Janet Yellen produced no surprises with her Senate testimony today and her dovish posture was in full view. Yellen said a rate hike in the near future was "unwarranted" and future moves would be data dependent suggesting it will be a long time. Consensus estimates immediately moved from a June hike to a September rate hike.

Market Statistics

Yellen told senators that dropping the word "patient" from the FOMC statement did not necessarily mean that rate hikes would follow two meetings later. The existence of the word patient has meant at least two more meetings before a hike but she was careful to say that it could be longer than two meetings. She also emphasized that rate hikes would not be sequential like the past cycle where the Fed raised rates 25 basis points at every meeting. Yellen said the Fed would be slow and suggested a hike followed by several meetings with no change and then repeat the process. She also seemed to indicate the hikes might even be less than 25 basis points. The Fed wants to err on the side of caution and not get locked into some predetermined pattern. Analysts now view the future rate hikes to be episodic rather than routine.

Yellen expressed concern about the economic drag from Europe and Asia and the potential impact on the USA. She also mentioned the slow rebound in the housing market as a concern. Of course there was also a focus on the lack of inflation and the dormant wage growth.

If the Fed is truly going to be data dependent it could be months before patient is removed from the Fed statement. The major economic reports have been weakening and that suggests the Fed should be nervous about rushing the rate hike process. The data is not cooperating with the Fed's desire to hike rates. Before the testimony the Fed Funds futures were predicting a rate hike in August and after the meeting the futures are now pointing to October.

Yellen also reiterated that the sharp decline in oil prices was a major stimulus event for the economy. While oil prices are holding down inflation the cheap fuel will spur additional economic activity in the months ahead.

Art Cashin said it appeared Yellen had taken the Hippocratic Oath of "First do no harm" to the economy. Yellen will have a tougher job on Wednesday with her testimony to the House because there are a lot of members there with strong negative feelings about the Fed. The questioning is likely to run longer and be more heated.

The dovish performance today lifted the markets to new highs once again and powered the Nasdaq to a 10th consecutive day of gains as it moves ever closer to that psychological level at 5,000. The Nasdaq was weak all morning but finally joined the party in late afternoon.

The economic reports today offered a little more in the way of bad news. The Richmond Fed Manufacturing Survey declined from 6 in January to zero for February. This came after setting a four-year high at 20 back in October. At the present rate of decline I would not be surprised if it fell into contraction next month.

New orders fell from +4 into contraction territory at -2 and backorders fell even further from -9 to -10 and the fourth month in contraction territory. The difference between new orders and inventories fell from -21 to -22 and also the fourth month in contraction. The average workweek component declined from +8 to -6 and the employment component declined from 13 in December to 4 in February.

With all the components declining the outlook is weakening. It is possible the port problems over the last 6 months have impacted manufacturing because of missing parts but that would not impact new orders so that excuse may not be valid.

The separate Services Survey rose from 14 to 18 and the second month of gains. However, the employment component fell from 14 to 4 after a high of 24 in November.



After Consumer Confidence hit a seven-year high last month at 103.8 we were due for a pullback. The headline number declined to 96.4 in February with the -7.4 point decline a lot more than analysts expected. The present conditions component declined from 113.9 to 110.2. However, the expectations component was the hardest hit with a -9.8 point decline from 97.0 to 87.2.

Consumers said jobs were harder to get and they did not see any better expectations for the summer months. Those that expected an increase in income declined from 19.5% to 15.1%. Those expecting an income decrease rose from 10.8% to 12.0%.

Consumers planning on buying a car fell from 13.1% to 11.0%. Home buyers increased slightly from 5.4% to 5.6% and appliance buyers rose slightly from 44.4% to 45.8%.

The decline in confidence could have been blamed in part on the severe winter storms and rising gasoline prices but that would be grasping at straws. There were no clear indications of discontent. However, the increase in those that felt jobs were harder to get could mean we are going to see a weaker than expected jobs report on March 6th.


The Texas Service Sector Outlook rebounded slightly from -2.8 to +1.7 for February. These numbers are down from the 27.7 high back in September. The employment component rose from 5.8 to 12.0 and the second biggest gainer in the survey. Input prices rose from 11.4 to 18.9 and wages and benefits rose from 13.5 to 16.4 suggesting profits are getting squeezed.

Eventually Texas is going to start reporting some negative numbers with as many as 100,000 workers being laid off from energy companies according to Dallas Fed projections.

Lastly the Case Shiller home prices for December rose +4.3% YoY and were flat with November. Despite low inventory levels the big rebound in prices from the 2009 lows appears to be over. Four cities in the ten city index saw prices decline in December. Those were Boston, Chicago, Las Vegas and San Diego.

The only material economic event on Wednesday is the New Home Sales for January. The biggest hurdle will be Yellen's testimony to the House. The big worry is that she will reflect on her Senate testimony today and decide she was too dovish and attempt to correct that view on Wednesday. Also, the likelihood of numerous hostile interviewers could also generate some unintentional responses. However, I believe she will tough it out and the market will take the testimony in stride.

The GDP revision on Friday is the next challenge. This is for Q4 so it is past tense. The dock slowdown had not really taken hold and the holiday shopping season was in full bloom. Estimates are for a revision to +2.2% growth. The dock slowdown will have a material impact on the Q1 GDP.


In stock news Toll Brothers (TOL) posted a +76% increase in earnings to 44 cents compared to estimates for 30 cents. Revenue rose +33% to $853 million. The average price of a delivered home rose +13% in Q4. However, in the Case Shiller numbers above the average price was flat at +4.7% YoY in December. This could mean Toll is going to be facing some pricing pressure in the months to come. Toll was positive on the coming selling season and raised guidance for homes sold from 5,000-6,000 to 5,200-6,000 with an average price range of $725k to $760K. Toll does sell to a higher end customer that is somewhat insulated from the problems in the lower end of the housing sector. People buying $750k homes don't normally have credit problems and they are making a lot of money.


Home Depot (HD) posted earnings that rose +43.8% to $1.05 compared to estimates for 89 cents. Revenue rose +8.3% to $19.162 billion and also a beat. Free cash flow jumped to $8.242 billion. The company said Black Friday was the biggest sales day in the company's history. Full year sales rose +5.5% to $83.2 billion.

Home Depot raised its dividend +26% to 59 cents payable on March 26th to holders on March 12th. Management also authorized an $18 billion stock buyback to be completed by 2017. In 2015 they plan on buying back $4.5 billion in shares. Sales are expected to grow 3.5% to 4.7% in 2015. Same store sales in Q4 rose 6.1%.

At the end of 2014 the company said it had 2,269 stores in the USA, Canada, Mexico, Puerto Rico, Guam and the U.S. Virgin Islands. The company said it was hiring 80,000 workers for the spring selling season.

Dow component Home Depot's +4% gain added the equivalent of roughly 30 Dow points to keep the Dow in positive territory most of the morning.


First Solar (FSLR) reported earnings of $1.89 compared to estimates for 71 cents. Revenue of $1.01 billion missed estimates of $1.27 billion by a wide margin. Guidance for revenue in the range of $550-$650 million was also a miss with estimates at $857 million. They expect a per share loss of 25-35 cents in Q1. The earnings report was complicated by Monday's announcement of a spinoff. First Solar identified 13.5 gigawatts of opportunity in new solar projects. By comparison they completed 509 megawatts in Q4.

First Solar will partner with SunPower (SPWR) to spin off a YieldCo vehicle. The assets to be spun off were previously held for sale and this complicated the accounting. The Desert Sunlight and Topaz projects were completed and were expected to be sold. By retaining them for inclusion into the spinoff the company believes it will generate significant value for shareholders in the long-term. Essentially the solar farms will be spun off into a separate company that sells electricity to utility companies and structured to pay a high yield to shareholders in the form of dividends.


Cracker Barrel (CBRL) reported earnings of $1.93 compared to estimates of $1.62. Revenues rose +8.2% to $756 million to beat consensus at $734.1 million. Same store sales tose +7.9% with a +3.2% increase in the average check. In addition the average menu price increased +2.5% for the quarter. CBRL guided to earnings of $1.30-$1.40 compared to estimates for $1.33.

The company credits lower gasoline prices with higher customer traffic and the higher sales per customer. They said in the prior quarter earnings they were already seeing a boost in business from falling gasoline prices so the pattern did continue.


BHP Billiton (BHP) reported earnings of $1.60 that fell -47.3% from the $3.03 in the year ago quarter. Revenues fell -11.9% to $29.9 billion. They produced record amounts of copper, aluminum and nickel but the prices declined in the commodity crunch. BHP said it was shutting down 40% of its shale oil rigs and would operate only 16 by June. The company has seven major projects under development with a combined budget of $13.5 billion.


Trex (TREX) reported earnings of 16 cents that beat estimates by a penny. Revenue rose +16.3% to $74.2 million compared to estimates for $70.3 million. Guidance for revenue of $120-$121 million for Q1 was in line with estimates.

All those details sound very mediocre but I doubt few investors remember this company was on the verge of bankruptcy in 2009. The new CEO Ron Kaplan turned the company around and shares hit a new historic high on today's earnings. The stock is up +1,050% since Kaplan took the helm.


Agrium (AGU) reported earnings misses on both earnings and revenue but the shares still posted a $4.00 gain. Earnings of 46 cents missed estimates for 60 cents. Revenue of $2.71 billion missed estimates of $2.96 billion. However, they guided for full year 2015 earnings of $7.00 to $8.50 and estimates were only $7.54. The company said after the drop in natural gas prices they hedged their 2015 requirements between $2.50 and $4.00 MMBtu. Earnings were not good but the guidance was great.


After the bell Hewlett Packard (HPQ) reported earnings of 92 cents beat estimates of 91 cents. Revenue fell -5% to $26.84 billion and that missed estimated for $27.38 billion. The company warned that earnings for the current quarter would be in the 84-88 cent range and analysts were expecting 96 cents. Shares of HPQ fell -$4 in afterhours.

Hewlett Packard reported flat or lower quarterly revenue in all of its operating units. They blamed the strong dollar for much of the weakness and guided to currency issues in 2015 as well. Two-thirds of their business is international and 50% of that is in Europe. HP expects full year earnings of $3.53-$3.73 with a 30 cent hit due to currency issues. This is well below analyst estimates for $3.95.

There will be a $1.50 hit to earnings for the proposed split of the company later this year. The company will split into HP Inc and Hewlett Packard Enterprises by November 1st. One company will continue in the PC/Printing sector and the other company will concentrate on enterprise hardware and software for the cloud and cloud services.


Casino stocks with operations in Macau received another blow today. A senior Macau official said the city wants to study restrictions on mainland Chinese tourists to ease overcrowding. The government will ask China's central government in Beijing to analyze Macau's capacity for visitors and consider how "too many tourists" impacts the quality of life for residents. China's president has asked Macau to "diversify away from its reliance on casinos and turn the city into a world tourism and leisure center." Macau casino revenue fell for the eighth consecutive month in January due to stricter travel rules from mainland China and a yearlong crackdown on corruption that has high rollers trying to avoid scrutiny, which includes the analysis of money transfers from the mainland to Macau for gambling.

Shares of WYNN fell -5%, LVS -4% and MGM -3%.


Crude oil declined -25 cents to $49.26 and is on the verge of breaking below that short term support at $49. The rebound in oil prices appears to be fading and now traders are betting on a new low in the weeks ahead. The January low was $43.58 on January 29th. Many analysts believe the next decline will see a break of the $40 level.

There was a slight boost to $54 and change on Monday on news the OPEC president may call an emergency meeting in the coming weeks if the price of crude continues to be weak. That $54 level was touched three times in February and that appears to be the short term top.

If crude prices continue to decline the equity market will suffer. We need to watch this over the next few days and act accordingly.

Hedgeye posted this picture last week and it is very appropriate.



In related news President Obama vetoed the Keystone XL pipeline late this afternoon. He said he did not object to the pipeline just the timing. He has had the State Department reviewing the pipeline for the last six years to determine if it was in the national interest.

We entered WWII on December 7th 1941 and the war ended on September 2nd, 1945, a period of four years. During that time we built thousands of tanks, airplanes, ships, millions of guns, uncounted tons of ammo and bombs and trained and transported more than 12 million soldiers and all those supplies to the various countries to fight and win. So why does it take more than six years to decide if a pipeline to transport cheap Canadian oil to the U.S. across only 3 states is in the national interest? TransCanada (TRP) could have actually built the pipeline 3 times in that six year period.


Markets

It was questionable at the open whether the markets were going to rally or not. The negative economics led to lower opens and then the worry over a Yellen surprise kept traders on the sidelines until well into her testimony. Once they decided she was not going to say something negative the shorts began to cover.

Traders coming off the sidelines added to the gains and it turned into a pretty decent market day. Advancers were 2:1 over decliners and all the major indexes closed at new highs. The Nasdaq was a new 15 year high but at 4,968 it is closing in on that March 2000 high at 5,132. It appears to be only a matter of time.

The S&P added a decent +6 points to close at 2,115 and edging closer to resistance at 2,125. The S&P was only up +1 point most of the day but finally moved higher into the close after Yellen quit speaking.

Personally I would be perfectly happy with 6 point gains every day. Slow and steady wins the race and gains that slow allow traders to enter and exit at will without any stomach churning volatility.

While the markets look like they are going to continue moving higher there are some considerations. The Nasdaq is well into overbought territory and it did not really turn positive until early afternoon and then it was shaky. After 10 consecutive days of gains it is time for a rest.

The second problem will be a further decline in crude prices. This will weigh on the energy sector, which is 12% of the S&P and a couple of large stocks in the Dow.

While I believe the market will go higher in the weeks ahead it might not be straight up. March is the 4th best month in the S&P in the third year of an election cycle. Since 1963 the Dow has not had a down March. The S&P has only been down once out of the 13 years. The Nasdaq began in 1971 and has only been down once in March in year three of the election cycle. The Russell 1000 and 2000 came along in 1979 and they have a perfect record of gains in the last 9 cycles. The data is from the Stock Trader's Almanac.

While history does not have to repeat it generally does. The positive March cycle is related to end of Q1 portfolio restructuring and the quarterly expiration of options and futures.

However, March also has a rocky record of losses after expiration Friday. The Dow has been down 17 of the last 27 years in the last week of March.

To put this in perspective the next three weeks should have a bullish bias. That does not mean it won't be choppy with doses of volatility. Once into March expirations I would look to tighten up my stop losses and be prepared for a decent decline. That is of course if we don't get it before then. Once traders figure out market cycles they tend to trade ahead of them and sometimes that disrupts that cycle.

S&P short term support is 2,104 and 2,090. Resistance 2,125.


The Dow is moving through a gauntlet of resistance with the high today at 18,230 and long term uptrend resistance from July. This is a minor range that has been broken before. The next material hurdle will be 18,300 to 18,325. Home Depot was a major support for the Dow this morning and was responsible for keeping it positive in the early going. Once the post Yellen rally really kicked off the number of Dow gainers increased significantly.

Support 18,100 and 17,965. Resistance 18,300 to 18,325.



The Nasdaq may be about ready to give up its leadership role. Since most of the Nasdaq gains have been on the back of Apple (AAPL) and this stock needs a rest the Nasdaq should rest as well. Since year end the Nasdaq 100 has gained about 224 points. More than 218 of those points have been from only five stocks. The Nasdaq 100 is a market capitalization weighted index. That means stocks with large market caps like Apple have a large impact on the index. Since December 31st Netflix has been responsible for 10 Nasdaq points. Gilead added +15, Biogen +17, Amazon +35 and Apple +141 Nasdaq points. Those five stocks were responsible for +218 of the Nasdaq's 224 point gain.

If the Apple rocket finally runs out of fuel it will be hard for the Nasdaq to overcome. Apple is 12% of the index. Apple shares were negative today and could easily give back quite a few points. Apple has gained +23 points or roughly 20% since its earnings.


Coupled with the potential for profit taking in Apple is the psychological resistance at Nasdaq 5,000. While 5,132 is the Nasdaq intraday high from March 10, 2000 and 5,048 was the high close, the 5,000 level is considered milestone resistance. The Nasdaq struggled at that level twice during March before crashing back to reality.

Getting through that 5,000 level could be a real challenge.


We all know that the Nasdaq can remain in rally mode far longer than anyone expects. Most of us have suffered repeatedly from trying to short an "obviously overbought" Nasdaq in the past. Overbought can always become more overbought. However, when reality returns the declines can also be dramatic. I am not predicting one here but we are nearing nosebleed territory.

Support 4,950 and 4,900, resistance 5,000.



The Russell 2000, NYSE Composite, S&P-400 Midcap are all at record highs. The Russell is nibbling away at the new highs by 2-4 points a day rather than taking big bites, which suggests fund managers have not yet gone all in on the small caps. OR, maybe they have gone all in and there is no cash left in the bank.

While I would like to see the Russell continue adding points I would like to see some excitement hit the small caps. Until then I would be cautious. The NYSE Composite is showing the same pattern. Today's new high was only 18 points over Friday's high. This index is creeping higher rather than sprinting.




While I do have a bullish bias for stocks for the next three weeks I do want to emphasize that it may not be straight up. We are due for some negative volatility and it could come at any time. As a trader I would buy the dips but probably not the first day. Remember stocks do go up and down and not always in a straight line.

Enter passively, exit aggressively!

Jim Brown

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