You may not look a gift horse in the mouth but we should question the Tuesday turnaround.

Market Statistics

On Monday's selloff the volume was huge at 9.55 billion shares. The advance decline line was 6:1 in favor of declining shares with 5,898 declining and 1,058 advancing. Volume was 9:1 negative with 8.5 billion shares declining and 952 million advancing. This was a decent market flush but normally with we get a flush of the weak holders it is followed by a strong rebound. Monday was not a strong rebound. It was listless and on mediocre volume of 7.6 billion shares. The A/D line was only 2:1 positive with 4,573 advancers to 2,290 decliners. It was hardly an enthusiastic rally.

There was not even a decent short squeeze. The Dow actually turned negative for a brief time after the open and then moved up slowly to its peak at 1:PM at 15,481. The Dow faded from there to set an afternoon low at 15,392 almost -100 points off its high. It did rebound into the close but that was also muted.

The Dow is an index of only 30 stocks. That makes determining direction a little easier than the broader indexes. I scanned the charts on all 30 stocks and only 4 of them were showing a positive short term trend. Those were CAT, DD, MRK and PFE. There were 19 stocks with positive gains today but in almost all cases the rebound was lackluster and not suggesting it would repeat the gains on Wednesday.

Weighing on the market was a -4/2% decline in the Japanese Nikkei to a four-month low. The Nikkei rallied +57% in 2013 and it is now down -14% year to date. Obviously there is some profit taking in progress and it could continue trading lower. The Hang Seng lost -2.9% and China's Shanghai Composite was closed for the Lunar New Year. The majority of the European indexes were also in the red.

The economic calendar was weak and led by the Factory Orders for December. The headline showed a drop of -1.5% in orders and the weakest since July. This compares to a +1.8% gain in November. Nondurable orders rose +1.1% and durable goods orders declined -4.2%. Backorders declined from 0.9% to 0.4%. Durable goods shipments declined -1.7%.

This was not a good report. It came after a sharp drop in ISM Manufacturing from 57.0 to 51.3 and a sharp -4.3% decline in durable goods orders last week. Analysts are blaming it on the weather but I think that is turning into a kitchen sink excuse. The drop in the ISM was the largest single month decline since 2001.

The ISM New York report showed a continued improvement in the New York area with the index rising from 615.4 to 622.6. New York has seen the fastest three-month expansion of activity since early 2011. All of the internal components were positive except for the six-month outlook, which declined from 73.2 to 70.0. The employment component surged from 55.1 to 60.7 for the biggest increase in hiring in years.

Unfortunately the ISM New York report is normally ignored by the market as being too localized.

The calendar for Wednesday is headlined by the ADP Employment report and the ISM Nonmanufacturing report. The ADP report is expected to show a gain of +238,000 jobs. The ISM Nonmanufacturing was expected to show a slight gain but after the negative surprise in the ISM Manufacturing I believe we could see a lower number.

The estimate for the Nonfarm Payrolls on Friday has not changed. The official consensus number is for a gain of +175,000 jobs and an upward revision to the December number of +74,000. This is going to be the key report for the rest of the week.

It is possible the December number was impacted by weather but the same could be said about January since it was the coldest January in 30 years. This will definitely be an interesting report.

The big news in earnings for the Day was Michael Kors (KORS). The company posted earnings that increased +73% to $1.11 and easily beating estimates of 86 cents. Revenue surged +59% to $1.01 billion and beat estimates for $859 million. Same store sales rose an amazing +24% compared to +21% in the prior quarter.

Not only did they blow away the Q4 estimates but they predicted same store sales growth in the current quarter of 15% to 20%. Kors has the retail division and the wholesale division where they partner with others to sell merchandise in their stores. The retail sales division saw sales rise +51.3% with +27.8% same store sales growth. They opened 89 new stores in 2013. The wholesale division saw sales rise +68.2% and licensing revenue rose +59%. Gross margins rose 100 basis points to 61.2%.

If you thought all those numbers were good you have not seen anything yet. European sales surged +144% with a whopping same store sales growth of 73%. Kors has barely broken the surface in Europe and sales could continue to explode as they open more stores.

Kors was the highlight of an otherwise drab retail sector. Coach, Ralph Lauren, etc, barely broke even in a highly promotional shopping season and Kors blew the doors off.

Shares of KORS rallied +$13 or +17% on the news to a new high at $89.92. We were long Kors in the Ultimate Investor Newsletter on a fundamental play.

YUM Brands (YUM) reported earnings of 86 cents on revenue of $4.18 billion. Same store sales in China declined -4% with U.S. sales declining -2%. YUM is still fighting a sharp drop in sales in China on a chicken scare in 2012. Two suppliers to YUM were shipping meat with too much antibiotics and growth hormones but the problem was corrected in early 2013. They had just about recovered the lost sales when a new outbreak of bird flu broke out again in China. More than 100 cases of human H7N9 avian flu have been reported with more than 20 deaths. This has caused another drop in sales of chicken. Tyson, a supplier of chicken to China, said demand was down about -30%. Tyson is only one of roughly 30 chicken suppliers to Yum in China.

Despite the sale declines Yum CEO reaffirmed guidance for 2014 and expects 20% EPS growth in 2014 and re-establish the prior trend of double-digit EPS growth.

The YUM chart has no trend as a result of the various chicken and bird flu problems over the last two years. The spike today may be an opportunity to sell for those investors that mixed the rally in November. Once YUM does establish a trend I believe they will be a good long term hold.

Arm Holdings (ARMH), the maker of chips used in most smartphones, reported a loss of $10.1 million for the quarter. ARMH shares declined -9% on the news and triggered short sale restrictions. Shares eventually rebounded to close down -4% or -$2.

Aflac (AFL) said profits rose +17% to $1.45 per share, up from $1.24. Revenue declined -9% to $5.8 billion due mostly to the yen/dollar exchange rate. Analysts were expecting $1.38 and $5.9 billion. AFL shares rose +75 cents.

Gilead Sciences (GILD) reported earnings of 55 cents that beat estimates by 5 cents. Revenue was $3.2 billion compared to estimates of $2.85 billion. The company did not give an earnings forecast but they did project revenue of $11.3-$11.5 billion. Shares rallied +4%.

Archer Daniels Midland (ADM) reported adjusted earnings of 95 cents compared to estimates of 85 cents. Revenue of $24.14 billion was slightly below estimates of $25.34 billion. Shares of ADM declined -2%.

Toyota Motors (TM) reported earnings that increased +400% from 99.91 billion yen to 525.46 billion. Revenue rose from 5.318 trillion yen to 6.585 trillion. Toyota sales were helped significantly by the sharp drop in the yen. TM shares declined -26 cents.

Boston Scientific (BSX) reported earnings of 21 cents compared to estimates of 13 cents. The company cited improving overseas demand for cardiac defibrillators. Sales in the U.S. were choppy. The company said the economic downturn has reduced the demand for healthcare products. The new devices are so expensive that people not in insurance can't afford them and insurance companies are requiring higher copays for the devices. Shares of BSX were flat on the day.

Eaton Corp (ETN) reported profits of $1.08 that beat the street by 2 cents. However, the company issued guidance that was right in line and margins that disappointed. The earnings beat was due mostly to a special tax rate. Margins declined from 15.25% to 14.9%. Shares fell -2.3% on the news.

UBS (UBS) reported earnings of $1.02 billion that was three times what analysts expected. UBS called the year "transformational" as it lowered its risk profile and reduced its loan loss reserves from 28 billion francs to 22.5 billion. The bank is raising its dividend by 66% and promised to pay out 50% of its profits once the new Tier 1 common equity ratio hits 13%. It rose to 12.8% last quarter. UBS shares rose +6% on the news.

Buffalo Wild Wings (BWLD) reported earnings of $1.10 that beat estimates by 3 cents. However, revenues of $341.5 million missed estimates of $347.56 million. The company reaffirmed a goal of 20% net earnings growth in 2014. Same store sales for company owned stores was 5.2%. Earnings rose +23.6% and revenue +22%. Shares rose +$2 in afterhours.

Earnings results for the quarter deteriorated somewhat after a flurry of earnings misses on Friday. More than 72% were beating estimates last week but that has fallen to 68% this week. Earnings growth has risen to 7.4% for the S&P but revenue growth is lagging at +2.7%. The number of companies warning on the current quarter is still in the 59% range.

In a non earnings jump Furiex Pharma (FURX) rallied sharply after the company said a late stage test of their Irritable Bowel Syndrome drug met goals in a late stage study and the drug is on track for submission to regulators later this year. The structure of the recently completed research on eluxadoline has already been approved by the FDA and the European Medicines Agency. The drug has already received the FDA fast tract designation. The recent trial consisted of 2,400 patients. Furiex said about 28 million patients are affected by IBS. Shares rallied +130% or +$60 on the news.

Facebook (FB) turns ten years old today. Ten years ago a Harvard sophomore, Mark Zuckerberg, created a website called to let classmates find their friends online. By 2007 Facebook had 30 million users compared to MySpace at 200 million. Today more than 1.23 billion people are Facebook users or roughly 17% of the world's population. Foreign language versions began in 2008 with a Spanish language version. The website has become a cultural revolution and allows a billion people to track not only their close friends but track down long lost friends and relatives and reconnect with them in a personal way. From the dorm room Facebook has grown to be a $150 billion company with 6,337 employees. When Zuck dropped out of Harvard to work on Facebook his friends and relatives counseled him against it. Get your degree so you can have a future and make some money. Were they ever wrong.

When Facebook was born there were no smartphones or tablets. Everyone used a desktop PC or a laptop. Three years later the first iPhone was introduced and the mobile revolution was born. Today you can even have a Facebook account without Internet access, a computer or a smartphone. You can establish a text only account where your phone number is your identifier. Over 100 million users connect to Facebook in this way. Can you imagine what our future looks like ten years from now?

The S&P rebounded from Monday's closing low at 1,740 to close at 1,755 today. It was a decent dead cat bounce but it was not a bullish signal. The 100-day average at 1,770 is well above and the January high at 1,850 is much higher. The risk as I see it is a failure of this rebound and another leg lower. The S&P has already broken the 5% level where all the 2013 declines found support. That suggests we are at risk for a full -10% correction.

Obviously there is no guarantee of a continued fall and market can choose to rebound at any point. However, by falling below 1,770 the S&P has negated that support and it is now resistance. Breaking below the 100-day average is a serious technical failure. That average has held the prior three dips in 2013. This breakdown puts the markets on dangerous footing.

Readers have asked why we care about the swirling problems in the emerging markets. We should care because 50% of the sales from S&P-500 companies are made into the emerging markets. If their currencies are collapsing then sales will slow because products denominated in dollars will become more expensive.

We already know that 59% of the S&P companies, which have reported earnings, have warned on future guidance. This means they are expecting lower sales and profits in Q1 and that is the highest warning rate since the Great Recession. Does it mean we are headed for a bear market? Probably not but it does mean institutional investors like pension funds will be allocating less money to equities and more to bonds. We are already seeing that flight out of equities and into treasuries. This may be just temporary but as long as the global headlines are spreading unrest the smart money will be headed for bonds.

Late today S&P cut the credit rating on debt issued by Puerto Rico to junk. This is especially critical since the country was preparing a $2 billion bond sale to alleviate some of its short term problems. Puerto Rico has $77 billion in outstanding debt and it is in trouble. The downgrade from S&P will only cause more trouble with nearly $1 billion in penalties and other costs tied to variable rate demand obligations and other securities. Many institutional investors can't hold securities rated as junk so they will be selling them into the market.

While the downgrade of Puerto Rico is not the end of the world it will force a rethinking of municipal debt in the USA. This is a hit to sentiment and it came at the same time as the emerging market currency crisis. This could weigh on the equity markets since they are already unstable. The downgrade limits future debt sales by Puerto Rico and they could easily end up with a cash shortage and a possible default that will further disrupt the markets.

When unexpected events appear they tend to cluster. Each event by itself would be relatively insignificant but once the first domino falls the next domino has more significance. Five to six dominos later and it becomes a real problem. The emerging market issues seem to have improves over the last couple days so maybe it was just a brief scare made worse by the already weak equity markets.

I am not bearish on the market today. I view the decline as a buying opportunity but I want to buy it at the -10% mark on the S&P instead of today.

The Dow, like the S&P, has broken significantly below prior support. At the 15,445 close it is only about 550 points away from the 10% correction level. There is no material support until about 14,750. This means the Dow could easily continue its freefall. Earlier I mentioned that 26 of the 30 Dow stocks have charts with a negative trend. I suggest you load your favorite charting program and check out all 30. It should give you a different view as to our chances for an immediate rebound. However, since gains in only 2-3 stocks can have a dramatic impact on the Dow there is no guarantee it will continue to fall. Resistance should be prior support at 15,700.

The Dow declined -326 points on Monday and recovered +72 today. That is only a +22% retracement of that drop. I don't see that as anything but a lackluster oversold bounce.

The Dow did break below the 200-day average on Monday but the Dow is not reactive to moving averages because of the thin 30 stock price weighted composition.

In the weekend commentary I suggested the 4,000 level on the Nasdaq should hold for at least a trading bounce. That is exactly what we got. The 4,000 level held on Monday despite some serious selling efforts. There were multiple penetrations slightly below 4,000 with the close at 3,998. Today's +34 point rebound was a decent bounce but it recovered only one-third of the -100 points the Nasdaq lost on Monday.

I believe the 4,000 level is the line in the sand for the Nasdaq and I would look for a dip to 3,895 if that level breaks.

The Russell 2000 collapsed to major support at 1,096 and held on the first attempt. This should be strong support but that does not mean it can't be broken. The Russell did break below the 100-day at 1,115 and that produced a technical sell signal. Watch 1,096 as the line in the sand for the broader market. If the Russell support fails the big caps will not be far behind.

On CNBC's Fast Money late today they interviewed Terry Burnham, an economics professor from Chapman University. He withdrew $1 million in cash from Bank of America because he felt the bank was not safe. He warned that their exposure to emerging markets, their leverage and lack of insurance to cover his full account made them a risk. He said BofA was not paying any material interest on his account and if another crisis hit he would not be able to get his money out. He had written numerous articles on the risk to the banking system and the risk to the system the Fed had created. His articles were on PBS and some related websites. After the interview I went and read several of his articles and sent the links to other analysts. About 30 min later they responded that all the pages had been taken down. At first I thought maybe it was just because the servers were too busy with the thousands of people clicking through to find out why BofA was a risk and what he recommended you do with your money. I immediately wondered if some agency, and not Burnham, quickly killed all the pages to prevent a run on BofA and other banks. His warning was not BofA specifically but all the large money center banks.

Update: As I was preparing to send out this commentary I checked the primary link again and it was back up. I don't know if this temporary or permanent but I am providing the link here: Is Your Money Safe at the Bank

My point here is that we never know when the next big event will occur and it could start out as something as simple as a professor in economics warning that our banks are not safe.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email