Japan's finance minister warned the country would intervene in the currency market if the yen continued to rise. S&P futures spiked 10 points.

Market Statistics

The yen dropped sharply and a short squeeze was born. Crude prices shook off a drop to $43 and rebounded to close at $44.69 on worries over production outages in multiple countries. This caused energy stocks to soar as shorts covered and many rose more than 5%. Never short a dull market because you never know what headline will cause a short covering panic.

The surge in the overnight futures caused a massive short squeeze at the open that carried through until the close. After two weeks of declines a large number of short positions had been created ahead of the Sell in May cycle. Many of those positions were blown out this morning.

If you need further proof other than the Dow chart look at the Goldman chart below. Goldman had declined $10 in the prior six sessions and spiked $4 today on no news. The shorts that were built up during that decline were squeezed out on the spike.



Traders ignored a 7.6% intraday decline in steel in China and iron ore fell -6%. That does not sound like a growing economy. However, the Chinese consumer price index rose +2.3% for the third consecutive month led by food prices. The producer price index fell -3.4% and slightly less than the 4.3% decline in March. China is going to come back and haunt us but it was ignored on Tuesday.

On the U.S. economic front the NFIB Small Business survey rose for the first time in 2016. The headline number rose from the 2016 low of 92.6 to 93.6 and the highest level since December. However, the internal components were basically unchanged. The three categories that rose were plans to increase employment from 9 to 11, job openings from 25 to 29 and earnings trends from -22 to -19. Expectations for the economy to improve declined from -17 to -18, plans to raise prices fell from 17 to 16 and plans to raise compensation from 16 to 15. I thought it was interesting that respondents expect the economy to worsen but they are increasing employment.

The Job Openings and Labor Turnover Survey (JOLTS) showed the number of job openings rose from 3.7% in February to 3.9% in March. Job openings rose to 5.757 million but new hires declined from 5.5 million to 5.3 million. Separations declined from 5.16 to 5.06 million suggesting workers are content to stay in their current jobs. The JOLTS report is a lagging report for the March period and it was ignored.

Wholesale trade rose +0.1% for March after a -0.5% decline in February. This was the first gain since September. This was the first time in months that inventories did not decline and that suggests the inventory cycle has run its course and the manufacturing sector could rebound. Durable goods inventories declined -0.1% with nondurables rising +0.5%. Sales rose +0.7% with durables down -0.2% and nondurables up +1.6%. That is the first time sales have been up since October.

There is nothing material on the schedule for Wednesday with the April Retail Sales report on Friday the next big event. With the retailers all reporting earnings or lack thereof this week, that sales report could give us an earnings direction for Q2.


The Nikkei 225 rose +2.15% on the comments from the Japanese finance minister. Those were the strongest comments from an official since the BoJ failed to add additional stimulus several weeks ago and the yen has been rocketing higher. The drop in the yen on his comments helped lift the dollar to its fifth day of gains.




After the close on Monday The Gap (GPS) warned of slowing sales and guided lower on earnings. Shares fell -11% today and weighed on all the retailers. The Gap said same store sales fell -10 at Old Navy, -7% at Banana Republic, -4% at The Gap and -7% globally. With the majority of retailers reporting earnings later this week, it was not a good sign. Gap said earnings would be in the range of 31-32 cents compared to estimates for 44 cents.


L Brands warned on Thursday and shares are still falling. Several analysts have come out in favor of buying L Brands here but I would definitely wait until we see a bottom form and that may not happen until the other retailers report.


Allergan (AGN) shares spiked $11 after the company said it would buy back up to $10 billion in stock thanks to high drug sales. The company reported earnings of $3.04 that beat estimates for $2.99. Revenue rose 48% to $3.8 billion but missed estimates for $3.95 billion. That statistic drives me nuts. Revenue rose 48% but still missed analyst estimates. What are analysts thinking and why should a company be penalized for missing outrageous estimates? Fortunately, the stock buyback news helped push the stock higher.

Botox sales surged from $84 million to $637 million after the FDA approved it not only for wrinkles but for muscle spasms and bladder control. Allergan shares hit a two-year low on Thursday.


Stamps.com (STMP) ruined a string of impressive post earnings gains despite some really good numbers. The company reported earnings of $1.72 compared to estimates for 25 cents. The company raised full year guidance from $5.00-$5.50 to $6.00-$6.50. Shares spiked 17% in afterhours trading BUT gave it all back today. STMP has a habit of monster post earnings spikes but the gains from Monday after the close evaporated almost immediately this morning and ended the day with a $5 loss. There was no specific news that related to this decline. Once a trend is established traders will eventually bet against it. The options on STMP are extremely overpriced and it is next to impossible to trade them ahead of earnings.


Lumber Liquidators (LL) posted a loss of 29 cents compared to estimates for 28 cents. Revenue fell -10.2% to $233.5 million, which also missed estimates. Same store sales fell -13.9%. The CDC said in February that people buying laminate flooring from China were three times more likely to get cancer than it had calculated earlier. They originally said chemical levels in the flooring could cause as many as 9 deaths per 100,000 people. That estimate was updated to as many as 30 deaths per 100,000. Shares fell 8% on the earnings news.


Nokia (NOK) reported an 8% decline in network sales to $5.9 billion. Analysts were expecting $6.27 billion. Nokia said customers were holding off on purchases while the company digests the Alcatel-Lucent acquisition. The company bought Franco-American Alcatel-Lucent for $17.8 billion so it can compete with other network providers. Shares fell to a new low.


After the bell Dow component Disney reported earnings of $1.36 compared to estimates for $1.40. Revenue of $12.97 billion missed estimates for $13.19 billion. This was the first quarterly miss for Disney in five years. The company saw a slower than expected 4.5% increase in revenues from overseas theme parks after the terrorist attacks in Paris and Belgium. The revenue they did receive was reduced by the impact of the strong dollar.

Media network revenue of $5.793 billion missed estimates for $5.9 billion. The company said a calendar shift caused the majority of the weakness. In Q1 they only had one college football game compared to seven games in the year ago quarter.

Studio revenue was very strong with a 22% increase to $2.1 billion thanks to multiple blockbusters over the last six months and they have more to come.

Disney said it was dropping the Infinity game console business and would take a $147 million charge and lay off 300 workers. CEO Bob Iger said he had no plans to work past his previously announced retirement date in 2018. Analysts believe he would stay until a replacement is found if the board asks him to remain as CEO.

Disney shares declined from $106.60 to $100.92 in afterhours. As a Dow component that equates to about a 45 point headwind for the Dow on Wednesday.


Electronic Arts (EA) reported earnings of 50 cents that beat estimates for 42 cents. Revenue of $924 million beat estimates for $89 million. The company said the profits were driven by the Star Wars Battlefront game that has sold more than 14 million units. EA released multiple new games in the quarter including "Plants vs Zombies: Garden Warfare 2," "Unravel" and "EA Sports UFC 2." Shares spiked $5 in afterhours. Guidance for the current quarter was weak but the full year guidance was stronger.


The pox on retailers continued with Fossil (FOSL) reporting earnings of 20 cents that beat estimates for 14 cents. Revenue of $660 million fell -9% and missed estimates for $667 million. However, they warned that Q2 earnings would be 15 cents and full year earnings would now be $1.80-$2.80 compared to prior guidance for $2.80-$3.60. Analysts were expecting $3.03 and 58 cents in Q2. They blamed the fitness band craze and Apple Watch for increasing competition in the space. Shares fell -25% in afterhours.


Earnings for Wednesday are light with Jack in the Box and Macy's the most watched of the list. Thursday is retail day with Dillards, Nordstrom and Kohls with JC Penny on Friday.


Crude prices rebounded $1.21 in the regular session to $44.65 on worries the production cuts in Canada and elsewhere would actually eliminate the prior production surplus. Estimates for production cuts from Canada range from 280,000 bpd to 1.5 mbpd. Nigerian production is at a multiyear low at 1.7 mbpd because of attacks by MEND rebels. Columbian production is down -200,000 bpd and Libyan production is down to 300,000 bpd. Venezuelan production is falling because they cannot pay for workers or well services. While these concerns were lifting prices, traders were ignoring the new production coming online from Saudi Arabia at 350,000 bpd, Kuwait 250,000 bpd, etc. Iranian exports have risen to 2.8 mbpd from 700,000 under the sanctions. They are targeting 3.8 mbpd and the pre-sanction levels. Traders seem to fixate on one headline per day and today it was Canada and rising summer demand. May is the lowest demand month of the year and August is the highest. Demand will rise by 2.0 mbpd through August as Saudi Arabia burns an extra 1.0 mbpd to generate electricity during the summer months.

After the bell, the API inventory report for last week showed an inventory gain of 3.45 million barrels compared to estimates for a gain of 714,000. WTI turned slightly negative on the headline but it is the EIA number at 10:30 tomorrow morning that will drive prices on Wednesday. The CFTC said open interest on long futures contracts was at record highs. Nobody is left to buy oil.


Markets

The S&P exploded higher at the open on short covering. The index stalled at 2,080 for a couple hours before another surge of capitulation at the close pushed it above the light resistance from the prior Monday at 2,082.


The S&P has major resistance from 2,100 to 2,116 and it will take more than short covering to power the index through those levels at this point on the calendar. The current high close at 2,130 was made on May 21st last year after the index spent a week banging on the 2,130 level. The decline was not straight down but mostly sideways until the bottom fell out in August. This year there are far more events cluttering the headlines and the high close at 2,102 on April 21st could be the high for several more months. It will be interesting to see if there is any follow through to today's short squeeze. I am sure there are still some shorts in denial and expecting this rebound to fail. If we move higher that could produce some more short covering.

Key support remains 2,040 and key resistance 2,116.


The Dow came to a dead stop at key resistance at 17,925 but it did exceed that level in April to touch 18,167 and the top of the next resistance range. Key support is 17,500 and I doubt that will be seen this week. The 45-point Disney headwind is not really impacting the Dow futures overnight with only a -24 point decline. However, a lot of those gains in Dow components today are surely going to see some profit taking over the next couple of days. The $4 squeeze in Goldman Sachs on no news is just begging shorts to sell the rip. Same with IBM, Boeing and United Technologies.



The Nasdaq moved sharply higher with a 60 point gain to 4,809 and well over support at 4,750. However, the Nasdaq has a long way to go to retest the resistance from April at 4,960 and even farther to attempt a breakout over resistance at 5,160. The Nasdaq did not get any support today from the biotech sector with the index only slightly positive. That was the motive power for the Monday gain with the index rising 3%. Today it was up only .5% compared to 1.25% on the rest of the indexes.

This looks an awful lot like a normal oversold bounce and I will be very surprised if it continues significantly higher.



The Biotech Index rebounded only to the next resistance level over 3,000. This looks a lot like an ordinary oversold bounce and we could still retest 2,750.


The Russell 2000 rallied 10 points but it was only .94% compared to 1.25% on the big cap indexes. The underperformance suggests the short covering in the small caps was less pronounced and could easily fade. The bounce off 1,100 came from the right level but it needs to exceed 1,150 before it will garner any respect.


Historically a big short squeeze like we saw today, will fail over the next 48 hours. However, on rare occasions a big short squeeze is actually the start of a major rally that can run for weeks. While I do not expect that this week, it is always possible. The volume today was anemic at 6.6 billion shares and actually less than Monday's 6.8 billion. The recent down days like we saw last week came on 7.7 to 8.9 billion shares. Follow the volume. The days with the highest volume represent the correct direction.

Enter passively, exit aggressively!

Jim Brown

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