Over the last four weeks the Dow has gained 1,239 points, S&P +157, Nasdaq +410 and Russell 2000 +116. It has been a good four weeks considering the volatility over that same period.
Friday capped off a volatile week in the markets with the S&P spiking +32 points to close at 2,022 and exactly at another level of strong resistance. After a week of fighting the resistance at 1,999 Friday's gains were explosive as shorts covered on the breakout.
Obviously, the next question is what will happen on Monday. Will that 2,020 level prompt another week of choppy trading or will we blast through that level to test resistance at 2,078. I am betting we make it though the 2,020 level but you will have to read the rest of the commentary to find out why.
The market roared back from Mario Draghi's sell the news comment that he did not expect any further rate cuts. Draghi definitely over delivered with his changes to ECB policy and once investors realized the market acted inappropriately they bought the dip and the rest is history.
However, next week we three more chances for irrational behavior. The Bank of Japan will announce its rate decision on Tuesday. The FOMC will announce its rate decision on Wednesday and the Bank of England will announce their decision on Thursday. Janet Yellen will host a press conference at 2:30 on Wednesday and she will try to avoid a sell the news comment similar to Draghi's. After watching the Dow crash -309 points after he spoke on Thursday I would bet she will be watching her words very carefully.
Friday was nearly devoid of any economic reports with only the Import and Export Prices for February. Import prices fell only -0.3% in February after a -1.0% drop in January. Analysts were predicting a -0.7% decline. Helping to produce a stronger number was petroleum prices, which fell only -4% in February after a -14.3% decline in January. The recent rise in oil prices has analysts revising their inflation numbers based on higher than expected crude prices.
February was the first time since July 2014 that capital goods prices did not decline. They were unchanged so don't breakout celebratory champagne just yet.
We definitely have a full calendar for next week and plenty of headline risk. Other than the various central bank events, the Philly Fed Manufacturing Survey on Thursday is the most important. The report has been in contraction for the last six months and it is expected to stretch to seven with a reading of -3.1. The Philly Fed Survey is a proxy for the national ISM report that comes out in the first week of the month. If the Philly report remains in contraction, the ISM is likely to remain in contraction as well.
The next most important is the Retail Sales for February that comes out on Tuesday. Sales are expected to be flat after three months of minimal gains of +0.2%. The warm weather and rising dollar in February are expected to have had a detrimental impact on sales.
In stock news Ulta Salon Cosmetics (ULTA) was the best performer with a 17% spike of +$28. Ulta posted earnings of $1.69 that easily beat estimates for $1.54. Revenue of $1.27 billion also beat estimates for $1.24 billion. Revenue rose +21%, earnings +25% and same store sales +13%. Digital sales rose +44%. The company guided to earnings of $1.25 to $1.30 for the current quarter and analysts were expecting $1.22. Same store sales are expected to rise 9% to 11%. They plan to open 100 new stores in 2016 after opening 100 in 2015. They currently operate 874 stores. The company is doing everything right as evidenced by their PE of 41. That is too high for most analysts to recommend and I would expect some cautious ratings comments in the next couple of weeks.
Fiber optic subsystems and component company Finisar Corp (FNSR) reported earnings of 25 cents compared to estimates for 22 cents. Revenue of $309 million matched estimates. The company guided to revenue of $317 million and earnings of 25 cents for the current quarter. Analysts were expecting $314.7 million and 21 cents. The company said it was seeing a lot of growth in China.
Chevron (CVX) closed out the week with a minor gain of 64 cents but that came after $6 of gains in the prior four days. Goldman Sachs upgraded Chevron from a sell to neutral after the company held an analyst meeting and said keeping the dividend safe through 2017 was a top priority. Credit Suisse raised the price target from $86 to $94 after Chevron cut their capex from $26.6 billion in 2016 to a range of $17-$22 billion in 2017 and 2018. They are shipping their first load of LNG from the $54 billion Gorgon project in Australia with two more trains to come online in 2017. The Chevron CEO said total production would increase in 2016 and 2017 despite the decline in capex spending.
Bojangles (BOJA) was getting a lot of coverage after shares jumped +23% after reporting earnings of 22 cents that beat estimates for 19 cents. Revenue of $128.8 million also beat estimates. Same store sales only rose +0.6% but that was better an analysts expected. It was the 23rd consecutive quarter of sales growth. The company guided to full year earnings of 86-90 cents with its operated store base to increase by 8% with same store sales in the low single digits. Bojangles had been heavily shorted and was down 50% since its IPO.
El Pollo Loco (LOCO) saw the opposite reaction after posting earnings of 15 cents that beat estimates for 13 cents. Revenue of $86.3 million missed estimates for $88.1 million. Same store sales rose +1.8%. They guided to full year earnings of 70-74 cents and analysts were expecting 74 cents on revenue of $395.6 million.
They plan on opening 18-22 new company stores in 2016 and 10-15 franchised stores. Shares declined -8% on the weak guidance.
Zumiez (ZUMZ) reported earnings of 53 cents that beat estimates of 49 cents and revenue of $242.43 million that beat estimates for $241.1 million. However, same store sales fell -8.6% for the 11th consecutive month of declining sales. The company guided to a loss of 7-11 cents in the current quarter with same store sales expected to decline 5% to 7%. Analysts were expecting a loss of 1 cent. Shares fell -13%.
Kyle Bass, who started the Coalition for Affordable Drugs, has challenged a drug patent from biotech company Acorda. On Friday the US Patent and Trademark Office announced it was instituting an "inter party review" over the patents surrounding the drug Ampyra. The CEO of Acorda said the company had extensive clinical development programs resulting in new and important discoveries relating to using the drug to treat MS. The patents in question expire in 2025 and 2027. Bass has used his wealth and power to attack multiple companies under the guise of trying to make drugs cheaper. He shorts the stocks and then challenges the patents. He wins regardless of the outcome. I have no objection to somebody challenging a patent but there should be a financial penalty paid to the patent holder if you lose. The patent holders are being forced to pay tens of millions of dollars in court costs to defend what is legally theirs.
Crude prices continued to rise with a 65-cent gain on Friday to $38.49 but that level is turning into significant resistance. Even if that breaks the $40 level is going to be serious psychological resistance for traders. Once a 4 handle appears on the price there is going to be a flood of sellers. With long contracts on WTI futures at record levels and only five trading days before contract expiration there is a very good chance of a decline in the days ahead.
The proposed March 20th meeting in Moscow for OPEC and non OPEC producers is rapidly evaporating. With Iran claiming they are not going to honor a freeze and all the other countries saying everyone must agree or there will not be a deal, the agreement is falling apart. The Russian energy minister said a firm date has not been set and "could be from March 20th to April 1st" if everyone agrees. Officials from multiple countries said there was no reason to have the meeting if Iran did not agree to a freeze.
Reportedly, Iran has been offered an output cap at 2.93 mbpd but Iran wants a cap of 4.0 mbpd, their pre sanctions production number. Iran is currently producing about 2.6 mbpd. So, if everyone agreed to a production freeze and Iran got the 4.0 mbpd cap, actual oil production could rise another 1.4 mbpd assuming everyone else was frozen at their current levels. That is going to be really hard to sell to the rest of OPEC.
Multiple producers have warned that holding a meeting before everyone agreed meant the meeting could fail and the negative press from that event could send oil prices significantly lower.
In reality, any agreement that involves Iran having a higher cap is worthless. It is just a publicity stunt to try and lift oil prices higher. Any agreement will actually allow production to increase by a significant amount. Eventually uninformed investors will finally understand and oil prices will decline.
We are rapidly approaching the end of the inventory build season in early April and refiners will ramp up production of gasoline and diesel for the summer driving season and inventories will fall. That should have a positive impact on crude prices but we are still several weeks away.
Goldman Sachs reiterated their view that crude prices could fall sharply in the coming weeks because of record inventory levels offsetting production declines.
Active rigs declined -8 to a 67-year low of 480. Records were started in 1949 and the lowest level of active rigs was 488 in April 1999. The U.S. only produced 5.5 mbpd in 1999. Active oil rigs declined -6 to 386 and active gas rigs declined -3 to 94.
Anadarko (APC) announced last week they were going to operate only FIVE rigs in 2016, down from an already reduced level of 25 at the end of 2015. There are only 33 active rigs in the Bakken today. That is down from 207 a year ago. Continental Resources (CLR), one of the largest producers in the Bakken, has halted fracking on any new wells. They have cut their active rigs down to 4 but they are not going to complete any new wells they drill. Continental is cutting capex spending for 2016 by 65% to $920 million and expects to cut production by 10%. Multiply this across all the shale producers and production is going to drop significantly by the end of 2016. Crude prices should rise to $50 by the end of December. Saudi Arabia is not going to allow any agreement where prices rise too soon and a shale sector revival.
I am not going to trash talk last week's rally despite the three days of uncertainty in the middle. Any week that ends with a gain of +206 points for the week is ok with me even if all those points came with the +218 point gain on Friday. It does make it fairly difficult to pick plays given the wild triple digit swings.
Friday's close on the S&P at 2,022 was the high close for 2016. We are still -21 points down for the year with the 12/31 close at 2,043. I am betting if the BOJ/BOE/FOMC do not do something stupid we will close over that 2,043 level by next Friday.
I have an ace up my sleeve. That ace is the pre Fed rally that occurs in the 36 hours prior to the Fed announcement. Historically we see a decent gain on Tuesday and sometimes on Wednesday morning. If the Fed or more specifically Janet Yellen avoids the temptation to say something tricky on Wednesday then we could go higher. The CME FedWatchTool is showing a 96.1% chance of the Fed funds rate remaining 50 basis points after the March meeting. That means almost zero chance of a rate hike.
The wild card is of course how the Fed phrases the outlook for future hikes. With the chance of a recession fading, a strong jobs report even if they are only part time jobs and the market heading back to its highs, the Fed is going to want to stick a pin in this euphoria balloon and bring everyone back to reality. However, with the ECB, PBOC and BOJ still cutting rates it is going to be a tough task to tightrope walk future guidance in a way that does not tank the market.
There is a significant confluence of resistance at 2020-2022 with downtrend resistance, horizontal resistance and the 200-day average. That means it is target for every short seller with any cash left. It also means that a break through that level will cause some significant short covering.
I would expect some profit taking on Monday depending on what happens in the Asian markets on Sunday night. I would expect any potential dip to be bought and that 2,020 resistance to fail on Tuesday as the S&P pushes higher ahead of the Fed.
That is my roadmap and we will check in on that forecast on Tuesday evening. I know there are a lot of traders betting that 2,020 level is going to hold and predicting a return to 1,950 or even lower.
The Dow benefitted from the rebound in financials, healthcare, mining and energy stocks to punch through the same 200-day moving average that is currently threatening the S&P. However, downtrend resistance is a little higher at 17,300. On the positive side the prior resistance around 17,000-17,017 should now be support. The MACD and RSI are growing more oversold as each day passes but they have room to run.
The Nasdaq also closed at a two-month high at 4,748 but it may still be in the grasp of the 50% retracement at 4,700. The Nasdaq benefitted from a major +3% short squeeze in the biotech sector on Friday. That sector has not been able to mount any kind of consecutive gains in months. The index is well below its retracement levels and struggling just to get back to 3,000. I do not think the BTK rebound is going to stick but I hope I am wrong.
The BTK declined -41.8% from its high of 4,431 in July to the low of 2,575 on February 9th. It has rebounded +13.4% from that low but it has a long way to go and the sector remains under pressure from politicians and people like Kyle Bass. Some analysts claim it will not be investable until after the elections and maybe long after depending on who wins.
As long as the BTK remains stuck in the mud the Nasdaq is going to have a tough time moving higher.
The Russell 2000 was again the percentage leader on Friday thanks to biotechs and energy stocks. The +2.21% gain was second only to the Dow Transports at +2.32%. The Russell is back in the retracement brackets but will remain at the mercy of oil and biotechs. With oil prices due to crack at any time, the Russell could be an anchor next week.
Next week depends on two events. The first is obviously the Fed and the hope they do not mess things up trying to be cute with their guidance for future rate hikes. The second is oil prices. With crude threatening to fail at resistance at $38.50 with even stronger resistance at $40, a breakdown in WTI ahead of the futures expiration could grease the skids for a market decline. Whether the typical pre Fed rally can offset a drop in oil prices remains to be seen.
Should oil prices inexplicably rise over $40 we could have a major market blowout when coupled with the pre Fed rally. While I am not predicting that, it is always a possibility.
I do expect the market to try and move higher. Whether it is successful depends on a lot of factors with the Fed the pivotal event.
Clocks spring forward Sunday morning with the arrival of Daylight Savings Time.
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Amazon (AMZN) said it signed a deal to lease 20 Boeing 767 widebody freighter aircraft to ensure capacity to fulfill its promise of one and two-day deliveries in the USA. The rapid growth of its Prime subscription service with free two-day shipping is prompting Amazon to bulk up its delivery capability. Handing those packages off to UPS at the warehouse with two-day requirements is expensive. However, if Amazon can deliver those packages to UPS at the closest major UPS/FDX hub city the cost is a lot more reasonable.
If Amazon can fill these planes with prime packages every day and deliver them overnight to the major UPS/FDX hubs then regular ground shipping can get them delivered in two days.
Amazon tested the concept by utilizing planes owned by Air Transport Services Group (ATSG) over the last several months. Apparently, it worked well enough to commit to leasing 20 of the giant freighters for 5-7 years. They will begin operations on April 1st. Amazon also has the right to buy up to 19.9% of ATSG stock over the next five years at $9.73 per share. That stock closed at $14.32 on Friday.
Private equity firm Apollo Global Management is reportedly nearing a deal to acquire Fresh Market (TFM) for $1.3 billion. That would be about a 30% premium over the company's market cap at the close on Friday. The cash offer is $28.50 a share with the Friday close at $23. If you have access to a time machine, you could go back to February 11th when it was under $18 just prior to announcing Kroger had expressed interest in the chain. Sources claim Kroger lost out in the bidding in the auction that followed.
Bearish sentiment is dropping fast with a -4.9% decline for the week ended on Wednesday. Bullish sentiment rose +5.3% and those timid sheep in the neutral camp barely budged with a -0.5% decline.
Comedian Jerry Seinfeld picked the wrong time to sell expensive cars. Seinfeld auctioned off 18 of his cars on Friday for a total of $22.2 million. While that sound like a lot the pre auction estimate was $28-$32 million. The expected star of the show was the 1973 917/30 Porsche Can-Am Spyder that was expected to sell between $5 to $7 million. Instead, it was a fight to lift the bidding to the final price of $3 million. Seinfeld bought the car in 2012 for $4.4 million. Even millionaires sometimes take a hit when their ego gets in the way of reality and they just have to own something special.
Overall, six cars sold above estimates and seven cars set new price records for their models. A 1974 911 Carrera 3.0 IROC RSR sold for $2.3 million and a new record. A 1955 550 Spyder sold for $5.3 million. His VW Beetle sold for $120,000 and a new record. Seinfeld goes home with $20 million in his pocket after commissions and a lot more space in his garage.
Barbie celebrated her 57th birthday last week and she does not look a day over 16. It was not a fun party because sales are dropping fast despite all the new models. Annual sales are the lowest in 12 years at roughly $900 million after peaking in 1997 at $1.8 billion. In the 1990s girls ages 3 to 11 had to own at least one Barbie and most had several. Today girls in the upper end of that age bracket want an iPhone.
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