. The new is evidence that not all retailers are suffering, just some of them. Shares of the stock rose in after hours trading


The Indices

The market moved higher today but barely. Today's action saw the indices hover near break even in the early morning, rise to test recent highs, dip back to test break even and then rise again going into the close. The major indices were able to close with gains today, led ironically by the Dow Jones Transportation Average. I say ironically because it continues to lag the broader market and persists in testing support along the long term trend line while other indices are pushing new highs.

Today's action lifted the index 0.56%.Today's move up from 8,500 was halted beneath the long term trend line and the bottom of the previous 6 month range. The current positioning of the index is alarming as it is beneath two major support lines and at the intersection of those two lines, a set-up I have noticed can result in substantial moves. The long term trend remains up so I am not turning bearish just yet. However, if it does not regain the upper side of the trend line and support a deeper correction could follow.


The NASDAQ Composite made the next largest gain today. The tech heavy index moved up to test the current all-time-closing high but fell short of setting one. The index is moving higher and looks like it will test the all-time high, closing and intra-day, in the near term. Momentum is bullish, weak but bullish, and stochastic is moving higher supporting this view. We still need a break to new highs, which would have a target near 5,250 in the near to short term, to get bullish for the summer. If the test of new highs is rejected first support target is 5,000 with the long term trend line next target, near 4,800. A correction to the trend line would be close to 6%.


The Dow Jones Industrial Average made the third largest gain today, about 0.34%. The blue chips did not make a new high but they traded in a tight range just below the current high. The index appears to be struggling with resistance but the indicators are consistent with higher prices so a retest of resistance is likely. MACD and stochastic are both bullish, stochastic showing strength in a crossover of the upper signal line that could lead to another 250 points of upside. It looks like the index wants to move higher but without a more decisive break-out I remain cautious.


The S&P 500 brings up the rear in today's action. The broad market gained only 0.23% but was able to set a new all time closing high. Today's candle tested the current all-time intraday high but was not able to break it. The indicators are bullish and stochastic at least is gaining strength so it looks like a test of the high or another new high is likely. Regardless of making a new high, today is the 5th day of trading above the recently broken previous all-time high and a good sign for the bulls. The longer the index can trade and consolidate at this level the better.


There is a divergence in the market that is gaining attention. The transportation average persists in trading at the bottom of its range while the blue chips and broader market are setting new highs. Depending on which way you look at it the transports are going to lead the broader market lower, or the broader market is going to lead the transports higher. It all comes down to economic and earnings outlook. If you are in the camp that sees economic growth stalling then the transports could be leading the broad market lower. If you are in the camp that sees economic growth and expansion continuing into the future then the broad market is leading the transports higher. I for one still see economic expansion and earnings growth on the horizon.

Until then, remember the trend!

Thomas Hughes