The Nasdaq struggled all day to remain above the flat line but eventually closed with a minor gain.

Market Statistics

It was a tough day with the Dow rising +137 early in the day to 16,407 only to fall back at noon to 16,294. Fortunately the index recovered thanks in part to IBM's $6.79 gain that added 56 Dow points. The Nasdaq spiked to 4,274 at the open for a gain of +47 points but then collapsed with a -71 point drop into midday. The index rebounded slightly to post a +8 point gain and close at 4,234. The Nasdaq has been the market leader for the last three days and techs have been leading us into a ditch.

The market opened higher as a result of better than expected Consumer Confidence and New Home Sales. Consumer Confidence rose from 78.1 to 82.3 and the highest level in six years. The gains came from the expectations for the future rather than how consumers felt today. The current conditions component declined slightly from 81.0 to 80.4. The expectations component soared from 76.5 to 83.5 and its highest level since September. Apparently the cold weather grip on consumers has broken and they are looking forward to spring.

However, those respondents planning on buying a car fell from 13.8% to 12.6%. Those planning on buying a home fell from 5.7% to 5.4%. Appliance buyers rose from 47.9% to 49.7%. Expectations for the job market declined but those who felt business conditions will decline fell from 13.2% to 10.2% and the lowest level since August 2007.

New home sales for February declined from 455,000 to 440,000 annualized units but that was better than estimates for 432,000. The pace of sales declined -3.3% over the same period in 2013. The decline was expected as a result of the worst winter in 10 years with weekly severe storms in February. Sales in the Northeast declined from 34,000 to 23,000 as a direct result of the weather. However, the Midwest was also cold and sales rose from 49,000 to 67,000. Sales declined in the South from 259,000 to 255,000 and West from 113,000 to 95,000.

Months of supply rose to 5.2 from a low of 4.9 in November. Average new home prices fell from $265,900 to $257,200. There were 189,000 new homes for sale in February. As the weather improves builders will accelerate completions and inventory will rise. A lack of inventory in the West is slowing sales. Builders are expecting a strong selling season this spring.

The Richmond Fed Manufacturing Survey slipped deeper into contraction with a decline from -6 to -7 for March. New orders were flat at -9 but back orders declined from -8 to -13. Employment was flat for the second month at zero, down from 14 in December. The weather was blamed once again.

In the services portion of the survey the headline number rose from zero to 5.0 and the highest level since November. Employment fell from +7 to -4. Retail employment rose from -8 to -3 but still in contraction. Overall the services component improved slightly and it should improve significantly over the next two months as the cold weather fades.

State Personal Income slowed from 1.1% growth to 0.6% in Q4 as a result of lower farm product prices forcing farm wages lower. For all of 2013 wages rose +2.6% but that was significantly worse than the +4.2% growth in 2012. However, 2012 was helped by the acceleration of bonuses into the last quarter to avoid the rising tax rates when the payroll tax holiday ended on January 1st 2013. This report is ignored by the markets.

The only material report due out on Wednesday is the Durable Goods for February. The big events are on Thursday with the last revision of the Q4 GDP and the Kansas Fed Manufacturing Survey. That wraps it up for the week with the reports on Friday mostly ignored.

It was a quiet day in the market despite the volatility. The biggest impact on the market was IBM. The company announced a collaboration with Pitney Bowes (PBI) to use IBM's BlueMix platform-as-a-service to develop new hybrid cloud location services using big data to link customers, geographic locations, connections and networks to deliver more personalized services and "contextually relevant experiences." I copied that out of the press release and I have no idea what it really means.

That was not the only IBM news today. IBM said it had been selected by BP to integrate and manage the company's business applications globally as well as provide enhanced service desk support for 60,000 employees and 80,000 devices in the America's and Europe.

There is still more. IBM and PSA Peugeot Citrogen announced plans to use IBM Big Data and Analytics and IBM MobileFirst solutions to launch a new era of connected vehicles. They are going to integrate "massive amounts of data" from cars, phones, traffic signals, lights and other sources and analyze it in real-time to deliver on the promise of the connected vehicle.

This barrage of good news for IBM powered the stock to a +$7 gain and breaking through resistance at $188.50. IBM broke out to an eight-month high at $195. I am sure a lot of that was short covering since earnings expectations are still cloudy.

Disney (DIS), another Dow component, announced a deal to buy Maker Studios, a YouTube-based video supplier, for $500 million. Maker Studios generates more than 5.5 billion views a month and has a subscriber base of more than 380 million. If Disney and Maker can grow the service to reach specific targets Maker will get another $450 million. The Maker network targets the younger millennial generation, which consumes more online content than any other demographic. Basically Disney is buying more digital content and an outlet for its own digital productions. Unfortunately Disney shares did not get the same pop as IBM.

Dow component Caterpillar (CAT) rallied nearly $2 after the company said it would willingly participate in a Senate subcommittee hearing on April 1st looking into the company's "offshore tax strategy." Caterpillar said "We are a leading U.S. exporter and pay U.S. income tax on sales in the United States as well as on export sales." Caterpillar said the company's tax rate averaged 29% and "relatively high for a company with substantial earnings generated from business activities outside the United States." The committee is also looking into offshore strategies used by Apple and Microsoft. Credit Suisse told the committee in February the bank had helped American account holders avoid as much as $12 billion in taxes.

A former Caterpillar tax manager alleged in a 2009 court appearance that the company used offshore operations in Switzerland and Bermuda to avoid an estimated $2 billion in federal income taxes by attributing up to $5.6 billion in U.S. sales to a unit in Geneva.

Carnival Corp (CCL) shares lost -5% after the company reported better than expected earnings but issued guidance that disappointed. Carnival reported earnings of zero compared to estimates for a loss of 8 cents. Revenue of $3.59 billion beat estimates of $3.56 billion. Unfortunately the good news stopped there. Guidance for the current quarter ranged from a 2 cent loss to a 2 cent gain and analysts were expecting a 7 cent profit. For the full year the company now expects $1.50-$1.70 but analysts were expecting $1.73. Carnival had previously guided to a range of $1.40-$1.80. The company sais costs excluding fuel were expected to rise but fares were still in discount mode. They are "cautiously optimistic" that fares will improve but they have a lot to overcome. After the cruise industry suffered a horrible couple of years with wrecks, fires and sickness there was heavy discounting to fill cabins at any price. Add in a couple new ships and there are more rooms than there are customers.

Walgreen's (WAG) blamed the weather and a smaller profit from generic drugs when they reported earnings today. The company said a wave of generic drugs hitting the market in the year ago quarter helped profits then but produced some tough comparisons for this year. Adjusted earnings declined -5.2% to 91 cents and analysts were expecting 93 cents. Revenue rose +5% to $19.61 billion and in line with estimates.

Despite the severe weather the drugstore dispensed a smaller number of flu shots thanks to a mild flu season. On the positive side same store sales rose +4.3%. The weak earnings came after four quarters of double digit profits. They are going to close 76 stores this year in an effort to weed out nonperformers. They currently have 8,210 store nationwide.

CSX Corp (CSX) was placed on the top pick list by Bank of America saying the railroad is likely at the trough of its utility coal declines. BAC reiterated a buy rating with a $32 price target. With natural gas at $4.40 and well over the breakeven point for burning coal at $3.00 the utility companies are moving away from gas and back to coal. Peabody Energy (BTU) has said repeatedly that thermal coal use was increasing because of the high price of gas. Coal and oil are two staples of the railroad system today and the rail companies have all complained about the decline in coal shipments in 2013. That decline is over and demand is increasing. With natural gas inventories at a ten-year low and active gas rigs drilling for gas at a 19 year low the price of gas long term is going to stay over that $3 breakeven point.

Five Below (FIVE) reported earnings after the bell that beat estimates. Earnings of 47 cents and revenue of $212 million beat estimates of 45 cents and $208 million. FIVE said same store sales for Q1 were expected to rise +3-4%. They guided for the full year for 86-89 cents and analysts were expecting 87 cents. Shares of FIVE rallied $5 in afterhours.

International Game Technology (IGT) said after the close it was cutting 350 jobs or about 7% of its workforce in response to difficult industry conditions. The company said the cuts would save $30 million this year and $50 million in future years. They also lowered guidance saying North American gambling revenue has declined more steeply than it expected. The international business was being hurt by weakening currencies and other problems. IGT now expects to earn $1.00-$1.10, down from $1.28-$1.38. They expect to earn 18 cents per share. Analysts were expecting 29 cents for the current quarter and $1.20 for the full year. Shares declined to $13.68 in afterhours trading.

King Digital Entertainment (KING) will begin trading on Wednesday after it priced its IPO at $22.50 per share tonight. That is the midpoint of the expected range and raised $344 million for the company and $150 million for early investors. A total of 22.2 million shares were offered. This is the definition of a "one trick pony." King is the producer of the addictive game Candy Crush Saga for smartphones and tablets. According to King they have 97 million daily active users. The company made $567 million in profits in 2013 as revenue rose 1100% to $1.9 billion. Candy Crush was the top grossing app on Apple iPhones in 2013. Most analyst believe revenues from Candy are about to be crushed. The popularity of the game has peaked and like most fads they tend to pass rapidly. The fact that the long awaited IPO only priced in the middle of its range rather than higher on strong demand.

Netflix (NFLX) continued to decline after the announcement of an Apple (AAPL)-Comcast (CMCSA) partnership. This deal will allow Apple to bypass the "last mile" congestion in the cable provider's public line. This will allow Apple to deliver more HD video-on-demand and live TV through its set top box to Comcast subscribers. It is expected to impact Netflix and shares of the company have declined -$62 over the last four days.

It was amazing that the market closed with gains after Philly Fed President Charles Plosser said this morning he would like to see QE end in October and he expects the Fed Funds rate to be 3.0% in 2015 and 4.0% in 2016. That is a huge increase from the 0-.25% rate we have today. This makes him the most hawkish member on the Fed and he is a voting member of the FOMC in 2014. None of the other Fed heads see interest rates at more than 3.5% by the end of 2016. He also warned that should the market get ahead of the Fed, which is almost guaranteed, the Fed would have to accelerate its rate hikes. He also said Yellen did not make a mistake with her comments on the "considerable period" being six-months.

Another hawk on the FOMC is Dallas Fed President Richard Fisher. He said today that the Fed will keep rates low for as long as it takes until the Fed is certain a sustainable recovery is in progress. This was rather tame considering past remarks. It suggests he is trying to soften that considerable period statement from Yellen that cratered the market last week. I warned then the Fed speakers would be trying to walk back that remark and so far only Plosser has pushed it even farther.

In late news tonight Germany's Bundesbank opened the door to QE in Europe. The bank said, "The ECB could buy loans and other assets from banks to help support the eurozone economy." That marks a radical softening of its stance on the contested policy. Mario Draghi has always said he will do "whatever it takes" but has failed to actually follow through on that statement. The European economy is still weak and inflation is very low. The president of the Bundesbank, Jens Weidman, said the ECB should consider purchasing euro zone bonds or top rated private sector assets. The Bundesbank has always veered away from QE and been a major factor in the ECB not pursuing that course of action. If the bank has really changed its position we could see a rapid change in ECB policy.

President Obama is in Europe trying to get the G7 leaders to agree on a course of action against Putin to prevent him from expanding his grip on adjoining nations. Today Poland called up 7,000 Polish workers as reservists and told them to report for active duty ASAP. Polish authorities claim this is routine BUT this has never happened before. The Polish Prime Minister said, "The world stands on the brink of conflict, the consequences of which are not foreseen...Not everyone in Europe is aware of this situation."

In a press conference in the Netherlands President Obama was asked about Russia as a threat to the U.S. and he replied, "Russia's actions are a problem. They don't pose the number one national security threat to the United States. I continue to be much more concerned when it comes to our security with the prospect of a nuclear weapon going off in Manhattan." While I agree with him that is probably not what a president should say. It does not build confidence and it suggests there are bigger threats to U.S. security than what is commonly known.


The S&P-500 traded in a 16 point range between 1,856-1,872 and closed at 1,865 and right in the middle. It was a lower high but not a lower low. It was an inside day and suggests there is still a lot of indecision in the market. The strong Dow gain intraday helped pull the S&P and Nasdaq back from negative territory but the final result was not exciting.

The press release on the Bundesbank and potential QE in Europe has lifted the S&P futures to +3 points around 8:PM. That is not a big bounce on what could be a major change in Europe. It appears the bulls are not yet back. Dip buyers are alive and well but they are not pushing prices higher. The biotech stocks are trying to find a bottom but there has not been a material rebound yet. The individual declines have softened and about 50% of the majors finished in the green today. That is a significant change from last week when the entire sector was crashing.

The improvement in that sector helped the S&P but there were still a lot of momentum stocks in crash mode. Google (GOOG) gained only 79 cents after dropping more than $60 over the last four days. Amazon (AMZN) gained just under $3 after losing -28. The hard selling may be over but there was no broad based buying.

The S&P needs to continue posting positive days. They don't have to be big days just a single digit gain would be fine until we are out of March. The end of quarter window dressing should kick in later this week but March is not a big month for that. The seasonal trend is for the last week of March to be negative. That is why posting any daily gain for the rest of the week would be a huge positive. April is normally very bullish but we have to get there first.

The S&P showed us nothing to trade on today. Support is 1,850 and 1,840 and resistance 1,875 and 1,883. We are riding the center line until something changes.

The Dow is a little better off than the S&P with a decent gain and a close near initial resistance at 16,400. The next material resistance is 16,457 followed by 16,505. The Dow benefitted from the big gains in IBM and JNJ but Visa and Goldman Sachs were big drags. Both GS/V are in declining trends so we have a headwind for any future gains.

The Dow may have trouble getting over that 16,400-16,457 resistance unless there are some decent headlines to provide the motive power. Support appears to be rising with 16,300 the first line of defense for tomorrow.

The Nasdaq is still the anchor dragging us lower or at least preventing any advances. The Nasdaq had another very volatile day with a 71 point range from strongly positive to strongly negative but clawed out a minor gain at the close. The strong support at 4,200 was not tested today but we came close at 4,203. Apparently dip buyers were poised and waiting.

With the biotech stocks trying to find a bottom I have hope that the 4,200 level will hold and the Nasdaq can assume its leadership role to the upside. This would require some of the big cap stocks like Google to post more than fractional gains. On the plus side Apple is finally breaking out to the upside. Apple broke over the 100-day average at 536 today. That resistance has held it back for a month. The deal with Comcast was the final headline to convince investors to climb onboard.

The Nasdaq has declined to uptrend support (blue) and that 4,200 level. In theory this should be enough support to launch a new move higher. If we do break below 4,200 it could get ugly with 4,100 the next material support followed by 4,000. We don't want to go there level if at all possible.

The bad news comes from the Russell 2000. The Russell closed fractionally negative and the chart does not look good. Bloomberg published an article saying the small caps were the most overvalued since the 1990s. Actually they said they were valued +26% more than the 1990s. The article said the Russell 2000 is trading at 49 times reported earnings compared to 39 times in March 2000. That is three times higher than the S&P-500. The Russell has rallied for seven straight quarters and the longest stretch ever.

Fed Governor Daniel Tarullo used the small caps as an example of why the Fed should be worried about creating risk in the financial markets.

These articles and comments appear to be weighing on the small caps while the big caps like IBM, CAT, UTX, etc are in rally mode. We could be seeing a serious bout of sector rotation and from small caps to big caps ahead of the normally weak "sell in May" period.

The Russell closed at 1,178 and not far above critical support at 1,172. At this point I don't have a lot of faith in that support. If it does fail it could be a rather large drop to the 1,100 range. I would use the Russell at 1,172 as your market indicator for the rest of the week.

I would be cautious on the market until the Nasdaq and Russell develop a positive trend. There are a lot of bearish charts on individual stocks so we are not out of the woods yet. Keep your powder dry until a real trend appears. These highly volatile intraday swings are evidence of indecision. Wait for that decision to be made and a direction to appear.

Enter passively, exit aggressively!

Jim Brown

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