Introduction

China fear reared its ugly little head today, depressing already skittish global markets. The latest trade data showed a sharp decline in China's imports and exports, raising fear of China's slowing economy and its affect on the global economy. Asian indices were a bit mixed on the news, the Shanghai index held break-even while others in the region fell more than -1%, those in Europe decisively lower with the addition of falling oil prices and FOMC outlook weighing them down.

Market Statistics

Futures indicated a sharply lower open all morning, in the range of -1%. There was little in the way of market moving earnings news before the bell and the economic data that was released was viewed as rate-hike positive, helping to keep futures near the low of the day. The broad market opened with a loss near -0.5% and quickly moved lower. By 10AM the indices had fallen to an early low, slightly more than -1%, and began a consolidation that lasted for the next hour. By 11AM an intraday bottom had been hammered out, leading to a nearly full reversal of earlier losses. By 3:30PM the indices were hovering close to break even levels and held those levels into the close of the day.

Economic Calendar

The Economy

Today's data was positive for the economy and future outlook yet at the same time reinforced FOMC rate hike expectations, raising fears. Initial jobless claims were reported as unchanged from last week, however that is from a downward revision of -3,000 that puts this week's data closer to the 43 year low. The four week moving average of claims fell by -3,500 and did hit a new 43 year low. On a not adjusted basis claims rose by 18.4%, a tenth hotter than the expected 18.3%, but remains lower on a year over year basis, -7.5%. Based on this data labor markets are experiencing improvements consistent with long term trends and supports the argument that labor markets are tightening and that we have already or soon will reach full employment. FYI, the JOLTs report was released yesterday and shows that job openings fell nearly 7% in August. Combined with initial claims data it looks like people are going to work.


Continuing claims fell by -16,000 to hit 2.046 million, the lowest level since June, 2000. The previous week's data was revised higher by 4,000. The four week moving average of continuing claims fell -25,750 to hit 2.07 million, the lowest level since July, 2000. These figures continue to trend lower and are on the verge of setting ultra-long term secular lows, consistent with ongoing improvement and health in the labor market.

The total number of jobless claims fell by -13,790 to hit 1.781 million, a new long term low. This low is consistent with long term improvement in labor and seasonal trends. Based on those trends we can expect to see it continue to fall for another 1 to 2 weeks although the rate of decline has moderated a bit. Regardless, total claims data is consistent with ongoing labor market health despite lack-luster job creation and a rise in unemployment.


Import/Export data shows a rise in prices for both. Import prices grew at a rate of 0.1% in September following a -0.2% decline in August, year over year import prices are down -1.1% but show what the report calls "upward trajectory" over the long term. Ex-fuel prices remain flat and unchanged over the prior month while fuel prices alone have risen 1.1%. Export prices outpace import prices, up 0.3% in September, but barely recovered from August's -0.8% decline. Ex-Ag items led with an increase in prices of 1.3%, offset by declines in agriculture products.


The Dollar Index

The dollar gave up some of its gains today, the Dollar Index falling -0.35%, but remains strong in the near term. Today's decline reveals possible resistance at the $97.60 level but upside targets are closer to $98.65. I redraw my Fibonacci Retracements today, using the peak set December, 2015 and the low of May, 2016, which is where that target comes from. The indicators are bullish in the near term but not overly strong and still consistent with range bound trading in the longer term. Support target should the index pull back is near $97.20. Tomorrow's economic calendar includes PPI data which could move the index, one way or another. Weak PPI would be seen as rate-hike negative, strong PPI rate-hike positive, with dollar value likely moving in line with each. The CME's Fed Watch Tool shows only a 9% chance of hike in November but a much greater 70% chance in December.


The Oil Index

Oil prices continue to waver at recent highs. WTI traded basically flat in an extremely volatile session which saw prices crash, shoot higher and stabilize in the matter of minutes. Inventory data released today showed a surprise decline in distillate inventories which offset a build in crude that would have otherwise been seen as bearish. WTI ended the day with gains near 0.2% after moving in a range of 2%, just above $50. Resistance is just above this level and may be broken if bullish evidence begins to appear. However, with the latest OPEC data and 2017 outlook I don't see that happening. OPEC's latest report shows output at 33.39 million barrels per day in September, the highest levels in over 8 years and above the recently agreed to production cap. The cartel also upped its non-OPEC supply outlook for 2017 adding downward pressure to outlook.

The oil sector continued to retreat to support today and may have found it. The Oil Index fell just over -1% intraday to hit the short term moving average and find support. Price action created a small but doji like candle, indicative of support but not strongly. The indicators are consistent with a fall from resistance and suggest range bound trading may persist into the near term. The top of the range is 1,180 , just above 1,180, with support targets at the moving average, just below that along the mid point of the range and then below that at the bottom of the range. Oil prices and earnings outlook among the oil companies is my target catalyst. Current outlook is bullish, if that is confirmed the index may break out of the range to the upside. Most of the big oil companies are set to report at the end of the month, 10/27 and 10/28, BP is first on 10/25.


The Gold Index

Gold prices held steady above $1,250 on a slightly softer dollar but gains were muted in light of the strong jobs data. The metal is tied firmly to FOMC outlook and at this time is under pressure. The jobs data reinforces the outlook that one of the Fed's two mandates have been met, tomorrow's PPI will reveal information about the other. Support for gold is just above $1,250, a break below this level would be bearish and could go as low at $1,200 in the very near term.

The gold miners are under pressure as well, their profits tied directly to the value of the dollar and its relation to gold. The miners ETF GDX gained a little in today's session, about 1.30%, but remain in consolidation near the recently set low. The sector is falling in tandem with gold, should gold fall through support this sector will fall right along side it. Support is near $22.50. The indicators are bearish but a bit mixed in their signals. Stochastic is showing weakness by dropping below the upper signal line, MACD potential support at this level through divergence.


In The News, Story Stocks and Earnings

Progressive Corporation reported earnings before the bell. The insurance company reported EPS in line with expectations but beat on net-written premiums. Net premiums grew year over year by more than 11% and helped lift the stock in early pre-market trading. The stock gapped up at the open and continued its rise throughout the day, closing with a gain near 2.65%.


Winnebago announced earnings before the bell as well, beating on the top and bottom lines. The company reported revenue up 4.9% due to higher shipments of vehicles and towables and gross margins which improved 90 BPS due to product mix and lower material costs. Shares of the stock fell on the news but opened at support, above the gap formed two weeks ago when an acquisition was announced, and traded up from there.


Delta Airlines missed revenue expectations but was able to deliver better than expected earnings. Earnings were negatively impacted by the technical outage experienced in early August. Looking forward the company is expected to slow capacity growth into the fourth quarter with revenue falling 3-5% year over year. Shares of the stock fell in pre-market trading but recovered the losses and more during the open session. Gains were capped however by resistance just above the $40 level.


The Indices

The market started today in a near freefall scenario. Data from China aggravated fear of slow global growth and hard landing which, on top of nerves already frayed by FOMC outlook, sent the indices ducking for support. The good news, at least in the near term, is that support was found. Today's action, in most cases, confirmed near term support levels and the bottom of the September/October trading ranges. The Dow Jones Transportation Average led the move, testing and confirming support at the short term moving average, right around the 8,000 level. The index closed the day with gains, about 0.5%, the only index to do so. The indicators have rolled into a bearish signal, consistent with an index trading within a range, and may indicate further testing of support. If broken a move to 7,750 looks likely, if not the index may be setting up to test 8,250.


The NASDAQ Composite posted the biggest loss today, about -0.50%. Despite the loss, the index created a white bodied candle although it is below resistance levels at 5,250 and the short term moving average. Near term, the indicators are bearish and both pointing lower so a deeper correction may be forthcoming. Short term the index remains within the September/October trading range with the lower range boundary near 5,100 as current target.


The S&P 500 made the next largest decline, -0.30%. The broad market traded in a range greater than 1% of its value, testing support at the 2,120 level. Support was found, the index created a small doji-like hammer candle, and the September/October trading range remains intact. The indicators are bearish and pointing lower so support may be tested further but they are very, very weak and remain consistent with range bound trading. If today's bounce continues a move up within the range can be expected with upside target near 2,180 and the top of the range.


The Dow Jones Industrial Average made the smallest decline today, about -0.25%. The blue chip index set a three month intraday low in today's session, testing and confirming support at the 18,000 level. The index has been trading in a tight range since the onset of volatility in early September and that range remains intact. The indicators are bearish and pointing lower so another test of support may be on the way, however, they are also very weak and remain consistent with range bound trading so a break of support does not look likely. If it were to break next target is along a long term up trend line near 17,750.


The market crashed hard on bad news but quickly recovered, but China was just an excuse. The data was bad, sure, but not earth shattering and merely caused a skittish market to make a knee-jerk reaction.

There is reason for the market to be skittish which means that volatility is likely to persist. Fear is growing that earnings, as foreshadowed by Alcoa and a number of negative warnings, may not be as good as we'd like and the FOMC question is still hanging over the market, as is the presidential election.

Today's data did little to indicate inflation but it certainly helps cement the notion that the economy is at or very, very near full employment so now all we need is some inflation to seal the deal on a rate hike. Tomorrow's PPI will affect that outlook for better or worse. On the earnings front nothing today swayed sentiment but tomorrow is another matter, when we get reports from Wells Fargo, JP Morgan and Citigroup. As for the election, that psycho drama will continue to unfold like the well scripted reality program it is. I remain cautious in the near term, wary of correction, not quite ready to commit, optimistic the next long term secular rally is just around the corner, waiting for my signal.

Until then, remember the trend!

Thomas Hughes