Introduction

The Fed gets aggressive with their balance sheet reduction plans and the market falters. A raft of economic data came in as or better than expected, reinforcing the Fed's hawkish tone and forward economic outlook, adding to volatility. Today's action saw many of the indices shed close to -1% intraday but the losses were pared as bargain hunters stepped in to scoop up cheap stocks. I wouldn't call today's bullish, but I wouldn't call it overly bearish either.

International indices were lower in today's actions with few exceptions. Asian indices were mostly lower with losses in the range of -1.0%, the Shang Hai managed to eek out a gain of 0.06%. In Europe safe haven Switzerland was able to post gains, 0.04%, after its central bank held rates steady but most indices fell. Losses were greater than -1.0% intraday but late day bargain hunting reduced them by the close. The DAX was a loss leader posting a decline of -0.89% at the end of day. In England the BOE held rates steady as well.

Market Statistics

Early morning futures trading showed losses for the major indices from the start. The SPX was indicated down about -0.7% in the earliest part of the session with that falling to nearly -1.00% following the release of economic data at 8:30AM. Downward pressure persisted into the opening bell but slowly diminished. The SPX opened with a loss of roughly 12 points or -0.5% and fought hard to maintain that level. Trading was choppy over the first few hours of the day resulting in an intraday low of -18 points for the SPX set just before 10:30AM. By noon intraday volatility had begun to subside and allow the indices to drift upward. The remainder of the day saw the indices drift sideways to up, slowly creeping higher until they were within spitting distance of yesterday's close.

Economic Calendar

The Economy

Lots of data today and all at least as expected if not better. Initial claims for unemployment fell slightly more than expected to 237,000, down -8,000 from last week's not revised figure. The four week moving average of claims rose by 1,000 to hit 243,000. On a not adjusted basis claims rose 10% month to month versus an expectation of +13.6% and are down -12.25% YOY, consistent with ongoing labor market health.


Continuing claims rose by 6,000 to hit 1.935 million, last week's figure was revised higher by 12,000. The four week moving average of claims rose by 9,000. Regardless the revision or increase this week continuing claims remains in downtrend and hovering just above the recently set 44 year low. This figure is consistent with labor market health and ongoing labor market tightening.

The total number of claims fell by nearly -10,000 to hit 1.785 million, a new seasonal low. The total claims figure remains in downtrend and is now down -16% from this same time last year. Jobs creation may not be robust but this figure, along with the initial and continuing claims numbers, show that hiring/job retention remain strong and consistent with healthy economic conditions.


The Philadelphia Federal Reserve Manufacturing Business Outlook Survey retreat in May but not as much as expected. The index fell to 27.6 from 38.8 showing growth but less growth than the month before. Within the report all components remain positive but have moderated from previous highs. The shipments index fell -11, new orders was unchanged and employment fell -1. Hours worked continues to expand as well but it too decreased by -1 this month. The 6 month forward outlook also fell, hitting a 2 year low, but remains positive.


The Empire State Manufacturing Survey rose a much stronger than expected 21 points to 19.8. This is a +2 year high, forward outlook also rose. Within the report new orders rose 23 to 18.1, shipments rose to 22.3 and inventories to 7.7 while employment and hours worked both rose modestly.


Import prices were unchanged in May while export prices fell -0.6%.

Industrial production was unchanged in May after substantial increases in the previous month and smaller increases in February and March. Year over year production is up 2.2%. Capacity utilization fell a tenth to 76.6% and -3.3% below its long running average.

The NAHB Index of Home Builder Sentiment fell 2 points to 67 from last month's revised 69. This is below expectations and driven by a lack of traffic. All components within the report fell, led by buyer traffic which fell below the expansionary 50 level to 49. Despite this sentiment remains positive and stable at 67 with sales of single family homes running at 73 and forward outlook for sales at 76.

The Dollar Index

The Fed raised rates as expected, delivered a slightly more hawkish than expected statement and addendum, and put the bull back into the dollar. The Dollar Index gained nearly 0.60% today and appears to be reversing the Jan/Jun down trend. With the ECB backing off from hawkish expectations and the FOMC sticking to their guns policy is back in divergence, if only mildly, weakening the euro and strengthening the dollar. The indicators support today's move with a strong buy signal that could easily carry the index up to test resistance at the short-term moving average. A break above the moving average, near $97.65, would be bullish and confirm reversal if not rally. Don't forget, reversal signals could mean a switch from down to sideways as easily as down to up.


The Gold Index

Gold prices fell in tandem with a rising dollar and firming FOMC outlook. The Fed may not be set to raise rates again this year but they are set to begin trimming the balance sheet and that is seen as dollar strong, at least for now. Spot gold fell more than -1.5% or $21 to trade below $1, 260 and is heading down to test support at $1,250 and maybe lower.

The Gold Miners ETF GDX lost about -0.65% and created a small doji candle sitting just above potential support. The ETF is now near the bottom of its rapidly narrowing trading range and set to trend along this level, or move lower. The indicators are both weak and pointing lower following bearish crossovers and consistent with a move lower within a trading range. Support may be at $22 or just below but more likely near $21. A break below this level would be bearish with downside target near $18.50.


The Oil Index

Oil prices continue to plunge. WTI fell another -0.5% in today's action and is now trading near $44.50. The latest data shows supply levels did not fall as much as expected adding to oversupply concerns. No matter what OPEC tries to do they just can't alter the fact that there is more than enough oil and production capacity to offset demand. I don't think this is going to change without increased demand or a serious disruption to supply and/or production.

The Oil Index fell nearly a full percent in a drop below the 1,120 support level. The index continues to experience volatility and is retreating to the recently set low. The indicators have begun to roll over into bearish signals consistent with this move but have not confirmed with crossovers. Support is near the current low just above 1,100, a break below this would be bearish and a continuation of the near-term down trend with target near 1,050. The near-term outlook for the oil sector is bearish and driven by falling prices. The market may move down from here but how much lower it can go is questionable since it is well within a solid zone of support. Long-term I remain bullish due to forward earnings growth outlook, waiting for the bottom I know is down there somewhere.


In The News, Story Stocks and Earnings

Wells Fargo, the once unblemished mega-bank, has fallen prey to scandal once again. The bank has been accused of making improper changes to mortgages held by those in bankruptcy. A series of lawsuits allege that while the bank was dealing with the account scandal last year mortgage staff were pushing loan modifications that lowered monthly payments while extending terms and increasing the amount paid over time. The bank responded saying it did nothing wrong and all involved parties were notified beforehand. Shares of the stock fell nearly -1% on the news but do not appear as if it is overly damaging at this time.


Kroger reported earnings this morning and did not deliver what the market wanted to hear. Quarterly results were good, revenue gains and better than expected EPS, but forward guidance was weak. Guidance has been chopped by nearly -9%, blamed in part on competition from Walmart, and sent shares diving in the premarket session. The stock opened with a loss greater than -10% and extended that to near -20% by the end of day to trade at a 2.5 year low.


The VIX rose today but still doesn't look like it is ready to spike higher. The index gained about 5% creating a small green bodied candle with long upper shadow signifying resistance. Today's high was 12.01 and just below the long-term moving average, two potential resistance areas. The indicators are mixed in the near-term but consistent with range bound trading and resistance in the long. A move above 12 would be bullish for volatility, bearish for the market, with upside targets near 14 and 16. Failing to break above resistance would be bullish and consistent with market rebound.


The Indices

Rotation from tech and into more promising sectors continues. Today's action say the indices fall to support levels, and find it. The Dow Jones Transportation Average led and was able to close with a gain. The index moved up by roughly 0.20% to create a medium sized green bodied candle rising up from support. Support is the 9,325 resistance-turned-support and previous all-time high. The indicators were bullish in confirmation of the break above resistance but stochastic is now showing weakness and bearish crossovers consistent with topping action. If the index is able to move higher it will face additional resistance at the current all-time high near 9,650. A break above there would be bullish.


The Dow Jones Industrial Average closed with a loss less than -0.10% after opening much lower. The blue chips created a small green bodied candle moving up from a long-term up trend line. The index had been struggling to break above the trend line and did so Tuesday. The indicators have confirmed the break with bullish crossovers and are both on the rise in support of higher prices. Upside target is 21,500 although caution is warranted because the move looks weak and the index a bit extended.


The S&P 500 closed with a loss near -0.20% and just behind the industrials. The broad market index gapped lower to create a small green bodied candle with long lower shadow confirming support at the long-term up trend line and short-term moving average. Price action appears bullish and trend following although the indicators do not confirm. Both MACD and stochastic have formed bearish crossovers and signals consistent with consolidation and pull-back. The index may not go below the trend line, or far below it, but I don't think the test of support is over. In fact, it may just be starting as there is still quite a bit of time until the next earnings season and very little economic data over the next week. Near-term support is 2,415 and 2,400, a break below there would be bearish with targets near 2,350.


The NASDAQ Composite brings up the rear with a loss near -0.50%. The index also opened with a gap lower, tested support and then moved higher from there to create a small green bodied candle with visible lower shadow. The candle helps confirm support at the 6,115 level but price action over the last week and the indicators lead me to think this move is not over. Both indicators are bearish and gaining strength in support of lower prices with target near 6,000.


The indices look mixed. One is going up while another is going down and two more going sideways at best. Basically, we're in a big sector rotation and tech is the loser. Market leading sectors include industrials, real estate, materials and energy which are all up more than 1% over the past 5 days while the NASDAQ and XLK Technology SPDR are down -2.5% and -3.5% in the same time. Rotation is likely to continue into the near-term. The next catalysts for movement other than political or random one-off news will be the NFP in 2 weeks and then the beginning of Q2 earnings season 2 week's after that. I am neutral for the near-term, cautious for the short and bullish for the long watching and waiting for the next great entries.

Until then, remember the trend!

Thomas Hughes


 

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