The Dow erased its losses from last week and set another new high as investors look to the future for further gains. The Russell failed to follow.

Market Statistics

After a slow start with the Dow trading flat or negative until 11:15 the index gained traction at lunch time and sprinted higher by +90 points to 14,700. The index stalled at that round number resistance for two hours before rolling over and losing half its gains. The Dow was up over 103 points at its highs at 14,716 but faded to close at 14,674 and a gain of +59. The Russell 2000 and the Dow Transports, key sentiment indicators for the market, failed to post gains.

The economic calendar was light with only two reports of note. The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings rose in February and workers hired rose by +2.8%. The number of openings rose from 3.611 million to 3.925 million. The number of openings was up +11.3% over year ago levels.

New hires rose to 4.418 million from 4.298 million. That is actually down -1.6% from year ago levels. Separations also rose from 4.173 million to 4.202 million. Quits were flat at 2.260 million. The worst metric was the increase in layoffs from 1.520 million to 1.615 million. The JOLTS report is lagging data for the February period so it was ignored by the market.

The second report was the Wholesale Trade for February. Wholesale inventories declined -0.3% and well below the expectations for a +0.5% rise. Nondurable goods declined -0.8% while durables rose +0.2%. Sales rose +1.7% compared to a -0.8% decline in January.

This was the first decline in inventories since June 2012. The inventory to sales ratio declined to 1.19. That is the number of months of sales at the current level before inventory is depleted. The decline to a two-year low is slightly bullish because manufacturers will have to ramp up activity soon to avoid inventory shortages.

The economic calendar for Wednesday will be dominated by the FOMC minutes at 2:PM. The worries persist over a potential tapering of QE. St Louis Fed President James Bullard was interviewed today saying he could see the Fed tapering in small increments of $10 billion a move as early as this summer. That is the comment that got the headlines. The text of the full interview shows him saying "If the economy continues to improve" and "adjust up or down on QE purchases." The "adjust up" comment never seems to get any air time in the press.

He also said he expects unemployment to decline to about 7.0% by the end of 2013. No, not because of a sudden surge in hiring but due to even more people leaving the workforce. He does not appear to be concerned since he is using that decline in unemployment as an excuse to cut QE purchases. I guess if another 10 million people left the workforce and unemployment fell to 6.5% the country would be booming in his eyes. Bullard is a hawk and I seriously doubt anyone is taking him seriously BUT this is evidence that QE taper conversation is ongoing. Hopefully the FOMC minutes will say something to confirm the longer term plan Bernanke continues to promote.

QE may not be good for what ails this economy but the market rally depends on it. Any news the Fed is going to slow purchases without a corresponding growth spurt in the economy is going to be met with a severe market correction. Bernanke is widely perceived to be allowing the open conversations on tapering to give opponents the feeling their views were heard in order to balance market expectations.

Another event for Wednesday is the release of President Obama's budget at 1:PM. Rumors claim it has cuts to entitlements and big tax increases. Everyone believes it will be dead on arrival. By putting in cuts to entitlements the Senate will not let it pass and by adding large tax increases the House will not pass it. The budget release is seen as more of a conversation piece to give Obama and the democrats a platform for the 2014 elections. Art Cashin said it could move the market because there are rumors it contains restrictions for 401Ks.

Economic Calendar

There was a lot of stock news today with some high profile events. The biggest is probably the firing of JC Pennys CEO Ron Johnson. The board finally gave up on his marketing revamp and gave him the boot. The board went back for the future and replaced him with the same guy Johnson replaced, Myron Ullman. That has to be satisfying for Ullman after he was replaced by this superstar marketing guy from Apple only to have Johnson fall flat on his face. The board thought enough about his past performance to put him back in charge.

For Johnson this was an expensive job. Over the two years he was employed he received $2.1 million in cash compensation plus $14.71 million in stock. Johnson was so sure his renovation would work he bought 7.26 million warrants for $50 million. Those warrants have an exercise price of $29.92 and expire in 2017. With JCP shares at $13.92 and a 12-year low the odds of those warrants being in the money in 2017 are slim. There is a much better chance of JCP being sold, broken up or severely downsized by 2017. If you subtract his compensation from his $50 million investment he is down about $33 million for his two years of work and he is probably not going to get a lot of job offers in the near future. His old job is still unfilled at Apple but I doubt they want the damaged merchandise back.

Penny's owns 426 of its 1,100 stores. The actual stores are valued at $3-$7 million per 100,000 sqft location. That equates to $11 per share. With JCP shares at $13.92 almost all of the value reflects the breakup sale price of the stores. At least the downside should be limited from here. JCP shares fell -12% to a new 12-year low.

JCP Chart

Herbalife (HLF) and Sketchers (SKX) were both halted this morning after KPMG said it fired the partner in charge of audits in Los Angeles. KPMG pulled the certification of the financials on both companies for the last two years. The partner, Scott London, was a 29 year employee of KPMG and he was fired for selling the private financial information of those two companies to a third party that used it to trade stocks.

This is a monster black eye for KPMG and there will undoubtedly be repercussions. The firm described him as a "rogue employee" and terminated him as soon as the allegations appeared. The company said London passed on information on "several" West Coast companies that was used to trade stocks. He was paid for the information.

For Herbalife it was a bad day. Immediately there were worries the KPMG certifications could have been fraudulent in order to make the information more valuable. Rescinding the certifications for the last two years means Herbalife is in violation of loan covenants and under an even larger cloud of suspicion. They are already under investigation by the SEC and FTC for complaints they are a pyramid scheme and their accounting was bogus. To have the firm that certified the accounting pull its certifications is a nightmare for Herbalife. They will have to hire a new firm and then educate them on their methods and policies. Since the new firm will be coming in to a questionable company already under investigation they will want to look under every rock with a microscope to make sure they don't miss anything. There is no assurance they will see the accounting policies in the same light as KPMG. What was ok for KPMG may not be ok for the new firm. That puts Herbalife under intense pressure to get the problem handled in a hurry. Unfortunately, these things don't happen in a hurry even when there are no problems. I suspect very few companies will even want to take on Herbalife as a customer under these conditions. Herbalife shares were halted until midday and then declined another 4% on the news.

Herbalife Chart

Sketchers shares rallied slightly on the day because there is no cloud over the company or their financials. CFO David Weinberg said he was very surprised London had admitted to the allegation and was leaving KPMG. The CFO said he new London for more than 10 years and would never have suspected him of doing anything illegal.

Sketchers Chart

Alcoa (AA) reported earnings Monday evening that were better than expected. That is because everyone expected bad earnings and had already lowered expectations to the bare minimum. Alcoa reported earnings that rose +59% to 11 cents and beat estimates of 8 cents. If that was the only headline you saw you would think it was good news. Alcoa benefitted from a lower tax rate and mark to market changes in energy contracts.

Aluminum prices declined -1.4% and shipments declined -5.5% YoY and -4.4% QoQ. The "less bad" earnings beat an already lowered target and that is probably a preview of things to come as the earnings season progresses. Shares of Alcoa were flat on the day.

However, the Alcoa earnings did energize several mining stocks. Cliffs Natural Resources (CLF) rallied +9% on short covering. Cliffs was setting at a multiyear low and comments from Alcoa crushed the shorts waiting for the next leg down. Freeport (FCX) rallied +4%, VALE (VALE) +5% and Rio Tinto (RIO) +6%.

Cliffs Chart

United Continental (UAL) said traffic for March declined -1.2%. The revenue passenger miles (RPM) declined to 17.33 billion. Capacity or available seat miles (ASM) declined -4.6% to 20.54 billion. However, the load factor improved to 84.4%, up from 81.5% in March 2012. Passenger revenue is estimated to have increased +7% year over year. High oil prices negated the impact of higher load factors. The company did not blame any of the weakness on the sequestration. Shares of UAL declined -2% on the news.

UAL Chart

The biggest gain of the day came from First Solar (FSLR). The company released guidance saying it expects to earn $4.00-$4.50 for the full year. Analysts were expecting $3.51. Revenue is now forecast to be in the $3.8-$4.0 billion range and analysts were expecting $3.1 billion. Shares of FSLR spiked +45% on the news on a monster short squeeze. FSLR said the 550 megawatt Desert Sunlight solar farm in Riverside California is expected to begin generating revenue later this year.

FSLR Chart

Earnings due out on Wednesday are BBBY, KMX, STZ, FDO, FAST, PGR and RT.

After the bell PriceSmart (PSMT) reported earnings of 82 cents that beat estimates by 5 cents. However, the revenue of $592 million missed estimates of $606 million. Shares still rallied +$3 to $83 in the afterhours market.

Realogy Holdings (RLGY) IPOed back in October at $30. They warned after the close today they expect sales of $950-$960 million for Q1 and will miss projections for $988 million. To add insult to injury they also announced a secondary offering. Shares declined -$3 in afterhours to $41.

Health Management Associates (HMA) warned that earnings would be in the range of 12-13 cents compared to estimates for 24 cents. Revenue would be $1.48 to $1.77 billion and below estimates for $1.8 billion. Shares fell -12% in afterhours.

Earnings for Q1 are not going to be pretty. A Bloomberg survey of 60 analysts showed expectations are for a decline of -1.9%. A Reuters survey this week expects earnings growth of +1.6%. S&P Capital IQ is now calling for a decline of -0.6%. Citigroup analyst Steven Wieting expects earnings growth of +5%. Regardless of which estimate you believe the odds are good it will be a fight to stay in positive territory.

There have been 108 negative guidance releases and only 23 positive guidance events. This is the worst pace in 12 years according to Reuters. Sam Stovall, chief equity strategist at S&P Capital IQ said "History has shown that actual earnings frequently outpace expectations." Let's hope he is right. The earnings bar is so low for Q1 a snake could cross it.

One thing that everyone appears to believe is that Q1 will be the trough for earnings in 2013. Full year earnings estimates range from 4% to 8%. Earnings for this quarter are facing tough comparisons to Q1-2012 when earnings rose +7.4%.

A plus for U.S. markets was the inflation data China posted overnight. The government inflation numbers for March showed a decline to 2.1% from the 3.2% pace in February. Wholesale prices fell by -1.9% compared to March 2012. Numbers earlier in the year are typically distorted by the Lunar New Year holiday. The week of business closures and celebrations distorts the entire economic spectrum. China is expected to release numbers this weekend that showed a pickup in manufacturing in March. If the numbers do come in better than expected we could see commodities explode.

The inflation number from China and the decline in the dollar today powered commodities higher. Copper rose +2.1%, gold rose +$12 to $1584 and silver gained +0.77 to $27.90. If it appears China is still in growth mode we could see commodities and emerging market indexes explode out of the gate on Monday. With Japan's big stimulus program China may have to increase its stimulus in order to keep pace.

Silver Chart

The Dow surged to a new intraday and closing high but stumbled at the 14,700 mark. After surging to that level early in the afternoon it found strong resistance. The Dow was up over +103 points at the high and faded to gain only +59. That was still good for a new high close but the intraday stall was troubling.

The S&P surged to 1573.89 and 0.23 points above the intraday high of 1573.66 last week. The entire dip to 1539.50 on Friday has been erased. However, that 1570 level could prove tough to conquer given the continued flurry of earnings warnings. March madness has given way to April anxiety although you could not tell by looking at today's gains.

The trading over the last week has given us some clear hurdles to watch. That is the 1570 level on the upside and the 1540 level on the downside. Anything in the middle is just noise.

S&P 500 Chart

The Dow is maintaining a slightly better uptrend than the S&P. April is typically the best month of the year for the Dow as blue chips are favored in the earnings cycle. The 14,550 level is interim support should we see any minor dips on weak data. Dow 14,400 would be critical support and failure there means the rally is over.

Dow Chart

The Nasdaq is lagging the Dow and S&P and barely made it back to the prior uptrend support, which is now resistance. The mediocre +15 point gain came with no help from Apple or Google with only a +3 point total gain between them. First Solar and NetFlix were the biggest gainers and the losers were small. There was simply no excitement in tech stocks.

The Nasdaq needs to hold over 3200 and find some way to crawl back over 3260 before the earnings misses sink the ship.

Nasdaq Winners and Sinners

Nasdaq Chart

Danger Will Robinson! Danger! (Lost in Space 1960) The Dow and S&P may have set new intraday highs and the Dow a new historic close BUT the Russell 2000 and the Dow Transports closed negative for the day.

The Russell lost -2 points after a mediocre rebound on Monday. The Russell lost -3% last week and has moved below support at 938. This is a danger signal warning us that fund managers have lost confidence in the rally and are easing out of small cap stocks. They are hiding money in the big cap Dow stocks for the blue chip earnings over the next two weeks and then they will be moving to the sidelines.

This is not a guarantee but the lack of small cap participation today is a warning things are not as they seem. Watch for a failed rally on the Russell and a new dip below 920 to short.

Russell 2000 Chart

The rebound in the Dow Transports FAILED at the 6100 resistance level, which was prior support. If this failure worsens the acceleration to the downside could be dramatic. This was a textbook breakdown, rebound to prior resistance and failure.

Dow Transport Chart

I am seriously concerned about the poor performance of the Russell and Transports on a day when the Dow and S&P were at new highs. The intraday fade on the Dow from a +103 point gain is also a worry. We still closed at a new high but there was an * on it.

I would pay close attention to the Russell and the Dow Transports the rest of the week. If they don't participate on any further gains I would begin moving to the sidelines.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email