The European banking sector took a real beating today and weighed the market down, along with another new low in oil prices.

Introduction

The European banking sector a beating today and helped send global markets to new lows. Adding to the pain was another drop in oil prices and additional testimony from Janet Yellen. In Europe indices were down more than -3%, led by double digit declines in banks like Society Generale and others driven by weaker than expected earnings, fear of contagion, uncertainty over FOMC policy and a surprise cut in lending rates by the Swedish central bank. The Riksbank cut already negative interest rates further, to -0.5% from -0.35% raising the specter of similar moves throughout the region and deflation.

Asian stocks were not immune. Although many of the markets in that region remain closed for holiday's those that were open shed -2% to -3% on growing fear that the worlds central bankers are losing control of the global financial markets. . . and that China will continue to slow and drag down global GDP.

Market Statistics

The global sell-off had its affect on our market as well. Early futures trading had our indices indicated to open with losses greater than -2%. In addition to the weakness in Europe and Asia another plunge in oil prices only added to fears. WTI was down more than -3.5% in the early morning session, trading below $27 and near lows set in 2003.

Janet Yellen was back on the Hill today, testifying before the Senate Banking Committee and did little to reassure the market. Among her statements; it's too soon to tell if the "too big to fail" problem of 2008 has been fixed, that "there is always a chance of recession" and that "negative rates are not off the table", all very scary in terms of the financial system and the economy. What really got me was when she said the Fed was not responsible for the stock market sell-off. Well, maybe not, but it is without a doubt that the continual back and forth between the different members and their comments about the economy and interest rate hikes contributed greatly to volatility and fear in the market.

The opening was indeed weak. US indices fell in the range of -1.5% to -2% within minutes of the opening bell. They tried to bounce back, moving within spitting distance of break even levels by 10AM but were not able to hold the gains. The SPX dipped below the 1850 support level at the open, tried to test it but failed. By 11:15AM the indices were setting new intraday lows, very near the intraday lows set January 20th.

Intraday bottom was hit shortly after 11:30, just after the close of the European sessions, but the market did not rally. The indices drifted sideways, near the daily lows, until mid-afternoon. Around 2PM the indices looked like they were gearing up for a rally, and the not, by 2:30 they had retreat back to the low of the day and lower. Just after 2:30 the SPX hit the low set January 20th and at that time a rally did materialize. Buyers swarmed into the market halving the days losses within 20 minutes, aided by a new report that OPEC is ready to help support prices, but once again the rally did not gain much traction.

Economic Calendar

The Economy

Very little economic data today, only the jobless claims numbers, but it was at least positive if not good. Initial claims fell by -16,000 from last week's not-revised figures to hit 269,000, just off the long term lows set last summer. The four week moving average of claims also fell, shedding -3,500 to hit 281,500. On a not-adjusted basis claims fell by -6.8%, much better than -1.3% predicted by the seasonal factors.

On a year over year basis the not adjusted number of Americans receiving first time unemployment benefits fell back below the previous years level, canceling the red flag raised in the previous couple of weeks. Not adjusted claims are -10% lower than this time last year, they had been above last years levels for a couple of weeks, likely due to shifts in seasonal firing practices mentioned in previous wraps.

These number look good for more reasons than one. First, they show that claims continue to trend near the long term lows and consistent with labor market improvements. Second, they show that the seasonal uptick in claims is probably over, in line with expectations. Third, with initial claims in decline we can expect to see continuing claims and total claims begin to come down over the next few weeks.


Continuing claims fell by -21,000 from an upward revision of 5,000 to hit 2.239 million. The four week moving average of claims fell -6,250 to hit 2.248 million. This is the 2nd week of decline since hitting the post holiday high and appears to be falling back toward the long term lows. Based on the initial claims numbers this figure should continue to decline into the next week or two at least. Regardless, the number remains low relative to the past few years, near the long term low and consistent with the ongoing health we've seen in the labor markets.

Total claims rose by 35,680 to hit 2.739 million. This gain is in line with seasonal expectations and well below the post holiday peak set a few weeks ago. Based on the historical perspective and drops in initial and continuing claims this number should remain steady near this level over the next few weeks before beginning to drop off going into the spring and summer hiring season.


Tomorrow will be big day for data, as will next week. Tomorrow we'll get reads on import/export prices, retail sales, business inventories and Michigan Sentiment. Next week on Wednesday the minutes of the last FOMC meeting will be released. Also next week are reads on PPI, CPI, Housing Starts, Building Permits, the Housing Index and others. PPI and CPI perhaps being the most important at this time as they may sway the Fed's decision come the March meeting.

The Oil Index

Wow, oil prices. Fell again. No support is apparent from OPEC, Russia or any of the major oil producing countries. Supply and production are high, demand is low and now demand forecasts are being revised lower. Today WTI fell more than -4% in a volatile session to set new lows below $27. There was some evidence of buying in the market in the form of intraday price spikes but none recovered the day's losses and by 2PM WTI was setting new lows for the day.

A couple of conflicting reports helped to drive today's oil volatility one bullish and one bearish.

The monthly OPEC report shows that Saudi and all-OPEC production increased in January.

Mid-afternoon a report from the UAE that OPEC was ready to cooperate with production cuts was published by the Wall Street Journal. The news helped to lift oil of its lows but in my opinion is just another rumor with little meat on the bone, when someone cuts, and the data shows the cut is for real, I'll believe it. Based on how quickly the news inspired rally lost momentum I would have to say that much of the market is as skeptical as I.

The Oil index fell a little more than -2.5% to touch the 900 support level. The indicators are in decline but remained mixed. Today's candle confirms support at the 900 level but if it fails look out below, next target is 800. Whether or not this happens is tied to oil, and at this time to the swirling rumor and hope that there will be a deal to support prices. I am hopeful we'll get one but not counting on it by any means. Until then fundamentals remain bearish.


The Gold Index

Wow again. Gold prices made the biggest move I think I have ever seen, more than 5% or $61, driven on flight to safety, weak dollar and Janet Yellen. Today's action carried gold prices above $1200, above $1225 and above $1250, wiping out all my targets and more. The day's candle is long and white, closed at the top of the day and comes on strong momentum. I expect there may be some consolidation between $1200 and $1250 but at this time it is looking like gold has fully reversed and is moving higher. Gold is now trading at a one year high.

The gold miners, well they got a lift too. The price of gold is at the highest level in nearly a year and will no doubt boost earnings in the sector. The Gold Miners ETF GDX gained about 7.75% in today's session, gapping up at the open to trade above $18 for the first time since June of last year. The $18 has been support/resistance in the past, today's action appears to confirm support at that level today. The indicators are bullish with momentum on the rise and at an extreme peak. Based on this alone it looks like the sector will continue trending higher.


In The News, Story Stocks and Earnings

The Dollar Index fell about a half percent in today's session to fall below the 61.8% retracement level. Janet Yellen's testimony, and global financial market turmoil, has put the FOMC rate hike time line in question with many assuming there won't be one any time soon. This, along with a massive flight to safety to Yen and gold has left the dollar at a four month low with increasingly bearish momentum and weak stochastic. Bearish momentum is on the rise, stochastic is moving lower in %K and %D, breaking below the lower signal line, both indicators supportive of ongoing weakness and lower dollar values. Next downside target is near the 78.6% retracement down in the range of $94.25.


Kellogg reported earnings today before the bell. The company reported a slight miss on revenue but beat earnings projections. Fourth quarter sales were down -10.6%, primarily due to currency conversions, but up 4.2% on a constant currency basis. Full year sales were also down, about -7.5%, but when factored for constant currency up 1.2%. Along with the report company execs reaffirmed full year guidance for 2016 and sent the stock shooting up to a new all time high. Today Kellogg's jumped more than 4.25% on above average volume. The indicators are mixed but rolling into a bullish signal, if the stock can hold these levels it is likely to run higher.


Pepsico also reported before the bell, coming in line with expectations. Both 4th quarter and full year revenue and earnings were in line with estimates, driven by 5% annual organic sales growth and expanding margins but were not enough to please investors. Full year 2016 guidance came in a little below the consensus, $4.66 per share versus $4.75 per share, and helped to depress share prices. The company also announced a plan to increase the dividend starting with the June payment. Today the stock opened with a loss near -1% and tried to move up from there. The short term moving average provided resistance, capping gains.


The Indices

It was a crazy mixed up market today. The indices fell hard driven by banking woe in Europe, Janet Yellen's testimony and plunging oil prices. In the end oil prices at least tried to stage a comeback, if rumor driven, and helped to get the broader market up off of its lows. Despite the late day oil driven rally the indices remained weak on the day and for the week, closing with losses across the board. Today's loss leader was the Dow Jones Industrial Average which post a decline of -1.62% at the close of the day's session. Between open and close the index had been down as much as 400 points, the late day rally helping to confirm that support is still present. The bad news is that we have a new closing low which could attract more selling in the days to come. The indicators are weak but remain bullish, consistent with support levels and the bounce we've all been expecting but if support breaks down I can see this changing pretty quick. Support is the 15,500 level, a break below could take it down to 15,000.


The day's next biggest loser was the Dow Jones Transportation average with a loss of -1.45%. The transports, believe it or not, remain the strongest looking index at this time; today's action was bearish but did not move down to support and did not set a new low. The indicators remain bullish and consistent with support but if the market takes another shock like it did today support could be tested. Current support is along the 6,600 level with a possible break to 6,500. A close below 6,600 would be a new low and could easily take the index lower.


The third largest decliner in today's session is the S&P 500. The broad market index lost more than 40 points at the low of the day, about -2.25%, and touched down to the January intraday low. This low, near 1,810, is support at this time and could be tested again. The indicators have formed a bearish signal, confirmed today by MACD, and could lead to a test or break down of support, if broken next downside target is near 1,735.


The days best performer, the one with the least amount of loss at the close of the session, was the NASDAQ Composite. The tech heavy index opened with a gap lower, the open was very near the low of the day, and then climbed higher throughout the session. The indicators are bearish and pointing lower so it is likely lower prices are on the way with a possible move down to next support target near 4,100. However, while bearish, the indicators are also diverging from the new low set today so it looks like the move lower is running out of steam and setting the index up for a rebound or relief rally at least. First upside target is near 4,350.


The market did not like what it heard today, at least not most of it. Oil setting new lows and Janet Yellen's testimony did very little to reassure the market. However, thinking back on what it was that helped to cap gains made in previous years and sparked the current down draft in prices the market is getting what it wanted; Lower oil prices, lower dollar value and a high probability the FOMC wouldn't be raising interest rates very aggressively.

Once oil prices stabilize, the earnings impact of lower oil prices lower dollar value is felt and we get some concrete sign the FOMC won't be raising rate too soon I think we'll start seeing the market rally. There could be deal to cut oil production, or at least more talk of it, very soon. The FOMC meeting is only a few weeks away and earnings are coming in better than expected

As for recession fears, the employment data does not support that view.

Until then, remember the trend!

Thomas Hughes