The Dow gave back -200 of the +263 points it gained in Monday's monster short squeeze. Giving back that many points on the last day of the quarter when retirement money should be flowing into fund accounts is not a good omen for the days ahead. The morning started out slightly negative but selling accelerated late in the afternoon.
The S&P and Nasdaq have risen for nine consecutive quarters and but the Dow broke its string after Tuesday's loss pushed it negative by -0.26% for the quarter. The Dow had the most triple digit swings in Q1 since the Q4-2011. The market's momentum has begun to fade with only the Russell 2000 (+3.99%) and the Nasdaq (+3.48%) posting decent Q1 gains.
The graphic below shows the Q1 gains and losses for the major indexes. The biotech sector was the big winner with +16% and crude oil the biggest loser at -11.3% despite a strong rebound in March.
There were no headlines this morning to account for the market decline. However, Monday was purely a short squeeze after comments from a PBoC governor suggested they could launch a new stimulus program in the near future. Also pushing stocks higher was merger Monday. A flurry of acquisitions helped to power stocks higher. United Health (UNH) will acquire pharmacy benefit manager Catamaran (CTRX) in a deal worth $12.78 billion. Drugmaker Teva Pharmaceuticals (TEVA) said it would buy drug maker Auspex (ASPX) for $3.5 billion. Horizon Pharmaceuticals (HZNP) is buying Hyperion Therapeutics (HPTX) for $1.1 billion.
When there was no rebound on Friday after a -414 point Dow decline for the week the outlook for this week was mixed at best. The short squeeze capitalized on the heavily negative outlook from Friday and everyone that went into the weekend short was severely squeezed at the open on Monday.
Today was simply a return to the sentiment from last week. Today should have been positive from quarter end retirement contributions so the lack of positive market suggests we are still going lower.
On the economic front the Intuit Small Business Employment Index showed hiring was flat in March at +0.7%. Businesses with less than 20 employees added 15,000 jobs in March and the same pace as February. However, hours worked declined -0.35% and compensation declined -0.16%. Small businesses normally rely more on walk in foot traffic and severe winter weather could have impacted the totals.
The Case Shiller Home Price index showed that home prices rose +4.6% in January compared to +4.3% in the prior report. This is a lagging report and the market ignored it.
Consumer Confidence for March rose significantly from 96.4 to 101.3. The February decline from January's 103.8 high was almost completely erased. The present conditions component declined from 112.1 to 109.1 but the expectations component rose from 90.0 to 96.0. Auto buyers increased from 11.8% to 12.8% while prospective home buyers declined from 5.6% to 4.5%. Prospective appliance buyers declined from 50.0% to 48.4%. Consumers are not spending their gas savings but using it to pay down credit cards and existing loans.
The economic calendar for the rest of the week is heavily weighted towards employment reports. The estimates for the ADP and Nonfarm payrolls have been fluctuating about 15-20K every couple of days as analysts rethink their positions. The ADP is now expected to show a small gain to +240,000 and the Nonfarm Payrolls are expected to show a decent decline from 295,000 to 248,000. Bear in mind that analysts are all over the map on these estimates because of the weak economic reports for the last month. There is a strong possibility we could get a negative surprise.
The Nonfarm Payroll report is on Friday and the market will be closed for Good Friday. This means investors will not be able to trade on the report until Monday and a three day weekend is a lifetime if you are positioned in the wrong direction. This makes the next two days critical for positioning and you better be very confident of your positions going into Thursday's close. The ADP report on Wednesday will give traders a potential heads up for their trades ahead of Thursday's close.
The ISM Manufacturing on Wednesday will also be important. With economic reports weakening this is the proxy for all of April. If the ISM comes in weak analysts will project that forward into April. The Texas Manufacturing Outlook yesterday fell from -11.2 to -17.4 and Texas is supposed to be an economically strong state. The Kansas Fed Manufacturing Survey a couple days before declined from 1 to -4 in a continuing series of disappointments. Analysts will be looking at the ISM for hope for the future.
This is going to be a short commentary tonight. Our Internet was down all afternoon and did not come back up until 8:30 ET. It is really hard to do research without the Internet. What did we do 20 years ago? We listened to our brokers and watched the nightly news at 6 & 10 and that was all we had. Think how much smarter and better informed investors are today.
In stock news Charter Communications (CHTR) announced the acquisition of Bright House in a $10.4 billion deal. This will give Charter a bigger footprint in California, Florida and Michigan. Charter will pay for the deal with $2 billion in cash and a mix of common and convertible preferred stock.
Bright House has about 2.5 million cable subscribers. Charter lost out on the Time Warner deal last year when Comcast agreed to pay $42.5 billion. However, Charter agreed to take control of 3.9 million Comcast cable-TV customers in order to make the approval process easier for the Comcast deal. That was a heck of a consolation prize! Time Warner has a right of first offer on the Bright House transaction but is not expected to take it since the Comcast acquisition is still in progress.
Priceline (PCLN) was upgraded from hold to buy at Stifel Nicolaus with a price target of $1,400. The analyst said the conditions in Europe were improving and the company had been giving conservative guidance. However, over 70% of foreign bookings have exposure to foreign currencies and Priceline was going to have to manage that headwind. Travel to Europe is increasing thanks to the strong dollar buying more European goods and services and that was seen as a positive for Priceline.
Dyax (DYAX) shares rallied +50% on heavy volume after the company said an early-stage study showed that drug DX-2930 designed to treat hereditary angioedema, a rare swelling of the extremities, was safe to use, achieved all primary goals and reduced attacks. The drug was granted a fast-track designation from the FDA.
Conn's (CONN) declined -6% after the company reported a worse than expected -44% decline in Q4 profits. The company reported earnings of 42 cents compared to 75 cents in the year ago quarter. Revenue increased +18% to $426.8 million. Analysts were expecting 64 cents and revenue of $421 million. The company said it was exploring strategic alternatives including the sale of its loan portfolio and will stop selling electronics and stick to furniture.
Orthofix (OFIX) reported earnings of 17 cents and said it had entered into an option agreement to acquire eNeura. Orthofix has 18 months to exercise the option. Orthofix has agreed to provide a $15 million loan to support SpringTMS in the U.S. and Europe. If the option to purchase eNeura is exercised, Orthofix will pay $65 million to consummate the merger and eNeura will repay the unpaid principle under the loan. Shares rallied 15% on the news.
Sprouts Farmers Market (SFM) rallied +5% after Morgan Stanley named the company to its "Best Ideas" list. MS said now was a "very attractive" time to buy into one of retails best growth stories. Shares had pulled back after the company issued cautious guidance of 20% earnings growth after posting nearly 50% in the prior two years. Morgan said Sprouts had a history of beating expectations.
Crude oil did not help the market today with a -$1.19 decline in regular trading and continued its fall in afterhours with another -40 cents. Multiple analysts are reiterating their call for lower $40s or even sub $40 prices in the weeks ahead. This pressured all the energy stocks and weighed on the Dow and the S&P.
The S&P declined -18 points to close just above light support at 2065 to eras all byt 6 points of the Monday gains. The index gapped lower at the open and did not even retest the high resistance at 2089 from Monday. The opening print was 2084 and it was all downhill from there. The next level support is now the 100-day at 2060 and the early March lows at 2040. Without a sudden reversal of direction I think that 2040 level is going to be tested.
The two-year chart on the S&P has been trending pretty much straight up. However, over the last three months the upward momentum has slowed and as you can see in the chart below the tops of the candles are moving farther and farther away from the top of the channel. There is a good chance we are going to have a retest of the uptrend support in the 1985-2000 range. The critical question will be whether that 1985 level holds given the weak estimates for earnings for the first three quarters of 2015. The uptrend support is almost identical to the 50-week moving average, which is also a critical support point.
The Dow only had three components that were positive with the heaviest weighted stocks losing the most points. Goldman, Boeing, IBM and Apple were the biggest losers and helped to drag the index significantly lower.
Art Cashin said there was $1.5 billion in stock for sale at the close on the NYSE. That was a lot of fund selling and suggests there was a race to the exits ahead of quarter end and the ADP Employment report before the open on Wednesday.
The Dow made a lower high and the odds are good it is heading for a lower low in the days ahead. Support at 17,620 is likely to be tested and possibly broken. That would then target 17,130 and the support from January.
The Nasdaq appears to be headed for a retest of support at 4850 and that level better hold or the broader market could accelerate lower. The biotechs have been supporting the Nasdaq while chip stocks and solar stocks have been erratic. Tuesday's -46 point drop came mostly in the last few minutes of trading and futures continued lower after the close.
The Small Cap Russell 2000 lost -5 points today but continues to hold the high ground. The index is only 14 points away from a new closing high. An analyst mentioned today that S&P stocks with no exposure to Europe were up +0.5% for the year while those with exposure to Europe were down an average -1.8% for the year. This is even truer for the Russell stocks with the index up +4% for the year. As long as the R2K holds above the 1230 level from last week the broader indexes should not decline too far.
I would remain cautious for the rest of the week after the return of the triple digit volatility. The S&P made another lower high and should it make a lower low in the next couple days it would be very negative. The S&P futures accelerated lower after the close and at one point were down -25 points. Unless there is a miracle recovery the market open on Wednesday is going to be ugly.
There is always the possibility that today's flush was some sort of technical selling or portfolio rebalancing for the end of the quarter. This was the first losing quarter for the Dow after 8 consecutive winning quarters. This could be a warning for the weeks ahead.
Enter passively, exit aggressively!
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