After a textbook example of window undressing on Monday, the markets were very calm on Tuesday. Too calm.

Market Statistics

There was some follow through window undressing at the open where portfolio managers repositioned cash they had used to dress up their final quarterly numbers. One analyst said it was the most window dressing he had seen since the recession. If we are only going to suffer Monday's decline and today's opening dip as a result, I would say we got off pretty easy.

The indexes traded in a narrow range with the S&P in a ten-point window and the Dow in a 95-point range. The Nasdaq was a little harder hit at the open and traded in a 22 point range. Each index posted minor gains with buyers appearing right at the close.

Weighing on the markets intraday was a headline the White House was considering a carbon tax to raise money for the overall tax cut plan. That spiked the solar stocks and weighed on energy equities. Very late in the session the administration said it was NOT considering a carbon tax and that allowed the markets to tick higher into the close. This allowed the S&P to close near the high for the day and right on resistance of 2,360.


The economic reports were as lackluster as the market. The CoreLogic Home Price Index rose 7% for February, up from 6.9% in January. Prices reached new highs in 11 states and DC. This was the 26th consecutive month of gains. The report was ignored.

The International Trade deficit declined slightly for February from -$48.2 billion to -$43.6 billion. The Chinese Lunar New Year came early in 2017 and pulled imports forward into January. The January deficit was about $6 billion more than the trailing 12-month average.

The New York ISM for March rose sharply from 51.3 to 56.5. This almost erased the drop from January's 57.7 to the 51.3 in February. However, the high for this cycle was the 63.8 reading in December.

The quantity of purchase component rose from 53.3 to 57.4 and employment from 43.2 to 47.7. A reading over 50 indicates expansion and the employment component is finally nearing that level. The big jump came in the six-month outlook, which rose from 58.2 to 75.6, which was the highest level in more than three years.

Expected revenues rose 14 points to 80 with current revenues rising from 62.1 to 65.4. Both of those are the highest since the summer of 2015.

Factory Orders for February rose 1% and in line with consensus estimates. Orders for January were revised higher from 1.2% to 1.5%. The headline gain was caused by a 1.8% rise in durable goods orders. However, orders ex-aircraft were down -0.1%. Unfilled orders were flat at zero after three months of declines.

None of those reports mattered to the market. Traders were still focused on the undressing and the constant dribble of headlines out of the White House and the House/Senate. There is a rumor there could be a vote on a healthcare bill later this week and it looks like the Senate republicans will invoke a rule change to confirm Gorsuch on Friday.

Wednesday is the first payroll number for March with the ADP report. The estimate has declined -5,000 since Friday to 185,000. The estimate for the Nonfarm Payrolls on Friday declined -10,000 to 180,000 new jobs. Since analysts have missed the prior two months by a mile, it will be interesting to see if they are any closer this month.

The estimate for the ISM Nonmanufacturing index at 57.0 has not changed. The Manufacturing ISM on Monday came in at 57.2 compared to consensus at 57.0 so everyone was accurate on that report.


Investors seem to be worried that the economic outlook is going to fade and the equity market is about to tank. The yield on the ten-year treasury has declined to 2.35%, down from 2.61% in the middle of March. The "Trump Bump" appears to be fading as his first 100 days in office expire on Saturday.

Kensho produced some research on a move of this magnitude in a 30-day period. It has happened 35 times since 2007. When the yield declines 30 bps in 30 days, the S&P declines an average of 2.31% in the weeks that follow. It occurred about 78% of the time. There were a few times when the market did not fall significantly but a 2.3% drop 78% of the time is a notable statistic. Treasury yields are falling because investors are buying treasuries instead of stocks. They are looking for safety rather than a sudden urge to earn 2.3% on their money.

There are numerous political reasons why economic optimism is fading and we are looking at roughly a 1% Q1 GDP. The GDP Now forecast rebounded from 0.9% to 1.2% after the international trade numbers this morning but that is still very anemic.



In stock news, the dumbest move of the day came from Verizon. They confirmed they were going to combine Yahoo and AOL and rename the combination "Oath." Seriously, they have two names that have been premium properties since the internet began and they are going to rename them Oath? Personally, I think that is a major marketing mistake but somebody in Verizon was paid big bucks to come up with that idea.

They also confirmed that CEO Marissa Mayer will not stay with Yahoo after the acquisition is completed. I seriously doubt anyone actually expected her to stay. She has a $23 million severance package and $69 million in unexercised stock options, and $97 million in Yahoo stock she already owns and will be free to sell if she leaves the company.

Her replacement, Thomas McInerney, former CEO of IAC (formerly known as InterActiveCorp) will start the job with a $2 million base salary, $2 million in bonuses in 2017 plus incentive rewards of up to $24 million in stock. Mayer was hired to turnaround Yahoo and make it profitable again. McInerney will have a significantly easier job of babysitting the remaining Yahoo shell company, which controls $40 billion in Alibaba stock and a large investment in Yahoo Japan of roughly $20 billion. The Yahoo shell will be renamed Altaba with the stock symbol AABA. The company does not intend to buy any new companies or stocks or sell any of the assets they own. They will basically be a caretaker ETF holding those two Asian assets. Altaba will have no duties to either asset and all they have to do is sit back and collect any dividends that are paid.

McInerney's main task will be to protect the assets from a barrage of suits from leftover "Yahoo operating company liabilities, class action suits over data breaches and ongoing dialogues with regulators."


Nvidia (NVDA) was downgraded to market perform from sector weight to underweight or the equivalent of sell by Pacific Crest. The analyst said PC graphics were slowing, margins were shrinking and their data center sales were slowing. Shares crashed $7.60 on the downgrade.

However, multiple analysts immediately reiterated their buy ratings. Bank of America reiterated their $120 price target and buy rating and said "consider the source of the downgrade" in what was clearly a jab at the analyst. A Bank of America analyst said the person at Pacific Crest had a spotty record in the past and investors should research that record before jumping out of Nvidia.

I have been writing these commentaries for 20 years and I have never heard such a specific slam of another analyst. I am sure it happens behind closed doors but to make the accusation on national TV was astounding.

Regular readers know I am an avid fan of Nvidia. I have a computer background that dates back to the 1960s. I know what I am talking about when it comes to computers. If PC gaming is slowing, why does every new graphics card Nvidia announces sell out immediately and go on near permanent backorder even at the astronomical prices of $700 to $1000 each? Nvidia's margins are shrinking because they have dozens of new mass-market products that are selling like crazy at the slightly lower margins.

Nvidia said last week that TenCent had selected Nvidia's high power GPUs to power its cloud offerings to clients that need lots of processing power to run AI and machine learning in their clouds. TenCent said revenues rose 48% in 2016 to $21.9 billion. Angel List said more than 1,700 AI startups had been funded by 2,300 angel investors and almost all use cloud based Nvidia GPUs for their products and services. Nvidia can now claim that every significant cloud service provider is a customer and supplier of Nvidia GPUs as a service, including Amazon, Google, IBM SoftLayer, Microsoft, Alibaba Cloud and Nimbix. How is that a slowing of the data center business?

Japan is building a super computer powered by Nvidia processors named TSUBAME3.0. The Nvidia powered supercomputer is scheduled to go online in April and will be the most powerful in the world. The computer will use 24 Nvidia DGX-1 AI systems. This will be the largest installation of DGX-1 systems to date. Each DGX-1 combines the power of eight Nvidia Tesla P100 GPUs, each capable of delivering the performance of 250 normal servers. Each P100 can process 10 trillion instructions per second. That is a combined total of 192 P-100s equivalent to 48,000 regular servers with Intel processors. There is nobody even remotely close to Nvidia in this area.

If you want to sell Nvidia, that is your choice. I view ANY decline back to the $90-$100 level a gift for investors.


Caterpillar (CAT) has been trading sideways for the last four months after a monster post election spike. Goldman Sachs (GS) reiterated a buy rating on Tuesday with a $120 price target and added the stock to its conviction buy list. The analyst said CAT has an attractive combination of structurally higher mid-cycle EPS, exposure to underinvested machinery markets in the early stages of recovery, a management strategy of improving returns on capital and a 20% underweight position by mutual funds.

CAT is currently in a fight with the IRS and agents raided their offices about a month ago. CAT says they are cooperating and analysts believe it will end up in a settlement. CAT's market cap has declined $4 billion since the raid took place.

If there was a $1 trillion infrastructure plan put in place later this year it would greatly benefit CAT as a company since it takes big machines to build infrastructure. CAT shares rebounded 2% on the upgrade to conviction buy.


Amazon (AMZN) got another shot of rocket fuel today when BMO Markets raised its price target from $900 to $1200 and named the company a "top pick." The analyst said Amazon's ad business was gaining significant momentum and will reach $3.5 billion in revenue in 2017 for a spike of 65%. He said Amazon is rapidly gaining ground in voice-based search, which is a negative for Alphabet. BMO downgraded Alphabet (GOOGL) from buy to hold and cut the price target from $1,005 to $880.

Amazon announced a new way to shop without a credit card. The program is called Amazon Cash and targets the lower income consumer. It works basically like a preloaded debit card. Amazon will give you a barcode for your phone. You go to a participating partner like CVS, Speedway, etc and give them cash. They will load that cash to your Amazon account and you can shop with your personalized QR code in any participating store or online with Amazon. The debit account can be refilled over and over where simple gift cards cannot be refilled. Amazon's most recent demographic shift has been towards younger consumers and those without credit card accounts. Amazon has even given away Prime subscriptions to low income families.


Craig Hallum's Anthony Stoss, upgraded Skyworks Solutions (SWKS) from sector weight to overweight (buy) with a $110 price target. The analyst said the iPhone 8 expectations are growing daily and Skyworks will benefit significantly from the coming upgrade cycle. The analyst said indications of strong component orders were increasing expectations for iPhone sales. They also said the strong product cycle for the Samsung 8, due out this month would be another revenue boost for Skyworks. The company normally begins shipping components to Apple in the last week of June. There are indications that component orders have been stronger and targeted earlier dates this cycle to enable Apple to have more phones available to ship when sales begin.


Crude prices rose again on expectations for an inventory decline in the EIA report on Wednesday. With refiners sharply ramping up production the four-month inventory decline cycle should begin this week or next.


Markets

The lackluster rebound today came on light volume of 6.1 billion shares and suggested a lack of buyer conviction. With the treasury yields falling on stronger buying, and the disorganization in Washington, we could see some investors begin to pull back from their prior posture.

I looked at nearly 800 individual stock charts over the prior three days and there has been a monumental shift in direction. The big caps techs like Amazon, Apple, Tesla and others are still at or near their historic highs. However, the rest of the crowd appears to be fading. Of those 800 charts, I only found about 25 charts that could be potential long positions. There were easily a couple hundred charts that would have been decent short positions. Most of the charts were broken. They had tried to rally and failed and were chopping around in a sideways motion similar to the pattern on the Dow or Russell 2000 chart.

The Dow is still the weakest index. The resistance at 20,750 is still intact and the new support level is well below at 20,500. We have tested that level twice in the last two weeks. The Dow chart remains bearish until it moves back over 20,800 and above that downtrend resistance from March 1st.



The S&P has a similar pattern but the index came to rest exactly at support/resistance of 2,360 at today's close. Over that level and it becomes support, under that level it is resistance. The fact it closed exactly on 2,360 indicated buyers and sellers were evenly matched today. There was a slight uptick at the close when the White House killed the carbon tax rumor.

The S&P is only slightly more bullish than the Dow and both are still in negative trends. One more decent decline with a lower close under 2,350 could tip the indecision into a stronger bearish mindset.


The Nasdaq Composite and the Russell 2000 were the perfect examples of the window dressing/undressing scenario. The Nasdaq was pinned exactly to its highs from the last month with a minor new high on Thursday. Friday's loss of 2 points was textbook as managers kept the index exactly where they wanted it. On Monday, the Nasdaq declined -47 points intraday as those trades were reversed. Today saw a minor follow through dip at the open and then a consolidation process throughout the day. The index did close almost at its high for the day. With Apple, Amazon and Tesla setting new highs, it would have been hard for the index to post a decline.



The Russell chart is probably the closest example of the 800 individual stock charts I viewed over the weekend. There is no direction other than sideways. The six days of gains heading into Friday pinned the Russell right at resistance and those gains were removed on Monday. Today was consolidation like the one we saw on the other indexes.


When the futures opened tonight, they were up about 3 points. While I typed this commentary, they have declined back into negative territory. The lack of bullish conviction intraday, the falling treasury yields and the disorganization in Washington, could be setting the stage for a larger decline.

I know I have discussed the potential for a correction numerous times and it has never arrived. That does not mean it will never come. April is known for being choppy over the first two weeks, negative in the third week and positive in the fourth week. We may not get that fourth week of gains in 2017. The budget and debt ceiling battle starting on the 23rd is going to be ugly. Government funding runs out on the 28th so there is a deadline.

I would recommend not being overly long over the next several weeks. The potential for an end of month decline seems to be growing as each day passes. I hope I am wrong and everything turns positive. Unfortunately, hope is not a strategy.

Enter passively, exit aggressively!

Jim Brown

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