The markets rested ahead of the FOMC minutes on Wednesday after weaker economic reports suggested the recovery was not yet self-sustaining.
Today was a busy day for economics in both the U.S. and the world. In the U.S. the market opened sharply lower after the retail sales report for January showed a lower than expected rise. Sales came in at +0.3% and half of the +0.6% in December. Estimates were for a rise of +0.5%.
Building supply stores saw sales decline -2.9% followed by a drop in sporting goods of -1.3%. Both of those sectors were more than likely hit by the impact of the snowstorms. Sales were supported by the rise in gasoline prices. That is not exactly where you want to see a rise in sales.
Year over year growth was very strong with a +8% gain. Core sales have risen to levels not seen since 2006.
This was a headline event where traders reacted to the headline and not the bullish internals of the report.
The weekly chain store sales snapshot showed sales decline -1.4% last week and that was the fifth weekly loss in six weeks. Again weather was a primary factor in those declines. As sprig weather arrives we should see a period of pent up buying that will be strong.
Another downer for the market was the NAHB Housing Market Index, which came in at 16 for the fourth consecutive month. Any number under 50 shows contraction. Analysts had hoped the homebuilders would see sentiment improving as we head into spring. Personally I don't know how sentiment could have risen given the blizzards. You can't build if you can't get to the worksite and shopper traffic had to slow with two feet of snow on the ground. I think the reaction to this number was overdone and we are very close to a sharp move higher.
The qualification to that outlook is still the massive number of foreclosures in the pipeline and the stricter qualifications required by mortgage companies.
On the positive side the NY Empire Manufacturing Survey was stronger than expected at 15.4 and the highest level since June. Internals were not as strong as in prior months but still decent. New orders declined to 11.8 from 12.4 and inventories increased to 9.6 from 4.2 and the fastest pace of accumulation since April. Backorders improved for the third consecutive month but remained in contraction territory at -4.8. That was at a low of -24.7 in November. The payroll components were flat. Overall the report was mildly bullish.
Wednesday has a flurry of reports with the FOMC minutes the most critical to the market. I suspect today's decline has more to do with option expiration and the approach of the FOMC minutes than worries over retail sales and profit warnings from FedEx.
Another drag on the market at the open was FedEx. They cut their Q1 guidance due to higher fuel costs and severe weather that disrupted deliveries. The new forecast was for profits of 70-90 cents and down from an earlier prediction of 95-cents. Analysts were expecting an average of $1.06. FedEx said fuel prices were up +13% since their earlier forecast. For a company with 81,000 vehicles including nearly 1,000 aircraft the price of fuel is a major concern. It is only going to get worse in the years ahead.
Despite the guidance cut and its impact on the market the stock of FDX rallied +2%. The gain came after FedEx CEO Alan Graf said the company continues "to see strength in our base business across all transportation segments and geographies."
JDS Uniphase (JDSU) has been charging ahead since earnings back in early February. It appeared to have reached the limit of its rope today. JDSU received multiple downgrades on Tuesday with Bernstein cutting its rating to hold from outperform. JDSU shares had risen +93% since early January. Most comments were based on over valuation concerns given the big gains. JDSU shares declined -10%.
The NYSE Euronext - Deutsche Boerse merger was formally announced after several days of rumors. Traders sold the news on both sides of the ocean. The combination of the two exchanges would create the largest global exchange. The NYSE is already a leader in derivatives, the largest capital market and a major provider of technology services.
If the merger is concluded the current DB shareholders would own 60% of the merged company and NYSE shareholders 40%. However, there will be some reservations by regulators. Some analysts believe lawmakers will not want to have a foreign company in charge of our markets. There are multiple jurisdictions in Europe that will also have to approve the deal. This deal is far from done.
After the bell Dell reported earnings of 53-cents compared to estimates of 37-cents. This is a major beat by Dell although revenues were fractionally light at $15.69 billion. Q4 operating margins were good at 7.3%, up from 3.4% a year ago. Michael Dell predicted a 5% to 9% rise in revenue in the current year. On the call the CFO reiterated Dell was going to remain a public company. This is an effort to squash the rumor Michael Dell was thinking about taking it private once again.
This was a good report by Dell and suggests the turnaround, which has been in progress for a couple of years now is proceeding nicely. Dell said the lower cost of components and rising corporate sales were the biggest profit drivers. Sales to small and medium businesses rose +12%. Unfortunately sales of PCs to retail buyers declined -8%.
Shares of Dell rose +5% in after hours.
Building supply stores may have had an ugly January but Home Depot (HD) still plans on hiring 60,000 seasonal workers for the spring shopping season. HD said that was comparable to hiring in 2010. Consumers have held off on making needed repairs to their homes during the recession and retailers like HD expect a burst of pent up buying this spring.
Home Depot Chart
U.S. WTI crude oil declined again to an intraday low of $83.85 before rebounding slightly at the close. The talking heads on TV assigned a variety of causes to the decline but I suspect it was mostly due to expiration pressures since the contract expires next Tuesday. There is very little available storage left at Cushing so speculators can't store the oil until it is sold. This forces prices lower and that is what we are seeing now.
In the API inventory report tonight crude levels dropped by 354,000 barrels. Analysts were expecting a gain of 2.4 million.
Brent crude declined slightly but remains at $102.
WTI Crude Futures
Brent Crude Futures
The biggest news today was probably the market decline. The Dow was down -75 points at its lows and commentators were using terms like two and a half week lows. It has been so long since we had a decent decline without an external event like Egypt that they did not know how to act. There was another parade of bulls calling for highs on the S&P at 1550 or higher based on a PE of 15 and earnings of $96 on the S&P. There was also a parade of analysts warning not to commit new money now because of the impending correction.
Regardless of your market bias there was somebody singing your tune on TV today. The S&P declined at the open to 1325, rebounded intraday to 1330 and then tested 1325 again prior to the close at 1328. If you picked up anything from that last sentence it should have been the very low range of roughly six points after the gap at the open and the immediate rebound from 1325 on both tests. The bulls did not vanish. They just stepped back ahead of Dell's earnings and the FOMC minutes on Wednesday.
You may remember last week when the S&P tried for four days to move over resistance at 1320. Now that we are well over that level we have had three tests of new support at 1324 and all have held. The first was noon on Friday and then twice today five hours apart. From my viewpoint nothing has changed. I believe the bulls are still in buy the dip mode but for that to work you have to have dips. With the worry over the FOMC minutes it was understandable they didn't rush in on high volume today. Let the market cool off and hopefully get a chance to buy at a lower level.
S&P-500 Chart - Daily
S&P-500 Chart - 15 Min
The Dow may have been down -75 points at its lows but there was rock solid support at that 12,200 level. This should by our line in the sand for the Dow. As long as the index remains over that level the trend has not changed. Actually it could move below 12,200 without breaking the trend but it would damage sentiment. We could dip all the way to 11,750 and still be in an uptrend but I don't want to be holding during that drop.
The longer-term uptrend should be measured by the 21-day average at 12,040 today. A break of that level would cancel the dip buy strategy until the index moves back over the 21-day again.
Dow Chart - Daily
The Nasdaq gave up -13 points but new psychological support at 2800 held on two tests. This is far from a major support level but it is comforting to see it appear so quickly after the break through last week. Real support is 2780 and 2765. The Nasdaq had a decent bout of profit taking back in late January and then a decent period of consolidating once the rebound began. Unless there is some new event to crush sentiment in our near future the weakness from today should pass.
Nasdaq Chart - 15 Min
Nasdaq Chart - Daily
The Russell was the biggest percentage lower for the day at .7% but given the rally over the last two weeks it was a drop in the bucket. The index punched through uptrend resistance on Friday and followed through on Monday to confirm. Today's pause at 820 was nothing to worry about. I would begin worrying on a dip below 805.
Russell Chart - Daily
In summary I don't believe the buy-the-dip trade is dead. Until the indexes break support at the levels I indicated above the declines are just dips. It is funny how some market commentators see every routine decline as the beginning of the big crash. Eventually they will be right but being right once out of 365 predictions has got to be painful.
We did not really have any material volatility last week as the markets consolidated in a range. This means the normal option expiration action was transferred over to this week and I believe today's decline was due to those positions being closed.
Volume across all the exchanges has been very low this week with 6.5 billion shares on Monday and 6.9 billion today. There is ZERO conviction by the sellers and no fear among the bulls.
Tomorrow's big event is the FOMC minutes and debate over what the phraseology really means. I don't expect anything negative since shocking the market now would contrary to the main QE2 objective of building it up. This is the minute of the Jan 25th meeting so the discussions would have been over December and early January economics.
Trade the trend until the trend changes.
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