The market gave up yesterday's Fed driven gains as focus shifts back to economic data and earnings.


It looked at first as if there would be some follow through to yesterday's Fed driven rally but it didn't happen. Volatile oil prices and a quadruple witching options expiration both played a part in erasing all of yesterday's gains. Oil prices fell hard on oversupply and high storage levels to retouch the long term lows set earlier this week.

International markets were higher in today's session, led by our rally post-FOMC announcement. Asian and European indices made gains greater than 1% in most cases, led by the German DAX 2.57%. The positive vibe carried over into our markets, at least through the early pre-market session, with little data or other news to impact the early part of today's session.

Market Statistics

Futures trading was mild all morning, positive but only barely so. The S&P 500 was indicated to open with gains of only a few points, the Dow about 30. These levels held right up and into the open at which time the indices posted gains as early indications suggested. This lasted for about 5 minutes and then a steady sell-off began that took them down to hit the morning low, near -1%, just after 11:15AM. The low held for most of the day but a round of selling late in the day set a new low and left the indices at the lows of the day when the closing bell sounded.

Economic Calendar

The Economy

Unemployment claims were in line with expectations. On an adjusted basis initial claims fell -11,000 to 271,000 from last week's not revised figure. On a not adjusted basis they fell -18.7%, more than the -15.3% predicted by the seasonal factors, and -4.5% lower than last year at this time. The four week moving average of adjusted claims also fell, by -250, to 270,750. The states with the largest increases in claims were California, New York and Pennsylvania with gains of 22,487, 13,113 and 12,021. The states with the largest decreases in claims were Kentucky and Arkansas with declines of -1,256 and -533. While still above the long term low and the moving average initial claims remain low compared to historic levels, near the long term low and consistent with healthy labor markets.

Continuing claims also fell, shedding -7,000 to hit 2.238 million. This is from a slight upward revision to last week of 2,000. The four week moving average of continuing claims rose however, adding 16,250 to hit 2.199 million. Continuing claims are above the moving average and off the recently set lows but remain near the long term low and consistent with labor market health.

Total claims posted what at first looks like an astonishing increase but when compared to historical data and expectations is not to alarming. Total claims gained 419,000 to hit 2.353 million and an 8 month high. This is an increase of 22%. Last year, in the comparable week, claims jumped 423,000 or 19.6% to hit 2.576 million. This years number, in that light, is not surprising, in line with expectations and down -8.6% year over year. We are entering a seasonal period of increased lay-offs so expect to see all the unemployment claims numbers rise over the next few weeks. The thing to watch will be how high they rise, how long they remain elevated and to what levels they retreat come the spring.

The Philadelphia Federal Reserve Manufacturing Business Outlook Survey was released at 8:30AM and was weaker than expected. The diffusion index fell nearly 8 points to -5.9 from last month's reading of 1.9, analysts had been expecting it to rise slightly to 2.0. Within the data new orders fell 6 points to -9.5 while shipments and employment both made gains. Shipments rose 6 points to 3.7 while both gauges of labor rose. Employment rose 2 points to 4.1 and hours worked rose a whopping 22 points to 5.5, its first positive reading in three months. Most disturbing is the fall in future indicators. The diffusion index of future conditions fell 23 points to 20.4. Outlook remains positive but at three year lows.

The Index of Leading Indicators rose by 0.4%, better than the expected 0.2% and down from last months 0.6%, showing the economy is expanding in December at a slightly slower rate than last month, but faster than expected. The Coincident Index rose by 0.1%, down from last months 0.2% and the lowest level in three months. The Lagging Index rose by 0.3%, up a tenth from last months 0.2%.

There are no economic releases tomorrow. Next week the calendar is light but includes the third revision to 3rd quarter GDP, existing and new home sales, durable goods and personal income.

The Oil Index

Oil prices tanked, no pun intended, with WTI and Brent both near 11 year lows. A stronger dollar had something to do with it but the underlying fundamentals are what's really to blame. Supplies and production are high, demand is low and there is little to suggest that situation is going to change soon. Next year, maybe, but in the next few weeks I don't think so. Prices may not fall much further but there is still no reason to get bullish on oil.

The Oil Index fell about -2% and looks like it will retest 1,050 if not move down to support targets between 1,000 and 1,025. Today's candle helps confirm resistance at the 1,100 level with low oil prices dragging the index down. The indicators are both bearish and pointing lower although there is some sign that support will hold or at least produce a bounce before being broken. MACD and stochastic are both bearish but momentum is weakening and stochastic is reaching oversold conditions so a bounce, relief rally or consolidation is highly likely once support is reached.

The Gold Index

Gold produced one of those wow moves that you think might happen but are still surprised when they actually do. The FOMC not only strengthened the dollar, they reduced inflation expectations, or at least alleviated fear of rising inflation, for the immediate future. This combination has sent gold back to its long term low with spot prices falling more than $25 or 2.5% to $1,050. Gold is now trading at support with bearish outlook. If the data starts to look like the Fed could raise rates at a quicker pace than expected gold could move to new lows.

The gold miners fell along with gold, the miners ETF GDX shedding more than -5.5%. Even with today's decline the ETF remains above its long term low but looks set to test it and soon. The prevailing trend in the sector is down and the indicators have just confirmed a trend following move so support at the low could easily be broken, especially if gold falls below $1,050. Current downside target is $13, a break below that could take it down to $12.50 or $12.

In The News, Story Stocks and Earnings

The dollar got a big lift from the FOMC rate hike. The Dollar Index gained nearly 1.5% today and broke back above the short term moving average. The index looks set to retest resistance at the recent high near 100.50. The indicators are rolling into a bullish signal, in line with the underlying trend in the index, so this move could be strong. Policy between the ECB and FOMC has officially diverged and this could drive the dollar index to new highs.

There were a couple of big stories in the news today; first the dirt. The CEO of Turing Pharmaceuticals, the guy who made the news when he jacked up the price of a commonly used drug, Martin Shkreli, got arrested. Not for his role as head of Turing, but for frauds he committed while head of hedge fund MSB Capital Management and later at Retrophin Inc. The gist of the story is that the hedge fund lost millions and tha Shkreli paid back investors with funds looted from Retrophin. KaloBios, a company Shkreli recently invested in, had its shares halted in pre-market trading due to volatility related to the arrest.

RiteAid reported earnings this morning and beat consensus by a penny. The company reported earnings of $0.06 on income of $373 million. Total earnings are up $40.4 million and driven by an increase in comp store sales of 0.9%. The company reaffirmed guidance for 2016 in a range around consensus saying they were “comfortable” with it. Shares of the stock jumped nearly 1% in the pre-market session only to fall during the day to post a loss at the close. RiteAid is involved in a possible buy-out by Walgreens for $9 a share announced at the end of October. The deal is expected to close late next year and is pending shareholder and regulatory approvals.

Disney. Star Wars opens tonight and is expected to post the largest box office opening weekend sales ever. Pre-sales have already topped $200 million and, according to Fandango, ticket sales have already surpassed their all-time record. I know I've go my ticket, I'm going on Saturday. This movie is going to be a huge hit for Disney across its entire footprint. They've already said there will be one movie a year indefinitely, they've got the toys, the TV, the merchandise, amusement parks the works. Shares of the stock fell -1.25% in today's session, dropping below the short term moving average, but appear to be moving higher in the near term. Resistance is near $115, if broken the stock could go to $120.

Redhat reported earnings after the bell. The open source software provider reported better than expected on the top and bottom lines. The results were driven by increased subscription revenues, up 22%, and deferred revenue, up 14% , with total revenues up 15% from last year. Results were good enough for execs to up guidance to a range more in line with consensus and sent shares of the stock shooting up more than 5% in after hours trading.

The Indices

Today's losses were led by the Dow Jones Industrial Average drop of -2.00%. The transports created a long black candle falling from the 7,750 level confirming resistance at previous support. The indicators are bearish and pointing lower so a test of 7,500 is likely with a chance of a move to 7,250. Looking back over the past few months it looks like 7,500 could be a bottom so a move below it could lead to further selling.

The next biggest decline was only -1.50%, posted by the S&P 500. The broad market created a long black candle and dark cloud cover pattern that could lead to another test of support along the long term trend line. The indicators are mixed but remain consistent with a market trading above support. First target for support is between 2,015 and 2,030 with a possible move down to 2,000.

The Dow Jones Industrial Average fell -1.43% and closed at the low of the day. Today's candle completely encompasses yesterday's and appears to confirm resistance above 17,600. The indicators are mixed however, consistent with a trading range or consolidation, so the depth of any downside movement is questionable. Support target is near 17,250 and the bottom of the 2 month range. A break below this level could take the index down to 16,750 and the long term up trend line.

The NASDAQ Composite made the smallest gain in today's session. The tech heavy index lost -1.35% and broke the short term 30 day moving average to end the day just above the long term up trend line. The indicators are pointing lower, consistent with lower prices, so a test of the trend line is looking likely. A break below the trend line could take the index down 4,950 or 4,900 in the near term.

They did it, the FOMC has raised rates and erased the uncertainty of when they would. Now we can begin to worry about when the next one will be but I think it safe to assume we have a meeting or two before that happens. Until then the focus will return to the fundamentals, the data and the earnings.

The fundamentals have been altered, if every so slightly, and it will take a little time to see how that will affect the economy and this could produce some market volatility. The economy is still in uptrend and expectations for next year are still positive so I am still bullish overall. The question is if expansion is hot enough for the economy take another rate hike, or need another rate hike, or if the recovery will falter. As for earnings, we've got another bad season to look forward to but this could be the last one of negative growth for a while so any earnings driven market down turn is a buying opportunity in my view.

Today's action was probably influenced by quadruple witching options expiration more than anything else. Expiration is tomorrow, tomorrow's action could be the same and may easily see a continuation of today's move, or a swing back to yesterday's high, or both.

Until then, remember the trend!

Thomas Hughes

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