The market moved higher as China fear subsides and domestic economic data supports rate hike lift-off.

Introduction

The market moved higher today despite a third day of devaluation for the Chinese yuan. The PBOC once again changed the mid-point for yuan trading but soothed investor sentiment with statements to the effect that there was no basis for a prolonged devaluation program. Reasons given were strong economic environment, a chronic trade surplus, a sound financial position and deep foreign exchange reserves. Whether or not any of this is true remains to be seen but nevertheless helped to support today's trading.

Asian indices ended their day in positive territory following another day of wild swings. European indices also finished in positive territory although rumblings from Greece may add volatility to the market tomorrow and into next week. The recently reached agreement between PM Tsipras and creditors will get voted on early Friday morning and faces tough opposition. The ruling Syriza party is facing a split as far left members seek to block the deal.

Market Statistics

All of this news had futures trading strongly positive in the early hours of the premarket session but economic data tempered the trade. Today's economic calender included reads on employment, the consumer and business that all support current rate hike expectations and a possible September lift-off. By 9:30 futures were indicating a flat to mildly positive open and that is what we got. The first hour of trading saw the indices struggle though and make a dip into negative territory. The SPX lost about 8 points at its morning low but was able to recover. By 10:45 the indices were flirting with break even levels and by noon most were back in positive territory.

Afternoon trading was exactly opposite to the morning session. The indices moved higher from the break even point, pushing more than a half percent higher from yesterday's close, but were not able to hold the gains. By the end of the day all the majors had retreat back to break even levels with more than one closing with more than one posting small losses.

Economic Calendar

The Economy

Today's economic calender was pretty full. Along with jobless claims we got data on Retail/Sales, Import/Export Prices and Business Inventories. First up, jobless claims. Initial claims for unemployment rose by 5,000 from a downward revision of -1,000 to hit 274,000. This is the fourth week of mild gains in initial claims but the number remains near the long term low and consistent with labor market health. The four week moving average of initial claims fell however, shedding -1,750 to hit a new 15 year low. On a not adjusted basis claims rose by 7% versus the 5.2% predicted by seasonal factors. Not adjusted claims are down -11% from this same time last year. Virginia and Iowa led with increases in claims of 1,094 and 538. California and Tennessee led with decreases in claims of -3157 and -1451.


Continuing claims also rose, gaining +15,000 from an upward revision of +3,000 to hit 2.273 million. This leaves continuing claims basically flat for the month and trending near the long term low. The four week moving average of continuing claims gained 14,500 to reach 2.258 million and is also trending flat, just above the long term low. Total claims fell this week, shedding -42,092 to hit 2.260 million. This is the first week of decline in over a month but is still nearly 11% below last year at this time and near the long term low.


Retail sales rose more than expected, +0.6%. Consensus was in the range of 0.5%. On a year over year basis sales are also up, 2.4% from last July. The previous month was revised higher to "virtually unchanged" according to the press release. Sales were boosted primarily by auto/auto parts and food&beverage which are up 6.9% and 9% over the last year at this time.


Import and export fell in July, primarily on the plunge in oil prices. Import prices fell -0.9% on the headline number and -0.3% ex-energy. Export prices fell a more modest -0.4%.


Business Inventories rose much more than expected, 0.8%. Consensus was in the range of 0.3%, in line with the previous month's 0.3%. Sales rose 0.2% for the month but are down -2.5% from last July.

The Oil Index

Oil prices fell again today, hitting a new 6.5 year low. WTI fell a little more than -3% to hit $42. Supply issues persist despite recent draw downs in US supplies. Worries over economic slowing in China are adding increasing pressure on demand outlook despite the changes in expectations issued by the EIA earlier this week. They are now calling for production growth to slow in 2015 and 2016, but remain near all time highs, while demand growth was upgraded for 2016. Even with this new prediction supply is outweighing demand and will likely keep pressure on oil prices. The EIA has also lowered its 2015 and 2016 price targets to $49 and $54 respectively.

The Oil Index fell only about -1.25% in today's action and did not set a new low. The index fell from resistance at the short term moving average and the 50% retracement level with indicators suggesting a test of that resistance may still come. Both stochastic and MACD are bullish and moving higher, in line with the underlying long term trend in the index, and could lead to a move above resistance, currently at 1235. A break above resistance could take the index up to next support, about 80 points above today's close, near the bottom of the long term trend line. Trend remains broken but recent price action suggests a bottom that could lead to a resumption in trend provided the energy sector does indeed return to profitability as expected.


The Gold Index

Gold prices fell in today's session, shedding about -0.8%, as the PBOC moves to devalue the yuan have strengthened the dollar. Gold lost about $10 but is still trading above $1100. Adding to the downside pressure is today's economic data which is in support of the upcoming FOMC rate hike whether or not the first one comes in September. Tomorrow's data, and in particular the PPI, could add additional downside pressures should inflation remain low.

The gold miners traded lower today, in tandem with the drop in gold, despite an upgrade of seniors Barrick Gold and Newmont Mining that came from Deutsche Bank. The upgrade is based primarily on valuation, Barrick alone is more than 35% below consensus targets and is expected to rise over the next year. This is consistent with my personal view of the sector which has been reporting increasing production and lower costs. The miners ETF lost -5.5% in today's session but looks strong to retest resistance met yesterday just below the 100% retracement level. Both MACD and stochastic are bullish and on the rise, today's action is no doubt tied to the drop in gold but may also include backing and filling after yesterday's opening gap up.


In The News, Story Stocks and Earnings

Retailer Kohl's fell more than -8% after reporting weaker than expected earnings. The company reported a miss on revenue and sales despite adding four new stores over the past year. Company CEO blamed the miss on a shift in sales in tax-free states from July to August but tempered it by saying they were well positioned for the back-to-school and fall season. However, positioning was not enough for the company to maintain guidance, which was lowered to the bottom of the previously released range. Kohl's is now trading near a 52 week low.


Eggs and egg prices have been in the spotlight this week as they are largely expected to rise. For one thing, egg producers have not recovered from the bird flu epidemic we saw this spring and summer. For another, bird flu is expected to become a problem again this fall when the seasonal migration of wild birds gets underway. According to data from the USDA prices for mid-west large brown eggs has risen more than 140% from last year and are at record highs.

This of course makes me think of Cal-Maine, a large southern based egg producer and one of the single largest distributors of shell eggs in the country. The company has not yet been hit significantly by the flu epidemic which is centered in the mid-west population. It has also not yet benefited from the increase in egg prices, per the most recent earnings report released in late July. Shares of the stock have been trending around $55 over the past few months, near the all time high, with support near $50. Rising prices should carry over into the companies bottom line with the risk that bird flu this year will not be as bad as predicted. Next earnings release is scheduled for the first week of October.


High end retailer Nordstrom reported after the bell. The company was expected to report $0.90 per share but the company blew away the projection and sent the stock shooting higher in after hours trading. According to the release sales grew at a rate greater than 9%, the fourth consecutive quarter of high single digit growth, and come on a 4.9% increase in comp store sales. EPS was projected in a range near $0.90, the actual is $1.09. The company also announced plans to open 19 new stores and upped guidance to a range slightly above previous guidance. Shares gained more than 5% after the announcement.


The retailers have been in focus this week and have largely disappointed the market. Companies from Macy's to Kohl's have reported weaker than expected earnings with a mixed outlook for the future. While economic data shows retail sales are on the rise the improvements are not carrying over into the general population of retailers. The Retail Sector Spyder XRT reflects this. The ETF entered a near to short term down trend with yesterday's candle and may see further declines. It ended today near flat to yesterday's close with weak indicators suggesting a test of support is likely. Both MACD and stochastic are pointing lower with first support target near $95. A break below this level could take it as low as $92.50. Resistance appears to be just above today's high, near $97.50.


The Indices

Today's action was mild compared to yesterday. Regardless of loss or gain all created small bodied spinning top candles without much indication of direction. For the most part the indices closed flat for the day, led by a small gain in the Dow Jones Industrial Average. The blue chips rose 0.03% in today's session and created a small doji candle after moving down, and then up, by about a half percent. Today's action is roughly centered in the 5 day trading range and stuck between support near 17,200 and resistance near 17,500. The indicators are both bearish/pointing lower with a test of support very possible, however, they are also still consistent with a supported market at this time. The short term moving average is still well above current price action and fast approaching the long term trend line. The long term trend is still up while the near to short term trend is down to sideways.


The NASDAQ Composite made the largest decline, -0.21%. The tech heavy index made a more pronounced downside movement but one that is still little more than a spinning top. The index is now trading just above the support of the long term trend line and set up for a trend following bounce. The indicators are bearish in the near term but MACD is cresting a bearish wave while stochastic is flat, both consistent with support at current levels. The trend line could be tested with a move down to 5,000 or lower, with a break below the trend line opening it up for a possible decline to 4,900.


The S&P 500 and Dow Jones Transportation Average made equal declines of -0.13%. The transports made a move down from resistance at the short term moving average and my support/resistance line at 8,280. This, along with rapidly declining bullish momentum and both stochastic lines moving lower, makes a test support look likely. Yesterday's candle puts support just below 8,250.


The S&P 500 also fell -0.13% and created a small bodied black spinning top candle. Today's action was trapped between two tightly packed support and resistance lines with indicators in support of a range bound index with little momentum, trading in the middle of a range. MACD momentum is on the bearish side but very very weak, stochastic is trending in the middle of its range with only very weak crosses by %K. News and/or data will likely cause a move in either direction but the risk I think, is to the downside. Any move to the downside is likely to find resistance before falling too far, with targets near 2,075, 2,060 and 2,050.


The markets are winding up on news, fears, earnings, economic data and FOMC expectations. At this point it seems like everything is being tied to the FOMC and rate hike expectations so there is a good chance the wind up could continue for the next month, up to and until the next Fed meeting. Between now and then there will be little in the way of earnings, we are near the end of the season, so news and data will be the market mover du jour.

China is the biggest risk for now. There is no telling what they will do, what they will say and what the data will show. My take is that whatever is going on over there has been going on for a long time and since we can't really trust the official government reports any news we do get has little worth... until we can definitely say it is having an effect on our economy. Until then our data remains positive and expansionary, earnings are still OK and outlook for both is good. I remain bullish for the long term and a buyer on the dips but ever so cautious.

Until then, remember the trend!

Thomas Hughes