The Dow extended its streak of consecutive Tuesday gains to 19 weeks thanks to comments from multiple Fed presidents.

Market Statistics

St Louis Fed president, James Bullard, a voting member of the FOMC, said the Fed should continue QE purchases because it remains the best monetary policy option right now. "It is closest to standard monetary policy, involves clear action and has been effective." He said the Fed should either raise purchases or taper purchases based on the actual progress of the economy. The market recovered from an opening dip after Bullard spoke. He was speaking in Frankfurt Germany and warned the ECB needs to take "aggressive QE action to avoid the fate Japan suffered." Japan left interest rates at zero for 15 years thinking the economy would eventually recover and it never happened. Now they are forced to implement extreme QE measures to combat the decade of deflation. The European recession stretched to six-quarters with a GDP of -0.2% in Q1.

New York Fed President William Dudley said he had not decided whether the Fed should taper or increase QE purchases. "Because the outlook is uncertain, I cannot be sure which way, up or down, the next change will be." Dudley is vice chairman of the FOMC so his thoughts count. He said the Fed may need to rethink its plan for eventually normalizing monetary policy. The current plan was adopted in 2011 and is out of date. "We may need to update our thinking with respect to the so-called exit principles." Those principles include a halt to QE, raise rates and finally sell securities owned by the Fed over a 3-5 year period. According to Dudley, "This seems stale in several respects." He also said the Fed may want to abandon the plan to sell its mortgage backed securities and just let them roll off as they mature. He said the slower than expected recovery from 2009-2012 showed in hindsight the Fed did not supply enough stimulus. In the understatement of the year he also warned the markets will overreact to tightening.

Chicago Fed President Charles Evans said the economy has "improved quite a lot" and "I am optimistic that the labor market has been doing much, much better and that unemployment is going to continue to go down." Also, "Currently we have the appropriate monetary policy in place." Evans has been supportive of QE. He said he would like to see monthly employment of 200,000 or more jobs for "at least six more months" before judging the labor market substantially improved enough to taper QE. "If I had high confidence this was going to be maintained over the next six months, I would be amenable to discussions about adjusting the flow of purchases downward. For now "I would like to see a few more months of data."

In the last week we have heard from Philly Fed President Charles Plosser who called for tapering QE purchases now. SF President John Williams favored a cut to purchases as soon as this summer. Boston President Eric Rosengren said low inflation and high unemployment suggested there may be a need for more stimulus, not less. Dallas Fed President Richard Fisher favors cutting QE now saying all we have done is make rich people richer by inflating the stock market.

The comments by Bullard, Evans and Dudley helped rescue the market from an early morning dip that had the S&P in negative territory for over an hour. In the end the Dow managed to add another Tuesday to its streak making it 19 consecutive weeks of Tuesday gains. The second longest streak was 15 set in 1927.

There were no economic reports of note this morning. The weekly Chain Store Sales rose +0.2% compared to a -2.0% decline last week. This report is noise.

The calendar for Wednesday has two major events. Chairman Bernanke will testify before the Joint Economic Committee at 10:AM and it is sure to be must see TV. Later in the day the FOMC minutes will be released for the early May meeting. Both of these events have the potential to rock the market in either direction.

The Existing Home sales are expected to have increased in April but other housing data has been showing some weakness. This report is not likely to be a market mover unless there was a huge shift in the numbers.

Economic Calendar

It was a slow news day with the focus on the grilling of Apple's CEO, Tim Cook, by a Senate committee on taxes, discussion of the Fed heads comments, expectations for Bernanke's comments tomorrow and the JP Morgan shareholder meeting. Throw in a couple earnings reports from Home Depot and Best Buy and the day was complete.

Tim Cook was grilled by senators on why they pay so little in U.S. taxes. Apple has $102 billion in cash stashed overseas in affiliates because the tax rate to bring it back to the U.S. is prohibitive relative to other countries. They have companies they setup in Ireland in 1984 to handle the cash generated in Europe. The money is earned in Europe and Asia and taxed in those countries. The remaining proceeds are transferred to the Irish holding company. The Irish company invests the money and Apple does pay full U.S. taxes on the proceeds of those investments. Apple also keeps a lot of cash overseas because that is where their products are manufactured. It costs billions to setup assembly lines, manufacture and inventory parts and pay to have the devices assembled. In the hearing Apple was beaten up for avoiding taxes even though the company has paid more than $6 billion in U.S. taxes over the last couple decades. That is more than any other company. Apple claimed it was just following the tax code of the various countries and paying whatever was required. Clearly the Senate committee wanted that to be a lot more payments in the USA. Apple shares were flat on the day with only a minor loss.

I loved Art Cashin's comment on the Senate grilling of Apple. He suggested the CEO say, "Ok, you convinced me. I will start making plans to shut down our U.S. operations and move to a country that appreciates our $6 billion in taxes." Good point Arthur!

Apple Chart

Jamie Dimon survived the JP Morgan shareholder vote and he retained the dual titles of Chairman and CEO. The initial vote was 32% in favor of splitting the positions. That was even lower than the 40% last year and suggests the entire topic is now mute. In a separate vote Dimon received a 98% vote to be retained as a board member. That was second only to Timothy Flynn, retired chairman and CEO of KPMG at 99.4%.

The risk committee barely polled over 50% for retention after the $6 billion whale trade fiasco last year. I would expect the board to revise that committee, consisting of James Crown, David Cote and Ellen Futter, in order to appease shareholders. Proxy advisory firms had recommended against reelecting them.

JP Morgan shares rallied to a new 12 year high after the voting results were announced.

JPM Chart

Best Buy (BBY) reported adjusted earnings of 36 cents that beat estimates of 24 cents but that was the end of the good news. Revenue, excluding Europe, declined -10% to $9.38 billion. The exclusion is due to Best Buy selling its European operations. Same store sales declined -1.1%. The CFO said the factors that hurt sales in Q1 would continue through Q2. The CEO said Best Buy had also decided to reduce sales in some non-core businesses. Even the Samsung store-within-stores project announced with great fanfare last quarter is now expected to decrease revenue. BBY shares declined -5% on the news.

Best Buy Chart

Autozone (AZO) reported earnings of $7.27 compared to estimates of $7.21. Revenue rose from $248.6 million to $265.6 million. Gross margins rose to 51.8%. The company said the longer colder winter produced more wear and tear to vehicles and sales increased noticeably in the Northeast and Midwest as the winter extended into the last four weeks of the quarter. They expect this winter wear to continue to support sales in Q2 since many motorists put off working on their cars until the weather warms up. Shares of AZO rallied +19 on the news.

AZO Chart

Dow component Home Depot (HD) reported earnings that rose +19% to 83 cents compared to estimates for 76 cents. Revenue rose 7% to $19.12 billion compared to estimates for $18.62 billion. The retailer said the housing recovery powered the gains despite a cold wet spring. "Weather negatively impacted our seasonal and exterior business but our core interior project business remained strong throughout the quarter." Same store sales rose +4.3%. The retailer raised guidance for the full year to $3.52, up from $3.37. Shares of HD rose +$2 to a new high on the news.

Home Depot Chart

Saks (SKS) spiked +18% after the New York Post reported the company had hired Goldman Sachs to explore strategic alternatives including a sale. Analysts believe the Manhattan store would be worth more than $1 billion by itself. The news came after Saks shares were already up strongly on better than expected Q1 sales. Same store sales were up +5.9% and that was three times what analysts expected. Saks also reiterated its sales targets for the rest of the year. Macy's reported same store sales of +3.8% and Nordstrom +2.7%.

Saks Chart

Herbalife (HLF) shares were halted midday to allow the company to announce it had successfully retained a new auditor. PriceWaterhouseCoopers LLP (PWC) will take over the auditing duties after KPMG was forced to drop Herbalife after a KPMG partner was caught gving inside information to a trader.

The naming of a new auditor is good news because it implies PWC has looked at their books and accounting methods and found nothing they could not live with. Some auditors may have been reluctant to put their name on the HLF financials given the high profile attack by Bill Ackman claiming they were a pyramid scam and predicting the stock was going to zero. If PWC had found anything questionable in a review of the books they would not have taken the company as a client. Herbalife said PWC would also re-audit the 2011 and 2012 financials.

This is good news for Carl Icahn and his new 16% stake of 16.3 million shares and bad news for Bill Ackman and his 20 million share short. However, Ackman said the re-audit could lead to "some additional interesting disclosures."

The PWC news was apparently leaked on Monday as HLF shares rallied +10% for no apparent reason. In retrospect we now know what was powering the spike.

HLF Chart

The S&P traded in a 12 point range and ended the day with only a +2.87 gain. The close was almost perfectly in the middle of that range and suggests the buyers and sellers were about even. In the overall market there were 3,565 advancers and 3,019 decliners. New highs totaled 997 out of a universe of 6,885 stocks. Volume matched the A/D ratio perfectly but only 6.1 billion shares were traded.

This could be seen as simply a consolidation day but after the recent rally there is always the rush to label it a topping process or a distribution day. I don't agree with the distribution because of the low volume and the advantage to the advancers. If volume were to increase without any material move higher I would agree more on the distribution call.

There has not been a consecutive two-day loss in the markets since April 18th. There have only been a handful of strong gains with the majority of the move in a step by step fashion. In a market rising 3-5 S&P points a day the consolidation is happening on a daily basis. Some traders take profits and other traders enter new positions on the dips in individual stocks.

Given the continuous gains since mid April it is hard not to want to predict a top but so far we are not seeing any technical indications. As one analyst said, "we are overbought but not overvalued." The more likely reason for the muted gains today is simply the twin challenges of the Bernanke testimony and the FOMC minutes on Wednesday. Investors were probably less interested about adding to long positions ahead of events that could rock the market.

Even a massive upgrade by Goldman Sachs could not push the indexes higher. David Kostin, Chief U.S. Equity Strategist, raised his year end target for the S&P from 1,625 to 1,750. He also targeted 1,900 by the end of 2014 and 2,100 by the end of 2015. The reason for the upgrades was attributed to multiple expansion and the end of economic stagnation in 2014. JP Morgan analyst Thomas Lee recently raised his end of year target to 1,715. Canaccord Genuity's Tony Dwyer raised his target to 1,760.

Unless a headline appears to suddenly change the investing environment I don’t see a meaningful dip in our near future. However, as I have said repeatedly "when investors are ready to take profits they will find an excuse." It could be a Fed headline, sudden economic change or a geopolitical event. On the way up those headlines are seen as stepping stones in the wall of worry. Once sentiment begins to change they are seen as potholes in the yellow brick road.

If Bernanke decides to change the game on Wednesday the market will react appropriately. I doubt he will do it because they have spent so much time and money creating the rally he will not want to crater it.

Initial support is currently 1,650 followed by 1,625.

S&P Chart - Daily

The Dow is fighting uptrend resistance at the top of the long term trend channel. Today it was the 15,400 level causing trouble. Each spike over that level was brief but the dips were immediately bought to close at 15,389. The pressure is building to the upside for a breakout over resistance like we saw on the S&P.

The Dow has risen +1,400 points on the last 19 consecutive Tuesdays. That represents 78% of the year to date gains.

Initial support is 15,325 followed by 15, 225.

Dow Chart - Daily

The Nasdaq Composite has stalled at 3,500 for the last three days but still managed to keep the string of gains alive. The Nasdaq has touched new intraday 12.5 year highs for 17 straight days. The Nasdaq is the most overextended of the major indexes and the RSI is at a whopping 75. The Nasdaq should be the first index to crack simply because of the overextension from the recent consolidation level. There is no guarantee but I would watch it carefully. However, if the index is successful in punching through 3,500 we could see another short covering leg higher.

Initial support would be around 3,450.

Nasdaq Composite Chart - Daily

The Russell 2000 has come to a stop exactly where I expected it to pause and that is the 1,000 level. That is a historic all time high and a very big round number for the small caps. In the Option Investor plays we had a Russell ETF IWM put with a trigger to enter at $99.75 on the IWM. In theory the IWM is a dollar equivalent of the Russell 2000 Index. The Russell index has exceeded 1,000 on both of the last two days but the IWM has failed to reach that $99.75 level. You can't short the Russell index but you can short the IWM and apparently there are enough sellers anticipating that 1,000 resistance or $100 on the IWM that the ETF can't punch through the ceiling.

Russell 2000 Chart

To recap we have the Dow at uptrend resistance at 15,400, the Nasdaq stalled at 3,500 and the Russell stalling at 1,000. In a normal market that would be a clear sign of an impending rally failure. In this market it may be just one more chance to induce the shorts to load up before a headline forces the next great short squeeze. Please be aware of the battle in progress at those levels.

Major events on Wednesday are the Bernanke testimony and the FOMC minutes. Be prepared for fireworks.

Enter passively, exit aggressively!

Jim Brown

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