After opening with a -102 point drop, rebounding to a +87 point gain and then closing down -35 it is clear there is confusion everywhere.
Market Stats Table
All the indexes gave back their intraday gains with only the Nasdaq closing fractionally positive. After a +400 point short covering rally on Monday we should be happy to see the indexes close flat instead of a major retracement of the Monday gains. Most traders are never happy with a flat day despite the reasons.
The economic news was also flat. The weekly Chain Store Sales came in at +0.1%. Definitely no excitement there. The Job Openings Labor Turnover Survey (JOLTS) was fractionally positive at +0.9% compared to a -3.8% decline in the prior month. This is a lagging report for the March period. In March 4.2 million workers were hired compared to 4.0 million that left their jobs. Job openings increased slightly to 2.7 million from 2.6M. This was a positive report but the amount of the gains was negligible.
Wholesale Inventories for March rose by 0.4% compared to estimates for +0.5% and a reading of +0.6% in the prior month. I am sure traders had to struggle to contain their excitement over the news. However they actually should have been excited by the +2.4% jump in sales. That was the twelfth consecutive month of positive sales growth and the strongest month since November. Durable goods sales rose +2.0% while non-durable goods sales rose +2.8%. The inventory to sales ratio fell by three basis points to 1.13 as sales outpaced inventory replenishment. This is bullish since it means manufacturers will have to increase their pace to stay ahead of the rate of sales.
Lastly the National Association of Realtors said home prices rose in 2010-Q1 to within 0.7% of the 2009-Q1 levels. This was much better than the -4.1% ratio in 2009-Q4 from 2008-Q4. This should not be a shock to anyone and this lagging report was ignored.
Economic reports due out on Wednesday include the weekly mortgage applications, International Trade, Treasury Budget and oil and gas inventories.
While the $1 trillion stability package for Europe continued to cloud the airwaves there was some return of stock news to the intraday headlines.
Intel (INTC) held its quarterly analyst meeting in Santa Clara and all the news was good. Intel's CEO, Paul Otellini, said revenue and earnings per share should see double digit increases over the next few years because of rising demand for chips used in personal computers and other electronic gadgets. Intel had experienced declines over the last two years but their futures are definitely improving. Otellini's comments suggested much better growth than current analyst estimates of a 5% growth rate in 2011.
Otellini also told analysts that Intel was pushing beyond its core processor business into software and services. "Don't think of us as a chip company anymore, we are a computing company." He said the growth in the Internet, especially video websites and video on demand was driving PC and server growth. Desktops are growing at a subdued pace but notebooks are expected to grow 22% annually through 2014 and netbooks will grow 15% annually. However, tablet computers are expected to grow between 73% to 88%. Otellini said the new explosion would be smart appliances, power meters, smart TVs, etc. Everything would be connected to the Internet and the growth of cloud computing. All the good news failed to boost Intel's stock.
You may have heard that smart phones using the Google Android operating system had surpassed Apple's iPhone in terms of U.S. market share. Market research firm NPD said Android controlled 28% of the domestic market based on unit sales in Q1. Apple was reportedly 21% with Research in Motion at 36% and the top position thanks to the BlackBerry.
Apple reacted to the NPD survey today in an uncharacteristic rebuttal to a news release. Apple claimed the BPD survey was "very limited" and only polled 150,000 consumers in an online survey and doesn't adequately address the 85-million iPhone and iPod Touch users. Apple has sold 51 million iPhones.
Apple spokesperson Natalie Harrison said the survey was "not truly representative of the truth of the matter." She also blamed buy one, get one promotions as skewing the survey numbers. "When a carrier sells a phone and gives another one away for free it counts as two phones toward market share and that is unfair."
Personally, I agree it would be unfair if the second phone was stored in a bedroom drawer and not used but since most of those free phones go to family members I think it qualifies as an active phone and part of the market.
On the global market the iPhone far outsells Android according to an IDC report last week showing the iPhone with 16% of the world's market but still behind Nokia and RIM.
After the bell Disney (DIS) reported earnings that jumped +55% on strong box office sales for Alice in Wonderland. That was wonderful news for Disney after moviegoers avoided the Confessions of a Shopaholic in the same quarter in 2009. Earnings were 48-cents compared to 33-cents in the year ago quarter. Disney said Alice brought in $962 million in worldwide ticket sales. This pushed the movie segment profits to $233 million from $13 million in the comparison quarter. Disney shares fell $1 in after hours to $34.60.
The big earnings news for tomorrow will be Cisco Systems. They will report after the close.
There were several groups testifying to Congress today. The SEC Chairman Mary Schapiro testified on the efforts to find out what happened in last Thursday's crash. She said they had not found any smoking guns or fat finger trades but they were still looking. In the 1987 crash there were 600 million shares traded. Last Thursday there were 66 million trades and 19.3 billion shares traded according to Schapiro. 17 million of those trades came between 2:PM and 3:PM. Just scouring through those 66 million trades is a monumental task. The SEC has over 100 people working night and day trying to find the first domino. She also said that only 35% of normal volume is handled by the NYSE and Nasdaq. The rest is spread over nearly 50 other electronic exchanges scattered around the country.
She testified that the market drop followed a sharp decline in the S&P E-mini futures and the rebound followed a sharp rebound in those same futures. She also said more than 25% of all ETFs experienced temporary price declines of more than 50%. One large ETF manager reported that 14 of its ETFs experienced executions of 15-cents or less and five traded for 1-cent or less. Those trades were all cancelled.
Schapiro said that volume in the E-mini futures normally precedes volume in individual shares. Funds have found that when they need to sell (or buy) a basket of stocks that selling E-mini futures first and then executing the order to sell the individual stocks will insulate them from price swings in the individual stocks. For instance, selling 1,000 futures contracts may not produce any material decrease in price in the futures because of the highly liquid contract. Placing orders to sell millions of shares of index sensitive stocks like PG, MMM, CAT, BA, etc can and will have a sharply detrimental effect on the indexes and futures. Placing an order to sell two million shares of MMM, with a daily volume of 4.7 million can produce a sharp drop in price. Multiply that across 20, 30 or even 50-100 individual stocks and there can be a sharp drop in futures.
If MMM is trading at $85 and you need to sell a couple million shares the price could drop to $82 or even $80. Multiply that across 30-50 individual stocks and you are going to take a huge hit in received price compared to the currently quoted price. By selling futures first then selling the individual stocks the fund can offset the individual price loss when it buys back the futures at a lower price after the corresponding price drop. Schapiro said the volume increase in the futures just before the drop in individual prices was not necessarily a problem.
An astute reader, thanks Carl, sent me a link to a story regarding the behind the scenes events leading up to the crash. Universa, a high profile hedge fund placed a $7.5 million option trade for 50,000 S&P-500 puts just 20 minutes before the crash. The bet would pay off $4 billion if the S&P declined by the June expiration. The broker on the other side of that trade, Barclays PLC, had to take a significant short position in the futures to hedge their risk. That large short in an already seriously negative market probably triggered other hedging as well as millions of stop losses.
The market was already seriously negative and the article pointed out that by 11:am the volume of sales without an uptick was the highest since the first day of trading after 9/11. As the markets declined the computers at the major brokers calculated the amounts needed to maintain an active hedge for all the firms various positions and they continued to increase the size of the hedges. This is automatic and program driven and produced a cascade of selling in the futures markets.
At Barclays the flow of trading data increased so sharply during the crash that the primary data feed system crashed. A backup system took over immediately and there was no impact to the firm. The head of Barclays electronic trading system said quote information spiked to 300,000 price changes per second. A normal peak is 60,000 quotes.
This is approximately when ARCA crashed or at least "became unreliable" and the Nasdaq quit accepting quotes from ARCA and sent orders elsewhere. Moments later the BATS exchange also stopped routing orders to ARCA.
Much blame has been put on high frequency traders for increasing the load on the exchanges. Several HF trading firms like Tradeworx saw the questionable volatility building well before the actual crash. Because their computers are examining trade data in real time and applying custom scans looking for opportunities the operators were suddenly being flagged with data that showed volatility was spiking. Several HF firms canceled their trading programs and shut down their systems before the actual crash. Tradeworx said it took a team of traders about two minutes to close all open trades when it would have normally taken a fraction of a second. Tradebot Systems in Kansas City also saw the volatility spike building and pulled out of the market.
Since high frequency program trading is reported to be 40-50% of all market volume today the shutdown of all these systems was seriously detrimental. The market depth, orders to buy under the current price, vanished. These funds primarily trade ETFs. Normally there can be hundreds of orders stacked in the queue under the current price in hopes of catching a dip. When the market depth vanished ahead of the hedging programs being automatically triggered the prices went to zero.
For instance, the Wall Street Journal reported that outstanding buy orders on the iShares Russell 1000 Growth Index ETF (IWF, $51, Volume 3.3 million) fell to ONLY 4 bids over $14 for a fund that was trading at $51 just minutes earlier.
As soon as the crash occurred trading computers that constantly monitor stocks looking for undervalued bargains were firing away with buy orders that caused a +500 point rebound in less than seven minutes. Needless to say there are probably thousands of programmers burning the midnight oil this week adding rules and processes to handle this type of exception should it happen in the future. Hundreds of billions of dollars were lost due to stop losses and trading programs that did not anticipate that kind of volatility. Hundreds of billions were made by traders and trading programs that saw the sharp declines and acted on the information. The WSJ reported that $1 trillion in market cap was erased on the drop only to be replaced on the rebound.
The SEC and the exchanges met and traded information and they are all working on coming up with a plan that will be implemented across all the exchanges to halt trading on a given set of circumstances. Part of the problem was the halt on the NYSE when the LRP was triggered. This took the NYSE out of the electronic loop while other exchanges imploded. They want to prevent that from happening in the future. If an event occurs they will halt all the exchanges for a specified period even if it is just a couple minutes. As discussed the event would be single stock oriented and not index related. Time will tell.
Another testimony event today involved the major players in the oil spill. The major players were grilled by Senators on why it happened and why they had not taken adequate precautions. Officials from BP, Transocean and Halliburton sat shoulder to shoulder and based on their testimony I am surprised there were no fist fights in the hearing room.
BP blamed the failure on the blow out preventer in use by Transocean on the Horizon rig. Transocean blamed the failure on the cementing procedures by Halliburton. Halliburton blamed BP for directing the crews to remove the drilling mud before the cement plug to seal the well was in place. The crew was directed by BP to remove the drilling mud from the well and replace it with seawater. The mud weighs 14.3 lbs per gallon/foot in an 18,000 foot well. The weight of the mud keeps the pressure in the well stable. Normally workers pour cement into the well on top of the mud. The cement is heavier than the mud and sinks through the mud to the bottom of the well where it hardens in about six hours. The mud is then removed from the well.
According to several reports from workers on the well BP instructed workers to remove the mud and allow the pipe to be filled with seawater before the cement plug was applied. Seawater weighs half as much as the drilling mud and is "water" compared to the higher thickness of the mud. According to a worker BP asked the Minerals Management Service in advance to displace the mud with seawater before the cement plug was added. This has been corroborated by other workers. As they were taking out the mud the blowout began with a flood of drilling mud being pushed out of the well followed by a series of explosions.
Senators asked why this process was used and got dumb looks from the officials. Transocean reminded everyone that the drilling on the well had been completed three days earlier and any responsibility by Transocean ended then. Halliburton said it was just complying with BP's directive and they were contractually bound to follow BP's commands. The BP USA CEO McKay said, "I am not familiar with the individual procedure on that well."
McKay reiterated that it was the responsibility of the men at the witness table to fix the leak, clean up the spill and compensate for any damage impact. Since it is actually BP's responsibility under U.S. law it appears he is still trying to drag Halliburton and Transocean into the public perception of liability with him. If he can blame it on Transocean then BP wins in the public perception category even if BP has to foot the entire bill along with its partners on the well APC and Mitsui.
After the hearings Transocean (RIG) closed up +2.52, Halliburton (HAL) +.75, Cameron (CAM) +1.11, BP was flat and partner Anadarko Petroleum (APC) lost -1.79. Apparently the news is finally getting out that Transocean has no liability in the spill and cleanup. The most commonly repeated cost estimate for the cleanup is $13 billion. That puts Anadarko's cost at $3.25 billion and their insurance only covers $177 million. While BP can pay its $8 billion portion Anadarko could be in trouble.
The $1 trillion stability package for the Eurozone was meant to ease concerns about future funding needs from the weaker economies. It was supposed to assure the world that the EU was not going to spiral further down the drain into a breakup. While it did take the risk of default off the table temporarily it also called into question how the weaker countries are going to pay for this new bailout.
Borrowing billions of dollars to pay off existing debt is like getting a cash advance on one credit card to make the payments on other cards. The increase in debt load is going to require an even steeper austerity program on almost all the EU countries and that means the potential for a double dip recession in the EU that could last years. After an opening spike in the euro on Monday the currency has moved sharply lower and is closing in on the 126.0 level once again while the dollar is moving higher.
The rise in the dollar again pressured commodities including oil and copper but gold and silver were immune. The rise in inflation in China's hit an 18-year high in April. Prices rose at a +2.8% annualized rate, up +0.4% from March and only 0.2% below the 3% target for the full year. Wholesale prices spiked +6.8%. Food costs were up +14%. Housing prices jumped 12.8% in April despite stricter controls and higher reserve rates for banks. China's stock market lost -1.9% on the news to close at the lowest level in 11 months.
Worries over inflation in China and the potential for rapid interest rate hikes and a severe crackdown on growth caused investors to buy gold and silver as an inflation hedge. Gold rallied over $1230 and a new 52-week high. Analysts are now calling for $1500 in the short term and as much as $2000 over the next couple years as inflation spreads to America.
In the U.S. the markets are suffering from a volatility hangover. The VIX has declined from Friday's high over 42 but is still well above the norms with a close at 28. Traders are still licking their wounds from Thursday's crash. The indexes may have returned to the pre crash levels but those who were stopped out for losses are still grieving.
The failure of the EU stability package to remedy the world's problems is also a cloud for the market. Since it deals with debt, deficits, currencies and bonds the average trader really does not understand why a trillion dollar deal was not the answer to the problem. China's sharply rising inflation is a challenge because of the impending crackdown on growth to control that inflation. China was the economic powerhouse that was supposed to lead us out of the recession. If their bubble bursts then the rest of the world may not be far behind.
The EU is the chief market for U.S. goods and a double dip recession there thanks to the austerity measures means they won't be buying many items from the U.S. in the near future.
In the U.S. the Q1 earnings cycle was a knockout. Over 75% of the S&P companies beat the street. That is near record results but also results built on weak comparisons from Q1-2009. As the year progresses the comparisons will become much harder and earnings will shrink. Add in the much stronger U.S. dollar and companies with strong overseas sales will find themselves losing money due to currency fluctuations. The majority of the S&P receive a majority of their revenue from overseas sales. You can bet their financial experts are hedging the rise in the dollar every day but rarely do they avoid taking some loss from the currency translation.
All of these factors are weighing on the markets. Add in the volatility hangover and changing tax picture in the U.S. and I would bet quite a few traders are opting for the safety of tax-free bonds. There are bears on every channel predicting a housing crash now that the tax credit has ended.
However, John Paulson of Paulson & Co. spent 80 minutes on a conference call on Monday telling investors he expects a 3-5% rise in home prices this year and 8-12% next year. I hope to hell he is right. His outlook is not shared by many but it would be very beneficial to the U.S. economy if his predictions came true.
In the short term traders are scared to go long and quite a few are probably scared to go short. They don't know which way to trade and they are waiting for the market to pick a direction. The +400 point rebound on Monday was all short covering. Today's triple digit down, up and back down again left them with no confidence.
The Dow closed at 10,750 after failing at 10,850 intraday. The morning low of 10,685 was within three points of the 10,688 low on Monday. This is clearly the support point that we should watch very carefully. A break under that two-day low would be a clear sell signal. The resistance high on Tuesday and Wednesday was 10,945. The 10,850 resistance today was a hundred points lower. I have to tell you I don't like the way this is shaping up.
The S&P-500 had strong support at 1165. That support was broken and is now strong resistance. The intraday rally today pierced that level but only briefly. That 1165 threshold is now a sell signal for anyone who wants to short this market. Every day that we do not rebound over that level increases the chances for another big decline. Bullish sentiment has been severely damaged and it will take some time for it to heal. Initial support is 1150.
Like the 1165 level on the S&P the 2400 level on the Nasdaq was strong support. It is now strong resistance and tech stocks are struggling. The Nasdaq closed -30 points off its highs and big caps with the exception of Apple were fighting a losing battle.
The Cisco earnings on Wednesday after the close could awaken tech investors if John Chambers puts on his cheerleading hat before appearing on the conference call. However, after Intel's loss today after a very bullish analyst meeting I am losing confidence that Cisco's earnings will be the magic potion for the Nasdaq. Support for the Nasdaq is 2350.
The Russell remains the standout equity index with the only decent gain other than the Dow transports. The Russell returned to 700 but was unable to hold those gains. The chart is more bullish than the Dow, Nasdaq and S&P but only barely. Prior support is still resistance BUT fund managers did come back to the Russell. That is a sign of mild bullish sentiment even though resistance held.
Russell 2000 Chart
The Dow Transports also rallied back to prior support now resistance at 4600. Although the gains failed to hold completely this suggests fund managers are confident the U.S. economy is recovering. Buying transports is a direct play on the economy. If the Transports can move over 4600 and hold it the rest of the market may pick up on the same bullish sentiment.
In summary, the markets are suffering from a volatility hangover. Traders don't know which way to bet so they are not placing bets at all. Volume was the weakest in several days and resistance held across all markets.
The shock from Thursday's crash is still permeating through all sectors and all markets. In order for normal trading to resume there needs to be some event that reenergizes traders or at least calms their nerves. The Cisco earnings at the close on Wednesday may help but Intel's bullish analyst meeting today was ignored.
I suspect the path of least resistance could be lower but only because there is no compelling reason to risk money today. Earnings are over and the summer doldrums are just ahead. Those contemplating the sell in May strategy should have already acted on that impulse so I doubt that is still a factor. Many who had not contemplated that strategy may now be wondering why they didn't take the plunge. I see no specific reason to be long but there is a growing list of reasons to be flat.