The major indexes closed at critical support levels where one false step could plunge us into the correction abyss.
The Nasdaq gave up another -3% for the week but the damage would have been a lot worse were it not for the +130 point rebound early in the week. Still the Nasdaq Composite closed exactly on the 4,000 level and only +3 points above the low for the year. This is a VERY critical support level. The Nasdaq has declined -8.1% from the 4,358 closing high on March 5th. A continued decline would target 3,922 and a full 10% correction, or worse.
The Russell 2000 lost -3.6% for the week, now down -8% from the highs, but still above critical support at 1,096. The 1,111 close is just above the 200-day average at 1,105 and that may have been what halted the decline when the index hit 1,107 intraday.
The Dow gave back -386 points for the week to close just above the psychological support at 16,000. This is a two month low but even at this level the Dow is only down -3.3% from its 16,573 high.
The S&P lost -2.65% for the week and most of that came in the last two days with a -57 point drop. The S&P closed at 1,815 and well below the 100-day average at 1,828. This sets us up for deeper decline to around 1,740.
The market decline was blamed on a lot of things from fear of geopolitical events over the weekend, the sharp drop in the Chinese imports and exports, the rapidly declining earnings expectations, lingering tax selling and the declining QE. I view it as all of the above. When the market wants to go down an excuse will appear.
The economic reports were positive but nobody paid attention. Consumer Sentiment for April actually rose +2.6 points to 82.6 compared to expectations for a minor decline. This was the highest reading since last July and indicates consumers are feeling a lot better now that winter weather is fading. The present conditions component rose from 95.7 to 97.1 and the expectations component rose from 70.0 to 73.3.
When combined with the lowest jobless claims number since 2007 at 300,000 on Thursday this should have been a strong positive for the market. Home prices are rising again and inventories are declining. While that is negative for buyers it is positive for those thinking about selling. It increases the wealth effect for those planning for the future.
The Producer Price Index for March spiked +0.5% and the biggest jump since last June after averaging almost zero for the prior four months. The core rate rose only +0.1% despite a sharp increase in pharmaceutical goods. The food index rose +1.1% thanks to higher prices for meat and dairy. Rapidly rising natural gas prices were offset by a slight decline in gasoline and diesel prices.
The headline rate is up +1.5% over March 2013 with the core rate up +1.2%. With China's economy rapidly slowing analysts worry that prices on imports will decline and push prices lower in the USA. Europe is already fighting a potential deflation cycle and lower prices will only accelerate it.
Economic news from China was really weighing on the market both here and overseas. March exports fell -6.6% and imports declined -11.3%. March exports to Hong Kong declined -43.6%. Exports also fell -18.1% in February for the biggest drop since the financial crisis. The news immediately deflated overseas markets and led to early losses in the US. The declines were muted because analysts believe the poor numbers were due to bad data in March 2013. In early 2013 there was a scandal where numbers in China were being inflated by shippers submitting bogus invoices to make it look like they were doing better than they were. Some think it was an attempt to make the outgoing premier look better or simply to avoid hassle from the government for low numbers. Chinese regulators in the past have told various industries not to report negative numbers. That means if you had to inflate numbers one month then you have to inflate them even more in successive months to continue posting gains. That practice was "supposedly" ended in May 2013 when regulators began cracking down on the practice.
Premier Li Keqiang said the nation will roll out more policies to support healthy long term growth but avoid strong short term stimulus. China is expected to grow GDP at +7.3% in Q1 and the slowest rate since 2009.
David Ignatius at Investor's Business Daily said "A report last week by the China Index Academy noted that real estate sales during the first quarter of this year in China's four biggest cities were more than 40% below the levels of a year ago. To sell property and raise cash, developers are said to be cutting prices sharply in some smaller cities. According to Anne Stevenson-Yang, a Beijing economist who blogs for the Financial Times, 40% price cuts have been offered by developers in Changzhou and Qinhuangdao, and developers in Ningbo, Wuxi and Suzhou have offered discounts of up to 40%. The slowdown in China's super-hot property market appears to be part of a broader pattern of difficulty." Add to that the calling of loans tied to commodities like copper, coal and iron ore and the corporate sector has some serious headwinds.
The calendar for next week has two housing reports, which should show improvements, and the Philly Fed Manufacturing Survey. The Philly Fed is seen as a preview of the national ISM manufacturing that is released two weeks later.
We also have the Fed Beige Book on Wednesday that describes all the economic activity in each of the Fed regions. Analysts expect it to show further growth.
The hot spot for the week will be the Janet Yellen speech on Tuesday. After a couple of stray sentences got her into trouble in her past speeches this one will probably be checked and rechecked to make sure all the content conforms to the Fed script and the inflections are carefully edited out. Even with the crosschecking you never know when she will say something that drives the market.
This is a short week with the market closed for Good Friday. The week before Easter is typically bullish. In fact it is bullish so often that there are several trading strategies built around it. Buy Monday, sell Monday or buy Wednesday's close sell Monday's open, etc. The week after Easter normally starts off with a decline as traders take profits from the prior week.
Forbes did a study over 30 years that found if the S&P was positive for the year by Easter then it was up the vast majority of the time by year-end. Over the 30 year period the S&P was up before Easter in 19 years. In 17 of those 19 years the market closed higher at year-end with a +9.8% average gain. That is a pretty good record. The S&P will have to gain 32 points next week to be positive for the year before Easter.
The Japanese Nikkei plunged -340 points to close under the 14,000 level and the lowest point since October. The Japanese economy is struggling and as a consuming economy it is closely related to the health of China's economy. With Chinese exports declining it suggests further weakness in Japan.
The decline in the Nikkei suggests global equities may have peaked. The yen carry traded is on the verge of coming unglued with the yen rising to four-week highs. A rising yen depresses equities. The Nikkei appears to be headed for a "death cross" where the 50-day crosses over the 200-day moving average. That is typically a sell signal. At this point even a sharp rally could not prevent the cross of the averages.
In the U.S. the yield on the ten-year closed at 2.62% and right at support. The rapid decline from 2.81% to 2.62% in only a week suggests a lot of money is rotating out of equities towards the safety of treasuries given the global uncertainties. China's economy is weakening. Japan's Nikkei is at a six-month low and falling. Russia is still poised on the Ukraine border with thousands of troops and tanks. Argentina is inching towards an economic crisis with inflation soaring and expected to reach 40% in 2014 and protests becoming more frequent. Venezuela is melting down to nothing as Maduro nationalizes everything in sight and promises more stimulus for the people.
The world is anything but peaceful and equity investors are using April as a springboard for the "sell in May" worst six-months of the year cycle. Money is flowing to treasuries as a safe haven in 2014.
The earnings for Q1 are not starting out well. In January the S&P estimate was for +5.1% earnings growth. Ten days ago it had fallen to +0.31% growth. As of Friday's close S&P is now expecting earnings to decline -1.2% and the odds are good it will get worse. I have warned repeatedly this would be a kitchen sink quarter thanks to the "weather ate our earnings" excuse.
JP Morgan (JPM) was the first Dow component to report for Q1 and it was not pretty. JPM profits fell -20% as investment banking and mortgage revenue declined. Earnings of $1.28 missed estimates of $1.39. Revenue declined -8% from $25.8 billion to $23.8 billion. Revenue from fixed income trading declined -21% to $3.8 billion. Rising interest rates has caused mortgage rates to rise and slowed the flood of home loan refinancing. Revenue from mortgages declined from $2.7 billion to $1.6 billion. Mortgage originations fell -68% to $6.7 billion. JPM had previously warned on earnings but the decline was larger than expected. JPM shares declined -3.65%.
Wells Fargo (WFC) reported earnings that increased +14% to a record $5.9 billion. Earnings were $1.05 compared to estimates of 97 cents. Revenue declined from $21.3 billion to $20.6 billion. This was the 17th consecutive quarter of earnings growth. New mortgage loan originations declined from $50 billion to $36 billion. Applications fell -$5 billion to $60 billion. Auto loans rose to a record $7.8 billion, up +16% from Q4. Total loans were $826.4 billion, up +4.2 billion from Q4. Average deposits were $1.1 trillion. WFC raised their Q2 dividend +17% to 35 cents. Shares closed positive on Friday and that is a major accomplishment.
The earnings cycle is starting to heat up. Next week has a couple dozen financial stocks but I only included the big names in the graphic. We also have Intel, Google and IBM. By the end of the week we will know what the Q2 earnings are going to look like. With that many banks and the three big tech stocks the good news will be over. Everything else in the weeks ahead could be weaker. The blue chips lead the cycle with the best earnings and the herd follows with weaker results.
Institutional investors look at a lot of factors before they decide to invest in equities or reduce equity investments. One major factor could be something like the economic slowdown in China. Sharp reductions in imports and exports have a ripple factor across other economies. Whenever institutions are doing their research they look for confirming facts to support their thesis.
One fact supporting the numbers showing a slowdown in China is the Baltic Dry index. This is the index of rates paid to ship dry goods from various points on the planet. The index has fallen for 14 consecutive days and at $1,002 it is an 8 month low. This is a real time index of freight rates and the very low number means shipments are declining and there are a lot of empty ships looking for something to ship. When commerce picks up the available ships decline and rates rise. When there are few loads the number of empty ships rises and prices decline.
The sharp drop in rates has even prompted several ship building companies to cut back on capacity and sovereign funds that lend money to shippers and builders are restricting loans due to the significant overcapacity at present.
This kind of factoid is just one more straw on the bull markets back. Every fact is part of the giant puzzle that institutions use to decipher their next strategy. Retail investors are only looking at a simple chart and the last earnings report to make a decision.
Market transitions are never smooth. Markets don't correct by moving sideways. Corrections are not just a couple days of minor declines. Bull market corrections are short, sharp and scary. It is the nature of the beast. Investors are always complacent at the top and it takes several days of significant selling to wake them up. Once they are focused the selling intensifies and the correction enters another phase.
Rallies in a correction are normally short, sharp and exciting as long as you are not short. Unfortunately the shortness of the rebound catches a lot of people off guard. The first day is a major short squeeze. The second day is a catch-up phase where investors who were not long get long thinking a new move higher has begun. The third day is when it runs out of steam and the shorts jump back into the game after 24-hours of licking their wounds. The decline begins again and skittish longs run for cover and new lows are made. The downtrend continues for several days and then repeats on some news headline that triggers another short squeeze.
Retail investors typically buy the most at market tops and the least at market bottoms. Markets must correct to reset the bullish/bearish outlook of investors. If everyone is bullish there is nobody left to buy. A correction is a vaccination against complacency. A fast correction is always a new lesson in stop loss management. I can't tell you how many times I have had to relearn that lesson. Just remember, the first loss is normally the smallest loss. Write that sentence out and tape it to your monitor.
Are we in a correction? Nobody knows but it sure feels like one. How it feels to you depends on your positions in the market. If you are long it is painful. If you are short it has been a fast ride. If you are in cash you are hoping this is the "big one" that gives us a great buying opportunity.
If we are not in a correction we are missing a good opportunity. When the S&P broke below critical support at 1,840 on Friday it signaled a new leg down. Jeff Cooper pointed out that the S&P triggered a "Rule of 4 Sell" signal. That is defined as breaking through a three point trend line or breaking below a triple bottom formation depending on which definition you read. The key point is that the S&P had three support lows in March and Friday's close was well below them. You can add to that the break below the 100-day average and there is no way to build a bullish case out of the current chart.
By breaking below the uptrend support at 1,840 it targets 1,800 in the short term and 1,750 in the longer term with a potential pause at 1,775.
The S&P is broken. With big cap industrials the strongest sector over the last couple of weeks our last support peg has failed. The Nasdaq and Russell are leading us lower but the S&P could pick up speed this week.
The market internals are declining rapidly. The number of S&P stocks over their 50-day average declined from 84% two weeks ago to only 39.2% today. In the January sell off they declined to only 25%.
The number of S&P stocks with a confirmed buy signal on the point and figure chart has declined to 66%. The number has been decreasing since the high at 91% last May.
The Dow screeched to a stop just above critical psychological support at 16,000. ANY continued decline under that level will indicate flight from big cap blue chips and a significant increase in bearish sentiment. The initial target would be 15,700 but 15,350 and the February lows are more likely. The uptrend support from April intersects the 15,350 level at about the right spot to provide decent support. The Dow would be very oversold if it reached that level with a decline of -1,225 points from the 16,573 closing high. While I can't envision a drop all the way to 14,750 that is always possible and it would be -10.9% decline from the highs and a technical correction. That makes that level a serious target and serious support if it is reached.
The Nasdaq is either about to about to decline another 400 points to 3,575 or rebound like crazy. The dead stop on critical support at 4,000 on Friday was the bull's last chance to rally the herd. This is exactly where the Nasdaq should rebound with at least another short squeeze. However, it is also the line in the sand where any further decline means we are going to new levels of pain.
The 200-day average at 3,936 is being referenced by some as support since it has not been touched since December 2012. However, the Nasdaq is not very reactive to averages. It is too reactive to the momentum stocks in its construction. Since momentum stocks are in reverse in April this is a critical week for the Nasdaq. A break below 4,000 by more than a handful of points should trigger massive sell stops and additional shorting. Breaking 4,000 would probably mean an acceleration of the decline.
However, and you knew there was a however, a 10% decline from the 4,358 closing high on March 5th would be 3,922 and just below the 200-day at 3,936. The combination of the two could halt the decline because speculators would buy a 10% drop just for a short term trade. Markets tend to respect those round numbers like a 10% decline at least for a short period. If the market is fundamentally broken any short squeeze from that point would fail again.
The Russell 2000 almost touched its 200-day average at 1,105 with the dip to 1,107 but I doubt that will be support. The last two times the Russell crossed the 200-day it was completely non-reactive to that average. More important is the 1,096 support level from November and the round number support at 1,100.
Unfortunately, like the Nasdaq and 4,000 a break below 1,096 could be significant. The next material support is 1,050 (300-day) but in reality it will probably be left to create some new support level somewhere in that vicinity.
Small caps are out of vogue and they are not likely to come back into favor until the market finds a bottom.
I would be very cautious next week. Earnings are going to increase in volume but that also means we could see an increase in negative guidance and earnings disappointments. A positive string of reports could turn the market around but that does not seem likely.
The "Sell in May" cycle is just around the corner and there is no incentive for fund managers to jump back into the market for just a couple weeks. The risk-reward ratio for that trade is pretty low. Anything is always possible but I would probably expect any short term rallies to be sold rather than extended.
The Business Insider has an article this weekend on the Start of a Market Crash with a lot of chart analysis. It is worth a read. Start of a Market Crash
For years the investors have been basking in the sunshine provided by the Fed's QE. The Fed claims that reducing QE is not the same thing as tightening rates but they are lying. Reduction of stimulus, regardless of what you call it, is tightening monetary policy.
I have reported more than once that new Fed Chairmen are normally tested in their first year in office with a correction that averages -16%. Yellen did not enjoy the typical honeymoon period before her market test began.
Bank America strategist Michael Hartnet said this decline is not the end of the bull market. He said he expects a 10-15% correction but not until late summer, early fall. BAC - Correction is Coming
Greece sold 3 billion Euros of 5-year bonds at a yield of 4.95% and the lowest since the debt crisis in 2010. Greece has a Caa3 rating, nine notches below investment grade, at Moody's S&P and Fitch ranks them six notches below investment grade at B-. The demand was so strong for this debt they could have sold over 20 billion. Why?
Greek debt is currently about 320 billion Euros or 175% of GDP and clearly unsustainable. When they initially asked the IMF and others for help they said they needed 69 billion Euros. After much deliberation and analysis of their books the first bailout package was 110 billion in May 2010. After discovering more debt that had been hidden they went back to the well again and got another 130 billion in October 2011. In March 2012 Greece forced private investors to take a haircut on their principal of roughly 90% but the total debt continued to climb.
The bailout money was used to pay off prior loans to international banks. For instance if international banks had 50 billion in Greek debt maturing in six months the international coalition (same countries) loaned Greece 75 billion to pay off the 50 billion plus interest. The short term obligations were satisfied and the banks were able to stave off a messy default. The new 75 billion loan had a longer maturity date. So far so good. Now repeat this process about three times as the months passed and more problems were found in the Greek books and each of the new loans matured. Finally in March 2012 a "sovereign debt restructuring" plan is agreed upon where Greece would not have to make a principal or interest payment for ten years. They kicked the can so far down the road that is fell off the radar. The interest alone will be another 160 billion Euros but nobody seems to care.
With Greece no longer required to make payments on the 320 billion in debt they suddenly had money to put to work in the economy. Fast forward to today. Greece ran out of money and had to go to the private sector with a bond offering. Remember, they have a massive debt load but no payments. However, since the P&I on the 320 billion is not due for 8 more years investors were perfectly happy to buy the five-year bonds because they would mature before the big debt turns into another default situation. Also, because Greece is backed by the IMF and the Troika they won't be allowed to default, right? Wrong.
The bonds sold last week are not worth the paper they are printed on. The interest will probably be paid to keep the charade going but no principal. Greece is broke, they are not going to be able to redeem the bonds and the entire long term Ponzi scheme concocted by the IMF and the Troika to avoid short term pain is going to self destruct just like the house of cards it is. The clock is ticking and while there are still eight years until maturity it is still going to end badly.
Wall street Journal chart
Lance Roberts re-posted this chart again this weekend and it is always a winner. The stages of fear and greed have been discussed in the stock market media for decades. This chart just puts the names on the chart of the S&P in approximately the right stages. Note the equity inflows in the background and how they began tapering off in early 2014.
Fear and Greed Chart - Lance Roberts
David Kelly and the market strategy team at JP Morgan Asset Management has produced a "Guide to the Markets for Q2." This is an excellent presentation with more data in charts and graphs than anyone can consume. Put on your market analyst hat and dig in.
JPM Market Assessment
In the "Can't make this stuff up" category today KFC is offering a chicken drumstick corsage for homecoming. Surprise your date with a corsage that doubles as a late night snack. I suspect it would be the last date you ever got with that girl. Video of the Corsage Advertisement (Priceless!)
France already has a 35 hour work week. Shamelessly some workers were actually working longer than 35 hours so the government passed a new rule. You can no longer check your work related emails on your PC, tablet or phone after 6:PM. The new law also forbids employers from pressuring employees to check their email. The rule does not apply to everyone but to more than one million IT workers in the technology industry. Personally, after being in the tech sector since the mid 1960s I can't imagine such a draconian rule. When computers break or software bugs appear it is normally at odd hours. They don't go down only during business hours. Apparently Germany already has a similar rule in place and Sweden is experimenting with a 30 hour work week. It is no wonder the European economy is weak.
A poison gas attack in Syria killed 2 and wounded more than 100. Both sides blamed the other for the chlorine gas attack. I am sure glad that red line went away or the U.S. would have to do something to stop this from happening in the future. Maybe President Obama could call Putin and ask him to tell Syria to stop using gas. I am not holding my breath.
On Saturday Ukraine said it was halting payments to Russia for natural gas in a "dispute over prices." In reality Ukraine ran out of money and it sounds better for Ukraine to be the one to call a halt rather than let it be known they are broke. Russia has said they would not halt shipment of gas through the pipelines because of late payments but Ukraine claiming they won't pay could increase the risk of a real confrontation.
Enter passively and exit aggressively!
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