The Nasdaq is going for the gold with seven wins in seven days. The Dow and S&P are tied for the silver with 6 of the last 7 days higher.
The Nasdaq closed at a new 13 year high by ONE point. The close on January 22nd was 4243.00. Friday's close was 4244.03. As we have seen in the Olympics even a hundredth of a second can determine the difference in medal positions and a one point win on the Nasdaq is good enough for a new 13 year high. The Nasdaq has closed positive for seven consecutive days and the best rally since July 2011.
The S&P is only 10 points away from a new historic high and the Dow is -420 points below its high. Both are riding a wave of increasing bullishness after a consolidation dip on Wednesday. The closer we move to those old highs the stronger the market is becoming.
The market overcame another round of bad economic data to post another day of strong gains. January industrial production declined -0.3% compared to estimates for a +0.4% gain. The weather got the blame once again with a -0.8% decline in manufacturing output. That was the largest decline in five years. Durable goods output declined -0.8% and motor vehicles and parts declined a whopping -5%.
Consumer sentiment was unchanged for February at 81.2 thanks to a small gain in the expectations component. Analysts had expected a minor decline to 80.7. The present conditions component declined from 96.8 to 94.0 while the expectations component rose from 71.2 to 73.0. Consumers said they were depressed over their finances and this is normal. When the credit card bills come due in January and there is not enough money left over for discretionary spending we see consumers begin to be depressed. This leads to lower purchasing power over the next three months. Two months of weak job reports also weighed on sentiment.
The constant stream of weaker than expected economic numbers has not hampered the market. Nearly every day now we have seen multiple downgrades to GDP estimates and nobody seems to care. Citigroup downgraded their Q1 GDP estimates from 1.5%-2.0% to +1.0% growth. This is typical of the downgrades we have been seeing.
The economics for next week will be focused on the FOMC minutes on Wednesday and the Philly Fed Manufacturing Survey on Thursday. The PPI and CPI will not attract much attention because there is no material inflation today. The three housing reports could be weaker than expected as a result of the severe weather over the last two months.
When we say cold weather we mean really cold. The Great Lakes are more than 90% covered in ice and that is closing in on the record of 95% set in 1979. Lake Erie, Huron, Superior are all 95% covered or more. Lake St Clair is 99.5%, Lake Michigan is 82.3% and Lake Ontario is 43.4%.
FlightAware.com said there have been more than 60,000 flights cancelled in 2014 and more than 75,000 since December 1st. More than 250,000 flights have been delayed so far this year. If you have been on an airplane that was not delayed you were in the minority. This is the most cancellations since 1979, which just happens to have been the record year for ice in the Great Lakes.
This means the weather will be the "kitchen sink" excuse for earnings in Q1 even though most companies were already warning about the quarter before the weather even became a topic. Art Cashin called it a "Get out of jail free card" for Q1 earnings.
That theory will be tested next week when Walmart reports earnings on Thursday. They already warned when their quarter ended on January 31st. Because of their fiscal quarter their Q4 earnings will have both December and January weather events. Analysts are expecting $1.60 in earnings, which is a -4% decline and their first negative quarter since January 2009.
Walmart is also struggling because of the cutback in the Food Stamp program, which is thought to be 5% of Walmart revenues. The point here is that Walmart earnings are going to be weak and their guidance will be critical to analyst estimates for other retailers and for retail in general for Q1.
Friday was not a good day for earnings. GNC Holdings (GNC) reported weaker than expected earnings of 63 cents, which missed estimates by a penny. They blamed a competitive environment and heavy promotions during the holiday period. However, the real damage came from the guidance for full year earnings of $3.18-$3.24 compared to analyst estimates for $3.46.
Stamps.com (STMP) reported earnings of 61 cents that beat estimates of 54 cents but revenue of $32.4 million was below estimates of $34 million. They guided for the full year for a wide range of $2.10 to $2.50 and analysts were expecting $2.54. The company said subscriber growth was slowing and they were going to move away from the low profit photo stamp business and from customers acquired from "enhanced marketing activities." That means they don't want the high acquisition cost users that don't stay long and don't use the application.
Trulia Inc (TRLA) reported adjusted earnings of 3 cents, which was well below estimates of 7 cents. Revenue was in line with estimates. Unique visitors were 35.3 million, up +49% from the year ago quarter. Total subscribers rose +3,300 to 59,700 with the average revenue per subscriber at $179. Guidance was in line with estimates but shares declined -18% on the report. The CEO said they were about to embark on a $45 million strategic marketing campaign to combat the $65 million campaign announced by Zillow. For a company that only made $11 million in Q4 that $45 million is a major outlay.
Zillow (Z) reported earnings on Wednesday and warned on future profits because of the high cost of advertising that would double S&M expenses to $37 million in Q1. Shares of Zillow were also down.
There is an advertising war about to begin between Zillow and Trulia and my money is on Zillow.
Agilent (A) reported earnings of 67 cents that beat by a penny but warned on 2014. They guided to $2.96-$3.16 and they had previously forecasted $3.03 to $3.33. Analysts were expecting $3.19. The company cited "challenges" in the aerospace and defense market. Shares fell -8%.
Shares of Weight Watchers (WTW) imploded after the company guided for earnings of $1.30 to $1.60 for 2014 compared to analyst estimates of $2.78. The company said it would release plans to "resize" its business in the second quarter and the costs associated with that restructuring were NOT included in the lowered guidance. They said membership fell -8.5% in Q4 and profits fell by nearly 50% to 54 cents compared to $1.03 in the year ago quarter. Revenue declined -11%. Membership trends have been bad and continue to be bad. Shares fell -28% and I would expect them to continue falling as a result of that guidance.
So far the Q4 earnings cycle has surprised everyone with 7.8% earnings growth and likely to be over 8.0% by the time the laggards report. This is the highest growth rate in two years thanks to aggressive stock buybacks reducing the number of outstanding shares. The beat rate is around 67% although the numbers are starting to get a little flaky because all the bean counters seem to have different criteria on how to determine a beat. However, Q1 earnings estimates are plunging since nearly every company is warning on 2014 guidance.
One company not expected to warn when it reports earnings next week is Tesla (TSLA). They are expected to report stronger sales and higher guidance. With used Tesla Model S cars selling for more than new ones it seems there is no weakness in demand. According to iSeeCars.com the average used Model S sold for $99,734. That is well above the MSRP of $71,700 to $94,900 fully equipped. The average selling price for a new car is $93,000. Several are listed on AutoTrader.com for more than $100,000 used. There is a 2-3 month wait for a new car so impatient customers are searching for them online.
The earnings event is expected to provide more information on the first deliveries to China and the progress on the "giga" factory to produce lithium-ion batteries for Tesla cars. The lack of batteries is the main reason Tesla can't ramp up sales to even higher numbers.
Another fire in a Model S was reportedlast week in Toronto bringing the total to 5 out of the 40,000+ cars on the road. Tesla said we don't know the precise cause but have definitely ruled out the battery, charging system, adapter or the electrical receptacle because these items were untouched by the fire. Seven Tesla employees visited the owner and surveyed the car and garage. They offered to pay for the damages but the owner declined. That is suspicious to me. Why decline an expensive repair job unless you are at fault in some way? Despite the five fires the Tesla cars have a much lower fire rate than gasoline powered cars. The rate of fires in gasoline cars is 5-10 times higher according to Tesla. Tesla shares declined -1.40 on the news. Earnings are Wednesday.
Twitter (TWTR) shares rallied $1 on Friday ahead of the first lockup expiration on Friday. Twitter employees will be eligible to sell up to 9.9 million shares on Monday. This is their first opportunity to cash out. However, the big hurdle is the expiring lockup on May 6th of 474 million shares. That will include shares owned by executives, directors and early backers with monster equity stakes from their venture capital investments. With the volume on Friday of 12.6 million shares the 9.9 million new shares available for sale on Monday should not rock the market. Just because they are available for sale does not mean all 9.9 million shares will be sold. Employees may hope the price returns to $74 and wait to sell rather than take the $57 today. The lockup expiration in May will be a very different story. Get your puts early.
Gold traders have a tiger by the tail. Gold has rallied from $1260 to $1320 over the last week and showing no signs of slowing down. The $1318 close on Friday was over the 200-day average at $1309 and the first time to trade over the 200-day since February 2013. There is a major short squeeze in progress and the gold bugs are showing up in droves. They point to the constant stream of weaker than expected economic data, the currency fluctuations in the global markets and their expectations for the Fed to halt the taper and even increase QE as the country slips back into recession later this year. Multiple gold miners have shut in reserves with a high cost of production until prices return to profitable levels and China is stockpiling gold on a massive scale according to multiple analysts. Barrick Gold wrote down reserves by $11.5 billion with $2.82 billion in Q4 alone. I am not going to expound on those points but the short squeeze is making believers out of a new flurry of gold investors.
After a double bottom at $1185 the price of gold is nearing crucial resistance at $1350. A breakout there would be very bullish. Gold posted its best weekly gain since August. An analyst at Stifel Nicolaus said the break over the 200-day targets $1600. Goldman Sachs reiterated their forecast for a drop to $1050 by year end.
Silver also broke out of three month consolidation to close at $21.48 and over the 200-day average at $21.12. Silver has been a laggard but a move over $23 could be powerful. This was the best week for silver since March 2008.
Does size matter in a correction? Apparently not since the broader markets only declined average of -7% before rebounding to almost completely erase the decline in only seven sessions. The constant call for a deeper decline of at least -10% went unanswered and now it appears the 2013 market has returned. Just remember, appearances can be deceiving.
When the bears were left out of the rebound without their 10% correction being fulfilled they are now preaching the double top mantra saying once we return to the highs a new decline will begin. While that is certainly possible I don't view it as probable today. Once we get there and see how the market reacts I may need to change my view but as of today the markets are acting very bullish.
The only warning I would make today is that volume during the week's rally has declined significantly. Friday's volume was only 5.9 billion shares and the lowest since January 3rd. However, we were heading into a three-day weekend and quite a few traders left early on Friday to stretch that weekend out even longer. The real truth is that there were probably quite a few that did not even show up for work on Friday because of the winter storm.
While a low volume day does not negate the gains it does put a question mark on the score card. If the S&P has even a mediocre day on Monday it could close right at those old highs of 1848 and the test of the bull market would begin. If we can move over 1850 there will be a bout of strong short covering. If we fail at the old highs the bears would load up again and the entire correction conversation would begin anew.
The S&P closed at 1838 and only 10 points away from its prior high at 1848, which should now be resistance. Support would be the Wednesday lows at 1816-1820. The S&P has sprinted for +101 points since the 1737 low on February 5th. That is overextended by almost any measure. It does not mean it is overvalued but simply overextended on a short term basis.
The spring to 1838 did appear to negate the right shoulder formation but it does not mean there is no decline in our future. Only a strong move over 1850 would put those rumors to rest.
The Dow still has the potential for a head and shoulders formation but it could take another week to prove it out. If the Dow runs another +400 points to 16,500 the S&P would probably already be well over 1850 and that could drag the Dow higher. The 16,200 level is the next material uptrend resistance dating back to January 2000. The shorter term trend shown in the red line predicts resistance at 16,400.
The Dow has a rough road ahead. Just getting to 16,500 will be a challenge after the +810 rebound over the last seven days. The consolidation on Wednesday helped and suggests traders are still willing to buy every dip regardless of how shallow or what caused it.
The Nasdaq could give us a preview of what to expect from the Dow and S&P when they reach their prior highs. The Nasdaq Composite made a new 13 year closing high by one point on Friday. If the bears are correct in their predictions about a new decline that starts when the indexes reach their prior highs then next week should be ugly for the Nasdaq. However, if they are proven wrong by a move to even higher highs on decent volume then we could be off to the races.
Support is 4195 and resistance could be 4275 (red dashed) and 4330 (red solid).
The Russell 2000 continues to underperform despite a strong day on Thursday. The minor +1 point gain on Friday with the Dow up +127 suggests fund managers are not yet convinced the rally is real. The 1150 level on the Russell is currently resistance but any further gains should put that in the rear view mirror. That would then put the focus on 1165 and the early January resistance. Support is 1144 and 1130.
China has $1.8 trillion in "trust" products and a large portion of those could default this year. More than 43% of these trusts come due in 2014 and 80% mature over the next two years. The trusts in China take investor money and lend it out to companies that can't get financing from banks. This is part of the "shadow banking" system that China is trying to control. Investors get a higher interest rate but recent defaults suggest the system is about to implode. In January the "Credit Equals Gold" trust was poised to default on $495 million in obligations until a mystery group stepped in at the 11th hour and paid investors. It is rumored the Peoples Bank of China funded the bailout group to delay the impending trust disaster.
Last week a trust known as "Songhua River #77 Shanxi Opulent Blessing Project" defaulted on payments to investors. The trust was relatively small at $48 million. The money was raised from wealthy clients of China Construction Bank, China's second largest lender. The promised yield was 9.8%. This was the fourth trust managed by Jilin Trust that has defaulted in recent months.
The amounts listed above are just a trickle compared to the $1.8 trillion in trust products of which $778 billion will mature in 2014. If this trend continues the resulting defaults could seriously undermine China's financial economy.
According to Bloomberg China's non-performing loans grew by $4.7 billion in Q4 to a record 592.1 trillion yuan. This prevents the banks from making new loans and the defaults in the trust sector are dramatically slowing new investments. China's financial sector is a slow motion train wreck and the end result could be ugly.
The economy is growing and that is why the Fed is tapering. At least that is what we are supposed to be thinking. The Fed started tapering before the unexpected miss in the December payrolls at +74,000 instead of +205,000. That was before the ISM Manufacturing posted the largest decline in new orders in 4 years. That was also before the unexpectedly weak jobs gains of +113,000 instead of 189,000 for January. Then there was the unexpected decline in retail sales to the slowest growth since 2009. There was also the unexpected decline in industrial production that was the most since 2009 and the sharpest drop in factory orders in six months. We are told not to worry because all of these events are due to the weather. I guess it has never snowed in winter before.
Comstock Partners pointed out that the economy was sluggish before the abnormal weather and QE tapering was launched because it was losing its effectiveness. In English that means the Fed was no longer able to push the markets and economy higher. Risks Are High in Coming Months
Citigroup cut Q1 GDP estimates from 2.0% to 1.0%
Barclay's cut Q1 GDP estimates from 3.2% to 2.2%
Credit Suisse cut Q1 GDP estimates from 2.6% to 1.6%
Philly Fed cuts Q1 GDP estimates from 2.5% to 2.0%
Are you sensing a trend here?
Copper prices have been stuck in a rut for the last year after declining -35% from the post recession bounce. There has never been a global recovery without a spike in copper prices. The lack of a rally suggests the global recovery is nonexistent. This is even more amazing now that Indonesia, the world's ninth largest copper producer, has halted exports. Prices should be soaring.
According to the Stock Trader's Almanac option expiration week in February has been up 7 of the last 8 years. However, it has been rocky and Monday and Friday have been down more than up. The last week in February has been down 12 of the last 20 years. Also, they pointed out that more than half of the bear markets over the last 114 years have occurred during phases of economic expansion. The economy does not have to be in the tank for a bear market to occur. Events outside the market such as wars, currency crisis, debt crisis, credit bubbles, etc, caused the bear markets. An expanding economy does not guarantee a rising market.
Enter passively and exit aggressively!
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"Any fool can buy. It is the wise man who knows how to sell."
Albert W. Thomas (Investor, trader, author of If It Doesn't Go Up, Don't Buy It!,)