Positive economics for the second consecutive day caused fund managers to fear an early taper announcement.
The markets declined at the open with the Dow falling nearly -150 points at the lows before buyers showed up. The biggest decliner today was the Dow after the Russell 2000 headlined the biggest losers list on Monday. The biggest Dow losers were Visa, Boeing, Goldman, IBM, DuPont, 3M and Disney.
The data causing the taper tantrum today started with the ISM - New York, which rose from 598.7 to 608.5 and the fastest growth rate in three years. The current conditions index rose more than 10 points to 69.5 and the six-month outlook rose to 69.6 and the highest level in a year. Employment was the laggard with only a +0.6 rise to 50.8 and barely over contraction territory. The employment component has been lackluster for the last year.
The Intuit Small Business Employment Index for November rose +0.6 after declining -0.6 in October. That is the first time in four months the index has been positive. This is a positive sign for the ADP and Nonfarm Payroll numbers later this week. Average worker hours rose +0.6% to 25.1 hours. Average monthly compensation rose +0.4% to $2,710 or $32,500 per year.
This was the first time in four months small businesses added jobs and that speaks to a potential improvement in sentiment. However, this is the holiday season so any gains have to be questioned and could be erased in January as workers are cut and hours shortened.
There was a surprise in the weekly chain store sales. We have heard about the large crowds on Thanksgiving and Black Friday but the weekly sales actually declined -2.8%. If it were not for the Black Friday sales spike the number would have been much worse. The NRF said shopper traffic declined -4% for the weekend.
The most bullish report for the day was the surge in auto sales. The AutoData report showed the annualized rate of sales in November soared to 16.4 million compared to the 15.2 million rate in October. This was the fastest pace of sales since February 2007. Analysts believe the government shutdown in October may have pushed some sales into November but October was flat with September so I am not convinced.
Light trucks accounted for 8.3 million units and autos 8.1 million. Domestic sales were 12.5 million and imported 3.9 million. Ford was on pace for 2.6 million units, Chrysler 1.8 million, GM 2.8 million, Honda 1.6 million, Toyota 2.3 million and Nissan 1.4 million. U.S. brands fell to 44.1% market share due to strong sales for the Japanese manufacturers.
We are heading into a heavy economic schedule the rest of the week with several high profile events. The first major payroll report is the ADP Employment at 8:30 Wednesday. That will color the market expectations for the Nonfarm Payrolls on Friday. The employment component of the ISM Manufacturing report on Monday rose from 53.2 to 56.5 and suggests we could have an upside surprise to the Nonfarm Payrolls. That would be Fed negative.
The GDP revision is due out on Thursday and there are rumors it could be over 3.0% and that would also be Fed negative. Continued positive economic news would give the Fed cover to announce an earlier QE taper. However, while investors appear to be concerned about that this week I still believe they will wait until March because of the potential disruption from Washington in January and early February.
The rate decisions from the Bank of England and ECB on Thursday will also have a bearing on what the Fed does and how the market perceives the potential for a taper announcement.
It was a low volume news day. The market seemed oblivious to lower than expected retail sales numbers although several stocks did see some attention. Walmart said yesterday was the best Cyber Monday in company history. The five days starting with Thanksgiving were also the best online sales in company history with more than one billion page views on Walmart.com during that period. Walmart has been offering 200 online specials per day starting on Thanksgiving and continuing until next Friday. They are offering free shipping on all orders over $35 with 99% of Walmart items eligible. Online orders can also be picked up at a local Walmart on the same day in most cases. Normal brick and mortar retailers are seeing weak sales and weaker margins as a result of Walmart and online sales at Amazon and Ebay.
Walmart said the largest selling items on Cyber Monday were the LG 50" 1080P LED HDTV and the Apple iPad 2 with 16GB and Wi-Fi. Walmart sold 1.4 million tablets over the five day period. At one point Amazon was selling 300 tablets a minute. iPads were hot at Walmart, iPad minis were preferred at Target and surprisingly the Windows Surface was the top selling tablet at Best Buy. Walmart shares closed at a new high despite the negative market.
JC Penny's reported after the bell that same store sales for November rose +10.1%. The surprising jump in sales carried over into their online sales as well. The company said it hoped the momentum held throughout the holiday season. The company is facing some really easy comps so beating December 2012 should be easy. Shares of JCP rose +.51 cents in afterhours to $10.62.
Apple (AAPL) was upgraded by UBS from neutral to buy. They raised the target price from $540 to $650. The analyst cited the potential for an iPhone deal with China Mobile as the main selling point. A Chinese website related to China Mobile had a page up for a while advertising preorders for iPhones. It was taken down almost immediately and China Mobile denied the rumor. However, it is only a matter of time before they do a deal with Apple. China Mobile has more than 700 million subscribers. If only 15% converted to the iPhone that would be 105 million additional phones sold by Apple. Another broker raised his price target to $777.
Research firm IDC said tablets were taking over the PC space. They are projecting total shipments of 221.3 million units in 2013. That is an increase of 53% from 2012 or roughly 110 million additional units. They are projecting sales of 270.5 million in 2014 and peaking at 386.3 million in 2017. That is down slightly from prior estimates of 407 million in 2017. The slightly lower estimates are based on the new trend of users going to larger screen phones called "phablets" instead of a full size tablet.
Yesterday IDC said PC sales for 2013 would decline by -10.1% and the largest drop on record. Total shipments are expected to decline another -3.8% in 2014 before turning positive again. PC sales are currently running at 2008 levels. IDC said the emergence of 2-in-1 devices capable of working in both notebook and tablet configurations would provide boost for the Windows based platform sales. Apple currently owns 35% of the tablet market but share is continuing to drop with Android now claiming 60.8% of the market. That compares to 45.6% Apple in 2012 and 52% Android. IDC believes Windows tablets could rise from the 3.4% today to 10% by 2017. Applebee's said they were putting a tablet on every table in their restaurant chain by the end of 2014.
PC Sales Trends
2013 - 314 million -10.1%
2012 - 349 million -4.0%
2011 - 364 million +1.7%
2010 - 346 million +13.6%
2017 - 305 million estimate
Tesla Motors rallied +$20 today after the German equivalent of the NHTSA in the U.S. gave the company a clean bill of health on the Model S. The German consumer agency had requested information from Tesla on the three Model S fires. After reviewing the data the agency said they could find no evidence of a manufacturing defect and closed the file.
Two of the Model S fires were the result of a high speed impact with metal road debris that punctured the battery compartment from underneath the car. The third car caught on fire after crashing through two concrete and steel barriers and coming to rest against a third. The car was going at 3 times the speed where occupants were expected to survive yet all occupants walked away from the crash. There has never been a serious injury or death in a Tesla vehicle.
Shares spiked $20 to close at $144.67 after Morgan Stanley reiterated the overweight rating saying the selloff as a result of the fires gave investors a reason to buy the automaker. The analyst named Tesla his top pick in the automotive sector. Last week Deutsche Bank also reiterated their buy recommendation based on a series of positive catalysts in the months ahead. Those include news of sales in China, higher production rates, gross margin improvement and the resolution of the NHTSA inquiry.
Shares of TSLA had built a base at $120 after a two month decline on profit taking and the news of the fires. The stock was primed for a short squeeze.
Krispy Kreme Doughnuts (KKD) hit a slick spot and the share price was creamed today. Investors were not left with a sweet aftertaste as a result of lowered guidance. Consumers went on a diet with same store sales increasing only 3.7%. Revenue rose +7% to $114.2 million but missed forecasts slightly. Earnings of 16 cents beat estimates by a penny. The bad news came from the guidance. The company said full year earnings would be 60-63 cents compared to analyst estimates of 63 cents. Full year 2015 guidance was 71-76 cents compared to estimates of 77 cents. KKD said same store sales growth would be in the low single digits with international stores declining in single digits.
They are going to open 10-15 company stores and 20-25 franchise stores and 85 international stores in the current fiscal year. The company talked about cannibalization of market share with new stores in the same area and the honeymoon effect. That honeymoon effect refers to the surge in business when a new store opens followed by a decline in sales as the newness wears off. Investors don't want to hear that the company is opening too many stores too close together and that 85 new international stores will open when same store sales are already declining internationally.
YUM Brands (YUM) finally reported positive same store sales in China. Last year they were plagued by problems resulting from a supplier using higher than legal levels of antibiotics in their chickens and by an outbreak of bird flu that turned people off from chicken meals. Sales were down in double digits for several quarters. While the November results were not outstanding they were positive at +1.0%. Analysts were projecting a -1.2% decline. Same store sales were flat at KFC but rose +7% at Pizza Hut. YUM reiterated they expect a 20% increase in profits in 2014. They have more than 6,000 stores in China and will open more than 700 additional stores this year. Shares declined $2 on the news after a +$14 rally over the last six week.
The markets sold off on low volume on worries of taper possibilities. At least that was the official excuse. Remember, historically the Dow normally declines on the first two days of December. That can be blamed on portfolio restructuring and tax selling but I think that is also just an excuse.
If you are a fund manager and your fund is up 25% to 35% for the year you are now faced with making decisions ahead of year end. With the normal December market gain of 1.5% to 2% you have to weigh the potential for adding another 2% with the possibility of losing 10% to 15% if the market suddenly decides to correct. Do you take profits and lock in your gains or do you roll the dice and try to squeeze another 2% out of the market? I am sure there are quite a few managers thinking about locking in those profits.
Historically when the market is up big for the year the gains continue through December as managers behind the curve try to chase performance right up until the last minute.
Obviously the difference between those two types of managers is what will drive the market over the next month. Complicating the picture is the budget deadline in Washington on the 13th and the worry that stronger than expected economics will cause the Fed to taper early. What is a trader to do?
In a situation like this we have to depend on the charts for guidance. The S&P declined to support at 1,790 intraday and closed back over 1,795 although just barely. Since October every minor dip like we have seen this week was bought. There were two of them in November. On the surface if would appear to be another buying opportunity. The S&P rebounded from support after a two day decline.
I think it is more important that this was a day where the markets rallied into the close rather than declined. Four out of the prior five days the markets sold off into the close. The reversal of that trend could be significant when coupled with the bounce off support.
I would recommend we use Tuesday's selloff as our trading plan for the rest of the week. I would buy the dip but if support at 1,790 breaks I would be a seller. We could easily see a return to 1,750 or even lower if fund managers suddenly begin to feel their gains are threatened.
On the upside the resistance is still 1,810-1,812 and it has been rock solid. If we test that level again and fail again I would be a seller. Obviously on a breakout I would add to positions.
As traders we tend to over analyze situations or ignore the obvious. We either jump the gun on a whim or enter what we call the paralysis of analysis. If we try to take and analyze all the factors impacting this market over the next three weeks we will be too conflicted to trade. Good analysts fail all the time because they get locked into one mindset where they have analyzed all the options and come to a firm conclusion. When that conclusion turns out to be wrong they try to justify their position and wait, sometimes for weeks or months, for the market to reflect their belief. This is silly but we all do it at one time or another.
Trading should be simple. If the market is going up, buy something. If it is going down, sell something. Markets and stocks making new highs tend to keep making new highs and the reverse is true on the downside.
For the rest of this week focus on the 1,790 level. Buy a bounce from that level and sell a break below that level.
The Dow did exactly what it should have done if a chartist had written the script. The Dow declined to support at 15,900 and held. It was not pretty with a -40 point drop below that level intraday but in the end it closed over 15,900 and that is all that mattered.
The Dow was very overextended and could easily pull back even further to as much as 15,600 and still retain its uptrend. However, I suspect the trend changed at the close today, and assuming the ADP Employment report on Wednesday is not a blowout, it should move higher. While I am not expecting a dip like we saw in June, August and September that is always possible.
The key level to watch on the Dow would be the intraday support at 15,875. A breakdown there would be a strong warning signal that 15,600 is going to be revisited. On the upside the 16,100 level is strong resistance.
The Nasdaq gave back only 8 points today and remains well above prior resistance at 4,000. This is bullish given the -180 point decline in the Dow over the last three days. The Nasdaq is susceptible to a larger decline if events warrant. Strong support is well below at 3,895. I sure don't want to see that level again but it is possible.
As long as the Nasdaq remains the stronger of the three major indexes we should continue to move higher. Tech stocks and small caps are generally favored in December so as long as that historical trend holds the market should do fine.
The Russell is also a picture perfect chart. Resistance held at exactly where I drew the line two weeks ago. In theory the Russell should be headed back to support at 1,100 after failing at that uptrend resistance but this is small cap month. That would be a disruption of historical cycles. Obviously there is nothing preventing a further decline so we need to be aware of the risk.
The 1,120 level was light support and it did hold and produced a minor rebound. Let's hope this was a sign of better things ahead.
Merrill Lynch released a survey this week showing that stock ownership by individual investors is only around 53% and a 15 year low. Normal is between 60-65%. Stocks are not "over owned" and there are still a lot of people in denial over the 2013 rally.
Fund managers are probably sitting on pins and needles this week. They don't want to make any changes but they know it is their responsibility to protect investor money if the market begins to weaken. They will be watching critical support levels even closer than individual investors. Not only does their fund performance depend on it but so does their bonuses.
We have had a very nice year in the markets. Most of the indexes are near new highs and the outlook for the future is improving. If we can just keep the Fed from rocking the boat we could have a good 2014 as well. Analyst estimates are ranging from 2050 to 2200 for the S&P by year end 2014. Don't go through 2014 alone. Take advantage of the 15th annual End of Year Renewal Special today. Don't wait until the last minute.
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