The three day short covering rally ended today.

Introduction

The three day short covering rally ended today, what comes next is the question on everyone's mind. The rally and bounce from deep support levels is promising in terms of future rallies but not a guarantee of a reversal or continuation by any means. Until the market decides it really is time to start getting bullish on stocks this move looks a lot like a range bound market hitting the top of the range.

Asian markets may be giving a bullish sign. Indices in the region gained more than 2.25% in Thursday trading driven by what Chris Weston at IG thinks could be the start of a "fear of missing out" rally. European indices followed the lead set by Asian traders, gaining more than 2% intraday only to see those gains cut by the close on weakness in our markets.

Market Statistics

US indices were indicated to open positive all morning, if barely. The SPX was indicated to open with a gain near 0.25%. Better than expected, or at least not as bad as expected, data released at 8:30AM helped strengthen the trade to 0.35% and that is how the markets opened. After the opening bell the mood changed quickly. Within minutes the indices fell to break even levels and below, led by the transports. Intraday low was hit just before lunch, the rest of the day saw the indices hover between Wednesday's closing prices and the early low.

Economic Calendar

The Economy

Initial claims for unemployment was reported as 262,000 this week, down -7,000 from last week's not revised figure and better than the +5,000 increase predicted. The four week moving average also declined, losing -8,000 to hit 273,000. On a not adjusted basis first time claims fell -11.1% versus an expected decline of -8.7% and are now -7% lower than last year at this time. The states seeing the largest increase in claims are Texas and Rhode Island with gains of +1,674 and + 783 respectively. The states with largest decreases in claims are Illinois and Tennessee with declines of -5,503 and -3,067 respectively.

This week's data helps cement the idea that seasonal increases in joblessness are behind us. This week's initial claims are now less than 15,000 above the 43 year low set last summer and consistent with ongoing health in the labor market. Based on these numbers we should see declines in continuing claims and total claims over the next few weeks.


Continuing claims rose by 30,000 to hit 2.273 million from last weeks upwardly revised figures. Last week's data was revised by +4,000. The four week moving average of continuing claims rose 13,500 to 2.262 million, the highest level for the moving average in over 6 months. In the near term view this is a negative, we don't want to see joblessness on the rise, but considering the post holiday surge in initial claims and the recent down turn in those claims this is very likely the peak in continuation claims. And, despite the near term increases, continuing claims remain at low level relative to the recovery and indicative of labor market health.

The total number of Americans receiving unemployment benefits fell -19,218 to 2.720. Total claims has been holding relatively flat near this level for the last four weeks, since hitting the post holiday peak in mid-January. Based on initial claims data and the historical total claims data we should see a down turn in total claims in the next 4 weeks or so. Total claims lags initial claims by 2 weeks so we may see some downward bias as soon as the first week of March. On a year over year basis total claims are down -4.7% and remain consistent with labor market health.


The Philadelphia Federal Reserve Manufacturing Business Outlook Survey was also released at 8:30AM. The headline number was -2.8, better than the -2.9 expected by economists and also better than the -3.5 reported last month. The 6 month forward outlook remains positive but fell to 17.3, a 3.5 year low. Within the report new orders fell -4 to -5.3, shipments remain positive but fell -7, inventories and back log orders declined and the employment index fell -3 to -5.0. What I found interesting about the employment segment was that only 20% of respondents predicted a decline in employment while 63% saw no change and 15% predicted they would be hiring in the near future.


The Index of Leading Indicators was released at 10AM. The headline number was a decline of -0.2% from January, exactly as expected, with a downward revision of -0.1% to December and a +0.1% upward revision for November. The index now stands at 123.2, 23.2% better than 2010 levels. The Coincident Index rose 0.3% and the Lagging Index rose 0.1%. According to Conference Board economists this month's reading does not indicate recession and remains consistent with moderate economic expansion expected for the first half of the year.

The Oil Index

Oil prices were a bit choppy today but not quite as choppy as they have been recently. In the early part of the day what appears to be a growing consensus from OPEC and non-OPEC producers to curb production levels helped to drive prices up by over 3%. Later in the day EIA data showing a larger than expected build in US stockpiles helped to moderate the day's gains to about +0.8%.

While talk of the proposed production freeze is supporting prices the fundamentals remain unchanged. A curb to production would leave supply at current high levels and do little to alleviate oversupply. So long as supply and production outweigh demand expectations oil prices are going to remain low so it looks like what we have brewing is a buy-the-rumor and sell-the-news type of scenario.

The Oil Index made a small gain at the open, just below the 1,000 resistance level, and sold off from there. The index end up losing about -1.75% on the day, created a dark cloud cover and confirmed resistance. The indicators are bullish and rising, but remain consistent with a range bound asset at this time. This range may persist in the near to short term while the market decides on whether oil prices have bottomed or not, and if talk of production curbs are enough to drive prices higher. A break above 1,000 could go to 1,100, support targets are at 950 and 900. No matter what happens I expect to see more volatility out of the oil patch.


The Gold Index

Gold prices rose more than 2% today, gaining more than $25, as risk averse investors fueled the flight to safety trade. Goldman Sachs may be right about shorting gold, but from my perspective the target entry for such a short would be near $1,250. If Goldman is wrong they've added fuel for another round of short covering. Regardless, the technicals support a retest of the recent high at least. Low inflation data and a more dovish than not Fed could help fuel this trade as well, the risk being that ECB QE could devalue the euro and reinvigorate dollar bulls.

The gold miners rose along with the prices of gold. The Gold Miners ETF GDX gained more than 4.5% to break back above $18 and approach the 7 month high set last week. The index is moving up to retest the highs, as indicated by convergences in the indicators, with a target near $18.68. Strength in the indicators, particularly a near 3 year extreme peak in MACD momentum, suggest that the gold miners have reversed, or at least bottomed, from the 5 year down trend. The sector may correct and/or trend sideways from here. It will of course come down to gold prices which appear to have set a new, higher, support level at or near $1200.


In The News, Story Stocks and Earnings

The Dollar Index held steady in today's session, below the shot term moving average and resistance at the $97.50 level. The indicators are bullish and pointing higher but not strongly. Diminished expectation for a March rate hike has the dollar under pressure and could keep it below resistance and range bound until the next round of central bank meeting, about 3 weeks away. Fed hawk James Bullard said just yesterday that it would be unwise for the Fed to continue raising rates at this time.


WalMart released earnings this morning and did not please the market. The company beat on the bottom line but revenue fell short due to weakness in the US the impact of currency conversion. The company also gave weaker than expected guidance, due in part to currency conversion and to the string of store closings announced last month. Today the stock lost more than -5% in the early part of the session but seemed to attract buyers. By end of day the loss was halved leaving a white bodied candle with long lower shadow.


La-Z-Boy reported after the bell on Wednesday and sparked a massive increase in share prices today. The company reported a 7.3% rise in sales, a 26.5% increase in quarterly EPS, a 29.9% increase in operating income and the highest margins in 12 years and all with positive forward outlook. Today the stock gained 20% on 4 times average daily volume.


Boston Beer Company, maker of Sam Adams, reported after the bell. The company beat expectations on the top and bottom line although both were down from the same period last year. The decline from last year's results was due to a 3% decline in shipments coupled with increased advertising and marketing costs that were only partially offset by price increases. Advertising and promotional expenses were up about 9% from last year at this time. Also impacting revenues was a decline in market share attributed to the wave of craft brewers sweeping the nation. (I live in Asheville, NC, we have about 30 microbrewers in town and more pop up every day, the funny thing is that PBR remains the top selling brand). The stock traded down -2.5% during the day, resting on the 30 day moving average, with little to no action in the after hours market.


The Indices

The indices fell in today's session, but other than that the day looked pretty good. The day's declines were relatively small and for the most part left the indices near the highs of the rally which began last week. The one exception is today's loss leader, the tech heavy NASDAQ Composite, which fell a little more than -1.0%. Today's candle is a little ominous, dark cloud cover, so we may see a pull back to test support. The indicators remain bullish in the near term, and consistent with a bottom in the short term, so any such pullback could result in new entry points for bullish positions. Resistance is just above today's open, near 4,600 and the short term moving average, with first target for support near 4,375.


The Dow Jones Transportation Average was the next biggest decliner among the major indices, losing about -0.57% in today's session. The index is taking a breather from the intense rally of the preceeding 3 days but is supported by strong indications of higher prices. MACD momentum is on the rise and at an extreme peak, stochastic is about to cross the upper signal line, both indicative of higher prices or at least a retest of current highs if a test of support occurs. The index is below resistance targets so has a little room left to run in the nearer term. Resistance target is 7,500 with first support target just above 7,000 near the short term moving average, which happens to be moving higher for the first time in nearly 3 months.


The S&P 500 made the third largest decline, nearly -0.5%, and looks like it could go higher. Today's action was more of a consolidation move than a reversal signal, with the decline halted at the short term 30 day moving average. The indicators are pointing higher and stochastic is firing a strong signal with this second bounce from support so a test of resistance looks likely. Resistance target is near 1,950, a break above this level would confirm a reversal from the recent low. If the index pulls back to test support first target to the downside is 1,900.


The Dow Jones Industrial Average made the smallest decline in today's session, only -0.25%. Today's candle is black and may indicate a peak but the close above the short term moving average suggests the market is still moving higher. The indicators are also both still pointing higher, suggesting a move up to the 16,600 resistance target is likely. A break above this level would confirm the reversal and could spark another rally.


The short covering rally is over. Now it's time for the market to decide what is going to happen next. Based on the indicators it looks like there will be at least a test of resistance, if not another move higher. Over the next week earnings and data are going to play a big role in what happens, especially the data due to its impact on FOMC speculation. Tomorrow's data, CPI, could go a long way towards swaying the speculation.

I remain a bull, it looks like the market is bottoming, but I have one concern yet to be alleviated and that is earnings. Earnings expectations for every quarter in 2016 continue to decline, full year expectations are now in the range of only +3.5% (down from +15% last summer), and could easily derail any hopes of a sustained rally.

Until then, remember the trend!

Thomas Hughes