The ECB did indeed expand their QE program, what they did not do was meet the market's expectations.


There is a lot to go over today but let me start with today's top story, the ECB meeting. The European Central Bank ended their December policy meeting this morning and announced their plans. They did indeed increase their QE efforts but in a way that surprised the market. The bank held it's benchmark rate steady but lowered the deposit rate by 10 basis points to -0.30%. In addition to this they announced that they would keep asset purchases at 60 billion euros monthly but extended the duration until March of 2017 at least. They also announced that they would be reinvesting the interest payments from assets. The bank also raised its outlook for GDP over the next 2 years but is worried about the slow pace of inflation stating they they wanted to see signs of sustained inflation growth before ending QE.

Market Statistics

The news was a surprise to the market and caught euro traders in a massive short squeeze that added 3 handles to the EUR/USD pair. This move appears to confirm support at the 1.0500 level but with the NFP data coming out tomorrow and the FOMC meeting two weeks away it may be setting the pair up for another move lower. Regardless of how they did it, the ECB did increase QE and the FOMC is still expected to tighten policy, a combination that has until today strengthened the dollar and weakened the euro.

International markets were mixed going into the ECB announcement and press conference. The Asian indices closed flat except for the Shanghai which gained a little over 1.25%. European markets were largely higher ahead of the announcement and then reversed their gains following it. The DAX fell more than -3%.

Futures trading indicated a positive open for our markets most of the morning. The trade was strong ahead of the ECB announcement, indicating an open near 1% higher than yesterday's close, but fell to break even levels afterward. From then until the open of today's session futures wavered, slipping into negative territory several times only to find support and move back into the green.

The indices moved higher immediately following the opening bell but not far. The SPX met resistance within the first few minutes of trading and by 9:45 had fallen into negative territory. The morning low was hit by 10:20 at which time the indices made a small bounce and began trading sideways, just below yesterday's closing level.

The sidewinding only lasted about an hour. By mid-lunch the bears were back out and pushing prices lower. The indices began a slow march that took them down nearly -2% in most cases. Bottom was hit by late afternoon, a small bounce ensued, but not enough to regain today's losses. By the end of trading the SPX had only regained a few points and closed with a loss near -1.5%.

Economic Calendar

The Economy

There was quite a bit of economic data today as well. The Challenger, Gray & Christmas report on planned lay-offs started us off. It shows that planned lay-offs fell -39% from October to November and is sitting at a 14 month low. This is of course following 4 months of heavy cuts. On a year over year basis the November data is down -14% but nevertheless year to date cuts are still running at a 6 year high. Year to date cuts are running close to 575,000, 28% higher than last year at this time.

Now, to put those numbers into perspective. The previous high, in 2009, was over 1.2 million job cuts, double this years expected total. Also, the cuts we have seen this year are primarily in 5 sectors which account for 60% of the total. These are, in order from largest to smallest contributor; energy, government, retail, computer and industrial goods.

Job cuts in energy we can discount because most of those are due to low oil prices, not declining economics, and not really comparable on a year over year basis; the YTD total in the sector is up 708% from last year. Retail and Computers can also be discounted to some extent as these are due to restructurings which as seen as a positive for their sectors. In terms of computers most of those cuts were done by Hewlett Packard pre-spin-off and Microsoft when it wrote off its investment in Nokia. In this light yes, there are a rising number of job cuts but no, it doesn't look too alarming.

Initial claims for unemployment rose slightly this week from last week's not revised figure, in line with expectations. This week claims gained 9,000 to hit 269,000, the four week moving average fell by -1,750 to 269,250. On a not adjusted basis claims fell by -14% versus an expected -16.9%, year over year the not revised figure is down -11%. The largest increases in claims were in California and Illinois, +7941 and +3617, while the largest declines were reported by Louisiana and Rhode Island, -792 and -207. Initial claims data continues to trend near the long term lows and remains consistent with a healthy labor market.

Continuing claims also moved higher adding 6,000, however, last weeks figure was revised lower by -50,000 so the net difference is a decline from last week's report. Continuing claims are now at 2.161 million and holding relatively steady at the long term low. These figures continue to show a labor market in which long term unemployment and turnover rates are low.

The total number of Americans claiming unemployment also rose in this week's report, adding over 100,000 to hit 2.059 million, an 11 week high. This is mildly alarming but based on historical data not unexpected, there is usually a rise in total claims going into the end of the year. Despite the gains the total number of claims remains low by historical standards and consistent with labor market health.

Factory order rose more than expected following two months of declines. October factory orders rose 1.5%, slightly ahead of the 1.2% expected by the analysts. Within the report unfilled orders rose 0.3% while inventories fell by -0.1%. This is the 4th consecutive month of declining inventories.

The Services Sector ISM came in at 55.9, down 3.2 points from last month and below expectations for a reading of 58.5. Within the report all three sub indices declined as well. Business activity fell to 58.2%, New Orders fell to 57.5% and the Employment Index fell to 55%. Despite the declines the headline number and sub-indices still reflect a growing economy, just as a slower pace than last month.

Tomorrow is the all-important NFP release, along with the unemployment rate, average hourly earnings and workweek. Based on the ADP report I would expect the number to be steady to strong in the 200K+ range. Unemployment levels may tick up due to increased levels of Total Claims. Regardless, it will take a huge miss for this data to derail the recovery. A weak number may however alter expectations for the Fed rate hike.

The Oil Index

Oil prices spiked today on a report that the Saudis were going to make a proposal at tomorrow's OPEC meeting to curb production in 2016. WTI and Brent both spiked more than 4% on the news but gains were tempered later in the day when another report, citing a different high ranking Saudi official, said the idea of OPEC supporting prices through production cuts was baseless. WTI settled with a gain near 3% but remains near below $42. There could be some big moves in oil tomorrow and next week depending on what happens with the OPEC meeting. Until then supply and production are high and demand is low.

The Oil Index tried to rally with oil but wasn't able to do it. The index moved up to hit the 30 day moving average and met resistance which drove prices back down to below yesterday's close. Today's action breaks support at 1,175 and is approaching firmer support targets near 1,150. The indicators are pointing lower with momentum on the rise so a test of 1,150 is likely to come in the least. A break below this level could take the index down to the long term low near 1,025.

The Gold Index

Gold prices tried to rally on the back of the ECB decision and managed to eek out a gain of 0.7%. The ECB decision and wild rally in the EUR/USD has pushed dollar values down, giving gold its lift, but the effect may not last long. Despite disappointing the market the ECB has still increased QE, and indicated it will add more as needed, and the FOMC is still expected to raise rates, so the dollar rally is likely to resume. I remain bearish on gold and do not think we have seen the bottom yet.

The miners have been holding relatively well in light of gold prices hitting 6 year lows. The miners ETF has been trending near its long term lows but has not set a new low since September. It is possible that the miners are indicating a rise in gold prices but I think it more likely to be the other way around; gold is leading the miners lower. The indicators are pointing higher but momentum is very weak, the ETF was unable to cross the short term moving average today and the overall trend is down so I see it testing support again, if not breaking it.

In The News, Story Stocks and Earnings

Kroger reported earnings before the bell. The food retail giant reported record results, better than expectations, and raised full year guidance. EPS of $0.43 is 20% higher than last year and 10% above projections. Sales increased only 0.4% over the same period last year due to lower retail prices for fuel but other segments of business were quite strong. Ex-fuel comparable sales grew more than 5%. Shares of the stock jumped on the news and gained nearly 5% to hit a new all time high.

Dollar General also reported before the bell. The discount chain reported earnings slightly above estimates on revenue that fell slightly short. The news that helped drive the stock higher is the strength in sales, up 7.3% over last year, and guidance which was affirmed in-line with estimates. Shares of the stock gained more than 4.15% and are trading at a one month high.

Shares of Yahoo! fell more than -4% today as the board of directors deliberates on what to do with the business. A sale of the core seems to be the most likely outcome but other possibilities exist as well. As of this posting there is no word on their decision. The list of potential buyers has firmed up with reports that NewsCorp, Verizon and IAC are interested. Today's action confirmed resistance near $35.50 and looks set to take the stock back down near $32.50.

The Indices

The indices sold off again today. The move was led by the Dow Jones Transportation Index which closed with a loss of -1.80%. Today's candle is long and black and set a new two month low. The indicators are pointing lower with rising momentum so it looks like this move will continue. However, even though they are pointing lower the indication are weak and more consistent with a move within a trading range than not. Downside target is the bottom of the 4 month trading range near 7,750 with a possible move to 7,500 if first target doesn't hold.

The NASDAQ Composite made the next largest decline, nearly -1.7%. The tech heavy index made its largest decline in two months and is now sitting on the short term moving average with potentially strong support just below along the long term up trend line. The indicators have made a bearish crossover and are pointing lower so a test of support is likely. I am bullish looking into next quarter and next year (only 4 weeks away) so any pull backs and tests of support remain buying opportunities in my opinion.

The next largest decline was in the S&P 500. The broad market fell -1.42% in a move that broke the short term 30 day moving average but was stopped at the 2,050 support level. The indicators are pointing lower with rising momentum so it looks like support will be tested further with a possible move below to the long term trend line. The long term trend is still up and current action appears to be a consolidation/sector rotation ahead of the anticipated rate hike, next earnings season and next year.

The Dow Jones Industrial Average made the smallest decline in today's session, -1.41%. The blue chips broke support at 17,600 and the short term moving average with bearish indicators and downside target near 17,200. A break below my support target could take the index down to the long term trend line near 16,750. The long term trend is still up but near to short term action may remain mixed up to and until the market focuses on expected earnings growth.

The market sold off today there is no doubt about that. The move was more in response to the ECB's failure to meet full market expectations than it was to anything else. The ECB added to QE, just not as much or quite in the way the market expected. Over the past 5 years QE has led to one rally after another and this addition is more than likely going to do the same. On top of that expectations for next year remain stable with revenue and earnings growth expected for all 10 S&P sectors. With that in mind I find it hard to expect a bear market.

The fact that we have one more quarter of negative growth to look forward is likely going to keep the market churning in the near term but it looks like the market could be in a sector rotation. This rotation could last for several more weeks at least, up to and until next earnings season begins and/or outlook brightens. Needless to say I am still bullish on the economy, earnings and the market and a buyer of dips.

In between now and then is the FOMC meeting. They are expected to raise rates, tomorrow's NFP could easily affect the speculation. If the data looks like a rate hike is guaranteed the dollar could easily regain a lot of the ground it lost today.

Until then, remember the trend!

Thomas Hughes

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