There was no "Sell in May" but one day does not make a trend.

Market Statistics

The rally today came from an unexpected improvement in the national ISM Manufacturing report at 10:AM. The report came in significantly higher than expected and several of the internal components were strong. The news immediately reversed a market that was headed lower at the open. The Dow was down -45 points from its opening high when the ISM was announced. The resulting short squeeze lifted the Dow +164 points from the morning low to a new four year intraday high at 13,338.65. That was the highest level since December 31st, 2007. Even worse the Nasdaq, +44 points off its morning lows ended with only a +4 point gain.

It was JUST a short squeeze. Sellers reappeared at the close to knock -60 points off the Dow's gain. Obviously the $64 question will be whether the rebound will continue or will the 13,330 level be a double top?

Dow Chart - 5 Min

Nasdaq Chart - 5 Min

The April ISM headline number came in at 54.8 compared to expectations for a decline to 53.0. The index was 53.4 in March. The headline number contradicted the various regional manufacturing reports, which have been showing declined in activity, some of which were sharply lower.

The strongest component was new orders which rose from 54.5 to 58.2 and the highest level in a year. New export orders spiked to 59.0 from 54.0. The employment component also rose from 56.1 to 57.3. However, backorders declined sharply into contraction territory at 49.5 from 52.5.

Of the 18 manufacturing sectors covered in the survey there were 16 that reported growth. That is an improvement from 15 in March and 11 in February.

The expectations for today's national ISM were very low. That bar was pushed even lower after the very disappointing ISM Chicago on Monday. That report declined significantly from 62.2 to 56.2. That lowered the pessimistic whisper numbers for the national ISM today to less than 50 and made the positive report an even bigger surprise.

ISM Manufacturing Chart

The good news in the ISM Manufacturing will raise hopes for the ISM Services due out on Thursday. The U.S. has evolved to an economy that is 70% service related.

In other economic news the Construction Spending for March rose a paltry +0.1% but that was better than February's -1.4% decline. The lackluster construction spending by governments and corporations alike suggests the economic recovery will continue to be slow. Analysts claim the lack of spending is related to the longer term U.S. fiscal problems and the potential for a sharp rise in taxes and regulation.

The global Semiconductor Billings for March rose by +1.6% and that was much better than the -1.3% decline in February. This was the first rise in billings since September. Billing in the Americas rose +1.1% and Japan +1.2%. Most encouraging was a +4.0% rise in billings in Europe.

Auto sales for April were flat at an annual pace of 14.4 million vehicles compared to estimates for 14.5 million. Analysts believe the flat sales were a result of warmer weather pulling sales forward. February had blowout sales at 15.1 million units. That was well above the January number at 14.2 million. Clearly there was a surge of buying earlier in the year.

Toyota was instrumental in keeping the sales flat. Toyota saw sales rise +12% and without them the overall numbers would have declined. Ford barely outsold Toyota by 2,314 vehicles in April after beating them by more than 20,000 in March. GM sales declined -8% in April thanks to a -25% decline in fleet sales. Sales of the Chevrolet Cruze declined -28% because of stronger competition from Toyota and Hyundai. Ford was not immune. Sales of the Fiesta declined -44%.

Chrysler sales rose +20% with the Dodge Ram pickup posting a 19% gain. Volkswagen sales rose +31.5% thanks to the gas economy of the Passat. Hyundai saw a 36% rise in sales of its luxury Genesis and Equus models. I would never associate Hyundai and luxury together but apparently some buyers do.

The economic calendar for the rest of the week is dominated by payroll reports with a side attraction of the ISM Services on Thursday. The ADP report on Wednesday will be the first look at the overall April employment numbers although ADP missed the estimate on payrolls last month by about 100,000. Even if ADP is wrong it is still a market moving number.

The weekly jobless claims have come back to the forefront as a material indicator and any number that starts with a 4 is going to be market negative. The last three weeks have averaged more than 388,000.

The consensus estimate for the Nonfarm Payrolls on Friday is holding in the 165,000 to 170,000 range but I heard several commentators discussing 100,000 to 120,000 today. This may be another report where the unofficial bar is slipping so low that anything over 100,000 will be considered acceptable and any number over the official consensus will be seen as a major surprise. If the payroll number is strong and the prior month is revised higher as we have seen as the trend for several months now then the sell in May strategy could be replaced with buy in May.

Economic Chart

The sudden improvement in manufacturing rekindled some expectations for higher demand for commodities in the months ahead. Crude rallied over critical resistance at $105 and agricultural commodities were all strong

Helping to push commodities higher was news from China that the Purchasing Managers Index (PMI) rose to a 13 month high in April. The number rose to 53.3 from 53.1. Ratings above 50 signal an expansion of activity. The manufacturing sub-index rose to 57.2 from 55.2.

I am constantly reminded by our readers in China not to trust the official numbers because they are manipulated by the government. The HSBC Flash PMI, considered to be a more reliable indicator, was only 49.1 for April and the sixth month in contraction territory below 50. The final HSBC reading for April is due out on Wednesday. HSBC believes the economic activity has bottomed in China and the rebound is beginning.

WTI Crude Oil Chart

Stock news was pretty slim today with bonds getting all the headlines on the stronger than expected economics. Bonds were being sold as yields rose. The dollar fell sharply before the open and hit a low just before the ISM. The resulting spike on short covering pushed the dollar index from 78.60 to 78.98 almost instantly.

Sears Holdings (SHLD) rallied +8 points after the company gave bullish earnings guidance and detailed its plans to spin off the Hometown and Outlet stores. Sales are still declining with same store results expected to drop between 1.0% to 1.6% with sales at Kmart the biggest decline. The company said sales of electronics declined sharply but overall those declines were erased by double digit gains in footwear and apparel.

The company projected earnings of $155 to $195 million in Q1. If that sounds better than expected it is. That includes $235 million in gains from the sale of some Canadian and U.S. based business units. Analysts are expecting a loss of -$1.69 per share so the projected earnings and analyst projections are apples and oranges.

Sears will spin off the Hometown and Outlet stores under the symbol SHOS and that spin is expected to be completed in Q3. They expect to raise $400 to $500 million in the spin off. Sears shares rallied on the news.

Sears Chart

BP Plc (BP) posted net profits of $4.93 billion for Q1, down from $5.61 billion in the comparison quarter. The decline was due to sales of non core producing assets to raise money to pay for the Gulf spill. The company said production fell -6% to 2.45 mbpd. They said production costs had also risen because they implemented expensive measures to protect against a repeat of the disaster.

BP is an active deepwater producer and they pumped about 260,000 bpd from the Gulf of Mexico in 2011. That is down from more than 400,000 bpd before the Horizon disaster. Their production is set to decline further after they sell additional Gulf fields including Holstein and Marlin that will reduce output by another 50,000 bpd.

BP is still facing fines in excess of $20 billion according to the Dept of Justice although BP said it expects fines of only $3.5 billion. I think somebody at BP is sniffing gas fumes to come up with that estimate. The judge in the liability trial has set a May 3rd date for an appointment with the remaining parties to determine if the trial can begin. BP is requesting a delay until after a hearing on the fairness of the civil settlement is held in November. Analysts claim BP will continue to request delays as long as humanly possible in order to delay the eventual pay date and to let memories of the spill fade. The farther out the trial is pushed the less likely witnesses will be able to accurately recall the events of the disaster. In theory that is a plus for BP.

BP Chart

Research in Motion (RIMM) unveiled its BlackBerry 10 operating system with a lot of cool features. Unfortunately they did not unveil any new devices that use that operating system. RIMM can't seem to do anything right or on time. Google and Apple continue to steal market share and RIMM keeps pushing new technology farther into the future. BlackBerry 10 may be the device and OS for RIMM to regain some of its former luster but if it does not come until after the coffin lid is nailed shut then it won't help. RIMM shares declined -6% on the news.

RIMM Chart

Herbalife (HLF) was crushed after activist investor David Einhorn questioned company officials on the earnings conference call. HLF is a multilevel business which means distributors sign up new distributors as well as sell products. Everyone buys the product wholesale and sells it at retail or at least some semblance of retail. Einhorn asked what percentage of product was purchased by consumers as opposed to purchased by consumers. In a multilevel all the product is purchased from Herbalife by distributors at wholesale and what happens to that product in later transactions is not relative to HLF earnings. The company said in a press release after the conference call that "They were elementary questions usually asked by investors new to our industry" in a jab towards Einhorn. Multiple analysts reiterated buy recommendations after the decline.

Herbalife Chart

Embattled gas producer Chesapeake Energy (CHK) reported earnings of 18 cents compared to analyst estimates of 28 cents. The company has been hammered by the fall in natural gas prices. They have committed to cut production but that is easier to say than do. CHK said they curtailed 54 Bcf of gas production in February and March but overall production was still up +18% over the comparison quarter. Production in March was 271 Bcf compared to 272 Bcf in Q4 so new production coming online in other fields offset curtailed production in existing fields.

Chairman and CEO, Aubrey McClendon, said he would resign as Chairman of the Board after possible conflicts of interest had surfaced over the last month. The company said the Founders Participation Program, where he would personally pay 2.5% of the cost of each new company well in exchange for a 2.5% personal interest in that well, would be terminated in 2014. With gas prices plunging this has been a money loser for McClendon and he was forced to borrow more than $1 billion from third parties in order to pay the well costs. However, you never hear that in the press. You only hear the 2.5% interest part not the associated costs. The company has been under fire for this program even though shareholders approved the plan in 2006.

CHK Chart

Import earnings for the rest of the week appear to be concentrated into Wednesday. MasterCard, Visa, Symantec, Time Warner and Whole Foods. None of those are expected to move the market and gains will probably be restricted to only those stocks with good results.

Earnings Calendar

Bloomberg reported over the weekend that U.S. stock funds had seen withdrawals for the 12 months ending on March 31st of $121 billion. Bond funds saw inflows of $191 billion over the same period. The data was produced by EFPR Global, a firm that tracks funds with more than $16 trillion in assets.

Equity funds had net redemptions of $18.6 billion through April 25th. Those April withdrawals are the largest since 1996. U.S. only stock funds saw outflows of $17 billion.

The Investment Company Institute (ICI) said equity fund redemptions hit $8.7 billion in the week ended on April 18th but non U.S. equity funds saw inflows of an identical $8.7 billion. Bond funds saw inflows of $5.3 billion.

Sell in April, buy in May? That appeared to be the strategy this year with the market weak for nearly all of April only to rebound in the last three days of the month. While May is off to a good start it is far too soon to begin projecting market direction. The morning rebound was yet another short squeeze and the sharp afternoon decline was ominous.

The week still has the critical payroll reports to provide volatility but the real motive power is fading. That is the Q1 earnings cycle. Without a steady stream of important earnings reports the interest in the market will fade. Part of the reasoning behind the sell in May strategy is for individual investors to move to the sidelines so they are not distracted by the market while the kids are out of school and vacations are in progress. Since the summer doldrums normally provide little market stimulus, investors don't normally miss any big moves and the yearly dips in August to October give them ample opportunity to jump back in.

Since the money flow trend continues to show money moving from stocks to bonds the prospect of a summer rally appears to be dim. Anything is possible but not everything is probable.

There are critical events in Europe this week that could affect our markets so there could be offsets to any positive earnings news.

For the third time in four days the S&P blasted back through 1,400 and today was the highest close at 1406. We are well above initial support at 1,395 and 1,390 so a breakdown below 1,390 would be critical. Overhead resistance at 1,420 and 1,428 is the target for any continued rebound.

S&P Chart

The Dow spiked above prior resistance thanks to Chevron, IBM, JP Morgan, American Express and Exxon. Chevron added 14 Dow points, IBM +13 and JPM, AXP and XOM +20 points.

The four year intraday high was newsworthy but unless we get a close over that level it is just noise. The 13,200 level has emerged as initial support so that is the number to watch for a directional decision. The Dow needs to hold over that 13,275 level to keep the bulls in the game. A drop back below 13,200 will have the bears piling on in hopes of a May decline.

Dow Chart

The most troubling big cap index was the Nasdaq. The Nasdaq Composite gave back 40 points of gains to close up only +4 points. With another ten minutes of trading I believe it would have gone negative.

Apple appears to be broken. It has posted losses in nine of the last ten sessions but that one gainer was +60 points. Apple is back below $600 and closed at a five day low. The -2 point loss today was minimal but it was -14 points off its intraday high.

The Nasdaq touched resistance at 3085 this morning but the touch was extremely brief before the selling began. A break below 3040 will put the Nasdaq at a four day low and suggest a retest of strong support at 3000.

Nasdaq Chart

I am very neutral on the market for the rest of the week. I know that sounds like a contradiction of terms but I could make an equal case for a move in either direction. There are so many opposing forces it is tough to choose a side.

It will again be a headline driven market and this should be a pivotal week. Problems in Europe and U.S. economics are going to be center stage with the earnings dropping back to a supporting role.

If forced to make a decision I would lean to a bearish view. I hate to join that group because the bearish camp is very crowded at present. Sometimes when everyone is leaning in the same direction a counter trend move can be explosive as we saw from the ISM news today and the Amazon earnings last week. Beware the herd. They tend to be wrong.

Jim Brown

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