The market seems to be hanging on every word coming out of the negotiations over the Greek bailout program. Every headline causes immediate but minor moves in the indexes. The biggest hit came from the Monday battle between Germany and Greece that caused a temporary but abrupt end to talks. Cooler heads prevailed today and the markets recovered.

Market Statistics

The headline battle on Monday caused the S&P futures to drop more than -10 points in overnight trading. The Dow opened lower by about -60 points but recovered throughout the day as the Greek talks progressed. News in mid afternoon that Greece may ask for an extension of the bailout temporarily lifted the markets but once the headline was confirmed it was not an extension of the bailout but only of the existing loan program. The markets gave back their gains and there was $1.4 billion in market on close orders at 3:45. The dip buyers prevailed and the indexes managed to post some minor gains with the S&P adding only +3 but still making a new high.

The market appears to be on hold because of the Greek crisis and the FOMC minutes on Wednesday. Nobody knows what to really expect from a negative decision on Greece and they are afraid the FOMC minutes could also indicate a larger possibility for a rate hike.

The economic reports did not help bullish sentiment. The NY Empire Manufacturing Survey headline number declined from 10.0 in January to 7.8 for February. The new orders component declined from 6.1 to 1.2 and just barely over contraction territory. The unfilled orders component improved slightly from -8.4 to -6.7 but it has been in contraction territory now for over a year.

The prices paid component rose from 12.6 to 14.6 indicating higher costs but the prices received component declined from 12.6 to 3.4 indicating they are getting less for their higher cost goods. On the positive side the capital expenditure plans rose from 14.7 to 32.6 suggesting business believe this is a good time to expand. That is a key sentiment indicator since businesses would not expand if they thought conditions were going to weaken.


The NAHB Housing Market Index for February declined slightly from 57 to 55 after a high of 58 in November. The buyer traffic component declined from 44 to 39 but that could be a result of the onslaught of harsh winter weather. That was the lowest level since July 2014. To rebut that idea the Northeast where the weather was the worst saw the conditions improve from 43 to 48 and its first gain in three months. It was the Midwest that dragged the index lower with a drop from 59 to 49. The West remains the strongest region with conditions falling only slightly from 65 to 64. The South was flat at 56.

Builder sentiment remains fairly strong and low mortgage rates should help the spring buying season that began on President's Day. However, mortgage rates jumped an eighth of a point today alone and so far in February we have seen the biggest monthly rate bounce in six years and the month is only half over.


Internet E-Commerce sales for Q4 rose from $77.8 in Q3 to $79.6 billion. That is a relatively mild +2.3% increase from Q3 but a whopping +14.6% increase from Q4-2013. Sales in Q3 rose +3.6% so the pace of increase slowed in the holiday quarter. E-Commerce sales have been rising steadily to 6.7% of all retail sales compared to 6.6% in Q3. Internet sales have risen for 24 consecutive quarters and without a U.S. recession analysts expect them to continue rising.

The calendar for Wednesday is highlighted by the FOMC minutes and a possible reason why the market action today was muted. While nobody really expects any bad news from the minutes the worry over rate hike language is a cloud over the market.

This drives me crazy. Historically, despite the Fed telegraphing the move months in advance the market tends to decline about -6% on the first rate hike. In the months and hikes that follow the market tends to rise because business conditions are improving enough for the hikes to take place. This means for the next several months the market will remain nervous about the timing of the first hike, which is now expected to be June.

The Philly Fed Manufacturing Survey on Thursday is an important report but it is not expected to really move the market unless if misses the estimate by a wide margin.

Yellen's testimony next Tuesday is the real hurdle but at least the Greek issue should be resolved by then.


GoPro (GPRO) soared +12% today as the lockup expired on 76 million shares. This effectively doubles the amount of shares available to trade. The key here is that more than 50% of the float on GoPro was sold short in expectations for a flood of insider selling when the lockup expired. There was a surge in volume from the average of 7.9 million shares to 15.7 million today. The price spike suggests that was probably a lot of shorts trying to cover. Analysts are relatively undecided on the stock with 5 buy ratings and 10 with hold ratings according to FactSet.


Shares of Vipshop Holdings (VIPS) surged +15% after reporting earnings of 12 cents compared to estimates of 14 cents. The earnings miss failed to hurt the stock thanks to a sharp uptick in sales. Revenue rose +109% to $1.36 billion and that easily beat estimates of $1.23 billion. The number of active users rose +114% to 12.2 million. The company guided for revenue in the range of $1.25-$1.30 billion with analyst estimates at $1.21 billion. The guidance upgrade was responsible for the big stock gains.


Waste Management (WM) wins the price for the most volatility. On Friday WM gapped down from $52.70 to $50.70 on a downgrade from buy to hold by Stifel. Today the stock rallied +5% to $54 on earnings of 67 cents compared to estimates for 61 cents. Revenue of $3.44 billion was slightly below estimates for $3.5 billion due to a divestment of Wheelabrator Technologies. However, the board approved a $1 billon buyback program to be completed in 2015. The trash hauler guided for earnings in the $2.48-$2.51 range and analysts were expecting $2.48. Just yesterday the CEO said the drop in oil prices was making recycling unprofitable.


Fossil (FOSL) reported earnings of $2.69 but that missed estimates of $3.07. Revenue of $1.07 billion also missed estimates of $1.12 billion. Currency headwinds reduced sales by $32.5 million. Even worse the company is expecting a sales decline in Q1 of 5.5% to 7.5% with some of that due to the strong dollar. They guided to a "best case" for the full year of a +1% increase in revenue with a worst case a -3% decline. Investors were not happy. Shares fell -14% to $85 in afterhours trading.


Jack in the Box (JACK) parent of Qdoba Mexican Grill, reported a 24% increase in earnings to 93 cents compared to estimates for 87 cents. Revenue of $468.6 million beat estimates of $460.3 million. The company guided for full year earnings in the range of $2.85-$2.97 and analysts were expecting $2.84. Same store sales at Jack in the Box stores rose +3.9% and Qdoba sales rose +12.9%. They guided for 4% growth in 2015 with 8.5% sales growth at Qdoba. I hate this because JACK shares spiked to $91.20 after the report and I was hoping for a dip to the 30-day average at $84.50 for an entry point.


Rackspace (RAX) reported earnings of 26 cents that beat estimates of 19 cents but revenue was light at $472.4 million. The company warned for the current quarter saying revenue would be in the range of $477-$484 million and analysts were expecting $492.6 million. Amazon Web Services is killing the datacenter service business and RAX is in the crosshairs. The company also said the strong dollar was a headwind since 32% of their customers were non-U.S. clients. Shares fell -$2.50 in afterhours.


The earnings calendar is shrinking and after this week there will be only a few left to report. The highlight on Wednesday is oil driller EOG and Solar City. Thursday is the last big day with Priceline and Walmart the highlights. The Q4 cycle is nearing the end and traders will have to look elsewhere next week for trade ideas.


Celsus Therapeutics (CLTX) shares fell -81% on news their lead drug failed a mid-stage study. The company said it would stop developing the experimental drug to fight inflation for ulcerative colitis and psoriasis. Turn out the lights, the party is over.


A rebound in crude prices helped lift the market off its lows. The dip to $50.81 early this morning depressed the energy stocks and the recovery surge to a high of $54.15 lifted those same stocks off the bottom and relieved the pressure on the indexes.

There is an analyst war on the price of oil. Goldman said the recent decline in active rigs will not slow down U.S. production growth, which hit a 35 year high last week at 9.223 mbpd. Active oil rigs have declined about -35% to 1,056 but Baker Hughes expects a decline of 40% to 60%. Goldman is expecting an oil price in the lower $30s.

Morgan Stanley believes the supply glut that caused the crash is quickly coming under control. "We are seeing tentative signs that oil markets are starting to rebalance later this year." Analyst Martin Rats said, "Make no mistake there is still overproduction, but the estimated amount of overproduction is getting smaller and that is a positive development." Morgan Stanley upgraded Oil Services and Exploration and Production stocks to "attractive."

Analyst and economist Gary Shilling believes the price is going down to $10-$20 per barrel. He said U.S. production is expected to rise +300,000 bpd in 2015 because it is the inefficient rigs and low return fields that are being idled. Rigs drilling in the strong production areas are still going full speed ahead. In addition the recent Iraq deal with the Kurds will allow another 550,000 bpd of Iraq oil to enter the market.

However, offsetting Shilling's dire forecast is the drop in production in Libya to almost zero due to the heavy fighting. Also, the IEA said it was seeing some declines in activity in the Middle East as a result of the drop in oil prices. All of these factors will influence future prices.

My worry is that when available storage capacity fills up the 1.3 mbpd of excess production today will have nowhere to go. That is when the prices will implode. If demand for cheap oil can increase quickly and oil production in conflict areas around the world decline we may not see that over capacity event. Right now I am not holding my breath.


Mortgage rates are exploding higher because treasury yields are also surging. Two weeks ago we saw a 1.65% yield on the ten-year treasury. That yield has surged to 2.145% over just the last ten trading days. It rose +6.1% (12 bps) today alone. We may finally be seeing the "great rotation" everyone has been predicting for the last two years. If the Fed is really going to begin hiking rates then bonds are no longer a safe haven. If you owned the ten-year treasury two weeks ago you were a happy camper but the rebound in yields has been very painful. The bond market may be moving from TINA status (there is no alternative) to junk status as investors rotate out of bonds and into stocks at new highs. As I have said many times in the past nothing pulls investors off the sidelines faster than new market highs.


Markets

The markets hit new highs again today with the exception of the Dow, which closed -6 points under a new high. That is close enough to count. The markets appear to be pricing in a compromise deal on Greece and avoiding the worst case scenario of Greece leaving the eurozone. Reportedly Greece is going to ask for an extension of its loan but not an extension of the bailout, which has severe austerity measures attached. Good luck with that. That is the equivalent of saying "I am not going to sign your contract, just give me the money." However, the results of not reaching a compromise are so severe on both sides that the market is pricing in a solution. What really happens if there is no compromise is unknown.

The S&P rallied +3 points to strong psychological resistance at 2,100 and came to a dead stop. Personally I am glad the touch of that level did not act like an electric fence and repel the index to lower levels. Fortunately we closed right on 2,100 with no real evidence of selling and that is a positive for tomorrow. If sellers were waiting at that level their volume was so small that it did not matter. Tomorrow may be another matter after they have had the night to think about it.

Clearly the bulls are in control and the dip buyers are alive and well. The early morning dip was bought even though the morning headlines were dire. While the S&P is at new high levels the rebound from the February lows at 1,980 is getting a little overbought. A +120 point gain in ten trading days is not extreme but any further gains will increase the likelihood of some profit taking. If you look at the short term chart of the S&P the gains have been rather mild from day to day so traders have been able to rotate in and out of positions without any significant increase in volatility. Slow moves like these could last for weeks. Markets can always stay overbought longer than analysts expect.


On the daily chart the prior resistance at 2,075 should now be support on any profit taking. The next real resistance is in the 2,125 range. Despite closing right on 2,100 that level is still in play as decent resistance because it is the lowest end of year target by Barclays and Goldman Sachs. This provides the psychological resistance at that level.



The Dow closed only 6 points below the prior high at 18,053.71. In theory it would only take a hiccup by any Dow component to push it over that level but there are some underperforming components that are holding it back. Walmart reports earnings on Thursday and most analysts are not expecting a good report. One stock can actually weigh on the Dow enough to matter as we saw with American Express last week.

Just closing over 18,053 will not seal the deal. There were three intraday highs over 18,070 with the highest at 18,103 in December. The Dow needs to close over that 18,103 mark and then tack on additional gains in the days that follow in order to confirm a breakout. It will not be smooth sledding because of some longer term uptrend resistance.

Support remains 17,800 and resistance 18,053 and 18,103.



The Nasdaq continued its winning ways but only managed to add another +5 points. That put it right at 4,900 and moving ever closer to that historic high close of 5,132 in March of 2000. Apple closed at a new high at $127.82 with a 75 cent gain. A challenge this week could be Priceline when it reports on Thursday.

The Nasdaq is becoming more over extended than the S&P because of its +315 point gain since the February 2nd lows at 4,580. The index has gone vertical thanks to the semiconductor and biotech sectors.

Support remains 4,800 and resistance 4,925.



The Russell tacked on another +2 points to come to a dead stop at resistance at 1,225. I am still encouraged since the rise in the small caps points to fund manager support. They do not appear to be worried about Greece or the FOMC minutes if they continue to nibble away at the small caps. The Nasdaq is still the market leader but the Russell could steal the baton at any time.


The fly in the soup is the Dow Transports. They are still not confirming the gains on the Industrials although they are trying to creep higher from the 9,000 level. I understand why the transports are lagging with oil prices rising but Dow theory needs the transports to confirm a Dow breakout with a new high of their own.


I remain positive on the market but I would rather buy a dip than a breakout. That gives me some cushion if the breakout fails. There is some concern that the Dow could "double top" here but as long as the other indexes are outperforming that should not happen.

Late today the wire services reported that ISIS burned alive 45 people in the western Iraq town of al-Baghdadi. That is only 5 miles from the Ain al-Asad air base where 400 U.S. military personnel are training Iraqi soldiers. This is the equivalent of taunting the American forces and America in general. The markets did not even blink when the news broke.

Enter passively, exit aggressively!

Jim Brown

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