Monday's short squeeze may have fun for those already long but Tuesday was definitely a hangover day where the celebration enthusiasm faded.
The short squeeze from Monday had no follow through today. Volume was very low and only the large cap tech stocks managed to finish in the green. The Dow flirted with positive territory most of the day but a sell program at 3:15 ended the chance for a positive close.
Dow Chart - 4 min
Weighing on the markets were a pair of less than exciting economic reports. The March Richmond Fed Manufacturing Index fell -13 points to 7.0 from 20.0 in February. This was a three month low and the internals were not good.
New orders declined to 11.0 from 21.0 and shipments fell from 25.0 to 2.0. Employment fell to 6.0 from 13.0 and the average work week fell to 2.0 from 10.0.
The pace of growth slowed dramatically but after two months of robust growth you would expect a pause now that early 2012 capital expenditures are well underway.
Richmond Fed Manufacturing Survey Chart
Also losing some of its luster was the final reading for the March Consumer Confidence. March confidence was revised down to 70.2 from the prior March reading of 70.8 and February level of 71.6.
Rising gasoline prices, actually the talk about the potential for $4 gasoline, were credited for the slight decline in confidence. The present conditions component rose to 51.0 from 46.4 but the expectations component declined to 83.0 from 88.4. It was "expectations" of future gasoline prices that drove confidence lower.
Buying plans improved appreciably. Those planning on buying a new vehicle, probably one with better gas mileage, rose to 12.0% from 10.3% of respondents. Those planning on buying a home rose from 4.2% to 4.9% and plans for buying an appliance rose to 48.1 from 45.4. Inflation expectations also rose nearly a point to 6.3 from 5.5, also driven by the rise in fuel prices.
Consumer Confidence Chart
The economic calendar for the rest of the week is still headlined by the Kansas Fed Survey and the ISM Chicago. The final GDP revision on Thursday will be market neutral unless there is a dramatic change. Probably the most anticipated event on the calendar is the RIMM earnings on Thursday. This previously high flyer at $147 trades at only $14.70 today but there is still a lot of investor interest.
Despite the negative economic reports the dollar ended the day flat and then ticked up slightly in afterhours thanks to comments from Bernanke in a late presentation. He said the economy was improving but it was "far too early" to claim victory. Also helping the dollar were comments from Richard Fisher and William Dudley that the Fed had done all it needs to do to insure the economy moves back to sustainable growth. Those comments lessened the potential for QE3 but only barely. Fisher is not a voting member of the FOMC this year but Dudley is a voter.
St Louis Fed President James Bullard also said a third round of QE is not necessary at this time. Bullard said "unless the U.S. economy were to deteriorate further, more QE is unnecessary." He also believes the Fed should return to normal rates as soon as possible. Bullard is not a voting member of the FOMC this year.
It appears Bernanke will have a difficult task ahead if he wants to add further monetary stimulus at the April meeting. Based on his recent comments he appears ready to add some new stimulus to insure the recovery becomes self sustaining. He will need to do it at the April meeting because there is no meeting in May and Operation Twist expires in June. If he is going to make another policy change he has to do it ASAP to avoid charges it is politically motivated. The Fed normally avoids changes in the six months before a presidential election so time is running short.
Dollar Index Chart
If it is an election year and gas prices are rising we should expect a release of oil reserves from the Strategic Petroleum Reserve (SPR). In fact we should just change the name to the Strategic Political Reserve. Crude prices were flat today despite news that South Sudan oil fields were bombed by Sudan and Total (TOT) was forced to shut down some oil and gas rigs in the North Sea because of a blowout. Shell has platforms in the area and was also evacuating workers.
With multiple platforms shut down and production halted on about 180,000 boepd or 8.7% of average U.K. production, you would have expected crude prices to rise. Total shutin 130,000 boepd and Shell 50,000. The key here is the production is mostly gas and natural gas liquids. BOE means barrels of oil equivalent. Only about 60,000 bpd are actually oil but that platform is one of the largest contributors to the North Sea production.
Total said it could take six months to control the gas leak on the North Sea Elgin platform. Gas and NGL are bubbling up under the platform like a shaken 2 liter bottle of pop. One spark and you would have another roman candle similar to the Horizon disaster only without the five million barrels of spilled oil.
South Sudan said Sudan bombed their oil installations and that called into question the scheduled meetings by country leaders to resolve border disputes. South Sudan has daily oil production of 350,000 bpd but it has been shutdown until the border dispute is settled. South Sudan has the oil but the pipeline goes through Sudan and South Sudan halted pipeline shipments because Sudan was stealing the oil. (Their claim) South Sudan recently seceded from Sudan.
The halt in production from South Sudan and declines in Nigeria, Yemen and Syria plus the Iranian oil embargo has forced oil prices higher although Saudi Arabia continues to claim the market is oversupplied by more than one million barrels per day.
Gasoline prices rose to $3.90. Against this backdrop it should be no surprise in an election year that the White House is floating the weekly trial balloon of a release of supplies from the SPR. Today it was a Bloomberg report quoting Charles McConnell, assistant secretary for fossil energy for the DOE as saying a SPR release is being considered. He said the administration is looking at all alternatives to lower the price of fuel. That suggests a surprise announcement ahead and that kept oil prices from rising.
WTI Crude Chart
Brent Crude Chart
Natural gas producers wish somebody would bomb their fields and put them out of their misery. Natural gas prices declined to $2.17 intraday and are trading at $2.19 overnight. Prices have not been this low since February 2006. The gas in storage is more than 50% above the five year average at this time of year and it is expected to reach much higher levels before the summer generation cycle begins. Later this year it is expected to reach maximum capacity and require pipelines to shutdown or restrict the amount of gas they accept. Almost everyone expects to see gas under $2 soon.
This is impacting the entire energy sector because most investors don't really know which companies have a material exposure to gas other than the majors like Chesapeake (CHK), Encana (ECA), EOG (EOG), Chevron (CVX), etc. The S&P Energy sector is down -12% for the quarter and the only sector in negative territory.
Natural Gas Futures Chart
The best economic report today was not an economic report. It was the earnings report from Lennar Corp (LEN). The homebuilder reported a better than expected 8-cent profit in earnings for Q4 compared to a loss of 5-cents a year ago. Revenue rose +30% to $721 million. Lennar said new deliveries were up +29% and new orders were up +33%. The CEO said the market had stabilized driven by a combination of low home prices and low interest rates. Shares of LEN rose +5% on the news.
This was a breath of fresh air after the ugly earnings from KB Homes (KBH) on Friday. That earnings report depressed the entire sector but the Lennar news today recovered all that loss for everyone except KBH.
Homebuilder ETF Chart
Annie's Inc (BNNY) priced its IPO tonight. The company makes organic foods but it best known for the white and purple boxes of mac and cheese with the bunny on the label. The company is selling five million shares and the initial price range was $14-$16 but they changed it on Monday to $16-$18 because of high demand. It priced tonight at $19 so demand must have been good. You can thank the success in Whole Foods Market (WFM) for the demand for Annie's. The bunny has grown so popular it was a natural for Annie's to use BNNY for their stock symbol. There are 10 additional IPOs expected to price this week and roughly 400 more this year.
Nasdaq big caps continued to drive the overall market higher and Apple was the leader today. Tradition Equity raised their price target from $600 to $700 and that is not the high targets on the street. Apple continues to be the most recommended high dollar stock on the planet. Apple shares accounted for 33% of the YTD gain in the Nasdaq 100.
The S&P 500 does not have the good fortune of being only large cap techs. Declines in the tech and energy sectors caused the S&P to lose some of its gains from Monday. The 1426 level and the May 2008 closing high is the current target and it may be a struggle. The big cap techs are helping but with 500 stocks in the index that means there is a lot of dead weight to drag.
I still believe there will not be a lot of gains for the rest of the week and the indexes will chop around on low volume as fund managers try to keep their windows dressed. Volume today was barely 6.01 billion shares. This is on the low side and about what we have been seeing lately. Volatility has been minimal so fund managers are having a relatively calm week ahead of quarter end. The only worry today is over hedge funds trigging large shorting programs ahead of month end. Fund managers would rather they wait until April.
S&P-500 Chart - Daily
The Dow was lackluster today after gaining +161 points on Monday. The sell program at the close knocked off -40 points but otherwise the Dow held its gains and that was bullish. Unfortunately over the last two days it has failed to make a new high and that is slightly bearish since the S&P and Nasdaq have accomplished that feat.
Dow Chart - Daily
The Nasdaq big cap rally continues. That is all I really need to say.
The Nasdaq composite was held up by the big caps and the Nasdaq 100 was the only index to close in positive territory thanks to a $10 gain in Apple to a new high. When this rally eventually fails it could be really ugly. We need the Q1 tech earnings to be very strong if we have any hope of avoiding a summer bloodbath. Analysts have been raising estimates for techs but there is very little conviction.
Nasdaq Chart - Daily
Nasdaq 100 Chart - Daily
The Russell 2000 gave back the most of any index on a percentage basis at -0.7%. It was also a strong gainer on Monday as the short squeeze pushed it above resistance and to a new 52-week high. If the Russell can use that prior resistance at 832 as support and then move higher I will have to rethink the potential for an April swoon.
Russell Chart - Daily
I expect further window dressing for quarter end but the majority of the moves should be over. Managers will try to keep the indexes pinned at the highs but I doubt they have a significant amount of uncommitted funds left. The markets "should" move sideways for the rest of the week. Obviously unexpected headlines could change that EOQ pattern.
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