Introduction

The market held tight, all eyes are on Janet Yellen and her speech tomorrow at the Jackson Hole Conference. Neither Fed Speak nor economic data could move the market today as anticipation for clues to future Fed moves overshadowed all. Her speech is expected to lay out the framework for rate hikes and will be closely watched for any indication of when the next will come but in reality is not an official policy statement and unlikely to be very revealing. At least two Fed members made comments in the news today, both of course indicating the nearness of a rate hike in once sentence then hedging that statement in the next.

Esther George, Kansas City Federal Reserve President and voting member, says a rate hike is due but the pace should be slow and gradual, nothing new about that. She went on to say that she does not favor a hike, and that recent economic data has given the committee pause. Despite the economic hiccup she still thinks 2nd half growth will be strong enough to sustain 2% annualized GDP. Robert Kaplan, Dallas Federal Reserve President and Alternate Member, says that the expectations of growth are a challenge, that we've made progress on the employment front and are "moving toward" a rate hike.

Market Statistics

International markets were flat to negative in the early hours of the morning as traders around the world await the words of Janet Yellen. Losses in Asia were minimal, led by a -0.57% decline in mainland China shares driven on liquidity fear only a day after the PBOC injected another round of cash into the system, the first cash support provided by the bank since February. Losses in Europe were a little steeper, led by a near -1% drop in the DAX. Caution ahead of tomorrow's speech as well as weakness in oil and health care helped to drag on the indices.

Futures trading indicated a mildly negative open for the US market all morning. Economic data helped provided some support but did not serve to spark a rally. The indices posted small losses at the opening bell, about -0.25%, but were able to recover that loss by 10AM. Once the indices reached yesterday's closing levels already low volume quieted further and sideway's trading ensued for the next 45 minutes. By noon a new intraday high had been set, and then began a slow retreat back to test the days opening levels and slightly lower. These levels held but no late rally followed, leaving the indices at or near their lows of the day at the close of the session.

Economic Calendar

The Economy

Initial jobless claims fell -1,000 was last week's not revised figured to hit 261,000. This is the 77th week of claims below 300,000, the longest streak since 1970. The four week moving average of claims fell -1250 to 264,000. In both cases claims are trending near the 40 year low and consistent with ongoing labor market recovery. On a not adjusted basis claims fell -1.3% versus an expected -0.7% and are -4.4% below last year at this same time. Not adjusted claims are trending below last years levels despite a narrowing of the spread in recent months and are just off the 43 year low set 11 months ago.


Continuing claims for unemployment benefits fell -30,000 to hit 2.145 million. The four week moving average rose 250 to hit 2.155 million. This week's change in continuing claims is minimal and leaves both the headline and moving average trending near the long term low and consistent with general labor market health.

The total number of Americans receiving unemployment benefits fell -25,731 to hit 2.122 million. This is the 5th week of decline since total claims hit its seasonal peak and consistent with historical trends. We can expect to see this figure continue to decline over the next few weeks and possibly fall sharply going into September. On a year over year basis total claims are down -3.8% and consistent with labor market recovery.


Durable Goods came in much better than expected but when considering last month's -4.2% decline and the four month string of declines leaves them less than flat for the trailing three months. So, on the headline durables rose by 4.4% versus an expected gain of 3.5%. Transportation led the overall increase in orders, up 10.5%. Ex-transportation orders rose 1.5%, ex-defense up 3.8%.

Today's data is positive but does little to move the needle in terms of FOMC expectations although a small rise in probability did occur. The CME's Fedwatch tool is now showing a 24% chance of rate hike in September, up from 18% a few days ago, with a 30% chance in November. Tomorrow's data will likely be a non-event as well, revisions to 2nd quarter GDP and Michigan Sentiment, unless revisions to GDP are large. Next week however will be a different story, lots of data including the monthly NFP and unemployment figures.


The Dollar Index

The Dollar Index held firm today on data and Fed Speak as we await Yellen's speech. The index gained a little more than a 0.02% in a move that continues the small bounce from and consolidation above the $94.31 support level. This consolidation has begun to look like a wind-up within a near term down trend that may result in further downside. This is of course dependent on how the market reacts to whatever it is Yellen will say tomorrow. Regardless, the index remains range bound in the short to long term. First target to the downside is the support line at $94.30, the 78.6% retracement level. A break below that could go as low as the bottom of the 4 month range near $93. If Yellen does indicate that tightening is at hand and the dollar strengthens upside targets exist at $95.60, $96.50 and $97.50.


The Oil Index

Oil trading was a bit choppy today as prices hovered around the $46.75 level. Early in the session it looked as if over-production/over-supply was going to dominate sentiment. That changed shortly before lunch when speculators drove prices back above break even, near to $47, on renewed hope next month's OPEC meeting will result in some kind of price stabilizing move. OPEC may freeze output, but they won't cut, so I am not expecting much from the meeting other than near term support driven by news and rumors. Until then supply is high, demand is low so I expect to see prices remain under pressure. Support for WTI seems to be near $45, slightly above, with upside target near $49 should today's intraday bounce prove to be more substantial.

The Oil Index gained about a quarter percent in today's action. The candle created was very small and trading was very light, just above support at the short term moving average. The index remains range bound and may attempt to test the top of the range again, near 1,175. The indicators are bullish but weakening in the near term. MACD was not very strong to begin with and stochastic is in overbought territory for a range bound stock so a break out of the range does not look likely at this time.


The Gold Index

Gold prices fell slightly in today's trade but did not break support levels. Spot prices shed about -0.5% to make a small intraday bounce from $1,325. The market is cautious with Janet Yellen set to speak tomorrow, any indication of policy is sure to move gold prices. Recent Fed Speak has already had an impact on spot price, driving it down toward the low end of the 2 month range where it is now trading. Prices could move down to $1,318 without breaking critical support should tomorrow's talk send gold prices lower. If Yellen sends gold higher price could move up to $1,350 fairly quickly with a chance of moving higher. Regardless, without an actual change to policy, here or abroad, or a significant change in economic activity gold is likely to remain range bound.

The gold miners are suffering from the recent decline in gold prices and a renewed fear of impending interest rate hike. Fed Speak and data have the market ducking in search of strong support levels. Today's candle opened flat to yesterday's close and was able to move higher following a brief test of support but it looks like this move could be short lived. The indicators are both bearish and pointing lower, consistent with lower prices, while the ETF trades beneath resistance and below the mid-point of yesterday's larger than usual black candle. Next target for support should the ETF move lower is near $26 with a possible move down to $24.75, depending on gold, Janet Yellen, other Fed speakers, economic data etc. A break above resistance, just above today's close, would be bullish and could take the index up to retest the recent highs.


In The News, Story Stocks and Earnings

Mylan was in the news again today as the Epipen saga unfolds. Shares of the stock were up more than 3% in early premarket trading on news the company was widening it's discount plans in efforts to cut prices for the medication. Later, shares took a hit after the company CEO appeared on TV and did a less than stellar job defending the price, her basic argument is that it is the systems fault. The company does indeed charge a lot for the pens,it's a business after all, but about half the cost consumers see is added on by middlemen. An association representing pharmacy and insurers responded by saying blaming them is a red herring, the fault lies elsewhere. No doubt this isn't over. By end of day shares lost about a half percent to close at the low of the day and at near the low set yesterday, indicating potential support near $43.00.


Dollar Tree And Dollar General both reported earnings before the bell and both missed expectations, horribly you might think, and saw share prices plummet. The caveat is that this is a case of two companies producing good results, just not as good as expected. Dollar Tree delivered EPS of $0.72 per share, driven by the acquisition of Family Dollar, reversing a loss of ($0.46) in the same quarter last year. On a core comp store basis, sales still rose 2.7% which isn't too bad in today's environment. Dollar General did even better although it still wasn't enough for the market, improving last years EPS by 13.5%, announcing a new repurchase plan and confirming full year guidance. Dollar General also got hit hardest by the market, shares fell nearly 20%.


The VIX had, until recently, been trading at two year lows. In the past couple of days it has begun to rise and is now showing signs of a possible spike higher. The fear index is still below near term resistance at $14.25 but a bullish crossover of the moving average confirmed by a rise in momentum and a strong stochastic signal suggest it will be tested if not broken. A breakout of volatility could easily take the VIX up to 20 or 25 in the near term and would likely accompany a quick, possibly sharp, drop in the S&P 500.


The Indices

Today's action was light and more sideways than not. Most of the indices closed with losses near -0.2% but one, the Dow Jones Transportation Average, fell nearly -0.7% and closed at the low of the day. The transports fell the furthest but remain above the short term moving average. The moving average is first target for support should the index continue to move, which is indicated by both MACD and stochastic. A break below the moving average would be bearish in the near but likely to hit next support at 7,750. This index appears to be range bound over the short to long term, between 6,750 and 8,250.


The Dow Jones Industrial Average made the next largest decline, just under -0.20%. The blue chips created a very small black candle that fell to the short term moving average and looks like it may fall through, if on a lack of volume if nothing else. The indicators are both bearish and moving lower, suggesting support will at least be tested. Support is roughly today's closing level, near 18,450, with next target near 18,250.


The S&P 500 fell only -0.14% in today's session, creating a very small spinning top doji sitting just above the short term moving average. This is indicative of support but that support may be tenuous. The indicators are both bearish and moving lower in the near term,suggesting deteriorating market conditions, and divergent in the short term suggesting a weak, fragile market. A break below the moving average may find support near 2,150 but more likely not until about 2,030.


The NASDAQ Composite made the smallest decline, only -0.11%. The tech heavy index created a very small doji candle just below yesterday's close and just below resistance at the previous all time high. This close could easily lead to further downside if the upper side of resistance is not regained. The indicators are bearish and pointing lower however so it looks like a move down to the short term moving average could be coming, a drop of roughly -1%.


The market is hanging on the FOMC and what Janet Yellen says tomorrow but the indices may already be pointing the direction. While index prices languish near all-time highs the indicators continue to deteriorate. Significant divergences exist on all the charts, momentum has shifted to the downside and the fate of the rally, apparently, now dependent on a speech. Regardless of what she says tomorrow, the duel mandate is not met. Labor markets are healthy, but not healthy enough to drive the economy and inflation at the macro level, at least not yet. Until then I think we should expect rate hikes to be few and far between.

As for the market, we're approaching the end of the summer season with the indices trading near all time highs. These highs represent significant gains for positions entered in February, May and June, attractive gains for short, medium and longer term investors. I'm not saying we're facing a major correction or even a minor sell-off but I am saying the signs are there a correction of some form is brewing. Whether or not it comes these signs match with market seasonality and shouldn't be ignored so I remain cautious for the near term. Long term I am a buyer on any dips, when they come, and expect to see a continuation of the secular bull later this year.

Until then, remember the trend!

Thomas Hughes