The indexes battled resistance all day in a low volume market and gave up their gains at the close.

Market Statistics

There were no headlines of any importance and the Dow ran into strong resistance right at the open that held all day. There was simply not enough conviction or volume on the buy side to break through that 18,000 level. Without headlines or earnings, it was a lackluster day and probably the first of many over the next three months.


The economic news was less than exciting. The Core Logic Home Price Index rose +6.2% over April 2015. This was down from 6.7% for March. The index has increased for five consecutive months. Single-family prices rose +1.8% and home prices reached new highs in 17 states. Only one state declined and that was Connecticut. This was a lagging report for April and it was ignored.

Semiconductor billings for April declined -1.0% after a minor +0.3% gain in March. Billings have declined in five of the last six months. This was also a lagging report and was ignored.

Productivity for Q1 declined -0.6% after a -1.7% decline in Q4. This was a revision from a previously reported -1.0% decline in the first release. Nonfarm output per hour fell -0.6%. Hours worked increased +1.5% and hourly compensation rose +3.9%. On a trailing 12-month basis, productivity is up only +0.7%. Annual productivity growth has averaged only 1% since the recession. Without rising productivity growth, the economy will remain sluggish and the GDP growth will soften.

The economic calendar for tomorrow is also lacking any material reports. The Job Openings report is for April and we have already had two employment reports since that period. It will be ignored. The oil inventory numbers could cause a slight movement in the market with oil prices holding over $50. A big decline in inventories could lift prices and an unexpected build in inventories could push prices lower and drag the market with it.


In stock news, Tesla (TSLA) shares saw a bounce after billionaire Ron Baron of Baron Capital said Tesla was a stock you could buy and hold for 20 years because it was going to be huge. He believes Tesla could be one of the largest companies in the U.S. or even the world. He is talking his book since he has amassed a $300 million stake or roughly 1% of the outstanding shares. He has more than a dozen funds that hold shares in Tesla. One of his funds has a 15% stake and another has an 11.6% stake. He expects to make $6 to $7 billion on his investment over the next 10-15 years. He is expecting Tesla to increase sales from $4 billion in 2015 to $8 billion in 2016 and $20 billion in 2017. He said Tesla has no real competition and they are moving so fast that they will stay ahead of the pack. He expects battery sales to equal auto sales in revenue once the gigafactory is in full operation. Shares spiked 5% on his endorsement.


Biogen (BIIB) shares fell sharply after the company lost a big gamble on a MS drug. The company thought it had a winner but the drug trials proved them wrong. Opicinuamb was a drug that was supposed to improve symptoms of MS by improving cognitive function and disability over a 72-week trial by restoring myelination around the nerves. The "anti-LINGO" drug failed on both endpoints of the study. Some analysts had expected a big payday for Biogen if the drug had worked. Biogen is not giving up on the concept and will continue with their research and plans new Phase 2 and Phase 3 studies in the years ahead. Shares fell -13% or -$37.


Alexion Pharmaceuticals (ALXN) suffered a similar fate after a 26-week drug trial for generalized myasthenia gravis (gMG) failed to show any statistical significance compared to the placebo. There were some secondary endpoints that were successful so the trials will continue with an altered focus.


Sarepta (SRPT), a stock that is too volatile to trade, spiked 22% after the FDA requested more data on a MS drug they were expected to reject. The FDA advisory panel recommended rejecting the drug but the full FDA has the power to overrule the recommendations. The drug is for Duchenne muscular dystrophy (DMD). Hundreds of patients and their families have been showing up at hearings and pleading with the FDA to approve the drug. This has led to wide swings in the stock. Analysts believe the stock is worth single digits if the drug is rejected and it could be worth $50-$60 a share if the drug is approved. With shares in the $20 range, you either win big or lose big. There is no middle ground.

The FDA was expected to rule this week. When they asked for more data that was a clue they were trying to find some reason to approve it over the recommendation of the panel. This company is a real long shot but you have to be willing to lose 50% of your money if the decision is negative.


Valeant Pharmaceuticals (VRX) finally reported earnings this morning and while the miss was not large, the guidance was terrible. They reported adjusted earnings of $1.27 that missed estimates for $1.37. Revenue rose 9.3% to $2.37 billion but missed estimates slightly at $2.38 billion. They guided for full year earnings of $6.60-$7.00 compared to the prior forecast for $8.50-$9.50. Revenue guidance fell from $11.0-$11.2 billion to $9.9-$10.1 billion.

The new CEO, Joe Papa said, "Negative external attention continues to adversely impact the business and our reputation with patients, physicians and all of you, our shareholders, as well as our distracted organization." He said the results reflected the "significant disruption" over the past nine months. It will take six months to stabilize the company, including staff recruitment, improving relationships with doctors and drug payers, selling assets and repaying debt. They owe $31 billion with $15 billion due by 2020. Year to date they have repaid $730 million and expect total repayment in 2016 of $1.7 billion. Shares fell to a new low at $24.

I wrote on Monday it would be interesting to see if they packed all the expenses and losses into this quarter in order to clear the books and allow the recovered company to show positive gains in future quarters. The alternative was to front load gains to show a profit in this quarter and put investors at ease. Apparently, they took the first option. Is this a buying opportunity?


Zillow Group (Z) was upgraded by Barclay's after they settled a suit with Move.com for $130 million instead of the $500 million analysts expected. The suit had been ongoing for the last two years and kept a cloud over Zillow's future. Move.com was seeking $1.8 billion in damages. Move.com alleged that Zillow hired two of its executives, who provided Zillow with trade secrets that helped Zillow acquire Trulia in 2014 for $2.5 billion. Shares spiked 6%.


F5 Networks (FFIV) rallied 13% on news it had hired Goldman Sachs (GS) to help evaluate acquisition offers. The company did not say it had any offers but the wording of the story seemed to indicate they had received multiple expressions of interest. No parties were identified. F5 is a current position in the LEAPS Newsletter. Last week we had a big win with the Hewlett Packard/Computer Sciences news that spiked CSC by $15. I would be really happy if this trend continues.


The weekly API inventory report released after the bell showed a decline of -3.56 million barrels of oil and a gain of +760,000 barrels of gasoline and +270,000 barrels of distillates. The expectations for Wednesday's EIA inventories are for a decline of 3.138 million barrels of oil. The EIA estimate also calls for a decline in gasoline of -1.305 million barrels and a -504,000 barrel decline in distillates. If the EIA numbers are correct, we could see another push higher in WTI prices because of the decline in refined products.

Crude prices rallied into the close to an 11-month high at $50.47.


Markets

The Nasdaq closed slightly negative because the biotech sector finally cratered with a -1.7% decline. Now that the ASCO conference is over the biotech stocks should seek their natural level. Stocks had rallied in advance of the conference on expectations for some good news that could create some winners. Kite Pharma (KITE) was one of those winners with a large spike on Monday but shares fell -2.5% today. This is the story of ASCO. Shares rise on expectations and then on the actual news for those with good presentations. Afterwards the sector declines. This meeting is called the Super Bowl for drug stocks. We all know how interest in football fades about an hour after the Super Bowl ends. Unless you are the winning team, there is no continued celebration. The drug Super Bowl is over and the celebration is fading.


The S&P continued to post a higher close after spiking intraday to an eleven month high. However, it gave back -7 points to close up only +2. The selling was not as pronounced on the S&P as the Dow but it does exist. The index punched through the 2,116 level to touch 2,119 but the hang time was brief. The index fell back to close at 2,112 and just below that 2,116 level. It is either poised for a breakout or a resistance failure. Given the expected low volume, the consensus outlook is for a decline. The summer doldrums have started and there are no headlines on the calendar until the FOMC meeting next week and then the Brexit vote the week after. There is always the possibility of a continued meltup but the odds are against it. Of course, that is normally when rallies occur, when nobody expects them.


The daily Dow chart does not paint the true picture. The 5 min chart is the one that shows the solid intraday top and what the bulls will have to overcome this week if they want to move the market higher. The Dow has to break through that wall at 18,000 and then the resistance band from 18,110-18,165 in order to make a new high. That is going to be hard to do in a low volume market with no headlines to power the breakout.

Support remains 17,700 and I would feel better about our breakout chances if we saw a pullback to that level and then another attempt at overhead resistance.




Note the number of biotech stocks in the point losers list below. This should only increase in the days ahead. Without the biotech sector providing support the Nasdaq failed at the April resistance high of 4,968 and while it has only pulled back a hand full of points that has been resistance for the last several days. When the indexes only pull back a small number of points from strong resistance that is a signal the buyers are still trying to mount a charge. The S&P did this for the last 7 days with intraday pushes higher but then a close just under resistance. The stage was set for the next day but the sellers were knocking the S&P back every morning. Eventually the buyers won the battle and the index has risen for the last two days to another resistance point.

If the Nasdaq gets through 4,968 there is round number resistance at 5,000 and then a big gap before the old high resistance begins at 5,160. One day will not make a rally. With the low volume, it could take a couple weeks to push through to the highs. I am not sure the bulls have enough conviction to sustain that kind of assault.



The Russell 2000 gained only 3 points but it was a new 6-month high. The Russell is approaching major resistance at 1,200 and without the support of the biotech sector, it could be a tough uphill fight. The Russell is clearly overextended and needs to rest before attacking that 1,200 level.


Historically, June is flat to slightly bullish over the first two weeks. It tends to peak in option expiration week and then decline into month end. Historical trends are just that, they are averaged over a long period. Any single June can and sometimes does exactly the opposite of what is expected.

We need to trade the trend until it ends. The buyers have the momentum, although very weak. Remember, when the bulls have a new high target in sight they can climb almost any wall of worry to make it happen. Once that high is hit, it becomes a sell the news event as traders take profits and wait to see if the market direction changes. It appears the bulls are focused but the ranks are slim and therefore volume is low. As evidenced by the intraday chart on the Dow the bears are also focused on selling at resistance.

Today had the appearance of another short squeeze at the open. I saw dozens of charts on individual stocks that spiked straight up at the open and then went sideways to down the rest of the day. As long as strong short interest is high, these short squeezes can continue to chip away at resistance.

Enter passively, exit aggressively!

Jim Brown

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