Introduction

The market tried to rebound as weak earnings, tepid data and sluggish outlook weigh on sentiment. Neither the current quarters earnings, the recent string of data nor outlook give much reason for bullishness and today's events did nothing to alleviate concerns.

Global markets were mixed. In Asia markets were mostly lower but comments from a prominent, but unofficial, Japanese source helped to weaken the yen which in turn helped the Nikkei to move into positive territory before the close. Takotoshi Ito, an academic reportedly close to BOJ Governor Kuroda, says the bank my be ready to add QE as early as June. In Europe the markets started off on better footing, rising as much as 0.5% by mid day, only to give up the gains and more by the end of the session. Early strength was supported by rising oil prices, the late day sell-off in equities driven in turn by a reversal in those same oil prices.

Market Statistics

Futures trading indicated a positive open for the entire morning although indicated gains fell steadily throughout the morning. Weak earnings from the retailers along with a surprise jump in jobless claims may have been the cause, or possibly anticipation of three speeches to be given by Fed officials, a rising dollar or combination of these and other factors. The open was rocky, the indices did indeed move higher after the bell but gains were muted and intraday resistance was met within the first 10 minutes of trading.

By 10AM the indices had retreat to break even levels and by 10:15 had moved into negative territory, where they remained for the greater part of the day. Losses were not severe, the S&P 500 shedding about -0.5% at the low, and most were recovered by 2PM. A late afternoon rally helped to send the indices back up to test the early high but once again those levels were not sustainable. The indices retreated from the intraday highs going into the close and ended the day relatively flat.

Economic Calendar

The Economy

Not a lot of economic data today but what we got was a little surprising. Initial jobless claims jumped 20,000 in the past week, the 5th week of increases, to hit a near 15 month high. Claims came in at 294,000, still below the much watched 300,000 level and consistent with labor market health, but the pace of increases and the new high are waving a red flag. The four week moving average of claims also rose, by 10,250 to 268,750, to hit a four month high. On a not adjusted basis claims gained 7.6% versus the 0.6% projected by seasonal factors and are now above last years levels. The near term gains in claims may fall in the coming weeks as we enter the summer season but they will need to be watched, a reversal in trend would not be good.


Continuing claims rose by 37,000 to it 2.161, a 6 week high. This is on top of an upward revision to last week's figure of 3,000. The four week moving average of continuing claims is still falling however, but may begin to rise in the coming weeks. Despite the gains, like with initial claims, continuing claims remains low relative to long term trends and consistent with labor market health.

The total number of Americans receiving unemployment benefits fell by -61,992 to hit 2.136. This is the lowest level since late November 2015 and consistent with seasonal and long term trends. We can expect the total claims figures to continue falling for about the next 4-5 weeks providing the jump in initial claims does not linger and/or spillover into longer term unemployment. On a year over year basis total claims are down -5.2% and consistent with ongoing recovery in labor markets and unemployment.


Import/Export prices were released at 8:30AM. Import prices rose 0.3% following a 0.3% gain April, driven primarily by rising fuel prices. Export prices rose by 0.5%, impacted by both agricultural and non-agricultural products.

Not one but 3 different Federal Reserve presidents, all voting members this year, made speeches to day. They each spoke to different aspects of the economy, as well as the pace of FOMC rate hikes, and as a whole sound fairly hawkish. First up was Rosengren who says the market is too pessimistic on the economy and underestimating the pace of rate hikes. Mester says that uncertainty in forecasting should not stop the Fed from acting. Esther George says that rates are currently too low for the state of the economy, that low rates pose their own risks to economic stability and that she expects to see moderate growth to continue.

The next meeting is only 4 weeks away, the CME Fed Watch tool shows an 8% chance for a rate hike. Looking out to future meetings the Fed Watch Tool shows a less than 50% chance of rate hike all the way out to December when it jumps to 59%.


The Dollar Index

The Dollar Index rose by about 0.33% today on the heels of expected, projected, speculated BOJ intervention. Today's action recovered some but not all of yesterday's losses, and fell short of resistance at $94.30, the 78.6% retracement level. This level may prove to hold the index in check as BOJ talk at this time is just that, talk, and US data does not support a strengthening dollar. The indicators are bullish and pointing higher so a test of resistance is likely, but they are also very weak at this time so the strength of the move is questionable at this time. A break above this level could signal a reversal in the dollar and/or yen that could have negative impact on forward earnings, and take the index up to $95.50 in the near term. Tomorrow's CPI release could have an affect on the index, and PPI next week. If inflation gauges remain weak, and rate hike expectations and other economic indications, the index could easily return to retest its recent lows.


The Oil Index

Oil prices got a boost in early trading from yesterday's surprise draw of US stockpiles and an IEA report that says global oil markets are heading for balance. Within the report they also upped 2016 demand by over 1.5 million BPD and expect to see a steady draw-down of US stockpiles going into the summer. Oil prices surged in early trading to near $47 and a 6 month high only to attract sellers who brought volatility to the market. Prices were driven back below $46 intraday, but only long enough for the bulls to regroup and send them back up. By end of day WTI was trading near $46.50, just off the earlier high. It seems that fundamentals may finally be coming back into alignment, for the bulls, but are still skewed toward supply. Prices may continue to rise in the near to short term.

The Oil Index tried to rally on the rise on oil prices but succumbed to profit taking. The index opened with a small gain and pushed marginally higher only to fall back to break even before the close. Today's candle is small and black, with upper and lower shadows, sitting on a critical level. This level is near 1,115 and consistent with the short term moving average, today's support, and the 61.8% retracement level, broken. If support at this level fails the index could fall as 1,075 in the near term, if oil prices remain steady at the new highs and/or moves higher a bounce may be in store for the Oil Index with upside target near 1,175.


The Gold Index

Gold prices held steady near $1270 despite strengthening in the dollar. Today's session was a little choppy, early losses were erased mid-day only to have the index fall back to the earlier low about -0.25% below yesterday's settlement price. Regardless, today's action is more consolidation than anything else, gold prices remain above recently broken support with little expectation for a fall at this time. The risks are stronger than expected data or anything else that may lead the market to move up rate hike expectations, as well as possible moves from the ECB (not expected) or the BOJ (probable). Until then gold is likely to remain range bound with support in the region of $1250-$1260 and resistance near $1285 - $1300.

The gold miners fell in today's session but remain near recent highs. The miners ETF GDX fell about -1.35%, just off the long term high, to trade near the middle of the near term consolidation range. The ETF is in consolidation, longer term direction dependent on economic data, central bank activity, the dollar and gold prices. The consolidation range has support near $23.25 and resistance near $26, a break above could take the index higher into the long term with targets near $27.50 and $30. A break to the down side could take it down to support targets near $20-$21.


In The News, Story Stocks and Earnings

Apple was a major mover of the market today. The beleaguered tech company saw shares fall more than -2.25% to hit a near 2 year low as investor confidence continues to wane. Today's action also removes it from the top spot in terms of market cap. The indicators remain weak although bearish momentum is on the decline which could lead to a rebound from or consolidation at current levels. Looking back over the past 3 years the current bearish MACD peak is an extreme, showing underlying weakness in the market and suggesting that lower prices are likely. If the stock is able to mount a rebound I would expect to see today's lows tested before any rally were to develop. The risk is that the company will produce a new innovation or product to rejuvenate market dominance but there is little expectation of that at this time.


The retail sector got hammered again today. Macy's miss yesterday set the tone, today's miss by Kohl's cemented fears. Kohl's reported a miss on earnings and revenue despite the addition of new stores in the quarter, driven primarily by a near -4% decline in comp sales across the company's footprint. Shares of Kohl's fell more than -10% on the news and hit a new low. The XRT Retail SPDR also fell, shedding about -0.25% in a move that is testing support. The indicators are bearish and ticking stronger so further testing of support is very likely. Count in the after hours misses by Nordstrom's and Dillard's, as well as concern over the health of the consumer (mentioned in the Kohl's report) and I think we can expect to see the XRT fall in tomorrow's session. I think I've said this before, certainly no one is talking about it in the media, but the thing weighing down the consumer, the ones who have jobs anyway, is most likely Obamacare. High rates, low coverage and rising healthcare costs are digging into budgets across America.


IPO darling Shake Shak managed to beat EPS projections this quarter. The hamburger seller posted earnings of $0.08 versus the $0.05 consensus projection and was also able to raise full year guidance. Within the report revenue grew more than 43%, same Shak sales rose nearly 10% and the addition of 4 new stores was announced. The news was well received and helped to lift the stock 5% in after hours trading.


The Indices

The indices tried to rebound from yesterday's sell-off but could not muster enough bulls to make or hold significant gains. Today's action was led by the Dow Jones Industrial Average which was the only major index to close in positive territory. Now, positive territory means a gain of only 0.05% so flat is the operative word. The blue chips tested support in today's action, at the short term moving average, but the small doji candle and low trading volume show indecision in the move. The indicators are consistent with a bounce/test of support but remain weak at this time. Both MACD and stochastic are showing signs of rolling over into bullish crossovers but there is no guarantee of that happening. Should the index stage another rebound from this level resistance is just above, near 18,000, and will likely halt any upside providing no bullish catalyst emerges. A break below support could take the index down to the long term up trend line near 17,250.


The next best performer in today's session was the S&P 500 which lost only -0.02%. The broad market also created a small doji candle but one with longer lower shadow than upper, closing just above the short term moving average, showing support along the short term moving average near the 2,060 level. This support may hold, the indicators are consistent with support at current levels, but any upside move will encounter resistance near 2,075. A break above resistance would be bullish in the near term only as next resistance is just above near 2,100, with next target for resistance at the all time high. A break below the short term moving average could take the index as low as the long term up trend line, near 1975 and about 6% below today's closing price, with first target closer to 2,020.


The next best performing index was the NASDAQ Composite which had the additional burden of Apple weighing it down. The tech heavy index fell about -0.5% in today's action, creating a small bodied black candle falling from resistance. Resistance is near my line at 4,785 and compounded by the short term moving average which has been moving lower over the past few weeks. The indicators are mixed; both are bearish but they may be rolling into a bullish signal but with resistance just overhead any upside potential is muted, at best. A break above resistance could take the index up to 4,900 in the near term, a further fall from resistance may find support near 4,650.


The biggest decliner in today's session was the Dow Jones Transportation Average which lost a little more than -1.4%. The transports look the most bearish of all four indices and set a new 2 month low with today's close. The index is moving lower after a test of resistance at the short term moving average and is confirming resistance at 7,750. The indicators are also weak, much weaker than the other major indices, and are moving lower with today's action suggesting that lower prices are still on the way. If the index continues to fall first target for support is 7,500.


For the most part, discounting the transports, today's action appears to be more indecisive than not. Now, taking into consideration Dow Theory and the fact that the transports led us into the correction last year, and led us in the rebound which began in January, today's move is highly suspicious. If the transports continue to move lower the others are likely to follow. I've been growing more and more wary of decline in recent weeks, expecting a pull-back or correction driven by poor and declining earnings outlook, and nothing changed that today.

The long term outlook remains positive, a return to earnings growth is still in the forecast, but another quarter and maybe two of earnings decline is expected before then and that will be hard for the market to handle, especially over the summer. I'm still bullish long term but increasingly bearish in the near, cautious in the short and waiting for the next big bounce.

Until then, remember the trend!

Thomas Hughes