The Dow has rebounded 2,152 points from the 15,450 low on January 20th and is nearing massive resistance.

Market Statistics

Friday Statistics

If you measure the Dow rebound from the February 11th low at 15,503 that is 2,099 points or +13.5% compared to the 2,152 points and +13.9% from the January low. Regardless of which dip you use the rebound is severely over extended and has reached a level of significant resistance. The odds of the Dow moving through this resistance band without a significant problem are almost zero. It can be done but it would be a huge feat.

The S&P has a similar gauntlet of resistance from the Friday close at 2,050 to the May high at 2,132. Each level is likely to draw more sellers than the last and it becomes a cumulative effect.

We are six weeks from the start of the Sell in May cycle and I would be very surprised if the markets made it through those resistance bands before May. However, I have been surprised before. The biggest challenge this time is the extremely over extended Dow. Being very overbought already makes it even harder to continue climbing that wall of resistance worry.

More on this in the market section below.



There was only one economic report of note on Friday and that was the Consumer Sentiment for March. Sentiment fell from 91.7 to 90.0 and the lowest level since September. Analysts were expecting a rise to 92.1. This is the third consecutive monthly decline since the recent high at 92.6 in December when holiday cheer infected the survey.

The present conditions component fell from 106.8 to 105.6 and the expectations component declined from 81.9 to 80.0. Analysts said consumers were already complaining about rising gasoline prices and the potential for additional price hikes. How quickly consumers are spoiled by a few months of good fortune.


The calendar for next week is headlined by home sales and three Fed surveys from Chicago, Richmond and Kansas. The GDP revision will close the week and there are no expectations for a material change from the 1.0% growth in Q4. This is the last revision for Q4. The next report at the end of April will be for Q1 and expectations are for 1.9% growth. For the first time in a long time, the Atlanta Fed GDPNow forecast is roughly in line with the analyst average at 2.0% growth.



Starwood Hotels (HOT) cancelled a deal to sell itself to Marriott (MAR) after China-based Anbang Insurance, U.S. PE firm J.C. Flowers and China-based investors Primavera Capital, offered $78 or $13.2 billion for Starwood. The prior deal with Marriott was for $65.33 per share. The Chinese deal turned out to be an offer Starwood could not refuse.

Starwood operates the Westin, St Regis, Aloft and W Hotels among others. Some analysts believe the hiked offer could still be topped by Marriott because the prize is too big. If Marriott could complete the deal, they would become the largest hotel company in the world and offer many of the top lodging destinations.

Marriott signaled there might be a new offer saying, "it continues to believe that a combination of Marriott and Starwood is the best course for both companies" and "is carefully considering its alternatives." If Starwood actually accepts the Anbang offer the hotel chain will have to pay Marriott a $400 million breakup fee. Anbang is also close to acquiring another chain of hotels from the Blackstone Group for $6.5 billion. The Treasury Dept would be highly critical of a deal with Anbang and the department would have to approve that transaction. CIFUS would also have to approve the deal. Anbang has $129 billion in assets according to the Chinese state media.

According to S&P there has been $250 billion in M&A deals in 2016 and $116 billion involved foreign buyers. Dealogic claims $102.5 billion from foreigners with the record of $107.5 billion in all of 2015, which was twice the amount in 2014. Chinese buyers are racing to spend their yuan before it is devalued significantly later in 2016.


How do you know a company is really in trouble? The CEO sends out a press release saying, "Don't worry we are not going bankrupt." That is usually the kiss of death. Just having to say those words to assure people actually convinces more investors that it is a real possibility.

The Valeant (VRX) CEO, Mike Pearson, told his employees in a Wednesday memo that went public on Friday that "it expected to default on its $30 billion in debt because it had delayed its annual report beyond creditor deadlines." "I can assure you we are not going bankrupt." After the memo went public, the price of Valeant bonds fell 13% to 76 cents on the dollar. That suggests some of the holders suddenly considered the chance of a credit default.

Late last year the company started offering retention bonuses of $100,000 to employees who stayed with the company. They justified it saying working at Valeant was equivalent to working in "an emerging market or a dangerous place" where firms typically offer additional compensation. Some have compared Valeant to a "pharmaceutical Enron." Valeant has $17 billion in good will on its books and you can bet that is going to be written off soon and that will deflate the balance sheet even further. With more than $30 billion in net debt, it is going to be a tough uphill battle to recover without filing bankruptcy. Shares declined another 9% on Friday.


JP Morgan (JPM) authorized another $1.88 billion in stock buybacks in addition to the $6.4 billion authorized in 2015. Shares rose +3% on the news. Bank of America (BAC) authorized the purchase of another $800 million in stock in addition to the $4 billion authorized in 2015. BAC also gained +3% on the news. The price target on BAC is $18 and $69.50 on JPM.



Friday was quadruple option expiration and volume rose to 10.86 billion shares. That made it the third highest volume day of the year. Monday traded 6.31 billion shares for the lowest volume day of the year. The S&P rebalanced the weightings of some stocks as a result of their high level of share buybacks. The weightings for PG, PFE, GE, AAPL and MCD were all reduced at the close and all saw very minor declines in prices right at the close. For instance, PG lost -29 cents to $83.21 in the last 15 minutes of trading. Facebook (FB) was actually weighted higher and shares rose 46 cents at the bell. The impact of the reweighting was negligible.

Affymetrix (AFFX) spiked 14% at 11:30 after former executives offered to buy the company for $16.10 in cash. This beat out a bid by Thermo Fisher Scientific (TMO) that had offered $14 per share in cash in January. AFFX had previously accepted that $14 bid because it was a 50% premium at the time. The executives formed a new company called Origin. Origin's president, Wei Zhou, also founded a genomics company called Centrillion Technology in 2009. He said once Origin acquired Affymetrix that Origin had the option of combining with Centrillion to offer an unparalleled range of microarray and DNA sequencing technology products.


Western Digital (WDC) shares rose after they announced a debt offering for the acquisition of SanDisk (SNDK) after shareholders approved the $17 billion merger. Under the revised deal WDC will pay $67.50 in cash and 0.24 shares of WDC for every share of SNDK or roughly $80 with SNDK shares currently $76.57.

WDC is offering $1.5 billion of senior secured notes and $4.1 billion of senior unsecured notes due in 2023 and 2024 respectively. These are just part of a total package of loans and debt that could total $18 billion.

I believe the WDC acquisition of SNDK is a strong positive. They are expected to see synergy savings of up to $500 billion in the first two years and another $500 billion by 2020. They are also expected to see synergies of another $500 billion from their acquisition of Hitachi for $4.5 billion in 2012. The actual implementation of the acquisition was held up by Chinese authorities until approved last October. WDC has acquired four flash memory companies in the last two years and the acquisition of SanDisk will put them well ahead of Seagate (STX). Seagate acquired Samsung two years ago, which means there are only two major disk drive manufacturers today, WDC and STX.


Apple (AAPL) is holding a product event on Monday where it is expected to announce a new 4-inch iPhone and a 9.7-inch iPad along with some new watchbands. The phone is expected to be called a 5SE and is targeting the Asian market and lower budget consumers in the USA. The 5SE is expected to look like the 6 and 6S models with a metal casing, multiple colors and a 12-megapixel camera. The phone is also expected to have the A9 processor along with Apple Pay. RBC Capital expects sales of about $5 billion on the 5SE compared to total Apple revenue of about $230 billion in 2016.

RBC estimates there are about 35 million iPhones in the market with 4-inch screens that are at least 3 years old. These users actually prefer a smaller screen/phone and Apple needs to give them an upgrade path or risk losing them to an Android device. The current iPhone replacement cycle has expanded from 23 months to 27 months because the new phones have not had those new killer features that make users want to switch. Analysts believe the pricing for the phone could start in the $350 range up to $450.

If Apple could just make a new phone with a battery that lasts more than a few hours they could sell millions. My Motorola Android last 2-3 days without charging.

The new iPad is expected to have some of the features of the iPad Pro including a Smart Keyboard and stylus. There are no announcements expected on the watch other than some new bands. Apple is expected to sell about 10 million watches in 2016.


Amazon Kindle owners are going to be disappointed on Wednesday if they have not updated their Kindle software by Tuesday night. This is a mandatory update. You can go here Amazon Update to determine your device model and update methods.

Amazon also followed through on the agreement with Air Transport Services Group (ATSG) and acquired a 9.9% stake in the company. Amazon has the rights to acquire another 10% at $9.73 per share and a five-year time frame to complete the acquisition. This is part of the deal to lease 20 Boeing 767 wide body freighters from ATSG.


Shares of Office Depot (ODP) spiked earlier in the week when the New York Post said Amazon might be interested in acquiring the corporate business from Office Depot. Currently ODP is involved in a proposed merger with Staples (SPLS) but faces major regulatory problems. The two firms have a duopoly on large corporate contracts for business supplies and the Feds are against the deal. If Amazon were to acquire the corporate business from ODP then the merger might go through.


Lastly, Google (Alphabet) is reportedly trying to sell their robotics business. They purchased Boston Dynamics in 2013 in hopes of creating a viable robotics business unit. Their human-like robots were tailored for military purposes. While the company has scored a lot of money from the military for research, they have not found a way to produce them for civilian use. Amazon was rumored as a possible buyer since the company is making a big move into robots for commercial use. Amazon bought Kiva in 2012 to utilize their robots in warehouse and shipping. There was no comment from Amazon on the Google rumors.


Crude prices continued to inexplicably rise to a three-month high of $41.20 on Friday. Presumably, the rally was on news OPEC and non-OPEC producers led by Russia will meet on April 17th in Doha, Qatar. The very remote possibility that any actual agreement will come from this meeting was enough to cause yet another short squeeze in crude prices. After stalling at $38.50 for four days enough new shorts accumulated that the meeting announcement caused the squeeze to the highest level since December 9th.

The only way there will be an agreement in Doha is if they decide to go along with Iran's demand for a production cap of 4.0 mbpd compared to their current production of 2.6 mbpd. If they do agree to this then they are agreeing, not to a freeze, but to an increase in production of 1.4 mbpd over the next year.

However, the headlines will say "producers agree to an output freeze" and they will have been successful in talking up prices again despite any material decline in existing production. This is a propaganda war being waged by those OPEC members that could not raise production above January levels if their lives depended on it. Their only hope for rescuing their budgets is to talk up the price of oil rather than pump more.

WTI futures expire on Monday so we could see some extreme volatility to start the week.


Active rigs declined -4 to 476 and another 67-year low. There was a decline of 5 gas rigs and a gain of 1 oil rig. That new oil rig may have simply been a reclassification of a gas rig or a rig that had been moved from one field to another and reactivated. However, at our current rig levels and the current price of oil we could begin to see some rigs reactivated in the coming weeks. At $40 oil, a well can still be drilled in the Permian and make a profit. If oil prices rise any further I would expect to see the bottom in active rig counts. Oil prices typically rise in the summer as the driving season consumes more oil and inventories decline.


Markets

We may be approaching the end of the current rally. If you compare it to the August/September decline, the double bottoms are almost identical. The S&P rebounded +245 points from the September low at 1,871 to the November high of 2,116 or roughly a 13.1% rebound. Since the February low of 1,810 the S&P has rebounded +239 points or +13.2%. The September rebound took 36 days. The current rebound has taken 37 days.

Obviously, there is no rule that says one rebound has to follow the same script as a prior rebound but the S&P is only one good day away from downtrend resistance at 2,065 and then a steady stream of strong horizontal resistance at 2080, 2105, 2115, 2132, etc.

The identical patterns of the two rebounds are so easy to see that even a novice investor should recognize the similarity and become cautious. This is how tops are formed. It also becomes self-defeating in some cases because investors do not realize that conditions have changed.

In our current situation, the economic reports have improved. Recession fears have lessened and the Fed has backed off their original guidance for 3-4 hikes in 2016. Some analysts believe there may not be any hikes in 2016. The ECB is pouring stimulus on the fire and China cut reserve rates for the 5th time. Negative interest rates are more common than positive rates in Europe. While economists have not begun to upgrade economic expectations that could happen at any time.

The dollar is actually falling and closed at a five-month low last week after the Fed backed off their rate hike pledge. A weaker dollar helps U.S. international corporations and lifts commodity prices like oil, copper and gold higher. That lifts prices for energy companies and miners and puts a bid under the broader market. If the biotechs could find a bottom, we might be able to extend the rally.


Here is the key. As we approach those resistance levels, the natural tendency is for investors to take profits and shorts to back up the truck in expectations of another decline. If the dollar continues to fall and the biotechs behave, we could see those shorts get squeezed and the markets begin to rise again. Portfolio managers that thought they were being smart by lightening up on equities could suddenly find themselves underinvested as the market rose and they would be forced to chase stocks higher.

Personally, I believe we will fail as the S&P becomes stuck in those various resistance ranges. This is an election year and uncertainty is rampant. Earnings are getting worse not better. On Friday, FactSet predicted Q1 S&P earnings will decline -8.4% and it will be the first time since 2008/2009 that earnings have declined for four consecutive quarters. On December 31st, the estimate for Q1 was for earnings growth of +0.3%. So far of the 118 S&P companies that have issued guidance for Q1, 78% or 92 companies have lowered guidance. Only 26 companies have issued positive guidance. For Q4, with 99% of companies reporting, 69% beaten earnings estimates and only 48% beat revenue estimates. Revenue growth estimates for Q1 have fallen from +2.6% to a decline of -0.8% since January 1st.

Q1 profit margins are expected to drop to 9.3% and the lowest since the 8.9% margin in Q4-2012. Analysts have cut earnings estimates by an average of 9% since December 31st. That is almost double the ten-year average of -5.3%. Estimated earnings from the financial sector have fallen from growth of +1.6% to -6.7% decline. The technology sector estimates have fallen from +0.4% growth to a -7.2% decline. Earnings are declining at the fastest rate since 2009.

FactSet Chart

Given the negative expectations for earnings there is always the possibility for a string of positive surprises that overcome the negative expectations. However, I believe the negative implications from the political process will weigh on the market and the Sell in May cycle could be stronger than normal this year.

Regardless of what I believe, we need to monitor the S&P closely as it reaches the various resistance levels and trade what we see rather than what we expect to see.


The Dow is no different than the S&P. The index is a little more overextended and will be hitting that strong resistance at about 150 points over Friday's close. Because it is a narrow index, it has not been hit as badly from the biotech crash and was helped by the energy recovery and the firming in the financials. It still has the same resistance problems as the S&P and weakness could appear at any time.


If this were a stock, would you buy this chart?


The Nasdaq halted its gains on Friday almost exactly at major resistance at 4,806, which is the 61.8% Fibonacci retracement level. It is also the confluence of the 100-day average at 4,807 and the 150-day average at 4,803. This could be a very difficult level to cross unless there is some weekend catalyst that causes a blowout at the open on Monday.

The biotech sector is really weighing on the Nasdaq and the minor rebound in the $BTK on Friday was a breath of fresh air. Unfortunately, that only allowed the Nasdaq to gain 20 points. The BTK will have to rebound a lot further for the Nasdaq to have any hope of crossing that 4,806 resistance.



The Nasdaq oscillators (MACD, RSI) are still positive despite being at the upper end of their ranges. The RSI is showing no weakness yet.


The Russell was the strongest broad market index on Friday with a 1% gain. The Russell closed at a two-month high at 1,101 thanks to the strength in the biotechs and some energy stocks. The high close suggests market sentiment is improving. However, that can turn negative very quickly when the big cap indexes hit those resistance levels.


The Russell 1000, the top 1000 stocks by market capitalization, is also facing some serious resistance at 1,150 that confirms the outlook for the Dow and S&P.


My personal opinion is that the S&P will slow dramatically and more than likely stall somewhere around the 2,075 level. That could give us 2-3 more days of gains before the weakness appears. I would love to be wrong and for the S&P to charge right past 2,100 and attempt a new high before the summer doldrums appear. Since nobody can accurately predict market action at any given time, we must trade what we see rather than what we expect to see.


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Random Thoughts


Saudi Arabia wants to expand its market share for crude oil. Other than constantly cutting prices, how can they do that? One way is to buy up a lot of coastal refineries so they can refine their own oil. This not only gives them a locked in market share for decades to come but will also give them a retail price for their products.

It is one thing to sell a refinery oil for $35 a barrel. Oil is one of the most commonly sold commodities on the planet and prices do not vary much from one area to the next. That refinery processes the oil and turns it into gasoline, diesel, jet fuel and fuel oil and many other products. They earn a "crack spread" between the cost of the raw oil and the price of the refined products. This spread can be $10-$20 a barrel depending on seasons, competition and price fluctuation in crude.

If Saudi Aramco buys a refinery and processes its own oil then they also earn the crack spread on top of their cost per barrel of oil. Basically they gain an extra $10 or more on each barrel they sell.

Aramco had a 20 year partnership deal with Shell that was Motiva Enterprises. Last Wednesday Shell announced it was breaking up with Aramco after two decades. They are dividing the assets and leaving Aramco with only one refinery in the US. That is the nation's largest 603,000 bpd refinery in Port Arthur Texas. Shell will end up with two smaller plants in Louisiana with a combined capacity of 473,000 bpd. Aramco wanted all three plants but Shell refused to give in.

Aramco already has 5.5 mbpd of refinery capacity either owned outright or through partnerships all around the world. According to multiple people Aramco is going shopping for additional refineries and they would love to have them in the US since we are the largest consumer of oil and refined products.

Saudi has about 11.0 mbpd of crude production. If they bought up another 5.5 mbpd of refining capacity that would give them an extra $10 or more per barrel every day for decades to come. That appears to be a great strategy for Aramco.

The key now is to find out which U.S. refineries they might be targeting. I doubt Valero (VLO) is going to sell any of theirs and I would expect VLO to also be a bidder on any refineries Aramco might be targeting in order to preserve Valero's market share in the USA. They will not want Aramco to begin discounting refined products in the US. I will research this and report on the potential candidates in the coming weeks. There are 12 major refiners in the USA.


TransCanada Corp (TRP) the parent of the Keystone XL pipeline announced it was buying Columbia Pipeline Group (CPGX) for $13 billion. TRP is paying $25.50 per share for Columbia. The deal will give TRP another 15,000 miles of natural gas pipelines and link to TransCanada's existing 5,700-mile network. This will make TransCanada one of the largest pipeline operators in North America. This will become even more important once the multiple LNG export facilities on the Gulf are fully operational. If all the proposed trains are completed it would create as much as 20 Bcf per day of new demand. That gas would have to be piped from as far away as the Marcellus and the various shale fields in the Midwest. This will be a bonanza for TransCanada since they get paid for every cubic foot that moves through their pipelines. If a republican is elected as president the Keystone XL pipeline will also be approved and add to their volumes. TRP shares move very slow so I would not recommend buying on this news.


I was shocked when I looked at the AAII sentiment survey for this week. This was the fifth week of market gains but bullish sentiment actually declined sharply by -7.4%. I am guessing everyone is looking at the same charts we are and seeing that massive overhead resistance. I am surprised it registered to strongly on this survey. However, you may remember the first two days of the week were very choppy ahead of the Fed meeting. This survey closes on Wednesday and the real rally for the week had not yet begun. Next week's survey will be interesting



A week ago sophisticated computer hackers almost pulled off a $1 billion robbery from the New York Fed. The hackers infiltrated the Bangladesh central bank and for two weeks they planned their attack putting hooks in various places and deleting logs to erase their tracks. They submitted transactions over the SWIFT network to transfer $1 billion in total in a series of transfers to multiple banks. They extracted $101 million before a spelling error in the name of a destination foundation caused a human to question a specific transaction and raise flags on the other transactions in progress. They sent $81 million from the Bangladesh Bank's account at the Fed to four accounts in the Philippines and another $20 million to Sri Lanka. A bank in Sri Lanka caught the $20 transfer and returned the money. The money to the Philippines is still missing. It was transferred again to unknown destinations as soon as it was received.

The SWIFT network was not breached and continues to operate. The hackers infiltrated the Bangladesh computer network, captured logins and then simulated transactions as if a human was operating one of the three SWIFT terminals in the building. Security firm FireEye (FEYE) is doing a sweep of the Bangladesh Bank's systems and has found at least "32 compromised assets" that were used for reconnaissance and to gain control of the banks servers.

While $850 of the $1 billion theft was halted by a sharp eyed human, it is only a matter of time before even bigger thefts are completed. In a global banking system with tens of thousands of banks and networks there are far too many weak spots that hackers will find and compromise. Hackers are the Bonnie and Clyde of this generation. Knowing that somebody got away with $80 million will only encourage tens of thousands of other hackers around the world and it is only a matter of time before they succeed. In reality, they have already succeeded a lot more than we know because many banks will not report the thefts in order to save their reputation.


 

Enter passively and exit aggressively!

Jim Brown

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"The main purpose of the market is to make fools of as many men as possible."

Bernard Baruch