This morning started with positive futures trading following yesterday's retreat. An expected announcement from the ECB, U.S. employment data and earnings were all on tap. Asian shares had a mildly negative day, falling on slow growth concerns. The negative sentiment was not echoed in Europe, where traders eagerly awaited an expected interest rate cut. News as expected from Europe and a surprisingly good unemployment claims report helped the U.S. indexes at least to advance the mornings small gains. By days end both the European and U.S. markets had made a nice advance.

Commodity prices remain volatile. Gold continued it's trek back up from hitting its recent lows. Oil made a big intraday move, about 1%, but remains in the range we have seen over the past few months. Natural gas inventories were bearish and led those prices lower by nearly a percent. There is a huge rotation going on and commodities are one area being impacted. What I am hearing and reading is leading me to believe that the “sell in may and go away” attitude may be out of place this year.

It was also another big day for earnings. The sheer number of companies reporting, if not the names themselves, made it so. GM was biggest name that jumped out at me as an individual company but I/b> also noticed several gold companies as well. A glance at the charts, keeping in mind the recent low prices of gold, suggests that the prices of gold companies have not yet hit their lows. Even if gold prices remain where they are now they are still at multi-year lows and will negatively impact future earnings for these companies.

The Economy

There was actually a lot of data today. On top of the weekly unemployment claims figures there was also Challenger job cut estimates, productivity and unit labor costs. Even though today's economic roster did include one of the big two, ADP or NFP, the data is still very important to the overall picture. This week is unique in the monthly cycle of data because we get to see week to week economic data and monthly macro economic data at the same time.

Today is also unique because everything was released at the same time, 8:30. I'll start the barrage with my weekly favorite, initial claims. First time claims for unemployment fell by -18,000 to hit a +5 year low. This surprise drop was off set by a +3,000 revision to last week's data but still resulted in a net drop of -15,000. The four week moving average of claims also fell, shedding -16,000 to hit 342,250. This is the third week of declines in initial claims and the first week that the March spike has not been included in the moving average. This drop is a good sign, if less people are filing for unemployment the perhaps less people are getting laid off. At this time the trend in claims is down, lets see if it continues.

The Challenger numbers also support a market in which less people are being laid off. The Challenger survey revealed that the number of planned lay-offs dropped -24% in April. This follows a gain of +30% in March from February. On a year over year basis the April number of expected lay-offs was down 6% from last April and retreating from high levels seen earlier in the year.

Continuing claims data for last week was revised up and this weeks figure is another gain on top of that. Despite this double bump in claims the number of continuing claims is still at 5 year lows and trending down. After seeing this weeks number of initial claims I also expect to see continuing claims drop again in the next week or two. At this time the decline is very gradual but there is a definite down trend in continuing claims.

Total claims, which is not revised, dropped by over 100,000 this week to hit a new 6 month low. The total number of claims for unemployment dropped to 4.963, falling below 5 million for the first time since last November. This level is also very near to a five year low set the same time last November. On a year over year basis the total number of claims has fallen more than 24.7%. This pace is about the quickest I have noted this year and is expanding. Unemployment claims, as whole, are in decline. Whether this is a sign of less firing, more hiring or just plain less people participating is complicated. Some of all those factors are in play. The official unemployment rate, reported tomorrow, is expected to show a gain of +0.1%. Based on the down trending unemployment claims and drop in Challenger survey results I think that may be too cautious an estimate. Consensus estimates for the official unemployment rate are for a gain of +0.1% to 7.7%. The consensus for the Non-Farm Payrolls is for a gain of 145,000.

Non-farm unit labor costs and productivity were also released at 8:30 AM. Both numbers increased. Productivity increased by a weak +0.7% but is a reversal of the previous months -1.7% decline. This tepid increase in productivity could lead employers to hire, according to one article I read. If so it is one more argument on the side of lower unemployment. Unit labor costs also rose, but not as much as expected. Costs rose only +0.4%, much smaller than the previous months increase of 4.4%.

Today's Spotlight: The ECB

The ECB stole the show today with a semi surprise cut in its key interest rate. I say semi surprise because even though there was talk of a cut, and I include myself, I don't think anyone seriously thought it was coming. The ECB cut the rate by a quarter point to 0.5%. This is the first cut since July of last year and not enough according to some pundits. The ECB has been behind the rest of the world in it's efforts to stimulate growth and still has a 25 basis points to go before matching the efforts of the FOMC. Their lack of earlier effort may be good enough now, even with the somber tone to Draghi's comments. He says that there is still weakness in the EU and that it will continue into the spring. Policy will remain accommodating. The euro sold off after the release and statements, counter to earlier price action this week. The EUR/USD was bouncing off the short term moving average but hit resistance yesterday. A pin bar formed and was today confirmed as a shooting star. Bearish long term momentum is matched by a near term bearish divergence. My downside target on this pair are 1.2880 and 1.2750.


Gold, Gold Stocks, The Gold Index

Gold traded to the upside today following the ECB announcement. The gain brings the price of gold back to near break even for the week. Gold has been trading sideways for about a week since the recent bounce ran out of steam just under the $1500 level. The Gold Index has also been trending sideways. However, where gold has retraced more than half of the drop from $1600 to $1300 the Gold Index has only retraced 38.2% before meeting resistance. It has since fallen back to the 23.6% retracement level and looks like it is caught between the two, at least for now. The price of gold will lead the index, but only to a certain extent. The earnings potential of the gold stocks is severely hampered by low gold prices so I think we can expect to see more selling in that sector.

Gold Index

I glanced around through the list of gold stocks and came up with the same answer in each case. There is some variation from stock to stock but the theme among them all is downtrend. At least three gold miners reported earnings today. Goldcorp, Randgold and Royal Gold. Goldcorp's report says it all. The gold producer sold 9% more gold this year than last year in the same period and earned 38% less on a per share basis. The stock could not decide which way it wanted to go today. It is currently in a downtrend but above potential support. Long term technicals are also bearish but suggest that some support may exist around $27.50. If gold prices do not pick up Goldcorp's earnings potential is going to suffer further setbacks. A break below the $27.50 level could take the stock down around the $25 level or lower.


Royal Gold's report was even worse. The company reported a near 75% drop in revenue and earnings. The chart reflects this decline. The stock gapped down below support in tandem with the drop in gold prices last month. Now, it is consolidating in a sideways pattern. The recent bearish peak in MACD suggest that the recent lows will at least be retested if not broken through.

Royal Gold

Other Earnings Of Interest

GM beat estimates and provided positive guidance. Strength in the U.S. offset known weakness in the European segment and helped to produce better than expected net results. Even though weak, the European segment did show some improvements. The company reported earnings of $0.67 per share, far outpacing expected earnings for $0.51. Even including a $0.09 cent charge earnings are still beyond expectation. One gray cloud was the possibility of a slowing U.S. car market. As I look at the charts I say to myself, wow. I am immediately drawn to a head&shoulders on the MACD coincident with the tombstone/pin bar signal created by today's price action. Some investors were happy with the news and sought to buy in, others were happy with the news as well and started selling in force when prices hit the daily high. Today's high is near a resistance level set in 2011 and long term technical indicators are also divergent.


AIG reported after the bell. The market for this stock was bullish going into the close of trading, the reported $1.34 versus the expectations of $0.88 per share. Revenue did not meet estimates but that is not surprising. The stock has been trending up for the last 6 months and ended the day near long term resistance. The stock popped in the after hours market and punched right through long term resistance.


The Semiconductor Index

The Semiconductor Index made a new 2 year high as it approaches resistance at $450. Two major chip makers, Intel and Advanced Micro Devices are both moving up after breaking out of a five bottom in the chip sector. Both stocks are approaching resistance that could limit gains in the near term. These levels may coincide with the SOX reaching $450. Long term MACD is bullish, weak and divergent as price approaches resistant. In the near term MACD is strong but could be peaking. It is possible the Semiconductor index could rally and break through resistance but that moved could be capped as INTC and AMD approach their own resistance levels.

Semiconductor Index

Intel has a lead on AMD in terms of their respective breakouts. This stock has been rallying for about a month and broke out of its bottom about 2 weeks ago. MACD and stochastic are both strong and the stock has some room to move before reaching resistance. A consolidation here or even a pullback would help alleviate near term overbought conditions and help it to move up to the top of the range. The SOX breaking out to a new high may assist this move and attract new players to this market. Upside resistance is around $25 at this time with a secondary line drawn at $25.50.


The S&P 500

The S&P bounced back from yesterday's sell off to make a new all time high. The market was almost in stealth mode today. Nothing really exciting happened in the pre-market. Even the ECB rate did not move futures that much. In fact, futures had come off their highs following the reported rate cut. After the open the market was very quiet. The S&P traded in a very tight range for the first half hour, less than three points. Then, a little after 10 AM the index started to creep up and began moving toward the day's high. After pondering why this would happen, before the NFP number tomorrow, I came up with this. Now that the ECB has lowered its rates we have all central banks on board with global financial support. The FOMC is supporting the U.S. markets with $85 billion in bond and asset purchases each month, the BOJ is supporting, re-inflate is more appropriate a term, it's economy with “aggressive” and “unlimited” easing and money printing policies aimed at increasing inflation to 2% within 2 years. The ECB has been the long hold out on QE. It has now re-entered the fight.

SPX 30 Minute Bars

The SPX reached a new all time high today but still did not breach the round number resistance of 1600. The ECB news was good but is it enough? It is good for the central banks to support the economy, we still need help, but is this the right help? Will the long term implications be worse than the symptoms they are trying to cure? With the SPX at this crucial psychological level the NFP could be a real market moving event. A surprising drop could spark a round of fear based selling but I think it might not matter as much as it gets hyped. Last month's surprise drop helped get perspective in check. Near term support exists at 1580 and 1572, as for the upside a break of 1600 would be bullish.

SPX Daily

The Transportation average also traded higher today but did not regain as much ground as the S&P. It was halted at the top of the triangle range it has been in the last two months. This pattern is not great for predicting market direction but is great for predicting targets once a confirmed breakout occurs. The first target would be equal to the height of the triangle, in the direction of the break, from the point of break out.

This triangle has a high density of long black bars relative to the last 12 months which is a negative but not a definative indicator of direction. The long term MACD is weakly bearish, the near term weakly bullish. It looks like it could go either way.

Dow Jones Transportation Average Daily

Today was a big day but tomorrow could be bigger. Today brought the market to new all time highs but tomorrow could break us out into a new rally. Or it could come and go like so many other Friday's. The NFP is a highly anticipated report and its number is revealing. However, it is not the only thing driving the markets. The real question is what do CEO's, investors and traders think the economy and corporate earnings are going to be like next week, next month and next quarter. At this time the economy is stabilizing, the worlds central banks are working in synch to support financial systems, earnings are growing even if revenue is not and the long term labor outlook is improving. 1600 is my line to watch on the S&P 500. It may prove the level at which the bears begin to show themselves or it could mark the start of a new rally.

Until then, remember the trend!

Thomas Hughes