The markets battled another set of declines overseas and while we saw some lower lows, there was a rebound at the close.

Market Statistics

The European markets cratered again on yet another survey that showed those wanting to leave the EU were significantly above those that wanted to stay in the EU. The financials took another hit and the dollar spiked again to a two week high. The yield on the German 10-yr Bund fell into negative territory as a flight to quality as investors fled equities ahead of the Brexit vote.





In the U.S. the Retail Sales report for May came in with a +0.5% gain and slightly better than the +0.2% gain analysts expected. This was down from +1.3% in April. Unfortunately, the headline number was caused by a spike in gasoline prices ahead of the Memorial Day holiday. Excluding gasoline and autos, sales rose only +0.3%.

Sales in building materials fell -1.8%, general merchandise declined -0.3%. Gasoline sales rose +2.1%, food service and bars up +0.8%, non-store retailers +1.3% and clothing +0.8%. On a trailing 12-month basis, sales are up +2.5%.

Business Inventories for April rose only +0.1% compared to +0.4% in March and estimates for +0.4%. Manufacturers' inventories fell -0.1%, retailer inventories declined -0.1% and wholesaler inventories rose +0.6%. This was not a bullish report but it was for April and was ignored.

The NFIB Small Business Optimism Index rose slightly from 93.6 to 93.8. This was only the second increase in 2016 and it would be hard to say that was bullish. Those expecting the economy to improve rose slightly from -16 to -13. All the other components were basically flat. The uncertainty about the U.S. economy was blamed for the weakness in optimism. This report covered May.

Import and Export prices surged in May. Import prices surged +1.4% in May while April was revised higher from +0.3% to +0.7%. Analysts were only expecting a +0.7% rise. However, there is a catch. The rise in prices were led by a 17.4% increase in crude oil and refined products. This was the third consecutive month with petroleum up more than 10%.

Excluding petroleum, import prices rose only +0.4%. If you exclude fuel it only rose +0.3%. Excluding autos pushes it even lower at +0.1%.

The big events on the calendar for Wednesday are the FOMC announcement at 2:PM and the Yellen press conference at 2:30. The Philly Fed Manufacturing Survey on Thursday is the next most important event but it may be overshadowed by any reaction to the Fed news.


The API crude inventories after the close showed an unexpected rise of +1.2 million barrels for the week ended last Friday. Analysts were expecting a decline of -2.3 million barrels. Crude prices had closed at $48.47 with a decline of 41 cents. After the API news, WTI fell to $47.72 in afterhours. That is nearly a 4-week low. The real inventory number to watch is the EIA number at 10:30 Wednesday morning.


After the bell, MCSI rejected Chinese mainland stocks, again. The last time they rejected mainland stocks China responded by significantly devaluing the yuan and causing a ripple in the global markets. MCSI said there were lingering concerns about market access in China. They have too many trading halts. Those halts can last for months. Also, money cannot be easily removed from the market. The 20% monthly repatriation limit is a "significant hurdle" for investors. That assumes your stocks are not halted.

MCSI said it needed more time to assess the effectiveness of the Qualified Foreign Investor program including capital mobility, investment quota allocation and the effectiveness in the new trading halt rules. The MCSI emerging markets indexes has more than $1.5 trillion in assets and the inclusion of mainland stocks could result in those stocks representing 40% of the index. The potential for market disruption would be huge. The Chinese are making progress in improving their markets but they are not there yet according to MCSI. The China A-Shares (ASHR) ETF fell more than 2% in afterhours.

The Shanghai Composite had been trading sideways until June as investors waited for the MCSI decision. The spike over the prior week was speculation MCSI would approve China and an explosive rally would appear. The decline over the last two days could have been traders taking profits from that buildup rather than taking a chance on a rejection. The Chinese market could trade down significantly on Wednesday.


Synchrony Financial (SYF) a spin-off from GE warned it was facing higher charge off rates for delinquent accounts. The company expects an increase in charge-offs of 20-30 basis points over the next 12 months. This will cause loan loss reserves to increase and earnings to shrink. Write-offs as a percentage of total loans were 4.7% in Q1, up from 4.53% in the year ago quarter. More than 28% of Synchrony's credit-card loans in Q1 were to consumers with FICO scored under 660. Shares fell 13% on the news.

The CEO from Capital One warned earlier this month that default rates are rising. JP Morgan's Jamie Dimon warned that credit problems "are going to get worse." More than 31% of the subprime auto loans written over the last 3 years are in trouble. Revolving credit rose to $951.5 billion at the end of April. All the banks and credit card companies saw their shares decline today.


Alibaba (BABA) CEO Jack Ma, stunned attendees at their investor day when he said counterfeit goods are higher quality and sell at lower cost. While he has pledged to get rid of fake goods on his websites, that comment suggests it may be a long time before that happens. Ma said the fake products were made in the same factories but without the fancy name. That sounds like a theft of intellectual property if you contract to make Nike shoes and then use the same equipment to make an identical competitor. The company also lowered guidance for Q2 sales from $3.12-$3.19 billion to $2.81-$2.82 billion. Ma said he wants to reach $1 trillion in annual sales by 2020 and become the 5th largest global economy after Japan. Shares rose $2 on the trillion dollar comment.


Bob Evans Farms (BOBE) guided to $2.00 to $2.15 for the full year on revenue of $1.28-$1.33 billion. Analysts were expecting $2.19 and $1.32 billion. The company predicted same store sales in negative low-single digits for the year. For last quarter, they reported earnings of 48 cents and analysts were expecting 43 cents. Shares gained slightly on the earnings beat.


Perrigo (PRGO), a current Option Investor play, spiked $9 after Bloomberg reported they were close to a deal to be acquired by an unidentified UK company for $20 billion. That would be a 33% premium over Monday's close. Perrigo markets over the counter consumer goods and pharmaceuticals worldwide. Revenue is about $6 billion a year with strong growth. If the rumor were true, that would equate to a price in the $130-$135 range so plenty of upside left.


Exact Sciences (EXAS) rallied 33% on no news. Earlier this month they did hire Jeff Elliott, a former analyst for William Blair. He has been tasked with identifying and pursuing strategic business opportunities for Exact Sciences. Formerly he covered the diagnostic and lab industry for Baird. Coincidentally the company will be presenting at the 36th annual William Blair growth stock conference on Wednesday. Short interest was 22% and apparently, somebody got squeezed.


Whole Foods Market (WFM) received a warning letter from the FDA covering "serious violations" at a Massachusetts kitchen, claiming the food "may have been contaminated with filth." The FDA said leaky pipes were dripping onto work surfaces and employees were not changing gloves between tasks. Whole Foods replied with a letter but the FDA said it was unsatisfactory because it did not outline the steps the company would take to resolve the problems. Shares fell -$3 over the last two days.


Valeant (VRX) shares rose only slightly after the new CEO, Joe Papa, bought 202,000 shares for roughly $5 million. He paid an average of $24.48. The resulting blip on the chart was almost invisible.


There was very little stock news now that the earnings cycle has run its course. Everyone is waiting on the Fed and Brexit but there will be some earnings news on Thursday worth watching. Kroger, Oracle and Smith & Wesson will report.


Markets

The last 12 months of Brexit complacency is evaporating. Investors are moving to the sidelines ahead of the Fed and the exit vote. The Fed announcement should cause some market volatility, possibly in both directions. The first move after the announcement is often in the wrong direction and quickly reverses. Market spikes are sold and dips bought. You can never please everyone at the same time.

Nearly 100% of analysts surveyed do not believe the Fed will hike tomorrow. They list the jobs report (55%) as the number one reason, slowing global growth (15%), Brexit (13%), market expectations (5%) and other at (18%) as the additional reasons the Fed will not hike.

The VIX has broken out of complacency mode and this would normally be a buy signal for equities except for the headline events ahead. The 30 level is my preferred buy signal. I also like to sell calls when 30 is touched because it never remains there very long. If the Brexit vote is to leave we could see that 30 level.


The S&P declined to 2,064 intraday and then rebounded back to support/resistance at 2,075 at the close. That level has been both in the past year. The rebound of 11 points was strong and it started at exactly 3:PM at the low of the day suggesting it was a buy program or at least a program triggered a decent short squeeze. I am sure there were some shorts anxious to get out of their positions before the Fed decision in order to avoid the volatility.


The Dow had a similar pattern with a dip to light support at 17,595 and then a decent rebound to close at 17,784. The nearly 100-point rebound was likely short covering but it was not in the financials. Goldman, JP Morgan and American Express finished near their lows. The energy stocks were also a drag with oil prices closing in on $48 intraday.

The 16,680 level was resistance three times throughout the day so somebody was targeting the Dow at that level with some heavy selling.




The Nasdaq traded in a narrow range with the Nasdaq 100 ($NDX) actually closing positive. The winners and sinners list is not weighted towards any specific sector but the biotechs were down once again. The Nasdaq has support at 4,820 and resistance at 4,875.



The S&P futures were down nearly 5 points after the MCSI decision but rebounded to positive territory a couple hours later and are now back down again. The Asian markets opened lower but then rebounded slightly with only minor losses. There is still a lot of darkness before the dawn so anything is possible.

If you do not have to trade on Wednesday, I would recommend taking the day off. There are always plenty of cross currents surrounding the Fed announcements and with the Brexit only a week away, they could be more pronounced. There is always another day to trade if you have money left in your account.

Enter passively, exit aggressively!

Jim Brown

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