Today was an oversold bounce that recovered less than one-third of the points lost the prior two days.

Market Statistics

I was very happy to see the bounce arrive and I am not trying belittle its importance. The Dow declined almost 1000 points from Thursday's close at 18,011 to Monday's low at 17,063 and only recovered +269 today. That does not mean we are not going to recover all of it but so far this is only a one-day wonder. One day does not make a trend, just like the prior two days did not confirm a lower trend but that could still happen. In every market decline there are periodic rebounds powered by short covering and bottom fishing. It is what comes after that initial rebound that determines the market direction.

There was the constant droning of Brexit news but I think traders have become immune to the headlines. What will matter in the coming weeks is the dollar's direction and the number of earnings warnings because of the collapse in the British pound. That is where the rubber will meet the road to use a 1960s saying.

The pound recovered 1% today but compared to the 12% decline the prior two days that is insignificant. Some analysts still believe it could sink to 120 from today's close at 130.57. This will impact the dollar, yen, yuan and euro and cause central banks to take action to defend their currencies.


More than three million UK citizens have signed a petition asking for a do-over on the Brexit vote. Prime Minister Cameron said no deal. The vote will stand and UK citizens will have to live with the decision.

There were some economics today and they were not pretty. The Richmond Fed Manufacturing Survey for June declined from May's -1 to -7. That ties with March 2014 and together that is the lowest reading since January 2013. All of the components were negative with new orders falling from zero to -14 and order backlogs falling from -13 to -17. The inventory to order gap collapsed from -19 to -41. Those components suggest July will be ugly as well. The average workweek fell 10 points to -4 suggesting employment is going to be weak for June. Employment and wage expectations turned negative for the first time since 2009.

The separate services survey fell from 11 to zero but the employment component remained flat at 18. Retail employment rose from -3 to 31 and the highest level in more than a year.



The last GDP revision for Q1 rose from +0.8% growth to +1.07% growth. That is hardly something for the Fed to be bragging about. Corporate profits rose +1.8% after a -7.8% decline the prior quarter. Consumption was the main driver of the headline GDP with a +1.02% contribution.

This was the weakest quarter in the last year but Q2 is shaping up to be significantly better. The Atlanta Fed's real time GDPnow forecast is for 2.6%, down from 2.8% the prior week. The decline came from the drop in residential investment growth from 2.6% to 1.7% on June 23rd. The next update will be on Wednesday after the Personal Income report.



Consumer Confidence for June rose sharply from 92.4 to 98.0. The present conditions component rose from 113.2 to 118.3 and he expectations component rose from 76.5 to 84.5. Given the sharp drop in jobs in May and the rise in gasoline prices, I am shocked about the strong gain in the numbers. The biggest gain in the components was in "expectations for an income increase" from 16.5% to 18.2%. With jobs declining that is an odd change in the income outlook.


The biggest events remain the Janet Yellen speech on Wednesday. This is her first post Brexit speech and investors will be watching to see if she drops the "rate hikes will be appropriate in the coming months" phrase or ignores the topic all together.

The national manufacturing ISM on Friday could be a negative surprise given the numbers today from the regional Richmond report. That could be market negative.


Crude oil helped power the rally today with nearly a 4% gain thanks to the falling dollar. WTI rallied back to $48 after falling to $45.83 on Monday. After the bell, the weekly API inventory report showed a 3.9 million barrel decline for the week ended on Friday. This was the sixth consecutive week of inventory declines in the API numbers. Inventories at Cushing declined by -1.21 million barrels. After the API inventories prices rose a little higher to $48.25.

With the biggest driving weekend of the summer just ahead, the inventories should continue to decline. Historically crude prices remain high into August but the closer we get to the Labor Day weekend the better the chance for the price decline into fall.

Prices were also helped by the potential for a production disruption in Norway. Up to 7,500 Norwegian oil and gas workers could go on strike on Saturday if they do not have a new contract and higher wages by midnight July 1st. Norway produced 1.96 million bpd in May and we much as 1.5 mbpd could be shutdown if the strike occurs.


After the bell, Nike (NKE) disappointed on earnings for the third consecutive quarter. Nike beat on earnings with 49 cents compared to estimates for 48 cents. Revenue of $8.24 billion missed estimates for $8.28 billion. Global futures orders rose 11% excluding currency impact. However, U.S. futures orders fell to +6% and the first time it has dropped into single digits since Q3-2014. Chinese orders fell from 36% last quarter and +34% the prior quarter to only 24% in the current quarter. Nike guided to high single-digit to low double-digit growth for the full year. Analysts were expecting 10%. For Q1 they forecast mid-single digit growth and analysts were expecting 9%. The company said it only derived about 3% of its revenues from the UK. Revenue from North America was flat while Eastern Europe sales declined -4%. Western Europe sales rose 19%, China +18% and Japan +22% but emerging markets revenue fell -7%.

Under Armour took a $23 million hit from the Sports Authority liquidation. Nike said it was also fighting excess inventory levels as a result of that outlet closing. Gross margin declined as a result of Nike discounting that inventory through its outlet stores and other third party distribution channels. Shares of Nike dipped to $49 after the report but rose to $51 after the conference call. That was a $2 decline from the close at $53.


Dicks Sporting Goods (DKS) was upgraded to the "conviction buy" list at Goldman Sachs. The analyst said the liquidation of Sports Authority would reduce competition and benefit Dicks in many geographic areas. Sports Authority was its largest competitor with 464 stores. Dicks is now the largest at 600 stores. This should allow Dicks to improve margins from higher pricing. Goldman also noted that Dicks is bringing all of its online business back into the company in 2017. It is currently being handled by GSI, a subsidiary of Ebay, for a fee. Dicks is currently bidding to buy 17 Sports Authority stores currently in the bankruptcy process.


SolarCity announced the formation of an executive committee to consider the Tesla offer to acquire SCTY for $26-$28. The committee has two members because the rest of the board had to recuse themselves from the process because they had conflicts of interest with Tesla and/or Elon Musk. The committee hired Lazard Ltd as its financial advisor on the review. Some analysts are starting to warm up to the transaction because it solves the cash flow problems at SolarCity. Business is so good they are incurring debt at a rapid pace. They build and install systems on a lease agreement. That means they have to fund the cost but the payments do not amortize for a long time. Other solar companies have created yieldcos to buy their installations and free up the cash. Shares rose $1 on the news.


Taiwanese chip maker Advanced Semiconductor Engineering warned that its biggest customer, Apple, was being more conservative about placing orders than the same period in 2015. The company said Apple had told them to expect fewer orders in the second half of 2016. Goldman Sachs lowered its price target on Apple and cut its full year iPhone shipment forecast again from 212 million to 211 million units.

At the same time, Cowen & Co warned that potential iPhone sales could be huge. The analyst said more and more Apple customers are walking around with an iPhone that is 2-years old or older and these are the customers that are most likely to buy a new phone. The analyst said a "powder keg" is forming. They recommended buying the stock. Shares are struggling to hold initial support at $94.


Comscore (SCOR) delayed filing its annual report to regulators because an accounting review is taking longer than expected. The board said it needed more time to evaluate the data and make final decisions. Back in March the company disclosed its audit committee had "received a message questioning the company's accounting." They began a review, cancelled an investor event and delayed filing the year-end financial reports. Comscore acquired Rentrak for $800 million in February. Shares fell 19% on the news of the delay.


Markets

There was not much to say about the market rally today. The Asian indexes were marginally positive and the European indexes were sharply positive. That carried over into the U.S. markets with the S&P futures up +24 early Tuesday morning. A short squeeze was born and the rest was history.


I wrote last week that funds were sitting on near record amounts of cash and Thursday is the end of the quarter. If they were going to window dress their portfolios, they were running out of time. With stocks at three-month lows, it was the perfect opportunity. There is also a pension fund rebalance at the end of June. Analysts estimate pension funds needed to shift up to $18 billion into equities to keep their ratios intact. Pension funds typically hold x% of bonds and x% of equities. Bonds have risen so strongly that the ratios are off. They needed to sell bonds and buy equities.

I did not see any movement out of treasuries today. The 10-year yield rose -0.001% to 1.461% indicating continued buying pressure. That is a four-year low yield. If we ever get the "Great Rotation" Bank of America called for there would be a monster equity rally. For now, treasuries just keep rising in value.


The Volatility Index ($VIX) collapsed -21% and that was after a big decline on Monday afternoon. The sharp drop in the VIX and the lack of a rise to 30 over the prior two days is because investors did not believe the Brexit crash would stick. They were not buying puts 30-60 days out to protect their positions. The instant the S&P stopped its decline at 1,991 on Monday the VIX began to decline. Investors simply do not believe the crash will last.


Volume today was heavy at 8.3 billion but well below the 10.6 billion on Monday and 15.2 billion on Friday.

The S&P double bottomed at 1,991 on Monday with a touch at the open followed by a minor rebound and then another touch just before the close with another rebound to close at 2,000. This appeared to be too good to be true and the futures began rising not long after the close.

Today the index has returned to the 2,040 level that was strong support in May and could be strong resistance on the rebound. The consensus opinion is for the S&P to wander in the 2020-2035 range for the rest of the week while we work off the imbalances from the crash. A one-day rebound is just a one-day wonder until a new trend develops.

Initial support is now 2,020.


The Dow rebounded with the help of the stocks that were the biggest losers in the decline. Goldman, IBM, etc were sold hard in the crash and they rebounded sharply today. However, their rebounds were only about one-fourth of their declines. This was a decent short squeeze but there was no follow on buying.


The Dow rebound from the 17,063 low from Monday was decent but it stopped at 17,400 and a level that had been strong support. This could now be strong resistance. If the Dow rolls over and begins to retrace today's gains, it could turn ugly very quickly. A decline below 17,000 should target a retest of 16,000.



The Nasdaq was the strongest index today with a 2.1% rebound. It had been crushed by the back to back declines in the biotech and semiconductor stocks and the Nasdaq rebound was definitely a short squeeze. Many of those stocks were up 7-9% today and that is not just because they were suddenly a bargain. That was shorts being forced to cover.

The Nasdaq is facing prior support at 4,700 that should now be resistance with a close at 4,691. Support is yesterday's lows at 4,575. There was some decent support forming today at 4,650 that could act as a buffer against another intraday decline.



The Russell 200 struggled to add a 1.6% rebound after falling -7% in the crash. The 1100-1110 range covered most of the day's trading with a double top at 1,110 once in the morning and once just before the close. Both were quickly sold. The support at 1,100 was solid. The Russell rebalance pressures should be over tomorrow. Funds will have had 3 days to clean up their left over position squaring.


I am neutral for Wednesday. The S&P futures are down -4 points and the Asian markets just opened slightly positive. The key is the European markets. If they are positive like we saw today then the U.S. markets could follow their lead.

I do not think we are out of the volatility woods yet. There is still too much uncertainty over what the Brexit really means to corporations and how the big decline in the pound will impact earnings. The various political forces in Europe are still sparring in the headlines and the EU has said they will not negotiate with the UK until the Article 50 notice is filed. The UK said they would not file it until a new prime minister is installed in September. That just means more uncertainty for everyone.

 

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