Friday, 9 Jan 2015 - AMC

Dow -170.50 at 17737.37, Nasdaq -32.12 at 4704.07, S&P -17.33 at 2044.81

The first five day indicator shows a slight gain. Does this means the year is going to be bullish? Well I leave that to the future. Anyway it is a self-fulfilling 'prophecy'.

Market seems to consolidate prior to the Non-Farm Payroll as well as the unemployment data. They are major market moving factor and we will see some movement tomorrow. Is it going up? or down?

Direction for Friday 9 Jan, 2015; Abstain

Well we see some improvement in the employment data but the lack in wage growth just didn't convince the market to go higher. As a result we saw a sell off at the opening...  

Market Summary

Industry Watch

Strong: Technology

Weak: Consumer Discretionary, Energy, Financials, Industrials

Other Market Moving Factor:

• S&P 500 testing 50-day moving average (2045)
• December Nonfarm Payrolls beat estimates (252K; Briefing.com consensus 245K), but wage growth contracts 0.2% (expected +0.2%)
• Markets in Europe retreat amid reports ECB remains undecided on format for QE program

[BRIEFING.COM] The S&P 500 began the first full week of 2015 with a slide below its 50-day moving average (2045) and found itself fighting that level once again on Friday. The benchmark index settled just below the 50-day average, losing 0.8% to lock in a 0.6% decline for the week while the Nasdaq (-0.7%) outperformed slightly, falling 0.5% for the week. 

Friday's affair was a bit of a roller coaster with the first downswing coming in the early morning hours when futures retreated in reaction to a Bloomberg report indicating the European Central Bank remains unsure of a format for its QE program. The news rattled U.S. futures and markets in Europe considering a QE announcement in two weeks was all but priced in. 

The early morning slip was followed by a swift recovery of the losses when the December Nonfarm Payrolls report beat expectations (252K; Briefing.com consensus 245K) on the headline level. The resulting rebound rally was short-lived, fading as soon as the cash market opened and, we would contend, as soon as participants finished reading the report. 

Specifically, the lack of payroll growth took the shine off what would have been a decent report. Hourly wages declined 0.2% and November growth was slashed in half (to +0.2% from +0.4%). Once the realization that without payroll growth there can be no consumption growth sank in, equities retreated. In addition to pressuring stocks, dimming growth prospects weighed on crude oil ($48.40/bbl, -$0.41) while boosting Treasuries. The benchmark 10-yr yield fell four basis points to 1.97% after bouncing off the 1.95% level. 

Cyclical sectors bore the brunt of today's losses with four of six growth-oriented groups ending in-line with or behind the broader market. Notably, the implications stemming from the absence of wage growth kept financials (-1.3%) and consumer discretionary shares (-1.1%) behind the broader market throughout the session. 

The financial sector finished at the bottom of the barrel while the discretionary sector ended just above with retailers fueling the weakness. The SPDR S&P Retail ETF (XRT 95.25, -1.74) lost 1.8%. However, the widespread selling in retail stocks masked the relative strength among homebuilders. The iShares Dow Jones US Home Construction ETF (ITB 26.61, +0.07) gained 0.3%. 

Elsewhere among cyclical sectors, industrials (-1.1%) finished among the laggards while energy (-0.8%), materials (-0.5%), and technology (-0.3%) outperformed. 

The relative strength of the technology sector prevented the S&P 500 from revisiting its morning low. Several large cap names like Apple (AAPL 112.01, +0.12), Cisco Systems (CSCO 27.79, +0.28), IBM (IBM 159.11, +0.69), and Oracle (ORCL 43.39, -0.02) held their own while chipmakers eked out gains with the PHLX Semiconductor Index adding 0.1%. 

Similar to chipmakers, the high-beta biotechnology group spent the day ahead of the broader market. The iShares Nasdaq Biotechnology ETF (IBB 313.32, -1.12) shed 0.4%, helping the Nasdaq Composite finish a bit ahead of the broader market. 

Although biotechnology was able to underpin the Nasdaq, the group failed to lift the health care sector (-0.8%) ahead of the broader market as large cap components weighed. 

Outside of healthcare, the remaining countercyclical groups ended near the broader market with consumer staples, telecom services, and utilities losing between 0.7% and 0.8%. 

Today's participation was below average with roughly 713 million shares changing hands at the NYSE floor. 

Economic data included Nonfarm Payrolls and Wholesale Inventories: 

• Nonfarm payrolls increased by 252,000 in December after adding an upwardly revised 353,000 (from 321,000) in November while the Briefing.com consensus expected an increase of 245,000 
  • The unemployment rate fell to 5.6% in December from 5.8% in November (consensus 5.7%), but that resulted from a large decline in labor force 
  • Average hourly wages in December contracted 0.2% after increasing a downwardly revised 0.2% (from 0.4%) in November 
• Wholesale inventories increased 0.8% in November after increasing an upwardly revised 0.6% (from 0.4%) in October while the Briefing.com consensus expected an increase of 0.3% 
  • Durable wholesale inventories increased 0.8% in November, up from a 0.1% increase in October. Large gains in professional equipment (1.3%), machinery (0.9%), and automotive (0.6%) offset declines in lumber (-0.5%) and furniture (-0.3%) 
  • Nondurable wholesale inventories increased 0.7% in November, down from a 1.5% increase in October. Low oil prices pushed petroleum inventories down 3.7%. That loss was more-than-offset by a 5.7% increase in farm product inventories 

Monday's session will be free of economic data. 

• Dow Jones Industrial Average -0.5% YTD 
• S&P 500 -0.7% YTD 
• Nasdaq Composite -0.7% YTD 
• Russell 2000 -1.6% YTD

Week in Review: S&P 500 Bouncing Off Technical Levels 

The stock market began the first full week of 2015 on a cautious note. The S&P 500 lost 1.8% while the Russell 2000 (-1.3%) outperformed. Stocks began sliding at the sound of the opening bell amid weakness in Europe that was brought on by renewed fears of a potential Greek exit from the eurozone. With the January 25 Greek snap elections fast approaching, voices out of Germany have tried to calm investors, but those calls have fallen on deaf ears so far. Over the weekend, German Chancellor Angela Merkel said that a Greek exit from the eurozone would be manageable, but the comments did not stop the euro from falling below the 1.1900 level against the dollar immediately after the foreign exchange market opened on Sunday evening. Interestingly, the dollar rallied against the euro, but surrendered almost 100 pips to the yen (119.60), suggesting a sense of caution was present among foreign exchange traders. 

Equity indices ended the Tuesday session in the red with the Russell 2000 (-1.7%) pacing the retreat. Meanwhile, the S&P 500 lost 0.9% with eight sectors registering losses. The stock market held up relatively well through the first hour of action, but the return of some recent concerns pressured cyclical sectors and the broader market into negative territory. Specifically, the S&P 500 reversed from its session high after The Financial Times reported, citing Oxford Economics research, that Syriza party in Greece is on track to win enough votes that would translate into a mandate to push back against austerity policies imposed by the European Union. In addition to hitting U.S. stocks, the news knocked European markets off their highs and set a fire under U.S. Treasuries. The resulting safe-haven flows underpinned Treasuries, sending the benchmark 10-yr yield lower by seven basis points to 1.96% after marking a low just under the 1.89% level. 

The major averages rebounded from their recent swoon on Wednesday with the S&P 500 (+1.2%) posting its first gain in six sessions. The benchmark index settled just behind the Nasdaq Composite (+1.3%), while the Dow Jones Industrial Average (+1.2%) and Russell 2000 (+1.2%) ended in-line with the S&P 500. The midweek advance occurred in two stages with the market climbing out of the gate amid upbeat action overseas. The S&P 500 notched its morning high 30 minutes after the opening bell, but returned to its opening level two hours after the start of the session. Equity indices then charged to new highs after Bloomberg reported that German officials are expected to show willingness to restructure Greek debt. The report said that a debt write-off is not being discussed, but repayment terms may be eased. Stocks caught a second wind following the Bloomberg report and spent the remainder of the session near their afternoon highs, all but ignoring the FOMC minutes from the December meeting. The lack of reaction was understandable, considering the document did not introduce anything ‘new' in particular. 

The S&P 500 spiked 1.7% on Thursday, continuing its rebound that began on Wednesday when the index found support at its 100-day moving average (2005). The benchmark index surged past its 50-day moving average (2044) on Thursday and returned to unchanged for the year. Equity indices didn't waste any time after the prior day's rebound, extending higher in the futures market in reaction to evening comments made by Chicago Fed President, and more importantly, 2015 FOMC voting member Charles Evans. Presenting at the University of Chicago, Mr. Evans reiterated his belief that due to low inflation, the Fed should not rush to raise rates, adding for good measure that such move would be a "catastrophe." Interestingly, Fed insider Jon Hilsenrath of the Wall Street Journal wrote that the Fed could indeed raise rates soon if it is believed that low yields at the long end of the curve reflect an influx of capital into dollar-denominated assets, which could spark a surge in prices. Mr. Hilsenrath added that this was the view espoused by NY Fed President and this year's voting member William Dudley, who argued a similar situation presented itself in 2000s, leading to the housing bubble. The signs of an impending tug-of-war at the Fed over when to pull away the punchbowl did not stop the stock market from spiking out of the gate and adding to its advance in afternoon action. Meanwhile, Treasuries retreated, sending the 10-yr yield higher by six basis points to 2.01%.

DOW

NASDAQ

S&P

Macroeconomic Data

Economic Data

from Briefing.com

• Non-Farm Payrolls : 252K vs 245K (Prior 353K)
• Non-Farm Private Payrolls : 240K vs 235K (Prior 345K)
• Unemployment Rate : 5.6% vs 5.7% (Prior 5.8%)
• Hourly Earnings : -0.2% vs 0.2% (Prior 0.2%)
• Average Workweek : 34.6 vs 34.6 (Prior 34.6)
• Wholesale Inventories : 0.8% vs 0.3% (Prior 0.6%)

NON-FARM PAYROLLS

Highlights

• Nonfarm payrolls increased by 252,000 in December after adding an upwardly revised 353,000 (from 321,000) in November. The Briefing.com Consensus expected nonfarm payrolls to increase by 245,000.
• The unemployment rate fell to 5.6% in December from 5.8% in November. The consensus expected the unemployment rate to fall to 5.7%.

Key Factors

• At first blush, the employment report seemingly looks positive. Payrolls exceeded expectations and upward revisions to previous months showcase a strengthening labor market. Yet, those numbers are actually masking what we would determine as a decidedly weak report.
• The key is wage growth. With strong payroll growth and a downward-moving unemployment rate, the labor market would seem to be gather strength. But the average hourly wages in December actually contracted, falling 0.2% after increasing a downwardly revised 0.2% (from 0.4%) in November. 
• For all of those increases in payrolls, the decrease in wages resulted in no change in aggregate income in December.
• Unfortunately, without aggregate income gains, consumption growth cannot accelerate, inflation trends will remain subpar, and the overall economy cannot improve.
• Furthermore, the unemployment rate - which the headline decline suggests was another improvement in labor market conditions – was mostly caused by a large decline in the labor force. If the participation rate remained at November levels, the unemployment rate would have been virtually unchanged at 5.8%.

Big Picture

• Lackluster income trends will cap potential consumption growth and keep the overall economy from significantly improving.

WHOLESALE INVENTORIES

Highlights

• Wholesale inventories increased 0.8% in November after increasing an upwardly revised 0.6% (from 0.4%) in October. The Briefing.com consensus expected wholesale inventories to increase 0.3%.

Key Factors

• Durable wholesale inventories increased 0.8% in November, up from a 0.1% increase in October. Large gains in professional equipment (1.3%), machinery (0.9%), and automotive (0.6%) offset declines in lumber (-0.5%) and furniture (-0.3%).
• Nondurable wholesale inventories increased 0.7% in November, down from a 1.5% increase in October. Low oil prices pushed petroleum inventories down 3.7%. That loss was more-than-offset by a 5.7% increase in farm product inventories.
• The increase in inventories may not have been planned. Wholesale sales were down 0.3% in November after being unchanged in October.
• The decline in sales combined with the increase in inventories led to a small increase in the inventory-to-sales ratio, 1.21 from 1.20.

Big Picture

• Wholesale inventories are just one component of total business inventories. Manufacturing and retail inventories make up the rest of total business inventories. The market ignores this release and doesn't pay much attention to the full business inventory release that comes a few days later. Improved inventory management in recent years has reduced the economic swings associated with inventories and has helped produce a long-term downtrend in the inventory-to-sales ratio.

Market Internals

NYSE:

Lower Volumes than the day before – 731.9M vs 848.0M 


Decliners outpaced Advancers (adv/dec): 1145 / 1926

New Highs outpaced New Lows (highs/lows): 152 / 58

NASDAQ:

Lower Volumes than the day before – 1706.1M vs 2064.7M

Decliners outpaced Advancers (adv/dec): 943 / 1821

New Highs outpaced New Lows (highs/lows): 79 / 48

VOLATILITY S&P500 (VIX)

17.55 +0.54 (+3.17%)

Internals are not entirely bearish on Friday. Although VIX closed higher, it is still showing some confidence in the market (perhaps in the long term) and it is still hovering above 15.00. So I would say market is really cautious and easy to tank at the moment... 

Technical Updates

DOW JONES INDUSTRIAL AVERAGE ($INDU: CBOT)

17,737.37 -170.50 (-0.95%)

Volume: 93,391,882 (above average of 90,634,374)

Range: 17,686.09 - 17,915.32

NASDAQ COMPOSITE INDEX ($COMPQ.IDX: NASDAQ)

4,704.07 -32.12 (-0.68%)

Volume: 430,668,472 (below average of 468,429,506)

Range: 4,681.24 - 4,744.71

S&P 500 INDEX (SPX: CBOE)

2,044.81 -17.33 (-0.84%)

Volume: 503,887,000 (below average of 529,059,000)

Range: 2,038.33 - 2,064.43 

All the indices are sitting on their 20 and 50MAs respectively. This is going to be crucial if they break below the support. It seems like the indices might form a head and shoulder pattern soon provided they did not break higher...

Commodities

Closing Commodities: WTI Closed With Modest Loss

• Commodities ended the day mixed
• WTI lost some steam in afternoon action and finished with a modest loss
• Nat gas held on to a little upside, closing 2 cents higher at $2.695/MMBtu
• Feb gold rallied today and finished with a $7.70 gain at $1216.20/oz.
• Mar silver, meanwhile, rose 4 cents to $16.41/oz

Energy Price Action

• Feb crude oil fell $0.41/barrel to $48.40/barrel
• Natural gas rose 2 cents to $2.95/MMBtu
• RBOB Gasoline closed $0.01 lower to $1.33/gallon
• Heating oil closed unchaneged at $1.71/gallon

Agricultural Price Action

• Mar corn closed $0.05 higher at $4.00/bushel
• Mar wheat fell $0.05 cents to $5.62/bushel
• Feb soybeans ended $0.08 higher at $10.52/bushel
• Ethanol closed $0.01 higher at $1.48/gallon
• Sugar #11 rose 0.03 cents to 14.91 cents/gallon

Metals Price Action

• Feb gold ended today’s session $7.70 higher at $1216.20/oz
• Mar silver ended $0.04 higher at $16.41/oz
• Mar copper closed $0.01 lower to $2.76/lb

Currencies       

Currencies Tighten Up Trading Range in Afternoon Trade:

The Dollar Index has been trading just below the 92 level for the majority of the afternoon. The range has been tight with the DXY bouncing between the 91.89 to 92.05 area the majority of the time. Some profit taking following the job reaction pop has led to some of the weakness. But the light hourly earnings number has also raised some concerns over a potential lack of inflation. This could push back expectations for a Fed rate hike. 

• The euro is trading at 1.1835 as it recovered some early losses. The euro will move back into focus next week when the European Court of Justice is set to rule on the legality of the OMT program. The Court is expected to pass the program and set the table for a QE announcement at the January 22 ECB meeting.
• The pound has held on to early gains as it trades around 1.5160. On Tuesday the country will post its latest inflation report with markets looking to see if the deflationary pressures in Europe are impacting the U.K. as well. 
• The yen was able to rally to the 118.50 area as risk off trade took control of markets mid day. It has cooled off and traded in a tight pattern just above the 118.50 level for the majority of the afternoon.

Bonds

Quite a Week: 

• The first full week of trading for the month of January is done and it was a good week for the Treasury market. Yields fell sharply across the curve.
  • 2-yr -11 bps to 0.56%
  • 5-yr -16 bps to 1.44%
  • 10-yr -14 bps to 1.97%
  • 30-yr -13 bps to 2.56%
• Volatility in the stock market, a continued decline in oil prices, festering deflation concerns out of the eurozone, and a startling report that average hourly earnings decreased 0.2% in December provided much of the rationale for the buying interest 
• Friday's session was ultimately governed by the recognition that the drop in average hourly earnings should indeed leave the FOMC patient in raising the fed funds rate
  • 2-yr yield fell 5 bps to 0.56%
  • Meanwhile, the fed funds futures showed a drop in the probability of the first rate hike occurring at the September 2015 meeting from 59% to 52%
• Over the last 12 months, average hourly earnings are up just 1.7% versus 2.0% in November. Other key components of the December employment report included the following:
  • Nonfarm payrolls increased by 252,000 (Briefing.com consensus 245,000) and payrolls for October and November were revised up by a combined 50,000
  • Private sector payrolls increased by 240,000 (Briefing.com consensus 235,000) and payrolls for October and November were revised up by a combined 50,000
  • The unemployment rate fell to 5.6% from 5.8% (Briefing.com consensus 5.7%)
  • The labor force participation rate fell to 62.7% from 62.9%, which helped to explain the drop in the unemployment rate
• Wholesale Inventories for November increased 0.8% (Briefing.com consensus 0.3%), yet wholesale sales fell 0.3%. That pushed up the inventory-to-sales ratio to 1.21 from 1.20
  • Briefing.com boosted its Q4 GDP forecast this week to 3.6% from 3.2%, driven by the smaller than expected net export deficit and the jump in wholesale inventories
• Oil prices were volatile on Friday. Down more than 3.0% in morning action, they snapped to attention in the afternoon and settled down 0.9% at $48.36/bbl
• Precious metals prices drew some buying interest, supported by a weaker dollar and the thought that major central banks are going to remain extremely accommodative (and boost accommodation in some cases)
  • Gold +0.9% to $1219.20/troy oz.
  • Silver +0.3% to $16.44/troy oz.
• U.S. Dollar Index dropped 0.5% as tempered rate hike expectations took a little shine off the greenback
  • EUR/USD +0.4% to 1.1842
  • USD/JPY -1.0% to 118.60
• 2-10-yr spread held steady at 141 bps

The Week Ahead: 

• There is no data on Monday. Atlanta's Lockhart discusses monetary policy (12:40). Treasury will auction $24B 3Y notes. 
• Data kicks off for the week on Tuesday with JOLTS -- Job Openings (10) and the Treasury Budget (14). Treasury will hold a $21B 10Y note reopening. Minny's Kocherlakota opines on "Goal-Based Monetary Policy Report" (17). 
• Wednesday's data is heavy as the weekly MBA Mortgage Index (7), retail sales, import/export prices (8:30), business inventories (10) and the Fed's Beige Book (14) are due out. Treasury will reopen $13B 30Y bonds. Philly's Plosser gives his economic outlook (9).
• Data continues to flow on Thursday with initial and continuing claims, PPI, Empire Manufacturing (8:30) and Philly Fed (10). 
• The week's data concludes on Friday as CPI (8:30), industrial production and capacity utilization (9:15), Michigan Sentiment (9:55) and Net Long Term TIC Flows (16) cross the wires. Minny's Kocherlakota gives his "Goal-Based Monetary Policy Report" (8:50) and St. Louis' Bullard discusses the economy and monetary policy (13:10).

Treasury Yields:

• 2 Year Note 0.59% -0.03
• 5 Year Note 1.45% -0.05
• 10 Year Note 1.98% -0.05
• 30 Year Bond 2.55% -0.04

2/30 Spread: 196 bps ( -1 ) …  2/10 Spread: 139 bps ( -2 )

Preview for the week Monday 12 Jan to Friday 16 Jan, 2015

Earnings Highlights

Monday:
BMO - None Scheduled
AMC - AA, LMNR, SNX

Tuesday:
BMO - IHS, KBH
AMC - CSX, DRWI, LLTC, PRGS

Wednesday:
BMO - JPM, NORD, SJR, WFC
AMC - CLC, GEF, FUL, HGR

Thursday: 
BMO - BAC, BLK, C, CBSH, FAST, FRC, HOMB, IIIN, LEN, MTB, PPG, TSM, WNS
AMC - OZRK, INTC, MBFI, PBCT, SLB, WTFC

Friday : 

BMO - SCHW, CMA, GS, PVTB, STI, WIT

AMC - None Scheduled

Summary

Basically the week ended flat and that is a pretty rough first week. The overall market sentiment I feel is still moving towards bearish as it has been cautious. Like I mentioned above, if the market price could not break higher its resistance level, we should see a correction then.

Next week will be the start of Q1 earnings season, as usual I suppose the volatility is going to continue.  

Direction for Monday 12 Jan, 2015; Up

Direction for the week Monday 12 Jan to Friday 16 Jan, 2015; Down

2015 Daily Directional Accuracy: 2/5 (40.00%) 
2015 Weekly Directional Accuracy: 0/1 (0.00%)