Introduction

Equity indices fell hard on profit taking in the tech sector. Considering the amount of gains made by tech since the end of the year and the fact that tomorrow is the last trading day of the 2nd quarter and 1st half today's action isn't too surprising. The market is in sector rotation ahead of 2nd quarter earnings, it's only right to take profits and redeploy, the question now is how low will the market go? With the next earnings cycle gearing up and expectations as strong as they are my initial reaction is not to low.

Asian indices close the day with gains following the US led rally of Wednesday and a round of semi-positive central bank comments. It seems that bankers around the world are beginning to change their tune, not just the ECB, as economic activity continues to stabilize. European indices were higher during the first half of the session but fell in the second, weighed down by bearish sentiment here in the US.

Market Statistics

Futures trading was positive all morning. Most indices except the NASDAQ were positive with some upward pressure after the release of economic data. The NASDAQ itself turned positive for a brief time but spent most of the morning hovering just below break even. The open was positive as expected but what was not expected was the steady and continuous downdraft in prices that lasted until early afternoon. The market hit bottom near 1:30 and bounced, recovering a little less than half the days losses by the close.


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Economic Calendar

The Economy

The 3rd and final revision to 1st quarter GDP was released alongside this week's jobless claims. The number came in at 1.4%, up from the previous and above expectations, as spending and exports grow. Looking forward 2nd quarter growth is expected to come in around 2.9% according to the St. Louis Federal Reserve's GDPNow tool.


Initial claims gained 2,000 on top of an upward revision of +1,000 to hit 244,000. The four week moving average of claims fell however, shedding -2,750 to hit 242,250. On a not adjusted basis claims rose 4.5% versus an expectation of 3.6% for the week. On a year over year basis not adjusted claims are down -9.2% and consistent with ongoing labor market tightening.


Continuing claims rose by 6,000 from a downward revision of -2,000 to hit 1.948 million. The four week moving average of claims rose 7,250 to hit 1.938. Despite these gains continuing claims remains low relative to historic levels, trending near the 44 year and consistent with labor market tightening.

The total number of claims for unemployment benefits rose by 11,835 to hit 1.828 million. This gain is in line with seasonal trends and expectations so no surprise. On a year over year basis claims are down -10.0% and consistent with ongoing labor market tightening.


The Dollar Index

The Dollar Index fell to new lows today as global central banks begin to change tack. The Bank Of England and Bank of Canada have both come out in favor of raising interest rates in their respective countries, adding their weight to the ECB and pushing the dollar lower. The index fell another -0.40% breaking below the $96 level to trade near $95.60. The index appears to be headed lower and that moe is supported by the indicators. Downside targets are $95 and $94.25. Looking to the calendar the next week could do a lot to help that. Tomorrow's data is Personal Income and Spending along with PCE Prices, the Fed's preferred gauge of inflation, a release that will surely affect FOMC outlook. Next week is the FOMC minutes and the monthly jobless numbers.


The Gold Index

Gold prices continue to hold steady in the face of falling dollar value. With the dollar falling as it is I would expect to see gold shooting higher which leads me to think there is some other force, perhaps declining political risk, working against it. Today's action saw spot prices hover just below break even and the $1250 level with no sign of breaking out of the near-term range. In the near-term support is in the range of $1,245, resistance near $1,255, a break of either may indicate new direction but I'd be very cautious until the gold/dollar correlation starts working again.

The Gold Miners ETF GDX fell -1.80% to trade at support along the $22 level. The ETF remains inside its short-term range with little to no sign of breaking out. The indicators are consistent with range bound trading and do not indicate strong movement in either direction. I expect this range will persist into the near-term unless and until gold breaks out of its range.


The Oil Index

Oil prices continue to drift higher as signs of slackening production in the US. The weekly production figures show a slight dip in production that alleviated oversupply fears but the decline is not expected to last. Analysts have pointed out that production was slowed due to Tropical Storm Cindy in the Gulf of Mexico and maintenance outages in Alaska, both one-off factors. WTI moved up by more than a half percent to test resistance at $45 but was rejected. Price below $45 by the close and appears to confirm resistance.

The Oil Index moved in tandem with oil prices, gaining about 1.0% intraday to test resistance and fall from it. Today's action saw the index move up toward resistance at 1,120 and fall back, creating a medium sized doji and possible shooting star. Resistance is confirmed by the short-term moving average and may prove to be strong. A fall from this level would further confirm resistance and the short-term down trend with downside target near 1,050.


In The News, Story Stocks and Earnings

Walgreen's and Rite Aid made headlines this morning when they announced earnings and the suspension of their merger agreement. Walgreen's announced better than expected earnings on slightly weaker than expected revenue along with a new plan to purchase stores from Rite Aid rather than merge with it. Walgreens will acquire a few more than 2,100 stores from Riteaid for $5.175 billion. The move is expected to result in nearly a half billion in annual synergies and helped to boost share prices in premarket trading.


Rite Aid will get a $325 million termination fee for its trouble but is left with a smaller footprint and increased competition from larger Walgreens. This company reported a top and bottom line miss that sent shares tumbling nearly -20% in the premarket to trade at a 4 year low.


Fred's, a smaller discount drug store chain operating in the southeast, was supposed to purchase a number of Rite Aid stores as part of the original Walgreen's/Rite Aid merger agreement. They get nothing now and expansion plans are scrapped. Based on adoption of poison-pill measures the company is not interested in a take over so their next move is unclear. Shares of the stock fell more than -23% to trade at an 6 month low.


The Indices

The indices looked like they were going to extend yesterday's rebound and then the market opened. At that point sellers took over to drive the indices to 1 month lows but the action was not all bearish. Support levels were reached and bargain hunters snapped up good deals. Action was led by the tech sector and the NASDAQ Composite. Intraday losses were in the range of -2.5% but the index managed to claw its way back to close with a loss of only -1.44%. Today's candle is long and red, the longest since early June, and comes with mixed signals. Its length and color suggest more downside to come, the long lower shadow a sign of support. The indicators are weak and confirming a sell so I expect to see downside pressure with a chance of finding strong support just below today's lows. Downside target is near the long-term up trend line just above 6,000, a break below there would bring additional targets.


The broad market closed with a loss of -0.85% and created a medium size red candle with long lower shadow. The fall from the long-term trend line confirms resistance at the all-time highs, the long lower shadow support below the short-term moving average. The indicators confirm the move lower and suggest a further test of support is likely. Today's action closed below the short-term moving average so downside target for near-term support is 2,400 and then 2,350 should the first level fail.


The Dow Jones Industrial Average closed with a of -0.78% after hitting lows near -1.5% intraday. The blue chips created a long red candle with visible lower shadow, falling from resistance at the long-term up trend line. This move confirms signals fired by the indicators but was halted at support along the short-term moving average. The indicators persist in moving lower so I expect to see support tested further. A break below the moving average would be bearish with downside target near 21,000 and then 20,500 should a deeper move ensue.


The Dow Jones Transportation Average closed with the smallest losses of the day, -0.37%. The transports created a small red candle just below the current all-time high. The index appears to be drifting up to test the all-time high and the indicators are consistent with this. MACD momentum is bullish and stochastic is rolling over into bullishness which together do not make a buy signal but at the same time do not indicate lower prices. Resistance is at the all-time high, a break above that would be bullish.


The market continues to churn and the charts look like more downside is possible. The caveat is that today's move and much of the volatility we've seen over the last few weeks is driven by sector rotation ahead of earnings season, the end of the quarter and the end of the half. After tomorrow we'll be in a new month, a new quarter and a new half with earnings season unfolding and outlook for double digit earnings growth over the next 18 months. Selling may continue tomorrow and even next week but I think it won't last long and won't drive the market too low unless the earnings season is a disappointment. I'm neutral for the near-term and still bullish for the long.

Until then, remember the trend!

Thomas Hughes


 

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