Nomura strategist Bob Janjuah expects the S&P to decline 20-25% to the 1050 level before the November elections.

Market Statistics

On a day when the major indexes touched multiyear highs there was a flurry of negative predictions from the major analysts. Goldman Sachs sent a note to clients warning them to get out of stocks before they fall off the fiscal cliff. Goldman strategist David Kostin warned that worries over the impending fiscal cliff could knock equities for a 10-12% to his year-end target of 1250. The fiscal cliff is thought to be worth -3.8% in GDP terms and the economy is only growing at roughly +2.0% so the impact of the cliff would push the U.S. GDP well into contraction. Kostin believes lawmakers will fail to address the cliff before the elections and then be unable to enact any material changes in the lame duck session after the election. Kostin believes the risk from uncertainty is worse today then 12 months ago when the S&P fell -11%.

Even more bearish is the call from Bob Janjuah at Nomura Securities. To put this in perspective in April he predicted a mid-year rally to 1420 on the S&P. Check! He predicted a decline to 1270 in June. Check! He predicted a return to the highs before a pre election decline. Check! He predicted all of this back in March-April and June. Now he is predicting a 20-25% decline in the S&P to trade at or below the lows of 2011 at 1074. Since Janjuah has been deadly accurate for the last year the warning of a pre election crash shook traders up as the indexes rolled over from the multiyear highs this morning.

Not to be left out Citi's Tobias Levkovich warned in a note to clients this morning that September has not been kind to the markets on a historical basis. September is the worst month for the markets over the last 60 years. Levkovich does believe the market will finish on a high note at 1425 to 1500 "if" the election provides a more pro-business result. In the meantime he expects a pause and a period of consolidation. That is what analysts describe downside volatility when they are long term bullish. I doubt Levkovich is expecting the kind of "consolidation" that Janjuah is expecting.

Doug Kass of Seabreeze Partners also told investors this morning to expect some downside in the coming weeks. He warned that the last five times the VIX was this low it was followed by a sharp selloff. No big new there.

Goldman perma bull Abby Joseph Cohen also warned that although she expects the S&P to finish the year higher there was significant risk near term. She warned about the political situation and the approaching fiscal cliff and the potential impact on investor confidence and the markets. She said the current economic weakness was not expected to worsen in 2012 and that would be underlying support for the markets on any decline in equities.

The flurry of market top calls just as the markets were testing new highs was apparently too much for investors to bear. Stocks sold off slightly as traders took profits from the recent gains. They did not fall dramatically. The Dow, Nasdaq and S&P only returned to the levels seen in the last couple days. It only seemed more dramatic because of the sharp move higher at the open. The Dow was up +59 at the highs before closing with a 68 point loss. Wednesday will be a pivotal day as we see whether the caution continues or the bulls buy the dip.

On the U.S. economic front there were no material reports. The weekly chain store sales declined -1.5% but this report is normally ignored.

The calendar for Wednesday is highlighted by the FOMC minutes followed by the Existing Home sales for July. After the close the Hewlett Packard earnings after the close will be even more important after the Dell disappointment tonight.

The FOMC minutes could be market disruptive if there is any indication of resistance to future QE stimulus by the Fed. Several voting members have recently spoken out in favor of additional stimulus but there have also been some hawks speaking out against any further moves. The minutes will give us an insight into the real FOMC posture.

Economic Calendar

Best Buy (BBY) reported earnings this morning that disappointed and the stock declined to a nine-year low intraday. Net income declined to 4 cents or $12 million. That is down from $150 million and 39 cents in the year ago quarter. Excluding charges earnings were 20 cents compared to analyst estimates of 31 cents. It was a major miss.

Revenue declined -3% to $10.55 billion. Same store sales declined -3.2%, the eighth decline in the last nine quarters. Same store sales in the U.S. were down -1.6% but international sales were down -8.2%. Best Buy suspended its guidance and cancelled share buybacks for the rest of 2012. They bought back $122 million in shares in Q2. Best Buy also continued its decline from Monday on the rebuffed buyout offer from founder Richard Schulze. Investors are not sure the current path is sustainable.

Best Buy Chart

Dell (DELL) was the big news after the close. Dell posted earnings of 50 cents compared to estimates of 45 cents. The bottom line was good thanks to cost cutting but they missed slightly on revenue of $14.48 billion compared to estimates of $14.64 billion. Dell guided analysts to revenue of $13.76-$14.19 billion for Q3 compared to analyst estimates of $14.85 billion. Dell also lowered its full year earnings target by -20%. That was not what investors wanted to hear. Dell blamed the weak forecast on "the uncertain economic environment, competitive dynamics and soft consumer sales." Dell stock took a sizeable hit in May after the last earnings disaster. Today Dell shares declined about 50 cents in afterhours trading.

Dell Chart

Williams Sonoma (WSM) spiked +9% in afterhours after posting earnings of 43 cents compared to estimates of 41 cents. The earnings beat was not strong enough for the +9% rise in shares but same store sales were huge. The Pottery Barn stores saw sales rise +11.7% and West Elm stores +15.6%. Williams cautiously raised guidance for Q3 to between 43 and 46 cents and analysts were expecting 43 cents.

WSM Chart

Apple's (AAPL) market cap surpassed Microsoft's during the 2000 tech bubble to become the highest valuation of any company on record at $623.52 billion. That was Monday. Today Apple shares spiked to an intraday high of $674.88 (+10) and then promptly sold off to end the day -9 points at $656. Volume was 29 million shares and three times the average. The reason for the decline was a downgrade by a research firm called Oracle Investments. The company's analyst said the "hype concerns us." They cut their price target from $670 to $650. Again I have to ask, "Why bother?" The answer is of course to generate a press release and capture their 15 minutes of fame. In the end nobody will ever care what Oracle Investments has to say about Apple. Interesting word play there, Oracle downgrades Apple. What would Steve Jobs be saying today?

Last week Jefferies raised its price target on Apple to $1,111 calling it a "trillion-dollar baby" because that target would value Apple at more than $1 trillion. Which analyst target do you think investors care about? Oracle at $650 or Jefferies at $1,111?

The Apple spike to $675 at the open pushed the Nasdaq 100 to an 11-year high over 2,800. October 2000 was the last time the Nasdaq 100 was over 2,800.

Apple Chart

The overnight rally in the futures that propelled the equity markets to new intraday highs this morning was due to comments out of Europe that the ECB was drawing up detailed plans on future bond buying for countries currently in trouble. Headlines, true or not, suggested the ECB was planning to set rate caps for debt for countries like Spain and Italy. Whenever yields rose to those caps they would buy bonds in the open market to drive rates lower.

The ECB was asked about the article in the Daily Telegraph and officials said it was misleading to comment on policy decisions that had not been made. Clearly a "we can't confirm but we are not denying either" type of response. A rate cap has been discussed in the past as one way the ECB could keep debt rates low without setting a specific euro amount of bond buying to be expected. A German magazine also reported the same rumors.

This cap would fall under the "whatever is necessary" pledge by Draghi. European markets rallied on the news and U.S. markets started off higher until the flurry of market warnings began to appear.

The ECB news pushed the U.S. dollar to a two-month low and that helped support equities and commodities.

Dollar Index Chart

Corn prices surged nearly 2% to a new high after new reports further cutting crop estimates as a result of the drought. The damage from the drought is spreading as previously lesser impacted areas took a turn for the worse. An 11 mile section of the Mississippi has been closed to barge traffic as a result of low water levels and more than 300 vessels are trapped waiting for authorities to designate a new channel if one is possible or for the water levels to rise. Water levels are so low in Indiana that cities that were flooded intentionally when rivers were damned decades ago are starting to reappear.

Corn Chart

WTI crude oil spiked to $97.60 at the open on the drop in the dollar and news that Iran had announced a new surface to surface missile with a 185 mile range. Actually the missile is more than ten years old but they have "reportedly" upgraded it to launch quicker and be more accurate. Nobody knows if that is true since they announced the same "new" missile about a month ago. Whenever they believe the news from Israel has slowed they "announce" some new capability to keep the war of words active. Iran also announced the start of construction of a new air defense site saying "If an enemy ever has the intent of attacking this soil, we will make the Persian Gulf their grave."

Israel also increased tensions with Egypt saying a move by Egypt to deploy tanks in a volatile border area was a violation of the landmark 1979 peace accord between the two nations. Egypt has been increasing its presence in the Sinai since militants attacked an army post on Aug 5th and killed 16 soldiers. Under the peace accord Egypt is only allowed to have lightly armed policemen in the zone along the border with Israel.

Tanks moving into the Sinai

Syria also played into the rise in crude prices as tensions there rose again as the government moved heavy bombers into a region where they were being used to bomb civilians. President Obama said he is not going to interfere in the civil war unless the government uses WMDs on the population.

With all these factors playing out in the Middle East I am surprised crude prices are not higher.

WTI Crude Oil Chart

Warren Buffett said he was terminating $8.25 billion in credit default swaps he sold on municipal debt. Buffett has called derivatives weapons of mass destruction but he has owned them in the past. He currently has $16 billion in credit default swaps on municipal debt. These are guarantees of payment if the municipality were to default. Given the recent flurry of municipal bankruptcies I am sure he is starting to sweat. Berkshire said in a filing it had reached an agreement with a counterparty to terminate $8.25 billion of swaps in the portfolio. The swaps cover more than 500 state and municipal debt issuers. The announcement did not name the counterparty. Citigroup believes these were held with the estate of Lehman Brothers. Lehman bought $8.25 billion in swaps from a Berkshire subsidiary in 2007.

The market spiked at the open to fulfill the quest to break the YTD highs. Once that was done the sellers appeared in volume and the Dow moved from +59 to -85 at the afternoon lows. New highs tend to be resistance as sellers wait for the print as a signal for selling. Today was a textbook sell the highs event. It should not be seen as anything as an automatic response to a technical event.

Tomorrow, actually the rest of the week, will be critical for market direction. If the dip buyers appear and the indexes move back over those highs then shorts will be forced to cover and new move will be born. If the indexes continue to decline then critical support as in S&P 1400 will become the focal point. A failure there will bring out even more analysts claiming the highs for the year are in and making the case for a double top in the markets.

With the focus on the FOMC minutes Wednesday afternoon and then shifting to Bernanke's speech at Jackson Hole the following Friday there is a significant opportunity for the market to be disappointed with the result. Given the flurry of analyst warnings about a market top today you would have to think that some investors will act on those warnings.

The S&P high close in May 2008 was 1426.63. The S&P made it to 1426.68 today. Yes, there was a new high but only by a nickel and it was not a closing high. Clearly there were a lot of traders with sell orders waiting at that 1426 level.

The decline to the low of 1411 intraday was ONLY to the same level the S&P dipped to at the open on Monday. The Monday dip was quickly bought as was the intraday dip to that level today. Just like sellers were waiting at 1426 the buyers were waiting at 1411. Volume was slightly higher than yesterday's 4.8 billion shares with 5.6 billion trading today. Considering the high visibility of the 1426 level you would have thought volume would have increased in both directions. The increase was minimal because quite a few traders are still on vacation. That means the swings can be volatile but there is still no conviction. Let the S&P move under 1400 or over 1426 and I think you will see volume accelerate dramatically.

Other than the technical print at the new high there was nothing noteworthy about today's trading. Central casting could not have scripted it any better.

S&P Chart - 60 Min

S&P Chart - Daily

The Dow was a similar picture to the S&P. I am not surprised it spiked to 13,330 and sold off. I would have been surprised if it didn't. The closing high of 13,279.32 is still the high for the year. The intraday spike was just noise and it reminded me of those game in Chuck-E-Cheese where the kids hit the critter when he pops up from the hole. The markets were like that today only traders knew in advance the breakout was coming.


The Wack-A-Market game for traders could continue for several days or the indexes could run and hide if the selling continues. The critical Dow levels are 13,279 on the upside and 13,100 as support. If either number is exceeded I would expect volume to pick up dramatically in that direction.

Dow Chart - Daily

The Nasdaq rallied to touch 3100 but could only exceed it by .54 of a point. This was an electric fence type of rejection. It was nearly instantaneous and corresponded with Apple coming within 12 cents of $675. That 3100 level (3085) is clearly resistance and 3000 is support. That 3000 level is a distant target given where the Nasdaq has rallied over the last week but it is still a target and one I would expect to be tested. A break below that level will prompt significant selling.

Nasdaq Chart

The Russell 2000 spiked well over the 820 resistance level to 827 but the spike was whacked hard to see a close at 815 and -12 points off the highs. That is a material range for the Russell and shows us that 820 resistance is still alive and well.

Russell 2000 Chart

I am not surprised the intraday breakouts were sold. As I said above the key now will be the direction for the rest of the week. If the bulls return in volume to push us back over the highs then short covering will be heavy. If the sellers continue to appear as a result of the various analyst warnings about an impending market decline then we will have clear support levels to watch for longer term clues. S&P 1400, Dow 13,100, Nasdaq 3,000 are the lines in the sand.

The FOMC minutes at 2:PM are the event to watch for volatility.

Enter passively, exit aggressively!

Jim Brown

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