Introduction

Economic data and Federal Reserve officials continue to give mixed signals and leave Fed transparency as murky as ever. Stanley Fischer, vice-chairman of the board of governors and voting member of the FOMC, says low rates are a sign of possible economic trouble. Jeffrey Lacker, president of the Richmond Fed and not on the FOMC this year, says that rates should already be higher and that strong labor data bolsters this case. Today's data was good, when added to ISM and other data released this week point to economic recovery and higher interest rates.

Asian markets rose in the Thursday session, supported by rising oil prices. Gains were led by the Hang Seng index, most indices in the region closed well of intraday highs. European indices were not so buoyant, trading first up but later falling into negative territory on outlook concern. In both cases moves were small, less than 1%.

Market Statistics

Futures trading indicated a flat to slightly negative open for most of the morning. Economic data was good, but led to a slight increase in rate hike expectation that depressed trading further. The indices opened the day with small losses and then quickly moved lower to set an early low just before 10AM, and then another slightly lower low just after 11AM. This second low turned out to be intraday bottom and led to a quick reversal in price action. Between 11:15AM and 11:55AM the market rallied, recovering most if not all of its earlier losses, setting an intraday high, on the SPX, just above break even. This level held for the next several hours as the indices moved sideways within a narrow range into the close of the day.

Economic Calendar

The Economy

The Challenger Gray & Christmas report on planned lay-offs was the first bit of data released today. The headline number is 44,324, an increase of 38% over the previous month. At first glance this is not great but within the data are quite a few details that shed a more positive light on the labor situation. First, the number of lay-offs planned in September is about average for the past 2 years so not alarming in and of itself. Second, the number is 25% lower than this same time last year. Third, YTD lay-offs are down -12% from last year at this time. Fourth, 3rd quarter lay-offs are down -8% from the 2nd quarter and down -41% over the 3rd quarter of last year.

So, while lay-offs increased this month they are trending lower in the near and long terms. This month's gains were led by the education sector and primarily ITT Tech which is responsible for about 18% of the total. Back this out and lay-offs would have only gained about 12%. Computers and retail also contributed significantly to September job cuts. Cuts in the computer sector are a continuation of shake-up and consolidation within the sector that has been going on for nearly 2 years. Cuts in the retail sector are seasonal in nature and off-set by robust job gains announced in the August NFP report.


Initial claims for unemployment fell -5,000 from last week's not-revised data to hit 249,000. This is the 83rd week of claims below 300,000 and the 2nd week in 3 for claims to set a new 6 month low. The four week moving average of claims fell -2,500 to hit 253,500, the lowest level the average has seen since 1973. On a not adjusted basis claims rose by 2.2% week to week, versus an expected 4.5%, but are down -10.75% over this same time last year. Based on these numbers the labor market continues to show signs of active recovery.


Continuing claims fell by -6,000 to hit 2.058 million. This is the lowest level for this metric since July, 2000. The four week moving average of claims fell -21,000 to hit 2.094 million, also a low dating back to 2,000. Both of these figures continue to trend lower, consistent with ongoing labor market recovery. They, together with initial claims, my not indicate creation of new jobs but they certainly suggest that less people are losing work, more people who do lose a job find new work quicker and some of the massive amount of open jobs, as reported by JOLTs, are getting filled.

The total number of Americans filing for unemployment benefits fell by -79,054, consistent with seasonal and long term trends, to fall below my target of 1.80 million. What is not consistent is the rate of decline over the past few weeks, much greater than what we've seen at this time of year in the past and suggestive of some significant change in the overall employment situation. Based on seasonal trends we can expect to see total claims continue to decline for another 2-3 weeks before bottoming out. As I said before, these figures may not indicate job creation but they do indicate a decline in overall unemployment and ongoing health in the labor market.


Tomorrow is the all important NFP and unemployment data. ADP suggests that NFP may be on the weaker side, in the range of 160K to 180K, but stable relative to long term labor trends. Based on the claims data I expect to see a drop in unemployment and maybe even an uptick in the participation rate.

The Dollar Index

The Dollar Index surged higher today by 0.55%, breaking out of the narrowing trading range I have been watching. The move is being powered by this week's round of positive data and to some extend rising FOMC expectations although there are some caveats. First, the FOMC still isn't likely to raise rates soon and they might not this year at all. Second, the ECB meets before the FOMC and now that an ECB taper is on the table there is a chance the euro could be strengthened and suck the wind out of the dollar bull's sails. The indicators are bullish and pointing higher but remain consistent with range bound trading. If the index is able to break free of the trading range and move higher next target is near $97.50 and still within the 4 month FOMC-rate-hike-outlook driven trading range.


The Oil Index

Oil prices gained more than 1.5% today as bullish sentiment driven by the OPEC deal and yesterday's draw of crude supports higher prices. Today's move took WTI above $50 for the first time since July and looks like it could continue higher. The risk is that oil prices are now within a former congestion band and resistance zone set during June with bearish fundamentals in place. The OPEC deal is still without substance, production remains highs, storage is at/near record levels and there is little reason to think it won't stay that way.

The Oil Index gained a little more than a half percent to trade right up to the top of the 6 month trading range. The indicators are bullish and pointing higher so further testing of resistance or break above resistance is possible. A break above 1,175/1,180 would be bullish and could take the index up to 1,250 in the near to short term. However, until then, the index remains range bound and at the mercy of the oil markets. If oil is able to sustain its gains the Oil Index will likely do the same.


The Gold Index

Gold prices have broken out their trading range, fallen below critical support and heading lower. Today spot gold lost another -1.25% to trade just above $1,250. This move is driven by dollar strengthening economic data and FOMC rate hike outlook. $1,250 may provide support while we await data, the ECB and the FOMC meeting but if broken, could lead spot prices down to $1,200 or lower. Tomorrow's NFP could be the catalyst that does it, if it shows enough strength.

The gold miners are suffering from falling gold prices. The miners ETF GDX fell a little more than -3.5% today to hit a potential support level. Today's action created a small doji type candle just above the $22.50 level, an important level of support during the April/May period and the mid-point of the 2016 rally. I'm using this opportunity to set up some fresh Fibonacci Retracements, using the January 2016 low and the August 2016 high. So far, the indicators are consistent with support at the 50% level but this move is not played out. Expect further testing of the $22/$22.50 level which, if broken, could lead to a deeper retracement. Downside targets, on a break of the 50% line, are $19.75 and $16.50.


In The News, Story Stocks and Earnings

Twitter was trending on social media today as possible suitors pull away. The news is that Disney, Apple and Google among other big money names are no longer in the running. With interest waning the question arises, who will buy it and for how much? Shares of the stock fell more than -15% in the premarket, opened with a big loss and moved deeper into the red during the day. Twitter closed with a loss near -20% and could easily go lower until a viable bidder comes into the scene. #istilldontknowhowitworks, #whatsthepoint


Walmart reports earnings in about 6 weeks but provided a mid quarter update today. The company outlined a shift in strategy and gave guidance for the next three years. Moving forward the worlds largest retailer will slow the number of store openings and shift focus toward comp store sales and ecommerce. Guidance for the current year was maintained but fiscal 2017 and 2018 both came in well below analysts estimates. Shares of the stock fell more than -3.2% on the news, breaking below $70 for the first time since May.


The Indices

The indices began the day ducking for cover. At the low of the day the SPX was down nearly a half percent but by end of day that move had been erased although the trading was mixed. Three of the four major indices closed with losses but all closed more flat than not, within a range of 0.2% of break even. The biggest loser was the NASDAQ Composite which lost -0.16%. The tech heavy index created a very small spinning top doji candle just above the short term moving average and just below the recently set all time high. This is the 8th day the index has drift sideways at this level, after setting the all time high, and the indicators are deteriorating. MACD was weak to begin with and divergent from the high, stochastic the same. Now, both are confirming a peak with bearish crossovers but remain consistent with range bound trading in the longer term. Support is along the short term moving average, a break of that could move down to 5,080.


The next biggest move was made by the Dow Jones Industrial Average. The blue chips declined -0.09%, creating a very small doji-like spinning top just below the short term moving average. The index is trending sideways and nothing has changed about that. The indicators remain consistent with range bound trading as well. If the index is able to move higher next resistance is about 250 points higher at 18,500, if it moves down to the bottom of the range support is about 250 lower near 18,000.


The smallest decline was posted by the Dow Jones Transportation Average. The transports fell only -0.04%, barely declining at all, creating a small spinning top doji candle. Price action is hovering right at the top of the range, near 8,128, although it does not look like it will break above it at this time. The indicators are both rolling over to form bullish peaks, consistent with the top of a trading range. A break above this level would be bullish but would also face additional resistance at the 8,250 level. Support targets should prices pull back exist at at 8,000 and 7,750.


The S&P 500 posted the smallest move but the only gain in today's session, 0.04%. The broad market created a small spinning top doji style candle just above the short term moving average and very near the middle of the September/October trading range. The indicators are consistent with range bound trading and show a market that has reached a point of near calm. A move lower will find the bottom of the range, at 2,120 and near the previous all time high. A move higher will find the top of the range, near 2,185 and the current all time high.


A lot has happened in a couple of days. ISM and employment data have been good, ECB tapering has come onto the table, more FedSpeak to confuse the market and a sharp rise in oil prices. What hasn't happened is a change in the equities market. The indices continue to trend sideways and appear to have reached a point of calm ahead of the NFP report. This report is likely to shake the foundations of the market, at least for a few minutes, and move the indices within their ranges. Whether or not it will be strong enough to move the indices out of their ranges remains to be seen.

Don't forget, earnings season is here again, the next few weeks will be a roller coaster of reports, sentiment and has a high potential for knee-jerk market reactions so caution is due regardless your market stance. I remain cautious in the near term, eyeing early November and a cluster of events each with major market moving potential; the elections, the peak of earnings season and the next FOMC meeting. Longer term I'm bullish, earnings growth is at hand and economic data support it, just waiting for the market to give the signal to go all in.

Until then, remember the trend!

Thomas Hughes