The dollar shot up another +1.2% to a new 12 year high and oil prices dipped to nearly $48. Bearish forecasts for earnings and oil prices along with the outlook for rates sent equities lower with financials leading the way.

Market Statistics

The Dow collapsed with a -332 point drop and the S&P gave back -35 points to close well below obvious support levels. Monday's +133 point rebound turned into a dead cat bounce and sellers came back on heavy volume. Crude oil closed the regular session at $48.29 after multiple analysts lowered their forecasts suggesting Brent crude could trade down to $45. That would suggest WTI could trade under $40. This weighed heavily on equities with the emphasis on the energy sector.

Financials traded sharply lower ahead of the Fed's ruling on their capital programs on Wednesday. Citigroup lost -3.2% with Bank of America (BAC), Wells Fargo (WFC) and JP Morgan (JPM) losing about -2.5% each.

The dollar gained another +1.18% to 98.75 on the Dollar Index. This is going to crush the earnings from the 50% of the S&P that receive a lot of their revenue from overseas. This is forcing analysts to further cut their earnings estimates on a weekly basis. Investors are now pricing in a decline in earnings for Q1 and Q2.


The economic news for today was not negative and that is a change from the recent trend. The Wholesale Trade report for January showed a +0.3% gain in inventories compared to zero growth in December. However, sales were significantly negative. Sales of durable goods declined -1.4% and nondurable goods declined -4.6%. That is the sixth consecutive monthly decline for the nondurable goods. This forced the inventory to sales ratio up from 1.22% to 1.27%. This suggests the rise in inventories was not because wholesalers were bullish but because of slowing sales.

The Intuit Small Business Employment Index showed hiring rose +0.7% in February. That equates to a gain of +15,000 jobs compared to +30,000 in December and +20,000 in January. Compensation declined -0.05% and hours worked declined -0.09%. Overall February was relatively weak for small business conditions. Revenues have been declining since October and that continued in February.

The NFIB Small Business Economic Trends showed optimism rose from 97.9% to 98.0% and a barely noticeable change. Those companies with plans to increase employment declined from 14% to 12%. Capex plans were flat at 26% and expectations for increasing sales were flat at 16%. Those with current job openings did rise from 26% to 29%. Earnings trends remained flat at -19% meaning more businesses felt negative than positive. The report was ignored.

The Job Openings and Labor Turnover Survey (JOLTS) showed job openings rose +3.4% and the same pace for the last four months. The number of job openings did rise to 5 million and a 14 year high. Hiring declined slightly from 5.2 million to 5.0 million. Separations also declined from 4.9 million to 4.82 million. The quit rate rose +2% and layoffs declined -4.7% from year ago levels.

The most important economic release on the calendar for Wednesday is oil inventories. However, the Fed will release its approvals for capital spending by the big banks and it is possible the Fed could curtail some of those plans. The Comprehensive Capital Analysis and Review (CCAR) tests the 31 largest banks on their plans to return capital to shareholders with dividends and buybacks. The recent stress test assumed the unemployment rate rising to 10%, stocks entering a bear market and a 25% decline in housing prices. The banks have been closing down some operations and selling others in order to reduce risk and raise cash. That does not guarantee the Fed will let them give money back to shareholders but it is a start. Last year Citigroup passed the stress test but the Fed would not approve their capital allocation strategy saying they were still too exposed to losses in "material parts of its global operations."

The capital approvals should all pass this time around since the banks knew from last year what the Fed was looking at and where their ratios needed to be. Any bank that is curtailed by the Fed this year will see its shares decline.


The FOMC meeting next week is becoming more important as each day passes. Monday evening outgoing Fed President Richard Fisher, a noted hawk on rate policy, said in a speech the Fed needed to hike rates immediately at a moderate pace because waiting longer could force the Fed to hike rates faster once they started and cause another recession. He favored not waiting for wage growth to pickup saying it will eventually rise with inflation.

The Fisher speech caused another spike in the dollar and the collapse in the European markets. Some European indexes were down over -2% as the euro fell to $1.07 and the dollar rocketed +1.2% higher. Deutsche Bank predicted the euro would fall to parity with the dollar by the end of 2015, drop to 90 cents in 2015 and 85 cents in 2016 as a result of ECB QE and rising rates in the USA. This is going to cause severe earnings distress for multinational companies that represent more than 50% of the S&P.

In stock news Apple (AAPL) shares declined -$3 intraday to knock about 15 points off the Nasdaq 100 ($NDX). The company formerly announced the watch on Monday and a new smaller and lighter MacBook laptop. They also announced HBO Now for $14.95 a month on Apple TV and dropped the price of the TV to $69 to better compete with Amazon at $29. Apple bragged that every major car brand is adding Apple's CarPlay. This is an in car system for listening to music, getting directions and making calls from your iPhone.

Today was the Apple shareholder meeting and Tim Cook was all smiles. Apple sold more than 200 million iPhones in 2014 and produced more than $200 billion in revenue. They returned $57 billion to shareholders through dividends and buybacks. He promised the watch would change the way people use the Internet and that is a very risky call. He was very bullish on the partnership with IBM and expected their applications to boost sales of iPads. In talking about weak iPad sales he said there were "other things in the pipeline" that would boost sales. He was why Apple did not buy Tesla and accelerate their plans to create an electric car. Cook ignored the real question by saying they had no relationship with Tesla but "we would love for them to use" CarPlay.

Apple shares tend to decline to the 100-day average, now $114.50, every few months. I view this as the level to enter new positions. Shares rallied +$28 in Jan/Feb and today's close at $124 is about $10 over the optimum entry level.


Barnes & Noble (BKS) shares declined -10% after reporting earnings of 93 cents compared to estimates for $1.41. The company is working on spinning off its college bookstore business from the retail stores and the Nook e-reader. The breakup is expected to be completed by August. This would leave BKS with the struggling retail business that is being killed by Amazon and other online retail sites, and the money-losing Nook division. The company is also adding toys and gifts in the retail stores to try and market to a wider audience. Same store sales rose +1.7% and revenue of $1.96 billion beat estimates for $1.9 billion. Last June the company gave up on selling its own e-reader hardware and partnered with Samsung to provide the device. The company said losses in the Nook division decreased -53% from the prior quarter. They are still losing money, just losing it slower.

Personally I don't understand why the stock is worth even $22. The PE is a -112 and Amazon is beating them badly. Apparently I don't understand the outlook and the potential for turning them from a book seller into a gift and toy store.


Urban Outfitters (URBN) was the biggest gainer in the S&P with a +11.5% spike after earnings. The company posted earnings of 60 cents compared to estimates of 57 cents. A +12% increase in revenue to a record $1.1 billion only met estimates. Wedbush Securities and Credit Suisse reiterated their neutral ratings and Brean Capital reiterated their buy rating. While analysts were not excited about the earnings but shares soared on the outlook that the turnaround was accelerating. There are 22.3 million shares remaining on the existing stock buyback and that should supply support.


Qualcomm (QCOM) announced on Monday it was going to buyback $15 billion in shares with at least $10 billion over the next 12 months. This replaces the existing program that had $2 billion remaining. The company also raised its dividend by +14% to 48 cents. Qualcomm is sitting on $32 billion in cash. Qualcomm is the major communications chip supplier for Apple and Android phones.


Orbital ATK (OA) continues to ris ein the face of a negative market with a +4% gain today. Orbital Sciences and ATK merged in early February to form Orbital ATK. In the process they spun off Vista Outdoor (VSTO), an outdoor sporting goods supplier, and became a pure play aerospace manufacturer. Barclays upgraded it from neutral to buy today after Orbital signed a $120 million deal with the Army for a fuse for precision guidance munitions. On Wednesday they will test fire the new SLS boosters in Promontory Utah. These boosters will be used for the next moon mission and the eventual manned flight to Mars. Orbital ATK shares are being bought on increasing volume now that they are a pure play aerospace company.


Lumber Liquidators (LL) rebounded +6% after Blackrock increased their investment in the company and well known short seller Citron Research said the selloff was way overdone. Blackrock increased its stake from 4% to 10.1%. Short interest is roughly 34% and the rebound suggests some shorts were caught off guard.


Acadia Pharmaceuticals (ACAD) rallied +18% to $46 after the company cancelled two investor meetings and sparking speculation that a deal to buy the drug maker could be in the works. Acadia is working on drugs for the nervous system including Parkinsons. The cancelled events were Monday and Tuesday and hosted by Cowen & Co and Roth Capital partners. Acadia has a partnership with Allergan. Company spokesman did not answer calls asking for comments.


Just before the close an investor bought 200,000 contracts of the January $94/$102 put spread on the FXE paying nearly $2 or roughly $39 million in premium. This is a bet that the euro (FXE) will decline another 11% by January 2016. While I believe that is a pretty safe bet I would not bet $39 million on the outcome. January is a long way off and anything can happen. Whoever placed this bet has some serious conviction. If the FXE moves close to that lower $94 strike the investor can make $120 million.


Crude prices continue to be under pressure by the rise in the dollar. There is a battle in progress here with the $49 level the battleground. Storage is filling up at an accelerated pace and refiners are in the middle of their annual maintenance cycle and crude refining volumes are dropping. Refinery utilization is down to 86%. It is a race now to get the refineries turned back on before storage becomes critical.

The EIA lowered its price forecast for 2015 from $55.02 to $52.15 before rebounding to average $71 in 2016. They raised the production expectations from 9.3 mbpd in 2015 to 9.6 mbpd in 2016. I should note that production last week was a 35 year high at 9.324 mbpd and already over the EIA forecast.

Just yesterday Goldman Sachs said its $40 forecast for WTI may be too low because the oil market is "surprisingly healthy." The bank said weather disruptions, the failure of global inventories to increase and stronger than expected demand could keep oil above that level for the next two quarters. Sandstorms disrupted Iraqi exports, Libya closed down 11 fields because of violence, cold weather in the U.S. and a drought in Brazil bolstered consumption, according to Goldman.

A senior Saudi Aramco executive said the industry could cancel more than $1 trillion in projects if oil prices do not rebound soon. Capex around the world is being slashed and many companies have now cut spending forecasts more than once.

So far this has not boosted the price of oil. Analysts said inventories in the U.S. could rise as much as 8 million barrels this week and continue adding to the storage pressures. One analyst was quoted today predicting Brent prices could fall to $45, which would suggest WTI could trade under $40. The trouble with price predictions is that everyone has one and very few will be right. However, WTI's failure to move over $50 for over a month is telling me the next move may be lower. Support at $49 has been rock solid but eventually investor patience will expire.


Markets

There is nothing positive to say about today's decline. The S&P dropped -35 points to close at 2045 with the 100-day average at 2040. However, the 100-day has not been reliable support in prior declined. Recently the 150-day average has been more predictable and that is 2016 today. If we did move that low I would expect the 2000 level to be tested as it was four times in December and January. This is clearly the support target on any continued decline.

The pace of the decline was extreme at the open after the futures turned sharply negative at 4:AM after the European markets turned negative. The S&P dropped -28 points in the first hour of trading and then dipped again as two other sell programs hit at 11:30 and 1:30. In the last 10 minutes of trading another sell program hit to produce a $3 billion imbalance in market on close orders to the sell side. This closed the markets on the lows of the day.

About 85% of the volume was negative despite decliners running only about 3:1 over advancers. The high beta stocks were being crushed while the average security was down only slightly.

Support on the S&P is 2040, 2016, 2000. Resistance 2082, 2100.


The Dow lost -230 points in the first hours and after a minor rebound at 11:00 it fell victim to the same sell programs as the S&P to close on the lows at 17,677. All uptrend support has failed and the Dow may have minimal support at the 100-day average at 17,609. The Dow did react to that average on 3 of the last 4 declines. I would not bet the farm on a rebound from that level. The severity of the breakdown over the last week suggests we are going lower with the obvious target the 200-day at 17,251. The big names on the Dow were crushed with Visa losing -$6, Goldman -$5 and MMM -$4. Those are the highest weighted stocks in the Dow and their declines cemented the Dow's loss.

Typically when the Dow falls into "cascade" mode it does not rebound abruptly. There will be a day of indecision at the bottom and then a rebound. The alternative is an intraday V bottom with a rebound.

However, futures are strongly positive tonight and suggest somebody is buying the dip.



The Nasdaq is stronger on a relative basis than the Dow and S&P and strength in a couple of sectors can sometimes overcome a broad market decline. That did not happen today. The Nasdaq gapped down -67 points in the first hours and closed down -82 for the day. Apple was responsible for about -15 of those points on the Nasdaq 100. Add in big declines in Google, Amazon and Netflix and the index had no hope of recovery.

The Nasdaq has light support at 4850 before falling into a congestion range with the 100-day at 4711. That is a huge spread of 139 points. The key for the Nasdaq will be the fight at 4850. If it loses that ground at the open it could have another ugly day.

Resistance is 4950, support 4850.

Today is the 15th anniversary of the March 2009 historic high close at 5048 and intraday high at 5132.



The Russell 2000 gave back -15 points to close right on support at 1208. That is where the opening gap stopped and that level held all day. This is the only encouraging point I can make about the markets. The small caps crashed with the market at the open but drew a line at 1208 and would not cross it. This may not be bullish but it is a positive sign.


Volume was NOT heavy despite the monster decline. Total volume was just over 7 billion shares and less than we saw on Friday's decline at 7.4 billion. At the end of the day declining volume was 6:1 over advancing volume with decliners 5501 to 1508 advancers. Typically it takes an 8:1 to 10:1 declining volume day to produce a washout and suggest a rebound the next day. We did not get that today.

S&P futures are up +5 points at 9:PM and that would suggest a strong open but there is a lot of darkness before morning. If overseas markets follow us lower those futures can evaporate in a heartbeat.

I have no bias for Wednesday. The bank capes approvals could be a help if all the banks are approved or a hindrance if several are prevented from implementing their capex plans.

When the S&P broke below 2065-2070 that turned the outlook bearish for me. However, whenever we get a big flush I always expect the dip buyers to appear. Whether or not they want to venture into these waters is unknown. Multiple -300 point declines (Fri/Tue) tend to blunt investor sentiment and sometimes declines beget more declines. I would want to see the S&P climb back above 2060 on decent volume before I would turn bullish on the markets this week.

Enter passively, exit aggressively!

Jim Brown

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