Introduction

US indices pulled back on mounting tension with North Korea, is it time for correction or is this the next entry point within the Trump Rally? The answer to that question will likely come down to how the North Korean situation plays out. If it continues to escalate the correction could deepen, if it begins to blow over the rally may resume. Regardless, underlying fundamentals remain bullish with positive forward outlook so a major reversal is likely not in the cards.

International indices moved lower on mounting tensions with North Korea. Asian markets were the least affected, shedding less than a half percent on average. The Heng Seng led with a loss of -1.13%. Losses in Europe were much sharper in the range of -1.0% on average. Downward pressure was exacerbated by weakness here at home despite positive showing on the earnings front.

Market Statistics

Futures were down all morning indicating an open about -.35% below yesterday's close. This held fairly steady throughout the morning with little movement on earnings or economic releases. The open was active but not crazy, the indices began trading with small losses and quickly turned those into moderate losses. The SPX hit -1% around 10AM, bounced before moving a bit lower, and then hit intraday bottom near -1.25% just after 12:30. The market crept steadily higher over the next hour but did not recover more than about 0.25% of the loss before resistance was hit. Late in the day selling resumed and took the indices down to the lows of the session where they lingered into the close.

Economic Calendar

The Economy

Weekly jobless claims continue to reflect tight labor market conditions. Initial claims rose by 3,000 on top of an upward revision of 1,000 to hit 244,000. The 4 week moving average of claims fell by -1,000 to hit 241,000. On a not adjusted basis claims rose 6.5% versus an expectation of only 5.1% and are down -8.5% year over year. While the downtrend in initial claims has stabilized over the past 6 months it has done so near historic lows and is consistent with labor market health.


Continuing claims fell by -16,000 to hit 1.951 million. The headline number of continuing claims has made a near term top and fallen below the moving average so may be headed lower in the near term. The 4 week moving average of claims rose by 500 but remains well below 2.0 million, near historic lows and consistent with labor market health.

The total number of Americans receiving unemployment fell by -35,172 to hit 1.971 million. On a year over year basis total claims are down -8.0%. This week's decline is in line with seasonal and long term trends, and consistent with ongoing labor market improvement. Now that the total number has crested it's seasonal mid-summer peak we can expect to see it fall over the next 2.5 to 3 months. Downside target is between 1.5 and 1.75 million.


The Producer Price Index came in at -0.1% and below expectations. Consensus target was 0.3%. Ex-food/energy inflation is unchanged month to month. On a year over year basis headline producer level inflation is running at 1.9%, just shy of the Fed's 2% target. In terms of market reaction this report was perfectly neutral as it did not raise fear of the Fed or of a slowing economy.


The Dollar Index

The Dollar Index was able to creep higher by 0.15% despite safe haven flows to the yen and the Swiss franc. The index created the fourth of four small bodied candles that have formed since the NFP induced bottom last week. The index may be in reversal but this may mean a change to sideways from down and not down to up. The indicators are bullish and moving higher although stochastic may be said to be overbought within a downtrend. If the index is in reversal there will likely be a test/retest of support with additional signal so I see no need to rush into anything. Support is at the recent low, near $92.75 and the 15 month low. Resistance is just below $94, a break above which would help confirm bullish reversal. On the economic front data is in support of growth and the dollar, but not strong enough to increase the FOMC rate hike outlook.


The Gold Index

Gold prices surged to a 2+ month high of safe haven inflows. In the near term resistance is near $1,300 with spot prices trading just below at $1,292. Today's action saw the metal gain nearly a full percent and confirm support near $1,280. If the Korean Situation escalates further it could send gold even higher with the caveat the move is driven on fear and taking gold to an upper extreme it may not have otherwise reached. Sooner or later the situation underlying the move will blow over and prices will return to a more normal level. That said I'd be more interested in selling at resistance than getting on board with the rally.

The Gold Miners ETF GDX jumped nearly 2% on the move in gold but the move was capped at near term resistance. Resistance is near $22, the top of near term trading range and the mid-point of a short/long term trading range. The indicators remain consistent with range bound trading and do not suggest change is coming. If the ETF does move higher it will hit next resistance near $23.60 and the 38.2% retracement level. Support may be found just below today's candle near the long and short term moving averages, in the range of $22.50 to $22.75.


The Oil Index

Oil prices had another volatile day, first moving up to test resistance and then later falling from that resistance to close with losses greater than 1.30%. While US inventory data was bullish yesterday new data confirming rising production within OPEC and indications Russia is thinking about increasing production weighed on prices. On the OPEC front today's data included details on last month's production, a 2017 peak driven largely by Nigeria and Libyan increases but also attributable to tenuous compliance with the production cap. On the Russia front Gazprom said in a statement that it was economically feasible to resume production in fields now dormant once the OPEC/Russia production cap expired. Fundamentals remain supply side heavy and likely to remain so into the foreseeable future.

The Oil Index fell a little more than -0.80% to hit the 1,120 level. This has been a significant support/resistance level for over a year whose test as support now may confirm bottom and reversal in the energy sector. I've been anticipating such a reversal for some time now, primarily due to forward earnings growth outlook, but not yet ready to pull the trigger. The indicators have only just rolled over and oil looks like it might move lower within the range near term so a test of support at 1,120 is likely. A move below this level would be bearish near term with target neat 1,100. A confirmation and/or bounce from support may find resistance near 1,150 and the long term moving average.


In The News, Story Stocks and Earnings

Earnings, and specifically retail earnings, were front and center this morning. Reports from Kohl's, Macy's, Dillards and others failed to soothe fears of slow down in the brick & mortar operators. Macy's reported earnings and revenue slightly above consensus but also comp store sales down -2.5% and full year guidance for -4% sales growth. Kohl's also reported above expectations but internals within the report show declining sales and struggling business. Dillard's revenue beat by a fraction, due to massive mark downs that I myself took advantage of, but declining YOY revenue and comp store sales weighed on share prices. The group as a whole moved lower led by Dillard's -16% and followed up by -10% for Macy's and -6% for Kohl's. The XLF Retail Sector SPDR fell -3% and below near term support levels.


Snap reported after the bell and the social media app reported less than expected. Less than expected revenue, less than expected earnings and less than expected user growth. The good news is that revenue did grow, by a whopping 153%, but the net loss also widened calling into question profitability factors. Shares of the stock fell more than -6% on the news.


The VIX jumped nearly 40% today. The gain is caused by a combination of declining index prices and increasing options prices, and driven on near term fear. It is possible this fear will develop into something longer term but there is no sign of that at this time. Today's spike takes the index up above 15 and to levels it has peaked at 4 times before in 2017. At this level put options begin to become attractive, a test and/or confirmation of resistance could be the trigger for a fade.


The Indices

The indices moved lower today and there was no doubt about it. The North Korea situation is the catalyst but I think the market was ready to sell and just waiting for an excuse. Today's move was led by the tech sector and the NASDAQ Composite with a loss of -2.1. The index created a long red candle with flat bottom coming to rest just above my long term up trend line. It looks like it will continue lower to test support near the trend line at 6,200. The indicators are bearish and indicating strength in the near term, confirming this outlook. A break below 6,200 would be more firmly bearish but still not damage the long term up trend. Downside target in that case would be near 6,000 and the long term moving average.


The S&P 500 made the 2nd largest decline in today's session, -1.31%. The broad market index created a long red candle with bearish indications. Today's action falls below the short term moving average and is confirmed by bearish indicators. Both MACD and stochastic are moving lower in confirmation of the fall although longer indications remain bullish. If selling persists into the near term downside target is near 2,400 and the long term moving average.


The Dow Jones Transportation Average made the 3rd largest decline, -1.25%. The transports created a medium sized red candle falling below the long term moving average that looks poised to move lower. The indicators are mixed and suggest the move lower may be losing steam although downside momentum prevails. Target is near 9,000 or just below along the long term up trend line which has provided strong support several times in the past.


The Dow Jones Industrial Average fell -0.92% and created a medium sized red bodied candle. The index fell to support at a long term uptrend line and broke through. The indicators are consistent with a a peak within an uptrend but have not yet confirmed a move lower. Downside target is just below along the short term moving average, if the transports are leading the market we can expect that target to be exceeded.


The markets are moving lower and those moves may continue into the near term. The bottom line is that moves in the dollar, gold and equities are being driven by fear and not fundamentals. The Korean Situation is scary, poses a risk to the market and may result in WWIII but more likely to be resolved in a less dramatic way. What I am trying to say is that it is an excuse for profit taking and an extension of rotations already underway. Risk-off safe haven flows will eventually reverse and the markets will reverse with them. I've been waiting for a dip and this is it. I am firmly bullish long term and cautiously bullish near term waiting and watching for the dip to be bought.

Until then, remember the trend!

Thomas Hughes