The ECB exceeded expectations but may have fired their last shot in the war on sluggish economic growth.

Introduction

The market went on a wild ride today, first up, then down and then up again. Driving today's action was the ECB policy decision, Mario Draghi's comments during the press conference, news out of of OPEC and a wild swing in oil prices.

The ECB exceeded expectations with today's policy announcement but hinted more QE is not to come. The news first sent the euro crashing, then soaring, as traders weigh the effects of the new policy versus comments from Mario Draghi and expectations for the FOMC meeting next week. The news initially sent indices in both the EU and here at home shooting higher until Draghi's comments cooled the market off, and other news from the oil patch sent the oil price plummeting.

The ECB move is seen by many analysts as a last gasp in the stimulus efforts and leaves the bank little room, if any, to do more to spur growth. Today's changes include lowering the refi rate to 0%, the deposit rate to -0.4%, an increase of 20 billion euros to the monthly asset purchase plan and an extension of the QE timeline to March of 2017. Mr. Draghi effectively gave the market what it wanted while negating the effects of it at the same time; you can have your QE but don't expect any more.

Market Statistics

Asian indices ended their day mixed; the Nikkei gained the Chinese markets fell as they awaited the news from Europe. European indices were first flat, then skyrocketed by nearly 4% after the policy announcement only to fall back to break even and lower on nullified expectations of even more QE and falling oil prices. EU markets closed with losses in the range of -2%.

Futures trading on the US indices indicated a flat open for much of the morning until the ECB policy announcement, at which time they gained nearly 1.5%. This held more or less steady until the open despite news from OPEC the March meeting in Russia was likely to be 86'd. The open was positive but action was mild, the indices moved higher in the first 30 minutes but only posted gains in the range of 0.5% versus the gains seen in futures trading.

The morning high was hit shortly after 10AM at which time the bears stepped in and drove the indices lower. The mid day sell off was slow and steady, pushing the indices lower by about -1% at the low of the day. The low was hit shortly after 1PM and was followed by a rally which took the indices back to break even levels by the close of trading.

Economic Calendar

The Economy

Not much economic data today, only the jobless claims, and they were good. Surprisingly the news was largely overlooked by the media in the face of the ECB decision and volatility in the oil patch. Initial claims fell by -18,000 versus an expected drop of only -2,000 to hit 259,000. This is the lowest level in nearly 5 months and very near the long term low set last fall. The four week moving average also fell, by -2,500, to hit its lowest level in 4 months. On a not adjusted basis claims fell by -6.7% versus an expected drop of only -0.1% and are now -10.1% lower than last year at this time. The states with largest increase in claims are New York and California with gains of +17,920 and +4,346. The states with the largest decline in claims are Massachusetts and Michigan with declines of -3,413 and -1,054.


Continuing claims also fell shedding -32,000 to hit 2.225 million. The four week moving average of continuing claims fell -4,500 to hit 2.252 million. Continuing claims are at their lowest level in about 2 months but basically holding steady around the 2.250 million level, as is the moving average. Based on the initial claims data these figures are likely to fall further over the next couple of weeks. Regardless, continuing claims remain stable near the long term lows and consistent with ongoing labor market recovery.

The total number of claims for unemployment benefits rose by +60,535 to hit 2.719 million, the highest level in 4 weeks. This rise remains consistent with historical trends and below the post holiday peak set the first week of January and is -6% lower than this same time last year. Based on the historical trends and the initial and continuing claims data this figure should begin to fall in the next 3-4 weeks.


There is very little data on tap for tomorrow, only the import/export prices figures. Next week is another big week for data and could move the market on a number of levels. The big event will be the FOMC meeting at which, according to the CME's Fed Watch tool, there is 0% expectation for a rate hike. Also on tap next week are reads on CPI and PPI along with retail sales, several reads on the state of manufacturing, business inventories, housing starts and building permits. The overshadowing theme next week will be what the Fed does, what they say about the future and how the data fits into the outlook.

The Oil Index

Oil prices got hit by rumor/news once again. Early trading saw WTI move higher to trade above $38 only to have remarks concerning the March meeting to discuss output caps send prices lower. The latest news is that the meeting between Russia and OPEC at large is likely not going to happen due to Iran's lack of support for output caps. The news sent WTI heading lower, at least during the first half of the day, with intraday losses in the range of -2.5% at the low of day. Support stepped in around $37.50 and sent prices back to break even going into the close of trading. Supply and demand is still out of balance, in the favor of supply, so there is a distinct possibility oil prices could fall further.

The Oil Index fell about -1.5% in the early part of today's session but regained most of the loss by end of day. Today's candle is more of a spinning top than anything else but does help confirm support at or near the 1,050 level. The indicators are convergent with the high set on Monday so I would expect to see this high retested although near term indications are pointing lower. If broken next support is along the 1,025 level, aided by the short term moving average, and may be retested depending on which way the oil news points tomorrow morning. A break below this level could see a retest of 950. Upside will be dependent on the supply/demand outlook, and also upon which way the news is pointing.


The Gold Index

Gold prices got a boost today, not because Draghi increased QE but because of his outlook for more QE. Now that hopes for increasing QE in Europe has been quashed the FOMC and low expectations for US rate hikes are dominating the dollar, sending it lower and helping to boost gold. Spot prices initially dipped on the ECB policy statement then made a $25 turnaround on the press conference for a gain of $15 over yesterdays prices. Gold is now back above $1270 and likely to go higher provided the FOMC remains dovish on rate hike outlook into the end of the year.

The Gold Index rose along with the underlying commodity to gain a little more than 4.5%. The index is approaching the $20.50 resistance level and highs set over the past two weeks but may be halted there. The indicators are a bit mixed, they are pointing lower, but in light of the strong uptrend could just as easily be setting up another entry for bullish positions as indicating reversal. I am still bullish on gold with the caveat that data and the FOMC could pressure it lower. In terms of earnings the miners are expected to see robust increases over the next quarter or so due to higher realized prices and that alone could help support the index. Resistance is near $20.50, first target for support is now near $19 with next target near $18.


In The News, Story Stocks and Earnings

The Dollar Index fell today even though the ECB exceeded market expectations. The driving factor turned out not to be the policy changes or the extent of policy changes but the fact that Mario Draghi has taken further QE off the table. This move firmed the euro which, along with dovish FOMC expectations, weakened the dollar. The index moved up about 1.25% on the policy statement, and then reversed the gains for a loss near -1.25% on the outlook. The DXY set a new one month closing low in today's session with downward pointing indicators and looks set to retest support near $95.50.


Dollar General released earnings before the bell. The discount retailer announced record quarterly and full year results beating top and bottom line estimates. The company guided in-line for the current year and also raised the dividend. The dividend was raised by 14% to $1.00 per share and is part of the company's plan to increase shareholder returns over the next year. In addition to the new dividend execs also announced a roughly $1 billion stock buy back plan for 2016. Results were driven by strength in candy, snacks, perishables and tobacco products. Shares of the stock gapped up at the open and closed with a gain near 9%, setting a new all time high on 3X average daily volume.


Bojangles, maker of delicious spicy fried chicken and biscuits, reported after the bell. The fast food chain reported better than expected top and bottom line results despite a slight miss on comp store sales. Guidance for the coming year is in line with estimates but may be low considering the addition of 16 new stores opened during the past quarter. Shares of the stock traded flat during the day and then popped more than 2.5% in after hours trading.


The Indices

Today's action was wild to say the least. The indices climbed, fell and climbed again driven by ECB policy, Draghi's comments and more rumor from the oil patch. By days end the market was basically flat on the day, led by a small gain in the broad market. The S&P 500 closed with a gain of 0.02% after making a near 2% swing from the high of the day to the low. Today's candle is a doji of significant size that appears to be confirming support at the 1980 level. The indicators remain bullish but continue to weaken so caution is due, especially with next week's big data push and FOMC meeting.


The Dow Jones Industrial Average closed near to flat with a loss of only -0.03%. The blue chips also created a significant looking doji candle but where the S&P action appears to confirm support this one appears to confirm resistance. Today's action tested the underside of my up trend line near the 17,100 level. The indicators remain bullish but are showing nearer term weakness so there could be additional downside, testing of support or consolidation. Support target is near 16,750.


The Dow Jones Transportation Average closed with a loss of -0.14% and created a doji like spinning top candle. Today's action confirms near term support along the 7,500 level and the bottom of a possible consolidation range I mentioned on Monday. This range could hold for the next few trading days at least while we wait on data and the Fed meeting. Upside limit is near the 7,700 level, downside limit appears to be at 7,500. The indicators remain bullish as with the SPX and DJI but also shows nearer term weakness, consistent with Monday's touch to resistance and today's move down to support.


The NASDAQ Composite made the largest decline today, about -0.26%, and created the most bearish looking candle although it too shows a significant amount of lower shadow, indicative of support. Today's action tested support at the 4,600 level and confirmed, closing above 4,650. This index is within a consolidation range, between 4,600 and 4,750, and looks likely to remains so for the next few trading days. The indicators remain bullish but are showing the same near term weakness as the others.


Today's action was wild but all in all I would say is at least promising, if not positive. Neither Draghi's surprising comments or the swing in oil prices was able to derail the market. To me this shows some resilience in the market, in the very least it shows indecision ahead of the Fed meeting and that traders are focused on the FOMC for cues on what to expect moving forward.

For now it appears as if the bounce from February lows remains intact, whether or not that remains true will come down to what happens next week. So long as the data remains in the sweet spot, not too hot and not too cold, the FOMC is likely to keep normalization on hold. This may be enough to keep the market moving higher but that is yet to be seen. Any indication another rate hike will be soon could spook the market.

Oil prices remain a major driver of day to day action in the market as well. If not for the ECB meeting today's news from the oil patch could easily have been the talk of the day and resulted in a much larger swing in oil prices, and the broader market.

I remain bullish for the longer term, into the end of the year and next, but cautious in the near term. The bounce may continue higher but I think the next few days are better for watching the market, and waiting for signals, than entering new positions.

In my opinion it will come down to earnings. Expectations for the coming season remain weak and in decline; that fact alone could easily drive the market back to test longer term, stronger, support levels before any significant move higher is seen. Once we finally exit the earnings recession and expectations begin to brighten I think we will see another extended period of rising stock prices.

Until then, remember the trend!

Thomas Hughes