The Dow moved into its resistance band and the S&P pulled a little bit closer as positive economics and end of quarter retirement funds offset a sharp decline in oil prices.

Market Statistics

Friday Statistics

The Dow closed just slightly over initial resistance at 17,750 as a late day surge of short covering pushed the index higher. On the NYSE, there was $1.5 billion in buy on close orders that kept the index from rolling over at that resistance level as it had in the prior two sessions.

Friday's close at 17,792 was the first close in that resistance range but the S&P has yet to reach the strong resistance at 2,075.



The economic reports were mixed but traders took the good news and ignored the bad news. The good news came from the Nonfarm Payrolls and ISM Manufacturing. The bad news was a decline in construction spending and a sharp drop in March auto sales.

The March Nonfarm Payroll report showed a gain of +215,000 jobs, down from 242,000 in February. This was slightly above consensus estimates for 205,000 and could be considered a Goldilocks number. It was not too hot and not too cold. Revisions to the prior two months were minimal and totaled a loss of only -1,000 jobs.

The unemployment rate rose from 4.9% to 5.0% as more people entered the workforce. The labor force participation rate rose 0.1% to 63.0 and the highest since March 2014. New or returning workers added 396,000 people to the labor force. That means returning workers began looking for work again. However, the more accurate U6 unemployment/underemployment rate rose slightly to 9.8%.

The average hourly earnings rose +0.3% and erased the -0.1% decline for February. The services sector added 219,000 workers while manufacturing saw a decline of -29,000 jobs. That is the largest decline since December 2009.

Energy and mining lost another 12,000 jobs after losing -17,000 in February. The construction industry added 37,000 jobs thanks to the continued warmer than normal weather. The government sector added 20,000 jobs. Retailers added 48,000 jobs despite a constant stream of negativity regarding weakness in consumer activity. Healthcare added 44,000 jobs, leisure/hospitality 40,000 and professional/business adding 33,000.

Those taking part time jobs because they were unable to find full time work rose +135,000 to 6.12 million and the highest level since August. The number should be in the 4.5 million range in a healthy economy.


The manufacturing sector may be returning from the dead despite the loss of 29,000 jobs in March. The ISM Manufacturing Index rebounded from four months in contraction territory to post a solid 51.8 for March. New orders surged from 51.5 to 51.8 and backorders rose from contraction at 48.5 to expansion at 51.0. While only four components are still in contraction, compared to 9 in February, three of them improved for the month with only employment declining from 48.5 to 48.1.

Analysts believe the worst is over for the manufacturing sector as we move into spring and summer, which are normally positive as inventories build ahead of the holiday buying season.

One handicap was the sharp rise in prices paid from 38.5 to 51.5 indicating the cost of raw materials is rising. Another term for that is inflation. However, a lot of that was related to the $26 low for oil in February.



On the down side, the vehicle sales for March fell sharply from an annual run rate of 17.5 million to 16.57 million. This was well below expectations for 17.5 million and 3% below year ago levels. Analysts suggested part of the problem could be GM moving away from their heavily discounted fleet programs. Others said the early Easter might have shifted buying patterns. I think they are grasping at straws. With warmer than normal weather across the country there were plenty of shopping days but consumers were not shopping. The rapidly rising gasoline prices were more likely to blame. Gasoline prices were up 40% from the February lows. That is enough to scare consumers into keeping their existing cars. Another factor is the shrinkage of the subprime auto loans. After a year of pushing those loans, the banks are starting to pull back because of rising repossessions. Without financing the marginal buyer is only a dreamer.

GM sales rose only 0.6% compared to estimates for 6.0%. Ford sales rose 7.8% compared to estimates for 9.4%. Fiat Chrysler sales rose +8.1% compared to estimates for 14%. Honda saw a 9.4% increase compared to estimates of 16%. Volkswagen sales fell -10.4%. Toyota sales fell -2.7% compared to estimates for a 5.6% rise.

JD Power said there were "worrisome trends below the surface" with rising inventories at levels they have only seen once in the last 24 years. Used car prices were falling sharply. The company also said incentive spending on new vehicles has risen rapidly and is trending towards recession-era levels industry wide and has already exceeded recession-era levels on cars. Q1 sales incentives averaged 9.6% of MSRP. The increased incentives reduce future resale values and drives down trade-in values for the current transaction.

February construction spending declined -0.5% to $1.144 trillion compared to estimates for -0.1%. However, January was revised higher from 1.5% to 2.1%. The -0.5% decline was led by a -1.7% drop in public construction. Residential spending rose +0.9% to $448 billion. That jumps to 1.2% if you remove home improvement spending.

Consumer sentiment rose slightly from the first release but was down for the month. March sentiment rose from 90.0 to 91.0 compared to 91.7 in February. The present conditions component declined from 106.8 to 105.6 and the expectations component declined from 81.9 to 81.5. This is the third consecutive monthly decline in sentiment. You can blame this on gasoline as well. A 40% hike in gasoline prices produces a direct link to the consumer attitudes. Gasoline may be below $2 in most areas but that $1.50 we saw in many states in February was a powerful stimulant. Consumers are facing withdrawal symptoms as prices rise. In California, prices rose 10.1 cents per gallon over the last week to average $2.78 per gallon but prices are nearing $4 in some areas. No wonder California has more than 21% of all registered Tesla cars.


The various economic reports on Friday caused a 0.1% increase in the Atlanta Fed real time GDPNow forecast. They are now predicting 0.7% GDP growth for Q1. The construction spending report showing a rise in residential construction was responsible for the increase in the GDP forecast.

Despite the increase, this is still well below the 2.7% growth forecast in the middle of February. The outlook has decreased significantly. This is the main reason Janet Yellen was so dovish in her rate forecasts last week. They are not going to hike rates with the GDP so close to zero growth.


Overseas the Chinese PMI for March came in at 50.2 and well above the forecast for 49.3 from a Reuters poll. February's PMI was 49.0 and the lowest reading since 2011. All categories of the index showed improvement. New orders rose above 50 suggesting the government's stimulus measures have started to work. However, one month is not a trend. Analysts also said the stabilization of the yuan may have helped calm nerves and stimulate growth.

The economic calendar for next week is highlighted by the FOMC minutes on Wednesday and another appearance by Janet Yellen on Thursday. The Yellen event is actually an unprecedented round table discussion with Yellen, Bernanke, Greenspan and Volcker. I cannot imagine a discussion with four Fed Chairmen all at the same table. Their outlooks are dramatically different and there could be some fireworks to roil the market.

The other reports highlighted in green are important but not normally market movers.

Analysts will be scouring the FOMC minutes for clues about the next rate hike. A total of 6 Fed heads were talking about accelerating the hikes last week with the implication that April is a live meeting with rate hike potential. However, after Yellen's dovish comments there is almost zero chance of an April rate hike. The CME FedWatch Tool is showing only a 4.6% chance of a rate hike. June jumps up to 25%, July 40%, September 52%, November 55% and December 65%.



In stock news, BlackBerry (BBRY) reported an adjusted loss of 6 cents that beat estimates for a loss of 8 cents. However, revenue of $464 million declined -29.7% and missed estimates for $560 million. Hardware revenues contributed 39%, service fees 29% and 32% from software and licensing, which was up +106% in the quarter. BlackBerry said it won 3,600 enterprise clients in the quarter.

They generated $225 million in free cash flow and ended the quarter with $2.377 billion in cash. Long-term debt decreased from $1.707 billion to $1.277 billion. While they are not setting the world on fire they are reducing their debt and growing their software and licensing business, which the company has said will be their future business. They expect to grow that revenue by 30% for the full year. Shares declined -7.5% on the news.


Tesla's Model 3 debut event was a huge success with more than 232,000 orders received in the first 48 hours according to an Elon Musk tweet. That represents $232 million in deposits at $1,000 per car. Musk said the average selling price with options would be around $42,000 so that amounts to nearly $10 billion in sales. He said, even if you only bought the base model at $35,000 you would still have the finest car on the road for that price. The car features 0-60 in six seconds, 215 mile range, semi-autonomous driving, touch screen dashboard and seats 5 adults. Unfortunately, they will not begin to ship until late in 2017.

GM will begin selling the Bolt electric car with a 200-mile range later this year. Hyundai's Ioniq will have a 110-mile range and will match Tesla on price and goes on sale this fall. Unfortunately, for those companies, buyers are not lining up around the block at local dealers to buy them.

Shares were up +$17 intraday but fell back to prior resistance at the close. Short interest in Tesla shares is currently 25% or 32 million shares and an all time high. Tesla has 132 million shares outstanding. Apparently, a lot of people were expecting a sell the news event.


Regeneron Pharmaceuticals (REGN) shares spiked $45 after the company and its partner Sanofi (SNY) reported results from two Phase 3 trials using their experimental drug dupilumab for moderate to severe dermatitus. The trials showed that roughly 37% of the patients were able to clear up their skin lesions compared to only 10% that took the placebo. Using the Eczema Area and Severity Index, patients on the drug showed a 67-72% improvement in their rating. The number of adverse events for both trials were minimal suggesting the treatment was easily tolerated. The drug has already received a "breakthrough-therapy" designation by the FDA so the final approval should be favorable. The companies are going to submit the findings to the FDA in Q3.


Netflix shares gained +$3.47 after the FCC said it was not going to investigate the company for slowing download speeds to mobile subscribers on AT&T and Verizon. The FCC chairman said Netflix did not violate any laws because that was outside the net neutrality rules. Netflix admitted degrading picture quality to reduce download sizes because of data caps at those carriers. The company said it had been doing this for five years to "protect customers from exceeding their data limits." Netflix said last week they would soon introduce an app that would let users pick their video quality based on their current data limits.


Chipotle Mexican Grill (CMG) was not finding any love on Friday. Goldman Sachs (GS) cut them from buy to neutral and Wedbush went from hold to sell. A week earlier Jefferies, The Maxim Group and Deutsche Bank cut them from hold to sell. CMG said in March they expect to lose $1 a share because of declining comps and additional costs from the food contamination issues. Shares declined -$6 to $464.

The company applied to trademark the name "Better Burger" in what analysts believe is an effort to branch out in the fast food burger market to compete with Shake Shack, Five Guys and others. Chipotle already operates 13 Asian Kitchen restaurants and three Pizzeria Locale locations in a joint venture to test the concept.


Yahoo (YHOO) lost another executive ahead of their sale. Senior VP of Talent Acquisition and Development, Sandy Gould, resigned saying "leaving Yahoo is the hardest thing I have ever done." It was probably not as hard as recruiting new talent into a company that is about to be sold and dissected. In a statement she said, "It is time to take a break and decide my next adventure." She had only been at Yahoo for 3 years after working at Disney and RealNetworks. She is only one more in a long line of executives to flee the sinking ship.

Yahoo has reportedly received interest from as many as 40 groups interested in buying the core business. The company has given them until April 11th to submit preliminary bids. That is next Monday. It is hard to believe there may actually be a bidding war for Yahoo. I am guessing my $1,000 offer may be too low.


The equity markets disconnected from oil after a huge drop at the open. The Dow fell -119 points at the open and the S&P dropped -17 after oil prices collapsed 4.5% on events in the Middle East. The Saudi Arabian deputy crown prince said the kingdom would not freeze production unless Iran and all the other major producers freeze as well. That is contrary to what was implied a few days back when some producers said they would cap production even if Iran were not part of the agreement.

I have said for weeks that the agreement would never work and even if they agreed, it would not reduce the current glut and future production. The entire exercise was simply to lift prices by deceiving the uninformed public.

In other headlines, Saudi said they were planning on increasing production annually through 2020. The UAE said they were planning on increasing production from 3.1 mbpd to 3.5 mbpd by the end of 2017. Iran, Iraq, Libya, Nigeria and the UAE were always questionable about agreeing to a production freeze. Any OPEC producer with excess capacity coming online in the near future needs to sell that production to offset the loss of revenue from the low prices. The only producers that are really pushing for a freeze are the ones with declining production.

A UAE official said OPEC does not want oil prices to rebound to $50 because that would allow much of the shale drilling to be restarted. That is exactly what U.S. producers have been saying that a $45-$50 oil price would allow them to go back to work. It would appear that $40 could be a top for a long time unless U.S. inventories decline dramatically.

Crude prices fell to $36.63 at the close and I would seriously doubt that they will rise significantly in the near future. We are more than likely going back to the low $30s based on the fracture in the freeze coalition. Inventories and production are still rising. With 1-2 mbpd going into storage somewhere on the planet there is a point where a limit will be reached.

Inventories in the U.S. rose 2.3 million barrels last week to 534.8 million and a new historic high. Production declined 16,000 bpd to 9.022 mbpd and -588,000 bpd off the peak from last June.


Baker Hughes said the active rig count in the U.S. declined -14 to 450 with oil rigs falling -10 to 362 and gas rigs -4 to 88. Those are historic lows since records were started in 1949.


Markets

Since I have been saying the same thing for several weeks I will try not to bore you and repeat myself too much today. The Dow and S&P are over extended. The S&P is approaching major resistance that begins at roughly 2,075 and continues to the 2,132 level from the high last May. While it is entirely possible for the indexes to fight through this resistance and make a new high, it will not be an easy task.

With the big gains out of the February low, the Dow is up +14.7% over 7 weeks. The S&P has rebounded +15%. By any metric you care to use this is grossly over extended. Continuing to press through another 60 points on the S&P "should" be very difficult.

I reported on Thursday night that FundStrat guru Tom Lee is looking for better than expected earnings because the bar is set so low. With traders holding more than $1 trillion in existing short positions and the most since 2009, he believes the earnings beats will cause a short squeeze that takes us to new highs. I would love for that to happen but we need to be aware that it could be a tough battle to move higher.

The Williams %R indicator I added to these charts is a momentum indicator for determining overbought/oversold conditions. A number under 20 indicates overbought and a number over 80 indicates oversold. This indicator is used for determining entry and exit points for traders. For the S&P and Dow the indicator has been over 20 since late February. The last time the S&P was this overbought for this long was the rebound out of the October 2014 dip. The S&P topped out at 2,079 from that rebound, pretty close to where we are today, and then fell back to 1,972 over the next two weeks. The chart pattern for the rebound from October 2014 looked almost identical to the rebound from the September lows in 2015 where the S&P reached 2,116 before falling nearly 100 points back to 2,020.

Past performance is no guarantee of future results but patterns like this do tend to repeat. The longer the S&P remains overbought the bigger the correction when it finally happens.


The Dow chart is similar to the S&P chart with the same overbought conditions. The next 400 points on the Dow to return to a new high should be very tough to win. Consider it a Super Bowl equivalent of a goal line defense every 50 points. It is not just one resistance level but a series of resistance levels every 50 points.

Lately we have seen some rebounds from the dogs of the Dow like American Express, IBM and others that have been remarkable. The key question is will they continue higher after such big gains already. IBM has rallied 31% since the February low and American Express +21% in only 7 weeks. While they are short term overbought, they are both still well below their highs. Can they continue the sprint higher?

Because the Dow is only a 30 stock index the performance of only a handful of stocks can materially impact the index. If 6-7 stocks continued posting those strong gains the index would be dragged slowly higher.

I will be the first to admit that the Dow internals look very bullish. I went through the charts for each of the Dow stocks and 22 of the 30 were either bullish or extremely bullish. Only 8 stocks, JPM, GS, DD, PFE, NKE, DIS, XOM and CVX were not showing a bullish pattern. GS and JPM were on the verge of turning bullish.

Based on the individual analysis the odds of the Dow continuing higher are very good but remember, the Dow is only 30 stocks and the S&P is 500. The Dow could drag the other indexes higher if the individual performances continue.

That does not mean the index is just going to plow through those major resistance levels. It should be a fight and prior winners could see profit taking at any time.



The Nasdaq has a much easier road ahead. There is significant resistance at 4,926 and psychological resistance at 5,000 but those are just stepping stones on the way to major resistance at 5,165. The major Nasdaq challenge is the biotech sector and that is showing signs of recovery. The biotechs have keep the Nasdaq from rebounding as strongly as the Dow and S&P but should that anchor turn positive we could see the Nasdaq sprint to catch up with its big cap brothers.



All of the indicators on the biotech index are turning positive. The $BTK closed over 3,000 on Friday after making two higher lows in March. The biotech struggle is not over with the political candidates bashing them on a weekly basis but the damage to Valeant (VRX) is fading and it will no longer have a material impact to the sector. There were some positive drug trials announced last week and that caused investors to reevaluate their risk profile to see if it was safe for them to go back into the sector. It may not be clear sailing for the sector yet but the worst may be over and a choppy rebound could begin.


The Russell 2000 was the second best gainer for the week with a 3.5% move. However, the last three days saw minimal moves with the index locked under the strong resistance at 1,120. If the biotech recovery continues, the Russell could move higher but declining oil prices could blunt that move. There are a lot of energy stocks in the Russell and they could act as a brake on the gains. The Russell is far from the same overbought levels of the big cap indexes and could really energize the broader market if the rally continues over 1,120.


This could be a pivotal week for the markets. This is the only week between now and the start of earnings the following week. If traders want to position themselves for a potential earnings rally, they need to do it this week. If they want to capture some profits from the seven-week rally and then move into some earnings positions then this is the week. There could be a positive bias early in the week from funds putting end of quarter retirement contributions to work. That could be offset from any window undressing that could occur later in the week.

The economic calendar is devoid of market movers other than the FOMC minutes on Wednesday and Yellen's roundtable on Thursday. To summarize this could be a volatile week with a slight upward bias. The direction the next week will depend on how the earnings play out.

Friday was April Fool's Day. Hegeye released this cartoon of an April Fool in the form a bullish trader. Do you think there is a message here?



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Random Thoughts


Saudi Arabia is fed up with being dependent on oil revenues for their future. The Saudi deputy crown prince wants to establish a $2 trillion sovereign wealth fund to generate income for the kingdom for the next century. This could greatly exceed the $880 billion fund held by Norway, which is currently the largest.

In order to kickstart this fund the prince wants to take Saudi Aramco public in 2017 in what would be the largest IPO ever. Since Aramco is owned by the government and shrouded in secrecy, it would mean an extremely high volume of public disclosures including reliable third party estimates on the amount of oil reserves in each field, actual production and depletion and remaining expected life of the field. These numbers are as classified as the exact specifications for making a hydrogen bomb. No OPEC nation has released this data in more than 40 years. In OPEC, size does matter and everyone can claim they have reserves of any size in a fight for position amongst themselves but going public with an IPO requires opening the accounting tent for the world to scrutinize. They may find out that the level of pain and embarrassment is simply too high and cancel this plan before it ever gets to the IPO stage.

Several of their largest fields are thought to be nearly exhausted and disclosing that to the world in official documents could be detrimental to their standing inside OPEC. Saudi Arabia is operating 128 rigs today, compared to the 104 in July 2014 when the oil crash began.


As many as 1 million Americans will stop receiving food stamps this year as a 20 yr old law goes back into force. The 1996 law required able-bodied adults without dependent children to work a minimum of 20 hours a week to qualify for food stamps. Some states suspended the law during the financial crisis but it went back into effect on January 1st with a 90-day grace period for recipients to find a job. That grace period expired on April 1st. Some analysts are blaming that law on the surge of new part time jobs over the last three months. The number of food stamp recipients without children and without a disability has increased from 1.7 million in 2007 to 4.7 million in 2014. Thousands Losing Food Stamps


The AAII Investor Sentiment Survey was a real surprise this week. Bullish sentiment declined -6.6% despite the rally. Neutral sentiment rose +4.6% to more than 47% while bearish sentiment actually went up. Apparently, some investors are actually looking at the charts.



Professional April Fool's jokes.

Election Insurance from ESurance

Quilted Northern Rustic Weave

Donald Trump Campaign Announcement

Spray on TV Screens

Kars for Kids, Get your Kid Today

Google Reality Headset

Google Self Driving Bicycle

OpenTable Lickable Food Photos

Velcro car seats from Lexus


NBC, a unit of Comcast, said it has sold more than $1 billion in ads for the Summer Olympics in Rio de Janerio. With most games occurring in prime time for the USA the audiences should be huge. The games start August 5th and last for 17 days. The EVP of advertising said we still have four months of sales ahead of us and advertisers will become more focused as the event draws near. NBC agreed to pay $7.65 billion for the rights to air six additional games between 2022-2032 and no other companies got to bid.


I wrote about the Carlucci Indicator several weeks ago. In theory the combination of indicators on a weekly basis represent a market timing tool that some claim was the best ever invented.

Only one thing needs to happen for this indicator to give a buy signal. The percentage of S&P-100 stocks trading over their 200-day average has to exceed 65% and it closed at 63% on Friday.

The other requirements have already been met. According to Carlucci only two of the following three have to be met but as of Friday all three were positive.

The weekly RSI is over 50.
The weekly Slow STO black line is over the red line.
The weekly MACD black line is over the red line.


The problem with hard coded technical indicators is they do not take into account the calendar, resistance levels, external events, fundamentals like earnings, economics, etc. While the setup suggests entering long positions today there is no relationship to external events. Market technicians will tell you that the market has already factored in all the external events to get to this level. Time will tell.


 

Enter passively and exit aggressively!

Jim Brown

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"The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt. People must again learn to work instead of living on public assistance."

Cicero , 55 BC

Apparently, we have learned NOTHING over the past 2,069 years.