We became very familiar with the sudden short squeeze in 2013 and it came back to haunt the bears for the first time in 2014.
Positive overseas news overnight sent the futures higher and traders who shorted the weakness in the first three days of the year were greeted with the first short squeeze in 2014. The S&P gapped up from 1,826 to 1,840 in the opening minutes of trading and never exceeded that high for the rest of the day.
The economic news in the U.S. was not particularly outstanding but it did not take much to overcome the gloom that had settled in over the first three trading days of the year.
The International Trade report for November was better than expected but the key word there was November. This is a lagging report and not normally a market mover. However, the trade deficit declined from -$39.3 billion to -$34.3 billion. That is the lowest deficit since October 2009. Exports rose +0.9% and imports fell -1.4%.
This suggests the data will add about half a point to the Q4 GDP. Morgan Stanley (MS) was quick to revise their Q4 GDP estimates from +2.4% to +3.3%.
The biggest component of the trade deficit is petroleum imports. The petroleum deficit declined by -$4.3 billion to $15.2 billion with exports spiking +5.5% and imports plunging -11.2%. The rapid expansion of shale oil production has reduced the need for imported oil and the decline in WTI prices has made it more profitable for refiners to export gasoline and diesel. The nonpetroleum trade balance narrowed only marginally by -$200 million to $41.1 billion.
The weekly chain store sales plunged -5.4% after posting three weeks of gains. Winter storms Hercules and the current storm Ion were to blame with drivers staying home and shopper traffic dropping significantly. This is for the week ended on Jan 4th so the full impact of the current record cold temperatures will be reflected in next Tuesday's report. Grocery stores saw a huge spike in volume as consumers stocked up on staples ahead of the big storms.
The economic reports for the rest of the week will have a lot more importance for the market than the ones we saw today. The ADP Employment report will be the first look at the December jobs numbers. The consensus expectations are for a gain of +205,000 jobs compared to +215,000 in November. However, the consensus range is telling. The range of estimates are from 130,000 to 218,000. Clearly that suggests several analysts are not expecting much in the way of job growth in December.
While the Fed does not rely on the ADP report for its guidance the market will definitely change its outlook for Friday's Nonfarm Payrolls based on what the ADP report reveals.
The consensus estimate for the Nonfarm report is a gain of +200,000 jobs. However, the estimate range is from 120,000 to 225,000 so again some analysts are expecting the worst.
We could be back to the bad news is good news environment again. A lower than expected jobs number could mean the Fed will go slower on the taper process while a better than expected number could mean they speed up the taper. This makes the actual number a pivotal market event. A Goldilocks number around 185,000 would be perfect for keep Fed expectations in check.
The FOMC minutes are going to be of great interest since this was the meeting where they decided to begin the taper. Analysts will want to know how that decision was reached to develop insight into future taper expectations.
Janet Yellen, 67, was confirmed by the Senate as the new Chairwoman for the Federal Reserve and the first woman to hold the position. However, the vote was only 56-26 to confirm. That represents the lowest Senate support on record and lower than the 70-30 approval for Bernanke. Some senators believe the controversial QE programs are building asset bubbles that will harm the economy as they are unwound. Also, some senators were unavailable for the vote as a result of the massive shutdown of airline flights that prevented them from returning to Washington. However, when everyone was in session her nomination advanced in a procedural vote by only 59-34. She is going to have a tough time with lawmakers in the years ahead because the unwinding of stimulus is not likely to go smoothly. Texas republican Jeb Hensarling, chairman of the House committee that oversees the Fed has promised "the most rigorous examination and oversight of the Fed in history" with a series of hearings in 2014. The next one is January 9th and will be dedicated to the international impact of QE.
Yellen will be assuming the helm of the Fed with a record $4.2 trillion balance sheet and the toughest task ahead of any prior Fed chairman. This is the dictionary definition of a hot potato. The Fed has never successfully unwound a stimulus program without impacting the economy and the market and with stimulus at record levels there is the potential for a record impact to the market as it is unwound.
Philly Fed President Charles Plosser is doing his best to crash the market saying the Fed may consider cutting QE purchases by more than the $10 billion already announced. He said the Fed may need to cut by -$25 billion to get ahead of the improving economy.
Fed dove, Boston Fed President Eric Rosengren, voted against the taper at the last FOMC meeting warned that the Fed should remove stimulus slowly and not take any "dramatic steps" to wind down asset purchases because the economic news did not support it. He said he was "comfortable with the current approach" and expects the Fed to follow through on the announced gradual reductions even though he would have preferred waiting until there was a substantial improvement in the economy.
San Francisco Fed President John Williams said the Fed is likely to continue to cut asset purchases at a "steady, measured" pace at coming meetings. He said the current excessively high unemployment and too-low inflation call for continued monetary accommodation and the Fed will keep rates low for the "foreseeable future."
One thing for sure, it is going to be very interesting year to be a Fed watcher.
The FTC dropped a bomb on Friday when it said there would be a press conference on Tuesday to talk about deceptive advertising claims for weight loss products. Herbalife (HLF) and NuSkin (NUS) dropped sharply on worries they would be targeted. At the press conference today the FTC said it was announcing settlements with four companies and HLF/NUS were not involved in the investigation. Shares of the two companies rebounded to their pre announcement levels.
The FTC said it settled with four companies for $34 million in fines for deceptive ads. The biggest was with Sensa Products LLC, with a product claiming all you had to do was sprinkle it on your food to lose weight. They will pay $26.5 million and change their ads to reflect only scientifically proven results. Leanspa LLC, a company that advertised a colon cleanse to lose weight agreed to pay $7.3 million. The company used fake "news" websites to advertise acai berry as a weight loss miracle until the company was shut down by the FTC. L'Occitane Inc, marketed two skin creams that promised to "visibly reduce the appearance of cellulite." They agreed to pay $450,000 to reimburse customers. The FTC said there was no evidence the creams worked. HCG Diet Direct, sold liquid drops that it claimed contained a hormone produced by the human placenta that would help people lose weight. The company agreed to a $3.2 million fine but the judgment was suspended because the company could not pay it. The FTC said other actions were pending against companies that advertised fraudulently on TV and the Web. The actions would be announced once the cases were settled.
After the Bell Micron (MU) reported adjusted earnings of 77 cents on revenue of $4.04 billion. That compares to estimates of 52 cents and $3.72 billion. Revenue more than doubled thanks to an acquisition of semiconductor maker Elpida Memory. Shares of Micron rallied +6% after the report. Micron shares are up +300% over the last 12 months.
NetFlix (NFLX) shares were knocked for a -$20 loss after Morgan Stanley downgraded them citing increasing competition. Analyst Scott Devitt said online streaming services like Hulu Plus, HBO Go and Amazon Prime "could" hurt growth at Netflix. He said if the subscribership of the competition continue to grow the costs for content could rise as companies like Netflix bid more for exclusive content. He also lowered his subscriber growth targets for 2014. He cut Netflix to underweight or the equivalent of a sell rating. Netflix was the best performer in the S&P in 2013 with a +300% gain. They ended Q3 with 31.1 million subscribers after adding 1.3 million U.S. subs in Q3. Almost everyone believes Netflix will see the most of its subscriber growth from overseas and that is an area where they have barely scratched the surface.
Pharmacyclics (PCYC) shares rallied +20% after an independent committee recommended phase 3 tests on its Imbruvica drug be stopped because therapy had already met several goals. The drug, used to treat leukemia and lymphoma, showed "statistically significant improvement in survival rates" compared to other drugs. The company is developing the drug along with Johnson & Johnson. The trials covered 391 patients in 70 clinics in 10 countries. Pharmacyclics is now discussing the next step with health authorities in both the U.S. and Europe.
Epizyme (EPZM) rocketed to a 75% gain after it achieved a proof of concept milestone in a treatment for genetically defined cancers. The drug, currently named EPZ-5676, had performed well enough in tests to earn a $25 million progress payment from its partner Celgene (CELG). At the same time EPZM announced another progress payment of $4 million from GlaxoSmithKline (GSK) on another cancer drug. The company expects to have five additional proof-of-concept programs involving various cancer treatments.
Neurocrine Biosciences (NBIX) saw its shares rally +90% today after positive test results for drug NBI-98854. The drug reduces the symptoms of tardrive dyskinesia, an illness that causes involuntary movements and spasms. Doctors said 67% of the patients tested were "much improved" or "very much improved." Analysts said the results from the study were "unequivocally positive using multiple measures." The drug could be approved by 2017.
Those gains above pale in comparison to the gains in Medbox (MDBX). Shares of MDBX have rallied from $10 to $74 in the last two weeks. The company develops biometrically controlled dispensing and storage systems for medicine and merchandise applications. While that sounds relatively boring the recent change in laws concerning marijuana have sent this stock on a rocket ride. Shares rallied +85% today alone.
The company said it has improved its products for use in medical and recreational marijuana dispensing. The company is going to be marketing the improved machines as a "safe that dispenses medicine." In developing their machines for the Canadian medical marijuana program they were required to produce a machine that was "safe and secure" at all times. They added electronic and biometric locks that would aid in the safety and security of marijuana products. They are currently building machines on order contingent on licensing in Massachusetts, Washington, Colorado, Oregon, Nevada and Illinois over the next 12 months. They expect their business to boom as these states progress through the licensing process.
Palo Alto Networks announced last night it had acquired Morta Security, a two-year old Silicon Valley startup run by former employees of the NSA and USAF. Morta tracks the most advanced security threats known as "advanced persistent threats" and can be from criminals or nation states trying to gain access to government or scientific data. Traditional antivirus programs typically fail to protect against these highly sophisticated attacks. No financial data was given for the acquisition.
Michael Kors (KORS) shares fell -4% after Citi downgraded them to neutral from buy. The analyst said 2014 comps will be strong and beat expectations but to a "lesser extent." Citi said the compound annual growth rate of 30% would be modest but the company already has a higher valuation than its peers of Coach (COH), Tiffany (TIF) and Ralph Lauren (RL).
Kors has been growing very rapidly and they have repeatedly blown the doors off of analyst estimates. Obviously they can't continuing growing at record rates forever. However, would you rather own a company growing at a "modest 30%" per year or somebody like Coach with declining revenue? This downgrade is simply noise.
JP Morgan (JPM) was hit with about $2.6 billion in fines and forfeitures as a result of the Bernie Madoff scandal. JPM was accused of failing to catch the scheme and report it to regulators. Some of JPM's own bankers wrote between 2008-2011 in internal documents that the returns were too good to be true and some even suggested it may be a Ponzi scheme. Officials claimed they could not replicate Madoff's returns and even went so far as to invest $275 million in a Madoff feeder fund as a hedge against their own trading results. In 2011 that group became overly concerned that something was amiss and successfully withdrew the banks funds before the scandal broke. At first I thought this was just another witch hunt by prosecutors but after reading the facts I think JPM was guilty of not raising the red flags to regulators and today they are paying the price. All of the $2.6 billion will go to reimburse Madoff investors.
I just want to know when all the disasters at JPM will be over. Once the problems are behind them I want to be an investor in a bank that can take $25 billion in fines, charges and losses and continue to not only grow but increase profits. I am waiting for closing bell that signifies all the major challenges are over.
Winter storm Ion currently breaking cold weather records, some older than 30 years, has created havoc in the airline system. Flightaware said there were 12,000 flights cancelled over the last four days including 2,800 today alone. Over the same period 35,475 flights were delayed. Problems were extreme cold and blizzard conditions in many parts of the Midwest and Northeast. In some places in the country this morning it was colder than Antarctica. Temperatures in the -30s and even lower were breaking water mains and allowing snow and ice to pile up so high that trains were forced to shut down. For the airlines the extreme cold was freezing fuel lines and causing extreme icing on planes that required them not to fly. In Indianapolis all driving except for emergency traffic was prohibited.
In Illinois AAA was receiving more than 650 calls per hour for vehicle assistance.
Storm Hercules in December is thought to have reduced retail sales by more than -1% and Ion is going to have an even greater impact. Fortunately conditions should return to normal by this weekend when higher than normal temperatures are expected to return. Winners from the cold weather could be VF Corp (VFC) makers of the North Face and Timberland brands of cold weather clothing. Under Armor (UA) is expected to see sales rise as their undergarments help keep outdoor workers warm. Lastly Deckers (DECK), makers of the UGG boots, are expected to see sales improve significantly.
We are about to see the start of Q4 earnings when Alcoa on Thursday. This earnings cycle could contain some significant surprises. Earnings estimates of +5.7% growth for the S&P are likely to be overstated. So far in 2014, only 4 days into the new-year, analyst downgrades are running at the highest pace since January 2009 when the market was in free fall. We know that guidance warnings by corporations were running 10:1 over positive guidance in December. This suggests that either the bar has been lowered so far that everyone will be able to cross it or there are going to be a lot of earnings disappointments.
So far the earnings questions have not hampered the markets. The -1.1% decline in the first three trading days was just a hiccup where investors sold winners once we were into a new tax year. The short squeeze today worries me because there was no follow through. That could be earnings overhang or simply fear of the jobs numbers on Wednesday and Friday.
The S&P rebounded from Monday's lows at 1,825 but stalled right at short term resistance at 1,839. Other than the opening spike the trading was lackluster the rest of the day.
The S&P did honor the longer term uptrend support although it was rocky. The rebound back above 1,830 is somewhat bullish.
For the rest of the week I see 1,845-1,850 as strong resistance but a break over those levels should create a significant short covering rally as we breakout to new highs in 2014. Support is 1,830-1,825 and a breakdown below 1,825 would signal a new downturn in the market and possibly the start of a decent correction.
The Dow never declined to uptrend support at 16,350 and easily held over short term round number support at 16,400. The rebound today took the Dow to within 47 points of a new closing high. Resistance from Dec-31st at 16,560 was touched at the open but the Dow faded the rest of the day to close -32 points off its high.
The Dow performance was somewhat bullish since fund managers should be rotating out of their window dressing stocks. The +105 point gain suggests there is no wholesale exit by fund managers and they may be looking for new highs after the payroll numbers.
Support is 16,400 and resistance 16,560.
The Nasdaq punched through resistance at 4,150 at the close rather than the open and while that could have been just some late day short covering it is slightly bullish. This suggests any further gains would immediately target the 2013 closing high at 4,176. The Nasdaq sold off harder than the Dow/SPX but now it appears it may be the strongest if this trend holds.
Support is well below at 4,100 and it would probably take a serious market event to retest that level.
The Russell 2000 rebounded .9% but slammed to a dead stop at 1,160 and resistance for the prior three days. There was a stronger intraday drop on the Russell than with the other indexes and the intraday volatility so far in 2014 has been high. If the Russell can move over 1,160 it would be bullish for the broader market with new high resistance at 1,165.
The increased volatility in the Russell worries me slightly but until we get past the payroll reports the market will continue to be uneasy.
The rest of the week is dependent on the payroll numbers and the implied reaction by the FOMC. The minutes on Wednesday are going to be important but not as much as the Nonfarm numbers on Friday. I am currently neutral on the market. At Monday's close I was turning negative but today's short squeeze had just enough positive factors to get my hopes up. Futures are down slightly late Tuesday but there is a lot of darkness before morning and anything is possible. Beware the ADP payroll before the open and then trading accordingly.
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