News of a Russian withdrawal from the Ukraine border and tactical airstrikes by the U.S. in Iraq overcame a slow news day to cause a major short squeeze.
The market rallied on low volume as shorts covered their positions ahead of the weekend. This was a monster short squeeze as the expected invasion of Ukraine failed to materialize. Investors had been trading the market decline for the last two weeks in expectations for the Russian invasion, stronger sanctions and weaker economies in Europe. The news Russia had declared an end to its "military exercises" and was returning the men and equipment to their bases came at 1:PM and Dow spiked another +120 points on that news.
Strangely the massive short covering came on only a tweet from a Russian news agency rather than an entire story on the news wires. That shows how over shorted the market was and how concerned traders were about going into the weekend short.
The turnaround was significant after the S&P futures dipped -15 points overnight to 1890 before reversing course to trade at 1913 just before the cash market opened. You don't see a 23 point range in the S&P futures in an overnight session very often. This also proves the market was heavily shorted.
The yield on the ten-year treasury had declined to 2.37% early in the morning as the various war premiums were priced into the market. When the news broke at 1:PM about Russia ending the exercises the yield spiked back to 2.42% but that was still the lowest closing yield since June 19th 2013.
Elsewhere there was news of additional bombing strikes by U.S. and Iraqi aircraft against the Islamic State (IS). That suggests that once the campaign started it may end up being the beginning of the end for the Islamic State. The terrorists had pressed their gains and were moving towards Irbil, the capital city of Kurdistan, and putting the Kurdish people and many Americans and other nationalities at risk. Also, the IS had trapped up to 50,000 civilians of multiple religious backgrounds on a mountain in Northern Iraq. These civilians had fled from the approaching IS forces bent on genocide, rape and torture. Many of these people were Yazidis Christians that IS had sworn to kill and President Obama finally realized he had to act to head off a disaster.
In Israel the Hamas terrorists resumed their rocket attacks and the Israeli air force returned the fire with multiple attacks on the rocket launch facilities.
The economic news on Friday was minimal. The Wholesale Trade report for June showed inventories rose +0.3% and half the analyst estimate for +0.6% gain. May was revised lower from +0.5% to +0.3%. Durable goods inventories rose +0.7% while nondurable goods declined -0.2%. The report was ignored.
Productivity and costs for Q2 rose with output rising +2.5% compared to a -4.5% decline in Q1 as a result of the severe weather. Compensation rose +3.1% and significantly lower than the +6.8% rise in Q1. Unit labor costs slowed dramatically from an 11.8% rise in Q1 to only +0.6% in Q2. This report is positive for the Fed. They were concerned about the sharp rise in unit labor costs in Q1 and the potential for those costs to continue to rise.
Next week also has a light calendar with the Retail Sales and Industrial Production as the highlights. There is nothing on the calendar that should move the market.
The earnings calendar for next week has very few highlights. Priceline, Cisco Systems, Walmart, JC Penny and Applied Materials will be the most watched. This is the last major earnings week of the Q2 cycle.
Cereal maker Post Holdings (POST) probably wishes they could have announced earnings on Saturday when the markets were not open. The company lost 30 cents per share compared to a profit of 3 cents in the year ago quarter. In an effort to be less dependent on the low margin cereal business Post made 7 acquisitions since August 2013 and they announced another one with earnings. They said they were acquiring peanut butter maker American Blanching for $128 million. The loss came from trouble integrating all of those businesses into one company. Analysts worried they tried to grow too fast and the drag from the integration process could last significantly longer. Shares were down more than -20% intraday but rebounded to a -16% loss at the close.
Green Mountain Coffee (GMCR) reported a +21% rise in earnings to 99 cents that beat estimates of 87 cents and raised full year guidance. More than 81% of revenue came from sales of the single cup brewers and the K-cups to support them. Sales of K-cups rose +10% to $826.3 million on a 15% increase in volume. The company raised full year guidance from $3.63-$3.73 to $3.71-$3.78. Sales are expected to rise in the high single digits.
The earnings were strong but the stock was not. Their current quarter guidance was for 68-75 cents and analysts were expecting 86 cents. Shares of GMCR appear to be vulnerable below $113.
Nvidia (NVDA) posted adjusted earnings of 25 cents that rose +12.9% and beat estimates of 19 cents. Tegra processor revenues rose +200% thanks to automobile systems and mobile devices. Google recently selected the Tegra processor for its Project Tango tablet development. They upgraded guidance slightly on expectations for higher processor volume. Shares rallied +9% on the news.
The number of companies reporting has slowed dramatically and there was little in the way of reports on Friday. Despite the big gains in the market the volume was low at 5.5 billion shares. This was the lowest volume day of the week and this was a very volatile week. You would have expected a lot more volume given the volatility.
However, there are only three weeks left in the summer with Labor Day on Sept 1st normally seen as the last day of summer. Kids are going back to school already and any trader/investor still planning on a vacation is going to be taking it over the next three weeks.
If it were not for the Russian invasion cloud hanging over the market all week I doubt we would have seen any volatility and the volume would have been much lower. Assuming, the Russian military is being pulled back from the border the market could be very lackluster next week.
Not only has volume been low but most of it was leaving the market. Lipper reported outflows from stock funds of $15.8 billion for the week and the highest outflow in six months. Another $7.1 billion left high yield bond funds. That was the most in one week since records were started in 1992.
The S&P traded down to 1904 on Thursday followed by the futures trading down to 1890 overnight. These were critical levels that were begging for an oversold bounce. Add in the Russian short covering on Friday and the rebound was born.
A lot of long term rallies begin with a huge short squeeze. However, very few are started on a 5 billion share day. Volume is a weapon of the bulls and they were not expending any of that volume ammo on Friday.
James noticed an interesting point while researching plays on Friday. The stocks that rallied the most were the ones most shorted. That should not be a real surprise but he also noticed that the stocks that declined the least over the last two weeks barely moved on Friday and quite a few were actually down. This confirms the short squeeze theory and also points out that the rebound was very narrow in breadth. In a real rally you would expect the stocks with the best relative strength in a decline to be the biggest gainers when that decline is over. Clearly that did not happen on Friday.
An example would be IBM. The stock declined $12 over the last week and then rebounded sharply on Friday.
This suggests we should not expect the rebound to continue on Monday or at least not with a big gain. While I do believe that S&P 1900 level would be a great rebound point we do need to see some non headline confirmation. That means we need to see what the market is going to do without being headline driven.
If there is no follow through next week then the shorts will return and we could take another shot at that 1900 level. Resistance is now 1943.
The Dow gave us an example of a perfect support bounce. If the market was only the Dow then I would be telling everyone to load up with longs on Monday. The Dow declined to support and closed at 16,368 on Thursday. On Friday the opening low was only 16,364 indicating the support held and that could have energized the early morning rebound in the market. When clear support levels hold it is a sign for shorts to begin to cover.
The next hurdle for the Dow is going to be the 16,600 level where it tried to rebound and failed on August 4th.
The Nasdaq rebounded less than the Dow and remains stuck below strong resistance at 4371. The Nasdaq has vacillated around the prior support at 4344-4350 for the last week. There have been daily spikes to just below 4380 and daily dips to 4325 but it always seems to come back to center on that 4350 range. This is one reason we should not get too excited about the Friday gains. The short squeeze did not even reach the resistance highs from the last three days at 4380.
You will probably notice that the list of the top 25 point gainers below only has a handful of the big names you would normally expect to see in the list. GOOG and AMZN are there but the rest of the list is populated by an eclectic list of rarely seen tech stocks. For instance when have you seen FOSL gain $4 in one day? The stock has been in a steady downtrend since November. How about UEIC? Bet you don't know that company but an 11% gain got it on the list on Friday.
When the Nasdaq breaks back above 4400 I would be more inclined to bless the rebound. Until then I am going to be skeptical.
The Nasdaq 100 ($NDX) has the same pattern as the Composite index only less volatility. The uptrend support from March worked perfectly at 3850 but the rebound was lackluster. A decline below that 3850 level would turn market sentiment negative.
The Russell 2000 appears to be building its third bear flag since its decline from the recent highs. However, this time may be different. The Russell has shown stronger relative strength than the rest of the indexes over the last week. While the Dow, S&P and Nasdaq were making new lows on Thursday the Russell was resisting. When the short squeeze appeared on Friday the Russell closed at the high for the week. While that may be just another failed rally in progress it could also be the spark for a continued rebound next week.
The downside to the Russell daily chart is the impending cross of the 100 day average over the 200-day. While this cross is not watched as closely as the "death cross" of the 50-day below the 200-day it is still relative. The cross of the two longer term moving averages suggests a continuation of the trend to the downside. While the 50/200 cross is considered a shorter term trading signal pointing to a change in direction the 100/200 cross is seen as confirmation of the existing trend. In this case it would be a declining trend.
Obviously you can drive yourself crazy trying to match up all the various trend signals so I mention it only in passing. We should note it but not run out and sell every stock we own.
The key for me would be a Russell bounce back above those averages at 1144/1148. They will function as resistance and even more so since they are so close together. If we can move back over 1165 that would be a strong signal predicting a new high. However, for this week I would watch the bear flag and see if it breaks to the upside rather than downside. Three downside broken flags in a row would be negative.
The Russell 3000 also made a perfect goal line stand at the 1138 level and it has not relinquished its hold on the 100-day average. This is the seventh time it has tested that average since December 2012 and each time it dips just below only to rebound back to new highs. Let's hope this test follows the same pattern.
Lastly the Transports also made a perfect rebound off recent support at 8000. I wrote last week the transports should eventually return to their 100-day average, now at 7938 and they came close on Friday with a dip to 7959. I believe that is close enough and I would expect them to rally from here. That does not mean they won't retest it again but I think that support should hold.
While I believe Friday's rebound was just a monster short squeeze there were just enough positives in the charts above to suggest we may have found a bottom. The Transports, Russell 3000 and the Dow appear to be honoring decent support points. If we were to retest those support levels next week and rebound again I would be a buyer. I would be a reluctant buyer if we simply moved higher from here. I would want to see the Nasdaq and the Russell 2000 confirm the move with decent gains.
The market has been in a pattern of 3% declines and rebound to new highs for many months now. In this decline the Transports fell -6.5%, Dow -4.7%, S&P -4.4%, Nasdaq Composite -3.7%, Nasdaq 100 -3.8%, Russell 2000 -8.7% and Russell 3000 -4.8%. This has been a significant decline that was mostly headline driven. Even in the midst of this decline there were buyers. Once the headlines evaporate the fundamentals will come back into play. Overshadowed by the geopolitical events was a Q2 earnings cycle with 10% earnings growth, 5% revenue growth and +3.95% GDP growth. This growth will bring the Fed back into the picture with rate hikes sooner rather than later BUT we are still at least six months away from those hikes. The market has plenty of time to return to its highs before those rate hikes appear.
The S&P has not had a 10% correction since August 2011 but there have been nine mini declines of 3% or more. We are due for a 10% decline.
I am typically early with my calls on market direction and I am not saying we should rush into longs next week. However, we could be at a turning point and we should pay close attention to market direction early in the week. I would rather nibble at some longs in a positive market than be looking back 500 points from now and wishing I had bought something. Just be aware we could be at a turning point but cautious enough that a failed rebound does not cause a material loss of capital.
Next week is August options expiration and historically this is the strongest week of the month for August. Declines are normally early in the month and again at the end of the month.
The National Association of Active Investment Managers NAAIM Exposure Index has fallen to the lowest level since September. This means their exposure to equities is at an 11 month low. At the same time the AAII weekly investor sentiment survey found the most pessimism among respondents since August 2013 with 38.2% bearish and 30.9% bullish. However, over the last week the ProShares UltraShort S&P-500 ETF saw outflows of $50 million and the ProShares Ultra S&P 500 ETF has seen inflows of $592 million. Apparently investors are using the surge in volatility and the return to support as a reason to buy stocks while they are on sale.
The CBOE Equity Put/Call Ratio spiked up to 1.04 on Friday August 1st. That was the highest reading in three years and the 19th highest since 2003. This suggests traders were turning significantly bearish and buying millions of puts. It is also a contrarian indicator because it suggests everyone is betting on a declining market. Buy stocks when nobody else wants them.
However, Reuters claimed the spike was due to a "fat finger" trade where more than 700,000 put contracts were traded across a number of different stocks in 1,300 trade orders. The premium on the contracts was $8 million and they were for weekly options that expired at the end of the day. The trades were executed in less than a minute and the options expired 3 hours later. All of the major exchanges said they had no broken orders or illegitimate trades so whoever placed the orders ended up paying a lot of premium for nothing.
Goldman Sachs said the 3 biggest risks to the stock market were 1) geopolitical events, 2) China and 3) rising interest rates. With Ukraine tensions easing and the U.S. finally attacking ISIS the main geopolitical events would seem to be fading. China's economic reports have begun to improve and Goldman said the China risk is now "broadly balanced" rather than "skewed to the downside." That leaves bond yields and rising interest rates as the most likely cause of market volatility in the coming months.
China's trade surplus surged to a record in July as export growth surged +14.5% compared to estimates for 7% growth. Imports declined -1.6% leaving them with a trade surplus of $47.3 billion. Exports to the EU surged +17% and +12.3% to the USA. The decline in imports is somewhat related to the drop in commodity prices. Volume of commodity imports rose +18.1% but the average price fell -14.5%.
Recession, what recession? Over the past three months growth in credit card debt has exceeded wage growth in the USA. This is the first time since the Great Recession and suggests the consumer is once again confident enough to borrow more than they make and leverage themselves once again. For the last five years the consumer has been deleveraging and getting rid of debt. Now that trend is reversing. Is it because they are more confident or has the cost of gasoline and food grown to the point they have to charge groceries to eat?
Mark Faber, author of the Gloom, Boom and Doom report reiterated his call for a 10% to 20% correction this fall. His call has become so monotonous that nobody really believes him anymore. Eventually he will be right but even a stopped clock is right twice a day.
Italy's economy declined -0.2% last quarter and that put it into a technical recession for the third time since 2007. Actually Italy's economy has declined 11 of the last 12 quarters so in reality it is a depression more than a recession. The decline has wiped out the prior 14 years of growth. Italy's problem is excessive regulation. It is hard to start a business and once started you can't fire employees. If you hire somebody you better like them a lot because you are stuck with them until they quit.
The number of stocks in the S&P-500 trading above their 50-day average declined to 23% and the lowest reading in more than a year. The number rebounded to 35.4% at the close on Friday but that is still very low. This would suggest serious oversold conditions and indicate there could be a continued bounce in our future.
Malaysian Airlines is being sold to the Khazanah Nasional Bhd sovereign wealth fund for $429 million. The fund already owned all but 30.6% of the airline. It will now become a national airline after the loss of two planes back to back over a 4 month period. The fund said the airline will require substantial funding to rebuild it into an effective operational company. Passenger traffic has dropped significantly after the twin disasters.
McDonalds (MCD) same store sales declined -2.5% in July matching the largest decline in a decade. Sales in the U.S. fell -3.2% and -7.3% in Asia. McDonalds menu has been challenged by numerous competitors offering healthier food and a broader menu. Also burger joints like Smashburger and Five Guys are exploding across the country. McDonalds and YUM Brands both suffered in Asia after a common supplier was found to have shipped them out of date meat that forced the companies to remove some items from the menu until alternate suppliers could be found.
Apple products were dropped from the approved list for government buyers in China. Apple failed to submit documents that included a pledge not to violate state or public interests. The documents would also have required Apple to submit detailed product information such as engineering details, product components and schematics. China is concerned U.S. products have embedded security hacks that will allow the NSA to eavesdrop on electronic communications. Ten Apple products including iPads and Macs were dropped from the list.
Putin announced bans on food and agricultural products from the U.S. and EU in retaliation for the sanctions. Almost immediately border guards began turning back trucks from Lithuania and Estonia loaded with cheese, yogurt and meat. Along with Latvia and Poland the Baltic states are heavily reliant on exports to Russia with those exports accounting for almost 2.5% of their GDP. Russia received 19.8% of Lithuania's exports in 2013, Latvia 16.2%, Estonia 11.4%, Poland 5.3% and Finland 9.6%. The sudden surplus of food products means food prices are going to get a lot cheaper in those countries as the excess supplies are dumped into the market. That may be good news for consumers but bad news for farmers.
Ukraine is threatening to cut off oil and gas supplies headed to Europe from Russia. Ukraine is no longer receiving gas for use in the Ukraine since Russia stopped exports to Ukraine in June. However, there are multiple pipelines across Ukraine that transport oil and gas to Europe. The Ukraine is considering a partial or complete ban on the transit of "all resources" across its territory in retaliation for Russian support of the rebels and the ban on food imports from Ukraine. More than 86.1 billion cubic meters of natural gas and 15.6 million metric tons of oil were shipped across Ukraine in 2013. A halt of this magnitude would be severely damaging to the Russian economy. The country is also considering a ban of Russian airline flights over Ukraine territory.
The news coming out of Russia is of course the exact opposite of reality. Sergei Glazyev, an advisor to Putin, said the U.S. "hawks" are "setting the world ablaze" and "provoking a global conflict" with the "aim of establishing control not only in Europe but also in Russia."Glazyev has prepared a list of 15 proposals to "counter the attacks against Russia" after Putin invited the Ukraine and its 40 million citizens into a trading bloc to rival the EU. Russia can't go it alone against the U.S. and must create an "anti-war coalition" to check the "U.S. aggression."
Russian strategic nuclear bombers conducted at least 16 incursions into northwestern U.S. air defense identification zones over the past ten days. This was an unusually sharp increase in aerial penetrations according to U.S. defense officials. The unusual number of flights by Russian Bear bombers prompted the scrambling of U.S. jet fighters on several occasions. During one incursion near Alaska a Russian intelligence gathering jet was detected along with the bombers. These flights are a blunt warning by Putin for the U.S. to stay out of the Ukraine situation. Putin believes President Obama is weak and he is trying to intimidate him into inaction with these flights.
The IRS is missing emails from the seven people in charge of the approval of tax exempt status of conservative organizations. Reportedly each of their hard drives failed about the same time Congress began looking into complaints about harassment. The EPA also "lost" emails that were the target of a Congressional investigation. Last week we learned that the Health and Human Services (HHS) department in charge of the roll out of Obamacare told the House Oversight Committee that the emails on the roll out had been deleted. The claim by Marilyn Tavenner at 5:PM on Thursday came 10 months after those emails were subpoenaed by Congressional investigators. Adding in the missing emails from the HHS that means emails from more than 20 witnesses under subpoena by Congress have been "lost or destroyed." These emails are supposedly protected by Federal laws on records retention.
It defies logic that emails for so many key people have been accidentally lost or destroyed in violation of Federal law. In each of the cases the loss of the emails were not disclosed until months or even years after they were requested by Congress. Only after the witnesses could stall no longer did they disclose the emails were missing. That homework eating dog must be getting really fat on his new email diet.
Enter passively and exit aggressively!
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"The only thing that stands between a man and what he wants from life is often merely the will to try for it and the faith to believe that it is possible."