China woe and plunging oil prices carry the markets to new lows.


China woe and plunging oil prices drove the global markets to new lows today. China's Shanghai index was the leader once again, hitting the -7% circuit breaker, which halted trading for the day. Volatility in the region has risen once again, due mainly to meddling by the government, and is expected to continue at least into tomorrow. New developments include a suspension of the circuit breaker, resumption of government backed equities buying and an extension of selling rules that had been set to expire tomorrow. European indices were led by the DAX which lost close to -4.5% on an intraday basis. The region was able to recover some, but not all, of the days losses with the DAX closing down -2.29%.

Market Statistics

Futures trading was indicating a loss of -2% or more for most of the morning with little effect from positive data and earnings released before the opening bell. The China situation, as well as rapidly declining oil prices, was firmly in focus. The markets retreat in quick fashion when the opening bell sounded, with the S&P 500 hitting an early low of -1.79%. This low held, the market was able to bounce, aided by the announced suspension of Chinese circuit breakers, and traded up off the intraday low until late in the day. By 1:30 the indices were back down testing their lows and setting new ones. The day's final low was set around 3:30 and led to a late day rally. This rally was short lived and left in the indices near the lows of the day.

Economic Calendar

The Economy

Today's labor data does not support a faltering economy. Along with the jobless claims data we also saw the latest Challenger Gray & Christmas report on planned lay-off's. This month's figures hit new lows on so many levels, but is tempered by statements suggesting that employers are shying back from job cuts during the holiday season. The ADP data yesterday, however, suggests that employers might not be laying off because they need those employees. Whatever the reason, in December 2015, planned lay-offs were 23,622. This is a 15 year low, the lowest December on record and makes the 4th quarter of 2015 the lowest level a 13 year low.

The December figure is down -24% from last month and -27.6% from December last year. On a full year basis 2015 did not hit a record high, as expected, but was up 24% over last year. Mitigating this rise is the increase in oil related job cuts, +660% over 2014, and government, +311%. There were some notably large cuts in the computer sector as well, HPQ and MSFT, but on a whole that sector is basically flat on a year over year basis.

Challenger's 2016 outlook calls for a slower pace of lay-off's, rising wages and increased hiring.

Initial claims for unemployment benefits came in at 277,000 this week, down -10,000 from last week's not revised figure. The four week moving average also fell, -1,250, and hit 275,750. On a not adjusted basis claims rose 16.9% versus an expected 21.5% projected by the seasonal factors. YOY not adjusted claims is down -7%. The states with the biggest increases were NJ (6935), MI (6348), and KY (5497). The states with the largest decrease in claims were CA (-9900), TX (-5083) and FL (-2474).

Initial claims have trended up in the nearer term but remain low and near the 40 year low set last year. We are entering a period of seasonal volatility in claims. They may rise somewhat over the next few months with larger fluctuations centered around MLK Day, Valentines Day and Easter..

Continuing claims rose this week, adding 25,000 to hit 2.230 million. Last week's figures were revised higher by 7,000 bringing this week's total to +32,000 from the previous report. Continuing claims have also risen slightly over the past month to 6 weeks but remain very low, near the 40 year low and consistent with labor market health. Total claims fell by -100,503, consistent with expectations, to hit 2.236 million. This is the lowest level in four weeks but still off the long term lows set last fall. Year over year total claims are down -7%. Looking forward we can expect to see this number rise over the coming months, how high and how long will be more important than the fact that it does. Based on last years data we could see a significant rise as soon as next week which would be data for mid December.

Tomorrow is NFP, unemployment, hourly earnings and hours worked data. Based on the ADP it could be quite strong, possibly as high as 250,000. Unemployment is expected to remain steady, as is hours worked.

The Oil Index

Oil prices fell hard in the early morning hours to hit a 12 year low. WTI fell more than -5% intraday to reach levels below $32.50 before bouncing back to break even later in the day. Supply and demand issues are still not resolved and for appear to be firmly in favor of supply. Today's action shows there are some buyers at these levels, whether or not the can support the market is in question but I wouldn't be surprised to see WTI hit $30.

The XOI fell in today's trading and hit the lower target just above 1000. The index fell more than -2% intraday and created a candle with long upper shadow in the process. Today's action suggests that this level could be support but that is yet to be confirmed. The indicators are both pointing lower in the near term, suggesting a test of support, but divergent from this new low suggesting support and/or reversal. In either event oil prices will lead. A break below this level could take the index down to 950, a bounce could go as high as 1,050 or 1,100.

The Gold Index

Gold prices are getting lift on a flight to safety and has poked its head above $1100. This move breaks a resistance target but does signal reversal. Prices are lifting on China woe mostly, a situation likely to fizzle out over the next week. If you remember, last summer China sent some ripples through the market that were largely forgotten two weeks later. Fundamentals, labor data, supports a strengthening US economy and a stronger dollar so for now this move in gold appears to be near term, and a selling opportunity for the bears.

The gold miners got a lift from gold. The miners ETF GDX rose more than 4.5% and broke through the top of the two month trading range to touch $15. The indicators are pointing higher a move above $15 could come. There some signs of resistance; an upper shadow on the candle, a near term down tick in stochastic %K and divergences in both indicators suggest the ETF is still range bound. $15 is a possible resistance line, next target is near $15.50.

In The News, Story Stocks and Earnings

Earnings season has begun, if quietly. KB Homes were among those reporting today before the bell and the home builder did not meet expectations. Top and bottom line misses, driven by weather related delays in construction, along with a poor outlook for earnings growth helped to drive the stock lower by more than -10% during the session. Although disappointing to investors, company CEO said that traffic was strong and demand remained robust. Of note, labor shortages are being cited as another reason for the shortfall in earnings.

The Walgreen's Boots Alliance reported better than expected earnings on slightly weaker than expected revenue. Earnings of $1.01 beat by a nickel and are up more than 11% from last year. The company also narrowed its guidance to the upper end of the previously stated range. The news helped to lift the stock by nearly 4% intraday but sellers took advantage of the gains and traded the shares down from there. Today's action appears to confirm support at $80.

Constellation Brands reported before the bell and pleased investors to say the least. The company beat on the top and the bottom lines, reported strong demand and raised guidance. Guidance was raised to a range of $5.30-$5.40, ten cents above the high end of the previous range, and drove shares up by more than 5%. The move looks strong but I think, based on the doji, rushing into this might not be a good idea.

The Container Store reported after the bell and did not live up to expectations. Consensus was $0.05, actual was -$0.04 which came on weak revenue and poor store traffic. The really bad news was guidance, which came in -30% below consensus. Shares of the stock fell in after hours trading.

The Indices

The indices are once again approaching correction territory, once again led by the Dow Jones Transportation Average. The transports lost more than -3% in today's action, falling to support targets at 7,000. Today's candle is long and black with very little shadow and declining indicators so a break of 7,000 could easily happen. The indicators are bearish in the near term, consistent with a move lower, but are also divergent from the newly set low. The divergence suggests the move is running out of steam, reaching an extreme of sentiment or approaching support, 7,000 could be it, if not a move down to 6,750 looks likely.

The NASDAQ Composite was the next biggest loser in today's session. The tech heavy index lost just over 3% in a move that appears to be confirming resistance. Today's action gapped lower at the open, moved up into positive territory and then fell to new lows, creating a candle with a long upper shadow and indication of resistance. The indicators are pointing lower, momentum is strong and gaining strength, so this move could continue. Next target is near 4,575.

The Dow Jones Industrial Average made the third largest decline in today's action, about -2.32%. The blue chips created a long black candle with very little lower shadow and broke below the long term trend line and support targets near 16,00. The indicators are bearish and pointing lower, but not overly strong, so it looks like this move could continue with downside targets near 16,000.

The S&P 500 was today's laggard in terms of losses. The broad market lost about -2.25%, created a long black candle and broke through support targets. Today's action is accompanied by bearish indicators, weakly bearish, and could go as low as 1,900.

The indices are nearing correction and could easily enter it tomorrow or next week. There is a lot of market turbulence, primarily centered on China and oil prices, set on the back-drop of what is expected to be a poor earnings season. These events are not inspiring, but may lead to the beginnings of the next rally.

Reasons why I remain bullish overall; Earnings season is likely to turn out better than expected, future outlook for earnings is for growth, economic trends (labor) are positive and growth is expected to expand in the next year. The noise will soon dissipate and the market will return to focus on these things, sooner or later.

Tomorrow we get the big one, the numero uno economic release that moves the market, the non farm pay rolls report. This number is likely to be strong, an even which should inspire a rally because is it shows economic strength, but this might be clouded by FOMC outlook in the face of China, sluggish global growth and weak earnings.

I expect China's market will be quite volatile overnight, what they do is really what will drive tomorrow's trade. I remain a long term bull, waiting for my entries, looking to buy on the dips but playing it very very cautious in the near term.

Until then, remember the trend!

Thomas Hughes