A dramatic fall in dollar value is helping to support the market; gold prices are up, oil is holding above $30 and the impact of currency on earnings expectations is diminished.

Introduction

The dollar has fallen sharply this week as global slowing and iffy US data weighs on FOMC expectations. This move is, at least in the near term, helping to support the market. The price of gold is rising and lifting the entire complex, oil prices are holding above $30 and supporting the energy sector, and the impact of currency exchange on earnings expectations is lessened. Whether or not this will continue depends on future data (NFP tomorrow) and the actions of central bankers in the coming months.

Market Statistics

The international markets were mixed as ours were waking up. In Asia, Japan closed lower by nearly -1%, both Chinese indices made gains greater than 1%, possibly affected by the Chinese New Year holiday which begins on Monday. In Europe wavering oil prices and weaker than expected earnings from Credit Suisse left those indices mixed but mostly flat across the region.

Early futures trading had our indices opening mixed as well but early weakness in oil prices helped to send them down by about -0.5% going into the 8:30 release of economic data. After the data futures trading slipped a little further, up to and until oil prices started to shoot higher. By the time the opening bell sounded the markets were indicated to open flat and this held for the first 5 or 6 minutes.

Between 9:45 and 10AM the indices fell below break even, bounced off their respective support levels, 1900 for the SPX, and then moved higher in tandem with a 3% jump in oil prices. The rally looked pretty strong at first but did not hold, a late morning reversal in oil prices is to blame. The rest of the day saw the market hover around break even, neither touching the early low or high, and held those levels into the close leaving the indices just above break even for the day.

Economic Calendar

The Economy

Lots of data today, and little good. The first bit released this morning was the Challenger Gray & Christmas report on planned layoffs. The number of layoffs jumped 218% in January, up more than 50,000 from December's report to hit 75,114. This is the highest level since July 2015, the highest January total since 2009 and 42% higher than last year at this time. The cuts were led by the energy and retail sectors which added more than 20,000 each. The number of cuts in the energy sector is the highest level for the sector since January last year. The cuts in the retail sector were broad but led by Wal-Mart (planning to close 269 stores) and heavily affected by the shift to online sales. The top three reasons given for cuts are restructuring, oil prices and store closings. There were 5 job cuts associated with the Flint, Michigan H2O scandal.


Now for some perspective. First, this month's gain in cuts comes on the heels of a 15 year low set last month. While high, this month's cuts are largely seasonal and affected by a shift toward cutting end of year jobs AFTER the holiday's, rather than during. Taking this into account the average over the past 2 months is closer to 49,000, slightly above the average monthly job cuts in 2015 (about 48,750). In addition to planned job cuts Challenger also reports on planned hirings. Planned hirings in January totaled 8,362, including 858 jobs in the retail and energy sectors. In 2015 job cuts ran near a record high, but were outpaced by job openings.

Initial claims for unemployment rose by 8,000 from a downward revision of -1,000 to hit 285,000. The 4 week moving average of claims rose 2,000 from a mild revision to hit 284,750. Looking at the charts, the adjusted number of claims is elevated from last summer but remains low by historical standards, near the long term lows and consistent with labor market health. That being said, the red flag raised by not adjusted claims in last week's data is still flying and will need to be monitored. On a not adjusted basis the number of claims rose by +5.5% versus an expected 2.4% and are now about 2% above levels seen this time last year. On a state by state basis Kansas led with an increase of only 65 new claims while California led with a decline in claims of -21,269.


Continuing claims fell by -18,000 to hit 2.22 million. This is down slightly from the 8 month high set last week but remains low by historical standards and consistent with labor market health. The four week moving average continues to rise however, gaining a little over 5,000 to hit 2.52 million. Last weeks continuing claims were revised higher by 5,000.

The total number of jobless claims fell by -26,783 to hit 2.702 million. This is in line with historical expectations and should lead to a drop in claims over the next 2 months. On a year over year basis total claims are down -4.5%, less than the -8 to -10% I've been tracking over the past 2 years but still down and consistent with labor market health. Going forward we'll need to keep an eye on this as well as initial and continuing claims, if the data refuses to return to trend and remains elevated we could be in for some trouble.


Q4 productivity and labor costs were released at 8:30AM. Productivity fell by -3%, more than the expected -1%, while labor costs rose by 4.5%, also ahead of expectations. Within the report output rose by 0.1% while hours worked rose 3.3%. On a year over year basis 4th quarter productivity is up 0.3% while the average quarterly gain is just over 0.6%. Hourly compensation rose 1.3%. I think this data is a good example of the old adage, what's good for Mainstreet is not good for Wall Street; cost are going up but Americans are working more and getting paid more. Third quarter productivity and cost were revised up and down by 0.1% respectively.


Factory orders was released at 10AM and came in a little worse than expected. The headline number, new orders, fell by -2.9% versus an expected -2.6%. The previous month was revised lower by -0.5% to -0.7%. Shipments and unfilled orders also fell, -1.4% and -0.5%, while inventories rose by 0.2%.

There is some important data coming out tomorrow that will likely move the market; NFP and unemployment, along with hourly earnings and average workweek. Based on the ADP figures from yesterday the NFP could stronger than the 188K predicted by the analysts. A strong number I think could be a good and bad thing for the market at this. At first blush it will point to ongoing recovery in the labor market and strengthening of the consumer, on the flipside it could lead to increased expectation for another rate hike. Unemployment levels may rise due to the high level of job cuts revealed today.

The Oil Index

Oil prices wavered in the early pre-market session as a weakening dollar and expectations for an OPEC led production cut wrestled for dominance with high levels of supply and production. WTI was first above $32, then below $32. After the opening bell prices shot higher with WTI gaining close to 3% to trade above $33 and then later fell back below $32 to close with a loss of nearly -2% for the day. The weaker dollar should help to support prices into the near term, expectations for a production cut may help but I think may leave price open to correction as we saw in the later part of today's session. Current resistance target for WTI is just below $35 and may keep oil prices contained into the near term.

The oil sector moved higher on the back of oil prices, gaining a little over 1% during the early part of the day but hit resistance at the 1,000 level, fell back and closed with a small loss. The sector is trying to balance poor earnings and poor earnings expectations with the OPEC/Russia rumors, the recent bounce in oil prices and a weaker dollar.

If oil prices are able to maintain current levels and/or move higher earnings projections for the sector in 2016 could begin to bottom if not reverse. The caveat is that oil prices have been extremely volatile and could easily fall back to support, near $30, especially if/when expectations for an OPEC/Russia deal to cut production evaporate. The indicators are bullish and point to a continued test of resistance but have yet to show real strength, until then we may see it range between 950 and 1000 with a chance for a move to 900 should bearish sentiment reassert itself. . . and this may happened soon if Obama is able to get traction for his proposed $10 per barrel tax on US oil.


The Gold Index

The weaker dollar is helping to lift gold prices as well. Gold rose more than 1.25% in today's session to trade above $1150 for the first time in 3 months. Candle stick action over the past few days looks strong, momentum could easily carry prices up with next target for resistance near $1175. Risks at this time are stronger data points leading to increased expectation for another FOMC rate hike as well as the ECB's and BOJ's apparent willingness to increase QE.

The gold miners are rising on the back of gold prices. Higher prices mean higher profits and better margins, coupled with production that has been on the rise could lead to upside surprises in earnings, most likely in the next reporting season. Today the miners ETF GDX gained more than 5%, gapped higher, above the $15.75 resistance line and is now approaching the top of the 8 month trading range near $16.50. The indicators are on the rise, momentum is strong, and are pointing to at least a test of resistance if not a break above it. A break above $16.50 may find resistance at $17, next target above that is near $17.50. The caveat at this time is that the gap opened today may be closed before the ETF moves higher.


In The News, Story Stocks and Earnings

The Dollar Index fell another -1% in today's session and is now approaching the $96 support target. Based on the extremely large black candles which formed yesterday and today, along with bearish crossovers in both indices and rising downside momentum it looks like this level could be hit very soon, perhaps as early as tomorrow. A Fibonacci Retracement of the rally from the August low to the December high have today's closing price sitting right on the 50% line, with the lower shadow extending beyond. This level could provide support but a I expect a pretty firm test at least before consolidation or reversal can take place.


ConnocoPhillips reported quarterly results before the bell. The company is suffering from low oil prices and reported a miss on revenue and earnings, the quarterly loss of $2.78 is a little of 9000% larger than last year at this time, and 400% larger than predicted. Along with the loss the company reported an updated capex plan for next year, lower, and also lowered its dividend its dividend by roughly 66%. The news shocked investors and may be a sign of more dividend cuts in the sector. Shares of the stock fell more than -8% with weakening indicators and is now trading just above the 12 year lows set last week.


A couple of the big name retailers reported before the bell as well, namely Kohls and Ralph Lauren. Both companies reported misses on revenue, Ralph Lauren at least beat on the earnings end. Both also lowered full year guidance. Kohl's fell more than -8%, Ralph Lauren more than -22% both weighing on the entire sector. The Retail Sector SPDR fell in the early part of the session, losing about a half percent, before buyers stepped in to support prices. If the rest of the sector is as weak as these two I think we can expect to see the ETF retest support near $37.50.


LinkedIn reported after the bell, beating EPS estimates. The bad news is that revenue fell short of expectations and led to a lowering of first quarter and full year 2016 earnings guidance. Shares of the stock fell nearly -25% on the news and are now trading near 2 year lows.


The Indices

The indices tried to rally today but just couldn't hold the gains. The weakness in the dollar is helping to support the market, but volatility in oil prices remains and is a strong driver of day to day pricing. Today's action was led by the Dow Jones Transportation Index. The index gained a little more than 3.15%, created a long white candle, closed at the high of the day and broke above two resistance targets; if we can expect the transports to lead the market higher, as they did lower, this could be the sign it's about to happen. Both indicators are pointing higher, consistent with a rising market and confirming the break above resistance. Stochastic has yet to show strength, it is still in the middle of its range, but MACD is on the rise and has reached what is at least a 2 year extreme dating back to the October '14 bottom. Following that bottom the index made a gain of roughly 20% within only 3 months.


The next biggest gainer in today's session is the Dow Jones Industrial Average with a gain of 0.49%. The index did not make an overly bullish move as did the transports but nonetheless appear to be moving higher. Today's candle was halted at resistance, just below the short term moving average and the 16,500 level, but the indicators remain bullish and on the rise so a test of the resistance is likely.


The third biggest gainer in today's session is the S&P 500 which closed with a gain of 0.15%. The broad market index was able to hold support in the face of wildly fluctuating oil prices creating a doji like candle with prominent upper and lower shadow. Today's action appears to be confirming support along the 1,900 level, with a little oil driven indecision, and comes with bullish indicators. Both MACD and stochastic are on the rise and suggest the index will continue to move higher, at least up to the short term moving average near the 1,945 level.


The smallest gain in today's session was made by the NASDAQ Composite. The tech heavy index made a gain of only 0.12%, capped at the 4,550 resistance line and created a doji like candle. This index looks the weakest of all and may be in for a test of support, LinkedIn's results are sure to have an impact on it tomorrow. The indicators are bullish but momentum is in decline and a bearish crossover on stochastic may be pointing to such a test.


Something is building in the market. Looking at the SPX, DJI and COMP it may be nothing more than a consolidation of recent lows, looking at the DJT it looks like an extended rally is brewing. Whether or not it happens will come down to a couple of factors, deeply intertwined and circular, that boil down to this; earnings expectations.

Data will show strength or weakness in the economy. Strength or weakness in the economy will put spin FOMC expectations. FOMC expectations will drive the dollar. Dollar value will drive earnings across the broader market including the gold sector, the energy sector and those companies who have exposure to currency conversion. All of these will affect the earnings potential of the broad market. A Goldilocks number for the NFP is what we need, hot enough to support ongoing labor market recovery, not so hot that the FOMC has to raise rates again.

Today's action in the transport sector looks very promising but until the NFP is released, and we see some confirmations in other indices, I remain a little skeptical. As of this past week earnings expectations for 2016 were still falling, if positive for the year; when these estimates begin to rise I will feel more comfortable about long positions. I remain bullish for 2016, but cautious, oh so cautious.

Until then, remember the trend!

Thomas Hughes