Economic data drives volatility as the world winds up for the FOMC meeting.

Introduction

Economic data from Japan, China and here at home helped drive today's volatility. However, despite signs of global weakness eyes remained focused on the FOMC meeting and possible rate hike scheduled for next week.

Asian indices fared worse in today's session, led by a -2.57% drop in the Heng Seng. Weak data from Japan and China both contributing to the declines. In Japan, Machine Orders fell -3.6% versus and expected gain of 3.7%, in China PPI fell -5.9%, about -5% more than expected. EU indices also fell, losing about -1% on average, but news from that region was light.

Market Statistics

Futures trading indicated some indecision in the pre-market session. When I first checked the indices were set for a positive open, up a bout 0.5%. Going into the 8AM hour, just before Jobless Claims data, futures reversed course and were soon indicating a down open, near -0.5%. At the open trading was just as manic. The indices opened with a small loss, made a quick test of support and then moved into positive territory, all within the first 30 minutes.

By late morning the market was firmly in positive territory but it was a case of two steps forward, one step back. Two distinct rallies, one before lunch and one after, both took the market to intra-day highs but neither held. At end of the day indices were positive, but showing only half of the intra-day gain.

Economic Calendar

The Economy

Not too much economic data today, Jobless Claims, Import/Export prices and Wholesale Inventories. Initial Claims for unemployment benefits fell by -6,000 from a downward revision of -1,000 to hit 275,000. The four week moving average also fell, shedding -1,000, to hit 281,000 but is basically flat due to revision. Regardless, initial claims are trending near 15 year lows and consistent with ongoing recovery in the labor market.

On a state by state basis New York and Ohio led with increases of 4,642 and 1,027, Pennsylvania and California led with declines of -1,549 and -1,301. On a not adjusted basis claims rose by 0.8%, less than the 3.3% predicted by seasonal factors. On a year over year basis not adjusted claims down -1.5%.


Continuing Claims gained 1,000 on top of an upward revision of 2,000 to hit 2.260 million in this week's data. The four week moving average fell, dropping -4,500. The changes in continuing claims data is minuscule and is the fourth week it has trended near flat at this level. I looks like claims have stabilized and may be a sign of increasing strength in the labor market.


Total Claims fell by -56, 574 to hit 2.153 million. This is the lowest level of total claims in 7 weeks and a contributing factor to the 5.1% unemployment rate we saw two weeks ago. Overall, the labor market appears to be stronger than ever with upward momentum. The JOLTs report yesterday is further evidence. According to it job opening are at an all time high while separations declined.


Import prices fell -1.8%, curbing expectations for inflation once again. The decline is primarily fuels but other, non-energy, prices are falling as well. Over the past year import prices have fallen nearly -11.5%. Prices for export also fell in this month's data, declining -1.4%. Over the past year export prices have declined -7%.

Wholesale Inventory fell -0.1% versus an expected gain of +0.3%. Last month's figure was revised lower, to 0.7% from 0.9%. This is weak data, but needs to be compared to business inventories and other data before a final verdict is made.

Not much data tomorrow either, just PPI and Michigan Sentiment. PPI could have an impact on FOMC outlook, gold and the dollar. Next week the economic calendar is super charged. Retail Sales, Empire Manufacturing, Industrial Production, Business Inventories, TIC Flows, CPI, Jobless Claims, Housing Starts, Building Permits, Philly Fed, the Leading Indicators and most importantly, the FOMC meeting on Wednesday. . . and a possible interest rate hike.

The Oil Index

Oil prices held firm in the face of another build in stockpiles. EIA data for crude was released today due to the Monday holiday and revealed a build of 2.6 million barrels. Natural gas inventory also rose, more than expected, which only adds to the over-supply/under-demand environment we are in. Supporting prices are a recent drop in the US rig count and a round of downward revisions to US production over the next 12 months.Prices for WTI closed the day with gains near 3.5% and trading above $45.50.

The Oil Index gained a little over 1% in today's session but remains below resistance. The indicators are pointing higher, suggesting that resistance will continue to be tested, but are weak at this time. It still looks like a retest of support near the recent low is likely based on the MACD peaks, and expected weakness in oil prices. Support target is near 1,020 with resistance just above the current levels along the 61.8% retracement level. A break above that level is not necessarily bullish, additional resistance exists in the form of the 30 day moving average.

There are signs of slowing production but supply remains high, in the US and abroad. Production in the US has been slowing all year but has yet to create a sustained drop in storage levels. Until then I think oil prices will remain under pressure and the Oil Index with them.


The Gold Index

Gold prices bounced from this week's low to gain 0.75% in today's session as weak Import/Export Price and Wholesale Inventory data helped depress FOMC rate hike speculation and weaken the dollar. Gold prices remain tied to the dollar and the FOMC, but I don't think today's data significantly changes expectations for next week's meeting. Along with FOMC outlook there is more and more evidence that other central banks, ie the ECB, BOJ and PBOC, will increase their efforts at QE which could further strengthen the dollar. Gold could easily retest lows below $1100 over the next week with additional lows possible after the FOMC meeting. . . if they raise rates.

The gold miners remain under pressure. Low prices for the underlying commodity are dragging them lower even as production levels rise. The Gold Miners ETF GDX traded flat to yesterday's action, creating a near identical candle and falling to support. The ETF is just off the long term low, within a long term down trend, with bearish indicators and weak outlook for gold prices. Current support is at the long term low, near $13.00, with both indicators pointing lower. Support may hold in the near term but gold prices will be the key, if they fall below $1100 the GDX could easily set a new low.


In The News, Story Stocks and Earnings

Lululemon reported earnings today before the bell. The ultra trendy maker of yoga apparel reported earnings and revenue in line with estimates and were able to raise full year guidance. The catch is that guidance fell short of expectations and was not received well. Shares of the stock fell -3% in pre-market trading and extended that loss to -16% by end of the day. Prices are now trading at an 8 month low.


Grocery chain Kroger reports earnings tomorrow. The grocery chain has been able to beat analyst estimates the past four quarters and is expected to do so again. Revenue and earnings have both been rising, along with comp store sales, which will all be closely watched. The stock has been trending sideways the last 6 months and is trading near the bottom of the range. Today it gained nearly 3% in move up from support with mixed indicators.


Shoe maker Zumiez reported after the bell. Expectations for $0.12 were not met. Revenue was in line but earnings missed by a penny. Comps fell by -7% versus an expected drop of -1% and were a major cause for decline. Guidance also came in weak, and helped to send shares lower in after hours trading. If after hour prices hold into tomorrow's open the stock will open at a new 52 week low.


The Indices

Volatility remains in the market and today's action is evidence of it. Futures trading was first up, then down, the open session characterized by wide swings within the daily range. Despite the volatility the market continues to move up from the recently hit bottom and today was led by the Dow Jones Transportation Average. The transports gained 0.93% in today's session but was capped by the shot term moving average. The moving average may continue to provide resistance but the indicators are on the rise so it looks like it will be tested further. If broken the index could move up to 8,250 or 8,500.The risk lies in possible retest of the recently set low. The bear MACD peak, coincident and convergent with the recent low, point to it.


The NASDAQ Composite posted the 2nd largest gain in today's session, 0.84%. The tech heavy index crossed resistance lines at 4,800 and approached the short term moving average but was not able to hold those levels. The indicators are beginning to show some strength following a bullish crossover but need to cross the short term average to confirm. Regardless, there remains risk of a retest of the recent low as indicated by convergence in MACD.


The S&P 500 made the third largest gain in today's trading, 0.53%. The broad market moved up to test resistance below the recently broken long term trend line and was held back. The indicators are moving higher, the recent stochastic crossover now confirmed by MACD, so a further test is looking likely. If prices are able to break above the trend line it could take the index up to 2,050 or higher. A failure to break could result in a test of support near 1,875. A retest of this level is also suggested by the MACD peak coincident and convergent with that low.


The Dow Jones Industrial Average made the smallest gains in today's session. The blue chips closed with a gain just short of a half percent, 0.47%, but fell short of resistance targets for the day. The indicators are on the rise so it looks like resistance will be tested but without a break above chances for range bound trading and/or test of the recent lows remains.


The indices are trying to move higher but with the FOMC just a few trading days away significant risk remains in the market. The recent bottom and subsequent bounce could keep going higher, but until resistance levels are broken the bounce looks just like that, a bounce. We may have already had our retest of support, but I think not.

The FOMC is just next week. It is one of the most highly anticipated meetings we've had, in a long string of highly anticipated meeting, has caused a lot of volatility, has a lot of impact on market direction and just happens to come the same week as options expiration. This combination is set up for volatility regardless of ultimate market direction.

Even discounting the possible affect of the FOMC meeting, another earnings season begins in a few weeks and expectations for it are not good. This could keep the market below resistance and trading sideways until we get a clearer picture of what 3rd quarter earnings really look like, and what to expect in the 4th quarter. For now, 4th quarter and full year 2016 earnings and economic growth expectations are good, so long as they stay that way the bull market should remain intact.

Until then, remember the trend!

Thomas Hughes