Introduction

Rotation persists as earnings season draws near. Today's round was led by Tesla as fears of bubble drive investors out of the stock. Adding to today's malaise was yesterday's FOMC minutes which revealed an FOMC as divided on interest rates as they've ever been. Earnings season begins next Friday with releases from Wells Fargo, Citigroup and JPMorgan, expect rotation to continue until then. Action today was light if bearish and did little to alter the near-term picture.

Asian indices were mostly flat if tilted to the downside following yesterday's FOMC minutes. Losses were led by the Nikkei's -0.47%. European indices were more firmly lower, closing with losses in the range of -0.5% as the G20 meeting gets underway. Speeches and comments from Trump concerning Russia and North Korea added to traders unease.

Market Statistics

Futures were down all morning but losses were limited to roughly -0.30%. The mornings economic data did little to inspire bullishness and left the indices drifting lower into the open. The SPX opened with a loss of -8 points and quickly extended that to -20 or -0.75%. Bottom was hit just after 10AM causing a fairly sharp bounce. The bounce cut losses in half, rising to meet resistance just below the opening level. Resistance drove the index back to the morning low just after 3PM where it languished for only a few minutes before extending the day's losses to -23 points.

Economic Calendar

The Economy

The Challenger Gray & Christmas report on planned lay off's fell -6% from the previous month to hit a 2017 low. The number of planned or announced lay off's totaled 31,105, -19% from this same time last year. On a year to date basis lay offs are running -28% below last year's level and are down -20% from the first quarter to the second. The hiring component shows the number of planned hirings at 40,095, down -48% from last month but up 190% YOY. This month's addition of jobs brings the YTD total to +487% over last year.


The ADP report on job creation says there were 158,000 new jobs created in June. This is below expectation and down from the previous month. Job creation was led by medium sized businesses and 100% services related. There was an increase in manufacturing jobs but it was offset by declines in natural resources and construction.


Initial claims for unemployment rose 4,000 to hit 248,000, last week's figure was not revised. The four week moving average of claims gained 750. On a not adjusted basis claims rose 4.5% versus an expectation of 3.8% and are down -6.3% YOY. Claims have been drifting higher over the past few weeks, in line with seasonal expectations, but remain consistent with long term labor market trends.


Continuing claims rose by 11,000 to reach 1.956 million, last week's figure was revised lower by -3,000. The four week moving average rose 6,750 to hit 1.944 million. Both of these figures have also been drifting higher in recent week's but not alarmingly so. Both remain consistent with ongoing labor market health and tightening conditions.

The total number of Americans receiving unemployment benefits gained 15,944 to hit 1.844 million. This is in line with seasonal expectations and consistent with long term trends, down – 9.9% from this time last year. We can expect to see the total number of claims continue to rise in the near term, topping out over the next couple weeks, and then resume its downward trajectory into the end of the summer and back to school/holiday shopping seasons.


The ISM Services Index came in at 57.4, above expectations and up 0.5% from the previous month. All components showed growth this month although the employment index declined. The employment index fell -2 points to 55.8 but remains strong relative to trend.


The Dollar Index

The Dollar Index fell on today's less than robust jobs creation numbers and FOMC uncertainty. The index shed a half percent to drop below the $96 level and looks like it could go lower. The indicators are both bearish and pointing lower, suggestive of lower prices, with a near term target of $95.50 and possibly move down to $95 and $94 short to long term. If the FOMC outlook for rate hikes remains weak or weakens while that of other central banks firms the dollar index is likely to continue moving lower.


The Gold Index

Gold prices held steady in today's trade despite mixed FOMC outlook and a weakening dollar. Spot prices hovered between $1,220 and $1,225 with little sign of breaking to one side or the other. Gold is not sitting on a support target waiting on tomorrow's NFP. A break below support could take it to $1,200 in the near term with a chance of breaking through to move lower. A bounce would confirm support but face resistance at $1,235.

The Gold Miners ETF GDX fell a little more than-0.5% and appears to be confirming resistance. Today's move lower begins at the $21.75 support/resistance line and is confirmed by the indicators. Both MACD and stochastic are ticking lower following bearish crossovers and consistent with lower prices. The caveat is that indications are a bit weak and remain consistent with range bound trading. Firm support should be in the range of $21, a break below that would be bearish with a target near $20.


The Oil Index

Oil prices tried to rally today but were not able to hold the gains. Surprisingly law drawdowns of crude and gasoline sparked a move of more than 3% but profit takers were ready to step in. WTI closed with a gain of only 0.33% as longer-term supply/demand reality capped gains. Support is now $45, a break back below there could easily send oil prices back to test the recent low.

The Oil Index fell a full percent and looks like it will continue to fall in the near-term. Today's candle is long, red and extends a fall from resistance begun yesterday. Resistance is the short-term moving average and previous support at the 1,120 level. The indicators are generally in line with the move but have not yet confirmed. Downside target is the current low near 1,080 and then 1,050 should that break down. The 1,050 level is the bottom of last year's long-term trading range and a likely target for support.


In The News, Story Stocks and Earnings

Tesla was the dog of the market today, falling another -5.5% as bubble fearing investors flee the market. The stock is now trading near $308.00 and entering bear market territory. Now down a little more than -20% from the peak set just a few week's ago Tesla is in danger of further downside. Although Tesla share prices are inflated with a glamour premium the move is likely overblown. This week's news was not overly encouraging but it wasn't bad enough to warrant a -20% decline, the stock has bounced back from profit taking in the past.


The financial sector has been strong in recent weeks but was not immune to today's selling. The Financial Sector SPDR XLF fell -0.75% creating a small red candle falling from resistance. Resistance is the current 9 year high just above $25.00. The indicators are weakly bullish suggesting resistance may be tested further but do not give strong indication a breakthrough is on the way. If the ETF is able to break through, perhaps on better than expected earnings, upside target is $26.50.


The VIX gained a little more than 13% today and looks like it will move higher into the near-term. Today's price action created a long green candle, the 2nd out of 5, and the completion of a Rising Three Methods continuation pattern. The indicators confirm the move as well, both creating bullish crossovers with today's action. Upside target is near $15. Despite the bullish outlook price action looks more methodical than driven on rising fear, for what that's worth.


The Indices

The NASDAQ Composite led the indices lower with a loss of -0.99%. The tech heavy index opened with a loss and then extended it but only created a small bodied red candle. Today's action tested support at the 6 week low and may continue to do so into the near-term. Both indicators confirm a move a lower with the possibility of moving down to firmer support at the long-term up trend line, just below today's close.


The S&P 500 made the 2nd largest decline in today's action creating a medium sized red bodied candle. Today's action confirms resistance at the short-term moving average with the caveat of support being just below today's close. The indicators are both confirming a move lower so support is likely to be tested further. Support is near 2,400, a break below that would be bearish for the near-term.


The Dow Jones Transportation Average comes in third today with a loss of -0.73%. The transports created a small red bodied candle falling from the just set all-time high. The index is cresting a peak within an up trend that may result in a correction of some form. The indicators are both consistent with a move up and touch to resistance although both are also divergent and suggestive of correction. A pull back from this level could go as low as the 9,500 level, about -1%, or below that to the short-term moving average, about -3%, in the near-term.


The Dow Jones Industrial Average brings up the rear in terms of losses. The blue chips shed -0.72% creating a small-to-medium sized candle moving down from resistance. Resistance is the bottom of the long-term up trend line and the current all-time high, support is however just below today's close at the short-term moving average and bottom of near-term range. The indicators are mixed, stochastic is pointing lower following a bullish crossover while MACD is making a weak bearish peak, but both suggestive of consolidation/test of support within an uptrend. A break below the moving average would be bearish in the near-term with downside target near 21,000. A bounce from here and break to new highs would be bullish with upside target near 21,600 and 22,000.


The market is still in rotation as we approach 2nd quarter earnings season. Considering the market has not sold off more than it has I'd say it was hopeful if not optimistic about results. We may see the indices pull back a little more before the season really gets underway but so long as forward outlook remains positive bull market conditions should continue. The question now is how good will earnings growth be this time around? The expectation is 6.6% with a chance of running as high as 10% and for double digit growth to continue for the next 6 quarters at least. With this in mind I have to be bullish for the long-term although I remain cautious for near-term trades. If there is a pull back I'll be ready, if not I'll still be ready.

I almost forgot, tomorrow is the NFP and a potentially market moving event. The ADP was a bit weak but never really gives clear indication of what the NFP will be. Other indications show that labor markets are firm and businesses are hiring so I expect the number will be at least positive. Consensus is 185,000, I'm going to guess 150,000 with a chance for positive surprise.

Until then, remember the trend!

Thomas Hughes


 

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