The market rebound on dovish comments from the ECB; could this be the Draghi Bottom?

Introduction

The market rebound from yesterday's lows after dovish comments from the ECB. The central bank held its key interest rates and policy steady but comments from Mario Draghi make it clear that there could be additional QE in the EU as early as next month. The comments; "there are no limits on how far we are prepared to act" and the back would "reconsider its policy stance at the next meeting". The reasons include a significantly diminished inflation outlook and the reemergence of increased downside risk. EU and US indices rallied on the news.

Asian indices did not get a lift from the ECB, they were closed long before the news was announced. These indices are likely to bounce back in Friday trading.

Market Statistics

Futures trading gave a mixed picture. In early trading they were indicating a negative open for the markets but this changed throughout the morning. The ECB comments gave the biggest boost but economic data and earnings helped as well. Following the 8:15AM ECB statement and the 8:30AM release of data futures climbed to break-even levels, and then into positive territory with an indicated opening gain of about 10 points for the SPX.

The open was a little weak. The indices opened positive, made a quick try for higher prices and then dipped into the red. By 9:45AM support, just below yesterday's closing prices, was hit resulting in a rally and today's move higher. By 10AM the indices were back in positive territory and continued to make gains up to and through the lunch time hour. Intraday gains were in the range of 1.5% to 2% but these levels did not hold. After lunch the rally lost its spark and fell back to break even level. This level held and led to a late day rally which reclaimed about half of the early gains by the close of the session.

Economic Calendar

The Economy

Initial claims for unemployment added 10,000 to hit 293,000. Last week's figure was revised lower by -1,000 for a net increase of +9,000. The four week moving average also rose, adding 6,500 to reach 285,000 for the first time in nearly 10 months. On a not adjusted basis first time claims fell -24.9%, slightly less than the -27.3% predicted by the seasonal factors. Not adjusted claims are now only -1.5% lower than last year, the narrowest margin since October 2015. The increase in claims is seasonal and should reach a peak over the next month or so. Despite the rise claims remain low relative to the long term trend and at levels consistent with the recovery.


Continuing claims fell by -56,000 to hit 2.208 million from last week's upward revision. Last week was revised up by 1,000. The four week moving average rose 3,250 to 2.227 million, steady near 2.225 as it has been for several months. So far the rise in initial claims has not affected this number but that will likely change over the next couple of weeks as seasonal job losses hit the market. Until then, this figure remains trending near the long term low and consistent with labor market health.

The total number of Americans receiving unemployment benefits jumped 302,793 to hit 2.852 million. This is the highest level since the comparable week last year and was predicted by the historical data. If the historical indication remains constant this week should be the peak in total claims. With the gain this week's data is -6.5% below last year and consistent with strengthening labor market trends. We'll need to keep an eye on all of these figures over the coming 6 weeks noting the peak and duration of claims increases relative to last year.


The Philadelphia Federal Reserve Manufacturing Business Outlook Survey was reported at -3.5 for January, the 5th straight month of negative readings and contraction in manufacturing. Although negative, the number was a little better than expected and shows a notable increase from December's -10.2. Readings of sub indices were mixed; Shipments gained +12 to hit positive levels for the first time in 4 months while New Orders, Employment and Inventory all declined into negative levels. The 6 month outlook remains positive but has declined below 20. Responses to a question about energy prices reveal that manufacturers see low prices as positive for the overall economy.


Tomorrow Leading Indicators and Existing Home Sales are both released at 10AM. Leading indicators are expected to remain steady with a 0% increase over last month. Existing home sales are expected to rise above 5.0 million from last month's 4.76 million. Next week's calendar is full as well with the key event the FOMC meeting on Wednesday.

The Oil Index

Oil prices were volatile today, imagine that. WTI fell more than -1% in early trading to dip below $28 only to spike on the ECB news. Oil gained more than 5% in later trading to move back above $30 but this move is likely to be driven by profit taking and short lived. Inventory data, released today because of the holiday, shows a much larger than expected build in US stockpiles and only increases the bearish outlook for oil. At the same time there are other signs of increased production, not even counting Iran. We may be getting close to a bottom in oil but I'm don't think we're there just yet.

The oil sector was able to bounce back from yesterday's decline with today's pop in oil prices. The Oil Index itself gaining close to 3%. Today's action may indicate a bottom in the near term but that is yet to be seen. If today's bounce continues higher there is resistance just above at the 950 level and the 78.6% Fibonacci Retracement. The indicators are mostly bearish but we may see further upside in the near term. MACD is diverging from the latest new low and stochastic is oversold with a bullish crossover, both consistent with a bear market rally. A break above 950 would find next resistance near 1,000 and the short term moving average, of course dependent on oil prices. If the rally in oil prices peters out any rally in the oil sector will do the same.


The Gold Index

Gold prices had a seesaw day today although prices are holding steady near $1100. Prices were up in overnight trading on safe haven bids then fell after the ECB meeting, neither event having much strength, probably because of the FOMC meeting next week. I don't think they are likely to raise rates again so soon but their view of when the next will come will drive the dollar and move gold. The ECB has set the euro up for weakness, if the FOMC sounds hawkish at all it could send the dollar index back above 100.

The miners got lift from today's rally but remain near their recent lows. The miners ETF GDX gained about 0.15% but remains below recently broken support. The indicators are bearish with stochastic pointing lower but diminishing momentum may indicate the latest down turn in prices is coming to an end. Resistance is now $13, my previous support target, and needs to be reclaimed else prices may fall to new low. If broken next target for resistance is just above near the short term moving average. If resistance holds and prices decline next downside target is $10.


In The News, Story Stocks and Earnings

Rail carrier Union Pacific reported before the bell and missed expectations. The street was calling for earnings near $1.45, actual results were $1.31 and a 19% decline from the previous quarter. Volume and lower surcharge revenue are primary culprits, volume declined by -9% and was only partially offset by price gains while declining oil prices reduced the impact fuel surcharges had to revenue in the prior year. Shares of the stock fell more than -5% in pre-open trading and fell to a new low. The indicators are bearish but significant divergences in both stochastic and MACD suggest support may be present near $70.


Not all transportation companies are hurting. Trucker JB Hunt reported before the bell, beating expectations by a penny. EPS of $1.01 is a 9% gain from last year, driven by a 6% increase in volume. The east led with an 8% increase in loads but all areas saw increases. Product mix and fuel surcharges combined for a 1% gain in revenue; +5% discounting the affect surcharges. Shares of the stock jumped in early trading, opened with a gap and sold off from there. Momentum may be shifting to the upside with support target $65 and resistance near $70 and the short term moving average.


Starbucks reported after the bell and didn't quite live up to market expectations. Bottom line earnings of $0.46 beat by a penny on slightly weaker than expected revenue but that's not what got investor attention. Guidance for the 2nd quarter of $.048 did not meet approval and sent the stock down in after hours trading. Shares closed the session with a gain near 3.7% then gave up all of those gains and more in the after market.


Boeing gave an earnings warning in the after hours. The company announced that it is cutting production of the 747 in half due to lack of demand and is going to be taking a $0.84 per share charge on its upcoming report. Shares of the stock fell -3.5% on the news.


American Express also reported after the bell. The credit and charge company announced earnings per share of $1.23, more than 10 cents above median estimates and despite currency exchange headwinds. The company also provided mixed guidance which probably accounts for mixed performance in the after hours market. 2016 guidance is in a range above consensus but 2017 guidance is below. Shares of the stock popped on the news then quickly gave up the gains.


The Indices

The indices tried to bounce today and did an OK job of it. Today's action is promising, at least in the near term, but needs to see some follow through before we start getting too bullish. The Dow Jones Transportation Average was today's market leader. The transports gained about 1.20% in a move confirming yesterday's test of support. Support is between 6,500 and 6,700, about even with a bullish continuation pattern which formed in 2013, and is beginning to look stronger.

The indicators are consistent with support and a possible bounce but not strong or bullish. The current MACD peak is diverging from the new low, set yesterday, and rolling over in the near term, consistent with support and/or a bounce but not a bullish signal. Stochastic is similar showing a bullish crossover and oversold in the near term while remaining weak and consistent with a bear market in the short term. Upside target is near 7,000 or 7,250 if the first target is broken.


The Dow Jones Industrial Average made the second largest gain in today's session, just under 1%. Today's action helps confirm support at 15,700 and yesterday's closing price. Today's candle is another sign that bulls are present in the market and when combined with the Hammer-like quality of yesterday's candle make 15,700 the strongest candidate for support we've seen since this down turn began. The indicators are mixed; they are weak and bearish but showing signs consistent with support and a possible bounce. If the market follows through on today's move upside target is near 16,500.


The SPX made the third largest gain in today's session, about 0.82%. The broad market has also confirmed support and managed to close above the August low of 1867. In the nearer term it looks like momentum may be shifting to the upside. Additionally, an oversold stochastic is firing a bullish crossover so it looks like a bounce is coming. In the short to long term the indicators show a weak market and strong downside momentum so a retest of 1,850 is likely, even if a sustained bounce develops now. A move up from here will find some resistance at the 1,900 level and then clear sailing up to 1,990. If the market falls through 1,850 a move to 1,800 is probable.


The NASDAQ Composite made the smallest gain in today's session and while confirming yesterday's test of support, it is also confirming resistance at 4,500. The small doji candle says it all, balance in today's session but indecision of where the market is going. The indicators are consistent with support and could lead to a bounce but remain weak in the longer term. If the index can break above 4,500 a move to 4,800 is possible. Risk is that the index will remain range bound near the recently set low.


The market has been in correction since the first of the year and now looks like it may have found support and begun to bounce. Today's action was a promising follow up to yesterday but needs additional follow through to confirm. Earnings and may help us to hammer out a bottom over the next couple of weeks. The reports are mixed but so far more positive than negative, support should step in so long as the long term outlook for earnings growth remains positive. If oil prices or a sluggish economy drag 1st quarter earnings growth into the negative we could see more downside.

The real risk is the FOMC. If they decide to raise rates, or sound to hawkish in the statement, it could drive the market lower simply out of fear. If they back off and indicate a more dovish approach we may see a repeat of today's ECB driven rally and make today the Draghi Bottom.

Until then, remember the trend!

Thomas Hughes