Introduction

Sluggish data and soft earnings weighed on the market today, NFP and unemployment are still ahead. Today's reports, both earnings and economic, did little to alleviate concerns. Earnings remain mixed but generally OK, if slightly better than a -8% decline for the S&P 500 is OK. Economic remains positive in the long term but shows slowing and weakness in the near.

Selling started in Asia although trading in the region was mixed. The Japanese Nikkei fell more than -3%, again, driven on floundering economics and lack of faith in the BOJ but the Chinese indices fell less than -1%. European indices tried to move higher in early trading but were overcome by negative sentiment sparked by weakness in Asia and poor earnings. By the end of the day they were in negative territory with losses in the range of -1%.

Market Statistics

Futures trading indicated a near -0.75% drop for most US indices as the early session began. Trading remained near the low of the session going into economic release at 8:30AM and held that level afterward and into the opening bell. The indices posted a large drop as soon as the bell sounded, the S&P 500 shedding a half percent in the first two minutes of trading. Momentum was strong the first 15 minutes of the day and drove the indices down to the early low, just shy of -1% for the broad market.

By 9:15AM an early bottom had been reached, a small rebound recouped about half of the initial losses and then more data at 10AM. ISM Services and Factory Orders were better than expected but not enough to recover the remainder of the day's loss. The market did move higher after the release but the move was choppy and did not last long. By 11:30 the market was back at the lows of the day, bounced again and then moved back to retest the lows again by 1PM. Afternoon trading was more of the same chop, below the mid point of the day's range, leaving the indices near the lows at the closing bell.

Economic Calendar

The Economy

The first release today, Mortgage Applications, shows that applications for new mortgages fell by -3.4% from last week. This is due in part to a slight uptick in interest rates. The rate for a 30 year fixed is now 3.87%, up 2 bps from last week. This week's is evidence of slowing in the housing market, which remains steady over the long term. Mortgage apps are up 0.4% year over year.

ADP Employment released their monthly employment report this morning at 8:15AM. According to them the pace of job creation slowed in April, contrary to the jobless claims data. ADP job creation ran at 156,000, short of the 195,000 expected, and the smallest increase in over a year. Within the report small business led with 93,000 new jobs, large business lagged by creating only 24,000 jobs. Services led with an addition of 166,000 offset by declines in goods producing and manufacturing. Construction added 14,000 new jobs.

Productivity and Labor Cost preliminary reports for the first quarter suggest that growth may have been weaker than the 0.5% estimate we received two weeks ago. First quarter productivity fell by -1.0%, more than expected. Increases in output were offset by hours worked and wages paid. On a year over year basis productivity is positive, up 0.6%. Labor costs rose by 4.1%, 3% in hourly earnings offset by -1% productivity. On a trailing 12 month basis labor cost are up only 2.3%.


ISM Services and Factory Orders were released at 10AM, both better than expected. ISM services rose to 55.7 from 54.5 versus an expected 54.7. This is a 1 year high. Within the report Business Activity fell -1% to 59.8 but Employment and New Orders both rose, gaining about 3% each to hit 56.7 and 59.9 respectively.

Factory Orders came in at 1.1% versus an expected rise of 0.5%. Shipments rose 0.5%, inventory rose 0.2% and unfilled orders fell -0.1%. The real driver of orders was New Orders, which rose 0.8% mainly on transportation equipment.

The Trade Deficit was smaller than expected. It shrank 13.9% to -$40.44 billion.

The Dollar Index

The Dollar Index was able to rebound somewhat in today's action. The data was enough to put a bid in the dollar although job creation appears to have weakened. The index was able to gain about 0.36% but the move was not strong. The indicators are consistent with a near term bottom, divergent from the recent low and rolling over in the nearer term, so the move could continue. The index is well below the short term moving average so a reversion to it is certainly possible. The only thing to drive the dollar over the next few weeks will be data, until the next round of central bank meetings, so ranges may dominate trading. Today's data did little to change overall outlook; one area appears strong while another appears weak. Support is at $92.62, with possible upside target near $94.25.


The Oil Index

Oil prices tried to rally in the early part of the session but a larger than expected build of US inventories curbed gains. WTI had been trading over $44.50 when news that stockpiles had gained 2.8 million barrels hit the wires. This, along with recent increases in Saudi and Russian output, adds to curent supply imbalance regardless of outlook for next year. The news sent prices heading lower, erasing most of the gains, to leave WTI trading near $43.50.

The Oil Index fell more than -2% and below the 1,120 support line in today's action. This line is coincident with the short term moving average and the 61.8% retracement line so this break could become significant to near term direction. The indicators are moving lower in confirmation of the break and pointing to lower prices. Bearish MACD is rising and stochastic %D is falling below the upper signal line so it looks like this move could have strength. If the index remains below 1,120 a move lower becomes more likely, next support target is near 1,050.


The Gold Index

Gold fell in today's session, shedding about -01.35% in a choppy session. This is the third day of decline since hitting peak and consolidation or decline may continue in the short term. The dollar appears to have hit a bottom and this could lead to range bound trading for both it and gold. Data will be the major mover of this market for the next few weeks with resistance at $1300 and first target for support near $1275 should prices pull back further. A break above $1300, should one come, would be very bullish for gold and could take it to $1325.

The gold miners fell today as well, the miners ETF GDX falling nearly -5% compared to gold's -01.35%. This move helps confirm the top set three days ago but does not rule out further gains. The ETF may consolidate at this level and will likely retest resistance before making a full reversal, if it does. The miners are still tied to gold, and gold to the dollar, so today's move could easily be reversed by Friday's releases, if not other news before now and then. If the NFP is as weak as the ADP it is very possible the dollar will fall back to the low and send gold back to $1300.


In The News, Story Stocks and Earnings

Randgold Resources reported earnings today and may have had some impact on the miners in general. The company reported a miss but there is a silver lining, evidence of the impact of higher gold prices. The miss is due to a -11% decline in production caused by commissioning and technical issues in certain mines offset by a 19% increase in quarter over quarter profits, a 25% increase in year over year earnings attributable to a 9% increase in average gold prices and lower input costs. Regardless, investors were not pleased and sent shares sinking in pre-market trading. Shares fell more than -5% at the open and -11% by the close.


Shares of Priceline fell more than -10% after revenue, profits and guidance fall short of expectations. The company is hurting from adverse conditions in several regions due to political instability, terrorism and the Zika virus. Guidance for the next quarter is in a range between $11.60 and $12.50, -16% below the consensus. Late day trading saw some buyers step in, enough to create a hammer doji, but not enough to recover the day's losses.


Health insurer Humana reported better than expected earnings, $1.86 versus $1.81, and reaffirmed full year guidance. According to the company is seeing improvement in most areas of business but remains cautious on it exposure to the healthcare exchanges. Shares of the stock opened with a loss near -1% but regained more than half that during the day. Despite the recovery prices remain below the short term moving average which may prove to be resistance.


Tesla reported after the bell but shares of the stock were moving long before then. Shares were down in early trading on low expectations for earnings, then extended those losses on reports two executives were leaving due to problems with the Model X roll out. Shares of the stock had been down about -2% and then extended those losses on the mid-day news. After hours trading saw the stock recover all of the earlier loss and add another 4% after the report of earnings. The company's reported loss was -$0.57 per share, one penny less than consensus.


The Indices

The indices began the day in retreat, hit new lows almost immediately, tried to rally and then moved lower again. Today's action left the indices at or below support targets in many cases, and indicate the market is ready to move lower if given the right push. Today's action was led by the Dow Jones Transportation Average, about -0.90%. Today's action created a medium bodied black candle which set a new one month low and came to rest on the 7,760 support target. The indicators are both pointing to lower prices and this level has not been strong in the past so it looks like a dip below 7,760 is coming. This move could go all the way to 7,500 if the index closes below today's support level.


The next largest decline was posted by the tech heavy NASDAQ Composite which lost nearly -0.8%. Today's action brings the index below the 4,750 level, the upper shadow on the candle suggesting resistance at that level. The index is now at a 2 month low and indicated lower by both MACD and stochastic. Both indicators are in decline and now confirmed by the short term moving average which has begun to move lower. Next target for support is near 4,650.


The S&P 500 fell about -0.60% today, created a medium bodied black candle and came to rest on a support target. The indicators are both confirming the move to support and suggest it will continue to be tested although momentum is not yet strong. A break below support, near 2,050, could take the index down to 2,020 in the near term with targets below 2,000 in the short term.


The Dow Jones Industrial Average made the smallest decline, about -0.56%, and came to rest on potential support. Today's action broke below the short term moving average and hit the support target near 17,620 where sellers were halted. The indicators are bearish and moving lower, indicating lower prices or at least a testing of current support, so it looks like a touch to 17,500 is very possible. An outright break of 17,500 could take the index as low as the long term trend line near 17,250.


The market appears to be moving lower and may extend losses over the next two days. Neither the data nor the earnings are inspiring rally and the way things are going it's hard to believe outlook will improve any time soon. Earnings may be, in general, better than expected but they are still down more than -7% from last year with forward outlook in decline so better than expected is the only thing positive about them. Economic data shows long term growth is still in the economy but that growth is slowing, no reason to expect earnings to grow or the market to move higher. Tomorrow will see quite a few more earnings reports and a little bit of data but nothing as earth shaking as the NFP report due Friday.

The way I see it now, the economy and market are stuck between a rock and hard place. If the NFP is weak like the ADP it could drag the market to new lows on slow growth, if it better than expected it may raise the specter of rate hikes, and that could drag the market to new lows, if it is in the sweet spot it may not be enough to overcome declining earnings outlook and that could result in selling too. I remain cautious in the near term, anticipating a test of support in some form and waiting for the next bounce.

Until then, remember the trend!

Thomas Hughes