The markets traded on both sides of zero on Tuesday and after being down significantly moved to nearly flat at the close. Initial support was tested as was resistance and the day ended with a tie.

Market Statistics

The Dow traded down to 17,715 before rebounding +100 points to 17,817 only to give most of it back to close at 17,761 and a -2 point loss. Ditto on the S&P with a drop to 2,072 and a rebound to 2,085 before closing right in the middle at 2,079 with a gain of less than 1 point. The scary index was the Nasdaq with a significant dip under prior support at 5,000 to 4,974 before rebounding to close at 5,013. Apple was the reason with a sharp drop to $125.62 before rebounding back over $128 intraday. Those of us wanting to buy Apple at $120 were cursing the rebound.

There were no earth shaking economics this morning but all the reports were positive. The NFIB Small Business Survey for May rose from 96.9 to 98.3 and the strongest showing since December. The job openings component improved from 27 to 29 and the economic expectations improved from -6 to -3 but still in negative territory. More than 14% of respondents said this was a good time to expand your business. That is the second highest reading since 2009. Everything else was basically flat.

The Job Openings and Labor Turnover Survey (JOLTS) showed a rise in the job opening rate from 3.4% to 3.7%. There are plenty of jobs available and layoffs are declining. Available jobs increased to 5.4 million in April and the highest level since 2000 when the report began. Hiring fell slightly from 5.1 million to 5.0 million. However, quits also declined from 5.1 million to 4.9 million.

The Manpower Employment Survey for Q3 found that 20% of respondents planned to hire in Q3, up from 18% in Q2. Only 4% planed to reduce jobs and that was flat with Q2. Most, more than 70% planned no changes to the number of workers.

Lastly the Wholesale Trade for April rose +0.4% compared to +0.1% in the prior report. Sales increased by +1.6%. Sales of durable goods increased from +0.9% to +1.2% while nondurable sales rose from -1.4% to +2.0%. This was a good report.

There is nothing of importance on the calendar for Wednesday. The retail sales report on Thursday is still the most important report for the rest of the week with expectations for a big rebound of +0.9%. There is a significant risk of disappointment if the number is weak.


The biggest news of the day came after the close when NetFlix (NFLX) announced that shareholders had approved an increase of 5 billion shares in order to split the stock. Currently Netflix only has 170 million shares outstanding. The company said it has no plans for selling shares to raise money or for any contemplated mergers.

Netflix shares rose +$20 ahead of the shareholder vote but unfortunately the company left investors out in the cold. CEO Reed Hastings said after the vote approving the shares that management will seek approval from the board "in due course" to pursue a stock split. Previously they had indicated they would announce a split after the shareholder meeting. I guess they didn't say how long after the meeting that announcement would be.


Target (TGT) increased its dividend by +7.7% to 56 cents and boosted its stock buyback plan by $5 billion to $10 billion. However, a few minutes later Target denied buyback expansion and pulled the press release from the website. The company said human error was to blame for the inadvertent press release. Apparently the board was planning on voting on those changes at the board meeting later tonight. Shares rallied slightly on the news since the odds are good the board will follow though tonight.


Lululemon (LULU) shares spiked $6.75 after the company reported earnings and same store sales that rose +6%. Earnings of 34 cents beat estimates of 33 cents and more than double the 13 cents earned in the year ago quarter. Revenue rose from $384.6 million to $423.5 million.

Shares spiked despite weak guidance for both the current quarter and the full year. For the current quarter LULU is forecasting 31-33 cents on revenue of $442.5 million. Analysts were expecting 34 cents on $439.5 million. For the full year the company is expecting $1.86-$1.91 a penny better than the prior forecast but analysts were expecting $1.90.


GE sold its sponsor finance business, Antares Capital, to Canada Pension Plan Investment for $12 billion. The finance unit had about $10 billion in loans on the books and the pension plan said the premium was justified. The plan has a tough time securing debt deals in the U.S. market that are backed by excellent credits. Canada Pension has about $215 billion in assets. This is the first deal since GE said it was planning on selling $200 billion in assets in its financial services division. Canada Pension said it was still open to talks on the $8 billion joint venture between GE and Ares Management. GE shares were flat on the day. It takes a lot to move GE shares with more than 10 billion shares outstanding.


Sears Holdings (SHLD) lost -$2.40 after reporting earnings Monday night that disappointed. Sears reported a loss of -$2.00 compared to expectations for a -$2.59 loss. Revenue declined -25% to $5.88 billion and missed estimates for $6.08 billion. Some of that miss was related to the separation from Lands End and the Canadian division. Same store sales in the U.S. were hammered with a -14.5% decline. Kmart comps fell -7% after a -2.2% decline in the year ago quarter. Sears said it was selling 235 Sears and Kmart stores to REIT Seritage Growth Properties. Sears will receive $2.6 billion in proceeds. Sears has long term debt of $3.2 billion and revolving debt of $3.275 billion. The company said lenders were willing to amend its current revolving debt facility to 2020.

Sears is still struggling and Eddie Lampert would probably like to just shoot it and put the chain out of its misery. Unfortunately he is into Sears up to his neck and he will have to keep fighting the problems for years to come.


FleetCor (FLT) announced a deal with Uber to provide drivers with a Partner Fuel Card for fuel purchases. Eligible Uber drivers will be able to buy gas on the card and have it deducted from their weekly earnings. It will also function as a loyalty card and provide "cents off" discounts at every station along with additional discounts at Exxon Mobil stations. Hundreds of thousands of Uber drivers will be eligible. FleetCor is a global provider of fuel cards and products to businesses with active fleets of vehicles. Shares rallied about $5 in afterhours.


Mattress Firm (MFRM) reported earnings of 33 cents that missed estimates by 6 cents after the close. They raised guidance for 2015 to a range of $2.50-$2.70 compared to analyst estimates for $2.62. Revenue estimates rose to $2.485-$2.535 billion compared to analyst estimates for $2.49 billion. The company said it was adding 20 new stores. Shares declined $1 in afterhours.


Gulfport Energy (GPOR) said it was purchasing additional acreage from American Eagle Utica and announced a secondary offering of 10 million shares to fund the purchase. The acreage was in three parcels consisting of 38,965 acres, 6,198 acres and 4,950 acres all in Ohio. The deal includes some production and 18 drilled but uncompleted wells. The combined purchase price was around $400 million. Shares fell about $2 in afterhours to $43.50.


Oil prices rallied +3.5% to close at $60.55 despite news from the EIA upgrading production forecasts for the U.S. in 2015. The EIA raised its production growth estimates from 530,000 bpd to 690,000 bpd for the full year. They lowered 2016 growth estimates by -160,000 compared to prior estimates for +20,000 bpd of growth. Basically they are expecting oil production to rise in 2015 and decline in 2016.

Traders blamed the rise in oil prices on the spike in gasoline prices ahead of the July 4th weekend. Gasoline prices tend to peak in early July and refiners are rushing to produce more gasoline to sell into this peak. This consumes more oil and reduces inventories. Once past the holiday we should see crude prices begin to decline.


The rising oil prices did not help the Dow Transports. The index declined again to close at 8,307 and just a handful of points away from a potential support failure that could lead to a drop to 8,000. The airline sector continues to plunge on worries over competition as well as the rising oil prices. The new airline ETF (JETS) hit a new low on the drop in the sector.



Markets

The S&P came to a dead stop on support at 2080 and -5 points under the 100-day average at 2085. This represents only a -2% decline from the recent high at 2130.

The low at 2072 was exactly the 150-day average, which has been support since 2012 with one exception last October. This is a key level and probably why the S&P rebounded almost instantly from the touch of that support. Unfortunately one intraday touch does not guarantee a continued rebound. That support level needs to be traded for more than 5 minutes and the rebound needs to be more robust. The initial short covering lasted about 30 minutes until 11:AM but then the index traded sideways the rest of the day.

A -2% decline from the highs is hardly a material correction. That suggests there may be more weakness ahead.


The Dow made another new two-month closing low but it did close well off the intraday lows. The support at 17,800 has failed and suggests we could see 17,600 tested. Much of the Dow's intraday decline was related to a $2 decline in Apple shares. Had Apple shares not rebounded the Dow decline would have been a lot worse. The rest of the Dow components were basically split between winners and losers and most of the moves were only fractional. This shows no conviction by either the buyers or sellers.

Resistance is now 17,800 and 17,900 and support 17,600.



The Nasdaq Composite broke character today with a drop well below support at 5000 to 4974. This was due mostly to the intraday drop in Apple and some weakness in biotechs. Netflix, Lululemon and Ambarella were instrumental in keeping the damage from being much worse. The Nasdaq rebounded to close over 5000 but the damage has been done. Traders will want to see support tested again on decent volume before they will want to buy the dip. The breakdown below 5000 was too easy and that probably put doubts into some investors about its ability to move higher.

Support is 5000 followed by 4975 with resistance 5025.



I have pointed to the strength in the Russell 2000 for the last several days as evidence there was no fear by fund managers. The Russell did decline today and it appears the resistance at 1260 is becoming stronger. Support at 1240 was not tested but the low was 1242 and that is very close.

That should be our directional signal for the rest of the week. If the $RUT moves below 1240 I would be a short term seller. The Russell rebalance trades will begin appearing late in the week and there is an FOMC meeting next week along with option expiration. All should weigh on the small caps.

Conversely should the Russell move over 1260 that would be a buy signal.


Volume continues to be weak with 5.5 billion shares on Monday and 5.8 billion today. The S&P internals are continuing to weaken. The percentage of stocks trading over their 50-day average has fallen to only 34.37% and the lowest level since October.


Those stocks trading over their long term 200-day average have now declined to only 56.91% and other than October that is the lowest level in years. This is a warning that market breadth is shrinking.


The percentage of stocks with a buy signal on the point and figure charts has fallen to 61.8% on the S&P.


All of these charts are telling us to be wary of the market. At this point I would be looking for a drop on the S&P to 2040 for a buy the dip entry. We may never see that level but that would be my ideal buy point.

Enter passively, exit aggressively!

Jim Brown

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