The Dow extended its streak of consecutive Tuesday gains to 20 but trouble is brewing.
The Dow spiked +218 at the open but gave back half of that as sellers appeared almost immediately. It was still a good day all around but all the indexes closed well off their highs and futures were declining at the close.
After three days of declines and a -1999 point drop from the recent highs the Japanese Nikkei rebounded slightly to gain +169 points after dipping to 13,943. The firming Nikkei helped to offset unpleasant comments from China on future growth.
Chinese officials said they were targeting 7% growth for the rest of the decade. That would be the slowest growth in 12 years and well under the analyst estimates for 8% in 2013 and China's current GDP at 7.7% growth. China is a major trading partner with Japan.
Japanese Nikkei Index
With no weekend meltdowns overseas the indexes were poised for a relief rally at the open. Positive economic reports in the U.S. provided additional rocket fuel to the market spike. The Case Shiller Home Price Index showed home prices surged in the three months ending in March. The 10-city composite index was up +10.3% over the same period in 2012 and compared to 8.6% in February.
Consumer Confidence for May exploded higher for the second consecutive month. The headline number rose +7.2 points to 76.2 after a +7.1 spike in April to 69.0. That is up from a cycle low of 58.4 in January. The sharp rise in home prices and new record highs in the stock market are powering confidence higher.
The expectations component surged much higher than the concurrent conditions component. Expectations rose +7.9 points to 82.4 and a six month high. The current conditions component rose +5.7 points to 66.7 and the highest level since May 2008.
Despite the surge in the headline numbers the purchase plans actually declined. Those planning on buying a home declined from 5.6% to 4.9%. Those planning on buying a vehicle declined from 10.6% to 10.1%. Buying plans for appliances/TVs rose slightly from 47.3 to 48.5. Inflation expectations declined to their lowest level since late 2010.
Surging confidence is due for a rest after the gains of the last several months. This will probably happen when the stock market eventually corrects. A negative payroll report next week could also be a buzz kill.
Consumer Confidence Chart
The Richmond Fed Manufacturing Survey for May improved slightly but remained in contraction territory at -2. The headline number was -6 in April after being at +6 in February. This is the first time the survey has been negative for two consecutive months since August.
The internals were negative. The new orders component fell further into contraction at -10 from -8 and this was the third month in contraction. The backorders component improved slightly from -21 to -11 but that is the 14th consecutive month in contraction. All of the improvement in the headline number came from the shipments component, which rose +17 points to erase a -17 point decline the prior month. I suspect a data problem there rather than an actual 17 point decline followed by a 17 point gain. With orders and backorders both declining the shipments component is also going to decline in future months. You can't increase shipments on declining orders. The employment component fell -6 points to -3 and now in contraction.
The Fed's Richmond district is very heavy in government contracting. As the sequestration continues to be implemented the activity in the Richmond district is going to weaken further.
Richmond Fed Chart
The better than expected home prices and consumer confidence sent equities soaring and bond prices crashing. The yield on the ten-year treasury spiked +6% to 2.13% and a 13 month high. Clearly some investors are rotating out of bonds and the surge in yields could actually accelerate if the equity market continues its gains. The dollar Index jumped +0.6% on the same news.
Ten-Year Treasury Yield Chart
Dollar Index Chart
The economic calendar for Wednesday is lackluster but it heats up again on Thursday with the GDP and China PMI. The ISM Chicago closes the week on Friday.
It was an eventful day for transportation companies. A CSX train hit a trash truck in Baltimore and derailed. The crash caused a fire that was followed by an explosion that rattled windows and knocked items off shelves a half-mile away. People three blocks away were knocked to the ground. Warehouses surrounding the derailment were severely damaged from the explosion. This is the third major crash in the last three weeks. On May 17th a commuter train in Connecticut derailed with 70 people injured. On Saturday a cargo train in Rockview Missouri derailed and destroyed a highway overpass that will take a year to repair. Seven people were injured.
Even though 2012 was the safest year on record for the railroad industry there are still plenty of accidents. CSX has reported more than 100 deaths in accidents in each of the last five years. The company operates 21,000 miles of track. CSX shares had opened higher but declined to a fractional loss after the accident.
Royal Caribbean Cruises (RCL) reported a fire on the Grandeur of the Seas that put the boat out of service and forced the ship to offload its passengers and crew at Freeport, Bahamas. The 2,200 passengers were flown to the U.S. with the exception of 23 that refused to fly. They were ferried to Florida where they will be given ground transportation back to Baltimore where the cruise originated. The cruise began on Friday and was headed for Coco Cay, Bahamas. None of the 750 crew were injured. The ship will be out of service for the rest of the year. Passengers were given a full refund and a voucher for a free cruise. RCL shares only declined -42 cents on the news.
You know Carnival (CCL) is breathing a sigh of relief today that it was not another one of their ships in trouble. They have had five incidents already this year.
Tiffany (TIF) reported a 3% increase in profits on a strong increase in revenue. Adjusted earnings were 70 cents compared to estimates of 53 cents. Revenue rose +10% to $895.5 million and beating estimates slightly. Same store sales rose +9% globally, +6% in Europe, +2% in Japan and +15% in the Asia-Pacific region. Sales were helped by advertising linking to the Great Gatsby movie. The 175th anniversary promotion also helped. Tiffany guided below estimates for the current quarter. The company expects earnings of 72 cents and analysts were expecting 79 cents. They reaffirmed full year estimates in line with analysts at $3.48. Tiffany has 275 stores.
NetFlix (NFLX) gave back some recent gains with a -$14 drop after mixed reviews surrounding the return of "Arrested Development" on their download service. Fox cancelled the series seven years ago and Netflix bought it as part of its plan to offer original programming. All 15 new episodes were released on Sunday morning. This allowed any of the 29.2 million subscribers to watch all they wanted over the holiday weekend. Arrested Development is the third original series offered by Netflix and they expected it to add up to 880,000 subscribers because of the large fan base.
Influential critics posted negative reviews of the series. One from the New York Times said "Netflix had killed the series." Not all the critics were negative but enough to cause the shares to sell off. Metacritic.com rated it a 72 on a scale of 100. That compares to 76 for the drama House of Cards and 46 for Hemlock Grove. Those are the other two Netflix original series.
IDC said tablet sales in 2013 would exceed those of laptop computers by a large margin. Tablets sales are expected to increase by +58.7% to 229.3 million compared to 187.4 million for laptops. The company said tablets are on track to surpass all PC shipments combined by 2015. The reason for this is the steeper than expected decline for PC sales. Shipments of PCs will decline by -7.8% in 2013 compared to 2012. That is significantly more than the -1.3% decline IDC predicted just three months ago. Worldwide PC shipments will be 321.9 million, down from 349.2 million in 2012. Fast forward to 2017 and they expect PC shipments to be 333.4 million thanks to a refresh cycle for business PCs and the next release of Windows. They claim the PC market peaked in 2011 at 363 million units.
Microsoft rallied +75 cents on the news because of the Windows 8 operating system that works on both PCs and tablets. The combined unit sales of tablets and PCs was much higher than previously expected.
The Washington Post released a very disturbing article this week claiming the plans of more than two dozen high technology weapons systems had been hacked and stolen by China with the country saving themselves 25 years of research and tens of billions of dollars in the process. This includes missile defenses, fighter jets, drones and combat ships. China has reportedly stolen the plans for these systems by hacking into the various manufacturers and defense dept contractors. The article cited an undisclosed section of a confidential report prepared to the Pentagon by the Defense Science Board.
They stole plans for the advanced Patriot missile system, THAAD, for shooting down ballistic missiles. They stole the Navy's Aegis ballistic-missile defense system specifications, the F-35 Joint Strike Fighter, the F/A 18 fighter jet, the V-22 Osprey, Black Hawk helicopter and the Littoral Combat ship. Having the technical specifications and blueprints for these weapons systems not only allows China to build equivalent systems for a much cheaper price in a shorter amount of time but also how to defeat these systems in a conflict.
Boeing (BA), Lockheed Martin (LMT), Northrop Grumman (NOC) and Raytheon (RTN) are the primary contractors for these systems. All of them have reported persistent security attacks by Chinese hackers. China of course claims it does not hack. Last week it was learned Chinese hackers had infiltrated Google and gained access to a secret database with sensitive information on U.S. surveillance targets. Google tracks Internet usage for a long list of people and organizations provided by the government and Homeland Security.
Since I personally view China as a very large security risk later this decade I am appalled that U.S. firms allow this kind of security breach. However, since I have been involved in the IT field since the mid 1960s I know that any system can be hacked given enough time. I hope these contractors are taking steps to safeguard new systems because our future safety against an Asian aggressor depends on it.
While I am on the security issue the Syrian problem is worsening. Russia said it was proceeding with plans to send high technology anti aircraft missiles with a range of 185 kilometers to Syria to prevent "foreign hot heads" from getting involved in the country's conflict. The S-300 weapons system is one of the worlds most advanced and could make it harder to implement a no-fly zone or to attack locations inside Syria as Israel did to stop the flow of weapons to Hezbollah. At the same time the Russian foreign minister blasted the notion of other countries selling arms to the opposition saying the move would be illegitimate and warning the U.S. it would derail future peace plans. He warned that giving arms to the opposition would only escalate and expand the conflict.
Meanwhile Iraq and Egypt are each deteriorating into a civil war. The entire region is declining and becoming more dangerous. The Iranian presidential candidates launched their campaigns bragging about Iran's nuclear future and promising to never give in to the U.S. and the P5+1 nations trying to prevent them from getting a nuclear weapon.
You have to wonder what the U.S. and the world will look like by 2020 and the prospects are frightening.
The Dow managed to stretch its Tuesday streak to 20 but the index gave back half of its opening gains. The Dow ended with a triple digit gain but there was plenty of selling along the way. The S&P ended with a +10 point gain to 1,660 but that was -14 points off the highs and it did not even touch a new high intraday. The high last week was 1,687. The S&P appears to have found new resistance at 1,675 with support at 1635.
The index now has a lower high with a sharp intraday sell off. The morning short squeeze was immediately sold and any further decline from today would setup a technical sell signal. When there are monster short squeezes like we had today it is really tough to decipher market direction. We need one more day to see if we get a lower low or a higher high for confirmation. With the Dow 20 for 20 behind us and no economics on Wednesday I view the risk as weighted to the downside.
S&P Chart - 60 Min
S&P Chart - Daily
The Dow may have stretched the string to 20 weeks but there is another trend holding the Dow at bay. The Dow has battled uptrend resistance for over a week and it has held firm. The intraday high today was lower than last Wednesday and the retracement was 50% of the gains.
We need to watch this pattern closely to see if it turns into as double top. At this point a retracement to support at 15,200 would likely fail.
The Dow has not had a three day loss in 2013.
Dow Chart - 60 Min
Dow Chart - Daily
There were very few losers on the Nasdaq today. It is rare when the top 20 list shows losers of less than $1. Netflix was the biggest loser followed by Apple and then the losses decline rapidly from there. Compare that with the gains at the bottom of the winners list.
The short squeeze was successful in returning the index to resistance at 3,500 but unsuccessful in holding it over that level. This is a key price point and gives us a large round number to focus on for market direction.
Nasdaq Winners and Sinners
Nasdaq Chart - Daily
Like the other indexes the Russell failed at resistance from last week and could be setting up for a short term double top at 1,000. This is going to be a key index to watch in the days ahead. At this point on the calendar fund managers are normally trimming positions ahead of the summer doldrums. They start with small caps. If the Russell begins to lose ground it could be contagious.
To recap we have the Dow at uptrend resistance at 15,500, the Nasdaq stalled at 3,500 and the Russell stalling at 1,000. In a normal market that would be a clear sign of an impending rally failure. In this market it may be just one more chance to induce the shorts to load up again before another headline forces the next short squeeze.
Enter passively, exit aggressively!
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