Earnings excitement began to wane after several companies provided disappointing results. With a monster rally over the prior two weeks it was time for the market to rest.

Market Statistics

Earnings from Pfizer, Beazer Homes, Clorox, Molson Coors, Alpha Natural Resources and Massey Energy provided disappointing results. The sudden wave of less than spectacular earnings depressed investor sentiment and the market bloom from the last couple weeks began to fade.

Earnings produced the big headlines today because there was little in the way of economics. The Factory Orders for March came in a +3.0% and almost double some estimates. This was the fifth consecutive month of gains. Analysts were expecting only +1.8%. Back orders increased a tenth of a point to 0.8 but it was the 11th increase in 12 months. Shipments spiked to 2.7 from 0.6 in February. Core capital goods orders rose +4.1% from a -3.7% decline in the prior month. The details in this report suggest a 3% GDP for 2011.

Economy.com Factory Orders Chart

Vehicle Sales for April rose again to 13.14 million (annualized) from 13.08 million in March. The problems from Japan had not progressed through the supply chain enough to depress sales because inventory levels were sufficient enough for April shoppers. There will be a decline in inventory levels in May and June as a result of the parts shortages.

There has been a major change in buying habits in in the last few months due to the rising gasoline prices. Higher fuel prices forced a move away from SUVs and trucks and towards smaller more economical cars. 52% of purchases were autos. GM's sales of light trucks fell to their lowest level since 2008. Apparently the pending repeat of the gasoline prices we saw in 2008 was enough to alter consumer habits. A body at rest tends to stay at rest and that is definitely true when it comes to consumers giving up old habits and vehicle types. The spike in prices apparently prodded some to get off the couch and trade in their gas burner for something cheaper to drive. The average price for gasoline in the U.S. on Tuesday was $3.97 per gallon, up +$1.06 from the same period in 2010. Three more cents and we will trip the fuel recession countdown clock.

U.S. branded vehicle sales rose to 47.4% and the highest since May 2010. Sales of imported vehicles fell to 24.1%. That was as high as 28% last August. Chrysler led the automakers with sales of trucks and SUVs at 70% of their total but down from 86% at the end of 2010. Their product line is weighted in that direction.

Sales by year-end are expected to rise to 13.7 million units. Where the majority of sales in 2010 was due to fleet sales the majority of sales so far in 2011 have been retail consumers. Assuming gasoline does not move over $4 for an extended period this trend could continue. However, every penny higher takes another $1.4 billion dollars out of consumer pockets each year. At today's rate of $3.97 per gallon U.S. consumers will spend $557 billion for fuel in 2011. A billion here, billion there and pretty soon the consumer will be broke.

The calendar for the rest of the week is mostly job related with the ADP report on Wednesday, Jobless Claims on Thursday and Non-Farm Payrolls on Friday. I suspect some of the market weakness this week is related to worry over the non-farm payrolls and a bigger than expected decline. This is what the regional reports of economic activity have been suggesting.

Economic Calendar

Earnings had been pushing the market higher but today they were instrumental in producing market weakness. Shares of OpenTable (OPEN) declined -$9 or -8% in regular trading but accelerated lower after the close to $96.80. That is a drop of -$19 from the morning high at $114. The decline came after the company reported a shakeup in the C suite. The CFO will go to CEO, CEO to Chairman. The Current CEO, Jeff Jordan, has been running Internet businesses since 1999 and investors are not that confident in the CFO to handle the job. Revenue was inline with earnings per share beating estimates.

OPEN Chart

Pfizer (PFE) posted earnings that rose +10% at 60-cents that beat estimates by 2-cents but revenue was below estimates. Pfizer kept full year estimates in the $2.16 to $2.26 range but lowered revenue estimates from $67 billion to $66 billion. The company also lowered its 2012 forecast to $63.5 billion. Pfizer is constantly plagued with drugs going off patent and generics eating away at its market share. Investors ate away at its share price with a -3% drop on the news.

Beazer Homes (BZH) reported a loss for Q1 and a significant decline in orders for new homes compared to year ago levels. However, this time last year homebuyers were rewarded with a tax credit so the comparisons are not valid. Beazer said it was cutting 130 full time jobs until business returned. The company said sales patterns remained erratic and showed no real evidence of a sustained improvement in the economy. Beazer reported a loss of 74-cents compared to analyst estimates for a 50-cent loss. Beazer shares declined -5%.

Clorox (CLX) shares declined -4% after reporting earnings that declined -8%. The company said higher costs for raw materials were to blame. This is going to be a common thread in months to come as higher commodity costs flow through the system but the weak economy prevents them from raising prices to pass the costs on to the consumer. Clorox said it had already raised prices on its Glad trash bags by 9.5% and said it would continue to try and raise prices on the rest of its product line. Trash bags and bleach bottles as well as many other components in the Clorox line are all made from oil. Earnings missed estimates by a penny and revenue was also light.

Molson Coors (TAP) said earnings declined -21% in Q1 due largely to higher costs for ingredients and ...drum roll please... higher fuel costs. Earnings of 43-cents missed estimates by a penny and revenue was also light. The company said its key consumer group, men under 28, are suffering from particularly high unemployment. Worldwide beer volume fell -1.5% for the quarter. The CEO said the company was able to increase market share and improve its margins but the weak economy weighed on sales. TAP shares ended the day down -6% at $45.52 but that was well off the pre-market lows at $40.

Molson Coors Chart

After the close First Solar flamed out on a guidance warning. FSLR beat on both earnings and revenue but then warned on future revenue. Accounts receivable and inventory were higher for the quarter but cash on hand declined. Free cash flow and operating cash flow were also at historical lows. The said sales would be flat due to delays on existing projects. Reuters also reported Italy was reviewing its tax incentives on solar and the latest draft of the review suggested declining tax incentives and a negative for the solar sector. Germany went through this process back in the fall and the sector was depressed for months. FSLR shares declined -$12 after the close.

First Solar Chart

Sears (SHLD) declined -10% after the company said it would post a big loss for Q1 after a sales slump in the U.S. and Canada. Sears sales have fallen every year since Sears and Kmart merged in 2005. It appears Q1 will be the biggest decline since the merger with sales falling -20% below the level seen in Q1-2007 before the recession began. They are expecting a loss of $1.35 to $1.85 for Q1. Same store sales declined -3.6% for the combined businesses but -5.2% for Sears stores.

Sears Chart

Computer Sciences Corp was crushed with a -13% drop after saying earnings were likely to come in at $4.75 per share compared to its forecast in February at $5.20 per share. The company said sales "probably" missed forecasts as well. Investors were not encouraged by the terms probably and likely in its guidance warning. This is the computer age and major corporations are expected to know within a few cents where sales are at any particular time.

Computer Sciences Chart

Las Vegas Sands was pummeled after the close when earnings came in weaker than expected. Earnings came in at 37-cents and analysts were expecting 43-cents. LVS said lower than normal table winnings in Singapore caused a $30 million hit and they lost another $45 million in Las Vegas. The company also had to write down its receivables on lowered collection expectations. LVS shares lost $6 in after hours.

LVS Chart

On the positive side Green Mountain Coffee Roasters (GMCR) rallied +$12 (+20%) in after hours when the company raised guidance and said it was going to sell 7.1 million shares to repay outstanding debt. Q1 earnings were 44-cents, up from 17-cents in the comparison quarter. Sales more than doubled to $647 million. GMCR said it sold 1.2 million Keurig coffee machines during the quarter, +86% gain, and K-Cup sales spiked +94%. GMCR raised guidance for the full year to as much as$1.50 compared to analyst estimates of $1.22.

GMCR Chart

While earnings were taking the shine off market sentiment the commodity sector was doing the real damage. Silver prices literally imploded for the second straight day. I wrote over the weekend I expected to tank this week and warned it would likely go down a lot faster than it went up. Silver closed today at $41.66 and well off Friday's close at $48.55. That was the biggest two-day drop since 2008. Helping push it off the cliff was the third margin increase at the CME in the last two weeks. It now costs traders $16,200 in margin to trade the full size 5,000 ounce contract. Margin was just increased on Friday to $14,513 per contract, a +13% increase from the prior level of $12,800. A year ago it only took $4,250 in margin to trade silver. That is a 200% increase and definitely raises the bar to entry for those attempting to speculate in silver. For banks, hedge funds and large speculative investors with thousands or even tens of thousands of contracts the sudden increase in margin meant a monster margin call and the immediate need to reduce their holdings. The CME is raising the margin to reduce the speculation that powered it to 1980 highs.

Silver Chart

Gold declined about $20 but escaped the carnage because gold if a reserve currency and is held by central banks and despite the new highs the amount of speculative excess has been minimal. You have to have deep pockets to own gold today and that protected it from a significant decline in price.

Gold Chart

Crude oil also lost its luster with a -$2.70 decline to $111. This is not yet a correction and just a bout of profit taking. The problems in the Middle East have not gone away. Now that we are in a new month it was time for commodity funds to take some profits. The 30-day average has been support for the recent rally and I expect it to remain support.

U.S. WTI Chart

Brent appears to be returning to support around $120 but as long as the Middle East remains a hit spot I don't expect it to break that level.

Brent Crude Chart

The rebound in the dollar was blamed all day for the drop in commodities. As you can see on the chart it would take a magnifying glass to see the rebound so I doubt it really had any impact on commodities. I wrote last week I expected a short-term bounce in the dollar and this was not it. I would expect a little more rebound before the next leg down.

U.S. Dollar Chart

The energy sector took the decline in oil prices pretty hard with nearly 50 energy stocks losing more than $2 and 15 losing more than $3. This bout of profit taking has been expected for several weeks and the move into the "sell in May" period made them perfect candidates for profit taking.

Is the market weakness this week related to the "sell in May and go away" strategy. Obviously it is too early to tell for sure but I suspect it is related more to profit taking from the big gains over the prior two weeks. However, volume today was 8.4 billion shares and that was the highest volume since March 18th. That could have been stops getting hit or it could have been an asset allocation program.

I compared volume across all the major exchanges thinking maybe it was related to the Nasdaq-100 rebalance. However the majority of the increase was on the NYSE at roughly a billion shares higher than Monday while the other exchanges saw negligible increases. That suggests the decline was related to the drop in energy stocks. That was the hardest hit sector and most of those stocks are on the NYSE. The XOI fell -2.49%, OSX -2.83%, OIH -2.49% and XLE -2.5% while the other major indexes were only down fractionally except for the Russell at -1.3%. Energy was due for a decline and even though most of the energy stocks were beating the street their production was declining. I think today's decline was driven by the profit taking in the energy sector.

The S&P declined to 1350 and then rebounded. I discussed over the last week the potential for a decline to 1340 if the natives really got restless. The 1350 level is mostly psychological but I am glad to see it held. When coupled with Monday's decline from the 1370 high that is a decent dip and I would expect early bargain hunters to appear at that level. S&P 1340 is still a possibility.

S&P Chart

The Dow decline -50 points intraday but rebounded to close fractionally positive despite major declines in XOM, CVX and CAT. Given the +700 point gain over the last two weeks the minimal decline over the last two days has been very encouraging and would appear to suggest the sell in May crowd has not yet arrived. Dow 12,800 appears to be new support. It is hard to really decide what is going to happen here because two days does not make a trend. If the Dow really started to sell off we could lose several hundred points without doing any real damage to the trend. Let's hope we don't have to test that theory.

Dow Chart

The Nasdaq was the biggest loser of the major indexes with a -22 point decline. However, it rebounded sharply off initial support at 2825. Whether this support will stick is anybody's guess. However, the lack of increase in the volume seems to suggest the decline is not related to the Nasdaq-100 rebalance and Apple shares gained +$2 so that would also be confirmation. I think the Nasdaq is simply consolidating from the rebound that started on the 18th and I have not seen anything yet to suggest we are going lower.

Nasdaq Chart

The Russell 2000 dipped to support at 840 and rebounded almost on the tick. However, the rebound was lackluster and only 4 points. As long as 840 holds we are good to go but a break under that level will endanger the trend. Small caps were the biggest lower for the broad indexes at -1.28% but that was just a minor dip, all things considered.

Russell Chart

In summary I don't see anything that tells me the trend has changed. The declines this week were minimal and in the case of the Dow almost nonexistent. Volume appears to have spiked thanks to the decline in the energy sector and remained flat elsewhere. We have decent support just below today's close. There is nothing pointing to a continued decline but also nothing preventing it. I would not be in a rush to enter and long OR short positions. I would prefer to watch for another 24 hours.

Enter passively and exit aggressively.

Jim Brown

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