Fear of global woe helped send the market into correction, but newly released data does not support a US economic slow down.
Global growth is weak, China is slowing, emerging market are iffy, the EU and Japan both sluggish, a combination that has helped to send international indices into corrective mode. The only thing is, our economy is still expanding, still building momentum and the newly released GDP revision supports it. Now that the market is bouncing the question is, is this a dead cat bounce or the beginning of another rally.
Futures had been positive all morning but gained strength after the release of today's data. The rebound which began in our market yesterday carried into Asia, where indices gained an average of 3%, and swept the globe. European indices were also carried higher, gaining 3% across the board.
Our indices were indicated to open about a half percent higher before today's data was released and extended that to near a full percent afterward. Strength persisted into the opening bell and saw the indices gain that full percent within the first few minutes of trading. The next hour saw them move more or less sideways, until about 10:30, when the bulls took charge and drove them higher. By 11:15 all the majors indices were flirting with 2% gains.
Mid afternoon was a bit of a roller coaster ride. After reaching early highs, the market began to rollover and reduced today's gain from 2% down to 1%. At one point it looked as if all of today's gains would be erased but the bulls were able to regain control. Later afternoon action saw the indices march back up to the early high where they held, leaving our indices with gains in the range of 2%-2.5%.
The 2nd estimate for 2nd quarter GDP was released at 8:30AM. The estimate was revised higher from 2.3% to 3.7%, after rising 0.6% in first quarter. The estimate was raised due to increased amounts of fixed investments and business inventories along with strength in PCE, exports and local government spending.
Initial claims for unemployment fell by -6,000 from last week's unrevised figure. This is contrary to an expectation for a slight gain and remains near the long term low. The four week moving average gained 1,000, also from an unrevised figure, to hit 272,000. On a a not adjusted basis claims fell by -1% versus a rise of +1.2% as predicted by the seasonal factors. Michigan and Kansas led with increases of 1297 and 1244, Illinois and Pennsylvania led with declines of -1486 and -1166.
Continuing claims gained 13,000 from an upward revision of +2,000 to last week's number. This week continuing claims is 2.269 million and still trending near the long term lows. The four week moving average fell, shedding -250. Continuing claims remain near long term lows and consistent with a healthy labor market.
The total number of Americans receiving is 2.207 million. A little odd since this is less than the number of continuing claims, but makes sense when you remember that continuing claims are "seasonally adjusted" while total claims are not. The non adjusted of continuing claims is only 2.1 million. In any event, this is the fifth week of decline in total claims which is trending near the long term low and consistent with ongoing recovery. All in all, the jobless claims data supports ongoing health in the labor market and expectations of decent numbers in next week's NFP and Unemployment reports.
Pending Home Sales was released at 10AM and helped rally the bulls to new intra-day highs. Pending sales rose by 0.5%, a little weaker than expected, but still a solid number. This is the 6th month of gain out of 7, June saw a slight decline, and leads existing home sales by a month or two. This brings the year over year gain to +7.4% over last year. However, on a not adjusted basis pending sales fell by -11.5% from last month. Despite this drop the not adjusted year over year total is still +7.2% over last year. Based on this number we can expect to see existing home sales continue to rise into the next month or two.
The Oil Index
Oil prices surged today, gaining more than 10% on an intra-day basis, to trade above $42 (WTI). This move is likely short covering and near term profit taking and not a reversal in prices. Crude prices have gotten a little support from hurricane season, Chinese stimulus hopes and positive US economic data but underlying supply/demand fundamentals are unchanged. There was a draw of US stockpiles, as reported yesterday, but this does little to alter the fact that supply and production remain high, actual demand and demand expectations are low and unchanged.
The energy sector got a lift from today's snap back in oil prices. The Oil Index itself gained over 5% on the news and closed near the high of the day. Prices have begun to snap back from the low set at the end of last week but hit resistance today. Resistance is the 61.8% retracement line and will likely get tested again in the least. The indicators are bearish at this time but mixed in their message. MACD momentum is convergent with the recently set low suggesting that it will be hit again, if not surpassed, while stochastic is divergent from that same low suggestive of support and an overextended market. Oil prices are leading, if they remain up the index could test or break resistance near 1120, if they fall back to their low the index will likely retest its low as well. I remain bullish on this index into the long term as expectations for oil prices in 2016 are near $50 average, and earnings growth is expected to return to the sector as early as the 1st quarter of 2016.
The Gold Index
Gold prices held steady around $1120 in today's session, shedding about $2 from yesterday's settlement price. The metal has retreated from its recent high and is now sitting on potential support, just above a small consolidation zone set earlier this month. Prices are stuck in a tug-of-war between sooner-rate-hike versus later-rate-hike speculation, all driven by economic data and dollar values. Inflation remains absent from the picture so I expect gold will remain tied to FOMC outlook for now. Until inflation shows up rate hikes and strengthening dollar value will continue to provide resistance.
The gold miners were able to trade higher despite the small drop in gold prices. The miners ETF GDX rose more than 5% on an intra-day basis and closed near the top of the daily range. This move highlights support at the $13 if not confirming it. However, the indicators have rolled over into a bearish signal, in line with the prevailing trend, so caution is due... if this is the bottom there will be other entry points. A break below support would be a new all time low for this ETF and could add downward pressure to the sector.
In The News, Story Stocks and Earnings
Dollar General reported before the bell. The discount savings store reported $0.95 per share, beating estimates by a penny and improving profits over last year's comparable quarter by more than 10%. Operating profits are up, margins are up, sales are up nearly 8% and comps are up. What is not up is guidance which was reaffirmed in a range just below consensus. Shares of the stock responded by shedding more than 5% and closing with a loss greater than -3%. Today's session was choppy and volatile, leaving long shadows on both ends of today's candle. The indicators are weakening and convergent with lower prices.
Tiffany's reported a bust. The high end jewelry retailer reported $0.81 per share versus expectations of $0.90. Along with this comes a down beat outlook that helped to send shares down by nearly -3% in pre-market action. The stock gapped down at the open, setting a new low, but buyers stepped in to provide support. Shares had moved into the green at one point during the day but were not able to hold it into the close.
Smucker's reported before the bell too. The maker of delicious jams and jellies beat earnings expectations and reaffirmed guidance at the high end of its previous range. The beat is due in part to an acquisition made earlier in the year and also in part to the launch of Dunkin brands K-cups for Keurig coffee makers. Shares of the stock gained more than 6.5% on the news and are approaching resistance at the long term high.
Zoe's Kitchen, an often not talked about fast casual restaurant, reported before the bell and beat expectations by a penny. The company reported $0.05 per share driven by the opening of 7 new stores and a 5.6% increase in comp store sales. Company execs were also able to raise guidance due to strength in the quarter. Shares of the stock gained nearly 4% in a move that looks set to move up to resistance near $40.
The indices moved higher in another day of wild trading. The size of the gains is significant, as is the mid day swoon and late day recovery. Today's action was led by the NASDAQ Composite which gained 2.45% and created another long white candle. The tech heavy index also broke above a potential resistance line near 4,800 with targets set on 5,000. The indicators are rolling over in line with the current bounce with stochastic making a bullish crossover and pointing to higher prices. Next target, near 5,000, is coincident with the underside of the long term trend line and could provide significant resistance.
Next in line is the S&P 500 with a gain of 2.43%. The broad market index created a long white candle, not quite as long as yesterday and closed near the high of the day, above potential resistance. The indicators are not yet rolling over so this bounce is a little questionable however strong it looks now. Next target is near 2,020 and then 2,050 upon a break. This bounce is in line with the underlying trend and forward expectations so could easily move up to test the current all time high.
The Dow Jones Transportation Average made the third largest gain in today's session, 2.40%. The index created a long white candle with no upper shadow, closing at the high of the day. Today's action carried it above recently broken support at 7,750 with indicators consistent with a bounce from support. MACD is still bearish so another test of support is very possible. Stochastic is also still moving lower, although %K is on the verge of making a crossover, supporting the idea of retesting support.
The Dow Jones Industrial Average made the smallest gain in today's session, only 2.27%. Despite coming in last the blue chips made a long white candle and extended the support bounce begun yesterday. The indicators are mixed with strong bearish momentum, declining, and stochastic creating a bullish crossover so it looks like a move up to next resistance is very possible. This target is near 17,200 and could be reached in only 2-3 days of trading if action continues as it has so far this week.
It looks like the bounce is on but the question remains, is it a recovery or a dead cat bounce? The indicators have yet to confirm the move and there is still significant resistance levels to overcome so the risk of dead cat bounce is very present. On the flip side, this move is quite strong, supported by trends in the economy and led by earnings expectations so could easily reach resistance, break through and move on to test current all time highs. In either event it looks likely the market will continue to move higher into the near term, provided a negative headline does not jump out and knock the bulls off of their feet.
There is not much in the way of data or earnings on the schedule for tomorrow to get in the way. On the data front look out for Personal Income And Spending as well as Michigan Sentiment. Income and Spending are both expected to rise by 0.4%, Michigan Sentiment to gain a tenth and rise to 93. The real risks at this time are global news, oil prices and FOMC talk. Next week will be another big one, I think. There is lots of data, and the Jackson Hole conference starts this weekend.
Finally, we've got about four weeks until the FOMC meeting and a possible rate hike. This alone could keep stocks range bound and below resistance targets.
Until then, remember the trend!