Introduction

Oil retreats and drags the broad market with it, on the cusp of another earnings season; a turning point may have been reached. Today's action was dominated by volatility in the oil patch, data from Cushing and output from Iraq combined to drive oil prices lower but the focus is on earnings season.

Trading in the international markets was mixed. Asian indices closed mostly higher but mixed is a better description. A rapidly strengthening yen is the story of the day in that circle, driven on the FOMC's minutes dovish tone and a lack of faith in the BOJ. European indices began the day moving higher on an early gain in oil prices but this did not last long. Bearish data sent oil prices lower and dragged them down as well.

Market Statistics

Futures trading indicated a negative open for the US indices all morning. The Dow was pointing to a drop near -100 points lower, about -12 for the SPX, and this held steady all morning. There was a brief uptick following the jobless claims data but that did not last long, going into the opening bell futures were near the lows of the morning. The open was as expected, declines in the range of -0.5% were logged for all the indices almost immediately. The first 45 minutes of trading saw the bulls try to stage a rally but this was capped near yesterday's break even level; from that point on the market drifted lower into the end of the day.

Economic Calendar

The Economy

Not much in the way of economic data today except the weekly jobless claims. Initial claims fell -9,000 to hit 267,000, the third week of decline since hitting a peak in early March. Last week's figure was not revised. The four week moving average of claims rose 3,500 to hit a four week high of 266,750 but remains very low and consistent with labor market health. On a not adjusted basis claims rose by 4.4%, less than the 7.9% predicted by seasonal factors and are now down only -3% from last years levels. The states with the largest increase in claims were Pennsylvania and New Jersey with gains of 2,058 and 1,457. The territory and state with the largest decreases were Puerto Rico and Indians with -1,415 and -908.


The number of continuing claims rose by 19,000 to hit 2.191 million on top of an upward revision of 1,000 to last week's figure. The four week moving average of continuing claims fell though, shedding 1,750 to 2.288 million. Despite the uptick in claims this figure remains very low, just above the 43 year low, and consistent with labor market health.

The total number of Americans receiving unemployment benefits is 2.454 million, down -83,120 from last week and the fourth week of pronounced decline. The total number of claims is now at a three month low and in seasonal decline, as expected. On a year over year basis the total claims is down -6%. If the figures hold true to historical trend the decline in total claims which began last month should continue into June and set a new low for the series. Regardless, at this time the claims data is consistent with labor market health.


The only data due out tomorrow is Wholesale Inventories, not too earth shattering. Next week is full again with over a dozen reports including retail sales, CPI, PPI and Fed's Beige Book.

The Oil Index

Oil prices had another wild ride. Yesterday's pop on bullish storage data carried through into the early part of this morning until new data, storage levels at Cushing and Iraqi output, reversed sentiment. Basically, Cushing storage was better than expected and seemingly unaffected by two major pipeline issues. Iraqi output was also better than expected; both pieces of news adding to the fundamental picture of oversupply and low demand. WTI fell more than -2% intraday to trade below $37, it closed with a loss near -1.25% trading near $37.50. Fundamentals will continue to drag on prices but the risk is that news, rumor, about production cuts and meetings could drive them higher.

The Oil Index fell about -1% to sit on the 1,050 support level. The index is suffering from volatility and indecision in the oil pits and is indicated to drift lower/retest support again. Both indicators are pointing lower but there is sign of near term support so a break of 1,050 is no guarantee. If it does fail the index could move down to next support target near 1,025 or lower to the 975-1000 level. Oil prices will be the primary driver in the weeks to come, with earnings a close second.


The Gold Index

Gold prices are the only thing supported by the FOMC minutes in today's session. Spot prices gained nearly 1.5% on dovish Fed outlook and a weaker dollar to trade above $1240. Prices are now just below possible resistance near $1250 but still well within recent ranges. The move higher could continue provided rate hike outlook remains diminished but is likely to hit resistance, if not at $1250 then near $1275-$1280. The ECB and BOJ are the biggest risk at this time, either of them could add to QE although there is little expectation of that now.

The gold miners ETF GDX moved up by roughly 3.25% to trade just below the $21 resistance target. The move created a gap that could be the beginning of a break out but for now is just churn within a consolidation zone. The indicators have been in retreat over the past few weeks, confirming consolidation and indicating caution, but have begun to roll into an early, trend following, bullish entry. Resistance is at $21 and needs to be broken to get overly bullish on the index, if not a retreat to retest support levels is likely.


In The News, Story Stocks and Earnings

The dollar weakened following the FOMC minutes but may have hit a bottom. Today's action say the dollar index fall more than a half percent to set a new low and then bounce back from a retracement level, a move indicative of support. This move may be just the first test of $94.25 but divergences in the indicators help confirm support of this level. Support may hold until the next central bank meetins unless strong data or surprise news hits the market. The next round of central bank meetings is begins in 2 weeks with the ECB. They are not currently expected to add more QE so the statement will be the focus. A break of support could take the index down to $92.60 and a full retracement of the trading range.


Food giant Conagra reported earnings before the bell. The company reported top and bottom lines beats driven on improvements in both consumer and commercial foods segments; both showing double digit increases in profit growth. They also reported the completion of a planned divestiture which led to a massive reduction in debt. Guidance for the year, when adjusted for comparable purposes, was slightly above expectations and helped to send the stock higher. Shares climbed by more than 1.5% to set a new high.


Yahoo caught a bid when news hit the market Verizon would be making a bid for the company. There is no news yet as to what kind of bid, those details are due next week, but the target is the web business. Shares of Yahoo jumped on the news after opening with a loss but were not able to sustain the gains. The stock closed with a loss of -1.3% but remains above the recently broken trading range.


Gap took a dive in after hours trading after reporting poor March and first quarter sales figures. The retailer saw a -6% decline in comp store sales, leading to year over year declines in revenues which, coupled with a warning of narrowing margins, helped spur a -10% fall in share prices. Look for shares of Gap to fall to the long term lows near $22.


The Indices

The indices did carry through on the post-Fed minutes rally of yesterday afternoon. They began the day in retreat and end the day near the lows of the session. Today's action was led by oil prices but mostly on low volume as we wait for massive round of earnings reports we're going to get over the next month. The decline was led by the NASDAQ Composite Index which fell -1.47% and set a one week intraday low; closing low is within the one week range. Price action is below resistance, and well above support targets, so risk appears to be to the downside. The indicators remain bullish, but also persist in showing weakness through divergences and indicative of a weakening market. If the market does pull back to support first downside target is near 4,775.


The Dow Jones Transportation Average made the second largest decline, about -1.30%, and fell below support targets at 7,700. This level is also the short term moving average and could lead to further decline without some form of bullish catalyst. The indicators confirm the break, both moving lower and gaining strength, so further decline should be expected. Next down side target is near 7,500.


The S&P 500 made the third largest decline, -1.20%, and appear set to test support levels near 2,020. The index set a 6 day low in today's session, within a multi-week consolidation, that could be setting the index for a short term head&shoulders reversal. Neck line appears to be the 2,020 level, coincident with current support targets and the short term moving average. The indicators have rolled over into a bearish signal so a test of support appears to be likely. A break of support could take the index down to stronger support levels near 1,950 to 2,000.


The Dow Jones Industrial Average made the smallest decline, about -0.98%, and is also approaching what could become the neckline of a head&shoulders reversal. The neck line of such a pattern would be between 17,400 and 17,500, consistent with near term support targets. The indicators have rolled into a bearish signal, consistent with a top, so a test of support should be expected. A break of support would help confirm the top and could the index down to 17,350 or further.


The market appears to be cresting a top. Today's action was driven by oil prices but that was just an excuse. The thing really driving the market now is earnings. The FOMC, the minutes and upcoming meetings are a back drop, earnings and the state of earnings growth and outlook for the same is what is on the minds of the market. The season is not going to be good. It may be better than expected but at best we can expect to see year over year declines near -4% for the S&P 500 and this is likely to cause the market to sell off.

What it will come down to are the statements within the report and guidance for future earnings. The longer term outlook remains positive so any market dip or test of support that occurs now is likely to be a buying opportunity for longer term positions. I'm still bullish for the long term, cautious in the near, waiting with the rest of the market to see what the earnings season brings us.

Until then, remember the trend!

Thomas Hughes