Friday's fear of the weekend sell off turned into a monster short squeeze with the Dow opening up +340 points. Although the indexes weakened slightly by late morning, it was not enough to save the shorts and they began to frantically cover by late afternoon.
The fear of an Asian market meltdown over the long weekend sent longs to the sidelines on Friday and apparently there was some serious shorting in progress as well. Some shorts covered into the Friday close but based on today's opening spike there were many more expecting that weekend Asian meltdown.
The Japanese market closed at a new seven-month low with a -2% decline but it did not impact the U.S. markets. The Shanghai Composite closed up +2.9% today despite some lousy trade data for August. The rebound in the Chinese market helped overcome the drag from Japan. China announced a new circuit breaker for the market that would halt trading on any large market swings.
There were only a couple economic reports in the U.S. and none that were market movers. The Manpower Employment Outlook showed a decrease in hiring plans for Q4. In Q3 20% of respondents said they were planning on hiring. For Q4 that number declined to 15%. Those planning on increasing employment fell from 24% to 21% and those planning on cutting positions rose from 4% to 6%. Those planning no changes rose 1 point to 71%. However, even though the number of firms planning on increasing employment declined slightly it still represents a positive trend.
The NFIB Small Business Optimism Index rose slightly from 95.4 to 95.9 in August. While that was the second consecutive gain, the index has not recovered the decline from the May high at 98.3. June saw a significant -4.2 point drop. The number of firms planning on increasing employment rose from 12% to 13%. The net number of respondents expecting the economy to improve fell from -4% to -6%. Those with current job openings rose from 25% to 29%.
The Federal Reserve Labor Market Conditions Index rose from 1.8 to 2.1 for August. That is the highest level since December and a rebound from the -1.0 low in March. The index is made up of 19 labor market indicators. There are an equal number of respondents that feel jobs are plentiful and those that feel jobs are hard to get. That is the first time since 2009 that the net was not negative with more feeling that jobs were hard to get.
Consumer credit rose +$19.1 billion in July compared to +$27.0 billion in June. This is a lagging data point and was ignored.
China's exports declined -5.5% in August and are now down -1.4% for the first eight months of 2015 and the decline is accelerating. At the same time imports declined -14% in August for the 10th consecutive monthly drop. The decline shows how much imports have slowed for commodities like copper, steel, aluminum, etc. A sales manager at Shanghai Steel Fashion Industrial Company, an exporter of prefabricated steel structures, said business declined -40% in August. The devaluation of the yuan has caused a sharp drop in China's foreign reserves by more than -$100 billion in August alone. Analysts believe the drop in the yuan was not enough to help China's exports. Analysts at Nomura say the pressure on China to devalue the yuan even further is now the strongest since 1994.
Late in the day, the World Bank warned the Fed not to raise rates until 2016 and said a rate hike could cause panic in the emerging markets. Now the IMF and World Bank have both warned the Fed not to hike.
China's inflation data is due out on Wednesday and Retail Sales on Saturday.
The economic reports on Wednesday are normally ignored.
The big event on Wednesday is the Apple product announcement. Apple shares rose $3 today ahead of the event. Typically, the actual announcement produces a decline in Apple shares in a sell the news event. Analysts expect the update on iPhone 6, news for the Apple TV and a monster 12.9 inch iPad for business users. The event begins at 1:PM on Wednesday.
Not to be outdone, Amazon (AMZN) is about to announce a $50 version of its Android Fire tablet. This will be a 6-inch screen and will be targeted at kids in middle class families. The overall game plan will be to bring in more consumers into the Amazon retail space. The Fire tablets have embedded retail advertising unless you pay extra to skip the ads. Amazon took a $170 million hit on the Fire phone but they are still plugging along on the various tablet models.
Amazon recently announced they were going to let Prime members download movies to watch offline. This is to better compete with Netflix and Hulu, which only let you stream programs when you have an Internet connection. They are billing it "anywhere, anytime viewing."
Disney (DIS) signed a deal with Amazon and Microsoft to offer their cloud based movie service on the devices from those firms. Disney already has deals with iTunes, Google Play and Vudu. Disney's "Movies Anywhere" launched in February 2014. Users can store their purchased Blue-ray and DVD purchases in the cloud and watch them anywhere on any device. Now Xbox users and Amazon Fire tablet and Fire TV users will be able to access the service through an app, which will also allow them to purchase new movies online. On Sept 15th, Disney Movies Anywhere will also be available on Roku and Android TV. This is a home run for Disney given their extensive catalog of movies available for purchase and viewing.
Apple is expected to announce an upgrade to Apple TV on Wednesday. All of these video streaming offerings are killing Netflix. All of these offerings add to the perception that Netflix is losing viewers. I said perception since there is no proof at this point. They continue to add customers every quarter but investors are racing to the exits.
Shares of Netflix declined another $4 today on worries that the streaming business is becoming a lot more competitive.
Alibaba (BABA) lost -5% after it lowered guidance for gross merchandise volume (GMV) due to weaker consumer spending in China. The company said GMV would grow in lower to mid-single digits compared to prior estimates. The AliExpress business is expected to slow to low double digits due to weakening currencies in markets such as Russia and Brazil. Alibaba has a lockup expiring on 1.2 billion shares on September 20th. This guidance will cause even more pressure ahead of the expiration.
After the bell, Yahoo announced that the IRS denied the company's application to spin off its Alibaba shares in a tax-free distribution into a company called Aabaco. While the IRS did not conclude definitively that the spinoff would trigger taxes under U.S. law, it declined to provide a ruling that it would be tax-free. In theory, Yahoo could continue with the split relying on an opinion from outside lawyers but that would be extremely risky. Yahoo said "work proceeds on the Aabaco spin-off plan. The company will continue to carefully consider the company's options, including proceeding with the spin-off transaction on the basis of an opinion of counsel."
The 15% stake in Alibaba is now valued at about $23 billion since BABA shares have declined -50% since their $119 high in November. The stake was worth more than $40 billion in January. Yahoo paid 40% in capital gains taxes in its prior BABA share sales. Yahoo paid $1 billion for 30% of Alibaba in 2005.
Alibaba shares were flat in afterhours but Yahoo (YHOO) shares declined to $29.75. You may remember the news after the close on Friday that the SVP, Global Controller and Chief Accounting Officer resigned unexpectedly and Friday the 11th will be his last day. The resignation with no notice and short fuse suggested there could be some problems at Yahoo. Now we know what they were.
JD.com (JD) is a competitor to Alibaba and lately it has shown some surprising growth, unlike Alibaba. In August, JD reported revenue that rose +61% to $7.4 billion and easily beat estimates. For comparison Alibaba reported a +28% rise in revenue to $3.26 billion and missed estimates. That was Alibaba's slowest revenue growth in four years.
Today JD announced a $1 billion stock buyback program using its excess cash. Shares spiked to $26 on the news but faded to gain +5% and close at $24.
MKM Partners upgraded shares of Micron (MU) to a buy from neutral with a $23 price target. The analyst said the risk reward has turned positive as we approach 2016 and valuations are attractive at 1 times "true" book value. MKM said there was a $5 billion opportunity over the next two years because the 3D Crosspoint memory breakthrough is undervalued and not recognized in other analyst notes. The new memory technology was announced in July. The analyst expects Micron to be rewarded with premium pricing and premium margins. Shares rallied $4% on the news. Since Micron is down from $36 in December to $17 today, that new price target of $23 is hardly a big upgrade. There is solid resistance at $20.
Bank of America (BAC) was upgraded from neutral to buy at Nomura with an $18 price target. Nomura said the bank was best positioned for the tough new CCAR capital rules. Shares rose +3% to $16.16.
Accenture (ACN) was upgraded from hold to buy at Argus Capital. They gave the stock a $108 price target with shares at $97. They said the company was executing well and expanding margins. Shares rose +3%.
FitBit (FIT) was upgraded to overweight by Morgan Stanley with a $58 price target. The broker said unit sales were up and they were realizing greater operating leverage. Shares rallied +11% to $35.46.
Constellation Brands (STZ) was downgraded from top pick to outperform at RBC Capital. This was a valuation call based on their $145 price target. Shares closed up +1% at $129. Since the market crash, they have seen strong support at $127. I would be a buyer over $130.
Deutsche Bank upgraded PNC Financial (PNC), US Bank (USB) and Wells Fargo (WFC) saying now is the time to buy regional banks. USB has the highest returns in the industry. Wells Fargo can capitalize on higher interest rates with its mortgage business and PNC management was continuing to cut costs.
Orbital ATK (OA) was upgraded to buy at Goldman Sachs with a $91 price target. Goldman said the company had multiple growth drivers and generated strong cash flow. I am a fan of OA. This is a good company with a strong government business. Shares rallied +5% on the news. The upgrade powered the entire sector with LMT, NOC and GD also posting strong gains.
GE gained +4% after the company won EU approval to acquire Alstrom's power business for $13.9 billion. They had to agree to sell some assets to avoid owning too large a share of the power business in France. This is the largest deal ever for GE. This combines the two largest manufacturers of power plant equipment and will help GE continue to move more into industrial manufacturing and away from finance. GE expects to save $3 billion in costs over the next two years. Alstrom has 500 gigawatts of installed power around the world and GE has 1,000 gigawatts.
Teco Energy (TE) rallied +25% on news they would be acquired by Canadian utility, Emera Incorporated. The acquisition price is $27.55 per share in cash. The deal is not expected to close until the middle of 2016. Investors can cash out now by selling the shares into the market at the closing price of $26.34 or hold on for the 68 cents in dividends and the additional $1.21 in cash at the close. Personally, I would take the money and run. You can make a lot more than $1.89 by reinvesting the $26.34 into some other stock over the next nine months.
Somebody knew about this deal in advance. Last week somebody bought 35,000 of the November $22.50 calls for a few cents each. Today they are worth $3.90. The owner of those calls should expect a visit by the SEC soon.
Crude oil declined to $44.52 early in the session but rallied sharply after JP Morgan raised demand estimates by +150,000 bpd for the rest of 2015. However, traders should have listened to the rest of the commentary. JPM said the "US supply decline has been insufficient to alter the price outlook." Also, "while part of the gains from the August lows have been erased we expect prices to continue to fall into quarter end."
China and the Asian region are key drivers to demand and recent economic indicators are suggesting demand growth could slow. "We expect downside from crude prices from current levels as the balance of probabilities favor lower prices in the weeks ahead as slowing demand growth, rising Middle East production and the seasonal dip in refinery crude runs add pressure to the crude markets." JPM is expecting WTI to average $47.50 well into 2016. They recommended shorting the December Brent crude futures.
WTI has held on to the $45 level since the prior week's short squeeze. However, that is not likely to continue as inventory levels begin to spike into the fall season.
Also providing positive sentiment for WTI this morning was a report out of Mexico that they would be willing to cut production along with OPEC if the cartel decided to try and manage prices in the future. This is BS since Mexico is in serious economic trouble because of the 50% decline in crude prices. They cannot afford to cut a single barrel and would likely "say" they are cutting but continue to produce at 100%. In other news, Russia talked down the idea from last week that they would be willing to cut production along with OPEC. No surprise there.
Today was an interesting day. It was a giant short squeeze after the second worst weekly loss this year. However, there was no race to the exits at the close. It was as though investors had turned off the consistently bad news from Asia and decided to just buy stocks. Only 12 stocks on the S&P-500 closed in negative territory.
After repeated days where early gains were sold and the market closed on its lows we actually saw the market close on its highs and the S&P futures are positive in the overnight session. That is also unusual. Recent trading days have seen the futures decline after the regular session. There is a lot of darkness before morning but that is an encouraging sign.
The S&P gained +48 points to close at 1,969. I mentioned in the weekend commentary that we could easily see a close at 1,971 or 1,871 on Tuesday depending on what happened in Asia. That upper guess came very close.
Unfortunately, the S&P has major resistance at 1,975 and 1,990 give or take a couple points. If we were to close above that 1,990 level this week, it would be a signal that the bottom is in and it could start a race back to the highs. Those are big IFs but entirely possible. Over the prior week, the S&P tested the 1,912 level twice over a four-day period and there were rebounds both times. Today's low was 1,927 and well above that support.
The Dow was powered by gains in all 30 stocks with major gains in some of the high dollar stocks that have the biggest impact on the Dow. Goldman +5.50, Boeing +4, etc. The majority of the Dow stocks were heavily shorted with only 5 Dow stocks having even a hint of a positive chart. That means a short squeeze found a lot of dry powder waiting in the Dow stocks.
It would be a waste of time to try and apply any form of rational thinking to the Dow rebound. It was not a case of investors suddenly deciding to buy Dow stocks. It was purely a short squeeze and nothing else.
Support is now 16,000 and resistance 16,500 and 16,666.
It was a similar case on the Nasdaq. The heavily shorted stocks were the biggest gainers and the index rebounded very close to resistance from the 31st at 4,830. The biotech sector was a big lift with nearly a +4% gain. The $BTK closed right at the resistance of the 200-day average.
The Nasdaq has decent resistance at 4,830 and then 4,900. Further gains this week will be a good indicator of investor sentiment.
The Russell 2000 posted decent gains but it was the weakest of the major indexes. This is due to the fact there were fewer shorts in the small caps. If the Russell can move above resistance at 1165, it could trigger some follow on buying and provide positive market sentiment.
Since 1990, the S&P has lost more than 1% in the first week of September 8 times. In 7 of those 8 years, the index finished the month lower with an average loss of -5%. Historically, the first 10-days of September are the best days of the month. Whether it is just a rebound from an oversold August or fund managers putting a little extra cash to work before the end of the quarter is unknown. The last 15 days of the month are normally ugly and lead to market bottoms in October, which is called the bear killer month.
I do not want to apply too much attention to historical patterns. Clearly there is nothing historical about the economic meltdown in China and potentially the first rate hike in nearly a decade. Every year stands on its own. I would like to think that the extreme volatility over the last three weeks has run its course and we will move higher from here. That may be wishful thinking but I can still wish for it. I still have a shopping list in case we do retest the lows. Be prepared for continued volatility in both directions.
Enter passively, exit aggressively!
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