Introduction

The indices are creeping higher as fears of FOMC rate hike recede. According to the Fed Watch Tool there is now only a 2% chance of a June hike. This, along with surging oil prices and a weakening dollar are helping to support the indices despite the World Bank's reduced 2016 global growth outlook, last week's less than tepid NFP report and the prospect of another quarter of negative earnings growth.

Yesterday the World Bank lowered its 2016 global growth forecast by a half percent to 2.4%. The reason, “sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows”. This news hit Europe hardest, down roughly -0.75% in today's session, but also took a toll on the Asian markets. Futures trading here at home did not seem affected, buoyed instead by rising oil prices. WTI crossed the $51 level in early trading, setting a new 2016 high.

Market Statistics

Futures indicated a flat to positive open all morning. Aside from the World Bank report and oil prices there was little in the way of actual news to impact trading. The S&P 500 opened the session with a gain of 0.58, points not percent, and quickly moved up to test resistance levels near 2,120. An early high was set within the first half hour of trading, at resistance, followed by a quick retreat to near the opening level and choppy sideways trading from there until late afternoon. Shortly after 2:30 most of the indices were able to work themselves up to the highs of the day or slightly higher. For the SPX this means a touch to my resistance line at 2,120.25 where resistance once again it held the bulls at bay.

Economic Calendar

The Economy

Two bits of economic data today, the mortgage index and the JOLTs report. The mortgage index showed a surprise gain of 9.3% from last week, possibly due to a marginal decline in interest rates or rebound from the slump seen the week before Memorial Day.

The JOLTs report continues to support the idea of labor market health, despite low job creation in May. The number of openings was "little changed" according to the report, but up nearly a half million jobs to a new all time high. This news is completely contradictory to a headline I saw this morning stating that large numbers of job seekers have quit looking for jobs. To that I say... those people may not be finding the job they really really want but there are plenty of jobs available, just look on Craigslist where MILLIONS of jobs are listed daily. The real problem is a growing skills gap, which I see employers complaining of more and more.

Within the JOLTs report the number of hires fell to 5.1 million, but is still near historic high levels, and the quits rate remains steady, also trending near historic high levels. Trades, transportation & utility and durable good manufacturing jobs led with the largest number of new openings, more than 150,000 combined.


There is very little data left this week, jobless claims and wholesale inventories the big two, but there is a lot of data due out next week. Before the FOMC announcement we'll get retail sales, business inventories, PPI and industrial production, all of which will play into economic and FOMC outlook. Following the announcement we'll get CPI, more jobless claims, Philly Fed, housing starts and building permits, all of which will play into economic and FOMC rate hike outlook. Basically, next week has a lot of potential to be a make or break week for the market.

The Dollar Index

The Dollar Index fell again. Today's action shaved another -0.35% in a move that looks set to test support near the $92.50 level. The indicators are both bearish and pointing lower, consistent with this outlook. MACD is on the rise and may gain momentum into the end of the week, beginning of next week, while we wait on the FOMC meeting. The risk between now and then is in the data, of which there is very little, and the FOMC itself, who knows which member will come out with comments to move the market. A move below support targets is not likely, unless the FOMC statement next week is too dovish and leads the market to believe a rate hike will be put off further.


The Oil Index

Oil prices surged this morning to levels not seen since last October on global supply disruptions. WTI crossed the $51 mark but had a hard time holding the level as current supply/demand issues persist. The weekly US inventory data showed a -3.2 million barrel draw down, in line with expectations, but other data shows rising production and storage levels. Gasoline storage levels rose by 1 million barrels, distillates rose by 1.8 million barrels and US production rose by 100,000 BPD. Gasoline and distillates levels may come down over the summer driving season, but with production on the rise supply of oil in general is likely to remain very high. Oil prices may continue to rise, momentum is to the upside, but I am very wary.

The Oil Index has finally broken out of its congestion band and is moving higher. It has not yet set a new high to match the price of the underlying commodity but it is getting closer. Today's action took the index up about 0.25% to hit the 1,170 resistance line, where resistance was present and capped gains. The indicators are on the rise, consistent with rising prices and a likely continued testing of resistance. With oil prices on the rise as well, a break of resistance is very possible. If so a move up to 1,200 or possibly 1,250 looks likely in the near term. If oil prices fall from their new high the index is sure to follow, first target for support is near 1,120 and short term moving average.


The Gold Index

Gold prices are reacting favorable to diminished FOMC rate hike out look. The spot price jumped 1.35% to hit a two week high. While this move has upward momentum and is likely to reach recent resistance levels near $1290/$1300 further upside is uncertain. The FOMC is likely not to raise rates next week but they are likely to raise them later this year. July is the next likely opportunity and any statements to that effect, or hawkish sounding in general, could put a bid back in the dollar and send gold back to support.

The gold miners jumped on the move in gold with many setting new highs. The Gold Miners ETF GDX gained more than 4% on the news and set a new high, near the $26.50 resistance level, creating a small and potentially ominous candle. Today's action, while posting huge gains, created a very small doji candle that could easily become a shooting star or pin bar, or even worse, an abandoned baby. Also of concern, two gaps have opened over the last week of trading days which leaves the ETF open to pull back. The indicators are on the rise with momentum showing some strength, suggestive this move to test resistance will continue, but with the FOMC next week and the chance they will surprise the market a possibility today's level is more attractive as a selling opportunity to me than they are for buying.


In The News, Story Stocks and Earnings

Lululemon reported earnings before the bell. The maker of yoga wear delivered mixed results but overall a good report. Earnings per share were slightly below estimates, revenue above estimates, driven by a 3% increase in comp store sales. Revenue rose 17% versus the same quarter last year, profits 16%, leading the company to raise guidance for next quarter and the full year. Despite the increase guidance remains below consensus estimates but was enough to send the stock higher. Shares rose nearly 4% to set a new 2.5 year high with strong momentum. Upside target is near $75.


Valeant lowered its guidance for the 3rd time in 6 months today citing its deal with Walgreen's as the reason. The company claims that Walgreen's is issuing prescriptions without first ensuring health insurance will pay for the medicines, causing Valeant to lose money. Valeant is trying to restructure the deal with Walgreen's but nothing is firm at this time. The stock fell -3% in today's session and is trading just off the all time low.


The Indices

The indices drifted higher, many are approaching all time highs, but the move was very weak. Today's leader was the Dow Jones Transportation Average which gained about a half percent but created the weakest looking candle of the day. The transports began the day with a nice move, close to 1%, but sellers stepped in and drove prices back toward the low of the day. Today's candle is relatively small and on low volume but created a longish upper shadow, indicative of resistance. The indicators are moving higher but weakly and stochastic is beginning to rollover beneath the upper signal line, also suggestive of resistance. The index may continue higher, next target would be near 8,125, but I'd like to see a stronger move before getting too bullish.


The other indices all closed within a very narrow range of each other, only a few hundredths of a percent, with the Dow Jones Industrial Average leading by a nose. The blue chips closed the day with a gain near 0.37% after moving up to test resistance at the 18,000 level once again. This is the 2nd day in a row it has wrestled with this level and today it closed slightly above. That being said it also looks very weak and susceptible to correction. Stochastic is moving higher and has broken the upper signal line, ordinarily a sign of strength but in this instance I think more a sign of overbought conditions than anything else. MACD momentum is very weak and does lend itself to much of a bullish argument at this time. If it does break through next target is near 18,150. A failure to break through may result in a move down to support at the short term moving average near 17,750.


The S&P 500 closed with a gain just shy of the Dow Jones' and set a new almost 11 month high. That being said it was not able to break resistance at 2,120 and does not appear very strong. The indicators are bullish, but like the Dow, consistent with a range bound index trading near at resistance. MACD is flat and very weak, stochastic entering the upper signal zone and indicating overbought conditions. If the index does break through the next target is the all time high, about 13 points above today's close. A failure to break could result in a move down to 2,100 or lower.


The NASDAQ Composite brings up the rear with a gain near 0.25%. The tech heavy index created a very small candle, the second of two spinning tops, just above the 4,950 support/resistance target. The index may be setting up for a move up to the next resistance target, near 5,050, but the indicators are not very supportive. MACD momentum is bullish, but retreating from a peak and approaching the 0 line, stochastic is high in overbought territory and making a bearish crossover, together indicating an index at or near resistance.


Today the market continued to drift higher. Rising oil and gold prices were a big help, as was FOMC outlook. The caveat is that the move is weak and without much conviction which leaves me skeptical the market will be able to break out to new all time highs, at least for now.

The FOMC meeting next week is focal point for all traders, it may set the market up for its next move, along with the data, but it will be the next round of earnings that drives the market up or down. The outlook remains negative for the quarter, growth is not expected to return until the next quarter.

The problem, and the thing holding me back from being too hopeful right now, is that earnings expectations have been slowing eroding for the past year. Each and every quarter for the last 4 has had similar outlook, negative now but positive next, up to and until projections were lowered and the next quarter became the next quarter of negative growth. It may not happen this time, I'm simply waiting to see the data improve. If, when, earnings expectations begin to rise I will get back on the bull train. With oil prices hitting new highs that could be very soon. For now, I remain cautious.

Until then, remember the trend!

Thomas Hughes