We thought Wednesday's price action would be revealing and it was. The S&P 500 rallied, and then it sold off, and then the S&P 500 rallied back after finding technical support at its 50-day moving average.
What the seesaw action revealed was a market that isn't entirely sure where it wants to go right now or where it is justified to go.
There has been a huge rally off the December 24 low driven by an awareness that things are not as dark on the economic, and earnings, fronts as they were made out to be in December. At the same time, it is clear the global economy is slowing, that earnings growth is slowing, and that there is a high degree of uncertainty surrounding the known unknowns of trade dealings with China, Brexit, and the partial government shutdown, the outcomes of which could make things better or worse.
There are understandable doubts, then, about just how much the market is willing to pay for every dollar of earnings in an environment where the risks to economic, and earnings growth, projections are tilted to the downside.
The natural offshoot of those doubts, after a huge, short-term move, is a market prone to vacillation as it takes stock of incoming data and news to determine if there is justification to keep the move going.
Given the batch of better than expected earnings results since yesterday's close, and this morning's report that weekly initial claims ran at their lowest level in nearly 50 years, one could argue that the market should be sporting a positive bias.
Union Pacific (UNP), Texas Instruments (TXN), Southwest Airlines (LUV), American Airlines (AAL), W.W. Grainger (GWW), Bristol-Myers Squibb (BMY), American Electric Power (AEP), and Lam Research (LRCX) are some of the companies that exceeded earnings estimates for the December quarter.
However, the good earnings news has been mitigated by other non-earnings news, namely Commerce Secretary Ross's contention that we are "miles and miles" from resolving China trade issues, ECB President Draghi's contention that significant stimulus is still needed, and the preliminary manufacturing PMI readings for January out of the eurozone and Japan that showed a slowdown from December.
Those headlines have run some interference, because they have stoked concerns about the pace of future economic growth, which in turn has stoked concerns about the pace of future earnings growth. That's bringing things full circle in terms of highlighting the question being considered now as to how much one is willing to pay up for every dollar of earnings.
Strikingly, the futures market turned south on Secretary Ross's remark, leaving the cash market on course for a modestly lower start. The opening indication probably isn't any worse, because the market appreciates by now that there is a good probability that another administration official will say something later that contradicts the "miles and miles" apart claim.
With respect to the initial claims report, it showed weekly claims falling by 13,000 to 199,000 (Briefing.com consensus 217,000). Continuing claims for the week ending Jan. 12 dropped by 24,000 to 1.713 million.
Claims filings by federal civilian employees, which are reported with a one-week lag, jumped to 25,419 for the week ending January 12, an increase of 14,965 from the prior week.
The key takeaway from the report is that the low level of initial claims is reflective of a tight labor market.