Introduction

The market faltered despite positive data from the labor sector. Post Brexit turbulence persists, adding to confusion, while we all await the upcoming onslaught of earnings reports. Today's action was light, within tight ranges and below resistance, possibly due to testimony from James Comey to Congress but more likely a normal pause in pre-earnings season trading.

Comey held his ground during an intense Q&A session before the House Oversight Committee. Both parties grilled him about the apparent disconnect between his findings and his report. He was able to fend off every one but it came down to some fine points in many instances. Bottom line, Hillary was extremely careless handling top secret information and will likely face an inquiry into allegations of lying under oath.

Asian markets were mixed following yesterday's dovish FOMC minutes. Indices spanned a range from -0.67% (Nikkei) through +1.03% (Heng Seng) on global growth concerns. European markets were largely positive though trading was choppy. Brexit fallout remains the major concern here and will likely affect trading over the next few months.

Market Statistics

Futures trading indicated a flattish opening in the earliest part of the session and later moved slightly higher after the release of today's data. Due to the Fourth of July holiday some of the data is off its usual schedule which means ADP and WTI storage levels were both released today, along with the usual. At the open trading moved the indices higher, about a half percent on average, but these gains were not sustained. By noon the indices had retreat to break even levels, most within a few hundredths of 0.00%. Afternoon trading was much the same, but in reverse. The broad market moved down to a low near -0.5% but did not hold it, moving back up to break even by the close of the day's session.

Economic Calendar

The Economy

Challenger Job Cuts was the first data point released today. Job cuts rose 28% in June, to 38,536, but this is off of a 5 month low. The year-to-date job cuts are now 313,754, 9% higher than at this same time last year but below the 1 year average. Job cuts fell from Q1 to Q2 by 27% led by sector specific declines in energy, retail and health care lay-offs of 42%, 48% and 65%. The report cites seasonal strength in labor markets as one reason for the low level of job cuts but also suggests they may remain low through the end of the year.


ADP employment figures were released at 8:15AM. According to them job creation rebound in June to 172,000. This is great for labor markets but still below the 200,000 level. Small business led growth adding 95,000, followed by medium business addition of 52,000 new jobs. Good producing jobs fell however, shedding -36,000, as did construction, -5,000. Services sectors created 208,000 new jobs, led by transportation/trade/utilities and business/professional.

Initial claims for unemployment fell -16,000 to 254,000, a 2.5 month low and the 70th week of claims below 300,000. The four week moving average of initial claims fell -2,500 to 264,750, also +2 month low. On a not adjusted basis claims rose by 1.4% versus an expected 8% as predicted by the seasonal factors. On a year over year basis not adjusted claims are now -12% below last years levels. Not adjusted claims have widened the gap in YOY claims and may indicate some volatility in upcoming weeks. Regardless, claims are trending near long term low levels, consistent with a healthy labor market.


Continuing claims fell -44,000 to hit 2.124 million. However, the previous week was revised higher by 48,000 canceling out any week to week declines. Despite the revisions continuing claims are trending near long term low levels and consistent with labor market health.

Total claims rose by 15,959 to hit 2.048 million, 4.6% lower than this same time last year. This is a continuation of the expected season rise in total claims which remain consistent with labor market health. If seasonal trends remain constant we can expect to see total claims rise for another 4-5 weeks and top out 2.185 million.


Tomorrow we'll get the NFP report. I expect it to rebound from last month's dismal 38,000, consensus is near 180,000. Unemployment is expected to rise a tenth to 4.8% and that may happen due to expected rises in total unemployment claims. Perhaps more important will be average workweek and hourly earnings as signs of improvement in consumer health.

The Dollar Index

The Dollar Index made some small gains today but remains within a recent congestion band. The index is being buoyed by weakness in the euro and the pound in a flight to safety trade that is at the same time a similar to flight to the yen is capping gains. This range may continue into the near term with additional churn spurred by economic data. Longer term outlook remains dollar strong as relaxed economic policy is expected from the UK, the EU and Japan in the next few months. FOMC outlook may help keep the index range bound in the near term unless the economic data noticeably strengthens or weakens. Near term support is near $95.50, resistance near $96.50. A break below support could go to $94, a break above resistance could go to $97.50 or $98.


The Oil Index

Oil prices seesawed today as draw down hopes were dashed. The market had been expecting a large draw down following last week's 4 million barrels and in anticipation of the holiday weekend, the EIA reported only -2.2 million barrels of crude and -100,000 barrels of gasoline. After the report WTI fell nearly -5% to trade just above $45 and set a new 2 month low. Prices remain trapped between signs of rebalance, tepid demand and persistently high production and winding up within a range. This range is likely to continue into the near term at least. Support appears to be just below $46, resistance near $50.

The oil sector tried to move higher in early trading but was held back and reversed by today's EIA data. The Oil Index itself fell about -1.25%, falling beneath the short term moving average. The index remains range bound between 1,175 and 1,075 and appears to be reaching a point of equilibrium near the 1,125 level. The indicators are both consistent with range bound trading and a test of support within that range. The fact that they are both trending in a narrowing range near the mid-point of their typical ranges points to a market that is quieting down, reaching a point of calm, waiting for something to happen. That something is likely oil prices and oil price outlook, and how it relates to earnings growth. If growth outlook for next year remains as strong as it is now this index will likely move higher in the short to long term despite any near term weakness.


The Gold Index

Gold prices held relatively steady today despite an early dip in response to the ADP data. The data helped to strengthen the dollar and FOMC rate hike outlook, if only marginally, and put some pressure on gold. Even so, gold prices are holding above $1360. The upward move in gold prices could continue despite relative strength in the dollar due to safe haven appeal. Upside target at this time is near the $1380 level. Risks include economic data and FOMC outlook, when strength in the economy reasserts itself gold may lose its appeal.

The gold miners are riding high on gold prices. The Gold Minere ETF GDX fell about -2% today but are trading just below a three year with bullish technicals. Momentum has peaked in the near term but is convergent with higher prices so a retest of the recent price peak should be expected at least. Stochastic is also bullish with plenty of room to move higher. There is a possibility of divergence in stochastic but no sign of it rolling over yet. Next upside target is near $31.25, resistance should the ETF pull back is likely near $27.50.


In The News, Story Stocks and Earnings

Pepsico reported earnings before the bell. The global provider of drinks and snacks beat earnings with revenue in line with expectations. Consensus forecast of $1.28 was short of the actual $1.35, driven on improvements in most markets and margin expansion. Earnings were impacted by currency exchange, an issue which is likely to persist, and volatility conditions in Venezuela. Forward guidance was raised to a range more consistent with analyst expectations. Shares of the stock jumped more than 3% in the pre-opening session, gapped up to open and close at a new all time high.


Shares of Humana took a beating today as questions were raised about the proposed merger of Athem and Cigna. The Connecticut Attorney General has concerns about the impact to the competitive environment and those concerns spilled over into the ongoing take-over efforts between Aetna and Humana. Shares of Humana fell -10% on the news, the hardest hit of all four companies.


PriceSmart reported earnings after the bell. The operator of membership driven sales clubs in overseas markets was able to increase sales and revenue on a quarter over quarter basis but fell well short of estimates. EPS missed by a full $0.15, hurt by foreign exchange, and it may do so in the current quarter as well. Growing sales figures are driven by the addition of 2 new stores in the previous quarter, raising the count from 36 to 38, but hurt by falling comp store sales. Early data for the current quarter show June comps fell nearly -2%. Shares of the stock fell more than -5% in after hours trading.


The Indices

The indices made small moved today, for the most part action was steady near yesterday's closing prices. The day's leader was the Dow Jones Transportation Average which gained 0.46% in a move that tested resistance at the short term moving average. Resistance was there, capping gains, and may remain there into the near term. The indicators are mixed, bullish but weak, and consistent with a market that has been trending lower. Should the index continue to fall from the MA and move below 7,475 further downside should be expected with target near 7,000. A move above the MA would be bullish and could take the index up to 7,750 in the near term.


The second largest move higher in today's session was made by the NASDAQ Composite. The tech heavy index was able to set a two week high, above the short term moving average, and may move higher. The indicators are both bullish but very weak, suggesting a test of resistance near 4,950 is possible. A move beyond resistance is not likely at this time unless bullish catalyst emerges. First target for support is the short term moving average, near 4,830, with additional targets near 4,800 and just below.


The other major indices were not able to post gains in today's session, led by the Dow Jones Industrial Average decline of -0.15%. The blue chips created a small spinning top type doji squeezed between the short term moving average and long term resistance at the 18,000 level. The indicators are bullish but very weak, suggesting resistance may be tested again but also giving the impression that range bound trading will persist. A break above 18,000 would be bullish and could take the index up to test the all-time high, a move below the short term moving average would be bearish and could take it down to retest support at 17,500 or 17,000.


The S&P 500 fell -0.13% in a move that created a small spinning top type doji candle. Today's action is above the short term moving average but below resistance and below the 2,100 level. The indicators are mildly bullish but trending near the middle of their respective ranges, consistent with range bound trading. A move above 2,100 would be bullish but would also face additional resistance at 2,120 and 2,130 before hitting a new high. A move below the short term moving average would be bearish and could take it down to retest support near 2,050 or 2,000.


The indices are winding up ahead of earnings and may have reached a critical inflection point. The market is firmly focused on earnings growth and it will likely provide the catalyst we need to get the indices broken out of their ranges. The question now is, which direction will they go? Better than expected Q2 earnings with a clear indication that earnings growth will return in the next quarter should be enough to keep the indices treading water and maybe enough to get them moving higher. Anything less than that could erode confidence and send the market looking for stronger support levels.

I am hopeful we'll see positive outlook for earnings return but remain skeptical. We've had to many quarters were expected growth was revised lower bit by bit until it turned negative for me to blindly trust current outlook, the possibility this will happened again and lead us into a sixth quarter of earnings growth decline is very real. I remain cautious in the near term, waiting for earnings. There are a few reports tomorrow, the big ones start rolling out next week. Alcoa is on Monday, CSX, Yum Brands, JP Morgan and Wells Fargo are due out later in the week.

Don't forget, the next FOMC meeting is only 3 weeks away!

Until then, remember the trend!

Thomas Hughes