The Dow flirted with 13,000 for most of the day but ended about 18 points short of that psychological level.
It was touch and go all day with the Dow trading as high as 13,013 and as low as 12,950 but in the end the Dow closed only 18 points away from the psychological 13,000 level. The Dow fought that level for the last four days and it is only a matter of time before we see a close over that millennium marker. The S&P finally closed over the April high close of 1363.61 but only by a couple of points at 1365. Every little bit counts.
The market got some help from the U.S. economics with the Consumer Sentiment for February rising to 75.3 and a new 12 month high. The survey posted a 55.7 low back in August and that was only 0.4 points from a 28-year low. Conditions have definitely improved in just the last six months. The final reading for the month was +3 points above the initial reading at 72.5 and that suggests sentiment is accelerating higher. Gas prices will kill that move eventually but as of month end the apparent good news on Greece has boosted sentiment.
The present conditions component did decline to 83.0 from 84.2 but the expectations component rose from 69.1 to 70.3.
More importantly this was only the second February since 2000 that sentiment posted a gain in February. Normally there is a sentiment decline as the holiday bills come due and consumers start worrying about paying their income tax. This was the sixth consecutive monthly improvement in sentiment.
Gasoline prices averaged $3.69 on Thursday, up +39 cents over the last six weeks. Analysts are expecting prices to continue rising to well over $4 and this is going to put a serious squeeze on sentiment in the months ahead.
Consumer Sentiment Chart
New home sales for January declined slightly to an annualized rate of 321,000 from 324,000 in December. January is not normally a big month for new home sales and analysts were only expecting 315,000 so the number was market positive. Sales are up +3.5% year over year and accelerating at their fastest pace in more than a year. Months of supply fell to 5.6 and the lowest level since early 2006.
The median home price rose significantly from $207,000 in December to $221,200 in January and that is another sign of an improving market.
In the "everything is relative" category we are getting excited about a pace of annual sales over 320,000 when sales at the 2006 peak were over 1.4 million. We have a very long way to go before the homebuilder sector is healthy again.
Home Sales Chart
The economic calendar for next week has several high profile reports. The GDP revision, Fed Beige Book and the ISM Manufacturing will be the attention getters. The GDP is expected to be revised higher to +3.0% growth. The ISM is expected to post a minor gain to 54.6 but there are whisper numbers in the 56.0 range. The Fed Beige Book is expected to show continued growth in at least ten of the twelve Fed regions. This is a preview of what the Fed statement might say when they meet on March 13th.
The ECB will hold their second LTRO loan offering on Feb 29th. The first one in December injected 489 billion euros into the market in the form of three year loans to European banks at a 1% interest rate. That immediately lowered the yield on short term sovereign debt as those banks bought the short term bonds for a guaranteed profit. There is significant anticipation over how much European banks will actually request in the second offering. Some estimates are as low as 250 billion euros and some are guessing it could be as high as one trillion euros. I think that is well out of the range because it would suggest the European banking system was still under a lot of stress. I think a lot of that stress was relieved in the first LTRO and banks are rather calm at present. It should be interesting. If there is a low number, say in the 250 billion range, the euro currency should spike significantly because a low number would provide assurance the danger is over. If the number is over 500 billion the euro could tank on worries there are still some underlying challenges for banks.
The next day the EU leaders will hold another summit with the EU Finance Ministers meeting the day before. With the Greek deal underway there should not be any major headlines from either event but you never can tell. We could see something erupt at any time. There is a G20 meeting in Mexico this weekend and the IMF is going to be lobbying for a bigger firewall around Europe's weak countries and for larger contributions to the IMF to create a bigger firewall from that institution as well.
Germany and Finland parliaments will be voting on the Greek bailout next week and that could provide some headline risk. There is no guarantee the votes will pass but it would be a big mistake if they were allowed to fail and restart the entire bailout discussion.
The markets traded sideways for the week with the Dow only adding 33 points and the S&P less than 3. The Nasdaq added 11. The major winner for the week was the energy sector with a +2% gain on a +6% gain in oil prices. Crude oil closed for the week at $109.62 with Brent at $125. Analysts are now targeting $120 for WTI and $140 for Brent thanks to Iran and problems in Syria, Egypt, Nigeria and the Sudan.
WTI Crude Oil Chart
Brent Crude Chart
Unfortunately a strong rally to new highs in crude tends to have the opposite impact on the markets. Initially strong crude prices lifts energy stocks and that lifts the S&P. Energy stocks account for more than 15% of the S&P. So what does that say for the S&P with a +3 point gain and the energy sector is up more than +2%? It says the rest of the S&P was seriously lagging and that included the help from Apple.
Apple gained another $6 to a new closing high at $522. The S&P can thank Apple for pushing it over that 1363 April high close that everyone has been worrying about. Apple is 3.7% of the S&P by weight. Apple was responsible for 50% of the S&P gains for the week. If Apple had been added to the Dow on January 1st it would be over 14,000 today.
Personally I believe the rally in crude is overdone in the short term. While I would love to see the sector continue higher I would rather it be with a stealth rally rather than daily $2 spikes in crude. The $6 move last week to $109 brought out the politicians clamoring for the president to open the Strategic Petroleum Reserve (SPR) to bring down prices. Clearly they don't understand the word strategic. When there is a strong potential for a shooting contest with Iran I don't think that is the time to be drawing down the strategic reserve to lower gas prices 10-cents. If Iran goes hostile on the Strait of Hormuz and WTI spikes to $150 then opening the SPR would make sense. Iran can't control the strait for more than a few days so the spike would be temporary.
While I expect crude prices to cool next week we can expect Iran to stoke the fires in an effort to push prices higher in the weeks ahead. If they are seeing oil sales decline then inflating the price of oil with some heated rhetoric is a good way to raise more revenue.
The IAEA team that visited Iran last week said Iran had tripled its enrichment of uranium, refused to allow them access to the Parchin military testing site near Tehran and has not resolved outstanding questions about weapons-related work. The IAEA said it "continues to have serious concerns regarding possible military dimensions to Iran's nuclear program." Iran has also provided four conflicting versions of the research and work being done at the Fordow nuclear site. However, the IAEA also said no diversion of nuclear material had occurred from Iran's "declared" nuclear facilities. The key is declared. If Iran does not declare a facility is a nuclear facility then the IAEA can't investigate it. The Parchin military facility is suspected of being the site of weapons testing for future nuclear weapons but since it is not a declared nuclear facility it can't be visited.
All this sleight of hand by Iran and the huffing and puffing by the IAEA, Israel and the U.S. should keep support under oil prices for the rest of the summer. Iran will attempt to keep those prices as high as possible using the media and staging war games every couple of weeks.
That suggests any dip in oil prices would be a buyable event since demand and prices tend to rise in the spring and summer months anyway. If there is an economic depression from the high fuel prices it will take several months to be felt. Obviously the transportation sector will be the hardest hit as prices move higher. Gasoline averaged $3.67 on Thursday and jet fuel $3.42 per gallon. With the spike in oil prices last week we could see another +15 cents rise in those prices next week.
I continually get emails complaining about big oil gouging consumers with high gas prices. The big story last week was Bill O'Reilly and Lou Dobbs complaining about refiners exporting gasoline and diesel overseas so inventories would be low and prices higher in America. Also mentioned in that episode was a complaint against President Obama and his anti-oil policies. They complained the president wanted gasoline prices as high as possible in order to force people to buy green vehicles.
Both of those complaints had a thread of truth but plenty of misinformation to go along with it. Coastal refineries around the Gulf of Mexico do export some gasoline and diesel. This is because there are more refineries in the area producing more refined products than are being used. There is a surplus of crude oil in the coastal Gulf and there is a lack of demand for refined products. Gasoline demand in the U.S. is -6% below year ago levels. Rather than shutdown capacity those coastal refineries export some refined products. If there was enough demand in the U.S. they would much rather sell them here because transporting, loading and shipping those products cuts into the profits. Despite these Gulf coast exports the U.S. "IMPORTED" 845,000 NET barrels of gasoline every day plus 122,000 bpd of diesel. That means they imported far more than they exported.
This fuel is imported on the east coast and the west coast where there is a shortage of refineries. This fuel has a higher cost because it started out life as Brent crude or some crude flavor indexed to Brent prices. The refineries on the east and west coast have to buy waterborne crude indexed to Brent to refine into fuel. Everyone in California and the east coast will be buying gasoline next week that was made from $125 Brent crude or some grade indexed to Brent. The refineries in the Midwest buy land locked crude indexed to WTI and that is why Colorado, Wyoming, Nebraska, etc, have $3.20 gasoline this weekend.
The problem with gas prices is not gouging by big oil companies. They have nothing to do with the price of oil or gasoline. In fact most refiners have lost money whenever the price of oil rises because the price of gasoline does not rise fast enough in the market to compensate. Read the earnings reports for the periods when oil prices spike. Big integrated oil companies like Exxon operate on extremely low margins in the range of 8%. That is far less than banks, manufacturing companies, tech companies, etc.
Lastly the president and his staff have said in years past they thought gasoline prices were too cheap and they needed to go higher in order to cause a shift in the purchasing patterns of consumers. He mentioned raising gas taxes to force that shift to economical cars. However, I guarantee you President Obama does not want high gasoline prices in an election year. If he could somehow push them back to $2.50 it would be done tomorrow. Given all the anti-energy policies he has pushed over the last three years the sharp rise in gasoline prices is the last thing he wants. That only draws attention to his policies and their results.
Whining over high gasoline prices will do no good. Buy some energy stocks on the next dip and earn some profits to help pay those prices. The biggest problem is going to be the recession that results from those high prices if they continue higher as expected.
For every $1 crude oil rises the U.S. airline industry loses $1.6 billion. With jet fuel at $3.42 and climbing it is already at the highs for 2011 and the worst months are ahead. Airlines are going to lose money, a lot of money. There have been 22 attempted fare hikes over the last year and only ten of them stuck. Most are quickly canceled when fliers begin booking elsewhere. The airline hurt the worst is US Airways (LCC). They don't hedge their fuel costs. The best airline for hedging is Southwest (LUV). Unfortunately the airline stocks have already begun showing the impact of the spike in oil prices. Buy puts on any airline if oil prices dip.
Airline Index Chart
The transportation sector is going to be crushed. Nearly all companies have fuel adjustment clauses in their rates but we saw in the last oil spike that rates did not adjust quick enough to protect companies like UPS (UPS) or CH Robinson (CHRW) to cover the increased costs. Cruise lines like Carnival (CCL) consume huge amounts of fuel and the spike will hurt their profits as well. After the ship disaster in Italy they are already going to be pressured to fill their cabins so raising prices will be a challenge.
The Dow Transports rolled over on Feb 3rd and should easily test support at 5075 or even lower at 4960 to 4800. This will be a classic battle between the economic hopefuls that expect the economy to continue improving and those that expect oil to go to $120 and crush the profits out of the transport sector.
Dow Transports Chart
U.S. consumers are going to start cutting back on driving and cutting back on non-essential purchases as gasoline prices cross over the $4 level. We know from recent history this is the threshold where spending decreases. Unfortunately there is nothing we can do about it other than plan ahead to profit from the rise in oil prices.
In stock news Hewlett Packard (HPQ) continued its decline to close at $26.64 after their disappointing earnings report after the close on Wednesday. HPQ has now lost about 8% since the $29 close before earnings.
Hewlett Packard Chart
Clearwire (CLWR) lost -7% after Google said it was selling its entire investment of 29.4 million shares for $1.60, a $453 million (-94%) loss. The WiMax technology never really caught on and the stake dumping by Google suggests the outlook is not good. The desperation sale by Google could be the beginning of the end for Clearwire. The company just got a shot in the arm when Sprint renewed their access agreements in December but that is a short term fix. The two major shareholders left are Sprint (S) and Comcast (CMCSA). With Google gone the hopes for a major acceptance of the WiMax technology appear slim.
Shorts piling into Sears Holdings (SHLD) after its big run in January and February were crushed again on Friday. Sears announced earnings and said it was selling nine Great Indoors stores and spinning off more than 1,000 hometown and outlet stores to raise up to $500 million. The news prompted a +17% spike on Thursday and another +11% gain on Friday to close at $68 after trading as low as $29 in January. Shares weakened earlier in the week ahead of earnings but anyone who took that opportunity to add short positions was punished severely. There are almost no shares available to short and covering those shorts is a painful process.
Sears Holding Chart
Also making unbelievers pay the price was Salesforce.com (CRM) with a +9% gain. The company posted adjusted earnings of 43-cents after the close on Thursday. Analysts were expecting 40-cents. Revenue rose +38% to $632 million. That was better than the +36% gain in Q3. Deferred revenue rose by 48% to $1.38 billion. That is for prepaid orders for future delivery. Customers receive discounts by paying annually for service and CRM recognizes this revenue as it is earned. One analyst said, "You don't have to believe the CRM story, but just don't short it."
On March 6th 2009 the Dow traded below 6,500. On two days last week the Dow traded over 13,000 intraday for a +100% rebound from those recession lows in slightly less than three years time. That 100% threshold on the S&P was 1332 and well behind us now. That 1332 number was strong resistance when touched on January 26th but we blew through it on Feb 3rd thanks to positive headlines from Europe.
The Dow also reacted on its first touch of 13,000 with two days of declines but it appears likely we will close above that resistance next week. This will be a crucial week for the market. Nearly every market commentator is predicting a pullback but those same analysts are also projecting higher highs ahead. This constant prediction of profit taking is preventing investors from going "all in" and pushing the indexes higher at a faster clip. Nobody wants to be the person to buy the highs just before the profit taking hits. The majority of investors are holding back in hopes of a dip but every shallow bump in the road is being bought and the anticipated 3% to 5% decline on profit taking has yet to appear.
The volume is terrible. The overall volume on Friday was 5.7 billion shares. The volume on the NYSE was the lowest since Jan 10th. Everyone is waiting for something to happen. That something is either a meaningful dip or a breakout over resistance on increasing volume. That volume increase is the key.
These back to back days of 2-3 point gains on the S&P is like watching grass grow. Friday's gain of +2 points to 1365 is not a breakout. It is technically a close over 1363.61 but still not a breakout in terms of sentiment. If we don't breakout this week and start stringing some bigger gains together the natives are going to get restless. Somebody will eventually give up on the rally and pull the sell program trigger when we least expect it.
When you look at the fundamentals the deck appears stacked against a continued rally. Earnings were terrible, the worst since the recession. The Q4 earnings cycle is over and 64% of the S&P lowered estimates for Q1. Oil prices are going to start squeezing the economy like a vise. We have already hit the year end S&P estimates for some analysts at 1350 and many more are just above at 1375 and it is only February. Morgan Stanley is holding firm for a sharp decline back to 1167 by year end.
They say bull markets are built by scaling a wall of worry. Greece is not yet behind us but in theory the potential for a catastrophic default has ended. They may no longer be the big obstacle in that wall of worry but there are plenty of Grecian thorns left on the wall until we get past the March 20th debt payment.
I am wondering if the big Greek default worry held investors back for so long that little things like crummy earnings are no longer important to the market. Investors are so happy Greece is going away that all they can see is blue sky ahead. Maybe the improving U.S. economics and some of the "less bad" European numbers are functioning as a security blanket for investors and insulating them from the cold earnings facts.
I can remember several rallies over the years that kept going and going and going just like the Energizer bunny despite constant calls for a correction. You know profit taking does not have come with triple digit declines on the Dow. Profit taking can also occur in the form of consolidation ranges where portfolios are adjusted, traders take profits and new money moves in from the sidelines. There has not been a triple digit Dow loss in 2012. The last -1% decline on the S&P was December 28th. Despite all the trouble in Europe this market has been digesting the headlines and inching slowly higher.
Dow Chart - 90 Min
This has been a stealth rally and one of the least loved rallies in history according to analysts. There has been no conviction along the way. No massive volume surges and relatively few days of decent point gains. However, if you could order the perfect rally this would be it. If you could order a rally would you want a one with a steady climb, no nerve racking declines to stop us out and one that continued for months while breaking out to new highs? I suspect the only problem is that it came when investors least expected it and they are frustrated they did not recognize it sooner.
Could the current rally be a duplicate of the one we saw in 1995? The rebound started in December 1994 and the market went straight up with barely any declines for 13 months until Jan 1996. Obviously we can always wish for a repeat performance.
S&P Chart for 1995
Now that Greece is almost behind us for at least a couple quarters the bond market is likely to help fuel future gains in equities. The urge to be in a safe and secure fixed income investment is going to fade fast if the Dow and S&P continue their moves to new highs. How much upside could you have left in bonds with the ten year yield already under 2%? I seriously doubt it is going much lower and if economics continue to improve the real value of your investment will decline.
Fixed income funds have been the favorite place to stash cash for the last couple years. Over the last several months bond funds received inflows of cash at the rate of 400% to 600% higher than equity funds. If equities continue to move higher next week and actually do move across current resistance levels on the Dow and S&P I suspect those fund flows are going to reverse and equities are going to be in favor again. It is not rational but new highs are the best attractant of new money. The herd always piles into the market after the majority of the gains have already been made. Hopefully, for those of us already long, the herd will push us higher for a couple more weeks.
Once past 13,000 the next material resistance is the May 2008 high close at 13,058 then it gets really choppy between 13,500-14,000. Current support appears to be 12,900.
Dow Chart - Weekly
The S&P bull market is now more than 1,000 days old. Since we did not decline -20% from the April 2011 high at 1363.61 and we closed above that level on Friday that means we are still in the bull market that started on March 9th 2009 at 676.53. Fridays close represents better than a +100% rebound in the S&P. The close above 1363.61 means this bull market has run for 1,082 days and makes it the ninth longest bull market in history. Statistics don't lie but they sure misrepresent reality. After two major bouts of selling in the summer of 2010 and 2011 it hardly feels like a three year bull market.
Support is 1355 followed by 1340. The next material resistance is 1425 and a lot of analysts will be very disappointed if we make it that far because it would take a bear market from that level for their yearend targets to be reached.
Year End Predictions from January
S&P Chart - Daily
The Nasdaq just keeps adding a handful of points nearly every day but there are no long candles after the breakout over 2885 in early February. It is two steps forward, one step back and repeat. Like the other charts the Nasdaq is consolidating in place as it moves slowly higher. I will have no complaints if this trend continues but the chart is definitely over extended. This is going to drive analysts crazy until a decent dip occurs.
Support is 2930 and you have to go back to December of 2000 to find resistance at 3,000. Those big round numbers tend to be a bump in the road but that resistance is 11-years old. How strong it will be is anybody's guess. IF investors suddenly start dumping bonds we could blow past that level and never look back. Unfortunately that is a capital IF. They have not shown any sudden urge to exit bonds in favor of stocks but this week could be the key if the Dow and S&P can tack on some points to their breakout.
Nasdaq Chart - Monthly
The Russell 2000 has been far weaker than the other indexes although several decent dips were bought on higher volume. Unfortunately it was not enough to produce a breakout over resistance at 830. Even if that resistance was broken there is even stronger resistance waiting at 860-865. The failure of the Russell to keep pace with the big cap indexes is another example of lack of conviction in the rally.
Russell Chart - 60 Min
Russell Chart - Daily
The broadest market index is a clone of the Dow with a dead stop right at strong resistance but also on the verge of a meaningful breakout. We need one good headline to punch through these resistance walls on the Dow, S&P and Wilshire and attract new money into the equity market.
Wilshire 5000, Total Stock Market Index Chart - Daily
This will be a pivotal week for the markets. The major indexes can't continue adding 3-5 points a day without moving into new high territory far enough to attract serious investor attention. A dip, regardless of how shallow, should be bought again. It appears a real breakout is in the cards and the only question is when?
We also need volume to pickup and for the Russell 2000 to confirm sentiment with a move over 830. As long as I am wishing for the seemingly impossible I would also like a 100 pound bag of $100 bills.
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