Crude oil prices rallied +24% over the last four days from $43.58 to a high of $54.24 intraday today. This caused better than 10% gains in many of the oversold energy stocks and helped power the Dow to a +305 gain. You have to love short squeezes!
There is no bell to signify bottoms and tops. We never know when severely oversold or overbought will begin to reverse and everyone who was riding the trend find themselves on the wrong side of the trade. When the trend is lengthy as it was in the oil price decline the mindset is established and everyone begins forecasting lower lows. Just last week hedge funds cut their long positions in crude futures to multi-month lows and increased their bearish positions back to recent highs. Talk about a bad move, they increased bearish positions at the exact bottom of the market and the short covering has been brutal.
WTI has rallied $10.56 or +24% since Thursday's lows at $43.58 to today's high at $54.24. Brent rallied from $48.29 to $59 at today's high. While these moves should not last without some serious profit taking I seriously doubt we will see the lows again. The sector damage was severe and like every move in oil it always over shoots. In declines we always fall well below what the fundamentals support and on rallies to new highs the same is always true.
The bulls are being encouraged by the historical trends. Oil prices have fallen more than 50% only five times in the last 30 years and each time there was a 50% rebound over the next six months. If that trend continues we should see prices in the $75 range by late summer.
I wrote in the weekend commentary that the downdraft at the end of January was to be expected since traders were dumping losing positions to close out a losing month. Also, I expected a positive bias for the first two days of the week as month end retirement contributions were put to work. I did not expect a +629 point Dow move from Monday's low at 17,037. The Dow only lost -507 points last week and it has already erased that loss in only two days. The spike at the close today is typical of a capitulation event for the shorts. The opening gap today was huge and the market traded flat at the 17,500 level for 4 hours. When there was no selling by 1:PM the remaining shorts who were hoping for an afternoon fade finally begin pulling the exit trigger.
The S&P futures were down more than -5 late Monday night and the crude futures were responsible for reversing that decline. Crude rose almost $2 overnight and that reversed the S&P futures to positive.
The opening spike on the Dow was blunted by the Factory Orders report for December that came out at 10:AM. New orders fell -3.4% and the fifth consecutive monthly decline. This followed a -1.7% decline in November and -0.7% in October. The rate of decline is obviously accelerating as the dollar continued to hit new highs. Core capital orders have fallen -10.6% over the last three months. Defense orders declined -7.9% and inventories fell -0.3% for the first decline in six months.
Nondurables goods orders declined -3.4% and durable goods declined -3.3%. Backorders declined from +0.2% to -0.8% and the first time in contraction since March 2013. This was not a bullish report. Actually it was pretty bearish. In the chart below you can clearly see that orders are at two-year lows. This is not a growth economy.
Moody's Factory Orders Chart
On the positive side auto sales for January came in at an annualized rate of 16.7 million and well over estimates for 16.2 million. Sales of light trucks and SUVs rose from 8.8 million to 9.1 million while sales of cars declined from 8.1 million to 7.5 million. Clearly the low gasoline prices are having a big impact on what cars people are buying. That proportion of trucks to cars is the highest in ten years even though car sales were also the best in ten years.
January is normally a slow month for car sales because weather slows shopping and people are doing their taxes in hopes of getting a big refund they can use for a down payment in March or April. Jeep said this was the best January ever and they have been around a very long time.
Auto loans are readily available because banks are eager to write loans where they can actually charge a decent interest rate. Longer maturities mean a lower payment for buyers and that means they buy higher prices cars. The average transaction price in January was +5% over January 2014.
The first payroll report is tomorrow with the ADP report. After the jobless claims declined sharply last week to 265,000 analysts upgraded their forecasts for the ADP employment from +218,000 to +225,000. This is down from the actual number of +241,000 for December.
The consensus estimate for the Nonfarm Payroll report on Friday rose from +230,000 to +235,000. However, there are some estimates slightly under 200,000 so there is some concern in the analyst community. There are worries that the layoffs in the energy sector may have started filtering through the system but you could not prove that with the low jobless claims the prior week.
Earnings after the bell were a mixed bag. Chipotle Mexican Grill (CMG) reported earnings of $3.84 that rose +52% compared to estimates of $3.79. While that was a beat it was not nearly as strong as prior reports. Revenue rose +27% to $1.07 billion fell short of estimates for $1.08 billion. Same store sales rose +16.1% compared to estimates for 16.3%. While the overall earnings were still good they lacked the spark that powered the stock to $726 and a PE of 55. Shared declined -6% or -44 after the report to close at $679.
The company said higher food costs had slowed earnings gains. Chipotle raised prices +6% late in Q3 to cope with rising food expenses for dairy, beef and avocados. Apparently they did not raise the prices enough because margins only rose +1% and slower than the +2% rise in Q3.
Lastly the company reaffirmed prior forecasts that 2015 growth would slow to mid to low single digits. Coming down from 16.8% that is a tough statistic to swallow. The company opened 60 stores in Q4 and plans to open more than 200 in 2015. The company also authorized another share buyback of $100 million in addition to the $98 million remaining under the prior authorization.
Gilead Sciences (GILD) reported earnings of $2.43 compared to estimates for $2.22. Revenue of $7.31 billion also beat estimates for $6.72 billion. Sales of Hep-C drugs rose to $3.8 billion. Gilead declared its first ever quarterly dividend at 43 cents and announced a $15 billion stock buyback program in addition to $3 billion still outstanding from a previous authorization.
Shares of GILD declined -$5 in afterhours when the company said it was offering steeper than expected discounts to health insurers and other group payers for the Hep-C drugs. Gilead said the "gross to net" adjustment for Hep-C drug sales will average 46% in 2015, up sharply from 22% at the end of 2014. Analysts had expected a 25-30% discount. Gilead and AbbVie are in a price war on expensive Hep-C drugs that cost from $84,000 to $96,000 for a 12 week treatment.
Sales of Sovaldi, the initial Gilead drug totaled $1.73 billion for the quarter. Sales of Harvoni, which does not require companion drugs, totaled $2.11 billion. Analysts were expecting $2.05 billion and $1.58 billion respectively. The company said 141,000 Americans had been started on the drugs and they expect 250,000 to be treated in 2015. There are an estimated 3.2 million people in the U.S. with Hep-C, which can lead to liver transplants and death. For all of 2015 Gilead expects sales of $26.5 billion compared to estimates for $28.6 billion. Analysts agreed that the Gilead guidance is conservative since projecting large numbers can make it more difficult to avoid bigger discounts to new buyers.
I continue to believe Gilead is one of the best companies in the space but I did close Gilead positions ahead of earnings to avoid the problem of expectations being too high. I would love to see a decent pullback so I can buy the dip again.
Disney (DIS) shares rose +$4 in afterhours after reporting earnings up +23% to $1.27 compared to estimates for $1.07. Revenue of $13.39 billion also beat estimates of $12.87 billion. The consumer products segment saw revenue increase +22% to $1.379 billion and earnings rise +46% as holiday shoppers bought products related to the film "Frozen." Attendance at theme parks was still rising despite the measles outbreak at Disneyland that has resulted in 93 cases. Disney is a solid company and earnings growth should continue.
Wynn Resorts (WYNN) dropped -$6 after reporting earnings of $1.20 compared to estimates for $1.43. Revenue of $1.14 billion missed estimates of $1.24 billion. The drop was caused by a -32% decrease in net revenue in Macau and a -6% decline in revenue in Las Vegas. Casino revenue in Vegas declined -15.5%. Problems at the $4.1 billion Wynn Palace Casino in Macau has pushed the opening from the Chinese New Year holiday in 2016 to later in the year. Cost overruns at the Casino in Boston have pushed costs from $1.6 billion to $1.75 billion. All this came at a time when casino revenue everywhere is declining. It was not a good quarter for Wynn.
Companies giving positive earnings guidance today included:
ENTR, MXL, MANH, ULTI, GLPI, CARB, M
Companies giving in line earnings guidance included:
ATO, EQR, BBSI, VASC, SLGN, TTWO, RSYS, PLNR, AEC, OCLR, FSIV, CBL, EW, AGCO, UPS, SPR, PNR, ETN, AET, CNC, HRC, ST
Companies giving negative earnings guidance included:
POWL, MYGN, AOSL, GILD, LSCC, VTSS, HCA, R, AEG, EMR, CHD, BHE, WEN
Earnings highlights on deck for tomorrow include Dow component Merck, Green Mountain Coffee, Humana, YUM Brands, and ADP.
Canadian Solar (CSIQ) spiked +25% today after the company announced it was buying project developer Recurrent Energy LLC from Sharp Corp for $265 million. Recurrent has a large pipeline of projects under development in North America with 3.3 gigawatts under development and 1.1 gigawatts under signed contracts. This was a very good deal for CSIQ, which had 1.4 gigawatts of projects in its own pipeline. I recommended CSIQ for a covered call last night in Option Writer before this news broke. I had researched the company and thought it was in breakout mode on its own and this acquisition only accelerated the process.
Salix Pharmaceuticals (SLXP) spiked +5% after Bloomberg said the company was in talks to be acquired by Valeant Pharmaceuticals (VRX). The article also said Shire Plc (SHPG) may also be interested. Salix collapsed back in November when a sudden inventory problem led to an unexpected management change and the company said it would be forced to restate financials. Shares declined to $86 on the news but have since rebounded to $140 on takeover rumors.
Shares of Office Depot (ODP) rallied +22% and shares of Staples (SPLS) spiked +11% on news the companies were in merger talks. According to the WSJ the two stores are in advanced talks but no deal has been finalized. In January activist investor Starboard Value, which owns 6% of Staples and 10% of Office Depot launched an effort to get the two companies to merge. Both are struggling and the combination would have significant synergies. It would also have some tough challenges to get regulators to approve a deal. Combined the two chains have more than 4,000 stores and $35 billion in sales.
Stratasys Ltd (SSYS) shares fell -28% after the company warned 2015 expectations were significantly below Wall Street estimates. The issued guidance for 2014 as well with revenue expected to be $748-$750 million and below their prior guidance of $750-$770 million. Analysts expected $758 million. Net income is now expected to be $102-$105 million, down from previous guidance of $117-$122 million. For 2015 the company is now projecting earnings of $2.07-$2.44 compared to analyst estimate for $2.91. JP Morgan, Piper Jaffray and Brean Capital all cut their ratings.
Lear Corp (LEA) rallied on news activist hedge fund Marcato is urging them to split into two companies. Marcato believes the combined value of the two companies would be $145 per share compared to today's close at $108. The fund wants Lear to split its seating division from the electrical parts division to let each one prosper on its own. Shares rallied 5% on the news.
Does a +624 point Dow gain in two days make the market overbought? Not when it is coming back from a -507 loss the week before and a -3% loss for the month. The rebound put the S&P within 2% of a new high. Who would have thought last Friday when we closed at six week lows that the S&P would be 2% from a new high today? This is why we trade what we see not what we want to see.
Emotionally I want to wait for a pullback before going long here but that would probably be the wrong idea. We saw the S&P rebound from support at the 150-day average for the third time over the last two months. That is a key support level and each time it has provided a strong rebound. The 1,980-1,985 support level from last summer was also in play. Had the S&P declined below that 1,980 level it would have been a major failure and suggest a repeat of the October decline.
Now the critical level to watch is the 2,064 resistance from January. If the S&P can break through that in the days ahead then new highs may be just ahead. We all know that when traders all line up on one side of the market that seemingly impenetrable obstacles can be overcome with ease. When the markets become directional the technicals don't matter. Moving +624 points in two days was mostly a short squeeze but a fire has been lit under the markets.
Support is now 2,030 and resistance 2,064.
The Dow chart is not so clear cut. The downtrend resistance at 17,725 is the next challenge. If that resistance manages to hold the Dow advance another lower high will be formed. Today's short squeeze market may have some fuel left but it may depend on oil prices. If the rebound in crude fades then Chevron, Exxon and Caterpillar will fall back to the losers list and be a drag on the other components.
Resistance 17,725, support 17,500.
The Nasdaq was the laggard all morning. With the Dow up +135 the Nasdaq was still negative at 12:30. The opening spike was quickly sold but the midday dip was eventually bought. The close was a six-day high. The composite and the Nasdaq 100 traded in lock step with many of the big cap stocks absent from the winners/sinners list.
Both indexes are nearing the top of their congestion range and solid resistance.
The Russell 2000 had a good day with nearly a 2% gain. It moved within 3 points of 1,200 and could -2% from a new closing high over 1,219. The Russell small caps held up well during the January market and could be preparing to take their leadership place in the coming days. If the Russell breaks over 1,200 it should drag the Nasdaq indexes with it.
If you look really hard with a glass half full outlook you could make a case for new highs in the near future. However, the market has moved too far, too fast and without a new catalyst to force a continued squeeze we could be in for some backing and filling. The ADP Payroll report on Wednesday should not be a market mover unless it misses estimates by a mile in either direction. The S&P futures are flat late Tuesday so there is no rush to take profits on the week's gains. WTI prices are down $1 to $52 but that is still a significant gain from last week. With the high today $54.24 some of the sell stops have already been cleared. If oil were to continue positive even by a little bit the equity markets should remain positive as well.
Enter passively, exit aggressively!
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