After a -460 point drop intraday on Monday and -110 intraday decline today the Dow actually finished slightly positive. Does this mean the January volatility is over?

Market Statistics

After the worst opening drop in January since 1932, the markets traded sideways for most of Tuesday. However, sharp declines in some big cap tech stocks kept the Nasdaq under pressure to close with an 11 point loss. Biotechs gapped open to provide an opening bounce for the Nasdaq but the sector rolled over to a loss late in the day and barely recovered to close with a 0.7 point gain.

Apple (AAPL) was a big drag on the Nasdaq and the Dow after a Japanese news outlet said Apple would slash production of the iPhone by 30% between January and March. The report said iPhone inventories have risen sharply in Asia, Europe and the U.S. because of lack of demand. Apple shares fell -$3 to $102.71. That short I recommended last Tuesday at $108.75 is looking pretty good today.

Apple suppliers Avago Technologies (AVGO), Skyworks Solutions (SWKS) and NXP Semiconductor (NXPI) crashed along with Apple on worries of slowing demand. AVGO fell -3.4%, NXPI -2.4% and Skyworks -6%.



The Asian markets all finished lower but well off their lows. The Shanghai Composite traded down -3% intraday. Had the Shanghai finished at the -3% level I am sure our markets would have also been negative.

The worry in China is that the six-month ban on insider selling expires on Friday and will allow pent up selling by those insiders. That worry added to the slowing economy is weighing on their markets.



In the U.S., the economic reports were not as bad as in recent days. The vehicle sales for December came in at a pace of 17.3 million, which was well below the November pace of 18.2 million and the forecast for 18.2 million. However, the total sales for the year reached 17.47 million and a record high. This was about 700,000 over the level seen in 2014.

Annual Sales

2011 12.7 M
2012 14.4 M
2013 15.5 M
2014 16.5 M
2015 17.3 M

Despite the record numbers for the year, vehicle sales are slowing. Light truck sales fell for the second time in three months while auto sales fell for the second consecutive month. Auto sales fell from 7.8 million to 7.4 million while light truck sales declined from 10.4 million to 9.9 million.

Foreign manufacturers did the best. Nissan saw sales increase 18.6%, Toyota 10.8% and Chrysler Fiat +12.6%. Ford sales rose +8.4% and GM +5.7%.

Semiconductor stocks were down after the semiconductor billings for November declined -0.3% from the +1.9% rise in October. This was the first monthly decline since July. Global billings were $28.9 billion in November and that is -3.0% below year ago levels. That is the biggest YoY drop since mid-2012. North American sales are now -7.1% below year ago levels.


Relatively speaking today's reports, although negative were the best in several days. On Monday, the ISM Manufacturing Index for December fell further into contraction to 48.2, down from 48.6 in November. December was the lowest level since the recession. All the major components were also in contraction.


The weak ISM followed the Chicago PMI last week that fell from 48.7 to 42.7 and the lowest reading since 2009. The estimate was for a rise to 50.1. Order backlogs fell -17.2 points to 29.4 and the 11th month in contraction. New orders fell from 44.1 to 38.8 with employment dropping from 51.6 to 46.8.

This followed the Philly Fed Manufacturing Survey that declined from +1.9 to -5.9 and the third month of the last four in contraction. New orders declined from -3.7 to -9.5 and back orders fell from +2.4 to -17.7.


Construction spending declined -0.4% and the weakest since November 2014.

Moody's Chart

The Atlanta Fed real time GDPNow forecast is now predicting only 0.7% growth in Q4 and dropping fast.


The U.S. economy is sinking fast and that is another reason our markets are weak. China's economy has now contracted for ten consecutive months with the December PMI numbers at 48.2 and the lowest since the recession.

Investors are worried the Fed is pressing its rate hike cycle because they want to get a few hikes completed before the U.S. falls back into recession. However, energy, commodities and manufacturing are already in a recession. Consumer spending is the only thing keeping economic our head above water.

Tomorrow is the first look at the December employment picture. Jobs are expected to decline but not materially. The ADP report is expected to drop from 217,000 in November to 190,000 in December. Typically, some employers reduce the workforce ahead of year-end in order to start the new year fresh. The Nonfarm Payrolls on Friday are expected to decline from 211,000 to 200,000. However, these forecasts are rarely accurate. If jobs suddenly tumbled more than expected after last week's bearish economic reports, it could impart some additional bearish sentiment to the market.

This is one set of reports where I would like to see some blowout gains that would support the Fed's stated outlook for an improving economy. Otherwise, the bears could gain a tighter grip on the market.


There were several ratings changes on stocks today. Analysts are sharpening their pencils and recalculating targets for 2016. First Solar (FSLR) rallied sharply on an upgrade from Goldman Sachs to buy, saying shares could rise 50% in 2016. They raised the price target from $61 to $100 and shares spiked +5 to $72. Goldman said FSLR was the underappreciated bellwether in the sector. However, Goldman cast some shade on the rest of the sector with a downgrade to neutral.


Fitbit (FIT) was crushed for an 18% loss after they announced a new watch at the opening day of CES in Las Vegas. Fitbit announced the Blaze smartwatch with features similar to Apple's Watch. The Blaze has a five-day battery life compared to Apple's 12-18 hours. The watch sells for $199.95.

However, UnderArmour (UA) also showcased a connected fitness system that included more functions than the Blaze. The UA system can connect to sensors in your shoe and has wireless headphones. Fossil said it will introduce more than 100 wearable products in 2016.

Competition in the wearable market is heating up fast and that means Apple needs to stretch out that battery life quick or be left behind in the smartwatch space. The competitor announcements crushed Fitbit shares today and it is only going to get worse.


President Obama proved he was the best gun salesman on earth again today as he announced more plans for gun control. Rather than wait for congressional action that may never come he is using executive action to restrict gun sales.

Smith & Wesson (SWHC) shares rallied +11% to a new high. Their shares are now up more than 1000% since president Obama took office. Sturm Ruger (RGR) shares spiked 7% on the news.

Louis Navellier, chairman of Navellier Associates, said "Mr. Obama is the best gun salesman on the planet." When asked if his firm was getting any kickback from investors for their holdings in the gun companies and he said no, "they just want us to make money."

The FBI said they processed more background checks on Black Friday, 185,345, than any day on record. The previous high was 177,170 on 12/21/2012. The FBI said for all of 2015 they processed a record 23,141,970 background checks. The prior record was 21,093,273 in 2013. Since 1998, the FBI has processed more than 220 million background checks for gun purchases.


Eli Lilly (LLY) warned that earnings and revenue for 2016 would be below analyst expectations. The company expects revenue of $20.3-$20.7 billion and below consensus for $21.36 billion. Lilly guided for earnings in the range of $3.45-$3.55 and also below consensus for $3.65. Bernstein said the guidance was very conservative and took into account the $675 million to $1.0 billion in currency translation issues due to the strong dollar. Lilly shares rallied +$1.24 on the lowered guidance. They got a pass because of the strong dollar impact.


Amazon (AMZN) reported third party merchants selling on Amazon sold a record 23 million items on Cyber Monday. That was a +40% increase from the prior year. That is not total Amazon sales, just the third party sellers on Amazon. The company releases details in such a way it makes it hard to compare with prior years. For instance, the company also said sellers that used the "Fulfillment by Amazon" service or FBA, sold more than 1 billion items in 2015. Those are sellers that let Amazon warehouse and ship their products so that Amazon can guarantee the two-day delivery. Those active sellers using the FBA service grew by more than 50% and are now active in 100 countries with sales to 185 countries. Worldwide FBA sellers located in another country grew by more than 100%. The FBA service now delivers qualifying orders the same day to customers in more than 750 U.S. cities.

Shares declined $3 on Monday after Monness Crespi Hardt cut them from buy to neutral saying gross margins were getting squeezed and there was increasing competition to Amazon Web Services. They may have to eat that downgrade when Amazon reports earnings on Feb 4th.


Nordstrom (JWN) was cut by Citigroup from buy to neutral. The bank said the investment cycle for Nordstrom was peaking and the return on capital would begin to shrink. They repeated the fact that sales slowed in Q3 and probably were lackluster in Q4.

Citi upgraded JC Penny (JCP) from sell to neutral based on valuation. The stock declined -30% over the last two months to hit their target price. While they believe JCP will still have an uphill battle they said the risk/reward no longer favors the downside.



Crude Oil declined to $35.97 at the close and well off Monday's high at $38.39 despite the ongoing conflict in the Middle East. Saudi Arabia and Iran are fighting a new war of words and Saudi cut off diplomatic relations with Iran. Bahrain, Sudan, the UAE followed and Kuwait recalled its ambassador to Iran. Saudi is already fighting a proxy war against Iran in Yemen and Syria. A Middle East diplomat said the confrontation was a level 5 on a scale of 1-10 with 10 being a shooting war.

Crude prices initially spiked on the news of the escalating war of words but then declined on the outlook for even more supply. I know that seems counter intuitive but they believe Saudi Arabia, Kuwait and others will simply pump even more oil to punish Iran with lower prices. The low prices are causing serious harm to Iran's economy. Saudi Arabia went so far as to lower prices to Iran's customers in Europe in an effort to take away the buyers for Iran's oil. Iran currently produces about 2.5 million barrels per day and has said they will increase that by one million by July once sanctions are released. Saudi Arabia is producing about 10.5 mbpd and has the capacity to pump as much as 12.5 mbpd according to the Saudi oil minister.

The price war may just be getting started according to one analyst today. He said with Saudi cutting prices to Iran's customers in Europe that will likely begin an entirely new series of price cuts by both countries.


Markets

In one of the other newsletters last week, I said, "There is a seasonal bout of volatility in the first week of January. We either shoot up big or fall off a cliff. It is a coin flip for direction." We lost the coin toss and the winners elected to press their advantage.

Obviously, we could not have predicted the dramatic reaction to China's economic numbers and the worries over the expiring trading ban. We also did not expect the U.S. economics to be so negative. Add those factors to the normal January tax selling and it has been an ugly week and it is just Tuesday. The S&P futures are down -25 as I type this so tomorrow is not looking to exciting either.

At this point, we simply need to stand aside and let the market do its thing. Eventually the market forces will equalize and the market will become buyable again. We needed a decent dip to finally remove the sellers that had been weighing down the market since early November. We saw that big rebound from the September lows and once it began to weaken we had significant volatility over the last two months as sellers continued to jump on every 2-3 day rally. I would like them to get it out of their system and let the markets retest the August lows. Once we have a decent retest maybe we can begin a bullish rally that lasts until summer.

Many analysts believe the market will be the strongest in the first six months of the year. I would love to be able to buy a retest and ride those positions up for that expected rally.

The S&P declined on Monday to 1,989 and exactly to the 50% retracement point from the August lows. If that 1,989 level breaks I think we will get our retest of the lows. Some technicians are looking for 1,969 as a pause point but I think sentiment has been damaged and a break below 1,989 is the trigger for a larger decline. The Monday low was another lower low and until that cycle is broken, we should continue to expect lower highs and lows. Note the MACD and RSI are both negative.


The Dow actually made a decent recovery from the -110 intraday drop. Goldman, Apple and Disney were the biggest losers but the winners were pretty broad based. We are still seeing a dash for trash with the most beaten up stocks from 2015 finding the most buyers in 2016.

The Dow also made a lower low with the -43 point intraday dip under 17,000 on Monday. The 17,000 level is now our line in the sand and the Dow futures are down -160 and trading at 16,927 as I type this. If we close under 17,000 we are in deep trouble and we could retest 16,000.

With earnings coming up in two weeks there could be some anticipation to lift stocks but with earnings for the quarter expected to decline -4% and companies warning every day we could see the reverse effect.



The Nasdaq closed right on the threshold of the abyss. Support at 4888-4900 has been broken both days but the close at 4,891 is still clinging by its fingernails. If that support fails we are probably going to retest the 4,600 level or even 4,500. Nasdaq futures are down -53.

The big cap techs are sinking fast and the biotechs were not adding support on Tuesday. If Apple continues to decline and take AVGO and SWKS with it the Nasdaq will suffer from a sentiment perspective.




The Russell 2000 imploded on Monday and managed only a 1.8-point rally today. The index tested support at 1100-1102 on both days. A further decline would target 1,082 and that would be a -16.5% decline from the highs. Small caps are normally favored in early January and that is not happening. This is negative for market sentiment and we can see that impacting all the indexes. Russell futures are down -10.


The Dow transports closed near a two-year low on Monday and barely recovered positive territory on Tuesday thanks to rate increases by three major airlines. The weak economics are going to be a continued drag on the transport sector and the overall market.


The Chinese economics, Saudi/Iran conflict and weak U.S. economics triggered a rapid dose of window undressing and tax selling. Anyone thinking about holding their yearend window dressing purchases for a few more days in hopes of a bounce from end of year retirement contributions into mutual funds, changed their mind in a heartbeat before the open on Monday.

Those not so quick on the trigger on Monday were probably hoping for a rebound today so they could reduce their losses. That did not happen and now we are looking at a significantly negative open on Wednesday if the futures do not improve.

I would continue to stand aside and wait for the market to settle. I ended my commentary over the weekend with the quote from Mark Yusko at Morgan Creek Capital Mgmt. "Trying to catch falling knives always results in lost fingers. Better to let the knife hit the floor, bounce around a little and when it stops moving go pick it up." We need to let the knives bounce around this week and look for a better opportunity in the days to follow.

 

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