The markets are going nowhere. Volume is still declining, earnings are eroding, economic growth is flat and everyone is waiting on a correction. If that correction does not come soon this is going to be a very boring summer.

Market Statistics

The U.S. markets are following the overseas markets and the negativity caused a -115 point decline in the Dow at the open. The dip buyers showed up instantly but volume dried up as the Dow approached resistance at 18,100.



The Dow has returned to the bottom of its formation and any further decline is going to start pushing more investors to the sidelines. There is still plenty of support in the 17,600-17,800 range but once that uptrend breaks we could see the selling increase.


The economics this morning were mixed as usual. The Factory Orders for April declined -0.4% compared to a 2.2% rise in March and expectations for zero for April. Orders for defense capital goods fell -11.3%. Nondefense capital goods excluding aircraft fell from +1.6% to -0.3%. Durable goods orders declined from 5.1% to -1.0%. Backorders slipped to -0.1% for the fourth month in contraction out of the last five months.

The NY ISM rose slightly from 681.7 to 683.7. However, the current conditions component declined from 58.1 to 54.0 and the six-month expectations component fell sharply from 73.4 to 61.8. The employment component declined from 60.0 to 57.3. Revenues also fell sharply from 68.8 to 55.6

The severity of the declines in the components suggests business conditions are starting to fade in New York. This report is not widely watched so it really did not move the market.

The report that did move the market was auto sales for May. Sales rose to an annualized 17.79 million units and the strongest pace since the cash for clunkers program in May 2005. Spring always brings out the car buyers but lower fuel prices are helping fuel the enthusiasm this year.

The average age of currently owned cars is 11.4 years according to an IHS Automotive study based on Polk Co. registration data. The rising age of the fleet is expected to reach 11.7 years by 2019. The average trade-in is 6.5 years old. There are currently about 257 million cars in the USA.

As the fleet ages it causes the upgrade cycle we are seeing today. People are seeing $100-$150 in gasoline savings per month and they have not been spending it in the retail stores. Apparently they are upgrading their cars and iPhones.

The strong dollar is hurting sales abroad but the U.S. market is surging as a result of new models and higher gas mileage ratings.

The positive auto sales data caused treasuries to sell off and yields to rise. The yield on the ten-year treasury spiked +3.37% to close at 2.266% for the second day of strong gains. The rising yields weighed on equities.


The dollar fell sharply with a -1.5% drop after spending a week at the 97.50 level on the Dollar Index. The weak factory orders report pushed the expectations for a rate hike farther into the future. On Monday the Fed's preferred inflation indicator, the PCE, showed no inflation with a trailing 7 month rate of -0.1% and a 12-month rate of only +0.1%. With inflation this low the Fed's rate hike plans just keep slipping away.


The Greek deadline playing out in Europe also weighed on the U.S. markets. Reports of offers, deals and ultimatums created headlines for the last two days. Late today the EU Finance Ministers reportedly agreed on a last ditch ultimatum for Greece but the odds are good Greece will not agree. Time is growing short for Greece with 1.5 billion euros of payments to the IMF due over the next three weeks. If Greece does not agree to the EU deal there is 7 billion euros of bailout funds that will expire at the end of June.

Because of the impending payment dates and deadlines the odds of something happening over the next week or two are very good. The market should breathe a sigh of relief if that happens even though a deal would have no direct impact on the equity markets.

The report schedule picks up again tomorrow. The ADP report is expected to show a gain of +192,500 private jobs. Another forecast miss would send investors scurrying for cover ahead of the nonfarm payrolls on Friday. Nicholas Colas from Convergex, is predicting a range of 140k-160k on the nonfarm payrolls because of all the weak employment components in the regional reports and the jump in weekly jobless claims. He also predicts the Fed is going to hike rates in 2015 regardless of the economy just so they can get the process started and end all the speculation.

If the payrolls come in around his expected range that will push any rate hike even farther out. Various Fed heads have said they would like to see payrolls at 200,000 or more for "several months" before they can hike rates.

The Fed Beige Book is also out Wednesday afternoon and while the information is important it will have a bullish bias because it is produced by the Fed. The report rarely has a bearish outlook.


Stock news was pretty muted today as well. There were a few earnings but nothing exciting. PVH Corp, the old Phillips Van Heusen, posted earnings of $1.50 that easily beat estimates for $1.38. Without the impact of the strong dollar earnings would have risen +20% to $1.77 per share. Revenues declined -4.3% to $1.879 billion but that still beat estimates slightly. The Calvin Klein brand saw revenue rise +5% on a constant currency basis. The Tommy Hilfiger segment rose +1% on a constant currency basis. Heritage Brands revenues increased +5.1% with a +14% spike in Van Heusen comps.

The company raised guidance for the full year for a 3% rise in revenue. Earnings expectations rose from $6.75-$6.90 to $6.85-$6.95. That includes a -$1.25 per share impact from currency headwinds. Earnings are expected to rise 11-14% over 2014, up from the prior forecast for a 10-12% rise. The CEO said free cash flow was allowing them to pay down debt and they were open to further acquisitions. Shares rallied +7%.


Dollar General (DG) reported earnings of 84 cents compared to estimates for 82 cents. Same store sales rose +3.7% but missed estimates for 4.1%. The company said sales were expected to rise 8-9% for the full year with earnings in the range of $3.85-$3.95. Shares rallied +3%.


Calavo Growers (CVGW) reported earnings of 49 cents compared to estimates for 48 cents. Revenue was $221.6 million. The company said double-digit avocado volume growth was accelerating. Mexican avocado operations were "hitting on all cylinders" with pricing and availability trending favorably. Demand is increasing and shipments will ramp up in Q3. Shares rose +8% on the news.


G-III Apparel (GIII) reported earnings of 15 cents beating estimates by 8 cents. Revenues rose +18% to $433 million compared to consensus of $405.8 million. They guided for Q2 at 15-20 cents EPS and the consensus was 19 cents. They did raise full year estimates for 2016 from $2.52-$2.63 to $2.66-$2.76 compared to analyst estimates at $2.63. Shares rallied +3.3%.


After the close chip maker Ambarella (AMBA) reported earnings of 71 cents that beat estimates by 13 cents. Revenues rose +73.6% to $71 million, which also beat consensus of $67.1 million. Gross margin was 64.8%. Ambarella produces the chips in the GoPro cameras as well as several other brands and applications. Shares were flat in afterhours.


Walt Disney (DIS) unveiled a new line of "wearable" toys to get kids off the couch and interacting with other kids. The new line is called "Playmation" and was created in partnership with Hasbro. The first products will be Iron Man gloves and Hulk fists. Kids can interact with other toys in the line or follow narrated stories called "missions" that they can download. The new toys will start at $120 and work with Bluetooth. Multiple kids can join together to carry out the missions or plan their own games. Disney said the toys are expected to bring in about $500 million a year to start and when more characters and games are added that will increase to more than $1 billion a year. Link to news release and video


Crude oil rallied +2% in the regular session to $61.31 ahead of Wednesday's inventory report. Inventories are expected to have declined by another 2.0 million barrels. There may also be some short covering in the market ahead of the OPEC meeting on Friday. While nobody expects any change in production there is always that risk.


Markets

Dip buyers rescued the market once again with the opening dip to -115 on the Dow. The drop stopped at 17,925 and only a handful of points above the 100-day average at 17,919. This has been support for the last two months.

The S&P touched the 50-day at 2099 and the rebound was immediate despite not being a material support point in recent months. The 100-day average is the real target at 2082.

The S&P has a clear pattern of lower highs since the historic high back on May 21st at 2130. The index is only down -21 points from that high close but the weakness appears to be growing. The long tails on today's candle shows how undecided traders really are. There was a big dip, big rebound but the index closed right in the middle. In theory that suggests buyers and sellers are about equal. However, the solid trend of lower highs suggests the sellers are going to win.


The Dow resistance at 18,100 has been solid and today's intraday dip was a four-week low. If we have any weakness in the payroll reports the odds are good we are going to test support at the 17,800 level.



On the bright side the Nasdaq is refusing to give up any ground. The Nasdaq Composite has tested resistance at 5100 almost every day for the last two weeks. Where the Dow looks poised to move lower the Nasdaq looks poised for a breakout.

Every dip is quickly bought but there are plenty of sellers at 5097. Apparently they are content to wait right under that 5100 level but eventually they are going to run out of stock OR they will decide not to wait and dump it all at once on some negative headline. The Nasdaq is holding its gains so well I suggested to James to add a QQQ long on Wednesday just in case we do get a breakout on a strong payroll report.

Support at 5050 has also been strong with back to back declines to that level over the last two days. Both times the dip was bought instantly.

The Nasdaq is well above the 100-day average that is threatening to be tested on the Dow/S&P.



The Russell 2000 is also holding its gains although a little farther away from the recent highs. The resistance at 1260 was tested again today as was initial support at 1240. To illustrate the tie between the buyers and sellers the index closed at 1251 and right in the middle of that range.

Just to emphasize that the small caps are doing ok the Russell Microcap ($RUMIC) closed at a six-week high today and over resistance from the last two weeks. If fund managers are buying microcaps they are not really scared of a June decline. This is one way to boost your beta going into the June window dressing for the first half of the year.



Over the last three months the Dow has traded in the smallest range in 60 years. Volume continues to decline (5.8 billion shares today) as we head into summer and it is a tug of war between the remaining buyers and sellers.

While the Dow and S&P are showing weakness the Nasdaq and Russell are not. The Dow Transports even posted a gain for the last two days.

The markets are coiling with a tremendous amount of cash on the sidelines. Eventually a direction will appear and the move could be explosive. However, there is no expiration date on this sideways consolidation. We will know it is over only when the break out/down appears.

One analyst was laying out his reasons today on why the market could remain lackluster for months. April had record stock buybacks to power it higher. May had record M&A deals to add to gains. Recent IPOs have been mixed with several losing ground almost immediately. NYSE margin debt is at a record high. Everyone that wants to be long is already long on margin. He said there was no catalyst ahead to really power a market move higher.

Everything he said is true and you have read it in these pages in various forms. However, bull markets climb a wall of worry and the adage "don't short a dull market" immediately comes to mind.

While nobody can accurately predict market direction we can predict movement. The odds of a strong directional move increase with every day where nothing happens. The market has not seen a 5% decline in 2015 or a 10% decline in over three years. That is no guarantee one is about to hit but we all know it will eventually arrive. What we also know is that dip buyers are alive and well as evidenced by the last several intraday dips. Once those buyers disappear our troubles will begin.

These are the kind of markets that tend to produce short squeezes. Sellers become convinced that a dip is coming and they load up on shorts at every lower high. Eventually some headline appears and it is off to the races as they rush to cover. Let's hope that is soon.

I remain cautiously long until proven wrong. Translated that means maintain a few long positions but retain some cash and keep your stop losses in place.

Enter passively, exit aggressively!

Jim Brown

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