The S&P closed over short term resistance and the Nasdaq hit a six week high and the S&P Midcap 400 is only 2 points from a new high. Headlines about Greece, China, Russia, Europe, ISIS and the strong dollar's impact to earnings are all fading from investor's minds as the market climbs the wall of worry.
Monday's decline was blamed on Greece but in reality it was probably just profit taking from the prior week's gains. The Greek situation certainly did not improve today so if anything it should still be a cloud over the market.
If you remember the last several times Greece was a major market headline back when they were getting the original bailout funds the market grew bored with the daily chatter and finally ignored it completely. I think the boredom threshold was even lower this time even though the potential for disaster is even greater. If Greece does implode in the next couple of weeks the headline flurry could still impact the market but for today it is still just a war of words between the newly elected Greek government and the EU/IMF/ECB. Traders don't really see how it is going to impact the U.S. market.
The U.S. economic reports were just a couple more steps in that wall of worry with 2 of the 3 reports negative. The NFIB Small Business Survey fell -2.5 points in January to 97.9 and the lowest level in three months. The drop came from weakness in the economic outlook. Those respondents that expected the economy to improve fell from 12% to zero. This means respondents were evenly divided between those expecting improvement and those expecting an economic decline. Those expecting an improvement in earnings declined from a net of -15% to -19% of respondents. I could go on listing the various components but the results are the same. As we move closer to potential Fed rate hikes the sentiment over business conditions is likely to deteriorate further.
Wholesale inventories rose only +0.1% in December, down from +0.8% in November and an average of +0.6% gain in the prior four months. Sales declined -0.4% for the second month. The inventory to sales ratio rose to 1.22 with a steady +0.01 monthly rise for the last five months. This is a result of slowing sales allowing inventory levels to build. This report is one traders normally ignore so there was no impact on the market.
The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings rose from 4.847 million in November to 5.028 million in December and the highest since 2002. That is up 28.5% compared to year ago levels. Hires rose from 5.054 million to 5.148 million. Separations also rose from 4.7 million to 4.886 million. These numbers suggest the job market is definitely improving. However, layoffs also rose from 1.655 million to 1.726 million but the layoff rate at 1.2% is at historic lows.
The largest number of separations, which covers voluntary and involuntary, was in construction and leisure/hospitality. This was a positive report but it is also a lagging report for the December period and investors normally ignore it.
Weighing on the market this morning was news that China's Consumer Price Index (CPI) for January rose only +0.8% and the smallest gain since November 2009. This suggests the economic downturn in China, lower commodity prices and a crash in the real estate market is pushing China closer to deflation. Producer prices (PPI) fell -4.3% in January and more than the -3.8% decline analysts expected. Prices have been falling at the factory level for nearly three years. According to analysts the continued declines will force China to cut interest rates in March/April and announce new stimulus programs to prevent the second largest global economy from falling into a possible long term deflationary slump.
Wednesday's economic calendar is also boring. The EIA oil inventories may end up being the most important even though it is normally just a 10 second sound bite for futures traders.
The geopolitical calendar is highlighted by the emergency meeting of the EU Finance Ministers on Wednesday on the topic of Greece. There is no telling what is going to come out of this meeting but I doubt it will be favorable for Greece.
Oil inventories are at 80 year highs and global storage is filling up fast. Once available storage is at capacity the impact to oil prices is going to be dramatic. Crude inventories in the U.S. have risen over 30 million barrels in the last four weeks to 413 million barrels. That is an 8% rise in inventories in just four weeks and this can't continue forever. According to the EIA the U.S. has 373 million barrels of storage capacity in various tank farms plus 70 million barrels at the Cushing Oklahoma futures delivery hub. Refineries have another 148 million barrels of capacity.
In theory that is 591 million barrels of storage capacity except that you can't fill everything to capacity. Operators like to keep 15-20% of space available for operations. They need to have space available for new oil coming in while old oil in other tanks is flowing out. Some of these tank farms blend crude by combining heavier crude with lighter crude to match refinery input specifications. That requires available capacity to provide the blending tasks of moving oil around. In reality the threshold level is probably in the 475 million barrel range and we are at 413 million today. Inventories normally rise until early May so there may be some trouble ahead. Crude oil declined -4% today to $50.78.
The International Energy Agency (IEA) released their monthly report today and warned that excess oil supplies will raise global storage to a record 2.83 billion barrels by the end of June. The IEA warning means lower prices ahead but they do expect the supply/demand ratio to be back in balance by the end of 2015. Currently production is 1.5 mbpd over demand and that oil has to be stored somewhere.
The U.S. Energy Information Administration (EIA) said its production expectations for 2015 and 2016 were virtually unchanged from the prior month. They believe new oil coming online from new projects will offset any temporary decline in shale production.
The world's largest oil trading company Vitol said they expect a "dramatic build in oil inventories over the next few months." If oil builds as we expect we could see a dramatic drop in prices. Most oil analysts believe the +20% spike in crude over the last two weeks was short covering and a new move lower is ahead.
An internal memo from Tesla's Elon Musk suggests heads are about to roll over dismal sales in China. Sources that have seen the memo claim Tesla sold only 120 cars in China in January. If those sales numbers are correct it would be very negative for the Tesla earnings due out on Wednesday. In the memo Musk threatened to fire or demote country managers if they are "not on a clear path to positive long term cash flow." Tesla's goal for annual sales in 2014 was 33,000 cars. They will need to have sold 11,000 in Q4 to reach that goal. Shares declined just over $1 when the news broke.
Apple (AAPL) shares rallied +$2.30 today to close at a new high at $122. This gives the company a market cap of $711 billion and the first company to exceed the $700 billion mark. With $178 billion in cash the odds are good shares are going higher. This cash pile is after Apple has spent $103 billion of its $130 billion dividend and stock repurchase program.
This afternoon Apple announced it was investing $848 million in a solar farm built by First Solar (FSLR) in California's Monterey County. The plant will produce enough electricity to power 60,000 homes. Apple will get 130 megawatts to power its new campus and 150 megawatts would go into the PG&E grid in California. This is the largest commercial solar deal on record and the deal is for a 25-year commitment. That $848 million is roughly four days of earnings for Apple. They made $18 billion in profit in Q4.
Micron (MU) shorts were treated to a big surprise when the company signed a new supply agreement with Inotera for 2016. Under the modified agreement Micron can purchase all of Inotera's output at discounted market prices for the rest of 2015. The only change in the 2015 agreement was the addition of "discounted" to market prices. The company also extended the deal for 2016 with a new formula that shares profits between Micron and Inotera. The agreement can be extended for another two years after 2016 and one year extensions in the years after that.
Micron shares exploded higher with a +10% gain as massive short positions were squeezed out of existence. Micron has been declining since early December as margin issues hit the DRAM sector. SanDisk warned back in early January and forced another leg down on the chip stocks. Short interest in Micron was very high. Micron has been a crowd favorite for trading in both directions for years because of the high volatility and low price. Shorts got their volatility injection today.
Shares of Pier One (PIR) were knocked for a -30% drop after the company warned that earnings for the current quarter would be in the range of 80-83 cents, down from a prior forecast of $.95 to $1.05. Analysts were expecting $1.00. The company said sales in January were "well below our forecasts" and forcing us to take a cautious view on February. Before today's drop shares had gained +10% in 2015.
Halliburton (HAL) said today it will lay off at least 5,000 to as many as 6,200 workers as a result of falling oil prices and a sharp decline in oilfield service contracts. This comes after a cut of 1,000 workers in December. Competitor Schlumberger (SLB) announced in January it was cutting 9,000 jobs. Baker Hughes (BHI), which is being acquired by Halliburton, said in January it was cutting 7,000 workers.
Also today Baker Hughes and Halliburton both received additional requests for information from the Dept of Justice in regard to the acquisition of Baker Hughes. Both companies had expected the requests. This is a formality that extends the waiting period on government approval by another 30 days. With an acquisition this large the additional time was needed.
Martin Marietta Materials (MLM) surprised investors with a +15% gain to $137 after reporting strong earnings thanks to high demand for cement. The company reported earnings of 99 cents compared to analyst estimates for 85 cents. MLM said they see rising demand for construction materials in an improving economy. They acquired cement maker Texas Industries for $2.06 billion in July and that gave them a foothold in the fast growing Texas market. The company said demand for cement in Texas is likely to outstrip supply for the next ten years. They recently hiked prices to account for the high demand. An example of the demand came from the $100 million in cement revenue in Q4 compared to $210 million for the entire year.
Molson Coors Brewing (TAP) disappointed investors with earnings of 55 cents that missed analyst estimates for 67 cents. Revenue fell of 5.3% to $973.8 million, which still beat estimates of $969 million. However, the company said beer sales were being hurt by the strong dollar and they guided for more of the same for the rest of 2015.
Dow component Coke (KO) posted a 55% decline in profits but earnings of 44 cents beat estimates of 42 cents. The company overcame a decline in carbonated beverage sales with new offerings. Coke said an earlier survey showed that more than 30% of sales came from products that did not exist 5 years ago. The younger generation is not as fond of carbonated drinks as they were in the 70s and 80s. The boomer generation is also moving away from carbonation in favor of healthier beverages.
The earnings calendar for the rest of the week is heaviest for Wednesday. Dow component Cisco systems and several other high profile companies highlight the list. After Wednesday the pace of earnings will decline significantly.
According to the Stock Trader's Almanac there has not been a down year for the third year in a presidential election cycle since 1939. Editor Jeff Hirsch said the gains normally come in the first half of the year before the presidential primary race begins to take shape. In the last half of the year the mudslinging begins and investors begin to worry about the economy.
That prediction and $5 will buy you a pricey Starbucks coffee but it won't guarantee us a positive market for the next six months. Mutual fund cash on hand is at 40 year lows. Margin debt at the NYSE is at record highs. Market breadth is shrinking and the market is being lifted by a few high profile stocks rather than broad based buying.
S&P earnings estimates for 2015 have fallen from $134 to $119 over the last four months and that type of decline has only happened twice in the last 30 years.
In theory the market is setting up for a decent decline but evidence this week suggests otherwise. If you want logic don't look in the stock market.
The S&P Midcap 400 is only two points away from a new high. The S&P-500 closed at 2,068 and just over strong resistance at 2,064. The dips are being bought again and the market could make new highs this week if Greece does not implode.
The S&P-500 inched past resistance at 2,064 to close at 2,068. I know that is not a big breakout but every point counts. The next challenge is the early December resistance at 2,075 then the all time closing high at 2,090 and the mother of all resistance 2,100. The S&P has traded in a broad range since topping out in November and it is moving back to test the upper limits of that range this week. That 2,100 level is the lower end of analyst expectations for year-end 2015. The average estimate is 2,227 but that is a long way from here. Once we hit that 2,100 level there could be a sell the news event as some investors decide the gains are in the bag. I would expect that to be very few investors but traders are another matter. Hitting 2,100 would definitely be a trading event with shorts piling on in expectation for another dip.
The rest of the week is not going to be a cake walk. If crude prices continue to fall the energy sector will be a drag on the market. Offsetting that is the sudden surge in the financial sector on expectations for a June rate hike. If we do succeed in moving over 2,075 it should draw a lot of investors off the sidelines.
Resistance (adjusted to round numbers) 2,075, 2,090, 2,100. Support 2,040.
You know it was a short squeeze day when IBM leads the list of Dow gainers. Half of the companies in this list were being heavily shorted just a week ago. The Dow is edging slowly higher with strong resistance at 17,915 to 17,960. We saw a decent +139 point gain today to close just below those levels. More importantly this rebound was from a higher low. The two day decline to 17,685 was the first higher low in a month. That is a definite technical positive. If the Dow can move over 17,915 we should see some additional short covering and a new high is actually possible. Nobody would have thought that on Friday February 2nd at 17,037.
The Nasdaq Composite is also very close to a new 14 year high. The high close in December was 4,806.91 and we closed at 4,787 today. The Nasdaq can jump that distance in a single day if traders were properly motivated but I don't see that urgency today. I would expect a slow creep higher with some possible backfilling as we get to the 4,800.
However, this is a bullish chart. Any move over 4,800 is going to attract attention and shorts will get nervous. Anyone still short this market at this level is asking for trouble.
Resistance 4,791, 4,800, 4,807. Support 4,722.
The Russell 2000 small caps continue to creep higher but resistance at 1,208 is solid. I think the Midcap 400 is going to be the spark that ignites any rally this week. If it breaks out to a new high the Russell and the Nasdaq should be right behind it.
Unfortunately there is a negative chart. The Dow Transports are not confirming any Dow move higher. The transports have formed another lower high and any uptick in oil prices is going to further pressure this sector. A break below 8,575 is really going to drag on the Dow.
In theory the internals, economics and fundamentals tell us we should be watching for a decline in the markets. The markets will always do almost the exact opposite of what analysts expect so we may see some new highs this week. However, the emergency meeting of the EU Finance Ministers on Wednesday could be a real hurdle for the rest of the week. Anything is possible and probable. While they will not vote to just kick Greece out of the Eurozone they may make it so difficult for Greece that the country decides on its own to exit. The headlines could be scary for Europe but the U.S. impact should be muted.
Assuming the FM meeting does not end in a declaration of war against Greece the market should shake it off and could move higher.
Enter passively, exit aggressively!
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