The bulls took a break today which may be a good thing, two days ahead of the NFP. The ADP jobs number was OK and December rate hikes are on the table.

Introduction

The market took a breather today, retreating from recently set 3 month highs. This may be a good thing as it will allow the market to consolidate, if only for a day or two, and could lead to new all-time highs later this week. We're all waiting on the NFP number which seems for now to be deciding data point for yes-or-no on the rate hike in the absence of rising inflation; the release could be the trigger that sends the market higher, or spark correction. Today's ADP report indicates jobs creation was steady last month, if the same is true for the NFP then December rate hike expectation could become more firmly entrenched in the mind of the market.

International markets were mixed. Asian indices were cheered by the rally we had yesterday, European indices were weighed down by the widening VW scandal. The mainland Shang Hai index led in Asia with gains near 4.25%. In Europe indices were mostly flat on the day save for the DAX which fell a little more than -0.8%. This, along with early morning data and earnings releases helped to keep US futures trading in the green. Indicated gains were small, only 2-3 points for the SPX, but this strengthened a little after the data and going into the opening bell.

Market Statistics

Bulls were present at the open and pushed the indices higher for gains near 0.25% right out of the gates. These gains did not last, sellers quickly outpaced buyers sending the indices back to break even levels and below. Selling was not wild, there was no rush to get out of the market, merely an orderly drift lower down toward near term support levels. By early afternoon the SPX was down a little over -0.5%, about 12 points, but that proved to be the low of the day. From then on the market bobbed along support levels until the close of the day.

Economic Calendar

The Economy

Economic data started rolling out pretty early today. Mortgage applications started it off at 7AM. Mortgage applications fell last week by -0.8% as higher rates impacted traffic. Last week applications fell by -3.5%. The 30 year fixed rate was 4.01%, up 3 basis points.

ADP employment figures came out at 8:15AM. According to their estimates 182,000 new jobs were created in the private sector last month. This is inline with expections, last months figure was revised lower to 190,000. The sector to drag on job growth was manufacturing. Small business created 92,000 jobs. Good producing sector created 24,000, services combined created 158,000. There were 35,000 new construction jobs which helps to reinforce the housing data and recovery there. Transportation/Trade&Utilities created another 35,000 new jobs. Not an overly strong report but a steady one. The high number of services jobs is a concern but we have been shifting to services for a long time.

Trade balance was released at 8:30AM. The trade deficit shrank in September, to $40.8 billion from the slightly revised $48 billion reported last month. The cause for the decline is an increase in exports, along with a decrease in imports. On a year to date basis the deficit is up 3.9% from this time last year.

The ISM Non-Manufacturing Survey was released at 10AM. The survey came in better than expected at 59.1. Analysts had been predicting 56.5, a small decline from last month's 56.9. Within the report the three main indices all rose. Business activity rose to 63%, new order rose to 59.1% and employment rose to 59.2%, a gain of 0.9%. The survey is a welcome sign after the manufacturing sector survey and shows that this segment of the economy is growing, and growing faster.

Tomorrow Challenger report on planned layoffs and the weekly jobless claims numbers come out before the bell. On Friday look out for the NFP, unemployment rate and average hourly earnings.

The Oil Index

Still no sign declining production or rig counts US is impacting supply US crude oil supply. Today's EIA reports shows that storage levels increased by 2.8 million barrels in the last week, ahead of expectations but down from last week's injection of 3.38 million barrels. WTI had bee trading flat, near yesterday's high above $48, but went ducking back to support when the storage data was released WTI lost more than -3.25% and closed below $46.50. The idea of reduced production/supply in 2016 may be supporting prices above $45 but current productions, supply and storage are keeping them from sustaining any kind of rally.

The Oil Index fell in response to oil's quick turnaround, shedding about -1.2% in today's session. The index fall came to rest on resistance-now-possible support at 1,230 and the 50% retracement line broken yesterday. The indicators are bullish at this time but a wicked divergence is present, one of the deepest I think I've ever seen, so the chance of false break-out is high. A fall below the 50% retracement could take the index back to longer term support near 1,160 and the short term moving average. I remain bearish on oil prices in the near to short term, until storage levels come down and/or production levels are more in line with consumption. Longer term the outlook for prices is bullish, as are earnings expectations, so I would be looking to buy on any dip.


The Gold Index

Gold slid to a new one month low today. Janet Yellen's testimony before congress restated the FOMC's openness to a rate hike in December. According to her December is a "live" meeting, her statement adding momentum to dollar bulls and sending gold prices down to $1106, nearly 7% below prices we saw just last week before the FOMC meeting. Gold prices are now back to long term support levels but could slide another $20 before hitting really firm support, if at all. At this time it is more and more likely the Fed will tighten, inflation remains absent and the ECB and BOJ are still loosening so this move could just be getting started.

The gold miners are not responding well to low gold prices. The miners ETF GDX fell -1.35% in a move that confirmed resistance at the short term moving average. The ETF tried to move higher in ealy trading, counter to gold's fall, but the moving average capped gains and then sent it shooting lower. The indicators are both moving lower, pointing to lower prices in the ETF, with MACD showing increased momentum and stochastic falling sharply toward the lower signal line. Downside targets remain near the long term low around $13.


In The News, Story Stocks and Earnings

The dollar gained a bit of steam from Yellen's testimony. The testimony was fun to watch, she got a thorough grilling on a few topics including the FOMC possibly overstepping its bounds, its assumption of authority under Dodd-Frank and a few complaints coming through the House Financial Services Committee from the banking sector. In terms of rate hikes and the economy, she says the economy is healthy, the banking sector is resilient and that the December meeting was a live one for possibly raising rates. The dollar rose nearly a full percent after the move, setting a new three month high, and creating a long white candle closing at the high of the day. The indicators are on the rise and showing some strength although divergence may be forming. The near term trend is up but resistance is just above today's close near $98.25.


About 350 earnings reports today. The list represented a pretty broad slice of the market, not too many names jumped out at me but one thing I did notice that juast about every other name on the list ended in pharm, pharmaceutical, biopharm, bioscience, therapeutic or some other reference to the health care sector in general. The sector has been lagging the broader market over the past few weeks despite earnings growth more than double projections. Today the XLV Health Care SPDR closed with a loss near -0.25 after reaching lows near twice that on an intra-day basis.

The ETF looks like it might be consolidating in preparation for another move higher, the indicators are bullish and showing a little strength relative to the past 12 months. MACD is retreating from a peak in the nearest term but that peak is convergent with the rally and recent high, suggesting higher prices. Stochastic is also showing some strength but at this time still below the upper signal zone and possible indicating resistance and the top of a range. A break above resistance, near $63.25, would be a bullish sign and could take the ETF as high as $77.50.


Allergan reported before the opening bell. The maker of Botox and target of Pfizers planned tax inversion reported earnings of $13.29 per share, $3.28 on an adjusted basis, verus the adjusted $3.20 consensus estimate. Revenue for the quarter was near double the same period last year with strong sales increases across the range of branded products. Botox sales alone accounted for 11% of revenue. Shares of the stock jumped in pre-market trading and opened with a gain. During the day they sold off, closing with a loss near -0.75%. Despite the losses the stock remains near recent highs and above the $300 level.


Facebook reported after the closing bell. The leadig social media website was expected to report $0.50 per share and blew estimates out of the water with $0.57. Revenue also beat, $4.5 billion versus $4.37 expected, with mobile accounting for 58%. Monthly active users is also up and helped to send the stock 3% higher in after hours trading.


The Indices

Trading was lack luster today. The indices moved lower on low volume but did not break any significant support levels. Action was led by the Dow Jones Transportation Average with a loss of -0.65%. The transports remain the laggard of the group and below resistance levels at 8,250. Today's action may be sign the index will remain range bound in the near term, the indicators are weak and suggest the same. Both stochastic and MACD have weakened in the near term and could be leading prices lower. However, the short term moving average is still supporting prices and pushing them up against said resistance. This could turn out into a test of the two, sooner or later one will break. Support is near 8,125, resistance is near 8,260. A break above resistance could go to 8,600, a break below support could take it down to 7,750.


The next biggest decline was posted by the S&P 500. The broad market lost -0.35% in a move that tested support at 2,000. The indicators remain bullish, despite the drop, so a test of the all time high is still looking pretty likely. Momentum is also still slowing weakening, divergent from the rally, so it is very possible resistance at the all-time could be substantial. Long term outlook remain positive though so any dips will be buying opporutunities.


The Dow Jones Industrial Average made the third largest decline, -0.28%. The blue chip index met resistance at the underside of the long term trend line, broken 2 months ago, as expected. The indicators remain bullish, the index riding a fairly strong wave of buying, so it is still possible it will break above the index, or trade up along the underside of it, to test the all time highs. That being said, momentum is winding down steadily and approaching the zero line so a peak in this rally is fast approaching. This could lead to a sideways consolidation or a pull back to find solid support levels.


The NASDAQ Composite made the smallest decline in today's trading. The tech heavy index fell only -0.05% and remains at the 3 month high. The indicators are bullish, momentum showing a little more strength than on the other indices, but once again are winding down in the near term. Near term trend is up with no real sign of a top yet but it is very possible the index will hit a peak in the very near future. Current target is the underside of the long term trend line, broken this past August, with a chance at the all time high.


The rally is still on although today the bulls took a breather. The market is riding a wave of buying that is now being supported by better than expected earnings, steady economic data and positive forward outlook. It's only natural for there to be periodic pauses in the up trend.

It looks like that the indices will reach and test their current all time highs, if not set new ones, but momentum is declining so caution is due.Tomorrow's trading could be more of the same while we wait for the big data point later this week. The NFP report on Friday could be the catalyst that breaks the market to new highs, or gives excuse for profit taking. Regardless, I remain a bull and will by on the dips, and until then keep my stops tight.

Until then, remember the trend!

Thomas Hughes

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