The market fell back today while traders wait for NFP/unemployment data, developments from Greece and a meeting of OPEC.

Introduction

The market fell back today while we all wait on several major events scheduled for tomorrow. US non-farm payrolls and a meeting of OPEC members both have the power to move the market and will likely cause some volatility.

Asian indices were mixed, and volatile. Signs of tightening margin requirements in China have spooked investors and increased fear the Chinese bull market is at an end. Indices throughout the region closed flat to slightly positive, led by the Shanghai index. It closed with a gain of 0.76% after dropping more than -4% on an intraday basis.

European markets were jittery as well, spurred by yesterday's comments from Mario Draghi and the ever present Greece debt issue. The news remains mixed; PM Tsipras says negotiations are going well, creditors say they aren't and a deadline scheduled for tomorrow has been postponed until later this month. Greece has chosen to bundle tomorrow's payment to the IMF with others due this month in what could be a sign it isn't able to pay. The move gives them more time to negotiate but also ups the stakes in terms of Greece's need to reach an agreement. If they can't pay now without help they won't be able to pay later without help, and that's not counting payments to the ECB due later this summer.

Market Statistics

Futures were indicating a negative open right from the start. Positive labor data did not have the power to lift them and early lows were held into the opening bell. The initial post opening sell-off was met by buyers who pushed the indices up to break-even levels but were not able to sustain the move. By 10AM the market was moving lower once again and didn't stop until mid afternoon. The drop was slowing by 1PM and may have bottomed but the late day announcement Greece was seeking to bundle payments helped it regain momentum and sent the market to today's lows.

Economic Calendar

The Economy

Challenger Gray & Christmas released their monthly report of planned lay-offs in the early morning. According to them the pace of planned lay-offs fell by -33% from last months peak. The financial and government sectors led with gains in planned job cuts. May's 41,000 is -23% below last May but brings the year to date total to +13% over last year. Oil only accounted for 1,000 lay-offs this month, down from 20,000 last month. So far this year there have been 69,000 job cuts blamed directly on oil prices, up from 3,000 in 2014. If we back out the energy impact on job cuts the year-to-date gain reverses to a decline of -17%.

Initial claims for unemployment fell more than expected. The number of first time claims dropped -8,000 to hit 276,000. This is not a new low but is just above it. Last week's figure was revised up by 2,000. The four week moving average gained 2,750 and is now 274,750. On a not adjusted basis claims fell by -9.2%, the seasonal factors had predicted a decline of -6.7%, and are -15% below last years level. Kansas had the biggest increase in claims, 2,716, Washington had the biggest decline, -507.


Continuing claims shed -30,000 to hit 2.196 million and another new 15+ year low. The four week moving average also hit a new low. Last week's figure was revised up by 4,000 but remains low. Continuing claims have not yet bottomed and are trending lower despite the recent bounce in initial claims, an indication that while the rate of job turnover remains stable it is getting easier and easier to find another job when one is lost.

Total claims also fell, losing a meager -735. Total claims are now at a new 8 month low and approaching the long term low set last September. They are also -15% lower than last year at this time. Based on this and all the other labor data it looks to me like jobs creation remains steady if not strong, and unemployment is still declining. Current estimates for NFP are in the range of 225,000 with the chance it could be higher. Unemployment is expected to remain steady at 5.4%, but I think we could get a surprise drop.


Productivity and labor costs data were also released today. This the final revision to 1st quarter data and shows productivity dropped more than first predicted, -3.1%. This is down from the previous estimate of -1.9% and the second quarter of decline. The decline is due to a -1.6% drop in output, and a +1.6% increase in hours worked. On a year-over-year basis productivity is up when compared to the first quarter of 2014. Labor costs rose by a whopping 6.7% following the 5% increase we saw in the fourth quarter of last year. This is due to a +3.3% increase in hourly earnings and the -3.1% decline in productivity.

Christine Lagarde and the IMF think the Fed shouldn't raise rates until 2016. They think the move should be put on hold until signs of inflation are more evident, and that policy shouldn't be used to stifle growth in the financial sector. They suggest regulation and oversight should be “strengthened”.

The Oil Index

High supply and expectations for OPEC to maintain current production targets combined to cause oil prices to fall sharply today. Both Brent and WTI lost more than -2.7%. Adding to this was an unexpected build in natural gas stockpiles and a new study from the EIA which says US production could rise 5-10% in the next ten years, depending on the level of technological advances. WTI is now trading near $58.

The Oil Index fell more than -1.25% in today's action. The index is extending its recent near term down trend with the long term trend line as a target. Today's decline in oil prices is likely why the index fell today, poor expectations for 2nd quarter earnings are likely why it has been falling over the last few weeks. MACD momentum is still bearish and stochastic is weak at the bottom of the range but divergence in both suggest the downside movement is weakening. However there is no sign of the downswing ending yet. The long term outlook is positive and near term expectations are improving so I will be looking for support and a possible bounce from the trend line, somewhere in the 1,250 to 1,300 range.


The Gold Index

Gold prices fell near -1% today even as the dollar weakened. Positive economic data and Fed rate hike speculation may have played a role. Price fell below $1180 and bounced off support near $1170 to settle at $1177.10. Today's move is the 2nd day of decline from the $1200 level but as yet nothing more than the same churn we have been seeing over the past couple of months. Prices are being affected in the near term by dollar fluctuation and economic data, and will likely continue to be until the next Fed meeting. At that time they may give an indication that will break the dollar and gold out of their trading ranges. Strong NFP and/or unemployment data could send gold back to test $1170 with the chance of a dip back to the long term low near $1150.

The gold miners ETF GDX fell by -1.55% in response to gold's fall to support. The move has taken it below my rising support line and increased the chances the sector will pull back to the long term low near $17.50. The indicators are bearish and ticking lower, pointing to lower prices, but any move is going to be tied to gold prices. I'm still bullish on the sector for the long term but cautious in the near to short term.


In The News, Story Stocks and Earnings

The SEC announced it was filing suit against the people responsible for the fake Avon buy-out offer that hit the market last month. The filing ties the Avon scandal to several other similar events centered on the Tower Group, Rocky Mountain Chocolate and other publicly traded companies. The SEC is targeting 6 firms linked to false press releases and other documents posted on the SEC's EDGAR site. Today Avon lost another -1.23% and hit a new 20 year low.


Dish Network and T-Mobile announced the possibility of merger today. This is the latest in a string of merger/acquisitions between a broadcast and telecommunications company including the ATT purchase of DirectTV. The move is seen as a positive for both companies and not likely to be snubbed by regulators. The news sent both stocks higher. Dish gained more than 5% intraday, closing with a gain of 4.86%. The stock is moving higher with rising indicators and a target about 7% above today's close.


T-Mobile gained close to 5% intraday but sold off from the peak. The stock closed with a gain of 2.6% and bullish indicators but it may pull back to support before moving higher. Momentum is diverging from price, even with today's huge gain, and stochastic is forming a bearish crossover that make a test of support appear likely. Possible targets are near $38.25 which would close the gap opened today, and then below that near $37.50.


Bird flu is still raging through the mid-west. The epidemic is leading to an increase in food prices due to a shortage of eggs that is not expected to end anytime soon. An estimated 10% or more of the egg-laying hen population has been affected with more cases popping up everyday. Egg-producers like Cal-Maine may see a benefit from higher egg prices that could show up in earnings reports as soon as this quarter. The stock has already seen a substantial rally related to positive earnings growth and ongoing expansion plans, rising egg prices could add momentum to this trade. MACD and stochastic are both convergent with the May peak, suggesting a retest of that peak if not a new high is likely. Support is currently near $55.


The Indices

The indices fell today, perhaps farther than would have had not Greece thumbed its nose at the IMF. The declines had been moderating until that news hit the airwaves. At that time early support levels failed and new daily lows, and in some cased a new monthly low, were made. Today's move was led by the Dow Jones Industrial Average which shed -0.94%. Today's move broke support at 18,000 and set a new 4 week low. The indicators are bearish and gaining strength so it looks like a deeper correction is on the way, possibly as deep as 17,500 or to the long term trend line near 17,250 which would be roughly 6% from the peak set last month.


The S&P 500 and Dow Jones Transportation Average tied for 2nd largest decline, -0.86%, but I will start with the transports. Today's move looks ominous for us bulls as it may be confirming the transportation index break below the long term trend line. The index fell from previous support now turned resistance following the break through. The indicators are bearish and could lead to further downside if buyers don't step back in to support the market. The indicators are also consistent with the early stages of a trend following signal so I am not quite ready to go full bear on this index quite yet.


The S&P 500 set a new 3 week low in a move that took it below 2,100 to the 2,095 support level. The indicators are bearish and gaining strength so it looks like support will be tested further. The index is now below the long term trend line and in danger forming a deeper correction. A break below 2,095 could take it as low as 2,050 in the near term. That being said the index is still above long term support with indicators consistent with that support and setting up for a possible trend following entry.


The NASDAQ Composite made the smallest decline, -0.79%, and is the strongest looking index of them all. Today's action was to the downside, but remains above support levels, the 30 day moving average and did not set a new low. This index is still trending higher in the near and short term although, based on the indicators and other indices, it may have crested its peak. MACD has just crossed the zero line and stochastic is dropping below the upper signal line following a bearish crossover, both indications of weakness and possible lower prices. A drop below support and the moving average could take this index down to the long term trend line, about 4% below the recently set all-time high.


The indices are still trending higher in the long term but it is looking increasingly like a correction or pullback of some variety is in the works now. The transports have already made a 10% correction and may be heading lower, the other indices are still near recent peaks but could easily lose 4-5% by simply correcting to trend. This correction could be due to near term fear, poor earnings expectations for the 2nd quarter, Fed rate hike speculation or a combination of all three.

In the mean time there a couple of things to remember. One is that near term fear is near term, and not likely to reverse the market no matter how worrying it may be. Another is that poor 2nd quarter earnings expectations are followed by positive expectations for the 3rd and 4th quarter, and robust expectations for 2016 which fits in with the idea of a correction to trend within a greater bull market. Yet another is that no matter when the Fed raises interest rates, and how it will lead eventually to the end of the bull market, this is just the first of many hikes to come over the next 5-10 years and a sign that our economy is stable with healthy outlook. . . not a reason for the market to reverse.

The NFP report is going to be a big market mover and may wind up confusing the market. A high number is a good sign of economic health and reason to rally, except that it may also mean rate hikes come sooner, which could give the market an excuse to sell-off. A low number is a sign of stalling economic recovery and a reason to sell, except it may mean rate hikes come later than expected, which has been reason enough to rally up until now.

I am betting on the NFP being at least as good as expected with a chance the market will correct regardless of what the number is. I remain bullish long term but cautious at the moment, waiting to see what tomorrow and the next two weeks will bring us. The FOMC meeting is less than two weeks away, June 16th and 17th, which is when I think the market will show us what it really wants to do.

Until then, remember the trend!

Thomas Hughes