Introduction

The market barely budged today despite a plethora of potential catalysts, all eyes remain locked on tomorrows NFP report. Even so, today's events are sure to have long lasting impact on markets ranging from forex, to commodities, equities, options and bonds.

To start things off Japans Prime Minister Shinzo Abe surprisingly put off the long awaited sales tax increase by another 2.5 years. This is the second time he has put it off and the second time he has raised questions about the health of Japan's economy and the effectiveness of Abenomics. The move sent the yen shooting to a multi-week high, and the Nikkei down by -2.32%.

The Japan news had an effect on European markets which were down in the early half of their trading session. However, traders in this region were more concerned about the ECB decision and Mario Draghi's comments. The ECB did not change policy, as expected, but did add commentary to the effect that economic recovery is not moving forward quite as fast as the central bank would like.

According to the statements EU recovery is slow but progressing, interest rates will remain low, or lower, for an extended period of time, inflation will remain low or negative into the near term, inflation may pick up in the second half of the year and GDP will remain below 1.75% out to 2018 or beyond. European indices moved higher initially, fell back to morning lows after the statements and then recovered enough to close flat by the end of the day.

Market Statistics

Futures on the US indices indicated a lower opening right from the start. The trade was weak, losses were indicated to be less than a tenth of a percent, moved marginally lower after the morning data and held those levels into the open. After the open the first 20 minutes of trading were decidedly bearish; the SPX moved down in two steps to hit a morning low of -0.51%. Once the low was hit the tone of the day's session changed and the market began to move up. By 1PM the day's losses had just been about completely erased, the Dow Jones Industrial Average at least moving in to positive territory. By 2PM the NASDAQ Composite and SPX followed the blue chips into positive territory and continued higher into the close of the day.

Economic Calendar

The Economy

Due to the Monday holiday many of the data points usually scheduled for Wednesday were released today. This means we got a massive dose of labor data, all good, with only the NFP/Unemployment left for tomorrow. The first bit was the Challenger Job Cuts data which fell to a 5 month low, and the second lowest level since October 2014. Planned job cuts fell to 30,157 and are -27% lower from last May although on a year-to-date basis are still running hot, +13%. Energy led with cuts numbering 7,572.


The ADP Employment report, a precursor to the NFP data, shows that 173,000 new jobs were created in May. This is up from last month, slightly below expectations, but well within the range we have seen over the past 18 months. Small businesses led with gains of 76,000 followed by medium size businesses with 63,000 and large business with gains of 34,000. One headline that may cause concern is that all of last months gains were due to gains in the services sector, 175,000, offset by declines in goods producing jobs, -1,000, and manufacturing, -3,000. When you look at where services jobs were created, trades financial and professional services, concerns melt away. I'd also like to point out a gain of +13,000 construction jobs which, along with the trades jobs, point to ongoing strength in the housing sector.

Initial claims for unemployment fell by -1,000 this week from last week's unrevised figure. Initial claims are now 267,000 for the 65th week running and remain low/consistent with labor market health. The four week moving average of claims fell by -1,750 to 276,750. On a not adjusted basis claims rose by 2.1% versus an expected gain of 2.4% and have moved back above last year's level in the comparable period, +6.5%. Not-adjusted claims have been moving above and below last years levels for the last 6 weeks and may be indicating a change in labor trends. Regardless, they are very low and consistent with current labor market health.


Continuing claims rose by 12,000 to 2.172 million on top of a downward revision to last week's figure of -3,000. The four week moving average of continuing claims also gained 12,000, reaching 2.162 million. This figure has been has been rising over the past month and reached a new 6 week high today, but remains very low and consistent with labor market health.

The total number of Americans receiving unemployment benefits fell once again, by -6,372, to hit 2.069 million. This is the lowest level since last November and consistent with historical trends and ongoing labor market health. On a year over year basis total claims are down -3.6%, a much narrower margin than we've seen over the past few years and may be indicative of slowing in labor market recovery. Based on historical data I think we can expect to see total claims fall for another week or two before hitting bottom, my target is still below 2 million.


Auto loan data was released this morning as well. The value of US auto loans hit a record high in May, a 10% jump from the previous month, totaling more than $1 trillion dollars. Also, the average loan, $30,000, and the average payment, $500, are at all time highs too. Jamie Daimon responded to the data by saying "the market is a little stretched" and that someone, not JP Morgan, was "going to get hurt". One reason may be the rising number of sub-prime loans and sub-prime borrowers entering the market.

Tomorrow the big news will be of course the NFP data but that is not all that is on tap. Also look out for unemployment, hours, wages, factory orders and ISM Services.

The Dollar Index

There was lots to impact the dollar today. First off the surprise move by Shinzo Abe sent the yen higher as expectations for a BOJ action declined; delaying the tax hike takes pressure off the economy and reduces the need for further QE. Next the ECB decision and statements; no move but hints at further stimulus and weaker outlook for EU growth weakened the euro. After that there is the US labor data which indicates tightening labor markets and points to FOMC rate hikes.

The Dollar Index began the day moving lower, then reversed above support levels and moved higher. It is now just below resistance at $96 and above support at the short term moving average, near $95, waiting on tomorrow's data and the FOMC meeting next week. If the data is strong, strong enough to indicate the need for rate hikes, the dollar could break above resistance and move up to $96.50 or higher. Looking to the CME's Fed Watch Tool there is only about a 21% chance of rate hike next week, down from 32% last week.


The Oil Index

Oil prices had a wild ride again today, driven by OPEC. OPEC had their bi-annual meeting in Vienna today and members have indicated there will be no change of policy, no production caps and that the market "can't rule out supply increases". The oil price began the day about 0.5% higher, WTI was trading near $49.30, then fell on comments from OPEC delegates, and then later in the day regained the earlier high on hopes of summer drawdowns to inventory. US inventory data was released today, because of the holiday affected week, and showed a 1.4 million barrel decline from last week and elevating expectation for higher summer demand for gasoline. Oil prices may continue to rise while inventory declines but fundamentals are still skewed to the down side so caution is due.

The Oil Index traded sideways from yesterday's candle, creating a small white candle that did not close above the short term moving average. The index has now been trending near the 1,120 level for more than 6 weeks, all while the price of oil has been flirting with 7 month highs, and has not been able to break out of its range. The index is currently below resistance targets near the 1,125 level and indicated lower by both MACD and stochastic. The caveat is that the indicators, while both are forming bearish crossovers today, remain consistent with range bound trading.


The Gold Index

Gold prices also saw some volatility today although the trading range was tight. Spot prices moved up by about 0.3% in the early part of the session on strong yen/weaker dollar only to fall back below break even later in the day on stronger dollar/weaker euro. Today's move was driven more by the data and dollar outlook than it was by Abe or Draghi, the focus being next week's FOMC meeting. Both the EU and Japan are faced with slow/slowing/sluggish growth and the possibility of further stimulus while the US is looking for the next move to tighten policy. If the FOMC does tighten the dollar is likely to move higher and drive gold prices lower. Support is still present in the range between $1200 and $1215, a break below here could take gold down to $1150 or lower.

The gold miners are under pressure in the face of declining gold prices and FOMC outlook. Today the miners ETF GDX traded in tight range and created a small spinning top doji below the short term moving average for the second day in a row. Over the past two weeks the ETF has moved below support levels at $23.50, confirming a double top formed in May, and appears set to move lower. The indicators are bearish although momentum seems to be subsiding, that being said the current MACD peak is an long-term extreme and suggests lower prices are on the way. My first downside target, provided gold prices remain low or move lower, is near $20.


In The News, Story Stocks and Earnings

Home builder Hovnanian reported earnings before the opening bell. The company reported substantial increases to revenue, +39.6%, but nevertheless posted a net loss for the quarter. Losses are due to massive debt load, a factor management says is being addressed. On a comparable quarter basis this quarter's loss was half that of the previous year, sign the company is making strides, but more work needs to be done. Company CEO says in the release they are focused on de-leveraging the balance sheet and investing in new lands rather than trying for growth at this time. Shares of the stock fell more than -11% on the news but found support, today at least, along the short term moving averaging. Based on housing trends, if they continue to make improvements to the balance sheet, this company could return to profitability in the not too distant future.


Ciena, maker of optical networking solutions, announced earnings before the opening bell. The company posted a top and bottom line beat, sending shares soaring, despite a decline in both from the same period last year. Company execs say results were driven by efforts to diversify the business and momentum in geo-specific locations. Guidance for the next quarter is in-line with expectations. Shares of the stock jumped more than 12% to hit a three month high.


Ambarella, supplier to GoPro and other imaging technology companies, announced earnings after the bell. The company beat EPS estimates smartly, $0.05 versus $0.02 expected, with revenue in-line with projections although down -19.5% from last year. The company also reported an increase in margins, as well as a stock buy back plan, which helped to send the stock higher in after hours trading. The stock traded higher all day, closing with a gain near 1%, and then gained an additional 5% following the release of earnings.


The Indices

Today action a bit mixed. Early trading saw the indices move lower, find support and then drift higher. Most of them were able to move into positive territory but even so daily ranges were only equal to about 0.5%. The only index to fail to move into positive territory was the Dow Jones Transportation Index which closed with a loss of -0.13%. The transports created a very small spinning top doji, sign of indecision, but above the short term moving average and near term support target of 7,750. The indicators are rising, suggestive of higher prices, but weak and in light of tomorrow's data and next week's FOMC meeting not too convincing. IF support holds and the index is able to move higher next target is 8,000 with a possible move to 8,250.


The NASDAQ Composite made the biggest move to the upside, 0.39%, and set a new 2016 high. The tech heavy index created a small white bodied candle, bigger than a spinning top but small nonetheless, which closed at the high of the day. Today's action took the index above the 4,950 resistance target with rising indicator so further upside is expected. Next target is near 5,050.


The second largest move to the upside was made by the S&P 500. The broad market gained 0.27% and closed at the highest level since early November. Today's action created a white bodied candle, closing at the high of the day, with long lower shadow indicative of support at this level. The indicators are bullish and pointing higher, suggestive of higher prices, but very weak. Next target should the index continue to move higher is near 2,120 with a possible touch to the all-time high near 2,133.


The day's smallest move to the upside was made by the Dow Jones Industrial Average. The blue chips gained 0.26% in a move that confirms support along the short term moving average. Today's candle is a small bodied white candle with long lower shadow, indicative of that support, just above 17,500. The indicators are bullish so a further move to the upside is likely although they have yet to show strength. Next upside target is near 18,000 with a possible move up to 18,150.


The indices are moving higher. It seems like maybe good news is good news again. The data, the labor data anyway, is positive and suggests economic recovery is at hand and while it also suggests a rate hike is due, it may not be the market shattering even we've all feared for the last year. The caveat is that earnings in the current quarter are still expected to be negative, and have declined again this week. The second half of the year is still expected to see growth, same with next year, so I am bullish into the longer term.

In the near term, the market may be able to reach the all time highs set last year but I am still nervous about correction. We've seen it happen before, the market move up to touch a new high only to pull back again on profit taking and repositioning. Tomorrow's data could help send the market higher, next week's FOMC meeting the same, but I reserve judgment until the next earnings season begins which is only 6 week's away.

Until then, remember the trend!

Thomas Hughes