Apple succumbed to Newton's Universal Law of Gravitation as it broke through orbital support at $500 and the decline accelerated.

Market Statistics

Apple was the biggest drag on the equity market over the last two days with a -35 point decline. This crippled the Nasdaq and was a major drag on the S&P as well. The Wall Street Journal reported that Apple had cut parts orders for the iPhone by 50% for Q1 due to lagging sales. Samsung is grabbing more market share on a daily basis and appears to be unstoppable. Motorola also has some new models out that are successfully competing with the iPhone.

Over the last six years Apple has been able to demand a premium price for their products because they were the leading technology. That is no longer the case. Apple is one of the crowd. They may still be the leader in some areas but the competition is chipping away at the Apple base.

In Q4 Apple had a 14.6% share of the smartphone market, down from 23% in Q4-2011. Samsung's share rose to 31.3%, up from 8% in Q3-2010 when the current smartphone battle began. Apple is seen to be running out of ideas on how to innovate their existing product line and come up with new products. The iPhone 5 looks like the 4s, which looks like the 4, which looks like the 3, etc. Several people in my family have recently moved from the iPhone to an Android device. That is being repeated all across the consumer spectrum. People are no longer rushing out to buy the most current iPhone offering and the iPhone 6 announcement is already been rumored. The iPhone Mini has been rumored as well. Every rumor of a new device slows demand for the current device because consumers don't want to buy only to find out the new product has some previously unknown feature they want.

Apple shares closed at $700 on Sept 21st and has fallen to close at $485 today. Analysts are saying $450-$475 should be strong support ahead of what should be spectacular earnings on January 23rd after the close. If Apple were to lower guidance significantly to match the 50% cut in parts orders another leg down could begin.

Apple Chart

Other than the Apple decline the market was relatively calm once again. Volume was light as traders wait for the monster earnings schedule on Wednesday. This is going to be a very strong day for financial earnings and that could provide a strong directional move depending on the outcome.

The financial reports out today failed to move the market although there was a decent dip at the open. The S&P dipped to 1464 at the open as a result of weakness overseas and the lackluster economics. Traders immediately bought the dip.

The NY Empire Manufacturing Survey for January fell to -7.8 from an upwardly revised -7.3 in December. Originally it was a reading of -8.1. Zero is the dividing line between retraction and expansion. This was the sixth month the survey has been in contraction territory and it does not appear to be getting any better.

New orders declined to -7.3 from -3.4. Backorders declined again to -7.5 from -6.4. Backorders have been contracting since June 2011. Employment improved slightly to -4.3, up from -9.7 but that component has been in contraction since September.

In a supplemental question to the survey employers were asked about 2013 employment plans. Only 27% said they expected to hire and 19% expected to reduce their workforce. In January 2012 there were 51% planning to hire and only 9% planning cuts.

The NY survey was a wet blanket on the market but only because the negativity continued. It did not get appreciably worse. Everyone was hoping for signs of a rebound.

Empire State Manufacturing Survey

The Producer Price Index (PPI) declined -0.2% and the third consecutive monthly decline. Analysts had expected an unchanged reading. Declining energy prices impacted the headline number. The core rate, excluding food and energy, rose +0.1% and the second monthly gain. Prices are declining as a result of moderating prices in the commodity sector that exploded higher because of the summer drought.

The recession in Europe is reducing demand and is helping to hold down prices at the producer level. The Consumer Price Index (CPI) is due out on Wednesday.

Retail sales for December rose +0.5% and well above the consensus estimates for a +0.2% gain. Auto sales contributed to the gain as the surge in buying continues. The decline in fuel prices caused gasoline stations to show a -1.6% decline in sales. Sporting goods sales rose +0.6% thanks to the surge in firearms sales after the election and the Sandyhook shooting. More than 1.1 million guns were sold in November and December.

Clothing sales rose +1.0%, motor vehicles and parts +1.6%, food service +1.2% and furniture +1.4%. Electronics declined -0.6%.

Year over year sales growth was +4.7% and the strongest since September.

The economic calendar for tomorrow is headlined by the CPI, NAHB Housing and the Fed Beige Book. The biggest of those is the Beige Book. That will outline the economic conditions in all 12 Fed regions and hopefully conditions have improved. Last month the majority of regions were showing improvement with the exception those hit by Sandy.

Economic Calendar

Wednesday's real market focus will be on earnings. This is a major earnings day for the financial sector. Only two of the symbols listed below for Wednesday are not financials. Goldman Sachs, JP Morgan and US Bank are the headliners but the rest will count as well. Clearly we will have a very good idea how the rest of the financial sector will report after the Wednesday lineup.

Ebay and Wendy's are the two non-financial companies reporting. Ebay is not really a tech company but results there will predict how companies like Amazon and Best Buy will fare.

Earnings Calendar

The big news for Tuesday was the private buyout of Dell by Michael Dell and Silverlake Partners. According to CNBC the deal has been under discussion for several months. Michael Dell and Silverlake will put up about $2 billion and the buyout will be in the range of $13.50 to $14.00. Michael said the company would bring back some cash from overseas to pay down debt and reduce the overall cost of the deal. The partners would finance $15 billion and according to reports that debt offering is oversubscribed. Seems a lot of investors are willing to loan on the strength of Dell's business.

The deal could be concluded within the next two weeks according to sources close to the company. Share volume hit 155 million today and about seven times normal. Dell shares closed at $13.00 in after hours. Michael Dell owns 15% of the company and he will be bringing fresh money to the table for his portion of the deal in addition to the 15%.

Dell went public in 1990 at the now split adjusted price of 5-cents. Dell was a regular splitter of its stock during the boom years and thousands of millionaires were created from early investments in the company. If they can pull this off and take the company private it will represent a full circle for a business that was started in Michael Dell's dorm room of making computers for other students.

Dell Chart - Monthly

Luluemon (LULU) shares lost nearly $3 after the company reported preliminary earnings of 74 cents. That was up from their prior guidance of 71-73 cents. Analysts were expecting 74 cents. Revenue projections came in light at $475-$480 million and analysts were expecting $489 million.

The company said same store sales would increase by "high single digits" and that was disappointing to the street. Analysts began to worry that growth was slowing since LULU has a history of beating estimates. Nothing grows to the sky as Michael Dell found out a decade ago.

LULU Chart

Express Inc (EXPR) raised its Q4 guidance to 72-74 cents per share, up from 62-68 cents. Revenue expectations rose from $53-$58 million to $61-$62 million. However, same store sales were up only +1% but expectations were for a low single digit decline. Express operates more than 600 stores targeting the 20-30 year old customer. Express shares rallied +24% on the news.

Express Chart

Facebook held its long awaited mystery announcement event today and investors were disappointed. The new product is called Graph Search. It allows users to search through the posts of friends looking for common interests, photos, associates of even dates. For instance you could search for pictures of Paris or people who like your favorite TV show. You could also search for potential dates that might like the Broncos, pizza and work in the financial sector.

I can see it now. Hi, you don't know me but I am a friend of Julie and she is a friend of your friend Mary and I know from your posts you liked 50 Shades of Gray. I did too. Do you want to go out?

The number one comment I heard after the announcement was "I need to change my privacy settings." Users can opt out of the searches and apparently may are going to do just that.

Shares of Facebook declined -3% after the announcement. Also making news today was a survey by social media company SocialBakers. They claim Facebook lost 1.4 million active users in December. The company said increased advertising on the site and new fees are driving away some users. Facebook is experimenting with charging $1 to send a message to anyone outside their friends list. I guess that will work well with the dating search above. Also, Facebook is going to charge $7 to promote your posts to more than just your friends. The rampant spamming of political posts of all kinds has also ruined the experience of many less involved users. According to SocialBakers there have actually been a large number of users who have taken a break from Facebook over the last month because of the heated debate over gun control. That is a subject that polarizes people even more than religion.

Analysts claim once you remove anyone 13 and under or 65 and older from the U.S. population, because those are not demographics for active users, the potential for new Facebook account growth is rather limited. The company has to profit from existing users rather than count on adding to the subscriber base.

Facebook Chart

When the VIX is low it is time to go. That is an old Wall Street saying and it normally proves out to be true. However, the timing is always questionable since the VIX can remain low for a long time before the inevitable market crash.

The VIX is at five-year lows and the markets may not be rushing higher but they are still ignoring relatively weak economics and debt threat worries. This will continue until it suddenly stops. There won't be a flashing red light warning that the market is going to cease its gains the next day. It will happen like a bolt of lightning when least expected.

VIX Chart

Right now the market is in full bullish mode except for Apple. If you removed Apple from the Nasdaq and S&P both indexes would have been positive today and that would have stimulated further buying. When traders look at their screens and the Nasdaq is -12 points it kills some of the incentive to add to risk positions.

However, if traders were only slightly observant they would have seen the Dow Transports and the Russell 2000 both closing at historic highs and the combination is very bullish. The Nasdaq will catch up once Apple finds a bottom.

The Dow Transports gained +39 points to close at 5,639 and well over the prior high of 5,618. Any further gains are going to be a money magnet for the market.

Dow Transports Chart - Weekly

The small caps are in breakout mode as well. Given the various factors weighing on the market this is very bullish. It suggests fund managers are not concerned about the coming debt debate and like the fiscal cliff they assume a deal will eventually be reached.

Russell 2000 Chart

The S&P has also broken out to five year highs and were it not for the Apple drag we could have seen the S&P over 1,475 at the close. The most recent intraday high of 1,474 on September 14th is the only remaining resistance of any significance until 1,550. We are VERY close to starting a new leg higher.

The key for this week is the financial earnings on Wednesday. This will be a market driver, only the direction is unknown. However, with bullish sentiment so strong we may see any lackluster earnings ignored while strong earnings will be celebrated.

S&P Chart - Daily

The Dow is stronger than the Nasdaq but the gains have been coming slowly. Adding 15-25 points a day is like watching paint dry but the overall result is still a gain. The next material resistance is 13,625 and with multiple Dow components reporting on Wednesday we could see a decent spike if the earnings are strong. Once past the financial earnings on Wednesday the next hurdle is the Intel earnings on Thursday and GE on Friday. Neither are expected to do poorly but you never know what trouble is lurking under the headlines.

Dow Chart - Daily

The Nasdaq hit strong resistance at 3125 on Friday and the -34 point Apple decline this week has prevented the index from retesting that level. However, once Apple finds a bottom the Nasdaq should catch up with the Dow. The CES show had plenty of positive headlines and even the Dell news is somewhat positive for market sentiment. Short term support is 3100 so the range of movement is very small.

Nasdaq Chart

We are still in a buy the dip market as the S&P drop to 1464 this morning proved once again. The financial earnings are going to be the key element Wednesday morning and the Fed Beige Book the key for the afternoon market.

With the Russell 2000 and Dow Transports breaking out it would take a seriously negative spate of earnings to slow down the advance. The debt threat does not seem to be impacting sentiment simply because the actual battle is still more than a month away. Secretary Geithner sent another letter to Congress today saying the government will run out of money by mid March. That extends the prior expectations by about two weeks. Nothing will happen until the last minute so there is plenty of time for the markets to run if they decide to do so.

I remain in buy the dip mode until proven wrong.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


The ABSOLUTELY Last Chance for the EOY Special