Terrible economic numbers out of China knocked the Dow for a -152 point loss at the open but the dip buyers were waiting. Unfortunately, for the Russell 2000 the short squeeze in commodities may be over.

Market Statistics

The Dow recovered intraday much like the Asian markets recovered from a huge drop at the open to end only slightly lower. Overnight China reported a 25.4% decline in exports in February, while imports declined -13.8%. Analysts had expected a 12.5% drop in exports compared to an 11.2% decline in January.

According to Reuters, the decline in exports was the steepest since May 2009. China's trade surplus fell to $32.50 billion in February compared to analyst expectations for $50.1 billion.

Analysts blamed the weak numbers on the timing of the Lunar New Year. In 2015, the holiday fell later and that pushed all the pre-holiday orders into February, which saw an unusually large spike in exports of 48.9%. This caused exports to decline -14.6% in March 2015. That means the March 2016 numbers will have a more favorable comparison and should show gains.

Last week China's leaders predicted GDP growth in 2016 of 6.5% to 7.0% and said they were willing to spend more on the economy to boost consumption. The PBOC also cut the reserve rate for the 5th time in a year to boost lending.

The U.S. markets opened lower and the Russell 2000 failed to rebound like the Dow. The Russell had been the strongest index over the last two weeks because of the short covering in oil, commodities, financials and the biotech sector. That all came to an abrupt halt today when oil prices gave back -4.4% or -$1.66 to close at the low for the day.

After the close the API inventory report showed a gain of 4.4 million barrels for the week ended on Friday. Crude prices after the report were flat. Traders are waiting to see if the EIA inventory numbers on Wednesday confirm the rise.


Commodity prices follow oil prices and the entire commodity complex declined today, with the exception of corn and lumber. That meant energy stocks and mining stocks gave back some of the 50% gains over the last week in the most heavily shorted companies.

The biotech sector lost more than 3.75% meaning all the biotech stocks in the Russell also gave back their gains.


Financials gave back -1.6% because the weakness in China should push further Fed rate hikes farther out into the future. Yields on treasuries declined with the yield on the ten-year falling to 1.83% or a -3.7% drop for today. Declines in financial stocks also weighed on the Russell.

Unfortunately, the Russell 2000 is the sentiment index for the broader market. The sharp decline in the Russell helped keep the other indexes in negative territory. The afternoon decline in the Russell blunted the Dow rebound to drag it lower at the close.


There was only one economic report of interest for today. The NFIB Small Business Survey for February declined from 93.9 to 92.9. The headline decline was the least troubling part of the report. In the internals, the employment component declined from 11 to 10 and earnings trends fell from -18 to -21 suggesting competition is heating up or sales are declining. Respondents planning to raise prices fell from 16 to 14 and those planning to raise compensation fell from 15 to 12. Those expecting the economy to improve remained flat at -21 and those expecting sales to rise fell from 3 to zero.

This is a report that reflects the optimism in the small business community and conditions are worsening.

Moody's Chart

There is only one material economic report on the calendar for Wednesday and that is the Wholesale Trade. The big news for the week will come from the ECB on Thursday morning. Expectations are high so there is a strong potential for market disappointment.


Goldman Sachs was active in the market today with multiple calls causing trouble. Goldman said the recent commodity spike was not sustainable. They said the short squeeze in oil was counterproductive and unsustainable. Inventories are still rising and the headline triggered rebound would run its course with oil prices sinking back again. I completely agree and I have said that multiple times in these pages.

Kuwait, an OPEC country that produces 3 million barrels per day said they would only freeze production if all the other major producers cooperate, including Iran. They are not the first to make that claim. That is a problem because Iran has said multiple times they are not going to freeze production and will be adding 700,000 bpd over the rest of 2016.

There was a headline on Monday that Latin American producers were planning to meet on Friday to discuss production levels and that helped boost oil prices on Monday. Since Mexico is the biggest Latin America producer and their production is declining already and their budget is in serious trouble as a result of the oil crash, it is not likely Mexico will agree to anything that costs them more money. However, if your production is already falling then agreeing to a freeze in hopes of lifting prices with a new headline would be a temporary strategy.

Goldman said rising oil prices only delay the inevitable because producers will cling to the lifeline of being able to hedge some production at a higher number but in the short term, the prices will decline. Any material rally would only entice producers to put more rigs back to work to increase production in a market that already has 2 mbpd of excess supply. Nothing good would come of that.

Everyone is producing every barrel they can. North Sea production is now above 2.0 mbpd for the 8th consecutive month and April will likely be a four-year high.

The IEA said demand growth in 2016 is likely to increase by only 80,000 bpd, down from their prior forecast of 110,000. China said vehicle sales in February declined -3.7% and that suggests China's oil demand growth will also slow. On the positive side February imports did rise +19.1% to 8 mbpd as they fill their strategic reserves. However, that 19.1% growth number compares against a holiday impacted February in 2015.

The S&P Oil Exploration ETF declined -8% as sellers raced to take profits on their big gains.


Lumber Liquidators (LL) dropped -15% after hedge fund manager Whitney Tilson said he had renewed his short on the company. Tilson profited from a major short position in early 2015 after he revealed the products LL was importing from China had high levels of cancer causing chemicals. He entered the short around $65 and exited the short in late 2015 at $14. He said today he just reentered the short at $12. He now believes there is a 50:50 chance the company will go bankrupt.

The reason he reentered the short at such a low level was based on a new report by the CDC saying people with these laminate floors from China were three times more likely to get cancer than previously estimated. Tilson said he had information from his "most reliable source" that LL's sales had fallen off a cliff in recent weeks. Tilson said knowing products have formaldehyde is one problem but knowing customers are three times more likely to develop cancer is a business killer. Over one million people have laminate floors from LL.


Dicks Sporting Goods (DKS) reported earnings of $1.13 that missed estimates by 2 cents. Revenue of $2.24 billion also missed estimates for $2.28 billion. Same store sales declined -2.5%. The company guided to full year earnings of $2.85-$3.00 and analysts were expecting $3.23. Same store sales are expected to rise +2%. For Q1 the company expects earnings of 48-50 cents with analysts expecting 54 cents. Dicks said they were hurt by the warm winter as sales of winter clothing slowed. Shares dropped sharply at the open but rebounded to close fractionally positive.

Dicks said they were going to pursue the customers of Sports Authority, which filed bankruptcy last week. The chain said it was planning to close or sell about a third of its 463 stores. Sports Authority was the largest sporting goods retailer several years ago. Dicks said about 100 of its locations overlap with 140 Sports Authority stores. The liquidation sales from those stores will hurt sales at DKS until the other stores close.


Navistar International (NAV) reported a loss of 40 cents compared to expectations for a loss of 77 cents. Revenue of $1.77 billion fell well short of estimates for $2.05 billion. They blamed the weak performance on the weak economy in Brazil and the ending of the Blue Diamond Truck joint venture. That was responsible for 25% of the revenue decline. Navistar guided for full year revenue of $9.0 to $9.5 billion with EBITDA of $600-$650 million. The company reiterated its guidance to be profitable and cash-flow positive by the end of 2016. The company did say demand for commercial trucks was declining.


Chipotle (CMG) cannot catch a break. Four employees at a store in Billerica Mass became ill on the job and the store closed voluntarily to undergo a full sanitation. The company said they do not know what caused the illness but after recent problems, they were taking no chances. Shares declined -$24 in afterhours.


Blue Buffalo (BUFF) reported earnings of 16 cents that beat estimates for 14 cents. Revenue of $265 million beat estimates for $259.8 million. The company guided for the full year for earnings of 72-74 cents on revenue of $1.12-$1.14 billion. Analysts were expecting 70 cents and $1.13 billion. Shares rallied 9% to $21 in afterhours.


Citigroup initiated coverage of Boston Beer (SAM) with a sell rating and price target of $186. The analyst said craft beers are taking market share from the big brewers. This was an echo of what the chairman, Jim Koch, said when they reported earnings a couple weeks ago. He said Boston Beer was losing market share as craft brewers enter the market and existing brewers expand their territories.

CSLA downgraded SAM from outperform to underperform, the same as a sell rating, with a price target of $200. The analyst pointed to "ongoing weakness in its flagship brews." Shares of SAM fell -12% to $175.


JetBlue (JBLU) warned that revenue per available seat mile (RASM) declined by 10% in February and they believe RASM will decline by 7% to 8% for all of Q1. The company said "load factors remain solid but yields are lower." That means the discounting required to fill those seats is taking a toll on profits. JetBlue also said their capacity rose 19.6% over year ago levels.

Southwest Airlines (LUV) said its load factor in February declined from 79.9% to 79.0%. Southwest said capacity rose 14.7% over the same period.

The Dept of Transportation said the average airfare declined -6.2% to $372 and the lowest since 2010. So far in 2016 there have been six attempts to raise fares with the most recent on March 2nd instigated by American on 460,000 routes. On March 3rd, Delta and United had matched the increase but on March 4th, United began rolling them back and by 4:PM all three airlines had cancelled the price hikes.


Autonation (AN) was cut from neutral to sell by Goldman Sachs. The broker said they saw pricing pressure on used vehicles plus limited upside from additional spending on marketing. Shares fell -6% on the downgrade.


Citigroup (C) warned that equity and fixed income revenue would be down -15% in Q1 and that was the good news. They also warned that investment-banking revenue would decline -25%. The CFO announced this at the RBC Capital Markets Financial Conference in New York. JP Morgan warned about similar weakness in trading income a couple weeks ago. It is not going to be a good quarter for the banking sector. Citi shares fell -4%.


Markets

We knew there would be a day of reckoning, we just did not know when. The S&P failed at the 1,999 resistance level for two consecutive days and S&P futures were already weak last night when the news broke about Chinese exports falling 25.4% in February. Futures immediately tumbled into a double-digit decline but improved slightly after the Asian markets recovered from an ugly open.

The Shanghai Composite is down another 2% tonight but the S&P futures are mildly positive. Let's hope that carries over through Wednesday's open.

The S&P declined -22 points to close at 1,979. The closest technical support is the 50% retracement level at 1,963.

Jeffery Gundlach, of DoubleLine Capital, was quoted after the bell as saying that the S&P has 2% risk to the upside and 20% risk to the downside. He said it would be "really dicey" for the Fed to hike rates next week. He also said it would be difficult for oil prices to move over $38. He believes stocks will likely fall but the U.S. will not drift into recession.

Gundlach is very well respected and when he speaks, investors listen. However, I do not see a 20% risk for the S&P from here. I believe we have risk to 1,950 but the double bottom in Jan/Feb at 1,810 is the bottom. That means investors should be looking for a dip to buy.

The dip we got today was meaningful and the S&P closed on the lows. On the way up to 1,999 the S&P created some support in the 1969-1979 range and that is exactly where we stopped at the close at 1,979. While that does not mean we cannot move lower, I believe it would take another catalyst to push us significantly lower. Like China on Monday night, it would have to be something unexpected.

However, the ECB rate decision on Thursday morning is a risk. Mario Draghi has implied additional stimulus too many times to take a pass here. It would be market negative.

I would look to buy a dip on Wednesday if one appears, just in case the ECB does what the market expects and we move higher. If the ECB disappoints I would be looking for a dip to 1,950 to buy. Under 1,950 the next support is 1,927.

Obviously, I would love to see the S&P positive from the open tomorrow and move back up to resistance at 1,999.


The Dow fell -109 points at the close after being down -152 at the open and rebounding to only -8 at 2:PM. The Dow was handicapped by the financials and the energy stocks with oil in crash mode. The index is still stuck to resistance at 17,017 despite the slightly lower close. That level has an attraction for the Dow and I would expect it to gravitate back to that level.

This is the 61% Fib retracement of the January decline and is such an easy target for investors that it is likely to be in play again this week. The 100-day average at 17,044 is also a confusion factor. The Dow is rarely observant of moving averages but it has been for the last six months. Worst-case support is back at 16,179.



The Nasdaq spent six days flirting with resistance at 4,691 before finally crashing away today. The -59 point drop was material but the opposite of yesterday. The FANG stocks all sold off on Monday and they all rallied intraday on Tuesday although Amazon fell $11 right at the close to lose -$2.

The biotech sector was the anchor for the Nasdaq with the $BTK losing -4% for the day. This tanked the Nasdaq and the Russell 2000. The biotechs cannot seem to hold a gain. The resistance at 3,000 on the $BTK was too much to conquer.



Support on the Nasdaq should be around 4,576 or 72 points below where we closed. Resistance remains that 4,691 level where we failed today.


The Russell 2000 was being supported by the short squeeze in energy, financials, commodities and biotechs. All of those sectors were crashing today and that knocked -26 points off the Russell or -2.4%. The Russell has support at the 1,050 level followed by 1,035.


Buy a dip to those support levels I outlined above but I would be cautious about buying a positive open. I find it hard to believe the three weeks of gains were all resolved with only one day of profit taking. I will not complain if the market goes higher but I understand the overbought conditions may not have been resolved.

Beware the ECB announcement on Thursday morning. That could provide a boost or a bust and therefore a potentially pivotal event.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now