A lack of positive headlines and a constant rehash of the negative events put traders to sleep and the markets drifted lower.

Market Statistics

The day's decline was not caused by a rush to sell but more of a buyer's boycott. There was nothing to stimulate the markets to the upside and there were plenty of leftover headlines that continued to put a cloud over investors. It was a lackluster day with low volume and the markets drifted lower on a lack of interest.

The economic reports were mixed but the one report that mattered was negative. The February NFIB Small Business Optimism Index declined -2.7 points to 91.4 and the lowest level since last March. Hiring indicators turned down and the outlook for the economy fell to a three month low. The future employment component fell from +12 to +7. Expectations for economic improvement declined from -11 to -19. The outlook for real sales growth declined from +15 to +3. The only components that showed improvement were the plans to raise prices, which rose from +19 to +23 and the plans to raise compensation, which rose from +11 to +14.

Weak sales trends and worries over declining economic conditions and increasing government regulations weighed on business owners. The NFIB surveys businesses up to 499 employees but those with less than 20 employees make up more than 75% of participants.

The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings rose only +1.5% in January to 3.974 million. That was only slightly higher than the 3.914 million openings and -3% decline in December. Private jobs openings rose +1.5% compared to a -5.5% decline in December. Government openings rose +2.2%.

Companies are not in a hurry to add employees given the economic conditions in early 2014. Construction hires rose slightly and retail hiring declined to 4.1% and the lowest level since June. The layoff rate rose slightly from 1.2% to 1.3% but that is very low. Companies are comfortable with their current staffing and they are waiting for the economy to improve before they increase their staff.

In the Wholesale Trade report for January inventories rose +0.6% compared to +0.4% estimates. Sales fell -1.9% and December's increase was revised down from +0.5% to +0.1%. The rise in inventories came primarily from autos at +2.2%, paper +2.8% and drugs +2.7%. Farm products declined -2.2%, furniture -1.2% and petroleum sales fell -7.5%. Wholesales struggled with sales to retailers in January and that pushed inventories higher. Obviously the weather was blamed for the declines.

The economic calendar for Wednesday is lacking any material data. Thursday's retail sales for February will be the highlight and there could be a negative surprise. Friday's PPI is expected to show inflation rose slightly at the producer level in February. Unless there is a major deviation from expectations the report will be ignored.

In stock news GM was a headliner after the Dept of Justice opened a criminal probe into the recall of 1.6 million cars because of a defect in the ignition switch that allowed the engine and other components including front airbags to turn off while the vehicle was traveling at high speeds. There are 13 reported deaths and numerous injuries from this defect. The problem first came to light ten years ago and it appears GM may have swept it under the rug in hopes it would not develop into a major expense. That was the wrong decision since the injuries continued to rise. The problem appears to be related to the weight on the key and bumps in the road. For instance if you had a heavy key ring with a lot of other keys and you hit a bump in the road the key could be jarred out of the "run" position and turn off the engine and other components even if the car was going at a high rate of speed. GM's solution was to use only the ignition key with nothing else on the keychain.

A House committee examining the GM issue gave the company until March 25th to turn over all the information about consumer complaints and their responses to those customers. Existing law makes it a crime to intentionally mislead the NHTSA about defects that lead to serious accidents. GM shares declined -5% on the news.

Tesla (TSLA) suffered a setback when New Jersey governor Chris Christie's administration approved a rule requiring sales of all new cars to go through franchise dealers. Direct sales of autos to consumers is no longer allowed. Tesla posted on its blog saying the governor's office "has gone back on its word" to delay the proposed "anti-Tesla" regulation until it could be taken up by the state legislature. Tesla has two stores in New Jersey and the company said it would halt sales of cars from those locations and force the layoff of 27 employees. "Having previously issued two dealer licenses to Tesla, this regulation would be a complete reversal to its long-standing position of the NJ Motor Vehicle Commission on Tesla stores." New Jersey is the third state, along with Texas and Arizona, to bar Tesla from selling cars direct to the consumer. Reportedly Tesla is trying to leverage the placement of their $5 billion Giga-factory to produce batteries in an effort to get the law changed in Texas. It will be interesting to see if Governor Rick Perry will lobby for the change to get 4,000 jobs and a major tax generator from the factory.

DuPont (DD) started the ball rolling for the Q1 earnings cycle by warning that weather in North America and the turmoil in the Ukraine would force it to report earnings below estimates for Q1. Analysts were expecting DuPont to earn $1.68 per share. DuPont did not give a revised estimate for Q1 but they did reaffirm the forecast of $4.20-$4.45 for the full year. Shares declined -2% on the news.

Fannie Mae and Freddie Mac (FMCC/FNMA) are going to be shutdown according to a bipartisan plan released by the Senate today. The plan would maintain government backing of mortgages but would eventually eliminate Fannie and Freddie. Holders of shares in the two companies would be wiped out. The two companies had a combined market cap of $8 billion on Tuesday. Anyone not selling those shares will eventually lose their investment.

Various hedge funds had bought shares of the mortgage companies after the 2009 collapse and actually had some nice paper profits but this proposed plan would wipe them out. Bill Ackman's Pershing Square paid $400 million for almost 10% of the two companies last October. His holdings were still worth $702 million after today's close. There are several bills in Congress to wind down the pair since they were taken over by the government as a result of the financial crisis. The two companies required a $188 billion bailout after the subprime crisis.

Herbalife (HLF) came under attack again by Bill Ackman when he released a report today that he claimed shows the company is operating in violation of Chinese laws. The report was based on third party research of Herbalife's complex compensation and recruiting plans in China. The report included interviews with current Herbalife employees and internal Herbalife documents obtained from a prior employee.

Ackman continues to claim that Herbalife is a pyramid scheme and he has a $1 billion short position to backup his beliefs. He said a major decline in HLF shares would give him a $2 billion profit.

Herbalife responded saying it remained confident its business in China was legal and would continue to prosper. The company said they "designed and implemented a unique business model in China that is in compliance with Chinese direct-selling and anti-pyramid regulations. The business model includes strict rules of conduct that prohibit, among other things, illegal recruitment, 'pyramid' activities, false product and income claims and conduct deemed illegal under Chinese law." Herbalife shares declined only 77 cents on the renewed Ackman attack.

Numerous hedge funds and institutional investors have taken bullish positions in Herbalife opposite Ackman. Apparently they are willing to support their positions by entering the market on days like today to keep the stock price from falling on the Ackman news.

Finally a deal! Men's Warehouse (MW) agreed to buy Joseph A Banks (JOSB) for $65 a share of $1.8 billion in cash. The five month takeover battle with multiple rejected offers has finally come to a close. Originally JOSB tried to buy its larger rival and that offer was turned down and resulted in multiple offers for MW to buy JOSB.

MW said it would terminate its recent offer to buy the Eddie Bauer brand and cancel a recently announced share buyback of $300 million. The JOSB chairman, Robert Wildrick, said he would leave the company after the sale and the combined company would be run by MW CEO Douglas Ewert. MW confirmed it had debt financing commitments from Bank of America and JP Morgan for up to $2.2 billion. The combined company will have 1,700 U.S. stores and sales of about $3.5 billion. JOSB was forced by its five largest shareholders to enter into talks to be acquired according to inside reports.

JOSB shares rallied +4% and MW shares rallied +5%. Apparently investors were just glad to have the fighting come to a satisfactory conclusion.

Urban Outfitters (URBN) shares fell -4.3% after the CEO warned that poor weather would contribute to lower sales and profits for Q1. American Eagle Outfitters (AEO) shares fell -8% after the CEO said it would only breakeven for the quarter and same store sales would decline in the "high single digits" compared to analyst estimates for a 2.3% decline. McDonalds (MCD) shares rallied +3.8% after the CFO said the company was looking at ways to "optimize our capital structure, while maintaining our long-term financial strength." That effort included analyzing general and administrative expenses and selling stores to franchisees in countries such as China, South Korea and Taiwan.

JC Penny (JCP) shares spiked to $8.67 after Citigroup upgraded the shares to buy from neutral saying the company will meet its revenue and margin forecasts this year. Recently JCP said same store sales would improve by mid single digits this year.

Copper prices continued to fall to a four year low as a result of the weak Chinese exports, the growing credit crisis and the decline in the yuan. China's first credit default in 17 years came last week and there are rumors of many more in the near future. China allowed Chaori Solar Energy Science & Technology to default on $14.7 million in interest payments on a five year bond. That is the first ever onshore bond default in China. By allowing the company to default they are sending a message that the implied government backing to corporate debt is no longer in force. Chaori is now exploring bankruptcy and/or sales of assets to pay its debt. Over the last 20 years investors put money into thousands of Chinese companies without regard to their ability to repay since the government never let any of them default. If default is now on the table those investors are going to be racing to sell their debt and escape the death spiral.

Copper is falling because it was used as collateral for numerous loans and may need to be sold to cover the debt. Much of the nations copper inventories are collateralized to more than one loan and we could see a spiral of credit defaults as the collateral is sold off at distressed prices to satisfy the primary debt. Add in the sharp decline in exports of manufactured products of -18% last month and suddenly there is a race to the exits. Copper prices have declined -14% since the January highs.

The Crimean problem has not improved. Germany told Russia it had to change course in Crimea by next week of risk more sanctions. The EU will discuss harsher penalties on March 17th barring "obvious changes in Russia's action." German Foreign Minister Frank-Walter Steinmeier warned a planned March 16th referendum should be cancelled because the outcome will be ignored. The EU announced a three-stage sanction process last week. Britain hosted a meeting today to compile a list of people who could be hit by sanctions. The U.S. banned visas for Russian officials and others it said were complicit in violating Ukraine's sovereignty. President Obama authorized financial sanctions including seizing assets. Several EU leaders have warned that the annexation of Crimea by Russia is only the first stage of dismantling Ukraine's independence.

The continued headlines from the Ukraine, the declining economy and credit problems in China and the weak economic growth in the U.S. weighed on the markets and pushed them farther below their recent highs. The S&P rallied to 1,882 at the open but that was the high for the day. It was a slow decline from there but it was pretty consistent once the trend began. The index closed only 3 points from the low of the day.

The 1,865 level appeared to be support but analysts are now targeting stronger support at 1,840 if the decline continues. When we are this close to new highs after the strong rebound from the February lows it is only normal to see some backing and filling as investors take profits at the highs and look for a dip to get back in. If we do get a dip to 1,840 I would be a strong buyer at that level assuming the news flow did not change.

Resistance is 1,882 and support 1,840.

The Dow hit a high of 16,460 at the open and closed at 16,352 more than -100 points lower. It would have been a lot worse but the gains in McDonalds and Visa offset the losses in Goldman Sachs and United Technology.

The Dow closed just above minor support at 16,340 but is vulnerable for a decline to stronger support at 16,100. We are at the point where one more negative news event could push a lot more traders into profit taking mode. Right now we are seeing some light dip buying but with the negative headlines stacking up it may only take one or two more to force a change in short term sentiment.

Resistance 16,450, support 16,100.

The Nasdaq found round number support at 4,300 but it may not last. Real support is in the 4,250 range and below that level we could end up in free fall. The major decliners were the big names such as PCLN, GOOG, TSLA, BIDU, etc. The momentum stocks are failing and that is not a good sign. When the momentum runners are not seeing the dips bought that suggests sentiment may be weakening and we need to watch for the market to accelerate.

Resistance 4,350, support, 4,250.

The biggest evidence of a change in market sentiment came from the Russell 2000. The Russell index declined -13.5 points of -1.12%. That was twice the percentage drop of the other indexes. The Russell appears to be picking up speed to the downside and that is not a good sign. With a close at 1,187 and support at 1,165 that sets us up with the potential for another -22 point decline. There is light support at 1,178 so there is the possibility the decline could slow.

In the process of our nightly research we normally look at somewhere between 400-700 charts a day. Over the last two days the number of charts showing significant declines has increased significantly and the size of the individual declines is growing. It started with the momentum stocks late last week and has now progressed to the second tier gainers. This is starting to worry me but given the headlines in play I am not surprised to see some selling. However, if this continues for another day or two it could morph into something more serious. The dip buys have been very weak and it appears market sentiment is changing. I would be hesitant about indiscriminate buying and look for the strongest stocks you can find.

Whenever we get a decent dip in the market the hidden jewels will appear. These are the stocks with small gains or a fractional decline when the rest of the market is moving lower. These are the stocks that normally move the fastest when the next rebound begins.

I have mentioned several times that the first two weeks of March are seasonally weak. The market generally improves around March expiration and then rallies into the April earnings. Nothing has changed my outlook for an April gain but I am targeting a little lower level on the S&P at 1,840 for a dip buy.

Enter passively, exit aggressively!

Jim Brown

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