The market climbed to new 2 month highs after a round of monthly macro data, but we're still waiting on the NFP.

Introduction

The market held steady in today's trading after a round of monthly macro data. Today's data was a bit mixed but supports the idea of slow and steady economic improvement, and does not appear to be strong enough to force the Fed into another rate hike at the March meeting. Even with this data, and data released during the week, the market is still waiting for tomorrow's NFP and unemployment report for cues on what the Fed may do.

International markets were mixed. Asian indices were mostly higher, led by the Nikkei, following two days of gains in the US markets. European indices began the day in positive territory but fell in late day trading as oil prices began to retreat, closing flat to slightly negative for the day.

Market Statistics

Futures trading indicated a flat to slightly lower open for the US markets up to and until the 8:30AM release of jobless claims, productivity and labor cost data. After the data futures spiked, briefly, only to fall back to flat line going into the opening bell. The open was positive, barely, but indices fell to break even and below within the first few minutes of trading. The morning was spent in negative territory, average intraday loss was near -0.5%, but those losses were nearly erased heading into the 11AM hour.

The indices topped out just before 11AM and fell back to retest the early lows by 11:30. Bottom was hit and another bounce ensued, taking the indices back to break even level. By 1:30PM the market was testing resistance near the 11AM high and by 2PM most indices were moving higher, led by the transports. Once the early highs were reached and breached the indices drifted higher into the closing bell, leaving them at or near their highs for the day.

Economic Calendar

The Economy

Lots of data today, the Challenger Gray & Christmas report on planned lay offs was first on the list. According to them planned lay offs fell by -18% from January levels to 61,599, led by the energy sector. The energy sector announced 25,051 lay offs in Februay bringing the YTD total for the sector to 45,154, up 24% from the same period last year. The top three reasons for lay offs in February were oil prices, restructuring and store closings. The technology sector also has substantial gains in lay offs, up 143% YTD from last year, but were shrugged off in the report due to "heavy churn" in the sector related to start-ups, bankruptcies and a rapidly changing environment.

On a year over year basis February job cuts are up 22% from last year, on a year to date basis are up 32%. Backing out the effect of oil prices the way I like to do the month to month, YTD and YOY numbers improve significantly. Energy related job losses account for 40% of the February total and 33% of the YTD total. Based on comments from John Challenger it appears that the effect of low oil prices on job losses is not spilling over into other areas of the economy.

"Shockingly, we have not seen a precipitous rise in unemployment in the many cities that were benefiting from the recent oil boom, suggesting that the job losses are contained to the energy sector, for the moment,"


Initial claims for unemployment climbed 6,000 from last week's not revised figure to hit 278,000. This is slightly above the estimates which called for a drop of -1,000 but does not change the fact that claims are trending near long term lows and consistent with ongoing labor market recovery. The four week moving average of claims fell -1,750 to 270,250.

On a not adjusted basis claims rose by 7.1% versus an expected gain of 4.9%. On a year over year basis not adjusted claims are now down -15.5% from last year, a gap that has been growing over the past few weeks to its widest level in about 10 months. On a state by state basis Massachusetts and Missouri posted the largest increases in claims, +3268 and + 1012, while California and New York posted the largest decreases, -5515 and -1282.


Continuing claims for unemployment rose 3,000 on top of a 1,000 upward revision to last week to hit 2.257 million. The four week moving average of continuing claims fell -750 to hit 2.257 million. The number of continuing claims remains steady near 2.257 million as it has for the past two months. This figure is off of its long term low but remains consistent with ongoing labor market health.

The total number of Americans receiving unemployment benefits fell -48,512 to 2.659 million. This is the lowest level since hitting the post holiday peak and is -5% from last years levels. The total claims date remains consistent with historical trends and labor market health. Based on the historical data we may expect to see total claims hold near this level for another 2 to 3 weeks and then begin to fall off going into the spring hiring season.


The final data for 4th quarter productivity and unit labor costs was also released at 8AM. Productivity fell -2.2%, not good, but is better than the -3% first estimated and the -3.3% expected by economists. On a year over year basis productivity in the fourth quarter was up about 0.5%. Labor cost rose 3.3% versus the expected +4.7% on a rise in hours worked, +3.2%. Total out put is up 1%.

Factory orders and ISM services index were both released at 10AM. Factory orders rose 1.6% versus and expected gain of 2%. Within the report shipments rose 0.3%, unfilled orders rose 0.1% and inventory declined -0.4%.

The ISM services index fell -0.1% to 53.4% and shows continued expansion within the services sector. Within the report data shows an increase in business activity, up 3.9% to 57.86%, new orders fell -0.1% to 55.5% and employment fell -2.4% to 49.7%. Employment falling below the expansionary 50 level is a concern but when taken in perspective not as much as it could be, this is the first month in 2 years that the employment segment has fallen below 50. Looking forward, businesses surveyed are generally optimistic about the economy.

Tomorrow is the all important NFP and unemployment data. Consensus is in the range of 200K for NFP and 4.9% for unemployment. Based on my read on the employment data I think this could be light but so long as it is not overly strong should not negatively impact FOMC rate hike outlook.

The Oil Index

Oil prices were once again volatile as traders weigh the supply/demand imbalance against outlook for production, demand growth and the effects of an OPEC/Russian production cap. WTI hovered just below yesterday's $34.80 settlement price for most of the morning before a spike sent it up over $35 to its highest level since late January. The spike in prices was met by sellers who drove it back below $35 but only just. Even with the volatility today's action was relatively calm when compared to the past few months and left prices flat for the day. I still think it's too soon to say oil has reversed but it does looks like a bottom is in.

The Oil Index gained about a half percent in today's session, extending its move above resistance and the break out which began yesterday. The index is moving higher on higher oil prices and its impact on oil sector profits but the move higher is yet to be confirmed. Price action over the past two days is promising and supported by the indicators but not yet showing real strength. MACD momentum and stochastic are both moving higher but both are also still weak. If oil prices are able to hold near $35 the index could move higher with a target near 1,100 but I would also expect to see a retest of support before any kind of longer term move higher. Support target is now the 1,000 level and the short term moving average which is just below.


The Gold Index

Gold prices moved higher all day and gained more than 2% to trade above $1260. Today's action was supported by the economic data which on the one hand shows steady labor markets, expanding services and positive factory orders but on the other is still weak enough to keep FOMC rate hikes in March off the table. Gold is still below the most recent intraday high, near $1265, but appears to be moving higher with an upside target near term target of $1300. Risk include tomorrow's NFP and unemployment, next week's ECB meeting and the FOMC meeting the week after. I see gold moving higher so long as data remains in the Goldilocks range and the ECB doesn't surprise the market with more QE than expected.

The gold miners are loving the uptick in gold prices regardless of how long it lasts. The price of gold is about 20% higher than it was at the end of last quarter and will equate to higher earnings for this quarter as well as a mark up to physical gold held in reserve. Today the Gold Miners ETF gained more than 3.5% to set a new 9 month intraday and closing high. The indicators have weakened over the past few weeks and recently turned bearish but in light of the uptrend and its relative strength may not be the red flag they would be in a non-trending market. Generally, a decline in indicators of this type while prices remain high is a good sign and setting the ETF up for additional gains. Support is just below $19 with an upside target near $21.


In The News, Story Stocks and Earnings

The Dollar Index fell today on economic data. The data, while promising, was not strong enough to spur FOMC rate hike fears. Fed funds futures now indicate a less than 2% chance there will be a rate hike in March, down 6% from Monday when there was an 8% chance. Based on the information provided by the CME Fed Watch tool there is less than 40% of chance of another rate hike going out until September. December is has the highest probability and that is just over 50%. Expectations for rate hikes in all months have come down drastically over the past 30 days.

With the probability so low I think the only risk for a rising dollar comes with unexpectedly hot data, and the ECB meeting next week. The ECB is expected to do some form of QE'ing next week but will need to at least meet the markets expectations in order to significantly move the euro, and they have a history of doing unexpected things and not exactly matching expectations.


Kroger released earnings this morning before the opening bell and failed to meet expectations. The company beat on the earnings side but revenue fell short, mostly due to low gas prices. Comp store sales ex-fuel rose 3.7%. Guidance may have been what caused investors to sell, 2016 guidance is in line with estimates and only expects to see 3% comp store sales growth. The stock dropped more than 6% pre-opening and then moved lower from there. Shares closed with a loss greater than -7% on more than 3 times average daily volume.


Shares of Barnes & Noble gained nearly 7% today not on good news, but on less-bad news. Earnings, released before the bell, showed revenue in line with expectations with a $0.02 miss on earnings. Earnings of $1.04, while below expectations, are more than 230% better than the same quarter last year and reflect slower declines in Nook use and fewer store closings than expected. Sales were led by strength in adult coloring books, toys and music and helped increase comp sales by 1.3%.


Smith & Wesson reported after the bell. The firearm and outdoor lifestyle company reported earnings and revenue well above estimates and provided next quarter guidance above consensus estimates. The news sent shares shooting higher in after hours trading and temporarily triggered a halt to trading. Shares jumped more than 7% and are now trading at a new high.


The Indices

The entire market moved higher today but the hands down winner was the Dow Jones Transportation Average. The transports gained about 1.15% in a move that extended the break above resistance which began a few days ago. The index appears to be moving higher and this move is confirmed by the indicators which are both moving higher. There may be some resistance near 7,760 but once that is broken next upside target is about 500 points higher near 8,300.


The next biggest gainer, the S& 500, advanced nearly 0.35% and closed at the high of the day. The broad market has broken above the 1980 resistance line, set a new 2 month high and looks like it is going higher. The indicators are both pointing higher, consistent with a rising market, and both are convergent with this new high. Today's action also crossed the 150 day moving average. Next resistance target is near 2,015 -2,020 and may be strong enough to precipitate a pullback or consolidation. First target for support is now 1,980 with next target just below that near 1,965.


The third largest gain was posted by the Dow Jones Industrial Average, about 0.25%. Today's action moved up to the bottom of the long term up trend line and the bottom of the 150 day moving average which could provide enough resistance to pause or reverse the rally. The indicators are bullish and pointing higher so I would expect to see at least a test of resistance if not a break. A break above the trend line could attract new money and help drive the index higher with resistance targets near 17,250 and 17,600. Support target should the index fall from this level is 16,600.


The laggard in today's session was the NASDAQ Composite which gained only about 0.09%. Despite the small gains the index closed at the high of the day and at a new 2 month with bullish and convergent indicators. The index appears to be moving higher with at least a little room to run. Next upside target is near 4,800 with 4,650 as support should it decide to pull back.


The indices are moving higher on what appears to be a run of Goldilocks data and a handful of other positive factors. The data points have all been either better then expected, better than last year or, as in the case of labor, just plain decent while at the same time weak enough to keep rate hikes off the table. On top of this China driven turmoil is absent from the market, oil prices are rising and lifting the oil patch and gold prices are rising and lifting the miners. All in all a perfect storm of positive, if not bullish, factors.

My biggest concern, that of earnings and declining earnings outlook, remains. The good news though is that with oil prices rising the sector with the largest negative impact on earnings outlook should begin to see at least a stabilization of outlook, if not improving outlook. I am bullish but will remain cautious and skeptical while earnings projections continue to decline. When they begin to rise I think it'll be time to get more aggressive.

Until then, remember the trend!

Thomas Hughes