A drop of more than 2% in the dollar for the week, a $4 rebound in crude oil and the dovish comments by the Fed all combined to produce a relief rally, which was led by the small caps. The Russell 2000 and the S&P-600 Small Cap indexes both closed well into new high territory.

Market Statistics

The Dollar Index closed at 100.18 last Friday and declined more than -2% to close at 97.93 this Friday. The decline in the dollar was due to the dovish comments by the Fed that pushed expectations for the first rate hike farther into the future. The declining dollar took pressure off crude oil and despite a monster inventory build of 9.5 million barrels the black gold rallied from a low of $42.03 on Wednesday to close just under $46 on Friday. Numerous analysts were calling a bottom on oil prices.


While I would welcome a bottom in crude oil I believe this is more of a reaction to the falling dollar and short covering in the futures as the April contract expired. Inventories are still building at an enormous rate and refiners have not yet concluded their spring maintenance and started producing gasoline for summer driving. We still have a few more weeks before crude demand increases and they start chipping away at the record inventory levels. There is still the danger of running out of storage space for new production.

However, Brent crude did not make a new low with $52.50 showing solid support and well over the $50 lows from January. This is encouraging for the oil bulls.



There were no economic events of note on Friday. However, the calendar for next week is full with the last revision of the GDP on Friday as the most important. There are quite a few estimates for something less than +2% growth. For Q1 there are forecasts down in the +0.5% growth range because of the severe weather. That first release will not be out until the end of April.

Since the FOMC stressed again that they want to see more job growth it will put more pressure on the ADP/Nonfarm numbers the following week.

This is a calm week for earnings as well and we will probably see more warnings next week than earnings since we are in the warning season. The earnings cycle does not officially start until Alcoa reports on April 8th.


Starbucks was the only new stock split that is worth trading. The 2:1 split is only 2 weeks away and the company closed at a new high on Thursday. Friday saw a little profit taking but given that Starbucks is a crowd favorite we could see a split run, market permitting.


The Fed removed the word patient but Yellen bent over backwards to convince analysts and investors alike that there would be no rate hikes until the economic data improved. Specifically mentioned were jobs, wage growth and inflation but what was not mentioned is the key. The statement reduced the Fed's outlook for economic growth and reduced the Fed's projections for future interest rates. Given the downgrades to the outlook we should not be looking for the Fed to suddenly reverse itself and hike in June.

The consensus for the first hike is in the August/September timeframe but that would still require several months of positive data to lift the Fed's projections before a rate hike could be tolerated. The bottom line is that the Fed will continue to support the market by reinvesting all the proceeds from treasuries and MBS that mature and that will keep real interest rates low. The March FOMC statement and press conference is the gift that keeps on giving.

In the Deutsche Bank projection chart below taken from the actual Fed forecasts you can see how the Fed's projections are declining. The lower blue line on the right is the new projections for growth from last week and heading for 2% in 2017. They can't raise rates in this environment despite what they would like to do.


The Greek bailout story completed another chapter after the EU finance ministers ended an early Friday meeting saying they had reached a breakthrough agreement to unlock much needed funds for Greece. The meeting lasted two days and involved heated discussions before reaching what they said was an agreement. The headlines were triggered all around the world that Greece would get 7 billion euros in aid and markets celebrated. About 12 hours later the agreement was in disarray and the finance ministers were again confused about what everyone had agreed to do.

The center of contention is a 7.2 billion euro rescue payment from the Troika and the conditions Greece must complete before the funds are released. Also unknown is how the ministers are going to verify that Greece has actually complied with the terms. More than once the country has said it took action and completed demands only to find out months later that nothing was ever done and it was just a smoke screen to get money released.

One of the keys is a list of reform demands that the EU gave Greece on December 10th. From that list Greece can complete the ones it wants and replace others will new reforms Greece is willing to add to the list. However, the new list must be approved by the ministers and then be verifies once enacted.

One of the problems is that the new Greek Prime Minister refuses to acknowledge the list. The former PM Antonis Samaras and finance minister Hardouvelis sent a letter to Merkel promising to implement a set of those reforms. Tsipras said last week, "Forget the commitment of the former government. There are no austerity measures. There is no letter of Hardouvelis." Tsipras said "I asked the finance ministers do you expect me to go through this evaluation and implement measures that Mr Samaras was not able to implement? The answer was no." Tspiras used that letter of harsh reforms to ridicule Samaras and win the election by promising they would never be done. Troika inspectors have now been prevented from accessing accounting data and bank records because Tspiras claims it would be a violation of Greek sovereignty.

The EU is stuck between a rock and a hard place. They don't want to give Greece any more money but they have already invested 240 billion euros. If they let Greece fail they will never get any of it back. If they keep the IV drip of cash flowing, even at a reduced rate, they may have a slim chance of some return in the future and not be faced with the disaster a Greek exit from the eurozone would cause.

The market rebound on the Greek headlines is over and the news out next week could be even more negative. The U.S. markets don't really seem to care if Greece stays in the eurozone or leaves but our markets will follow the direction of the European markets unless they are given a reason to do otherwise.

In stock news Biogen Idec (BIIB) soared 10% to $476 and a new high on news a new Alzheimer's drug was more effective than expected in early stage testing. The drug was so successful the company is going to skip the phase II testing and go to final stage testing needed to gain approval. The testing of 166 patients in an early trial reduced plaque buildup in the brain and slowed cognitive decline. Shares rallied $42 on the news.


Prothena (PRTA) shares spiked +32% to $39 on news of an early stage success on a drug to treat Parkinson's disease. The PRX002 drug showed to be safe, without serious side effects and it reduced levels of a protein that builds up in the brain and is associated with the disease. The company has a deal with Roche and could get as much as $600 million in milestone payments as well as a portion of future profits and royalties. Prothena has received $45 million to date on this drug.


Clearly the biotech sector is on fire and odds are good the gains in individual stocks will continue. We are currently experiencing a surge in new drugs that will tackle some of the worst diseases that debilitate those people that contract them. We are living in a period where many of these diseases could be cured or at least lessened. The biotech sector is up +23% year to date. Everyone keeps hoping for a pullback as a buying opportunity and it will come eventually.


Nike shares (NKE) rallied +4% after reporting earnings of 89 cents compared to estimates for 84 cents. Revenue of $7.5 billion missed estimates of $7.60 billion but future orders soared. Orders for delivery from March through July rose +15% compared to estimates for an 11.6% gain. Orders from China rose +11% beating estimates for 9.9%. Orders in the U.S. rose +6% to $3.25 billion for the quarter. Sales in Western Europe rose +10%. Without the impact of the dollar the sales would have risen +21%. The CFO said the impact of the dollar was increasing and would be a continued drag. The company did suffer from the West Coast port dispute. Their shoes are held up on containers yet to be unloaded and that detracted from U.S. sales. Nike said it will take a "few quarters" to get the inventory flow back to normal.


Tiffany (TIF) reported earnings of $1.51 that beat estimates by a penny. Revenue of $1.285 billion missed estimates of $1.311 billion due to weakness in the Americas and Japan. The strong dollar decreased overall sales by -3%. Sales in Europe actually rose by 9%. The guidance was weak. Management said they anticipate minimum earnings growth for 2015 and a decline of -30% in earnings in Q1 followed by a modest decline in Q2. Business is expected to pickup in Q3/Q4. Net sales in Q1 are expected to decline -10%. Shares fell -4% on the news.


KB Home (KBH) reported earnings of 8 cents compared to estimates for 2 cents. Revenue rose +29% to $580 million and beat estimates for $474 million. Gross margins rose +2.6% to 17.7%. The company delivered 1,593 homes in the quarter. The average selling price rose +8% to $329,500. The company guided for sequentially higher revenues in each of the remaining quarters for 2015. Shares rose +8%.


Darden Restaurants (DRI) rallied +3% after reporting adjusted earnings of 99 cents compared to estimates for 84 cents. However, revenue fell -23% to $1.73 billion and just over estimates for $1.72 billion. Darden sold Red Lobster back in July and that accounted for the drop in revenue. Olive Garden sales rose +3% for the quarter to $957 million and they added nine new stores. Longhorn Steakhouse sales rose +11.3% to $404 million and they added 25 new stores. The Specialty Restaurants division saw sales rise +14.7% to $367 million and they added 16 new stores. Darden now has 1,528 stores in total.


Shares of Facebook continued to soar after they announced the person to person payments on Tuesday. Shares hit a historic high of $84.60 intraday on Friday. Analysts were beginning to raise their guidance based on expectations for rising ad sales and whatever toll fee they are planning on charging for the payment function.


Crude oil inventories rose +9.5 million barrels to 458.5 million and an 80 year high. Inventories have increased +76.1 million barrels over the last 10 weeks alone. Inventories at the futures delivery point of Cushing Oklahoma rose +2.9 million barrels to 54.4 million and a record high. Cushing has about 71 million barrels of storage and typically they have cut off inflows when they reached 80% of capacity to maintain operational capability. Since the last record high on January 11th 2013 at 51.9 million barrels several million barrels of additional storage capacity have been added. However, 80% of capacity today would be 56.8 million barrels and just 2.4 million over current levels. Depending on the time of year they could accept a little more oil and this is the right time. Refineries will shift into overdrive in mid to late April and inventories should begin to decline fairly rapidly. While we are approaching a storage capacity problem it may not be for 2-3 more weeks.

U.S. production surged again last week to 9.419 mbpd and a 38 year high. Despite a decline of about 862 active rigs or about a -45% drop, production is still surging as previously drilled wells are put into production.

The active rig count declined -56 rigs last week to 1,069. Oil rigs declined -41 to 825 and gas rigs declined -15 to 242 and a new 18 year low. Offshore rigs plunged a whopping -11 to 37 or -23% in only one week.

In 2009 the rig count low was 866 and we have declined from 1,931 to 1,069 since September. Most companies say they will continue reducing rigs through July so more pain to come for the drilling sector.


This was a quadruple witching option and futures expiration and volume soared from an average of 6.6 billion shares for the first four days of the week to 9.76 billion on Friday. Advancing volume was 7:2 over declining volume. Advancing stocks were 5:2 over decliners. S&P-500 volume was 7:1 advancing over declining and advancing stocks were 7:1 over decliners at 397 to 61. There were 62 new 52-week highs and 1 new low. For the entire market there were 653 new highs and the most since December 23rd with 93 new lows.

Markets

It was a small cap week! The S&P SmallCap 600 ($SML) broke out to a new high and there were no doubts. Volume was more than double on Friday. That is no surprise since volume typically doubles with every quadruple witching expiration. The small caps are where it is at with little or no exposure to the strong dollar.


The Russell 2000 also broke out to a new high and did it in a serious manner. Since the 1206 low on March 11th the Russell has rallied +60 points or +5% in only seven days. Investors are moving money from big caps with dollar exposure to small caps that depend on the U.S. economy rather than Europe and Asia. This is a clear breakout and support should now be in the 1240-1250 range and above the prior highs. This is bullish for the broader market but you have to wonder if the small caps have run too far too fast and are due for a short term pullback.


Despite the bullishness in the small caps the S&P and Dow have not been able to return to the February highs. The rotation of money out of the large caps has been a drag on the indexes but the S&P still managed to turn in a respectable +5% gain since the lows on the 13th. The S&P and Dow had declined further than the small caps so they had a bigger deficit to overcome to return to new highs.

The S&P closed at 2108 and has decent resistance at the historic high close at 2117. On the support side there is light support at 2085 and 2065 with the 2040 level the strongest. The 100-day average at 2053 and the 150-day at 2025 should also slow any selling.


The Dow closed at 18,131 with the historic high at 18,288. At the rate we are adding triple digit days that is just one good short squeeze away. The range for the week was only 500 points from 17,700 to 18,200 but the Dow moved nearly 1,600 points within that range. The triple digit moves in alternating directions made it very hard for investors to enter decent positions but day traders probably made a good living.

Apple is now a Dow component and AT&T is not. Visa is only one-fourth its share price from the prior week and Goldman Sachs is now the biggest influence on the Dow with its $193 stock price. A $1 move in any stock now represents about 6.75 Dow points. Apple's decline on Friday removed about -10 Dow points. Apple shares imploded at the close to give back -$2 on very heavy volume in the last few minutes. Apple shares traded 8.7 million shares in the last 10 minutes compared to 68 million for the entire day.


The Dow respected the 100-day average on the March decline and again on the sudden dip on March 18th. I would not expect that to continue but at least it will be a speed bump on the next decline.

Resistance is 18,288 and the old high and support is 17,950.



The Nasdaq exploded over the 5000 mark at the open and despite some initial selling pressure it never fell back below the 5020 level. The February high was 5008.10 so Friday's close was a new 15 year high. We have to close over 5048.62 for a new historic high close and over 5132 for a new intraday high.

The drop in Apple knocked about 7 points off the Nasdaq at the close. Quite a few biotech stocks also lost ground and that pressured the index but Biogen's $38 point gain offset a lot of the losses on the smaller stocks.

In theory the 5000 level should now be support and a drop under 4980 would be a critical level. That was support all day on Thursday and it was a battle. There should still be support there so any failure could trigger a stronger decline.

Initial resistance should be 5040, 5050.



In theory with the market at the highs the internals should be stronger. However, the percentage of S&P stocks currently over their 50-day average is only 70%. This is below the February highs at 77.4% and the November highs at 88.8%. The internals are not confirming the recent rally.


The percentage of stocks currently over their 200-day average is only 73% and as you can see in the chart there has been a steady deterioration since July 2014. This suggests the rally has been led by only a few stocks and either the laggards are going to revive shortly or more likely the number of laggards will increase and drag the indexes lower.


The percentage of S&P stocks with a bullish point and figure chart has declined to 71.8% and well under the prior highs at 85% and 90%. Note that the percentage declined last week rather than rose.


The commodity sector is still trading at its lows. There is no inflation in sight because commodity prices have been driven to multi-year lows. The CRB is down -33% from the July highs, mostly because of the drop in crude prices and the rise in the dollar but also from lack of global demand.


The bottom line for me is that I think the small cap rally can only take us so high. The big cap indexes are nearing significant resistance and all the positive headlines may be behind us. The Fed meeting is in the rearview mirror. Earnings are not going to be pretty with current estimates for a -3% decline in Q1. The economic indicators have been declining for nearly two months and the number of declines and estimate misses are the worst since the summer of 2009.

The Bloomberg ECO U.S. Surprise Index now at the lowest since 2009.

Bloomberg chart (Original Link)

Markets can rally despite negative forces but eventually fundamentals will matter. With the ECB QE just starting, the bond rates for European countries are going to continue falling and dragging the euro lower. That will push the dollar higher and force earnings lower. When this will suddenly matter to the market is unknown but I would be cautious over the next several weeks. This week is the end of the quarter and fund managers will probably be restructuring portfolios to reduce exposure before the normal summer doldrums and investors are going to be taking cash out of the market to pay the tax man.

Random Thoughts

In keeping with the comments above Bank of American Merrill Lynch posted this chart showing that the global earnings revisions are now declining in the fastest pace since the Lehman disaster and to the lowest level since 2011. On a year over year basis forward earnings estimates (red) are now down -6.7%.



China is preparing to loan Venezuela another $10 billion on top of the $50 billion they already owe and have a near zero chance of repayment. About $5 billion will be loaned this month for "various projects" and the other $5 billion in June. That second tranche is expected to be used to hire Chinese firms to boost production in Venezuelan oil fields and that oil will probably make its way to China as part of a loan repayment. Venezuela has been "selling" oil to China in lieu of debt repayments. With Venezuela circling the drain the $5 billion loan will rescue the current Maduro administration for a few more months. I would not be surprised to see a Chinese flag on Venezuela in the years to come. The newly devalued Venezuelan currency is on the verge of becoming worthless and this loan may be the last lifeline for the Maduro regime.


Retired Dallas Fed President Richard Fisher said on Friday, "What worries me is how totally lazy investors have gotten, totally dependent on the Federal Reserve and I find this to be a precarious situation. Are we vulnerable in my personal opinion to a significant equity market correction? I believe we are. I could see a correction taking place of substantial magnitude." The market ignored the comment but it will continue to bounce around in cyberspace until the market trips up then it will be replayed over and over.


After the Wednesday FOMC announcement and Yellen press conference the futures are now predicting there will be no rate hike until at least December. The futures indicating the likelihood of a hike in September declined from 55% to 39%. The futures are also suggesting the likelihood of a hike in June at almost zero at 11% probability. The fed funds futures are now projecting an interest rate at the end of 2015 of 0.625% compared to the 1.125% forecast at the beginning of 2015. The implied yield on the December 2015 Fed funds futures contract declined to 0.42% and the yield on the December 2016 contract declined -0.21 points to 1.15%.

The Atlanta Fed GDPNow real GDP forecast for Q1 has fallen to only +0.3% growth. That is down from +2.3% back in early February. The rate of decline is nothing short of spectacular. The top ten private forecasters are still targeting a consensus of about +2.4% for Q1. That is a significant break with the reality of the Fed's real time calculator. There is no chance of a rate hike in the near future.


Despite the Fed's implied support of the market with continued zero interest and the reinvestment of all the funds from matured securities the market is not bullet proof. If the economy continues to weaken the stock market will pay attention and the Fed could actually be forced to implement a QE4 if the decline became severe. Currently with rates at zero the Fed has no dry powder in the case of further weakness and their only option would be further QE. That is a really scary thought.

Noted bear, Peter Schiff, CEO of Euro Pacific Capital, said the word "patient" was always a straw man and the fed has been bluffing the entire time. They have to pretend they are close to raising rates in order to keep some volatility in the rates and prevent them from declining even further. Some countries in Europe now have negative rates and Yellen does not want that to happen in the USA. Therefore they have to keep up the charade that rate hikes could come at any time even though economics continue to weaken. A large portion of the new jobs each month are part time because people need to eat. People with college degrees are flipping hamburgers because there are no full time jobs available.

Ray Dalio, founder of the $165 billion hedge fund group Bridgewater Associates, said in a note to clients the Fed is risking a 1937 style market slump when it finally raises rates. Christine Lagarde, head of the IMF, warned on Tuesday that US rate increases could trigger instability in emerging markets, leading to a re-run of the Fed-induced "taper tantrum" of 2013.

Dalio said, "If one agrees that either a) we are near the end of the developed country central bankers' ability to be effective in stimulating money and credit growth or b) the dollar is the world's reserve currency and that the world needs easier rather than tighter money policies, then one would hope that the Fed will be very cautious about tightening." For this reason our funds are avoiding concentrated investments at this time.


China finally admitted they lowered their growth targets for 2015 to 7% GDP but they also admitted it would be "tough to reach these levels." Bloomberg's Michael McDonough posted the chart below showing that the Chinese economy, even with all the bogus numbers in the system, is nowhere near 7% GDP. This is important because China is the second largest economy in the world.

Bloomberg Chart (Original Link)


The P5+1 talks with Iran over their nuclear program came to an abrupt halt last week after Iran suddenly demanded that all sanctions be lifted immediately or there would be no deal. The Iranian negotiator said this was a deal breaker and it was not negotiable.

Under the current P5+1 proposal the sanctions would be lifted after Iran complied with all the conditions in the proposal and the IAEA certified their compliance. Since they were caught violating the interim deal just last week and the odds are about 100% that they would violate any new deal that means the sanctions would never be lifted. The western nations believe even in a best case scenario where Iran cooperated fully it could take as much as two years for complete verification of compliance and the sanctions to be lifted.

Western negotiators are kidding themselves if they believe they can do a deal with Iran and that Iran will not cheat. They have always cheated on every deal they ever signed and they are not likely to change that pattern when they are this close to a nuclear weapon.

Former CIA Director, General David Petraeus, said last week that Iran was a much bigger threat to the Middle East and the U.S. than ISIS.


Over the last 25 years the last week of March has been negative 17 times with an average S&P decline of -1.6%. Beware the week after March quadruple option expiration.

Enter passively and exit aggressively!

Jim Brown

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"The problem with socialism is that you eventually run out of other people's money."

Margaret Thatcher