After five consecutive weekly gains the major indexes posted losses for the week. They were very minor and the Thursday rebound could setup another gain next week.

Market Statistics

Friday Statistics

The S&P dipped nearly to support at 2,020 on Thursday before rebounding +13 points to close with a minor loss. The Thursday low was -34 points from the Tuesday high at 2,056. Is that enough of a decline to neutralize the overbought conditions? Back on March 10th, the S&P completed a similar dip of -37 points before rebounding for the next seven days.


Over that same period, ending on March 10th the Dow declined -244 points compared to -249 points last week. Is that good enough to relieve the overbought conditions?

Typically a multi-week 13% rally on the S&P results in a 3-5% decline for profit taking. Last week the S&P almost reached a -2% decline from the high.


In theory, this week should be bullish as funds window dress for the end of the quarter. With multiple weeks of market gains, they will want to pad their portfolios with winners to suggest they were along for the ride.

In economic news, there was only one report that mattered on Friday. The final revision for the Q4 GDP rose slightly from 1.0% to 1.39% growth. Consumer spending, residential investment and government spending contributed to growth while inventories, exports and nonresidential fixed investment spending were a drag on the totals. Corporate profits declined -7.8% after a -1.6% decline in Q3. This was the largest drop in profits since Q1 2011. Estimates for Q1-2016 are even worse. The boost from consumer spending came from recreational services suggesting consumers were finally spending that money they are saving on gasoline.

Personal consumption expenditures (PCE) inflation rose only +0.3% in Q4 compared to +1.3% in Q3.

The Atlanta Fed real time GDPNow forecast for Q1 is dropping like a rock. The forecast fell from +1.9% to +1.4% on Thursday after the durable goods report declined -2.8% for February. The forecast for real equipment investment declined from +0.9% to -1.4%. Monday's drop in existing home sales also pushed the forecast lower. The next update will be on Monday after Personal Income report. With corporate earnings expected to decline -8.7% according to FactSet in the Thursday update this will also weigh on the final Q1 GDP report.



There are a lot of events on the calendar for next week but the highlights will be the March employment reports. The ADP report on Wednesday is expecting a decline of about -24,000 to a gain of +190,000. The Nonfarm Payrolls on Friday are expected to show a decline of -42,000 from the February level at 242,000 jobs to 200,000 for March. Any numbers over 175,000 would be seen as further strong job growth even if they are mostly part time as in the February report.

March is a tough month for payroll estimates. Since 2008, March has missed estimates in 7 of 8 years by an average of 53,000 jobs according to Bloomberg. Since 2000, March has missed estimates 67% of the time by an average of 69,000 jobs. In March 2015, the miss was 119,000 below estimates.

Closing the week will be the national ISM Manufacturing Index, which is expected to rise slightly from 49.5 to 49.9 but remain in contraction territory. I would not be surprised to see it return to expansion territory with a number over 50 because of improvements in the regional surveys.


Since the market was closed on Friday, there was very little stock news. Accenture was a big mover on Thursday after reporting earnings of $1.34 that rose +24%. That beat estimates for $1.18. They booked more than $9.5 billion in new orders in the quarter. Encouraged by strong sales they raised full year guidance to as much as 9% in revenue growth and $6.00 per share in earnings. That was up from prior guidance of $5.17. Shares rallied 6% in a slow market.


Buffalo Wild Wings (BWLD) gained $2.35 after Goldman Sachs added the company to its conviction buy list citing a compelling valuation. Goldman has a $187 price target and said "near term risk-reward is favorable as perceived risks related to the top-line and/or wing prices are priced in and/or overstated." In other words, the rise in wing prices from the bird flu last summer is already priced in and current wing prices are declining. Shares closed at $145.


PVH Corp (PVH) reported earnings of $1.52 and beat estimates for $1.45. That also exceeded the company's own forecast for $1.37-$1.47. The strong dollar knocked nearly 14% off earnings. On a constant currency basis, earnings would have been $1.88 and that was a real surprise. Revenue rose +2.1% to $2.112 billion and beat estimates for $2.073 billion. On a constant currency basis, revenue would have risen 7% and well over estimates.

They just signed a new partnership deal with G-III Apparel (GIII) and I would be a buyer on any decent dip.


KB Homes (KBH) reported earnings of 14 cents that rose +68% and beat estimates for 11 cents. Revenue rose +17% to $678.4 million also beating estimates for $633 million. Home deliveries rose +23% to 1,953 homes and the average selling price rose +5% to $344,400. Order backlogs rose +29% to $1.43 billion and homes in the backlog rose +22% to 4,285. The CEO was bullish on the conference call saying the builder had good momentum going into the summer selling season.


Raytheon (RTN) raised its annual dividend +9.3% from $2.68 to $2.93. The 73.25 cent quarterly dividend will be paid May 12th to holders on April 6th. Shares failed to move on the news.

Washington said it cancelled a Lockheed mine-hunting system after the Navy said the system was unreliable, prone to dropping communications and missed mines it was supposed to find. The system had been in development for 17 years but Lockheed had only delivered 10 of them. Lockheed (LMT) dropped -1.4% on the news.

Hedge fund Starboard Value has launched an all out attack on Yahoo. The company is trying to replace Yahoo's entire board with nine directors of its own choosing. Starboard CEO Jeffrey Smith sent a letter to Yahoo shareholders saying the company's management and board "have repeatedly failed shareholders." Starboard accused Yahoo of "lackadaisically engaging with potential bidders." Over the years since Starboard was spun off from Ramius in 2011 the $3 billion hedge fund has waged 46 proxy fights and gained 66 board seats according to FactSet.

Many of the activist fights end without board seats when the companies agreed to many of their demands to keep from losing control. In the case of Yahoo about the only demand is to get busy and sell the core business. Yahoo CEO Marissa Myer became CEO after Dan Loeb's Third Point waged a proxy fight in 2012 that gave him two seats on the board and forced that CEO change. Today, starboard wants Marissa out as well saying she has had plenty of time to make changes but the only change has been the decline in asset value.

Microsoft has met with possible bidders for Yahoo and is interested in providing funds under the right conditions. Microsoft would like to have a future relationship with Yahoo in order to retain their partnership in search. Those potential bidders were Verizon, AT&T, Bain Capital Partners, KKR and TPG Capital.


FactSet is predicting an 8.7% decline in Q1 earnings and the fourth consecutive quarterly decline since Q3-2009. Revenue is expected to decline -1.1% compared to expectations for 2.6% growth at the beginning of the quarter. To date 93 S&P companies (78% of those giving guidance) have warned on earnings and 26 have issued positive guidance.

The next two weeks are earnings warnings weeks. It is the end of the quarter and those hoping for a big end of quarter sales surge will have to face the facts and spit out a warning if those sales did not close. With expectations already so low, it is likely we will not see a big surge in warnings. With consumer spending improving in March there is always the possibility companies could beat the already low expectations.

Gasoline prices are rising ahead of the summer driving season because crude prices continue to defy gravity. WTI traded up to $41.90 on Wednesday on misunderstood headlines about a production freeze by OPEC suppliers. Saudi Arabia said they would participate in a freeze even if Iran did not. This has absolutely zero impact on current and future production but was simply another headline to support prices.

Crude inventories continued to build with a 9.4 million barrel rise to 532.5 million barrels and a new record high. This deflated the price balloon slightly with crude slipping back to $38.33 intraday on Thursday. That depressed the equity market at the open. Analysts believe oil in storage will reach 550 million barrels and will weigh on prices long term until it is sold. That oil costs the owners rent every day it remains in storage so the total cost of ownership goes up every day. The recent rise in prices should slow the rise in inventories. Speculators and refiners will not be so eager to store oil at $40 as they were at $30. Imports reached a three-month high at 8.38 mbpd while U.S. production dropped -30,000 bpd to 9.038 mbpd and the lowest level since November 2014. That is -572,000 bpd below the peak of 9.61 mbpd in June 2015.


Active rigs declined -12 last week to 464 and a 67-year low. Oil rigs declined -15 to 372 and gas rigs rose +3 to 92. Canadian rigs declined -14 to 55 and now -65 rigs below year ago levels.


Markets

We expected Thursday to follow the historical trend to close positive before the Easter weekend. I actually expected a little more in the way of gains but the sharp drop in oil prices hammered the open and the Dow was down triple digits. The rebound in oil prices was instrumental is supporting the market gains. If reality ever returns to the oil market, the equity market could be in for some tough sledding.

As I outlined at the start of this commentary the S&P has now duplicated the same dip we saw at the March 10th low. Whether that is enough to ease the overbought pressures or not is unclear. If fund managers do turn to window dressing to mark up their portfolios for quarter end, it will happen on Monday/Tuesday. The latter portion of the week is a tossup. The first three days of the quarter are normally bullish and that starts on Friday. The Nonfarm Payrolls should not be a challenge unless they come in really hot as in 250,000 or more jobs.

Last week no less than four Fed heads implied there could be a rate hike as early as April. Yellen went out of her way to push expectations well into the future and these four bozos went out of their way to pull those expectations back. You have to wonder what conversations are held in those hallowed halls of the Federal Reserve. Can Janet be heard yelling up and down those halls every time one of the rogue Fed heads goes on TV with some pompous prognostication of rampant inflation and the need for immediate rate hikes?

As long as the jobs numbers are tame, the expectations for hikes will probably be ignored by the market. Otherwise we could have a rocky few days.

The S&P rebounded from support at 2,020 but is still facing initial resistance at 2,050. That resistance becomes stronger starting at 2,075.

We have had a flurry of analysts out with forecasts for market declines in recent weeks. Mohamed El-Erian warned on Thursday the market could swing dramatically and overshoot with a 10% drop from a range bound market. He said we have had two 10% declines in 2016 and regardless of which way the market goes he expects a wider range in the coming months.

He said while central bank stimulus and buybacks can push rising markets higher, falling markets can "amplify" the effects of weakening fundamentals. He warned the market has not yet priced in the emergence of anti-establishment republican front-runner Donald Trump. He believes that will add significant uncertainty from the political side.

The February-March period is the heaviest time of the year for stock buybacks. More than 35% of purchases take place in that period. The average monthly buyback for the year is about $140 billion or $1.68 trillion for the year. Thirty-five percent of that is nearly $600 billion and that money is spent in the Feb-Mar period. Over the next five months, about 25% of the annual buyback funds are spent. That equates to $420 billion or roughly $84 billion a month. That is significantly less than the nearly $300 billion a month in February and March. Since 2010, the market has risen on average in Feb/Mar helped a lot by those buybacks. From April through August the market has averaged a decline. Companies also have a black out period for buybacks ahead of earnings so that means we cannot expect any further uplift from buybacks in the coming weeks.

Q1 earnings are normally stronger than Q2 so there is a little less excitement in the Q2 earnings cycle. With earnings expected to decline -8.7% for Q2 it would be tough to get excited about those results.

For these reasons, I am bearish on the market after the next couple of weeks. I believe it is entirely possible we will see another surge higher but that rally will fail as the Dow and S&P reach that strong resistance. We may not go straight down but volatility should increase and the overall trend will decline into the summer months. I could be completely wrong and we surge to new highs but my conviction is to the downside by summer. Bank of America is now predicting S&P 2000 for the end of 2016 with significant volatility between now and the end of December.


The Dow has the same overhead resistance problem. Once it reaches 17,750, it should become very difficult to move higher. Everyone that was trapped at that level in early January when the market crashed to 15,450 is going to want to close their positions and thank their lucky stars they were able to recover those losses. This is the same thing that happened from Nov-Dec when the market stalled at that level after rebounding from the August crash. Since hitting that resistance over the next couple weeks will be just before the Sell in May cycle there will be some urgency on their minds as those resistance levels are hit.



The Nasdaq is no different except that it has not rebounded as high as the Dow and S&P. The Nasdaq failed at the 61.8% retracement level and has not reached downtrend resistance or the horizontal resistance at 4,926. The wreck in the biotech sector has kept the Nasdaq rebound under check. So far the Nasdaq has made a lower high off of a lower low to the negative pattern is reinforcing. The Dow and S&P made nearly identical lows that gave the appearance of a double bottom. The Nasdaq did not.



The Biotech Index is trading in a narrow range between 2800-3000 and a breakout would be bullish but a break down is more likely given the political situation. A return to 2,600 and rebound could produce a double bottom but it would need to be a firm bottom over several days rather than a one-day wonder.


The Russell 2000 has been moving in lock step with the biotech sector. A break below 2,800 on the $BTK would equate to a break below 1,065 on the Russell. The oil volatility over the last two days has also provided some instability to the Russell. There is significant resistance at 1110-1120 and then again at 1,161.


Readers sometimes say I am not clear in my summations. That is because the market is never clear in its intentions. The best-laid plans can always go astray. I am slightly bullish for the next week or maybe two. However, I am bearish for the latter half of April and all of May. That could change based on the market action next week. Nothing is ever cast in concrete. We need to do the best we can in analyzing the situation, make plans that follow that analysis and then be ready to change those plans if the market does not cooperate.

If market analysis was fool proof we would all own islands and private jets. Since analysis is never guaranteed we scratch out a living one position at a time. The object of the game is to win more than you lose. If anyone ever tells you they never lose they are lying. A successful trader wins about 65% of the time. As long as your losers are smaller than your winners you will be successful.


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Random Thoughts


Over the last five days, volume in put options has lagged call option volume by 23.63%. That means investors are making more bullish bets than bearish. However, put volume is still close to the highest in the last two years so investors are still either concerned or expecting a decline.

The McClellan Oscillator Ratio ($NYMO) for the NYSE has rolled over and is heading lower. Note the levels in January and February when the market was correcting. The bullishness rebounded to 105.77 on the MO the prior week and that is the highest level since January 2009 and the second highest level since 1998. That is the farthest I could look back on StockCharts.com.


The corresponding NYSE McClellan Summation Index is nearly off the chart with a reading of 1,000. This is extreme oscillation and suggests we are going to roll over in the weeks ahead. The Summation Index measures advancing and declining volume on the NYSE. Over the last month, there has been about 5.83% more declining volume than advancing volume and this covered the period where the markets were up for five consecutive weeks.


Disney just hit $1 billion in the international box office for 2016 thanks to Star Wars and Zootopia. This is the earliest ever for Disney. Zootopia hit $415.9 million in its international release and Star Wars took in $447 million internationally as the two largest grossing movies this year. Zootopia is now the second largest movie ever in Russia, behind only Avatar, with $26.5 million. It has taken in $184.7 million in China and second only to the Avengers: Age of Ultron. Globally Zootopia has grossed $633 million and Star Wars has grossed $2.06 billion.


While the bulls gained some converts the investor sentiment survey did not change materially. Bullish sentiment rose +3.8% and bearish declined -3.1%. The survey closes on Wednesday so the end of week decline was not factored in.



Fortune Magazine just published its list of the world's 50 greatest leaders. Jeff Bezos was number 1 and his third year on the list. Apple's Tim Cook, Pope Francis, Paul Ryan, Angela Merkel, Stephen Curry, Ruth Bader Ginsburg, Melinda Gates and Bono were on the list. Absent from the list were President Obama and Donald Trump. 50 Greatest Leaders


Batman vs Superman? Really? My son asked me if I wanted to go see it this weekend and I turned him down. I cannot get past the absurdity of the contest. The man of steel against a flesh and blood human. Hey, batboy, here I am. Take your best shot. Take your 100 best shots but when you are done, I am sending you to the moon. I am sure the writers have come up with some clever way of making the match more realistic but it is still absurd. The movie only has a 30% rating on Rotten Tomatoes but it reportedly took in $27.7 million on Thursday night's open. It is expected to total $170 million for the weekend. Globally they expect $300 million. Apparently, the twin super heroes can still draw a crowd and for that reason alone they will both survive the battle. We cannot have either one of the golden geese killed off or the money would stop flowing.


 

Enter passively and exit aggressively!

Jim Brown

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"If you torture the data long enough, it will confess to anything."

Darrell Huff (How to Lie With Statistics, 1954)