Introduction

The ECB held rates steady but comments by Draghi roiled the markets. Holding policy steady, that was expected, talk of duration and risks to the economy were the wild card. In his comments Draghi said the bank would remain accomodative as long as needed, that risk to growth was to the downside and that EU inflation may turn negative in coming months. Mitigating this were comments on how households are improving and that recovery can be seen. The press release and press conference were about 30 minutes apart, plenty of time for the euro to shoot higher on as-expected news and then fall hard on the comments as market eyes turn to next week's FOMC meeting.

Asian indices ended their day mostly higher. Global financial turmoil seems to be settling down, Chinese markets are calm and earnings are better than expected if down from last year. EU markets were not so calm, trading was choppy and volatile while traders waited on the release, fell on the news and then supported by a weakening euro.

Market Statistics

Our indices were indicated to open flat to negative for the most of the morning. News from Europe, a heavy round of early morning earnings reports, mixed economic data and volatility in the oil pits each helping to confuse outlook. After the opening bell the indices hung at break even for about 3 minutes before moving lower. The first move lower was mild, only about a quarter percent for most indices. By 11AM the market was retesting opening prices but resistance held the rally at bay. Another move lower ensued that set new daily lows just after noon, and then again after 1PM. Weakness persisted all afternoon, driving the market to the low by mid afternoon and keeping there into the close.

Economic Calendar

The Economy

Economic data was mixed, jobless claims indicates a strengthening economy while the Philly Fed Business Outlook Survey does not. Initial claims fell -6,000 from last week's unchanged figure to hit 247,000, a new low not seen since 1973. The four week moving average of claims also fell, shedding -4,500 to 260,500 and very near its long term low. On a not adjusted basis claims fell -10.6%, more than the -8.4% predicted by the seasonal factors and -13% from this time last year. The biggest increases in claims were in California and Pennsyvania, 12,563 and 3,049, while the biggest declines in claims were in New Jersey and New York. These new low levels of claims are consistent with seasonal trends and long term recovery in the labor market.


Continuing claims also fell, -39,000, to hit 2.137 million. This is the lowest level in this indicator since 2000. The previous week was revised up by 1,250, the four week moving average fell by 10,000 to 2.168 million. This weeks drop in claims is consistent with recovery in the labor market and indicative it is heating up.

The total number of jobless claims also fell, -94,408, to 2.325 million. This is the lowest level of claims since late November and consistent with seasonal trends in the labor force. This week's number is -4.5% below last year and consistent with ongoing improvement in the labor market. Based on the seasonal trends we can expect another 6-7 weeks of declining total claims before hitting bottom in June, somewhere south of 2 million.


The Philadelphia Federal Reserve Business Outlook Survey diffusion index fell 14 points to -1.6% this month, well below the expected +0.9% predicted by the economists. All sub-readings within the report showed declines or remained in negative territory this month. New Orders was flat at 0, shipments fell to -10.8, unfilled orders remains in contraction and employment turned negative as well. The decline in current activity is off set by a near doubling of future outlook survey which rose above 40, a 15 month high.


The Index of Leading Indicators was released at 10PM, a little weaker than expected. The leading index rose by 0.2%, about half the gain predicted by analysts, pointing to ongoing but sluggish growth going forward. The previous month was revised lower to -0.1. The Coincident Indicator remained unchanged from last month, the lagging indicator rose 0.4%.


The Dollar Index

The dollar went on a wild ride this morning while the ECB event was unfolding. The first move was lower, policy was left unchanged and strengthened the euro. The second move was higher, to regain all of the early loss, sparked by Draghi's dovish and almost gloomy outlook. Today's action created a doji candle of significant magnitude, confirming support at the $94 level. This level is consistent with the 78.6% retracement level and may hold until next week and the FOMC meeting. The Fed is not expected to change policy but will be closely eyed for signs of when they may raise rates again. Dovish outlook could send the dollar down to test $93.


The Oil Index

Oil prices struggled to make gains in the early part of the session and then fell later in the day. Volatility in the currency market and a strengthening dollar combined with continued oversupply and outlook from the IEA to make a very choppy session. By end of day WTI was down nearly -2%, trading near $43.30. The IEA released new outlook that calls for an historical drop in US output this year helped support the market in early trading but this was offset by high production levels among OPEC nations, an end to the Kuwait oil strike, Iran's determination to ramp up production and market share, and a pledge from Russia that they may increase production too. Oil is holding above $40 and near two month highs but this may not last, near term outlook remains pressured by supply/demand imbalance that have yet to see change.

The Oil Index opened at new highs but did not hold them. The late day fall in oil prices dragged the index down, creating a small dark bodied candle, a spinning top, hanging just below potential resistance targets near 1,160. The recent push to new highs is confirmed by both indicators, pointing to higher prices, although the move remains weak. Stochastic is moving above the upper signal line but MACD momentum is divergent, an combination indicative of overbought conditions. In the end it will come down to oil prices, if they remain high they will lead the Oil Index higher on enhanced earnings outlook.


The Gold Index

Gold prices were also affected by today's volatility in the currency market. Spot price was first up on ECB expectations, then up again on the press release, and then down once Draghi's comments took their tool on the dollar. The early rally surged more than 1.5% to trade above $1270, a two month high, but prices remain within recent ranges. This range will likely hold until the FOMC meeting next week at which time direction will be dictated by the statement and rate hike outlook. Bias is to the upside, today's action shows that the dollar is ready to move lower and push gold higher, all we need is the Fed to indicate a willingness to hold off on rate hikes.

The gold miners ETF GDX made a new intraday high on the move but sold off in late day trading to create a dark bodied candle. The move is accompanied by bullish momentum and a bullish cross of the upper signal line on the stochastic so looks like it could continue to drift higher. The caveat is that divergence between the high and the indicators exists and suggests weakness in the market and potential correction. Support levels are currently near $22, first target should gold prices or the index begin to pull back.


In The News, Story Stocks and Earnings

The telecom sector was one of today's loss leaders. Verizon reported earnings before the bell, EPS was as expected but revenue fell short. That, along with flat outlook, helped to drive the stock and the sector lower. Although customer base earnings guidance for the full year was reaffirmed and earnings are expected to plateau. The telecom sector as a whole is expected to post greater than 10% earnings growth this quarter and next but that growth will fall off into the end of the year. Shares of the stock fell more than 4% to trade near a two month low.


GM also reported before the bell, beating on the top and bottom lines. Strength in sales trends was aided my product mix, more sales of higher cost/higher margin SUV's and crossovers. EPS came in at $1.26, a full quarter ahead of projections. Strength is expected into the end of this year although there is some fear than auto sales are peaking. Shares of the stock moved higher in the pre market, opened with a gap and then moved lower during the open session. Even with the move down from the high, shares of GM closed with a gain of 1.5% and trading at a near 4 month high.


Travelers Insurance helped Verizon drag the Dow lower. The insurance company missed on earnings, revenue beat, because of losses in catastrophe insurance. Losses are centered on the string of storms in Texas in late March. Despite the losses net premiums rose 5% and book value increase but it was not enough to support prices. Shares fell more than -6%.


The after hours session was very busy too. Today is not the busiest day of earnings season but it is the busiest day so far. ABC, Starbucks and Microsoft were only a few on the list, results were mixed at best. ABC, Google, missed on the top and bottom line. EPS of $7.50 was nearly $.050 below estimates. Starbucks reported EPS in line with projections but missed on revenue and comp store sales. Microsoft also missed, on the top and bottom, all three stocks fell on the news and are sure to have a negative impact on tomorrows session. Micrsoft lost -2% in the first minutes after the report, GOOG and SBUX fell -5%.

The Indices

The indices tried to hold their ground today but couldn't do it. Reaction to today's new was mixed, led by the Dow Jones Transportation Average. The transports made the largest decline, just over -1.21%, but remain above the 8,000 level. The indicators are mixed, momentum is to the upside but very weak and getting weaker. Both MACD and stochastic are divergent from this latest high which make it very suspicious. The index may continue to move higher but next resistance is near, at the 8,250 level, and looks like a likely spot for sellers to enter the market.


The Dow Jones Industrial Average made the second largest decline today, -0.63%, about half that of the transports. The blue chips fell from yesterday's new high to test support at 18,000 and may be set to fall through. Both indicators are giving mixed signals, and both are divergent from the high, providing plenty of reason to be suspicious of today's move. A drop below 18,000 could take the index down to next support target near 17,500. This target is near the short term moving average and stronger support targets, about 3% below the current high.


The S&P 500 made the third largest decline in today's session, only -0.52%. The broad market pulled back from the new high in a move that could take it back to 2,020. The indicators are both divergent from the new high, a sign of market weakness, and support the idea the market is reaching a peak. The index may continue to drift higher but next resistance target is very close, near 2,200, and likely to attract profit taking.


The NASDAQ Composite made the smallest decline today, about -0.5%, and created a small spinning top candle. This is the 7th day the index has traded beneath resistance at 4,950 and based on the indicators and the after hours earnings reports, it will not be broken tomorrow. The index has been riding a wave of momentum which has left it at 3.5 month highs. That momentum has been deteriorating for 2 months, diverging from the rally, indicating a growing chance of correction. First target for support is near 4,800 and the short term moving average, next target is 4,750.


There has been growing sign in the market that the rally begun in February is running out of steam. Divergences in indicators persist across the major indices even as they made new highs, and now that earnings seasons is unfolding that weakness may lead to correction. Today's action is sign that even though earnings are generally better than expected they really aren't that great and not enough to inspire confidence. Add in today's after hours action and the chance for correction in the coming days is greater. I still see the market moving higher in the longer term, once we get through the next quarter and return to earnings growth, but until then I am wary of the rally and cautious of the market at these levels. For now, I am watching and waiting for the next dip.

Until then, remember the trend!

Thomas Hughes