The equity market barely reacted to the Brussels news and volume was very light. There was an almost total absence of stock news in the headlines.

Market Statistics

The morning terrorist attack monopolized the headlines all day and even earnings from Dow component Nike after the close was hardly a blip in the news stream. Given the five weeks of market gains, a lack of a negative reaction to the attacks was positive. For three days now, the market has consolidated without a major move. Monday's intraday range was the narrowest for 2016. Monday's volume was the lowest of the year at 6.16 billion shares and today was even lower at 6.12 billion. The Dow has paused right at downtrend resistance so a lack of a decline is bullish.


In the economic news, the Richmond Fed Manufacturing Survey exploded out of a prolonged slump with a reading of 22 for March. This was the highest reading since December 2010. That compares to -4 in February. New orders surged from -6 to +24. Analysts cautioned that such a big rebound after five years of mostly lackluster readings could be an error in the survey. However, other regional surveys have also been improving.

The separate Richmond Services Survey rose from -2 to +9 to erase most of the -12 decline from January to February.



The calendar for the rest of the week is highlighted by the GDP on Friday, New Home Sales on Wednesday and the Kansas Fed survey on Thursday. The market is closed on Friday for Good Friday.


The Dow Transports were down slightly on the terrorist attack because of the drop in the airline sector. The Transports were only down about 0.8% and that is very minimal after a +1,500 point rally since the January lows.


Negative reactions to Monday's earnings included G-III Apparel (GIII). Shares fell -19% after the company posted a 17-cent profit and analysts were expecting 42 cents. Revenues rose +2.5% to $527.4 million that also missed estimates for $566.4 million. The company blamed weak performance on warm weather but that excuse has been used up. The CEO said the outerwear business was "heavily affected by the warmest winter on record" and that weakness was fully responsible for the poor results.

The company guided for the full year to earnings of $2.55-$2.65 and well below analyst estimates for $3.14. I like G-III for the future. They just signed some new marketing deals that will give them a big upside but it will be next year before those brands are fully implemented. I would look for a dip to $40 for a long-term buy. Some of their dozens of brands include Calvin Klein, Kenneth Cole, Tommy Hilfiger, Guess, Jessica Simpson, Ivanka Trump, Alyssa Milano, etc.


The ExOne Company (XONE) reported a loss of 8 cents after the bell but that beat estimates for a loss of 16 cents. Revenue rose +2.7% to $16.2 million and beat estimates for $14.89 million. Backlog at the end of the period was $16.5 million. XONE develops and markets 3D printing machines. Shares rallied 7% in the regular session to a nine-month high at $12.96 then added another 60 cents after the report.


Five Below (FIVE) reported earnings that beat the street by a penny at 77 cents. Revenue of $326 million also beat estimates for $323 million. The guided to current quarter revenue of $186-$188 million and analysts were expecting $187.8 million. They forecasted earnings of 9-10 cents and analysts were expecting 10 cents. Shares declined -5% in afterhours after a -1.6% decline in the regular session.


Krispy Kreme Doughnuts (KKD) reported earnings of 22 cents that beat estimates for 20 cents. Revenue rose 4% to $130.4 million but missed estimates for $131.4 million. Same store sales rose +1.6% but fell short of estimates for 2.9% growth. For the current year they expect to earn 87-91 cents and below consensus of 92 cents. They increased their stock buyback program by $100 million. Because of the low guidance shares declined from the $15.38 close to $14.17.


Red Hat (RHT) reported earnings of 52 cents that beat estimates for 47 cents. Revenue of $544 million beat estimates for $537 million. This was the 56th consecutive quarter of revenue growth. However, Red Hat guided for the current quarter to earnings of 50 cents and revenue of $558-$566 million compared to 44 cents and $481 million in the comparison quarter. That looked good on the surface but analysts were expecting 50 cents and $554.6 million. They met the estimates but shares fell -$2.50 to $73.10 in afterhours. On the positive side, the company said order backlogs were $2.13 billion a 15% increase year over year.


The big dog after the close was Dow component Nike (NKE). The company reported +22% earnings growth of 55 cents compared to estimates for 48 cents. Revenue rose 8% to $8.0 billion but missed estimates for $8.2 billion. Nike said revenue would have been up +14% on a constant currency basis. That would have been $8.65 billion. Margins rose from 45.5% to 45.9%. Future orders rose +17% on a constant currency basis. That beat estimates for 13.4% growth. Future orders from China rose +36%.

Nike guided for full year revenue growth of high-single to low-double digit percentages and low-teens earnings growth. Analysts were looking for 15% earnings growth and 10% revenue growth. Shares dropped from $65 at the close to $61 in afterhours. I am a Nike believer. I would be looking for a buying opportunity in the $58-$60 range. They are doing over $8 billion a quarter in sales, just introduced several new models, are riding the March Madness wave and have strong momentum headed into the summer Olympics. I believe they lowered their estimates because of the currency issues. How many other companies are reporting growth like this?


A federal jury in California has ruled in favor of Merck (MRK) and against Gilead Sciences (GILD) over a patent for a Hepatitis C drug. Merck accused Gilead of infringing on Merck's patents it had filed over a decade ago and claimed Gilead's Sofosbuvir infringed on those patents. Merck is seeking billions in damages and royalties on sales of both of Gilead's Hep-C drugs. Sofosbuvir is the active ingredient in Gilead's Sovaldi and also a component in Harvoni. Those two drugs produced revenue of $19.1 billion for Gilead last year. A month ago, a judge made the same ruling and the jury verdict today means the trial will move into the damage phase to determine how much Gilead owes Merck.

There is another battle under way to determine if Pharmasset, a company Gilead bought for $11 billion in 2011 to get the rights to Sovaldi, used Merck's patents to develop that drug. Gilead claims Pharmasset was working on Sofosbuvir a year before Merck filed the patents. Gilead had originally filed suit seeking to declare the Merck patents invalid. Gilead shares declined -$4 in afterhours. I would expect them to decline further.


Crude oil defied gravity once again. The April futures contract expired at the close on Monday. The May contract became the front month at $41.50 and in theory that contract should have seen selling at the open this morning to bring it in line with the expired price. Obviously, that did not happen and crude traded up to $41.90 before fading at the close.

The headline that lifted prices was a comment from Saudi Arabia saying they would take part in a production freeze even if Iran were not part of the agreement. Previously several OPEC nations had said they would not participate unless Iran was forced to participate.

In reality, this changes nothing. Iran wanted a 4.0 mbpd production cap when they are only producing 2.6 mbpd today. That would allow them to hike production 1.4 mbpd under the "freeze" agreement. Obviously, that was not a freeze. If Iran does not sign the agreement, they will still boost production so nothing has changed. There is no fundamental reason for oil prices to be this high. It is strictly headline spam. The OPEC nations have figured out they can raise the price of oil simply by creating meaningless headlines.

After the close today, the API reported an inventory build for the week ended on Friday of 8.796 million barrels. If the EIA report on Wednesday confirms this number it is simply more proof that a fake freeze agreement will be worthless.


Markets

The markets are holding up well given the five weeks of gains. The very low volume is somewhat bullish because it suggests there is no distribution in progress. Distribution is what happens at market tops when holders of large positions begin to sell off those positions in a calm and orderly manner to the investors that believe the market is still going higher. During a distribution phase, the volume rises but the markets do not. New investors are fighting an abundance of supply.

For instance, McDonalds (MCD) has rallied to its prior high of $124. If a fund owned 20 million shares they would tank the stock if they put in a sell order that large. Instead they put in a slow succession of smaller sell orders of 10-20,000 shares, sometimes with a limit price of say $123.75 and just under the high. As shares are sold, they are replaced with new sell orders. The market absorbs the volume because a lot of investors are expecting higher highs. The selling fund is "distributing" their shares to thousands of willing buyers. In the case of McDonalds there have been a couple days of higher volume so there may be some distribution occurring there.


We are not seeing that increase in market volume that would suggest there is any distribution in progress. In fact, the lack of volume suggests the current holders of equities are not willing to sell. Market sentiment is bullish because the major indexes have not yet reached those major resistance levels I have laid out in recent weeks.

The S&P appears to be stuck at 2,050 and downtrend resistance. Since the much stronger resistance levels begin around 2,075 this pause for consolidation may actually give the index the power to reach that higher resistance band. I am not convinced since the S&P has stalled here for the last four days but the lack of any material profit taking is definitely bullish.


The rebound in the biotech sector has been a major factor in support of the S&P and the gains in the Nasdaq. The Biotech Index ($BTK) has rallied +9.4% in the last four days after dipping to 2,705 on Thursday. This is a major rebound BUT there is also major resistance at 3,000. A break over 3,000 would be very bullish and could spark a significant rally in the S&P, Nasdaq and Russell 2000.


The Dow has also rebounded to just below downtrend resistance and appears to be consolidating for a move higher. The lack of any material selling, even with the terrorist attacks, suggests the next move could be higher. Nike will be a drag on the index at Wednesday's open with about a -25 Dow point impact. Falling oil prices could be another negative if the EIA inventories are very high and traders decide they care.



The Nasdaq continues to fight resistance at 4,806 but closed well over that level at 4,831 today thanks to the biotech rebound. The Nasdaq has succeeded in defeating the 100 and 150-day averages with the 200-day at 4,860. The Nasdaq has not been reactive to the moving averages so that is really just smoke we have to ignore. The key level ahead is 4,926 and then 5,100. Support is well back at 4,715.



The Russell 2000 is currently fighting psychological resistance at 1,100. There is no recent resistance in that level but it has definitely been a factor. The index has stalled there for three consecutive days. There is clear support at 1,078 and 1,064 and resistance at 1,108 and 1,120.

If the biotech rebound continues and oil does not decline, a couple big "IFs" the Russell could break out of that 1,100 level and try to move higher but like the other indexes the resistance only gets stronger the higher it goes.


While I do not see indications of a big sell off in the immediate future, I am still concerned that the path to higher levels is paved with some significant resistance. The S&P has not moved more than 1% in a single day in the last seven days. That is actually a positive because it means the market forces are evenly balanced. If we can continue moving higher at this snail's pace the rally has a much better chance of continuing. Sudden large moves tend to trigger profit-taking events.

Typically, the market is higher heading into the Easter weekend. We have not had a lot of success with historical trends in recent months but hopefully this one will return.

Enter passively, exit aggressively!

Jim Brown

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