Introduction

The market drifted higher on mixed data and mixed earnings reports. The data seems to edge us closer to a rate hike with one hand while keeping those same rate hikes at bay with the other; bank earnings are better than a expected, a little, but beg the question; in the face of year-over-year earnings decline are they better enough?

International markets were buoyed by earnings, data and oil prices. Asian indices were led by the Japanese Nikkei which gained nearly 3.25%, aided by a mildly softer yen. European indices were also able to close in the green after a morning spent hugging break-even. Late day trading got a boost following the release of US data and earnings from Bank of America and Wells Fargo.

Market Statistics

Futures trading indicated a flat-to-positive open all morning with little affect from either earnings or economic data. There was a little fluctuation during the early morning session but nothing major. At the open indices posted small gains, less than a tenth of a percent, and after a few minutes trading in the green quickly retreated below yesterday's closing prices. The market fell for the next half hour, reaching a low of about -0.17% for the SPX. Bottom was reached by 10AM, by 11:30 the market had returned to break-even level and pushed through to make a new high for the day, about +0.15%. This high was followed by another an hour later, about 0.30% for the SPX, after which the indices returned to break-even. The rest of the day saw more of the same sidewinding around break-even levels, leaving most of the indices in the green at the close of the session.

Economic Calendar

The Economy

CPI was released simultaneous to jobless claims, which dropped unexpectedly. Initial claims for unemployment fell -13,000 to 253,000, just above the 43 year low set last year. Two factoids; last weeks figure was revised lower by -1,000, this week makes the 58th week of jobless claims below 300,000, the longest streak since 1973. The four week moving average also fell, by -1,500, to 265,000. On a not adjusted basis claims rose by +10.4%, less than the +16.2% predicted by the seasonal factors, and are down -12% over this same time last year. On a state by state basis New York and New Jersey had the largest increases in claims, 4,511 and 3,836. California and Arkansas had the largest decreases in claims, -7,118 and -1,249. Simply put, initial claims data remains consistent with labor market health.


Continuing claims also fell, shedding -18,000 to hit 2.171 million, just above the long term 43 year low set last year. Last week's figure was revised lower by -2,000, the four week moving average fell by -10,250 to 2.178 million and is now at a 16 year low. Based on this week's data and long term trends continuing claims remains consistent with a health labor market.

Total claims also fell, -34,920, and are now 2.40 million. This is the lowest level since December 19th and down -4.25% year over year. Total claims continues to decline in line with seasonal trends and should continue to do so into June at least. Based on historical data total claims may shed as much as 35% in that time, falling to 1.85 million from the January high of 3.049 million, matching the long term low set last year, consistent with a healthy labor market.


The Consumer Price Index offered a mixed bag of results. Headline CPI rose only 0.1% versus an expected gain +0.3%, indicating some inflation growth but not much. Over the past 12 months not-adjusted CPI has risen 0.9%, better but still not nearly matching FOMC targets for a healthy economy. Within the report food inflation fell by -0.2%, offset by gains in energy, the first since November of last year. The core ex-food and energy CPI also rose only 0.1%, below expectations. Core CPI is up 2.2% year-over-year and it at least is trending at levels desirable for the FOMC. The low levels of growth helped remove any lingering expectation there would be a rate hike at the next meeting.


The Oil Index

Oil prices were choppy today but WTI held above $41.50. A new report from the IEA has lowered expectations for 2016 demand but at the same time the expected drop-off of US production is beginning to gain momentum. This is on top of anticipation of the Doha meeting and possible production caps, scheduled for Sunday. In the near term, prices are supported more by rumor and hope than anything else as fundamentals remain bearish. In the longer term prices may be supported by an evolving supply/demand outlook scenario that may be coming back into alignment. Risk over the next few days is firmly centered on the Doha meeting, most likely a buy-the-rumor-sell-the-news types of event.

The Oil Index continues to struggle with resistance at 1,120. The index has moved to the top of its range and, like the underlying commodity, not yet able to break above it. The current move higher is supported by hope and rumor, once the Doha meeting comes and goes there will be only the reality of production at current, high, levels. Since this reality is likely already priced into the market there is little reason to expect oil prices to move higher without some other fundamental change. If the index is able to break out next resistance target is near 1,150. If not, the index is likely to remain range bound with possible support along the short term moving average and/or the 1,000 levels. In either event oil prices remain the number one driver of this index.


The Gold Index

Gold prices retreat today on a stronger dollar, even though today's gains in the dollar were capped. Spot gold fell about -1.5% to trade near $1,228 and the middle of a three month trading range. The price of the metal, and the dollar, are winding up on central bank speculation with longer term direction in doubt. This wind-up is will likely continue until the next FOMC meeting, in just 2 weeks, driven by data and affected by the ECB meeting next week.

The Gold Miners ETF GDX fell a little more than -3.35% in today's action. Today's move is the first test of support at the $21 level and may not be the last. The sector made a major break out last week, so a test of support such as this is to be expected in order to confirm its strength. The indicators are mixed, bullish but divergent, so the strength of the break out is questionable. If support holds a move higher with near to short term target near $25 is very possible but whipsaw is another possibility. $22.50 has been significant resistance within the past 2 years and could mark a top. The next two weeks could be volatile while the market waits for the Fed meeting.


In The News, Story Stocks and Earnings

The Dollar Index moved up to make a one week high on today's data, and then confirmed resistance by pulling back from the short term moving average. Price action created a potential shooting star with the short term moving average as resistance, confirming the 4.5 month downtrend in dollar value. The data shows labor data is strong and trending healthy, supporting the longer view that interest rate hikes are coming, countered by CPI which shows consumer level inflation is tame with no indication an immediate rate hike is likely. With little left in the way of data to support the dollar before the FOMC meeting, and a low likelihood the ECB will weaken the euro, it looks like the index will retest the recent low near $94.


More bank earnings today. All in all, they are reporting better than expected but they are also reporting significant declines in year over year earnings. They are also reporting a troubled environment with uncertain outlook that helped to cap today's gains. Comments from the reports include things like uncertain FOMC outlook, volatile operating environment and negative market performance. Bank of America and Wells Fargo both beat by a penny, both impacted by near term hurdles including low interest rates. Bank of America saw a sharp decline in revenue from trading, Wells Fargo an impact from higher reserve requirements linked to energy exposure. Bank of America closed with a gain of 2.61% and a new 3 month high.


Wells Fargo was not able to close with a gain today. The stock opened with a loss and tried to move higher but was not able to do so. It looks like WFC is stuck in a near term trading range but was at least able to close above the short term moving average. The indicators are rolling into a bullish signal as well so a move to test resistance between $50 and $51 may be brewing.


The financial sector was able to move higher on the earnings news although the move was hesitant. The Financial SPDR XLF gained only a quarter percent in a move that indicates resistance at $23, consistent with a gap opened at the beginning of the year. The indicators are confirming today's new high so resistance could be broken with an upside target between $24 and $25. Support is near $22 and the short term moving average. Tomorrow Citigroup reports and could provide additional support for the sector.


The Indices

The indices, save one, crept higher in today's session led by the Dow Jones Transportation Average. The index made a gain of 0.25% and created a small spinning top candle just below 8,000. This is the third time the index has tested this level over the past month so it could provide resistance going into options expiration tomorrow. The indicators are mixed with bullish bias, stochastic is pointing higher while MACD approaches the zero line, so resistance may be tested or even broken. Next resistance target above 8,000 is close, near 8,125, a break above that could take it up to 8,400. Support is near 7,750.


The Dow Jones Industrial Average is the next biggest gainer in today's session, about 0.10%. Today's candle is a small spinning top, just below resistance at 18,000, with weakly bullish indicators. The indicators are moving up in the near term but persist in diverging from new highs in indication of weakness. Now that the index is back to 18,000 it will need to break through else risk a fall back to strong support levels. Support target is near 17,500.


The S&P 500 made the smallest gain in today's session, only 0.02%. The broad market created a small spinning top candle at 2,082 level. Price action over the past two days has negated any thoughts a head & shoulder were forming although signs of weakness persist. The indicators are both divergent from the newest high and consistent with a weakening market. A break above 2,082 could move up to test resistance near 2,100 or 2,020 but without a definitive break above the all time high this rally looks like it is cresting a peak.


The only index to post a loss in today's session was the NASDAQ Composite. The tech heavy index shed -0.03% in a move that indicates indecision. The candle is a spinning top, just below resistance, accompanied by rapidly weakening and divergent indicators. A break above 4,950 is possible but without some indication of strength or market conviction is would be questionable.


The market continues to move higher but signs the rally is tiring persist. The indices may not fall tomorrow but there are some things to consider before giving the all clear for rally, especially with options expiration day tomorrow. One is earnings. Earnings are mildly better than expected, reason to breath a sigh of relief but not to shout for joy, and it is still very early in the season. Another is oil prices. The indices are approaching all time highs driven primarily on oil prices. Oil prices are up on the hopes there will be an agreement to cap global production. These hopes are centered on a meeting scheduled to occur this weekend with an outcome likely to do little to change market outlook but a huge potential to drive oil prices on Monday morning. A sharp drop in oil prices could drag the broad market down with it, reason to close out positions going into the weekend. I remain bullish for the long term but wary of pull backs and correction in the near.

Until then, remember the trend!

Thomas Hughes