This Dow 13,000 story is getting ridiculous. After six days of fighting that resistance a +5 point close is hardly convincing.
Economics were very strong at the open and that overcame news from Ireland and pushed the Dow to 13,018 but the sellers appeared immediately and the rally came to a screeching halt. Opposing sides battled in a narrow range from 13,000 to 13,015 for several hours until a sell program hit at 1:30. That program knocked the Dow back to 12,975 but the dip buyers came right back to push the Dow back to 13,021 just before the close but sellers again tried to knock it back. This time they were unsuccessful.
I can't remember a period of trading where everyone stressed over a meager 40 point range in the Dow. The VIX has flat-lined at 18 and volume remains light. There is a definite lack of conviction by BOTH buyers and sellers but the buyers appear to be gaining an edge.
Ireland roiled the markets at the open by deciding to hold a referendum on the new fiscal treaty for the European Union. Support for the EU has cooled in Ireland because of the rising expenses related to the financial crisis. The last two referendums on the EU both failed to pass but after the EU offered some concessions they were approved by a narrow margin. The EU must have an approval by at least 12 countries or the new fiscal pact cannot become law. Ireland was forced to accept a bailout from the EU in 2010. A no vote would prevent Ireland from using the European Stability Mechanism (ESM), the rescue fund being built by the EU for future problems. Since Ireland will most likely need to access that fund in 2013-2014 they must approve the new fiscal pact. A poll last month showed 40% of respondents would vote for it and 36% would vote against it.
In the U.S. consumer confidence was far stronger than expected. The February confidence number spiked to 70.8 and only 1.2 points from a post recession high at 72.0. This was nearly a +10 point spike from the 61.1 reading in January and the highest reading since Feb 2011. Consensus expectations were for a +2 point rise to 63.0. The index has risen +73% since the October low of 40.9.
The present conditions component rose from 38.8 to 45.0 and the expectations component rose +11.3 points from 76.7 to 88.0. These are monumental gains in one month. The "jobs hard to get" component also improved noticeably with a decline from 43.3 to 38.7. That is also a major move suggesting the job market is opening up. Those expecting higher incomes in six months rose from 13.8% to 15.4% while those expecting a decrease in income fell to 12.8% and the lowest level since November 2008.
I cannot stress enough how significant this confidence report was. There were strong improvements in almost every area except for buying plans. Those planning on buying autos increased but home and appliance buyers decreased slightly.
In theory this report should suggest a stronger consumer because higher confidence normally suggests more robust spending. The flat buying trends in this report were probably tempered by the expected rise in gasoline prices. That removes discretionary income and budgets tighten. Still, this was a very positive report for the economy.
Consumer Confidence Chart
Another strong report was the Richmond Fed Manufacturing Survey. The headline number for February rose to 20.0 from 12.0 and well above the cycle low at -10.0 last August. The pace of growth was the fastest since Feb 2011. The headline number has rocketed higher since the 3.0 reading in December. 2012 appears to be off to a roaring start.
New orders rose from 14 to 21. Back orders rose from -4.0 to +4.0. Even more important the average workweek rose from 4.0 to 10.0 and the employment component rose from 4.0 to 13.0. These are very strong gains suggesting the nonfarm payroll numbers next week could be very good.
If the sharply rising consumer confidence translates into stronger spending in the months ahead the manufacturing sector could be poised to move sharply higher.
Richmond Fed Chart
Just to keep investors cautious the Durable Goods report for January showed a very sharp decline of -4%. This came after a very strong +4.2% gain in November and +3.2% gain in December so traders ignored the report. It was assumed there were some irregularity in the order flows and the trend is still positive. One serious decline was a -19% decline in aircraft orders. Those have been very strong in recent months so volatility was to be expected. January is normally a weak month for durable goods orders.
Tomorrow has a very busy economic calendar with the GDP, ISM and Fed Beige Book. However, the most important news could be the results of the ECB Long Term Refinancing Operation (LTRO). The ECB is offering an unlimited amount of money to European banks on a three year loan at 1% interest. This is the second offering. The first one put nearly 500 billion euros into the hands of banks looking to raise cash to offset deposit outflows and have money to lend. This was credited with lowering the interest rates on sovereign debt all over Europe as banks borrowed money at 1% and then bought short term sovereign debt yielding 2% to 5%. It was the ECB answer to quantitative easing (QE) in the USA. Basically they created digital money and spread it around to nearly 1,000 banks.
The results of LTRO-2 will be announced early Wednesday morning and it is possible the banks could borrow up to one trillion euros. However, estimates have come down sharply over the last week to a range between 300-600 euros. In theory a small number means the banks are well capitalized and don't need another big flood of money. That would be market positive. If the number was very large it could be market negative because it would mean the banks are desperate to get their hands on additional cash and the system could be under stress.
Like the U.S. where banks can put unused cash on deposit at the Fed overnight the ECB has seen very large amounts of cash deposited overnight ever since LTRO-1. This suggests banks borrowed the money to have a fallback position in case things got worse. That would be a kind of banking safety net. By depositing it back with the ECB and earning a minor amount of interest it decreased their expense while they waited for Greece to either get the bailout or default. Since Greece appears to be progressing towards the successful conclusion of the current round of funding the banking system in Europe is no longer showing the strain of just three months ago. This suggests the total for LTRO-2 could be low rather than high. A low number would be a vote of confidence in the European banking system.
Regardless of how much is requested in this tranche it is still another round of money printing by a central bank. That makes commodities a good bet.
Another hurdle to cross will be the Bernanke testimony in the House at 10:AM. With operation TWIST ending in June he will probably be peppered with questions about future plans for buying treasuries. Operation TWIST is the name given to the selling of short term treasuries and buying of longer term treasuries to force the interest rates lower on the longer end of the maturity curve. This forced mortgage rates to record lows. If the Fed halts it's buying in June we could see rates rise dramatically thanks to the improving economy. Fixed income holders beware because there could be a tsunami of selling in our future.
Investors don't seem to be very concerned that rates are going higher soon. So far in February bond funds have seen inflows of $30.4 billion compared to only $4.1 billion for equity funds. That is better than a seven to one ratio of money going into bonds. The returns for bonds over the last month has been 2.8% compared to 10.5% for equities.
The commodities market has been improving over the last few days in anticipation of the LTRO and because of the falling dollar. Gold rallied +12 to $1786 and is very close to strong resistance at 1800-1808. Cheap money is a very strong motivator to buy gold. Multiple brokers are calling for gold prices to move well over $2000 by year end.
Silver was the outperformer today with a +1.41 (+4%) gain to $37. Silver has underperformed gold since the September drop but it is catching up quickly with a +27% gain so far this year. The breakout over $35 last week was a major milestone and suggests the silver bulls are rapidly returning. The next major resistance is in the $40-$44 range and that could easily be breached if the dollar continues to fall and the euro return to strength. Got silver?
Crude prices declined again with a -$2 drop as traders take profit from the +14% run since the January lows. After trading near $110 on Friday WTI crude declined to $106.50 at the close. After declining nearly $4 in two days I don't expect it to decline much further. Iran has not yet decided to play nice with others so the direction for oil prices is still higher as the oil embargo comes closer to its July start date.
Iran warned it was training its elite troops for kamikaze attacks from boats and aircraft against the U.S. forces in case fighting broke out. At the same time the Supreme Leader reiterated his comments from last week that "production, possession, use or threat of use of nuclear weapons, are illegitimate, futile, harmful, dangerous and prohibited as a great sin." Nobody seems to be taking that as applying to Iran. His proclamations can change on a moment's notice.
Brent Crude Chart
On Monday after the close PriceLine.com (PCLN) reported earnings of $5.37 compared to estimates of $5.05 on a +52% surge in bookings. Guidance was good and shares rocketed higher today with a +$41 gain to maintain its stock price lead over Apple. What happened to stock splits?
Sina (SINA) reported earnings that were in-line with estimates at 21-cents and a minor beat on revenue but guided substantially lower. SINA projects Q1 revenue in the range of $101-$104 million and analysts were expecting nearly $114 million. Shares shook off the early market weakness and rallied +11%.
Autozone (AZO) reported earnings of $4.15 compared to estimates of $4.04 with a minor beat on revenues. Profits rose +13% on a +9% rise I revenues. Gross margin increased to 51.3%. They opened 35 new stores to bring their total to 4,867 stores. Average inventory on hand at each store rose to $530,000 from $517,000. Consumers keeping older cars running longer is a major plus for AZO. Shares were sharply higher to $376 for a gain of $10. This is another serious candidate for a stock split.
JP Morgan (JPM) held its annual investor meeting today and all the news was good and very positive. CEO Jamie Dimon was the last presenter of the day and attendees said it was by far the best speech. Dimon took on the new regulations saying JPM will meet all those troublsome regulatory requirements. He praised the banks past performance and said the trend will continue. "I will be damned if we don't have record profits in the next year or two." He explained why the bank needed to have exposure to Europe and said JPM currently had $15 billion in net risk primarily to Italy and Spain. He said he was not worried about the low stock price because strong profits would push it higher. After the stress test results are released on March 15th Dimon expects the Fed to give permission for stock buybacks.
Yahoo went fishing for dollars ahead of the Facebook IPO. Yahoo claims Facebook is violating as many as 20 of its patents and wants to be compensated for those patents. Yahoo did the same thing when Google announced its IPO and ended up cashing a sizeable check for its efforts. By waiting until the IPO announcement it now forces Facebook to settle the claims to avoid clouding the demand for the IPO. Representatives met on Monday to discuss the patents in question.
Apple (AAPL) joined the $500 billion market cap level with today's close at $535.41 producing a market cap of $504 billion. That is $90 billion more than Exxon. There are 56 analysts that rate the stock and 51 recommend a buy, four a hold and one with a sell rating. Apple is holding a new product announcement on March 7th and everyone is expecting the iPad 3 to be the product. The new iPad is expected to have a quad core processor, better camera, higher definition graphics and more new apps. Even at Apple's $500 billion market cap it still trades at a forward PE of 11. If only they would announce a stock split so normal people could own it. One hundred shares costs $53,500 and that is not in the budget for many investors.
Apple's Announcement Teaser
It just keeps going and going and going. Investors wonder if the battery powering this market is going to run done soon. Based on the low volume of 6.2 billion shares yesterday and today there is still a serious lack of conviction. The advance-decline line was dead even today with only 64 stocks difference out of a universe of 6,787. There were 3296 advancing and 3232 declining. 259 were unchanged.
Wednesday is going to be a critical day for market direction given the multiple high profile news events and economic reports. Of course everyone has been saying tomorrow will be a critical day for several weeks now. This time it is different.
The Dow closed over 13K and the S&P closed over 1370. Both of those are the highest closes since 2008. The charts on the S&P and the Dow are actually starting to show a little upside bias and dips are being bought with more aggression. It appears we may actually be ready to start a new leg higher.
The next target on the S&P could be 1400 and that could be a larger struggle than Dow 13,000. Support on the S&P is well below at 1340.
S&P Chart - 60 Min
S&P Chart - Daily
The Dow finally closed over 13,000 by a whole five points. I wish that was as conclusive as the football breaking the plane of the goal line in a championship game. Touchdown, points on the board, etc. Unfortunately crossing 13,000 is only a psychological event and one that can be repeated for days or weeks into our future. However, given all the events on Wednesday we could be well away from 13K by tomorrow's close. Personally I would love to see a 100 point move in either direction at the close. If it was up the curse would be broken and market commentators could start worrying about something else. If the move was down then we could start looking for a REAL dip to buy and we could see some new money come into the market.
Support is well back at 12,750 and upside resistance is around 13,500.
The Nasdaq trend remains intact and the indexes got a substantial boost from the multiple big caps posting major gains. PCLN, AAPL, GOOG, AMZN and NFLX to name a few. With Apple's big announcement next week there is a pretty good chance the index will continue higher although Apple is extremely over extended.
First Solar missed estimates after the close and dropped -10% but that is only $3 at the current FSLR stock price. It should not be a major problem for the index.
Support on the Nasdaq is 2970 and resistance 3000, another large round number.
Nasdaq Composite Chart - 90 Min
Nasdaq Composite Chart - Daily
Nasdaq 100 Chart - Daily
Wednesday is a headline day. The market will be driven by headlines more than fundamentals and it could be a roller coaster. I would love to see a dramatic increase in volume on good news but I fear it will take more than one day of good news to see volume return.
We need to see bonds sell off. Once the bond rush begins the equity market is going to explode. That may be closer to June and the end of Operation TWIST but you never know. Once it starts it could be dramatic.
Keep buying the dips until the strategy fails because the trend is still higher unless the news turns seriously negative.
Send Jim an email