The market is doing a great imitation of the Energizer Bunny with the strongest four-day gain since early April.
The indexes have moved to about 1% from new historic highs despite serious geopolitical tensions, declining earnings estimates and a pending speech by Ben Bernanke. If this sounds familiar it is. The last couple times he spoke the markets were testing overhead resistance and crashed after the speech.
If there was ever a perfect setup for a strong move this is it. The Dow closed right on resistance of 15,300. The Nasdaq closed right on resistance of 3,500. The S&P closed .51 points above the closing high from June 18th, which is also current resistance. For all three indexes to close right on resistance ahead of the FOMC minutes and Bernanke speech on Wednesday is seriously tempting fate.
S&P-500 Bar Chart
There were no economic reports of note on Tuesday. The Job Openings and Labor Turnover Survey (JOLTS) is a lagging report for May and is generally ignored. Hiring was flat according to the report with the number of available jobs at 3.828 million, up from 3.800 million. Hiring rose only slightly from 4.395 million to 4.441 million. This compares to 5.6 million a month prior to the recession. Separations rose slightly from 4.287 million to 4.323 million. Quits rose from 2.185 million to 2.203 million. This report was ignored.
A nonscheduled report that did move the market was news from CoreLogic (CLGX) that foreclosures fell by -29% to about one-million homes in some stage of foreclosure. Completed foreclosures totaled 52,000 in May. That is a -27% decline from May 2012.
The company also said the shadow inventory of homes fell below two-million for the first time since 2008. Those are homes that are seriously delinquent and in imminent danger of being foreclosed and those owned by mortgage servicers but not yet on the market. These may need repair before being listed or the mortgage companies are waiting for prices to rise further before trying to sell them.
While the falling foreclosure rate does not directly impact builders it does imply lower home inventories and the potential for builders to raise prices. Homebuilder stocks soared on the news with DR Horton (DHI) rising +7.5%. However, most builders declined by that amount just two days earlier when the interest rates spiked after the payroll report. Stronger jobs means tighter Fed policy and much higher mortgage rates. Rate hikes by the Fed may not happen until 2015 but rate hikes in the market in expectations of QE tapering are already occurring. Other gainers were TOL +6.4%, PHM +5.5%, LEN +6%.
The economic calendar for Wednesday will be led by the FOMC minutes at 2:PM. This is the minutes for the meeting that "deputized" Bernanke to outline a timeline for tapering in the post meeting press conference. Analysts will be scouring the minutes for signs of doves or hawks changing sides in the tapering debate. Several Fed heads appear to have changed sides to a more dovish position since the FOMC meeting so it will be interesting to see how the meeting dynamics played out. Expect volatility surrounding the event.
Bernanke does not speak until 4:10 and the topic is not specifically related to monetary stimulus. I expect this speech to be boring and ignored. However, he could take advantage of the podium to try and fine tune his post FOMC remarks that crashed the market. I don't expect him to say anything that will be market negative. If anything is said it should be an attempt to calm the markets and take the pressure off of mortgage rates.
YUM Brands (YUM) reports earnings after the close on Wednesday and they are the biggest report for the day. Because they sell to working class families their earnings and guidance will be important. They are still battling a scare over tainted chicken in China and positive news about winning that battle would be very good for YUM shares. The stock is close to a 52-week high and a positive earnings report could make that a reality.
Hi-Tech Pharma (HITK) had a dramatic earnings reaction. Shares opened at the low of the day at $30.50 before rebounding to close near the highs at $35.25. The company reported a loss of 34 cents or $4.6 million. This was less than the 73 cent loss of $9.9 million in the year ago quarter. Revenue declined -5% to $58.5 million from $61.3 million. Analysts were expecting a loss of 66 cents on revenue of $67 million. Obviously they beat substantially on the earnings and missed by a mile on the revenue. There was a large item where the company set aside $15.5 million tied to an investigation into price submission in Texas. Apparently traders were shocked by the revenue and once over the sticker shock they decided the stronger earnings were the key. HITK declined -7.3% before the open then ended the gain with a +5% gain.
Wolverine Worldwide (WWW) reported Q2 GAAP profits declined -11% to 36 cents per share. However, adjusted earnings were 46 cents and that beat analyst estimates of 34 cents. Revenue surged +88% to $587.8 million and analysts were expecting $590.8 million. The surge in revenue came from the acquisition of the Sperry Topsider, Saucony, Stride Rite and Keds brands. The company raised its full-year guidance to $2.60-$2.75 and analysts were only expecting $2.31. Shares spiked +7% before the open but gave back some in regular trading.
Earnings due out on Wednesday include FDO, FAST, YUM, TXI, PSMT and ADTN.
Earnings estimates for the S&P continue to fall. S&P IQ said today they are now expecting +2.9% earnings growth, a decline from last week's expectations of +3.3%. Revenue expectations rose from +0.5% to +1.5%. Without the financials the S&P would be looking at an earnings decline of about -4%. The rate of negative preannouncements has been the worst in the last 12 years.
In stock news Tesla Motors (TSLA) is replacing Oracle (ORCL) in the Nasdaq 100 (NDX). That is the 100 biggest nonfinancial stocks on the Nasdaq. Oracle announced it was moving to the NYSE. The addition of TSLA to the NDX will occur on Monday July 15th. The addition to the index will require hundreds of fund managers indexed to the NDX to buy shares of Tesla. With the low float we could see TSLA move sharply higher. The gains today were relatively muted given the news but the buys don't have to occur until Friday.
Intuitive Surgical (ISRG) was crushed after it warned on Q2 earnings and the decline in sales of robotic surgery systems. Revenue growth will drop to +7% compared to +23% in the prior quarter. The company has been under pressure after numerous complaints of problem with the machines that were harming patients. The company sold only 90 of the systems in the U.S. compared to 124 in the year ago quarter. Goldman Sachs, Canaccord and JMP Securities downgraded the stock and others are sure to follow. Shares fell a whopping -16%.
Goldman Sachs downgraded IBM from buy to neutral saying the tech giant is seeing pressure on its growth markets with slowing revenues in its higher margin business lines. Some analysts believe IBM is suffering from the same indecision and deferment on orders as Oracle and Accenture both warned about last month. IBM has not given any clue that sales are slowing and they are the leader in the industry. Expectations for IBM are already low so there is a possibility of an upside surprise. Shares of IBM declined -3.68 to knock -31 points off the Dow but the index was not deterred.
BlackBerry held its shareholder meeting today and the CEO pleaded for patience with the turnaround. He said, "This is a long-term transition for the company, but I can assure you that we are pushing very hard. Blackberry will pursue every opportunity to create value for shareholders." He was asked if the company might be broken up and he dodged the question but he did not say no. He said they were open to "any and all options that create value for shareholders." He indicated there may be some partnerships in the future. CEO Heins said they were already seeing some signs of market share gains in the top-end of the Smartphone line. He did say competition in the low-end devices in Asia was "intense" but they were holding their ground. The company said another round of layoffs was coming and they fired the VP for sales in the USA. Blackberry has 11,000+ employees after cutting -5,000 in 2012. Shares are trying to form a bottom at $9 after the big drop from $14 when earnings disappointed in late June.
The markets are setup for big things on Wednesday. We are either going to blow out to new highs or take profits from the last seven days of gains. With all the major indexes closing right on critical resistance the trap has been set and the FOMC minutes should decide whether it is the bulls or bears that get squeezed.
The S&P closed at 1652.32 and the closing high for June was 1651.81. That is solid resistance but not insurmountable. The historic high close is 1669.16 so we still have a ways to go before we hit blue sky again in the S&P. The S&P has rebounded +89 points since the 1560 low on June 24th. Even if we are destined to move higher it is time for some profit taking. That could be done in a day or a several days but we need some stop losses to be hit and give those on the sidelines an excuse to buy.
Support is the 50-day at 1628 and then prior resistance at 1620-1625.
The Dow is in a similar situation. The Dow stopped exactly on resistance from the June highs at 15,300. The high close in June was 15,318. The rebound from 14,550 in June has run for nearly +800 points without any material pause. The historic high close is 15,409 and only 109 points over today's close. With the target highs so close the odds are pretty good we will see them tested soon.
The challenge will be to avoid a double top failure if the earnings are disappointing. With warnings and downgrades an everyday occurrence now the market has proven to be very resilient. It will have to keep up the pace or investors could get cold feet ahead of the late summer doldrums.
The Nasdaq is leading the big cap pack. The Nasdaq closed at 3,504 and that is a new twelve-year high. The May closing high was 3,502.12. Closing at a new high was done without any fanfare. The Nasdaq just kept adding a small step every day and today's +19 points was not spectacular. Trading was calm and orderly with very low volatility.
With the Nasdaq and the Russell 2000 at new highs it would seem to suggest the Dow and S&P should follow. Support on the Nasdaq is now 3,450. The Nasdaq did stop at uptrend resistance and that 3,500 level was a real challenge in May. The index traded over 3,500 intraday on seven days but only close there once.
There is no doubt about the Russell 2000. The index has rebounded +76 points since the 942 low in June and the last three days have been strongly higher into new high territory. Today's +9 point gain on top of a big string of gains suggests the bulls are in control and there is no fear of the traditional summer weakness.
While a major part of this rally is related to the end of June index rebalance the buyers have stepped in with additional volume to keep the move alive. Resistance would be around 1,030 and support should now be 1,000. The Russell closed at 1017.54.
Russell 2000 Chart
Despite the halt at strong resistance levels on the Dow, S&P and Nasdaq the bias is clearly bullish. Assuming there is no smoking gun in the FOMC minutes that will poison sentiment I think the trend remains bullish. We need a couple days of profit taking but I would expect the dips to be bought.
The market is ignoring dozens of negative conditions from weak earnings, civil wars, economic weakness and currency volatility. Money is coming out of bonds and equities making new highs are a big welcome mat for that cash.
We can't afford to become too complacent so look both ways before stepping off the curb and save some cash back for the dip that will appear when we least expect it.
Enter passively, exit aggressively!
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