Introduction

The market seemed to shrug off a pair of central bank meetings and weak GDP data until late day selling drove it lower. Early action was driven by news and data, late day trading by a sell off in Apple sparked by comments from Carl Icahn. His comments? That he had sold out of Apple due to earnings and the China question.

The BOJ decided to leave interest rates unchanged which was surprising enough by itself. Kuroda took things a step further when he said that negative interest rates were not on the table although more QE may still be needed. Asian markets were hit hard by the news after expecting some form of QE to be unveiled. The Japanese Nikkei fell more than -3.5% followed by smaller declines in mainland Chinese indices and other markets in the region. EU markets were similarly affected but were able to rise in late day trading. Early losses on the DAX were in the range of -1.5% but this was turned into a small gain by the close of the day.

Market Statistics

Futures trading indicated a weak opening all morning. Indicated losses ranged from about -0.75% at the low to about -0.5% by the open. Losses were muted in part by positive earnings reports and a flurry of M&A activity but losses persisted into the opening bell. After the bell the indices quickly fell to the morning low but just as quickly reversed course. By 10AM the SPX was near break even levels and by 11AM it was trading in positive territory, moving up to set a high for the day. Another high was hit shortly before noon and from there it was down again to eventually retest the low of the day, and it did not hold. Just after 3PM the SPX reached the early low, and went right through it. Selling accelerated until hitting support targets just before 3:30. A small bounce formed but it did not carry the indices very far, by the closing bell they were back near the low of the day.

Economic Calendar

The Economy

Weekly jobless claims figures remain near long term lows although GDP figures were the headline of the morning. The first read on 1st quarter GDP was much weaker than expected, only 0.5%, helping push back expectations for FOMC rate hikes to later in the year. Consensus was in the range of 1% but had been coming down in recent weeks. This is only the first read, we can expect two more revisions so it may not be as bad as it looks. Regardless, this is the slowest pace of growth since the first quarter of 2014,due to deceleration in positive contributions including PCE and residential real estate.


Initial claims rose by 9,000 from last week's upward revision of 1,000 to hit 257,000. The four week moving average fell by -4,750 to 256,000, the lowest level it has seen since 1973. On a not adjusted basis claims rose by 1.2%, faster than the expected decline of -2.7%. On a state by state basis Massachusetts and Connecticut led with increases of 1,653 and 1,105 while Pennsylvania and Texas led with declines in claims of -4,270 and -2,539. Claims remain at historic low levels and trending lower in the long term, consistent with labor market health and contrary to economic slowing as indicated by the GDP data.


Continuing claims fell -5,000 from a downward revision to last weeks data to hit 2.130 million, the lowest level since November, 2011. The 4 week moving average also fell, shedding -10,000 to hit its lowest level since November, 2011. This data helps confirms health in the labor market as indicated by the initial claims data as it too is trending to new lows over the long term. Together these numbers indicate strength in jobs availability and declining unemployment levels so next week's NFP/unemployment data should be good.

The total number of jobless claims fell -69,811 to 2.255 million. This is the lowest level since November last year, -7.5% below last years level and consistent with seasonal trends as well as the long term down trend in unemployment. Based on the historical data we can expect the current slide in claims to continue for about 6 more weeks with an expected target near 2 million.


Tomorrow's economic calendar is pretty full. Personal income and spending data is rounded out by the Employment Cost Index, Michigan Sentiment and Chicago PMI. Next week is the turn of another month so ADP, Challenger, NFP and Unemployment data are all on tap along with auto sales, construction spending and factory orders.

The Dollar Index

The Dollar Index moved down to retest the 6 month low near $93.60. The index is being pushed lower by both the euro and the yen in the wake of yesterday's FOMC meeting, and today's BOJ. The FOMC appears ready to hike, but still dovish in terms of when. The BOJ is still in easing mode, but not quite as desperate as thought. Together, with the ECB's pause to easing, has provided a back drop in which both the euro and yen are firm and/or firming against the dollar while the dollar itself is weakening. Support may be at $93.60 but a break below this level will likely take the index down to $93. The indicators are rolling over in the line with the prevailing down trend so a test of support is likely.


The Oil Index

Oil prices persist in moving higher despite evidence of oversupply and over production. WTI flirted with 2016 highs day, driven more by a weakening dollar than anything else. Yesterday's US storage data, all time record highs, along with global production levels and demand outlook do not really support bull market conditions. There is sign of declining production, US daily production has fallen by about a half million BPD over the past year, but on a global level production remains well above demand with really no hope of a coordinated effort to curb it. We may get a rebalancing of the market by 2017 as many predict but that is a long way off. Until then I remain wary of oil prices at these levels and expect we'll see some of form of correction before then.

The Oil Index fell in today's session after trying to move higher. Today's candle shows signs of resistance with the long upper shadow and may indicate a peak has been reached. MACD is bullish but divergent from the new 5 month high while stochastic is overbought, leaving it susceptible to correction. Price needs to remain above 1,170, now support, to maintain a bullish outlook. ConnocoPhillips reported before the bell today, beating earnings and revenue expectations, adding support to the sector. Exxon reports tomorrow and could also produce better than expected results. Better than expected earnings is a good thing but with the bar set so low for this sector I'm not sure it matters if earnings decline -100% or -105% from the first quarter of last year.


The Gold Index

Gold prices got support from two central banks over the course of the past two days and saw prices jump more than 1.25%. A dovish toned Fed and less than ultra-dovish toned BOJ combined to send the dollar lower and gold higher. Spot price gained more than $16.00 to trade above $1265 and near the top of the 3 month trading range. It looks like prices will be supported by central banks into the next month to 6 weeks so it's time to turn to the data for cues. Upside target is near $1280 for now, unless data begins to come in hotter than expected. A move above $1280 could go to $1200-$1215. Support remains in the $1225 to $1235 region.

The gold miners surged to new highs today as gold prices firmed and the miners begin to report. GoldCorp reported yesterday, better than expected, and reversed losses experienced in the first quarter of last year. The company also reaffirmed full year guidance. Royal Gold also reported better than expected results yesterday, a 26% increase in revenue driven by higher realized prices and increased production. The gold miners ETF GDX jumped more than 4.25% and reached a new 19 month high. The indicators are both confirming the break to new highs with bullish crossovers although it looks like the three month uptrend may be losing strength. Upside target is now $26.70, the 78.6% retracement line which provided resistance in 2014.


In The News, Story Stocks and Earnings

M&A was almost a bigger story than earnings, data or central banks. So many deals were announced I lost count but the one garnering the most attention was Abbot's takeover of St. Jude. The deal is worth $25 in cash and stock and is aimed at strengthening Abbot's presence in the cardio-vascular arena. Together the two companies will be able to compete with Boston Scientific and Medtronic in just about every aspect of cardiac care. Abbot expects to close the deal later this year and begin to see the resulting increase in revenue soon after, pending regulatory approval. Shares of St Jude gained more than 25% in response to the offer, shares of Abbot fell nearly -10% in pre-opening action but regained some of the loss during the open session.


Ford reported earnings before the bell and delivered solid results. Earnings and revenue reached new record highs on cost saving initiatives and strength in global car sales. Boosting results was a near doubling of operating margin driven by solid results in the three top performing regions; US, EU and Asia. Along with this guidance was reaffirmed to be at least as good if not better than last year. Based on today's results and outlook for car sales this year it looks like this will be easily met. Shares of the stock jumped more than 3.75% on the news and are moving up from the lower end of a long term trading range. Today's move is accompanied by bullish indicators which are both rising and indicative of higher prices. Next upside target is near $14.50 with an additional catalyst due next week, auto sales figures. Positive auto sales data could attract new buyers and add momentum to the sector.


Facebook jumped more than 10% today after releasing better than expected earnings yesterday. The company proved yet again that it can monetize its assets and it is being rewarded for it. Amazon reported after the bell and blew away the expectations. The company reported top and bottom line beats that were well above projections driven on a 28% increase in 1st quarter sales. Shares of the stock jumped more than 10% on the news although guidance was only in line with forecast.


The Indices

Icahn's Apple comments may have been the spark that started the afternoon sell-off but there are many factors at play, not least of which is weak growth. Weak growth trumps no rate hike, especially if outlook dims. Today's action was led by the Dow Jones Transportation Average which lost a little more than -1.55%. Even with today's decline the index remains near the four month high. The index could continue to trend at this level into the near term although signs of weakness persist. Divergences in the indicators are confirmed today with bearish crossovers in both MACD and stochastic Support target on a pull back has a first target at the short term moving average near 7,775 and then next target 7,750.


The NASDAQ Composite was the second biggest lower in today's session, shedding -1.19%. The tech heavy index was caught in a tug of war between positive and negative earnings reports, succumbing to Icahn's opinion in the end. Today's action created the largest black candle in two months, and fell below the short term moving average. This move confirms bearish crossovers in the indicators which formed earlier in the week but the index has yet to break below support targets. Support appears to be 4,785, just below today's close, and likely to be tested.


The Dow Jones Industrial Average made the third largest decline in today's session, -1.17%, the biggest daily decline in about two months. Today's action is a move down from resistance, confirmed by bearish crossovers in both indices, that may lead the market into mild correction. First down side target is the short term moving average, just above 17,600, with next target should this one fail near 17,250.


The S&P 500 made the least decline in today's session, only about -0.9%. The broad market created a medium bodied black candle that closed near the bottom of the range, just above the short term moving average, and appears set to move lower. Today's action confirms resistance set by last week's 5.5 month high and bearish crossovers in the indicators. First target if selling sets in is near the short term moving average, if this does not hold prices will likely retreat to 2,050 -2,025.


The market has weathered several storms this week and it looks like the skies are clearing but this does not mean we've gotten the all clear for rally. Earnings are better than expected, yes, and the FOMC is in no hurry to raise rates, yay, but growth remains slow, earnings remain weak and earnings growth is still at least two quarters away. Bottom line, the bull market is intact but the chance for near term correction remains and this is backed up by the charts. The indices are cresting 3 month rallies just beneath all time high levels with increasingly weak technicals, divergences and signs of topping that add up to a weak market ripe for correction. I remain cautious for the near term, anticipating correction and opportunities for bullish entries.

Until then, remember the trend!

Thomas Hughes