Introduction

OPEC inked a deal but what do we really get? High production levels, oversupply and no change to fundamentals. The deal caps production but at the highest levels in over 10 years and well above production levels earlier this year when production caps were first discussed. So, we have a deal that does even less to alleviate oversupply than the first attempt and leaves the market supported by hot air and promises. Based on today's price action it looks like the market is beginning to realize that. The surge in equities and oil sparked by the OPEC announcement is already stalling.


International markets were also buoyed by the OPEC news. Asian indices gained in the range of 0.5% to 1.25% but gains were capped by reports of violence in India. The news, Indian Army regulars clashed with rebels in the long disputed Kashmir region. European indices were likewise affected, first up on OPEC driven euphoria then down as the reality of high OPEC oil production set back in to cap gains.

Market Statistics

Futures trading was a bit mixed and little choppy this morning. The US indices were indicated to open around the flat line for most of the morning with some fluctuations throughout. The market opened with small losses and hovered just below the break even level for most of the morning. By 11AM bearish sentiment took over and drove the indices down to intraday lows near -0.25%. These lows held for an hour and a half or so until a decisive move by the bears pushed them down to new lows just over -1%. Intraday low was hit just before 2PM at which time a snap-back rally erased about half of the day's losses. The bounce did not last, the indices retreat back toward the low of the day in late afternoon where they languished until the close of the session.

Economic Calendar

The Economy

There were two reports today, other than the weekly jobless claims, and the message hasn't changed; economic growth is tepid and spotty with ongoing signs of health in the labor market. Initial jobless claims gained 3,000 on top of a downward revision to last week of -1,000 to hit 254,000. This is the 82nd week of claims below 300,000. This weeks figure is just above the long term low and consistent with improvement in the labor markets. The four week moving average of claims also fell, shedding -2,250, to hit 256,000. On a not adjusted basis claims fell -3.7% versus an expected drop of -4.5% and is just above the long term 43 year low. Year over year, not adjusted claims are down -7.9%.


Continuing claims fell -46,000 to hit 2.062 million and a new low not seen since July of 2,000. The previous week was also revised lower. The four week moving average of continuing claims fell -23,750 to 2.11 million, it's lowest level since 2,000.

The total number of claims fell by -30,737 to hit a new 1 year low or 1.874 million. This low is not unexpected and is in-line with seasonal and long term trends. On a year over year basis total claims are down -5.5% and are consistent with ongoing labor market health. Based on the seasonal trend we can expect to see total claims drift lower for another 3 to 4 weeks, my final target is still below the 1.80 million mark. Altogether the labor data looks pretty good. Next week is the next round of monthly labor macro-data, based on the claims figures I think we can expect to see job growth remain steady at least, low levels of lay-offs, an increase in wages and high levels of job openings.


The 3rd estimated for 2nd quarter GDP was revised higher by 0.3% to 1.4%. This is above analysts estimates and helps improve the full year outlook. First quarter data held steady at 0.8%. The Atlanta Federal Reserve's GDP Now tool estimates 3rd quarter GDP at 2.8%, a number supported by labor data at least. Kansas City Federal Reserve President Esther George said today in an interview that she believes the time to "remove... accommodation" is now. The CME's FedWatch Tool shows only a 10% of rate hike at the November meeting and a 50% chance in December.

Pending Home Sales fell by -2.4% and raises some fear the housing recovery could stall out. This is the 3rd month in 4 for decline and the second lowest level of sales this year. On a year over year basis pending sales are down by -0.2%. Lawrence Yun, economist at the NAR, says that low inventory is the culprit and that if there is not an increase, either in existing or new home construction, the housing recovery could stall. He notes that new construction has not kept pace with labor market recovery adding to inventory deficits. On the positive side, new construction could be spurred by these conditions, next report on construction spending is next week.

The Dollar Index

The Dollar Index made some gains today but they were capped by resistance. The index remains range bound, trending over the past few days in a near straight line just below resistance at the mid-point of the range. Over the past few weeks and months the index has been winding up on global central bank policy and is now at a possible peak, ready to break in one direction or the other. This move could be sparked tomorrow with Personal Income/Spending and PCE data, maybe next week with labor data. In either event the move will likely leave the index range bound, but moving toward upper resistance near $96.60 or lower support near $94.50. Looking further out, I expect to see more sidewinding market wind-up going into November and the next FOMC meeting.


The Oil Index

Oil prices have surged on knee-jerk reaction to the OPEC deal but that surge already appears to have lost some of its oompf. WTI gained just shy of 2% today in choppy trading and met resistance at the $48 level, just like it did earlier this month. Near term oil prices are supported but they remain range bound longer term and at/near the top of the range. Longer term outlook is bearish, fundamentals are still supply side heavy so I expect to see prices come back under pressure.

The Oil Index gained about 0.85% in a move that extended yesterday's long white candle but failed to even reach the upper range boundary. The index remains range bound with a chance of testing the upper limit, near 1,180, in the near term. The indicators are consistent with rising prices within a range and do not show signs of strength at this time. I think the risk at this time is that the bottom could fall out of oil prices as the OPEC deal fades from importance, and bring the entire Oil Index down with it.


The Gold Index

Gold prices held steady above $1,320 and critical support levels. Trading was a little choppy here as well as the OPEC deal, economic data and FedSpeak rippled through the market. Prices are likely to remain range bound between $1,310 and $1,350ish in the near term, until the next FOMC meeting, unless economic data or another central bank makes some change to policy.

The gold miners were able to hold steady in today's action as well and continue to show support at current levels. The miners ETF GDX posted a net loss near to -1% but created a white bodied candle above support levels. Support appears to be rising from $25 to $27 and is supported by the indicators. MACD momentum is bullish although weak while stochastic has begun to tick higher again, a set up that could easily lead to a strong trend following signal. The caveat is that while there is support, there is also some resistance to higher prices that has resulted in wind-up similar to that found in gold and the dollar. A break out of this formation, if driven by a fundamental change in gold/dollar value, could lead to a significant movement in the ETF. Upside target is near $32.00, downside target is near $22.50.


In The News, Story Stocks and Earnings

Pespico reported earnings before the bell. The global snack and drink powerhouse, competitor to Coke and proud product of North Carolina reported revenue and earnings above consensus estimates and raised full year guidance to slightly above consensus. The results are driven by strong global demand and the company's ability to “manage what is in our control”. Shares of the stock were lifted by the news and gapped up at the open to trade just below the current all time high. Shares sold off during the day but were able to close with a gain of near 0.35%.


Conagra delivered nice results this morning driven by long term efforts to streamline operations. The company reported a 10% increase in GAAP earnings, +49% on an adjusted basis, that beat analyst expectations. Revenue was down about -5% but given the fact it is largely due to divestiture, foreign exchange and a voluntary “improvement” in the revenue base still a strong number. Margins also improved, 200 basis points, and helped drive shares of the stock up by more than 7.5%. The stock is now trading near a one month high and looks like it is headed up to retest resistance at the recently set all time high near $48.35.


Deutsche Bank was one of the biggest draggers on the market today, hitting fresh all time lows as the crisis deepens. The latest concern is that hedge funds which normally do business with the bank are pulling out. There are growing concerns the banks ties to the global banking community make it's fall a systemic risk with Lehman-like consequences. The news caused the stock to drop more than -6% from yesterday's close to set a new low.


The Indices

Volatility persists. The indices made another move greater than 1%, this time to the downside, but within near term trading ranges. Today's leader was the Dow Jones Transportation Index which managed to shed only -0.25%. The transports did not make a strong move today; the candle is a spinning top doji within the near term trading range, indicative of indecision and lack of market direction. The indicators are consistent with a move up, within the trading range, so upper resistance, near 8,100, may be tested. Support is a little below today's range, near the short term moving average, at 7,900.


The S&P 500 made the next smallest loss, about -0.93%, but created a med/large black candle. The candle is not significantly strong by itself but it's size does lend weight to the bearish argument. Two things to note, the candle is confirming resistance below the all time high and it is falling beneath the short term moving average. The indicators are bullish, consistent with a test of resistance, but also consistent with range bound trading so a break to the upside does not look likely. Support is at 2,120, the bottom of the 3 month range, and also does not appear like it will be broken any time soon.


The NASDAQ Composite is the next big loser, shedding -0.93% and equal to the SPX. The tech heavy index created a medium sized black candle sitting on the short term moving average and could easily move lower. The indicators are mixed, they show upward bias but are very weak and inconsistent with what we would typically be seeing if the index was about to make a break higher. The index is sitting on support, 5,250, a break of which would be bearish and could take it down to 5,100 in the near term.


The Dow Jones Industrial Average made the largest decline today, a little over -1%, and looks set to keep trending sideways into the near term. The index created a medium sized black bodied candle confirming resistance at the short term moving average near 18,250 but not an overly strong one. The indicators are pointing higher, contrary to today's move, but consistent with range bound trading in the near to short term. Support is near 18,000 and if broken will lead to additional support along the rising up trend line just below the 18,000 level.


Market shake up continues. The indices remain trapped within near term ranges with little indication of which way they will go once they break out. The good news is that the longer it takes for a break out to occur the closer we get to what is expected to be a return to earnings growth. If, in between then and now, nothing happens to alter the forward earnings outlook we could very well see the next major bull rally begin at or near today's index prices. The risks, as I've mentioned before, that not coincidentally occur about the time the indices will hit their respective long term up trend line include the next FOMC meeting, the peak of 3rd quarter earnings season and the presidential election. I remain cautious but growing more and more optimistic that once we get past these hurdles the path higher will be much easier.

Until then, remember the trend!

Thomas Hughes