Data driven rally derailed by debt ceiling impasse.


The market found support today after a round of steady and strong economic data lifted GDP expectations. Stock indices were moving higher until an impasse in the House stalled what had been a bipartisan spending bill and put the government at risk of shut down.

Labor data reveals that seasonal weakness is in line with expectations while retail sales and business inventories suggest the economy is gaining momentum. At the same time import and export prices fell, primarily on the down turn in energy prices. The data was well received and helped reverse some of the negative sentiment that has been sparked by plunging oil prices. The news also caused some speculation among economists who have begun to ramp up projections for final 3rd quarter and first estimates for 4th quarter GDP.

Market Statistics

Asian markets were not so lucky. They closed in the red, in the wake of yesterday's oil led decline in US market and amplified by another weak economic report from Japan. The latest news is the leading indicator of capital expenditure in the country has fallen by more than 6%, counter to expectation, and ending a four month streak of increases.

Investors in Europe were focused on the latest data from the ECB. The central bank reported that the latest round of low interest loans was met with better demand than the previous one. While the effects are unclear, the fact that the ECB is doing something and that EU banks are taking advantage of it helped to lift European indices. European markets were able to close off of their lows, led by the DAX which was able to gain 0.64% in today's session.

Our markets were positive from the very start of early electronic trading. Futures were indicated higher by a half percent or so and were able to hold those levels going into the 8:30AM release of economic data. After the release, a triple shot today, futures held steady and gained strength into the opening bell. After the bell trading was calm, but quickly moved the indices up by more than 1%.

Today's high was reached about 10:30AM, shortly after the final economic release of the morning. After that, trading was steady and held the indices in a tight range just below the intra-day high until 2PM. At that time the expected vote on spending, which was reported to have bipartisan support, was delayed causing the market to pare gains and retreat to today's opening levels.

Economic Calendar

The Economy

Jobless claims, US Retail Sales and Import/Export Prices were all released at 8:30AM. Initial jobless claims held steady with a loss of only 3,000 from last week's unrevised number. This week first time claims were reported at 297,000, below the heavily watched 300,000 level and the four week moving average. The average gained 250 this week, but remains below 300,000 as well. The down trend in first time claims may have come to an end but remains near long term lows levels and consistent with overall labor trends. This most recent spike in claims was expected, now lets see if it subsides, as expected. Based on the NABE and NFIB reports released earlier this week I expect to see claims fall back to the long term low.

On a not adjusted basis first time claims rose by 31.9%, slightly below the 33.2% expected by the seasonal factors. On a year to date basis not adjusted claims are down more than 16%. New York and Wisconsin led with declines of 2,979 and 2,293. California and Texas both had declines in claims far greater, -13,819 and -6,313 respectively.

Continuing claims gained a whopping 142,000 this week, counter to expectations for them to hold steady. This is a red flag but not a concern unless it becomes a trend. Because continuing claims lag initial claims by a week the spike could simply be the increase in initial claims working its way through the system. Balancing this out is a drop in the total number of claims, which shed 95,846. This is down from last week which was a three month high but is also near the long term low and consistent with the long term decline in overall unemployment levels.

Retail sales was much better than expected. The Census Bureau reports that estimated sales of retail level products rose by 0.7%. This is ahead of the consensus 0.4% expected by analysts and the fastest pace of retail sales growth in 8 months. It also comes with upward revisions to the previous month which raise October sales to 0.5% from 0.3%. Compared to last year sales are up 5.1% versus November 2011 and are up 4.7% year to date. Ex-Autos sales were also higher, rising 0.5% versus the expected 0.2% and last month's 0.4%. These numbers are inline with other data which suggests that momentum is building in the economy.

Import and export prices both declined in November. Import prices fell by 1.5%, export prices by 0.9%. The 5th monthly decline in prices, driven by fuel. The November decline is the largest monthly decline since June of 2012.

Business Inventories was released at 10AM and is on the rise. November inventories were reported as rising 0.2%, better than an expected decline of 0.1%. Inventories are part of GDP and along with retail sales helped to spur some comments to the effect that 3rd and 4th quarter GDP estimates could be raised. Current Q3 final numbers are now in a range above 4% while the 4th quarter is being estimated in a range that now goes as high as 4%.

The Oil Index

Oil had a volatile session today, first up nearly 1.5% and then down by 1% or more. WTI was flirting with $60 a barrel with Brent not far behind, just below $64. There is still no sign of support in oil so I am expecting more volatility here.

The Oil Index tried to claw its way higher today, after hitting an 18 month low yesterday. The index was not able to hold the gains and closed flat for the day. The index is in downtrend with bearish indicators pointing to lower prices. MACD momentum is convergent with the decline and stochastic is crossing the lower signal line. There may be a pull back to test resistance but the trend is down until oil prices stabilize.

The Gold Index

Gold traded in a tight range, just below $1230 and the two month high. Prices are being supported by long term economic prospects and expectations of higher interest rates and pressured by strengthening dollar. Inflation expectations are just that, expectations, because inflation hasn't really materialized yet so support could waver. On the other hand, the rally in the dollar is real and expected to continue which should add pressure to gold.

It's a real conundrum to be sure, the bottom may be in for gold because we know that inflation is bound to come, but whether or not a rally has started is in serious doubt. The hurdle, or perhaps the focal point, will be the trifecta of central bank meetings scheduled for next week. The FOMC leads by releasing their statements on Thursday, followed up by the ECB and the BOJ on Friday. Until then it looks like gold could ratchet higher with $1250 as a target.

The Gold Index traded lower today but held above long term support. The index shed over 1% and fell below the 30 day moving average but so far is being held by long term support. The indicators continue to weaken which suggests that this test of support is not over. Current support is $66.59, the 100% retracement of the 2008-2011 bull market in gold. Index prices will be tied to gold prices and if move below the retracement have a target near $60, another potential support. The index may be bottoming, along with gold, but that is not confirmed. The index will likely hover near these levels, as it has been the last 30 days, until the central bank meetings next week.

In The News, Story Stocks and Earnings

There were a few names in the news this morning. First up, earnings from Lululemon. The maker of yoga pants and other accessories reported earnings ahead of expectations. The company reported EPS of $0.42 versus the expected $0.38 along with an increase in comp store sales. The only negative was that they fell short on revenue, possibly due to discounting or sales shortfalls. The news was met with approval and caused the stock to gap up and move higher at the open. Shares of LULU had gained nearly 10% at the close of today's session and are approaching a potential resistance line.

Starboard Value announced it had taken stakes in both Staples and Office Depot, adding to speculation the two companies will merge. The activist investor in now holds 6% in Staples and 10% in Office Depot. Shares of both companies popped in early trading and gapped up at the open. Office Depot led with a gain of more than 12% but both closed off of their highs. These will both likely be active now that interest is on the rise.

Ciena reported a loss this morning but traders did not care. The surprise loss was due to shrinking margins but news that its converged optical networks, which create faster computer connections, was growing helped to support prices. Shares of Ciena gained close to 8% after gapping higher at the open and closed at a three month high. This one appears to be moving higher after bottoming within a long term rang, indicators are bullish but weak with a possible upside target near $20.

The Indices

The markets were moving higher with purpose today until political shenanigans once again caused buyers to evaporate. Stock indices were as much as 1.5% higher before the vote was suspended and never was able to recapture the gains. Later in the afternoon it looked like the bulls might try to stage a comeback rally but their efforts were not enough. Despite the impasse in Congress the indices were still able to maintain positive levels into the close, led by the Down Jones Transportation Average.

The Trannies closed with a 0.78% gain after reaching an intraday high a little more than 1.5% above yesterday's close. Today's action pivoted around the 30 day moving average and was not able to maintain the upper side. The indicators are bearish, but weak, and convergent with the recent down turn in prices. It looks like the index may continue to test support with a target near 8,750 in the near term. Longer term the index is still in an uptrend with strong indications the trend will continue. The most recent trend following peak in MACD is a multi-year extreme and convergent with higher prices.

The NASDAQ Composite managed to hold onto a gain of just over a half percent. The tech heavy index gained 0.52% and was able to hold onto support along the short term moving average. Unlike the transports, the techs never fell below this level which is now near term support. The indicators are weak and in decline, indicating the likelihood of further testing of support. Should the moving average fail to hold next target will be 4,600 and then 4,500 on a deeper pull back to the long term trend line. While the near term is looking weak, the longer term analysis remains positive. The trend is still up and the most recent trend following signals are convergent with higher prices.

The S&P 500 finished the day with a gain of only 0.45% after reaching close to 1.5% at the height of the day. This index began below the short term moving average, surged above it, and then fell back below it by the close. The indicators are bearish and leading the index to test support, but first targets for strong, longer term, support is just below the current level. This target is consistent with the September top and a quick consolidation that occurred over the 1st of November, near 2020. If this does not hold then next target is just below that near 2,000 and the long term trend line. As with the first two, the near term looks weak but the longer term analysis is in line with higher prices. The index is trending higher with indicators convergent with higher prices.

The Dow Jones Industrial Average brought up the rear today, as it often does. The blue chips are just not as interesting as the techs, the transports or the broader market. Today the Dow closed with a gain of 0.36% after nearly erasing all of yesterday's losses. This index was also unable to hold above the short term 30 day moving average and is accompanied by bearish indicators. Near term support appears to be present along the 17,500 round number but that may not hold. If not then next target is near 17,100. As with the others, the near term looks weak but the long term still looks bullish and in line with at least a retest of the most recent highs.

The market really wanted to bounce back today and by all accounts it was doing a pretty good job of it. That is, until our elected officials who are responsible for maintaining our nation and the well being of our citizens failed to vote, again. The failure was enough to cause the market to pare gains, but not enough to out-right sell off. I think perhaps there is still hope that something will happen before the weekend, and maybe indifference since the last time didn't seem to affect the economy very much.

If not for the lack of action in Congress today would have been a pretty good day. The market was bouncing from support,in line with long term trends, on positive economic data, data that shows increasing momentum in the economy and data that sparked increased speculation of positive GDP revisions.

The technical trends are up, the economic trends are up and the market is down. This usually equals “buy on the dip” and I don't see any reason for that not to be true now. However, since the indices still look weak and the FOMC is due to meet next week some caution is due.

Until then, remember the trend!

Thomas Hughes

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