Introduction

The market has weathered a busy three weeks rather well; with only three days left until the election volatility is on the rise as investors seek shelter from a growing storm. Earnings growth has returned to the market, economic data continues to trend positively and the FOMC stood pat on interest rates, the only thing left to rattle the market is the election and the chances it will rattle the market are only getting stronger. Tomorrow's NFP report will no doubt be an important one but the big market move, I suspect, won't come until next Wednesday.

Election jitters, the FOMC and falling oil prices weighed on Asian markets in the overnight session. The Nikkei led with a drop near -1.75%, followed by the Heng Seng's decline of -0.56%. European indices fared no better and were further depressed by a new ruling from British courts regarding the Brexit. Apparently, even though the referendum passed, the new PM must wait on a vote from parliament before beginning the Brexiting process. The ruling has raised questions about when or even if the Brexit will actually happen, meanwhile the Bank of England held rates steady and says that the vote has had no apparent impact on the British economy. They upped their GDP target for 2016 to 2.2%, with that moderating to 1.4% in 2017. European indices held flat for most of the day but sold off in late day trading, led by the FTSE.

Market Statistics

Futures trading indicated a flat to positive open for the US indices all morning, a raft of economic data and earnings reports having little impact on the trade. The open was quiet, fallout from the FOMC meeting was minimal, and the market was able to hold just above break even for the first half of the day. Just after lunch bearish sentiment prevailed and sent the indices down to an intraday low, about -0.25% for the S&P 500. This low held for a bit, sideways trading ensued, only to have a new low set in the early afternoon and then another shortly before the close of the session.

Economic Calendar

The Economy

Lots of data today, first up on the list is the Challenger, Gray&Christmas report on planned layoffs. This reports is released at 7:30AM and is for October. The number of layoffs planned in October fell by -31% month over month and -39% year over year to the second lowest level this year and the lowest October reading since 1999. The year to date total is now -14% below last year's YTD total with the energy and computer sector leading with the highest number of layoffs. Energy alone is up 15% YOY on a YTD basis. Despite continued weakness in the energy sector and ongoing restructuring with the computer sector job losses are trending lower in the near and long term, consistent with labor market improvements.


Initial claims for unemployment jumped by 7,000 from a not-revised figure to hit 265,000 in the past week. The four week moving average of claims gained 4,750 to hit 257,750. This is the 87th week for claims to trend below 300,000, the longest streak since 1970. On a not adjusted basis claims increased by 3.7% versus an expected increase of only 1.0% and are down -5.1% over this same week last year. My home state of NC leads gainers with an increase of 2,389 new initial claims, Kentucky leads decliners with a drop in claims of -4,073.


Continuing claims fell -14,000 to hit 2.046 million and a new low dating back to June, 2000. The four week moving average of continuing claims also fell, shedding -9,000, to hit 2.040 million and a new low dating back to July, 2000. The continuing claims figures has resumed its long term down trend, is making new lows on a week to week basis and consistent with improvement in the labor market.

The total number of Americans claiming unemployment rose for the first time in nearly 3 months, gaining 36,000 to reach 1.780 million. This increase is not unexpected (seasonal trends) although I thought there may have been one more week of decline before bottoming. Regardless, we can now expect to see the total number trend higher into the end of the year as staffing levels are cut in efforts to meet year-end budget targets and seasonal workers are laid off.


Third quarter productivity and labor cost data was also released at 8:30AM, both much better than expected. Productivity jumped 3.10% versus an expected gain of 1.80% and much better than the Q2 decline or -0.2%. Within the data there was a 3.4% increase in hourly wages, positive for the consumer, and a 3.4% increase in output, positive for the producers. Total unit labor costs only increased by 0.3% versus an expected jump of 1.2% and the much better than the 3.90% reported for the 2nd quarter.

New Orders for factory goods was released at 10AM and came in a tenth hotter than expected. September factory orders came in at 0.3%, up a tenth from expectations but down a tenth from the previous month. The dark cloud in the data is a sharp downturn in new orders, led by a -1.1% decline in transportation equipment. Surprisingly though, automobile production jumped to a level not seen since July of last year, suggesting the recent down tick in auto sales may be a short lived thing.

The Services Sector ISM index was also released at 10AM and shows a slowing of expansion in the services sector. The headline reading of 54.8 is expansionary but slower than the previous months 57.1 and below expectations. Within the report activity and new orders are both strong at 57.7 while employment levels show a more modest expansion at 53.3. Regardless the slowdown services are expanding.

The Dollar Index

The Dollar Index extended its correction in today's session. The Fed's decision to hold rates steady set the stage for near term weakness in the index that is being compounded by election fears and a surge in pound value driven by today's BOE/Brexit news. I say near term weakness because the longer term outlook continues to support higher rates, expanding US economy and a stronger dollar. Today's action carried the index down by -0.25% to test support at the 61.8% retracement level. The indicators are bearish and pointing lower so support is likely to be tested further. Tomorrow's NFP report could help provide support, or not, with next Wednesday a likely target for a much bigger move. Support is at today's closing level, just above $97. A move lower could go as low as $96.20 before meeting support, a move higher could go as high as $98.65 before hitting resistance. Longer term I am still anticipating a retest of highs near $100.50.


The Oil Index

The oil market continues to slide on rising fear, or acceptance I should say, of a market glut. Yesterday's record breaking injection of US crude supplies was followed up today by an above expectations injection of natural gas supplies and the realization that OPEC just isn't doing anything substantial to actually support the market. An attack on Nigerian oil infrastructure helped to support prices in early trading but that faded throughout the day, leaving prices for WTI down more than -1.4% on the day. WTI has now broken below the $45 support target and could easily head to $40.

The Oil Index is treading water within a trading range, today's action another day of sideways drift within that range. Price action created a small doji like candle, below the short term moving average, just about dead in the center of 7+ month trading range. The long term outlook is bullish, the sector is expected to see earnings growth next year, while the nearer terms are dominated by oil prices and volatility in the oil pits. The indicators are consistent with a test of support near 1,120 or possibly as low as the bottom of the range near 1,100. A break below support does seem likely at this time, not unless there is a serious deterioration in oil prices and/or earnings outlook.


The Gold Index

Gold held steady in a day of choppy trading. The metal is trading hovering around $1,300, driven by an election fear driven flight to safety, compounded by the dollar correction. It looks like $1,300 is providing resistance at this time and may hold, the longer term outlook is for dollar strength so any upside at this time is likely to be limited. A break above $1,300 may find next resistance at $1,320. A fall from $1,300 may find support in the $1,275 range.

The Gold Miners ETF moved up over the past few days, in tandem with the rise in gold prices, but have also hit a potentially strong resistance level coincident with the gap that opened during the first week of October. Today's action was positive, the ETF gained a little more than 1.75%, but was capped by resistance below yesterday's high and within the aforementioned gap. The indicators are rolling over, consistent with resistance levels, and firing an early/weak sell signal in line with the 3 month down trend. Support is currently at the short term moving average, just below today's opening price, a fall from this level could go as low as $22.50. A move up will require a break of resistance to move more than a nominal amount.


In The News, Story Stocks and Earnings

Today may have been the single biggest day of the earnings this cycle, I'm not exactly sure, there are a lot on the list. Despite this the news of the day was not earnings but politics, the election and the future of the economy, the stock market and the country. The amount of concern that, whatever the outcome, the election will result in a major market slide is growing. The VIX has risen for the last 8 days straight and today added more than 16% to hit a new 4 month high. The indicators look strong, the index is moving up with conviction, so this move could easily continue into the election and beyond. Next upside target is near $25, another 10% and more above today's close.


Another shock wave, completely unrelated to the election but not politics, that hit the market today was the announcement of a congressional inquest into the generic drug market and price fixing with the possibility of charges being filed. The news hit the sector hard with names like Mylan and Teva plunging -8% to -10%.


After hours action was busy, quite a few heavily traded names reported earnings and not all delivered what the market wanted to hear. To start it off, Starbucks reported EPS of $0.56, a penny above consensus, on revenue also above consensus. Results were driven by a 4% increase in global comp sales, 6% in China, and led the board to approve a 25% increase to the dividend. Shares gained more than 6% on the news.

CBS also beat top and bottom line consensus estimates, adjusted earnings beat by 17%. CEO Moonves says that "political spending is ramping up nicely" so we can expect to see that impact on the current quarter's results. This stock gained more than 2% in after hours trading.

Las Vegas sands also beat top and bottom estimates, as did Weight Watchers. GoPro however, did not meet expectations. Their results were so bad that the stock was halted before the release and did not reopen for trading until 30 minutes later. Due to declining demand for its ever more expensive, which have turned out to be a kind of novelty item and not the must have they once were, products the company reported a net loss of -$0.74, a little more than double what the market was expecting. Along with this comes weak guidance for the current quarter and CEO Nick Woodman's assurance that demand for the new line is strong and that the company will return to double digit earnings growth next year. The stock dropped nearly -30% on the news.


The Indices

Today's action was largely to the downside but there was one notable exception. The Dow Jones Transportation Average closed with a gain of 0.34% after trading much higher during the session. Today's action was bullish but weak and capped at the top of the recent trading range. The indicators remain consistent with range bound trading and do not show strength. At best this index looks like it will continue to move sideways, trending below the 8,100 level. At worst it may in for a correction to trend, target near 7,750.


The tech heavy NASDAQ Composite posted the largest decline, weighed down by Facebook which lost nearly -6% due to poor forward growth outlook, just over -0.92%. The index created a medium sized black candle, the third one in a row, and appears headed down to test support in the 5,000 to 5,050 range. The indicators are bearish and moving lower, consistent with lower prices, but not yet showing strength so a deeper move may not be forthcoming.


The S&P 500 made the next largest decline in today's session, just shy of -0.50%. The broad market index created a small-to-medium sized black candle, moving down from broken support, and appears like it is moving down to the next support target, possibly 2,050. The indicators are pointing lower, consistent with a test of support, but not showing any kind of strength at this time.


The Dow Jones Industrial Average posted the smallest decline in today's session, only -0.16%. The blue chips had the wildest ride in today's session, opening with a nice upward gap only to sell off hard throughout the day to close at the low. Today's action is the second day to close below the bottom of the September/October trading range and a sign that lower prices may be on the way. The indicators are still consistent with range bound trading but pointing lower so further testing of support at current levels is likely in the least. A move down from here, near 17,930, could go as low as 17,500 before finding next support.


It looks like the market is going to pull back to a stronger support level before the election. The growing chance that a possible criminal or egomaniac will get elected is becoming more of a certainty. What happens after the election is less of a certainty. On the one hand Hillary supports the establishment, so the status quo is likely to be maintained, if you can believe her. On the other hand Trump is threatening to do all kinds of things that are scaring lots of folks, but just might be the tough love America and the world needs. What I know for certain is that market will survive whatever happens; if we go into next week with our positions secure and some cash on hand we will be able to weather the storm, and maybe even make some money. I'm cautious, wary, and still see the makings of a long and sustained bull market rally that could begin, if not before the end of this year then really soon thereafter.

PS, don't forget what happened with the Brexit. All that pent up fear gave us a buying op that delivered an 8.6% rally in the SPX over the course of only a few weeks.

Until then, remember the trend!

Thomas Hughes


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