The rally began to show weakness today, even as new data supports strength in the economy. Jobless claims, pending home sales and durable good orders were all better than expected, reveal strength in the economy and point to an increased chance for a June rate hike. Adding to concerns were statements from at least 2 Fed officials; Bullard and Powell. According to them the market continues to mis-judge the FOMC and that a hike is warranted "very soon". Even so, the CME's Fed Watch Tool shows only a 30% chance of a hike at the June meeting.

International markets were fairly quiet today. Asian indices posted gains but they were minimal, led by a 0.27% gain in the Shang Hai Composite. Trading in the region was impacted by a strengthening yen and uncertainty of expected central bank actions in Japan and the US. European indices fared a little better, posting gains of roughly 0.5% as WTI and Brent crude both topped the $50 level for the first time since late last year.

Market Statistics

Futures trading indicated a flat to positive open for the US market. Trading ticked higher following the jobless claims and durable goods data but not substantially. At the open the indices moved higher, about 4 points for the SPX, and then proceeded to trend sideways in a very tight the rest of the morning. By 11AM most indices were showing a small loss for the day and were not able to regain positive territory until late afternoon. Even so, gains were small, less than a quarter percent, and within the early range.

Economic Calendar

The Economy

Today's data was pretty good and suggests the economic boom I've predicted for the 2nd half of the year may not be too far off. Initial jobless claims fell -10,000 to 268,000 from last week's unchanged data. The 4 week moving average of claims rose however, due to the recent spike in claims, but remains consistent with labor market health. Speaking of the recent spike in claims, I learned today that NY allowed certain public school employees to file for unemployment during the spring break holiday which accounts for the massive increase in claims we saw at the end of April. This week NY reported a -15,881 decline in new claims. On a not adjusted basis initial claims fell -1.6% versus an expected gain of 2.0% and have fallen back below last years levels by -3.7%.

Continuing claims rose this week, by 10,000, on top of an upward revision of 1,000 to last week's figure. Continuing claims totaled 2.163 million in this week's report and very near the 43 year low. The 4 week moving average also rose, by 8,500, to hit 2.151 million but remains very low and consistent with labor market health.

The total number of Americans filing for unemployment benefits fell once again, consistent with historical trends, to hit 2.055 million and a new 6 month low. Total claims are down -3.4% from last years levels and remain consistent with ongoing labor market health and declining unemployment levels. Based on the historical trends we can expect another 3 weeks of declinhes with a target below the 2 million mark, at which time we may see a month or two of increases before making another sustained move lower going into the fall and holiday season.

Durable Goods data was released at 8:30AM and came in above expectations. New orders for durable goods rose 3.4% versus an expected gain of only 0.6%. Transportation and aircraft led the increase, durables ex-transportation rising only 0.4%. Ex-defense orders rose by 3.7%. Shipments increased 0.6%, as did unfilled orders, while inventories declined by -0.2%. Capital goods, non-defense, rose by 7.8%. The weak spot was new orders for heavy machinery, down -0.7%.

Pending home sales data was also much better than expected and helps confirm strength in the broader housing market. Pending sales rose by 5.1%, analysts had expected only 0.6%, the third month of increases and set a new 10 year high. The index is now reading 116.3 and is up 4.6% versus last April. March was also revised higher.

The Dollar Index

The Dollar Index fell today, contrary to what I would've expected due to the strong data we received this morning. The index fell about -0.25% intraday, closing with a loss closer to -0.15%, confirming resistance at the 61.8% retracement level. Resistance is likely due to uncertainty over the FOMC decision due out in 3 weeks. Today the Fed's Bullard and Powell both made comments to the effect that the market was misjudging the FOMC intent and that a normalization of policy was warranted "soon" but both also hedged their comments. Powell says it doesn't feel like an economy with inflation about to break out.

The dollar has risen in value over the past few weeks because of hawkish sounding Fed talk, if they do not raise rates it is likely to fall back and test for support. However, even without a rate hike if the data continues to show signs of strength the dollar is likely to continue rising longer term. First target for support is along the short term moving average near $94.65, next target is just below that along the 78.6% retracement line, near $94.20.

The Oil Index

Oil prices flirted with the $50 level today. Both WTI and Brent moved above this level for the first time since late last year, both also fell back below $50 before the end of the session. On the one had we have increasing evidence of supply/demand rebalancing, on the other is a market that is still out of balance. Rebalancing is a future expectation, imbalance is a present reality and with prices reaching new highs is likely to continue. The higher prices get the more incentive shale producers, OPEC and non-OPEC countries will have to produce and sell more. Prices may continue to rise but there is reason to suspect a correction is coming.

The Oil Index persists in diverging from oil prices. The index opened with gains but is still well below the most recent peak, and far below a 7 month high. Today's action suggests resistance is building along the 1,140 level, also indicated by the short term moving averages inability to break above the 61.8% retracement level. The indicators are mixed, they suggest a shift in momentum to the upside is about to happen but without a break above 1,140 this may be temporary. Even if the index moves above 1,140, next target for resistance is just a few points higher, near 1,175.

The Gold Index

Gold prices were up in the early hours of the day, only to fall into the red following the release of economic data. Spot price fell about -0.25% to trade near $1220 and a two month low. Prices are being pressure lower by a stronger dollar and FOMC outlook and could move down to $1200 over the next couple of weeks if the data remains strong.

The gold miners are also in decline. Today the miners ETF GDX opened with a small gain, just below the short term moving average, and then fell from that level. The sector appears to be in reversal, today's action confirming a double top, with indicators in support of that move. The MACD momentum is bearish, strong and on the rise while stochastic is trending lower. If gold prices don't recover in the next few days the ETF will likely fall with targets near $21.80 and $21.20.

In The News, Story Stocks and Earnings

Dollar General and Dollar Tree both reported earnings before the bell, and both beat expectations. Dollar General beat EPS projections by nearly 10% although revenue fell a bit short. Even so sales rose by 7%. Dollar Tree did even better, aide by the purchase of Family Dollar, the opening of new stores and a 2.3% increase in comp store sales. Sales are up 133%, earnings up 105%, and guidance has been raised to a range above consensus estimates. Shares of both stocks were up today's session, but Dollar Tree is the real winner, gaining nearly 13% to trade at a new all time high. Dollar General gained only 5% but is also trading at a new all time high.

The retail sector was able to move higher on the DG and DLTR news but had a hard time holding on to the gains. The Retail Sector SPDR XRT gapped up at the open and then fell back to close the gap later in the day. Even so the ETF was able to post a gain near 0.5% and appears set to move higher. The indicators have rolled into a bullish signal, indicating higher prices, with the short term moving average as a first target. A break above the average would be bullish and could carry the ETF up to the $45-$46 level.

The housing sector did not move higher today despite the strong pending sales data. The XHB Housing Sector SPDR opened with a small gain only to give it up and more by the end of the session. Today's candle is black and may indicate a retreat to test support along the $33.50 level and the short term moving average. The indicators are bullish following the new home sales inspired break above the short term moving average so today's action appears to be consolidation rather than sign of reversal. First upside target is near $35, a break above this level would be bullish for the sector and could carry the ETF up to $37.50.

The Indices

Today's action was indecisive to say the least. Trading ranges were tight, moves small and without direction. The data shows a strengthening economy yet earnings outlook for the next quarter remains weak. While the data suggests that earnings and revenue will grow, it also suggests the FOMC will be raising interest rates. Raising interest rates is scary for the market, it could derail the growth, but it is also a sign the economy is strengthening.

The day's biggest mover was the Dow Jones Transportation Average with a loss of -0.27%. The transports made a very small spinning top style doji, just below resistance. Resistance is the short term moving average, just below the 7,750 level. The indicators have rolled into a bullish signal, confirmed by MACD's zero line cross yesterday, so more upside is very possible, but requires a break above the moving average. If so a move to next resistance, near 8,100, is very likely. If not a move back support at 7,500 become likely.

The next largest move, to the downside, was made by the Dow Jones Industrial Average. The blue chips fell -0.14% and created a small spinnning top candle with small upper and lower shadows. The move occurred close to neither support nor resistance, and appears to be consolidation before another move higher. The indicators have rolled into a bullish signal, confirmed today with a zero line crossover in the MACD, with upside target only 175 points above today's close, 18,000. This level is likely to provide resistance and may cap gains in the near term, a break above would be bullish and likely lead to a test of the all time high.

The S&P 500 made the smallest move of all the indices today, -0.02%. The broad market created a very small spinning top type doji not close to support or resistance. Today's move appears to be a pause within a near term rally, not surprising following two days of gains, and is supported by bullish indicators. Both MACD and stochastic are on the rise, confirming Tuesday's break above the short term moving average, and point to higher prices. First upside target is near 2,110 with a possible move to my resistance line at 2,120. A break above this level would be bullish and likely carry the index up to test resistance at the all time high near 2,130.

The NASDAQ Composite was able to post a gain for today's session, but a small gain, only 0.14%. The tech heavy index created a very small candle, doji, and indicated higher. Resistance is about 1% above today's close and is first target should the index continue higher. A break above this level would be bullish and could carry it up to the 5,050 level or higher. First target for support is near 4,795 and the short term moving average.

The market took a breather today, not unusual following 2 days of gains. Whether or not it continues to move higher is yet to be seen. Tomorrow there are two things to be aware of, either of which could move the market; a speech from Janet Yellen and the 2nd estimate for 1st quarter GDP. Yellen will be watched for FOMC clues, the GDP for signs of strength in the economy. Expectations are for GDP to be revised higher to 0.9%, a strong number will be bullish but also raise the chances for a sooner-rather-than-later rate hike.

I am still concerned about 2nd quarter earnings outlook, negative earnings growth is not good and could easily cause the market to correct, but the signs are good for a boom in activity that could carry us through the summer. Labor data remains strong, housing data is much better than expected, and the two combined could drive profits in the 2nd half. I'm not quite ready to give up my bearish stance for the near term, but am increasingly convinced the 2nd half of the year is going to be good for business, the economy and the market. Believe it or not the next earnings cycle begins in only 6 weeks, better than expected with rising forward expectations will go a long way to helping the market move higher.

Until then, remember the trend!

Thomas Hughes