Introduction

The market moved higher as Brexit fears recede. Global markets have recovered most of the losses post-Brexit but worry remains over the future impact of Britain's historic vote. Today is also the last day of the 2nd quarter and the 1st half of 2016, so portfolio re-shuffling is surely having an effect on prices too. The Dow Jones Industrial Average and S&P 500 both ended the quarter with small gains.

Asian indices were quiet today, closing mostly flat after trading higher in the early part of the session. EU markets were a little more lively. The early part of the session saw them trade mostly flat but a late day rally sparked by comments from the BOE helped to push them firmly into positive territory. The DAX gained a little more than 0.70% while the FTSE 100 was able to gain about 2.25% and close at a new high for the year. While there is evident relief the Brexit will not have major impact on the near term longer term outlook remains negative. The BOE's Carney said in statements that "the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer".

Market Statistics

Futures trading indicated a flat to mildly positive open for the US market all morning. Along with global markets, M&A activity and some better than expected economic data helped to support prices. At the open of trading indices opened higher but held a tight range, just above break even levels, for the first hour, up to and until the statements from the BOE. By 10:30AM a near term bottom had been hammered out resulting in a mild rally which lasted for about an hour. By 11:30AM the indices had reached a high and begun to consolidated near those levels, about 0.55% for the broad market.

After a quick consolidation today's rally was able to move higher. By 1PM another intraday high was hit, about +1%, at which time another consolidation took place. By 2PM those highs were being tested and by 2:30 the market was reaching new highs once again. The remainder of the afternoon saw the indices move sideways within a narrow range until the final minutes of trading. The market gave a final surge into the close leaving the indices at the high of the day.

Economic Calendar

The Economy

Initial jobless claims rose by 10,000, in line with expectations, to hit 268,000. This is the 69th week of claims below 300,000, the longest streak since 1973. The prior week's data was revised down by -1,000, the 4 week moving average remains unchanged. On a not adjusted basis claims rose 5.3%, more than the 1.2% predicted by the seasonal factors. Not adjusted claims are now -5.3% below last years level. New Jersey and Connecticut had the largest increases in claims, +3,210 and +2,612, while California and New York had the largest declines, -9,516 and -2,446. Initial claims remains low relative to the long term trends, trending near the long term low and consistent with labor market health.


Continuing claims fell by -20,000 from a downward revision to last week of -2,000 to hit 2.120 million. The four week moving average of continuing claims fell -13,000 to hit 2.133 million, the lowest level since November of 2000. While it appears as if initials claims may be stabilizing around the 270K mark, continuing claims appears to still be in down trend and consistent with ongoing labor market recovery.

The total number of jobless claims rose by 8,569 to hit 2.032 million. This gain was expected and is consistent with historic/seasonal trends. Based on the historical data we can expect this figure to continue rising over the next 5-6 weeks. Regardless, total claims are -5.3% below last years level and consistent with labor market recovery and declining unemployment. We'll get the next round of monthly labor data next week, we may not get a jump in job creation but I expect to see unemployment at least remain steady if not decline.


Chicago PMI was released at 9:45AM and rose a surprising 7.5 points to 56.8. This is the highest level since January 2015. The gains were made on increases in new orders, the highest level since 10/2014, backlog orders, the highest level since 3/11, and productivity, a new high for 2016. Inventories, which had posted declines for the past 7 months, saw double digit increases from May's 6.5 year low. Employment was the only gauge to decline, falling below the expansionary 50 level.


Tomorrow be on the look out for Auto/Truck sales, ISM Manufacturing and Construction Spending.

The Dollar Index

The Dollar Index jumped a little more than 0.5% today, making most the gains following the BOE comments. The index appears to be setting up for another move higher, perhaps as high as the $100 level. Price action is forming a nice little flag at this time, with a $3.50 flag pole, that is confirmed by bullish indicators. Driving the move is an expected rate hike from the FOMC sometime this year and dovish expectations for just about every other major central bank. Today's BOE statements have put easing firmly on their table, the ECB is already considering some form of action and the BOJ is expected to do some easing later this summer or during the fall at latest, all of which will help to strengthen the dollar. For now, the 50% retracement level, near $96.50, is resistance. A break above there would be bullish.


The Oil Index

Oil prices fell nearly -3% in today's action as fading supply disruptions over shadow hopes for supply/demand rebalancing. WTI fell about $1.50 to trade near the $48.50 level. Issues putting downward pressure on prices include but not are not limited to Nigerian supply coming back online after the recent round of attacks, OPEC's June Output hitting a new high and improving Canadian output. Adding to the downward pressure on prices is the BOE's outlook on economic risk and profit taking related to end-of-quarter activity and the 3 day holiday weekend. Prices will likely remain volatile and susceptible to news driven moves but it looks like $50 is gaining strength as resistance, support is evident just above $45.

The Oil Index gained about 0.75%, extended the move above the short term moving average and 1,120 level and looks set to move higher. Even so, the index remains range bound with upper resistance near 1,175 and lower support just below the 1,100 level. The indicators are mixed and support range bound trading, both trending near the middle of their respective ranges and consistent with a market trading around a point of equilibrium, roughly the 1,120 level. This range is likely to continue until more concrete evidence of rebalance/imbalance comes to light.


The Gold Index

Gold prices pulled back by a half percent in today's action. Rising dollar value and profit taking following the massive rise in spot prices both had an impact. At the same time declining fear of Brexit fall-out have sapped some of the safety trade. Spot price fell about $8 to trade below $1320, near the middle of a possible new range. Near term support is near $1300, previous resistance, with new resistance targets near $1,350. In terms of catalysts Brexit news could spark a renewed flight to safety, a strengthening dollar could cap gains and send gold moving lower

The gold miners were able to post some small gains today despite the pull-back in gold prices. The miners ETF GDX rose about 0.75% to set a new multi-year high. The indicators are bullish so a continuation of the rally is possible but divergences are present so caution is due. Next target for resistance is just above today's close, near $28.


In The News, Story Stocks and Earnings

Mondelez made big news today when it announced it was in talks to purchase Hershey's. The deal is reported to be worth $107 per share in cash and stock and would result in a new company named Hershey's with headquarters in Pennsylvania. The news hit the wires in the pre-opening session and cause shares of Hershey's to jump as much as 20%, and for circuit breakers to halt trading at least twice. The deal is not yet finalized, the board rejected this offer later in the day saying there was no basis for further discussion. Based on Hershey's closing prices, above $113, the market thinks the Mondelez bid could be raised.


ConAgra, one of the largest makers of packaged food products, reported earnings before the bell. The company missed revenue expectations but produced EPS in-line with estimates. The results were driven by a -6% drop in commercial food sales, a -12% drop in consumer food sales and 110 basis point improvement in margins. Guidance for the coming quarter is positive, slightly above consensus, and is expecting double digit growth. Shares of the stock fell in the pre-market session, opened lower than yesterday's close, and then rose throughout the day to close with a gain of 0.44% and just below the all-time high.


The financials were one of today's leading sectors. The entire sector saw gains in the wake of yesterday's CCAR results led by JPM (+1.70%), Chubb (+1.75%) and Goldman Sachs (+2.15%). Today's gains made up nearly all of the losses incurred post Brexit, the Financial Sector SPDR XLF rising more than 1.5% in the session and just over 6% for the week. Prices are above the $22 support target but below the short term moving average which may provide resistance. The indicators are mixed but are generally consistent with a market rising from a low; stochastic is firing a strong signal that is not yet confirmed by MACD. If the ETF continues to move higher and break above the short term moving average it could go to $24.


After the close of today's session the National Highway Safety Administration reported that Tesla was under an investigation focused on 25,000 of its Model S cars. The investigation is in response to a traffic fatality related to use of the auto-pilot feature. Tesla says this is the first know fatality in over 130 million miles of auto-pilot use, compared to 1 fatality in every 60 million miles worldwide. Shares of the stock fell -3% on the news.

Williams Companies reported that 6 of its 13 board members resigned after ETE withdrew from the planned merger of the two companies.

Micron Technology reported earnings after the bell and missed on the top and bottom lines. The company reported a net loss of -$0.09 per share, well below consensus estimates, with revenue falling -25% below the comparable quarter last year. Due to declining sales and "challenging market conditions" the company is going to cut an unspecified number of jobs from the global workforce in an attempt to save $300 million annually. The stock fell -8% in after hours trading.

The Indices

The indices were able to march higher today despite what at first looked to be a lack luster day of trading. The day's leader was the S&P 500 with a gain of 1.36%. The broad market created a third large white candle in a row, completing what might normally be strong bullish signal if not for the fact that the market is rebounding from the wild Brexit driven sell-off and on the cusp of a weak earnings season. The index broke above the short term moving average and looks set to move up to retest resistance, near the 2,120 level, but will need a new bullish catalyst to move much higher. The indicators are mixed and do not show much strength in the market, stochastic is firing an early buy but MACD has yet to confirm, both more consistent with range bound trading than anything else. I may be wrong, the rally may turn into a sustained move higher, but I would like to see how the market reacts to the pre-Brexit resistance before getting overly bullish.


The Dow Jones Industrial Average and NASDAQ Composite both closed with a gain of 1.33%. The difference is that the Dow Jones closed positive for the quarter while the NASDAQ remained in negative territory. The blue chips created a third long white candle, not overly strong, breaking above the short term moving average in a move that looks set to test resistance at the 18,000 level. This resistance is the same level at which the index was trading last Thursday and a possible area of reversal. The indicators are mixed, stochastic is pointing higher following a bullish crossover but MACD remains in bearish territory, so a break above resistance does not look likely at this time. If the industrials are able to break above 18,000 next resistance target is near 18,350 and the all time high.


The tech heavy NASDAQ Composite also closed with a gain of 1.33% but was not able to move into positive territory for the quarter. The index is moving higher off of the Brexit Bottom and may continue to do so, today's action broke above the short term moving average which may help propel it higher. The indicators are rolling into what could be a buy signal but has not yet been confirmed by MACD leaving them consistent with range bound trading. First target for resistance is near 4,859, the high set last Friday, with next target near 4,950.


The Dow Jones Transportation Average made the smallest gain today, only 0.97%. This index is set up much the same as the others but appears to have already met its resistance. Today's action created a small white candle with long lower shadow that closed just shy of the 7,500 resistance line. The candle's lower shadow is indicative of some weakness in the market and helps with the idea that the market is at resistance. A move above 7,500 would be bullish and could take it up to the short term moving average near 7,600. A failure to break above this level may result in a retreat to lower support levels, first target is near 7,250.


To put it mildly, the market has seen quite a bit of volatility over the past week due to the Brexit and I don't think it is over. This week's rally off the Brexit Bottom looks promising but is driven by short covering and relief and not sound market fundamentals which makes it highly questionable in my view. The market has shrugged off the Brexit vote but the risk associated with it remain. Not only are the full effects unknown, the actual event has not even begun. Invoking Article 50, the official request from Britain to the EU to begin the process, may not occur until later this fall and when it does we could see another big sell-off.

More important to short term direction is the upcoming earnings season. The cycle is not expected to be good and estimates continue to fall so there is little reason for the market to be in rally mode now. If Micron can be used as a gauge there is a real chance that earnings could be worse than expected. I still see a chance for an earnings driven correction and am waiting patiently for the season to unfold.

Looking forward, the market is expected to return to earnings growth in the second half but with the dollar gaining strength and poised to move higher it could have a negative impact on outlook, not to mention the possible economic effects of Brexit. When, if, earnings outlook brightens it will be time for the market to move to new all time highs. Until then I expect to see more of the sideways range bound trading we've seen over the past 18 months.

Don't forget that tomorrow is the first day of a new quarter. It's very possible that we'll see some volatility as managers put money to work getting ready for the second half of the year. I remain very cautious for the near term and optimistic the market will rally later in the year.

Until then, remember the trend!

Thomas Hughes

 

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