The market struggled for direction on the first day of the fourth quarter.


The market struggled for direction today, the first day of the fourth quarter of 2015. Although there was plenty of news nothing seemed to inspire much action. There were quite a few economic releases and a statement from Fed president Lockhart but investor eyes remain glued to tomorrow's NFP report and its impact on FOMC outlook. All signs point to at least a decent NFP number and a possible rate hike before the end of the year.

Asian indices started the quarter off on a largely positive note although new Chinese PMI data still shows an economy in contraction. The good news is that the number was a little better than expected so helped relieve some fear of declining momentum. European indices began the day in positive territory but were not able to hold the gains. Disappointing, although still expansionary, PMI data may have been the cause. The German DAX led declines with a loss of -1.57%.

Market Statistics

Our indices were indicated to open higher for most of the early session. Futures trading was not strong, there were no huge moves indicated, but they were pointing higher. Economic data released before and after the opening bell was largely positive but had little effect; labor data remains steady, auto sales are strong, the housing recovery is expanding as is manufacturing although momentum is waning.

The indices opened in positive territory but the bulls were not able to hold the gains. Sellers took control within the first few minutes and drove the indices back to break even levels and lower. Morning action was choppy but trend lower until intra-day bottom around noon. Some sideways action followed, until about 1:30PM, when the bulls were able to regain control and the indices rebound from their lows. The rally lasted until late afternoon and took the indices back into positive territory. The last hour of trading saw the indices falter once again but for the most part they were able to close even or better than yesterday's closing prices.

Economic Calendar

The Economy

The Challenger, Gray & Christmas report on planned lay-off's was released first. It shows that planned lay-off's increased by 43% over last month. This is a 93% increase over this same time last year and brings the 3rd quarter total up to 205,759 and the largest quarterly total since 2009. On a quarterly basis the 3rd quarter total is up 40% from from the 2nd quarter and 75% from the 3rd quarter of 2014. The year to date total is now 493,431, well above last years pace.

Now, to get a little perspective. More than 50% of last month's lay-off's are reported by one company, Hewlett Packard, as part of their ongoing restructuring program. These cuts are massive, but not unexpected as Meg Whitman has said repeatedly over the past year that more cuts were coming. On a year to date basis the tech sector, led by HPQ and Microsoft, are the second biggest contributor to cuts, 58,874. The largest contributor is the energy sector, also largely expected, coming in at 72,708 compared to less than 5,000 job cuts last year. Together these two sectors have contributed more than 25% of all job cuts this year. This is not to say that high job cuts are not something to be worried about, just that the pace of job cuts does not necessarily show weakness in the job market, just weakness in two sectors, and in two specific companies.

Initial Claims for unemployment rose by 10,000, slightly ahead of expectations, to hit 277,000. Last week's number was not revised. The four week moving average fell, losing -1,000, to hit 270,750. On a not adjusted basis claims fell by -1.8%, less than than -5.4% predicted by the seasonal factors. Despite the small gain claims remain near the long term lows where they have been trending for more than 6 months. On a state by state basis California had the biggest increase in claims, +3,725, while Wisconsin had the largest decrease in claims, -278.

Continuing Claims fell in this week's data, shedding -53,000 to hit 2.191 million. This is the lowest level for adjusted continuing claims since 11/11/2000. Last week's figure was revised higher by 2,000. The four week moving average fell, hitting 2.235 million. Needless to say continuing claims numbers are good this week and are another sign that labor markets were gaining strength going into September.

Total Claims fell by -2,996 to hit 1.985 million, another new low. Total claims have now made their second new low in two weeks and are -8% lower than they were last year at this time. Based on this and the other employment data I'd have to say it looks like hiring has been steady if not actual job creation. ADP came in at 200K earlier this week and shows steady, stable and almost strong private sector employment. The NFP is expected to come in around 200K as well and could provide an upside surprise. Unemployment is expected to hold steady at 5.1%.

ISM Manufacturing came in at 50.2. This is below expectations for 50.6 and last month's reading of 51.1 but is above the 50 level and shows some expansion in the sector. It is also the 33rd consecutive month of expansion in the manufacturing sector. Within the report all segments declined except New Export Orders which held steady.

Construction Spending was released at 10AM and came in hotter than expected. August Construction Spending rose 0.7% over the July figure, consensus estimate was near 0.5%. The year over year gain in spending is 13.7%. These numbers are pretty good and consistent with trends in housing. Low inventory, upward pressure on prices and buyer traffic are leading to increases in spending, which in turn is helping to drive the labor market, and the consumer.

Auto Sales were released throughout the day but were strong right from the start. All of the major manufacturers produced better than expected sales led by a 26% increase reported by Ford. GM sales rose by 12%, Toyota rose by 16.2%, Chrysler Fiat rose by 14% and even VW sales rose, by 0.6%. Total sales came in well above expectations at 18.17 million units, a high since mid 2005.

Federal Reserve Bank of Richmond president Lockhart made some comments today. The one that sticks out is that an October rate hike is possible because consumer spending warrants it. Another one I like mentioned the market and how it might doubt the FOMC's resolve.

The Oil Index

Oil prices tried to catch a bid today and gained over 2% in early trading. A basket of near term fears helped to lead the market higher but the gains could not be held. In no particular order Hurricane Joaquin, fighting in Syria, China PMI data, US auto sales and labor data and gave reason for oil to rise either on fear or thoughts of rising demand. With the storm and intensified activity in Syria there is a real risk of fear entering the oil market and driving up prices. If and until then, no real sign of diminished global capacity or rising demand.

The Oil Index gained on the rise in oil prices but like the underlying commodity, could not hold all of it's gains. The index extended its bounce from support but met resistance at the short term moving average, where it was halted. The index is in a rapidly narrowing range between support along the 1,020 level and short term moving average with weak indicators. Momentum seems to be settling down after hitting low last month and retesting that low this week but stochastic is still pointing lower so this retest may not yet be over. Long term outlook for oil prices, EIA says average $53 in 2016, up $4 from 2015, and outlook for earnings in the sector lead me to think we are at or nearing a bottom. The 1,020 is key at this point, a drop below here could lead to more pain in the sector, for now it is support and expected to hold, resistance is near 1,100.

The Gold Index

Gold held steady today but near the 2 week low. Prices traded with a few dollars of $1,112 all day, with a spike during the early morning following the release of data. Gold is hovering near the middle of the 3 month range and just above support levels at $1100. Price is tied to data and the dollar, tomorrow's NFP could be a big mover as it will, maybe, help cement when the rate hike is going to come. It will at least help to strengthen the dollar on economic health and potentially send gold lower.

The gold miners continue to trend sideways while gold prices are stuck in their range. The Gold Miners ETF GDX doing the same. Today the ETF lost -2.33% but is more or less flat over the last few weeks. The ETF appears to be settling down to support for another test or possible break through. Stochastic is already rolled over and pointing lower and MACD is very weak and retreating to the zero line so a retreat to support looks very likely. Where it goes from there will depend on gold prices, and of course data and the Fed.

In The News, Story Stocks and Earnings

Micron Technologies reported after the bell. The chip make beat on the top and bottom lines surprising just about everyone. The beat came on strong demand for its chips and sent the stock shooting higher in after hours trading.

Twitter was in the news today too. The board is expected to announce Jack Dorsey as CEO at any minute, an action which is calling their credibility into question. The issue of course is due to issues with Dorsey and his role as the CEO of Square. Regardless, I don't get Twitter to begin with, I don't use it and don't really understand what the point is. The news did not reassure investors either, shares fell more than -8% in today's session.

Growth story Dunkin Donuts announced it was closing 100 stores today in the pre-market session. Along with this announcement the company also lowered sales growth outlook for the US to 1% from an analyst consensus near 2.5%. Analysts suggest that the company expanded too aggressively an is not able to compete in some markets. Shares of the stock fell more than -12% on the news to trade just above the 12 month low.

The Indices

Today's action was mild compared to what we have seen lately but a little volatile just the same. Today's ranges were greater than 1% and saw the indices trade from one extreme to the other and back again, led by the Dow Jones Transportation Index. The transports were one of the indices able to close in the green, and did so with a gain of 0.60%. This move is an extension of a support bounce which began earlier this week, today's candle also tested support at yesterday's close. The indicators remain bearish, MACD is below the zero line and stochastic %D is moving lower, but there are signs support has been met, and that momentum may be shifting back to the upside. Support may be tested again but if holds could result in a move back to the recent high near 8,250. Support is indicated near 7,750 with first target resistance along the short term moving average.

The S&P 500 made the 2nd largest gain in today's session, 0.2%. The broad market created a small bodied candle with long lower shadow indicative of support near 1,900. Today's move extends and helps to confirm the bounce from which began two days ago but indicators remain mixed so it is possible the test of support is not over. Should the market find its legs this bounce could take the index back up to the 2,000 level with possible resistance near 1,950 and the short term moving average.

The NASDAQ Composite made the smallest gain in today's session. The tech heavy index gained 0.15% in a move that created a doji candle touching support. This is the 2nd day of gains for the index after hitting my support target Tuesday morning with indicators confirming this bounce. Although there is sign of near term strength short term indications remain bearish so support could easily be hit again, if not my lower target near 4,300. For now, support is indicated between 4,500 and 4,600. A move up from here could take the index 4,750 or the recent high near 4,900.

The Dow Jones Industrial Average was the only major index to close in the red. The blue chips lost -0.08% and created a candle with long upper and lower shadows. This is indicative of support near 16,000, but also of resistance near the short term moving average, near 16,500, but mostly of indecision. Near term fears are holding the market down while longer term outlook is supporting. The indicators are mixed but the most positive of all four of these indices. Momentum is bullish and rising, although it is weak, while stochastic is on the verge of a weak bullish crossover... a combination that makes the index looks as the market wants to move higher. The problem is resistance is just above the current levels, at the top of today's range, if it can break above there next target is 17,000.

The market has reached support, possibly, and looks like it wants to move higher. We've gotten past the government shut down, for now, and have only data, the Fed, earnings, global economic strength and the debt ceiling to worry about. Tomorrow's NFP report could spark a continuation of the bounce begun earlier this week but there is resistance, primarily due to aforementioned issues, that needs to be broken. So long as current trends hold this correction we're in should soon reverse, if it hasn't already.

The market has begun to retest support near the August bottom. Support has kicked in a little higher than I would have thought, which, along with current indications, suggests that the test of support may not be over despite the bounce we've seen so far this week. It might, but it might not and without a definitive test its hard to say for sure the correction is over. Until we get that definitive test, or move to the upside, I remain bullish in the long term, careful and optimistic in the near term.

Until then, remember the trend!

Thomas Hughes