The 1,810 low on the S&P on Thursday is far below the close at 1,895 today. Is the worst behind us or is this just another bear market bounce?

Market Statistics

Strong rebounds in the Shanghai Composite and Nikkei 225, comments from Mario Draghi and an early morning rebound in oil prices all combined to boost the S&P futures on Monday and lift the U.S. markets to open the week. The Nikkei rallied more than 7% on Monday and held those gains today. The index finished well off its highs but still positive for the day. The Shanghai Composite added +3.2% to its rebound that started in early February. The gains in both of these indexes calmed investor worries about a continued Asian meltdown.



Oil futures rallied to $31.53 overnight after Russia, Saudi Arabia, Qatar and Venezuela said they would freeze production at January levels. The agreement came after a meeting in Doha, Qatar to discuss production levels. However, freezing at the January levels represents record OPEC output at 32.67 mbpd and a 2.0 mbpd surplus over demand. That is hardly a meaningful agreement to solve the oil price problem. Venezuelan production has been declining so they would be lucky to exceed January levels even if they wanted. It has been rumored that Saudi Arabia has been over reporting their production so any future agreement would freeze them at a higher level than their actual production.

Iran and Azerbaijan immediately announced their intentions not to join in the agreement. Iran said it was not fair to limit their production right at the point where they were returning to the market. They said once they resumed full production they would "consider" capping production at that level. The last time Russia agreed to cooperate with OPEC in 2005 they never actually implemented their production cuts. Russia, like members in OPEC tend to promise one thing and then do whatever they want. Kuwait said they would watch production levels for three months to see if there was any change and then consider a production limit.

Crude prices rallied on the initial headlines but once all the qualifications and denials began appearing the prices crashed back to $29 and negative for the day.


Over the weekend, PBOC governor Zhou Xiaochuan, reiterated in an interview with Caixin that there was no basis for continued yuan depreciation. Analysts had been expecting China to devalue the yuan by as much as 20% in 2016 before the yuan was included in the SDR basket of currencies late this year. The currency hit its highest level against the dollar on Monday. China said new loans hit a record high of 2.51 trillion yuan, ($385.4 billion), in January. Total financing nearly doubled from December to 3.42 trillion yuan.

The removal of the yuan devaluation cloud helped lift the Asian and U.S. markets.

ECB president, Mario Draghi, reiterated his claim that the ECB is "ready to do its part" to make "the euro area more resilient" suggesting there were further stimulus measures to come. There were some rumors the ECB could begin buying bad loans from banks in an effort to provide some capital for those banks to begin lending again.

The positive market forces lifted the S&P by nearly 31 points to 1,895 but that is still well below the resistance at 1,950. The quadruple bottom at 1,810 is bullish but the chart is still negative until that 1,950 level is broken.


The U.S. economics did not contribute to the rebound. The NY Empire State Manufacturing Survey for February came in at -16.6 and much worse than the consensus forecast for -10.0. The headline number is still better than the -19.4 from January. The February rebound was still the second lowest reading since 2009.

The new orders component improved from -23.5 to -11.6 and the backorder rose from -11.0 to -6.9. On a comparable ISM basis, the headline number would have been -47.4. Two weeks ago, the ISM Manufacturing came in at 48.2.

Empire Chart

The NAHB Housing Market Index for February declined from 61 to 58. This was the lowest level since May 2015. The buyer traffic component declined sharply from 44 to 39 but there were two snowstorms in the survey period. The report was ignored because this part of the year is normally weak.

Treasury international capital flows were negative in December by -$29.4 billion after a $31.4 billion inflow in November. This was only the fourth month out of the last 18 that international cash flowed out of treasuries although foreign investors have been net sellers for 14 of the last 15 months.

Foreign investors were also net sellers of U.S. equities for the 7th time in the last 8 months with sales of $35.9 billion. There were sales of $4.6 billion to foreign investors.

FYI, in 2016 the Fed will buy $216 billion in treasuries to offset those in their portfolio that will mature this year. This should keep yields low most of the year.

There are a lot of reports due out on Wednesday but the FOMC minutes will be the only market mover. This is the minutes for the January meeting and analysts will be looking for clues that tell us what the Fed was thinking about future rate hikes.


Apollo Global Management (APO) agreed to buy home security company ADT Corp (ADT) for about $6.94 billion in cash. That values ADT at $42 and represents a 56% premium over Friday's close. Apollo is going to merge ADT with their Protection 1 subsidiary. ADT has a 40-day "go shop" period to hunt for a better deal. I wonder if Tyco (TYC) is listening? Investors appear to have been happy about the deal because APO shares rallied 5.4%.


Groupon (GRPN) rallied +41% after Alibaba (BABA) said they acquired a 5.6% stake in the marketer. That equates to about 33 million shares. Alibaba reported the position in an SEC filing after Groupon beat earnings estimates. Alibaba shares also spiked +9%.



Freeport McMoran (FCX) shares rallied +15% after announcing the sale of a 13% stake in the Morenci copper mine in Arizona for $1 billion in cash. The buyer was Japanese miner Sumitomo Corp, which already held a 15% stake in the mine. Freeport will now own 72%. Freeport said in the Q4 earnings call they were actively involved in discussions with multiple parties over sales of various noncore assets. The $1 billion will be used to repay borrowings from its bank term loan and revolving credit facility. We should expect further sales announcements in the coming weeks.


Community Health Systems (CYH) reported a loss of -28 cents compared to expectations for earnings of 95 cents. Revenue of $4.8 billion missed estimates for $4.99 billion. Total hospital admissions declined -3.6%. The CEO said the results were measured against a strong Q4-2014 when there were significantly more emergency room admissions attributed to respiratory illnesses and the flu. The results were also impacted by increased reserves for doubtful accounts. CYH shares fell -22%. Their earnings rippled through the sector with Lifepoint (LPNT) felling -6% and Tenet Healthcare (THC) -2%.


Fossil (FOSL) reported earnings of $1.46 compared to estimates for $1.30. Revenue of $993 million easily beat estimates for $924 million. The company guided for full year to earnings of $2.80-$3.60 and for net sales to a range of -3.5% to -1% decline. Shares rose +16% to $40 in afterhours.


Shares of Kinder Morgan (KMI) spiked +6.5% after hours after Berkshire Hathaway (BRK.B) announced a 26 million share position. This ranks as Buffett's 30th largest holding so it is way down the list but another new energy position. Buffett holds a $5.0 billion, 14.3% position in Phillips 66 (PSX). Kinder Morgan was Buffett's only new position in Q4. KMI recently cut its dividend by 75% and Goldman Sachs said that could be the first of many by MLPs.


Shares of Rackspace (RAX) declined after the bell after the company said revenue would be in the range of $517-$521 million for the current quarter and well below estimates for $531.8 million. Full year guidance ranged from $2.08-$2.16 billion compared to analyst expectations for $2.21 billion.

Earnings of 24 cents narrowly beat estimates for 23 cents. Revenue was $522.8 million compared to estimates for $521 million. Shares fell -9% in afterhours.


Despite the intraday rebound in oil prices, more than 35% of the world's exploration and production companies are at high risk for bankruptcy according to John England from Deloitte. That represents 175 firms around the globe. England said another 160 are also at risk if prices remain lower for longer. These companies are suffering from high debt and low cash flow. When they borrowed money to drill the price of oil was significantly higher, near $100 in most cases. With production costs near $30, it was a simple decision. Now with prices flirting with the mid $20s and production costs still in the $30 range they are losing money on every barrel they produce. Cash flow has declined -70% but debt payments remain at the high levels from two years ago. Of those 175 companies with the highest risk about 50 are in the most trouble because their assets are worth less than their debts.

Wood Mackenzie said E&P companies have postponed or cancelled more than $380 billion in projects since oil prices crashed.

Markets

The quadruple bottom around 1,810 on the S&P would normally be an all clear signal for buyers to rush back into the market. Some did that today but the gains were mostly short covering because of the spike in the Asian markets on Monday. The futures were up strongly and those traders short over the weekend hoping for another Chinese meltdown were caught off guard and a short squeeze was born. Add in those investors that believe 1,810 was the bottom on Thursday and the index nearly made it to 1,900.

The 1,880 to 1,920 range has been resistance since January 22nd with only 3 days seeing a temporary move over the 1,920 level that was immediately sold. That means today's close at 1,895 is right in the middle of that range and we could see another strong day of gains before testing that 1,920 mark.

We are not out of trouble yet but the various factors are lining up on the bullish side at least temporarily.


The Dow did not make a lower low. The 15,503 on Thursday was above the 15,450 low on January 20th and the 15,370 low from August. That does not guarantee a continued rebound but higher lows are always positive. The 16,425 and 16,500 levels remain strong resistance. The Dow has rebounded for +700 points since the Thursday low. That is approaching overbought once again.

The earnings from Dow components are over so the potential for big headlines are also over. For the next two months, it will be powered by the fundamentals and sector movement. Boeing was the exception today with a +$4 gain on negative news. The GAO denied Boeing's protest of the $80 billion bomber contract to Northrop Grumman (NOC). Boeing has until February 22nd to file a second protest and after that date their remedies will be limited to suing the GAO.

JP Morgan (JPM) upgraded Goldman Sachs from sell to buy and that gave Goldman a $3 gain.



The Nasdaq Composite was hot today with a +2.26% gain of +98 points. Most of that was pure short covering. I have a screen of about 800 stocks that I watch daily. More than 25% of them had gains from $2 to $14 and the majority of those were Nasdaq stocks. Quite a few were biotech stocks with the Biotech Index gaining +3.1% today and +9.8% since the Thursday lows.

I would note in the winners and sinners list below the number of stocks with gains over $4 compared to the 6 losers with losses over $2.

The Nasdaq has a long way to go before major resistance around 4,600 and the congestion range from 4450-4600 is also decent resistance. If biotechs continue to outperform we could make it through that patch but I suspect the short squeeze in that sector is about over.



The Russell 2000 found support in the 950 range and rebounded to close at 995. That is just under long-term resistance at 1,007 and stronger resistance at 1,035 and 1,050. The Russell has got a long way to go before it can turn skeptics into believers over 1,050.


I do not want to pour cold water on this rally and I would love to see it continue higher. Nearly every major market rally begins as a short squeeze and then continues once fund managers begin to chase prices higher.

Bank of America strategists claim it is a buy signal when cash levels at equity funds reach 4.5% and a sell signal when those levels decline to 3.5%. The current level is 5.6% and that should mean the market is a strong buy. However, fund managers hoard cash because they expect lower lows and it may take a few more days of gains to get them to part with that pile of money. Money markets took in $24.3 billion last week alone compared to $31.5 billion year to date. That one metric should tell you exactly how scared investors were as the markets hit the lows last week. Bank of America cut their 2016 price target on the S&P from 2,200 to 2,000. Fund managers have reduced net long positions from 21% in December to 5% at the end of January.

We can conclude from that data that there is a lot of money that needs to come back into equities and a move in the S&P over 1,950 could be explosive. Between our current level and 1,950 could be choppy as buyers and sellers try to test the highs and lows intraday.

Enter passively, exit aggressively!

Jim Brown

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