We would not know how to act without a major short squeeze or major news event to power the markets to triple digit gains or losses. Volatility is extreme and there is no conviction on either side.

Market Statistics

Rumors that Gaddafi may be looking for a way to exit his current dilemma sent oil prices plunging and created another short squeeze to power the Dow to a triple digit gain. Oil prices declined intraday to $103 even though the Gaddafi rumor was unsubstantiated.

Bank of America CEO Brian Moynihan gave the banking sector a boost after he predicted a return to normalized profits by 2013 in the range of $35-$40 billion. Bank of America and others are also planning on reinstating dividends once the Fed approves the change on March 20th. BAC is planning some special dividends and stock buybacks when that approval arrives. Moynihan expects 30% dividend payout by 2013-2014.

It was a really boring day for economic news with only two reports. The Manpower Employment report showed an increase in those responders planning on increasing payrolls from 14% to 16%. Those planning on cutting positions declined to 6% from 10%. Basically that means the net hiring component increased from 4% of responders to 10%. That is a pretty big increase even though the numbers are still fairly low.

The Weekly Chain Store Sales increased by +2.3% compared to a -0.5% decline last week. Better weather was blamed for the increase in store traffic. The drag from higher gasoline prices appeared to minimal.

The economic calendar for the rest of the week is limited without any material reports.

Economic Calendar

The big news was not economic but the Bank of America outlook. Moving to pretax earnings of $35-$40 billion will be a major recovery for the bank and the sector. The bank had a pre-tax profit of $11 billion in 2010. BAC outlined its expectations in the first analyst conference since 2007. Moynihan said BAC was on its way to becoming a "capital generation machine" thanks to its acquisitions of MBNA and Merrill Lynch. He said he was changing the culture of the bank. "We have no acquisitions to do. We don't need anything." BAC shares jumped +5% to $14.69.

The news helped to power the financial stocks in the Dow and create the opening short squeeze. Other stocks that would benefit from the kind of increasing economic activity Moynihan was expecting also rallied hard. Those Dow stocks included IBM, CAT, MMM, BA and UTX.

The Gaddafi rumor was credited with knocking some of the wind off oil prices but they were already headed south before the rumor hit the wires. The price of crude is over extended but many think after a bit of profit taking it will move higher.

Francisco Blanch, Chief Global Strategist at BAC, raised his targets for the rest of 2011. He said Brent could average $122 in Q2 and WTI $101. That is up from a prior estimate of $87 for WTI. He expects Brent to top $130 in Q2 but decline in Q4 to $94. His rationale is the surging demand around the world and the drop in output from Libya. He said 1.1 mbpd of light crude was now offline and regardless of who won the battle it could take many months to repair damage to oil facilities and reopen supply. This is exactly what I wrote about over the weekend in OilSlick. If the rebels win they consist of 12-20 tribes who don't like each other and the problem of how to divide $150 million a day in oil revenues will be a hotly contested issue. If Gaddafi wins it could still take months because of the purge of opposition supporters and the time it will take to rebuild the damaged facilities.

Gasoline prices nationwide rose to $3.52 according to one survey and $3.57 by another. MasterCard's Spending Pulse report showed gasoline demand declined -1.8% last week. The decline was broad based across all regions. MasterCard said they saw demand destruction in 2008 when prices moved over $3.20 per gallon so destruction over $3.50 today should not be a surprise. The spike in gasoline prices over the last two weeks was the sharpest on record according to the EIA.

Oil prices rebounded from the opening dip as OPEC members claimed to be considering an increase in production. The president of OPEC was reportedly calling all members for their input. I would not expect a true production increase. They might say they are increasing just to cover some of their 2.2 mbpd of cheating on their current quotas but you know they are perfectly happy at $100 oil. Saudi Arabia, the only vote that really counts has repeatedly said this week there is no shortage of oil. "The market is well supplied and the high price is the result of speculation." Sounds like the same tired chorus they used in 2008 and you know how well that played out.

Chart of WTI Crude

Chart of Brent

Urban Outfitters was the big story stock of the day with a -16% decline after missing earnings estimates by nearly every metric possible. Earnings per share were 45 cents compared to the 52-cent estimate. Gross margins declined by -2% to 39.7% and inventory levels rose +23%. Wall Street Strategies analyst said URBN missed the mark on style, fit and value and it could take them a year to work out from under their bloated inventories. Another analyst at Weeden blamed the winter weather for keeping customers away.

Chart of URBN

NetFlix took another pounding on news Facebook was entering the video streaming market with a Time Warner offering. Goldman said Facebook was a bigger threat to NetFlix than Amazon. Not everybody agreed. Facebook is offering only one title, The Dark Knight, for $3 in Facebook credits for a 48-hour rental. Obviously this is a trial balloon by Time Warner and there will be a catalog of titles once the effort is tested and proves worthy. Another limiting factor requires the movie to be streamed on a computer through the Facebook application. Google already tried this with YouTube and it was a flop. I don't see Facebook as a real competitor to NetFlix but traders did sell the shares today.

Chart of Netflix

McDonalds (MCD) said same store sales rose +3.9% in February. However, shares of MCD decline because U.S. sales fell short of analyst projections. U.S. sales rose +2.7% and analysts were expecting a +3.6% gain. Sales rose +5.1% in France, the U.K. and Russia.

Nvidia (NVDA) saw shares decline -4.5% to close at $19.55 on a sell the news event. Nvidia continues to claim it is going to expand its foothold in tablet computing but again failed to unveil any new designs or time frames for new graphics processors. The +27% gain on expectations is running out of fuel without some concrete products in the pipeline.

Nvidia Chart

The Dow Transports rebounded +2.5% on the minor decline in oil. This is clearly a short covering rally after two days of declines. Airlines were the biggest gainers. They have been raising prices because of high oil and the potential for oil prices to decline suggests they may be out of trouble. The close at 5147 was a two-week high.

Dow Transports Chart

I was glad to see the short squeeze today but it was far from bullish. The squeeze ended at 11:30 and the indexes started to fade as the afternoon progressed. So far this is just a lower high and any further decline from here would be bearish. The recent rallies have taken a back seat to the sudden appearance of sell programs and we are only one good sell program away from retesting the lows from Monday. I would advise caution until we get past the FOMC meeting next Tuesday.

S&P-500 Chart - 90 Min

S&P-500 Chart - Daily

The Dow also lodged a lower high on the rebound and failed exactly at downtrend resistance. We had a successful retest of the early March low but we need to see a breakout above the 12,300 level on Wednesday or the bears are going to load up on shorts again in an attempt to break the rally. The support at 12,050 will be critical if tested again.

Dow Chart - 90 Min

The lower high on the Nasdaq was weaker than the equivalent rebounds on the Dow or S&P. This is not a good sign. Big cap tech stocks did not participate in the rally with Apple gaining only 40-cents as an example. This is bearish for Nasdaq sentiment. The weaker lower high and the weak +20 point gain for the day is a warning signal for the rest of the week.

Nasdaq Chart

Wednesday is the two-year anniversary of the bear market low and I hope that does not mean we have a serious bout of selling. Anniversaries always seem to make traders nervous. Billionaire investor Carl Icahn told the investors in his fund on Monday he was returning their money, roughly $1.7 billion, because he was afraid of a new market decline and did not want to be responsible for their money in a new market crash. At least that was his official reason for returning the money. Analysts said it was more likely he did not want to register his fund as would be required under the new financial reform laws. However, I am sure investors "heard" the worry over a new market crash and did not hear the suggestion it was regulation related.

I would continue to be cautious until after the FOMC meeting next Tuesday. Tighten up your stops and exit aggressively to maintain any profits.

Jim Brown

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