After setting a six-week low on the Dow and S&P on Monday, the short covering was fast and furious.

Market Statistics

According to analysts the short squeeze was caused by a spike in crude oil to almost $49 and a blowout number on March Consumer Confidence. Since confidence rarely moves the market, it is hard to understand why it suddenly mattered. However, the 12-point gain was astonishing. The spike in oil prices lifted the energy sector even though it may not last.

The Dow was down -30 points when the confidence numbers were released at 10:AM. By 11:AM it had rebounded 100 points and was still climbing. The S&P rebounded from a -5 point opening loss to trade over strong resistance at 2,360 for an hour late in the afternoon but sellers appeared at the close.


Consumer Confidence for March exploded higher from the previously reported 114.8 for February to 125.6. The February number was revised higher to 116.1. This is the highest level since the tech rally bull market in 2000. The present conditions component rose from 134.4 to 143.1 and the highest since 2001. The expectations component rose from 103.9 to 113.8 and the highest since 2000.

The "jobs are plentiful" component rose from 26.9 to 31.7 while the "jobs are hard to get" component fell slightly from 19.9 to 19.5. The percentage of respondents planning to buy an auto rose from 13.7% to 14.1%. The percentage for appliances rose from 49.9% to 52.9%. Potential homebuyers declined from 6.5% to 6.0%.

This was a solid report showing a huge amount of optimism over the future of the economy. Confidence at these levels is consistent with a 4% increase in the annualized rate of real consumer spending for this quarter. That would be a major increase.

The impact to confidence has something to do with the equity markets. The percentage of respondents that expect stock prices to rise hit 45.9% and the highest level ever since the beginning of this report in 1987. The percentage expecting stock prices to decline is now at the lowest since 2007. On a contrarian basis that would be negative since everyone should be "all in" with confidence in the market at record highs.


The Richmond Fed Manufacturing Survey was also strong. The headline number increased from 17 to 22 and the highest level since December 2010 at 23. New orders and order backlogs both increased. The employment component doubled from 10 to 20. Wages spiked from 11 to 21.

This was the fifth consecutive month of growth and the longest since 2014-2015 when an 11-month streak ended on March 2015.

Offsetting the bullishness in manufacturing was a decline in the separate services survey. The headline number declined from 15 to 9. The component for expected demand over the next six months declined sharply from 51 to 34. However, employment rose from 7 to 17 and average wages from 14 to 23. Analysts said government supplied a significant portion of the jobs in the Richmond area and potential cuts to government activities and employment probably depressed the service indicators.

Manufacturing Survey


Despite the recent bounce in the economic numbers, the Atlanta fed Real Time GDPNow is still predicting only 1% growth in GDP for Q1 compared to the 2% growth in Q4. The expectations for Q2 are rising sharply but we will not have a GDPNow chart for several more weeks. They will not produce it until the actual GDP for Q1 is released.


The economic calendar for Wednesday is light with the Pending Home Sales and EIA oil inventories the only reports. The last revision of the Q4 GDP is Thursday with expectations for 2% growth.


In stock news, Tesla (TSLA) shares spiked nearly 3% after China's social media giant Tencent (TCEHY) said it had taken a 5% passive stake worth $1.8 billion. They accumulated the stake in March through a private offering from Tesla and on the open market. Tesla announced in early March it was going to offer $250 million in stock and $750 million in senior debt to raise money to produce the Model 3. The offerings were expected to bring in $1.15 billion after underwriter over allotments. That makes Tencent the fifth largest shareholder behind Elon Musk and four others. Tesla said it was on track to manufacture 500,000 vehicles in 2018 compared to the 84,000 in 2016.



McCormick (MKC) reported earnings of 76 cents that beat estimates for 74 cents. Revenue of $1.04 billion missed estimates for $1.06 billion. They guided for full year earnings of $4.05-$4.13 per share compared to $3.78 in 2016. CFRA downgraded the stock from buy to hold saying the 2% revenue growth was below estimates for 3.6% and margins were shrinking due in part to the strong dollar. Shares fell -3% on the earnings.


Amazon (AMZN) beat out Dubai billionaire Mohamed Alabbar's Emaar Malls to buy Souq.com in a deal reportedly worth $800 million. Goldman Sachs called it the biggest ever technology deal in the Arab world. Note to Alabbar, don't get in a bidding war with Amazon. They will pay whatever they have to in order to acquire what they want. It does not have to make financial sense at the time. Souq.com stocks more than 8 million items on its website and generates about 50 million monthly visits. The company delivers to the six Arab states in the Gulf plus Egypt. Souq.com said despite the tech savvy population, most Arabs still prefer to shop in stores. They are hoping Amazon can help them change that trend.

Stifel Nicolaus boosted their price target on Amazon to $1,025, which is 20% above today's close at $856. That is the fourth largest price target behind Susquehanna at $1,250, and $1,050 at Cowen and Deutsche Bank. The analyst also raised his revenue targets saying Amazon has a long way to go before it tops out in U.S. revenue. He believes the Prime service will continue to flourish because it is too good a deal for consumers to pass up. Amazon is currently fighting new high resistance at $860.


Valeant's (VRX) former CEO is suing the company saying they failed to honor the separation agreement and pay him for the three million shares of stock he is owed. Michael Pearson said he is owed 580,676 regular shares and 2.5 million performance shares due November 3rd under the terms of the separation agreement. He also said Valeant owes him $180,000 in consulting fees for work done after his separation. The company said it would not be paying Pearson at this time because of their current financial difficulties. The CEO that replaced him, Joseph Papa is paid a base salary of $980,000 annually plus a $9.125 million annual bonus and stock options worth $52 million. Since Papa took over the stock has lost 62% of its value. You do not have to be good to make a lot of money. You just have to be in the right place at the right time.


Restoration Hardware (RH) reported earnings after the bell of 68 cents compared to estimates for 66 cents. Revenue of $586.7 million beat estimates for $584 million. The company guided lower for the full year during the prior quarterly results. They blamed the election uncertainty and the late delivery of its fall line. They guided today for full year 2017 for earnings of $1.78-$2.19 on revenue of $2.3-$2.4 billion. Analysts were expecting $1.94 and $2.33 billion. Shares spiked $5 in afterhours to $43.46.


Sonic Corp (SONC) reported earnings of 15 cents that matched estimates. Revenue of $100.2 million missed estimates for $107.3 million. They guided for the full year for same store sales to be down -2.0% and analysts were expecting a 0.9% decline. Shares declined about $1 in afterhours.


Verint Systems (VRNT) reported adjusted earnings of 90 cents and analysts were expecting 86 cents. Revenue was $295.9 million and analysts expected $294.1 million. Shares spiked $2.50 on the news.


Dave and Busters (PLAY) reported earnings of 63 cents compared to estimates for 58 cents. Revenue of $270.2 million just barely missed estimates for $270.6 million. They guided for full-year revenue of $1.16 to $1.17 billion. Analysts were expecting $1.164 billion. Shares initially fell about $4 but recovered by the end of the session to a loss of only $2.


Vertex Pharma (VRTX) shares spiked after the company said two clinical trials showed significant benefits for the treatment of cystic fibrosis. They already have drugs in the market for this disease and will apply for FDA approval of the new drug in Q3. Shares spiked $16 on the news.


Wells Fargo (WFC) said it would pay $110 million to settle a class action suit for opening more than 2 million unwanted accounts customers never requested. The bank paid $185 million in fines to regulators last year. The settlement will be paid to customers that had accounts opened in their name dating back to January 1st 2009. Thousands of employees have been fired for the practice. The bank offered incentives for opening new accounts and employees figured out how they could do it on their own to collect the incentives. For instance, if you had a checking account they would open a credit card account and you would suddenly get a new card in the mail. I actually think I might get a check because I opened a checking account when I got a HELOC on my home and over the next several months, I received three different credit cards in the mail. Shares rose 15 cents in afterhours.


Apple (AAPL) shares spiked to a new high after UBS analyst Steven Milunovich said the shares could rise to $200. He said Apple would have to continue the iPhone cycles and come up with a new tech gadget that everyone must have. He also said buybacks would have to reach $50 billion to keep the PE stable at 17x. The analyst said he sees double digit iPhone growth next year and single digit growth in 2019. He said the iPhone 8 could be a super-cycle based on new features and the aging phone population. The current user's iPhone averages 19.5 months in age. In smartphone terms, those are antique given all the new enhancements and features in the new phones. He said Apple could move into an innovation cycle in 2019 as the new products, yet unannounced, move into full production and distribution. He closed his best-case scenario saying his 12-month price target is $151 but all investors heard was $200. Shares rallied nearly $3 on the news.


Markets

The Dow snapped an eight session losing streak that was the longest since the year 2000. Had it lost ground on Tuesday a nine-day streak would have been the longest since 1978. Even though the Dow had declined for 8 days, it was only 3% below its closing high of 21,115 on March first. As mini corrections go, this one was very tame.

However, one day is not a trend. The 150-point short squeeze simply relieved some short term oversold conditions and failed to rebound back above resistance at 20,800. The majority of the damage on the decline was thanks to the banks and energy stocks and those were some of the supporters on Tuesday. Apple added 20 points to the Dow.


The Dow dropped to a six-week low at 20,412 at the open on Monday and closed at 20,701 today after nearly a 300-point rebound. The rebound came from converging uptrend support at 20,500 but prior support at 20,800 should now be resistance. I was pretty negative on the markets after the close on Monday and today's short squeeze has improved that outlook somewhat but the Dow still needs to move over 20,800 to convince some bears it is time to switch coats.


The S&P rebounded from a -5 point loss at the open to close with a 17-point gain but it could not break through the prior support at 2,360. The index traded slightly over that level for about an hour but faded into the close. Like the Dow, the S&P needs to move convincingly over 2,360 and make a credible attempt at the 2,390 resistance from mid March. With the tech stocks still leading the market higher this could be possible but we are still talking about a one-day wonder until it actually happens.


The Nasdaq never broke below support at 5,800 although it did trade there intraday on three occasions. The 105-point rebound from Monday's low was definitely strong and the index is only 28 points below a new high. That is roughly half a percent and the index could cover that easily in a good day. The Nasdaq gained 34 points today. Nasdaq big caps are still moving higher but only Apple and Facebook are actually at new highs. The others, with the exception of Google, are close.



The small cap indexes are actually recovering as well. The Russell 2000 and the S&P-600 both closed at six-day highs after making 4-month lows. If the small caps continue to rally it would greatly benefit sentiment.


When I started this commentary, the S&P futures were up +3 and they have slowly faded back to flat. This was a short squeeze today and without some new catalyst to lift stocks over the resistance I quoted above, we could be right back in the downtrend very quickly.

I would be cautious about adding a bunch of long positions because the next 3-5 weeks are typically volatile with dips and spikes as traders take money out for taxes and restructure positions ahead of the Q1 earnings cycle.

Enter passively, exit aggressively!

Jim Brown

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