Introduction

The market moved higher despite last week's poor NFP, all eye's are on the Fed meeting scheduled for next week.

The NFP, it was a shocker don't get me wrong but let's put it into perspective. The number is only one month of data, there is a margin of error of 115,000 and all other labor market indicators support labor market health. Jobless claims are trending at historic lows, unemployment is falling, employee confidence (JOLTs quite rate) is trending at historic highs, wages are up more than 2% YOY and the number of job openings hit another all-time high in March. As I've asked before, does it matter if we create new jobs when we still can't fill the openings there are?

Today there were a number of Fed speakers, including Janet Yellen, and they still seem to think a rate hike is due fairly soon. Rosengren and Meister say a hike is still appropriate, Bullard says June may not be right but July could be.

In her speech today Yellen said many things, here is a quick recap; despite the weak NFP the economy is on track, wage growth appears to be picking up, she expects inflation to move up, a gradual increase in rates is warranted, it is likely the FOMC will raise rates before targets of full employment and 2% inflation are reached, and no mention of timing. She also warned against overreacting to a single data point. According to the CME's Fed Watch Tool there was only a 6% chance of a rate hike at this meeting as of this morning, that chance fell to only 4% following Yellen's speech.

Market Statistics

International markets were mixed. In Asia markets were mostly flat or marginally lower. The NFP report sent the yen surging against the dollar and helped depress the Japanese market which weighed on the rest of the region. In Europe the day began much the same, mixed to slightly down, until the open of trading here at home. At that time positive sentiment, and rising oil prices, helped to lift the DAX and others firmly into positive territory.

Futures trading indicated a flat to positive open for the US indices. The early hours were largely without market moving news, no major earnings reports or official economic data was released, so the trade held fairly steady going into the opening bell. At the bell the indices moved higher, by about a half of a percent in the first 20 minutes, and then drifted higher for the remainder of the morning. After a brief pull-back, around 1PM, the indices continued their march higher into the afternoon. Daily high was set near 2:30PM at which time the rally lost momentum and drifted sideways into the close of the day.

Economic Calendar

The Economy

No official economic data today but we did get the weekly Moody's Survey Of Business Confidence. The index fell by -1.8 points from last week, the second week of significant decline, to hit 26.7 and a new multi-year low. Mr. Zandi says that poor sales strength and less hiring are to blame as global sentiment deteriorates. The US remains the strongest region while Europe weakens; South America is the weakest region, affected by political instability.


There was no update on earnings or outlook from FactSet this week. As of last report the 2nd quarter is still expected to be very weak with negative growth of -4.8%. The unofficial start to the next cycle is only 5 weeks away.

The rest of the week is light on data as well. Even so, there are a few released due out this week and they may have impact on FOMC outlook and how the market views the NFP data. Tomorrow we'll get the revised productivity and labor cost data for Q1. This data, productivity especially, is expected to see positive revision and if so will play into the theory that job creation is slowing because productivity is on the rise. Wednesday is the JOLTs report for April, Thursday is the weekly jobless claims and wholesale inventories, Friday wraps it up with Michigan Sentiment.

The Dollar Index

The dollar tried to move higher from last week's sell-off but was not able to make significant gains. The Dollar Index was able to gain about a tenth of a percent intra-day but closed flat on the day. The index is sitting at a near one month low, below the $94 level and the 78.6% retracement level, with bearish indicators. The index certainly looks set to move lower, potential target near $92.50, and the indicators are in support of this view, but it will come down to data and what the FOMC does next week. If the FOMC surprises the market with a rate hike, or indicates that July is likely, the dollar could reverse last week's losses very quickly. Further, the BOJ is also set to meet next week and could move to weaken the yen, which could lift the DXY.


The Oil Index

Oil got a boost from a trifecta of near term events. First, a weakened dollar has helped to support prices. Next, sabotage at a major Nigerian facility has disrupted supply outlook furthering impairing supply from Africa's largest producer. Adding to supply/demand outlook is a reported 1 million barrel draw from the Cushing storage facility. The price of WTI rose as much as 2.25% in today's trading, coming just shy of the $50 mark, before Yellen's statements caused prices to retreat. Even so, WTI closed up by 1% on the day, trading above $49.

The Oil Index continues to trade near the 1,125 level. Today the index gained a little more than 1.5% to gain the upper side of this level but remains within the tight trading range we've seen over the past month. The indicators are neutral, possibly rolling into a bullish signal but without indication of true direction. At this point it looks like the index is waiting for something, possibly a more concrete idea of when supply/demand imbalances will re-balance. A break out of this range will could spark a large movement with up and down-side targets 75 points to either side of the 1,125 level.

I want to point out that the Oil index has still not made a new high and is in fact more than 6.5% below the last high while the price of oil continues to flirt with 7 month highs. This divergence gives reason for caution as the oil price may have gotten ahead of the market. If oil prices are able to hold these levels and/or move higher I would expect to see the index move up to make a new high as well.


The Gold Index

Gold was a bit choppy today even though moves were small. The spot price was down about a half percent in early trading but those losses were recovered following Yellen's speech. Spot price hung around the $1245 level and is near the mid-point of the 4 month range. Price may remain near this level into the FOMC announcement next Wednesday, after that it will come down to what they do and what they say. As always, if the FOMC appears to be more hawkish than not the dollar could rise and gold could fall back to support. If not a move up to recent resistance in the $1280 area is likely. Regardless, gold is likely to remain inside the range between $1200 and $1300 until the FOMC actually raises rates, or the data shows real weakening of the economy.

The gold miners made small gains today, about a half percent, and are trading near the multi-year high and the top of 6 week consolidation range. The miners are definitely benefiting from higher prices but as always remained tied to the price of the underlying commodity. The indicators are pointing higher, both have recently made bullish crossovers, with a possible test of the $26.70 level. The caveat, if the FOMC surprises with a rate hike or hawkish statements it could easily fall back to support along with gold. Bottom line, expect some volatility in gold over the next week, and the dollar, and most likely in the broader market, all due to the FOMC.


In The News, Story Stocks and Earnings

The board of Hertz Global Holdings approved the plan to split the company into two publicly traded companies. The split will produce Hertz Global Holdings, a car rental company, and Herc Holdings, a business equipment rental company. The deal is expected to be tax free for US shareholders for income tax purposes. The deal will be completed as a dividend distribution of all the assets deemed belonging to Herc Holdings at the rate of 1 for every 5 shares of the parent company. The deal is expected to be completed by July, 1st for shareholders of record on June 22nd. Trading on a "when issued" basis will begin two days prior to the close. Today shares of Hertz gained over 6.25% to trade at a 2 month high.


Home Depot was one of the few stocks to move lower in today's session and the biggest drag on the Dow. Today's move set a new 2.5 month low with mixed indicators, unless there is something I am missing this looks like a test of support following the all-time high set last month. Other than the fact that co-founder and former CEO endorsed Donald Trump for president, and the stock went ex-dividend on Friday, there was very little news to spur the near -2% decline in share value. If the decline continues support looks likely at the $125 level, a break below this level would be bearish and could take it down to $120 or $115.


FedEx announced a dividend increase after the bell. The global shipping company raised distribution by a whopping 60%, to $.040 from $0.25. The news helped to lift the stock by a half percent in after hours trading.


The Indices

The market moved higher today and is approaching, in many cases, long term resistance and the possibility of touching all-time highs. Today's leader was the Dow Jones Industrial Average which posted a gain of 0.63%. The blue chips created a medium bodied white candle with bullish indicators and appears to be moving higher. The caveat is that the index is approaching a potentially strong resistance level, 18,000, and the indicators are weak. A touch to this level could spark another sell-off if no bullish catalyst emerges. A break above this level would be bullish but also comes with the caveat that resistance at the current all-time high is just above.


The Dow Jones Transportation Average posted the 2nd largest gain in today's session. The transports gained 0.55% in a move that created a small bodied white candle with visible lower shadow. The candle formed precisely on the 7,750 support/resistance line, coincident with the short term moving average, with a close above that line. The close above the moving average, and the lower shadow, suggests support is present at this level although it is not showing much strength at this time. The indicators are bullish, but mixed and showing signs of potential weakness in that MACD momentum is in decline and stochastic may be rolling over. A move up from here may find next resistance at near 8,000, a fall back below the 7,750 level could go down to 7,500.


The NASDAQ Composite Index was third in line today with a gain of 0.53%. The tech heavy index closed above the 4,950 resistance level and set a new intra-day high for 2016. The indicators are bullish and suggest the move could continue although momentum is weakening. If the index does move higher over the next few days next upside target is near 5,035.


The S&P 500 made the smallest gain in today's session, only 0.49%. The broad market moved up to set a new 2016 high and is now less than 25 points away from the all-time high. It looks like the index is set to move up and test next resistance, which is the all-time high, but the momentum is weak so I am not confident it will break out even if it does set a new high.


The market moved higher today and may reach new all-time highs. Whether it holds those highs and moves higher is very questionable. In the near term the FOMC meeting and decision is driving the market. Friday's data and today's comments from Yellen seem to have taken a rate hike off the table, in June at least, but her message was mixed. The economy is better than the market thinks, but still not good enough for a rate hike. This may sooth an anxious market but is not enough to keep it at new highs, not without earnings growth and the coming cycle is not expected to produce growth.

Longer term, and of more importance I think, is the future of earnings growth. If the next cycle produces better than expected results, and forward outlook improves, we may very well see a summer break out to new highs and a rally that lasts into the end of the year. If not,well, the market is likely to correct again before moving higher. Don't forget, the market has been drifting sideways at or below the all-time high for over a year and a half, that's along time for investors to hold positions that are only treading water. A touch back to those level could easily draw sellers into the market. I remain cautious in the near term and hopeful in the long, waiting for earnings season to start.

Until then, remember the trend!

Thomas Hughes