Futures trading was mild ahead of the weekly claims data. Hotter than expected Chinese inflation data and a mixed response to the BoE's policy stance helped to put pressure on the markets. The consensus estimates ranged between 135,000-145,000, a small gain from last week. The surprising drop reported today did nothing to stimulate buyers and futures prices remained weak into the open. The first half hour of trading saw a small rise to just shy of break even before Wholesale Inventory data added some more downward pressure. By mid morning the S&P had retreated to -3 points, the Dow to -15.
Events began to take hold of the day when China reported a much larger than expected rise in consumer inflation. Consumer level inflation increased by 2.4% from the previous months 2.1%. At the same time producer level prices are falling. This is placing China's policy makers in a twist as they weigh the risks of rising consumer prices in the face of a slow or slowing economy. The one bright spot in the Asian arena was the KOSPI. Korean finance ministers lowered their key interest rate by a quarter percent, the Korean market rallied on the announcement.
The Bank of England did not follow in the foot steps of its fellow banks. The BoE held firm on its stance and did not make any changes to current policies or rates. This was met with mixed response from the European markets but did not seem to have a serious impact. Positive U.S. data may have helped soften the blow as the European indexes improved slightly going to the end of their trading day. Through it all earnings continued to roll in. Another 200+ reports were released today ranging from small regional banks to oil tankers, coffee roasters and retailers of the real and virtual varieties. The trend of improving EPS and weaker than expected revenue persists.
Today's data was dominated by the weekly jobless claims. Claims made a surprising drop and hit a five year low. For some reason this did not seem to make a big impact on trading. Initial claims fell by 4,000 from a mildly revised 327,000 to barely eek out a new five year low. The four week moving average also fell and reached 336,750, also a five year low. The continued declines in the initial claims data is a good sign for labor market stability and may be signaling a turn. Provided other factors remain stable we should be able to expect this number to keep trending down. There were widespread declines in claims, led once again by California. 10 states saw a drop of more than 1,000, out of those 5 had drops larger than 2,000. Only two states had increases of more than 1,000, Illinois and Oregon.
Continuing and total claims for unemployment also fell. Continuing claims matched its five year low, total claims set a new one. All in all, based on unemployment claims figures, there is improvement in the labor market. We are at least seeing a stabilization of employment conditions in which there is less turnover. Based on these tables and the downward trend in the overall unemployment figure it is very possible that we could reach the FOMC's target levels by the end of the year. If this data keeps moving lower I would expect to hear more and more chatter about the possibility of an end to QE in the coming months.
Better than expected Wholesale inventories added to the negative bias in today's trading. The expected 0.3% gain was beat by tenth and came in at 0.4%. The gain, which is normally good for the economy, came on a decrease in wholesale sales and could be sign of slowing in the auto and machinery sectors. Automobile sales have been a huge part of the rally to date, a decline in this sector would be an added headwind for the economy. Wholesale sales fell by -1.6%, the biggest drop since 2009.
This week was fairly light for data. Wholesale inventories was the last on the list this week. Next week is full with a total of 24 micro and macro U.S. data points. Early in the week retail sales, export/import prices, PPI, TIC flows, Industrial output/capacity utilization and mortgage index readings all happen before Thursday. After that there is the usual claims data, CPI, housing starts, building permits, Philly Fed, Michigan Sentiment and the Leading Indicators to wrap up the week.
The Dollar Pairs
The USD/JPY trade was apparently unaffected by the Chinese inflation data. This trade is still be driven by the aggressive easing policies enacted recently by the prime minister and new BOJ chairman. Their easing and stimulus plan is long term and aggressive with projections of 2% inflation in less than two years. There is a lot of skepticism over the BOJ's credibility and ability to meet those targets. This has raised the possibility of even more stimulus and yen printing. The USD/JPY pair traded flat for the morning then broke out to new highs in the afternoon. Long term indicators are bullish and near term are indicating the chance of higher prices. The break above 100 could take the pair to 110 or 120.
The EUR/USD is caught in a tight range bound by Fibonacci retracement and long term support/resistance lines. The ECB's recent change to its key interest rate, strong U.S. data and weak Chinese data are at odds and have the euro caught in the cross fire. MACD and stochastic on the long term weekly charts are mixed and at odds with each other. This supports my thought that the euro is trapped in a range created by new lower ECB rates, yen printing in Japan and a strengthening U.S. economy. Upside limits appear to be around the 1.3250 level with a first lower limit around 1.3000.
Oil And The Oil Index
Oil traded to the downside today but has moved up toward the top of its 6 month range since last week. Robust supply levels and no near term threat to production have traders easing off the recent rally. The rally may be losing steam as it approaches longer resistance in the $97-$98 range. The Oil Index got a nice boost from the rally in oil prices and broke out to a new high. The move has strong near term momentum and looks likely to move higher. In the long term momentum is crossing zero today and stochastic is indicating a buy. The closest resistance is 1400 and was tested today. A break above 1400 has upside targets of 1450 and 1500, downside support is 1350.
Gold And The Gold Index
Gold has been trading sideways for weeks now. Spot prices have yet to regain the $1500 level since the sharp drop in prices last month, in fact, prices have yet to climb above $1480. There are reports of increased physical purchases of gold but there are also reports of increased bearish activity in the form of ETF and mutual fund outflows. Regardless of long term outlook I think gold prices are going to be volatile over the next few months. The Gold Index was supported by the upward retracement of gold prices but have also been capped at resistance. Future earnings of gold companies is in serious danger of major declines, it is inevitable. If what you sell sells for less then you will make less. The index crept above the previous resistance of the 38.8% Fib retracement but fell back from the short term moving average to close below the retracement level as well. I still expect a retest of the previous low around $110. Today's candle may be confirming a double top at the 38.8% Fib resistance and the beginning of the move to make that retest.
Gold Index Daily
The hourly chart shows the Gold Index making its way above the $125 resistance level. At the same time a bearish MACD divergence is appearing. This divergence is confirming that $125 and the 38.8% retracement is resistance.
Gold Index Hourly
Earnings were a large part of the corporate spotlight today but are waning in importance. The earnings season is about the come to an end except for the random reports we'll get until next round. One company of note was Costco. The discount retailer reported that comp store sales increased more than 4% for the month of April. At the same time even larger increases were reported for net sales on a monthly and period basis. The stock traded to the upside for a short time before falling from resistance. Longer term indicators are bullish and gaining strength while in the nearer term momentum is waning and the stock is overbought. If the economy and jobs pictures actually improves then Costco could continue to see an increase in sales. The company is planning to move forward with the construction of 9 new stores throughout its empire over the next year.
Green Mountain Coffee reported earnings yesterday after the bell. The report and accompanying statement put nay sayers, including myself, silent. The company reported a net profit ahead of expectations and announced a new deal with Starbucks for its Keurig coffee systems. The new deal plus unexpected strength of sales led company executives to raise full year guidance. This news was met with the expected excitement and sent the stock up close to 30%. This move puts share prices at near a two year high. I expect to see some volatility in this market as traders and investors adjust positions.
Green Mountain Coffee
Shoe Carnival reported earnings for the fiscal fourth quarter and full year ending February, 2013. The shoe discounter reported sales increase of 0.5% for the quarter and 4.5% for the year along with record full year earnings. Company guidance for the fiscal first quarter did not meet expectations and kept stock prices in check for today. Shoe Carnival has been in a range for the past 4-5 months and looks likely to remain contained in that range at this time. Any break above the $21 level should be met with skepticism. This could be a good play for covered calls. When I checked the June $20 calls were going for about $1.40 and the $21.50 calls for around $0.75.
The S&P 500, DOW, Nasdaq and other major indexes snapped a five day winning streak today. It was unavoidable. The markets have been skyrocketing this year and need a period break from all the buying. The unemployment data, which was pretty good considering, may have helped buffer what could have been a much bigger down day. The S&P 500 traded in a tight range just to the negative for the early part of the day but even so close to break even MACD was signaling a peak in momentum. Later in the day the index managed to squeak out a very small new intra-day high before being pushed back into negative territory. As the day and the afternoon wore on the indexes succumbed to the negative pressure and fell to the day's lows. After that it was push and pull into the close.
SPX 1 hour bars
Today's candle is bearish and has downside implications. However, I do not think it is too strong, not yet anyhow. Tomorrow could see a continuation of a mild correction or it may see a mass sell off. The thing is there is no data or major earnings release or event to support the markets. The underlying fundamentals will have to do it on their own. In the longer term I think the fundamentals are supporting a rising market but it looks likely that a small correction or consolidation is in the offing, at least on the daily charts. Here we can see the bearish candle, the MACD peak and stochastic rolling over.
Longer term, on the weekly charts, MACD is bullish and rising. It is also divergent so caution is warranted but bullish and rising it is. As for stochastic, it is displaying a bullish crossover and potential long term buying signal.
The VIX has been retreating back toward its recent long term lows. Today it moved up from the bottom of the six month range but was capped at the short term moving average. This could be a telling signal in the morning. Look for the VIX to move above the moving average if stocks continue to sell off or be reversed at this level if support is present. At this time it looks like the most recent causes of fear are ebbing. Be on the look out for new reasons to be wary and don't forget about the possibility of sequester damage, unwinding fiscal policy, unexpected economic weakness or flare ups in Europe or China.
Tomorrow is a free day for economy watchers and another big day for small and mid cap earnings reports. I will be paying special attention to the report from Arcelor-Mittal. The steel giant could provide an important piece of the overall global economic picture. There is also more and more talk about no sell-in-May-go-away this year and to look out for a rotation into the cyclicals.
Until then, remember the trend!