Introduction

With Hurricane Harvey and the ECB behind us market eyes turn to Irma and the FOMC. Irma is a strong Category 5 storm and targeting a far larger swath of the US mainland, from the tip of Florida up into the heart of Appalachia and scouring the southeastern coastline from the Keys to Cape Lookout. There are already gas shortages reported as evacuees flee target areas, supplies are limited and destruction is expected to be heavy. Landfall is expected early Saturday, the approach and aftermath are sure to affect market sentiment.

On the International front markets were buoyed by the rally in US equities Tuesday but gains were minimal as the approaching storm, an ECB meeting and approaching FOMC meeting loom over the market. In Asia indices were mixed; both Chinese indices fell while Japan and Korea made small gains. European indices were more firmly bullish but gains were still small. Today's ECB meeting was as to be expected, a whole lot of nothing that left traders wondering what the bank really thinks. They left rates unchanged and gave little hint in the statement as to direction. The press conference was a different story, Draghi seemed to be both hawkish and dovish at the same time. He said a decision on “policy calibration” was coming this fall, commenting on the breadth and strength of recovery and then hedging those sentiments saying the bank was ready to increase QE if needed.

Market Statistics

Futures trading indicated a mildly negative open in the early hours. They crept higher as the morning wore on, reaching break even just before 8:30AM. The daily data releases and ECB statements lifted added a little lift to the trade and put the indices on track for a positive open. The SPX opened with a gain slightly greater than 2 points or 0.08% and gains held for the first 15 minutes or so of trading. After that the index dipped down to break even and then down into negative territory giving up about 5 points at the low of the day. The lowest low within the days narrow range came around 12:45 and resulted in nothing more than a small bounce and continuation of sideways trading. By late afternoon the indices had returned to near break even where they remained into the close of the day.

Economic Calendar

The Economy

This is the first week for Hurricane Harvey to impact economic data. The weekly initial jobless claims are perhaps the most current read on the economy and lag by a week only. The continuing claims lag that by a week, and the total claims figure by another week so the first impact of Harvey to those figures will be next week and the week after.

Initial jobless claims jumped 62,000 to hit a high not seen since April 18th, 2015. The number of initial claims is 298,000 and likely to remain elevated over the next few weeks. The previous week's figure was not revised. The four week moving average of claims rose 13,500 to hit 250,250. On a not adjusted basis claims 27.5% versus an expected 1.3% and are now up YOY by 15%. The caveat to these numbers is of course the storm, and the coming storm. Going into this week the numbers were good, trending low and lower with no expectations of change. I will assume trends will remain stable in unaffected parts of the nation but the overall affect on labor and economics is yet to be seen.


Continuing claims fell by -5,000 but expect this number to rise next week and in the coming weeks. Claims are now 1.940 million and in line with expectations. The previous week's figure was revised up by 3,000, the four week moving average fell by -4,000. At this time the figure is trending low and near the historic lows, consistent with labor market health.

The total number of claims fell -44,256 to 1.872 million. This is the lowest level since July 1st, consistent with seasonal expectations and long term labor market trends. Assuming no impact from the storm this number was expected to fall to a long term low over the next few weeks and is well on its way.


Unit Labor Cost and Productivity for the second quarter was released today as well. The data shows a 1.5% increase in productivity as output increased 4% and hours worked rose 2.5%. Year over year productivity is up 1.3% with a 2.8% increase in output and 1.5% rise in hours worked. This data is a win-win for the economy as it shows increased output, increased productivity and an increase in hours worked. Unit labor costs are up only 0.2% from the first quarter and down -0.2% over the past 12 months.


The Dollar Index

The Dollar Index fell more than -0.5% to break through support and set a new 2.5 year low. Today's move was driven by the ECB decision and comments as well as US data and impact from the storms. While Draghi's comments included lingering dovishness he can't seem to shake they did put a bid in the Euro. He raised forward outlook for GDP and indicated a policy decision would be made later this year. Assuming that there is no deterioration in the data this means taper/tightening.

The EUR/USD shot up to test long term resistance on the news and looks like it will break through. The dollar additionally lost ground against the yen and other world currencies as economic data remains in that Goldilocks range where we have growth and little to no inflation. The indicators are in support of today's drop in the DXY, suggesting targets low in the $80's range. The risk is that economic data will pick up and/or the FOMC will starting talking hawkish again.


The Gold Index

Gold prices firmed as the dollar weakened. The metal is supported by a weaker and weakening dollar as well as geopolitical turmoil that doesn't appear to be dissipating. Spot prices jumped more than 0.80% to trade above $1350 and at a one year high. Price is not at a significant resistance target and round number that could impact trading in the near term. A break through $1350 would be bullish and could take gold up to $1380 or $1400.

The gold miners moved higher in response to the increase in gold, the miners ETF GDX gaining a little more than 2.35% to set a new 7 month high. The move is supported by rising prices but is approaching a long term resistance level. This level is near $26 and the top of the long term trading range. The indicators are bullish and suggest that this level will be reached. That being said momentum remains weak and stochastic suggests an overbought asset within a trading range so caution is warranted.


The Oil Index

Oil prices were relatively stable today, trading in a tight range near $49 and closing with a small loss. Over the past few days prices have edged up as Texas oil country begins to come back to life and they may edge higher. Irma is putting an additional strain on gas supplies that will equate to draw-downs of supply in the coming weeks. In the near term resistance is at $50, a break above there would be bullish with targets near $52.50. Regardless, with oil trading near the high end of the short term trading range forward earnings outlook will stabilize and firm.

The energy sector is also moving higher. The Oil Index gained roughly 0.50% to set a one month high but still face resistance at the long term moving average. The index is bouncing higher from long term support and may have entered my long awaited reversal pattern. The indicators are bullish and gaining strength so a move up to test resistance at the long term moving average looks likely in the least. A break above the moving average would be bullish but face additional resistance before full reversal is assured.


In The News, Story Stocks and Earnings

GE took a hit today when analysts at JPMorgan said the company's fundamental's are most likely worse than we think. They say the company's reset is going to be undermined by structural weakness in power, a less than expected rebound in oil & gas and a more GAAP approach to accounting. They say there are downside risks to their already low estimates and compare the company's outlook to that of Tyco in the 1990's. Shares of the stock fell nearly -4% to hit an almost 2 year low.


GoPro updated its Q3 guidance before the bell. The company says that revenue and earnings will be at the top end of the range and above consensus as consumer trends strengthen. They also expect to see margins expand and to post a profit on a non-GAAP basis. Shares of the stock jumped more than 12% to create a pinbar doji at a significant resistance level.


The VIX closed with nearly no gain or loss, creating a small red bodied candle sitting on support at both moving averages. The index shows an elevated amount of fear but not an extreme amount and is trending near the middle of the 6 month range and appears to be stabilizing at that level. We may see additional spikes on news and events but so long as the index remains below the 16 level and within the trading range bull market conditions are likely to persist over the longer term.


The Indices

With so much hanging over the market's head right now the fact the indices are holding their levels shows some resilience. Today's action was impacted by data, the FOMC, the ECB and earnings. Disney and Comcast both issued profit warnings that took a bit of steam out of the media sector. Disney for one fell -3.9%. The Dow Jones Industrial Average posted the largest decline, -0.10%, creating a small red bodied candle. Today's candle is sitting on the short term moving average and closes below it, as well as the long term up trend line, but does not confirm a break of support. The indicators are mixed but generally consistent with support. A break below the moving average would be bearish with a target near the long term moving average. A move up would be trend following and bullish with potential resistance at 22,000 and then the all time high.


The S&P 500 also closed with a loss, -0.02%, and created a small red bodied candle. Today's candle is sitting on the short term moving average and confirms, in its small way, support at that level. The indicators are both bullish if on the weakside, as are both moving averages, suggesting additional upside is on the way. Support is near 2,460, a bounce from here would be bullish and trend following. A break below the short term moving average would be bearish but near term only, with target near 2,425 and the long term up trend line.


The NASDAQ Composite posted the smallest gain, 0.07%, and created a small doji candle. The index is sitting above the short term moving average appears to be consolidating after a trend following bounce from support. The indicators and both moving averages are rising in confirmation of the move and suggest higher prices are on the way. A bounce from the moving average would be bullish and trend following with upside target at 6,600 in the near term.


The Dow Jones Transportation posted the largest gain, 0.39%, and looks the most bullish. The index is consolidating above the long term up trend line, the long term moving average, the short term moving average and the 9,300 resistance line that has been in play over the last year. The indicators are bullish and support a strengthening market with both MACD and stochastic showing increasing strength. A bounce from this level would be bullish with possible resistance at 9,500 and then the current all time high.


With earnings season still a ways off and so much going on in the world it's a bit surprising to the see charts the way they are. Bullish. They are, as a group, bouncing up off long term support levels in line with prevailing trends and supported by the indicators. The only thing left for them to do, in most cases, is to break final resistance targets and move up to new highs. The VIX is a small concern but it's rise to current levels could be easily attributed to protective put buying rather than outright bearishness. I remain firmly bullish for the long term, and cautiously bullish for the near term. When and if the move higher begins I will be ready to add to bullish positions.

Until then, remember the trend!

Thomas Hughes