After a major intraday rebound on Monday, Tuesday lived up to its turnaround label.

Market Statistics

Until today there had only been three Tuesday's where the market closed lower in 2014. Now there are four and the market closed on the lows today. There was no single excuse for the decline and it was a slow news day.

Getting blamed for the decline was increased fighting in Ukraine with 30 rebels and 4 soldiers killed. Economics were also to blame with estimates for the Q1-GDP revision falling into negative territory. Headlines about bubbles in the market continue to appear. David Leonhardt penned "Time to Worry about Market Bubbles" in the New York Times. Lastly, it is May. Earnings activity is fading and the summer mindset is beginning to take hold.

The economic calendar was light with only the weekly chain store sales and March International Trade reports. The chain store sales declined -2.0% compared to a +1.6% rise the prior week. This weekly number is normally ignored by the market as noise.

The March trade deficit declined from -$42.3 billion to -$40.4 billion. Analysts were expecting -$40.3 billion. Exports rose from $190 billion to $193.9 billion. Imports rose from $231.8 billion to $234.3 billion. The rise in exports suggests the global economy is slowly improving while the rise in imports suggests the U.S. economy is improving. This report is normally ignored by the market.

The trade deficit did not narrow as much as the government had expected when they prepared the Q1 GDP estimates. When factoring in today's economic numbers the outlook for the Q1 revision has declined to between -0.3% and -0.6% representing a contraction in Q1. This is not going over well with investors since further weakness in the lagging reports could push estimates even lower.

The calendar for Wednesday is equally bland with the exception of the speech by Janet Yellen. She travels to Capitol Hill to answer questions about the health of the economy. Lawmakers are sure to ask her about the payroll report and the sharp drop in unemployment and the decline in the labor force. Yellen has a strong employment focus so her answers will likely be of great interest. With little else on the calendar this appearance could be a market mover. Her recent speeches have been growing progressively dovish so I expect that trend to continue.

Twitter (TWTR) was the big news for the day with an 18% decline. Today was the end of the lockup for more than 480 million shares. That was 82% of the outstanding shares. Basically there were six times more shares available to trade today than on Monday. You could see that in the volume with 134 million shares trading compared to only 10.4 million on Monday. Twitter posted earnings last week that failed to live up to investor hopes. Growth slowed from 30% to 25% with active users rising to 255 million.

Insiders holding more than 205 million shares had pledged not to sell them after the lockup expired but they may be reconsidering that decision today. Twitter shares closed at an all time low of $31.85. Even at today's price Twitter is still more expensive than Facebook (FB) and LinkedIn (LNKD). LinkedIn shares declined -6% to $142 and a new 16 month low.

AthenaHealth (ATHN) shares fell -17.50 to a six-month low after David Einhorn said he launched a new short position in the stock. At the Ira Sohn Investment Conference on Monday, Einhorn said the stock was overpriced and could "easily fall" -80% or more. Gina Sanchez, founder of Chantico Global, said Einhorn was right to call AthenaHealth a "bubble stock."

In 2011 ATHN had revenue of $324 million and profits of $19 million. In 2013 the revenue grew to $585 million but profits shrank to only $2.6 million. Shares have fallen nearly -50% since their all time high at $206 in March. If ATHN were to bounce from this level it would allow those holders that missed the move down to sell at a higher level.

Whole Foods Markets (WFM) reported earnings and their outlook wilted. Earnings were 38 cents compared to estimates for 41 cents. Same store sales rose +4.5% compared to estimates for +5.4%. The company lowered its full year guidance from $1.58-$1.65 to $1.52-$1.56 and the sales growth forecast to 10.5-11%, down from 11-12%. Same store sales growth was revised down to 5.0-5.5% from 5.5-6.2%. Analysts were expecting closer to 8%. The CEO did say they were confident in their ability to continue to grow market share and surpass revenues of $25 billion within the next five years.

Whole Foods is struggling against a number of new competitors including Sprouts, Fresh Market, Walmart, Safeway and Kroger. All are adding more organic products at lower prices. Walmart is adding more than 100 Wild Oats branded organic products from olive oil to canned beans in the coming months. Walmart said they would be priced "at least" 25% below other branded organic foods. Being the Neiman Marcus (Needless Markup) of organic foods may be a struggle for Whole Foods in the future.

Knowing the earnings were not going to be received well the CEO produced this table of projections for the next five years. This is one way to give analysts and investors something to measure future expectations against. Unfortunately, if they begin to miss on these metrics it will be another drop lower for the shares. Shares declined -$7 in afterhours.

Electronic Arts (EA) reported earnings of 48 cents compared to estimates of 11 cents. Revenue of $914 million beat estimates of $812 million. They guided for Q2 for revenue of $700 million and a loss of 5 cents. Analysts were expecting $633 million and a loss of 23 cents. For the full year they projected revenue of $4.1 billion and earnings of $1.85. Analysts were expecting $4.11 billion and $1.53. The CEO said strong sales of FIFA 14, Titanfall, Battlefield 4, Need for Speed Rivals and Madden NFL 25 powered their profits. He also said it was a challenging quarter because of the transition to the new Xbox One and PlayStation 4. Apparently they made lemonade from their lemons. Shares rallied sharply in afterhours.

Dow Component Disney (DIS) reported record earnings of $1.11 on revenue of $11.65 billion. Analysts were expecting 96 cents and $11.25 billion. Net income rose from $1.5 billion to $1.9 billion. The animated film Frozen has now brought in more than $1.2 billion in revenue to become the most successful animated film of all time. Even the ABC network saw profits increase +15%. Income at theme parks increased +19% thanks to higher ticket prices and higher attendance. Shares gained +70 cents in afterhours trading.

Activision Blizzard (ATVI) reported earnings of 19 cents vs estimates of 10 cents and revenue of $772 million vs $688 million. Shares were flat after the report.

Groupon reported a loss of -1 cent on revenue of $757.6 million compared to estimates for a loss of -3 cents on revenue of $738 million. Shares declined -40 cents in afterhours.

TripAdvisor (TRIP) reported earnings of 54 cents on revenue of $281 million compared to estimates of 55 cents on $283 million. TRIP shares fell -$12 immediately after the report to trade at $69.26 but eventually rebounded to close at $83.82 and $2 higher than the regular close.

High profile earnings on tap for Wednesday include GMCR, TSLA and MNST.

Four years ago today the Dow plunged from 10,878 to 9,870 for the largest intraday point decline in history. The Dow fell from 10,824 at 12:00 to 9,870 at 2:30, a plunge of -954 points in a little more than two hours. A +651 point rebound instantly appeared to close at 10,521. The "flash crash" as it became known threw traders and exchange officials into a tizzy. The following day the index was mostly flat as the Thursday trades were either busted or cleared. The following Monday the market rallied from 10,378 to 10,832, a gain of +454 points at the open and the point damage from the flash crash was effectively erased. The psychological damage took a lot longer to heal.

Traders and investors saw their portfolios slashed in value in just minutes and many had stop losses triggered to insure the losses were permanent. If you were not sitting at your PC and in possession of nerves of steel it was an ugly day. Opening your trading account in the evening was a shock for many traders. Investors, afraid of a repeat, sold stocks for months until they reduced their exposure to the market to the point where they could live with the risk.

The markets opened weak on fears Greece was going to implode and as the Dow decline began to accelerate the high frequency traders pulled their bids. Without the millions of quotes flowing through the system when the selling intensified the remaining bids were quickly filled leaving a market with no buyers. As an example Accenture (ACN) a $45 stock at the time, was quoted at a penny.

On the NYSE there was no flash crash. Rules on the floor at the time prevented stocks from trading significantly lower but on the electronic exchanges it was a disaster for at least an hour. Panic ensued because nobody at the time knew what was happening. Once traders realized that stocks on some exchanges had not declined as severely the buying began.

Since the flash crash the exchanges have implemented rules and automatic trading halts that are expected to prevent this from happening again.

Today's market decline was not a flash crash but more of a slow burn. The Dow opened lower by about 75 points and slowly bled points the rest of the day to eventually close on the low at 16,401. The Nasdaq only lost -10 points at the open and held its ground until 1:PM but then collapsed to end down -57 points or -1.4% compared to the -0.8% for the Dow. The S&P was weak all day to lose -17 points and close at 1,867. The Russell 2000 was the biggest loser at -18 points and -1.62%. The NYSE Composite was the strongest index with a decline of only -0.57%.

The Russell 2000 tends to lead on the way up and lead on the way down and today was a critical day. The index lost -18 points to close at 1,108 and just above critical psychological support at 1,100. However, The Russell closed under its 200-day average for the first time in 363 days. The record is 364 days dating back to 1996.

The market tends to ignore records like that but hedge funds and institutional traders will not likely ignore the close under the 200-day average. That is a sell signal for most institutional traders. However, the Russell did dip below the 200-day three times on an intraday basis over the last month and each time the dip was bought. Today that did not happen with the Russell closing on its lows. This is a very bearish signal and could suggest lower lows ahead. One day does not make a trend but the drop under the 200-day is simply another day in a down trend that started on March 5th. The Russell has been making lower highs and lower lows and a move under 1,100 on a closing basis would be severely bearish.

The S&P has tried since April 23rd to punch through the resistance at 1,885 and has been unsuccessful. The index succeeded several times on an intraday basis but sellers always appeared in volume to push it lower at the close.

Support at 1,880 for the prior three days failed at the open on Tuesday and the index closed on the lows of the day at 1,867. This is the lowest close since April 25th and closing on the lows suggests there is more pain ahead. The 100-day average at 1,839 and horizontal support at 1,840 and 1,850 should be the next targets.

The Dow is a picture perfect chart of a failure at resistance. For three days it tried to break through the 16,600 level and was unsuccessful. If we get a close under that late April dip to close at 16,361 then we should decline all the way to 16,000. The Dow is not reactive to moving averages so I removed it from the chart. For reference the 100-day is 16,235.

While the chart looks bearish it is not as blatantly bearish as the Russell and Nasdaq. The Dow could be just resting from its failed resistance test but a close under the April 25th low at 16,361 would point to further declines.

The Nasdaq gave back 57 points to close on the low of the day and while there is short term support at 4,070 the next target looks like a retest of 4,000. As you can see in the losers list below the momentum stocks are crashing again. Most of the big name stocks have the same pattern with a rebound last week, a stall for three days with no upward movement and then a collapse at the open this morning. Since the charts are mostly identical it looks like the result of ETF selling, probably in the QQQs.

The Nasdaq tested 4,000 in early April and recovered but I doubt this test will hold. Anything is always possible but the decline in hundreds of individual stocks appears to be broad based and persistent. A move under 3,996 would be a lower low for the year and another sell signal.

I don't normally post this chart but the direction is ominous. This is the Russell Microcap Index or $RUMIC. In theory these are the weakest stocks in the system and likely to be dumped at the slightest sign of trouble. The RMI closed at the low of the year and well below its 200-day average. This suggests the broader market decline may have farther to go.

Offsetting the bearishness in the charts above the NYSE Composite ($NYA) remains bullish. The index is more than 500 points above its 200-day average and only about 65 points below the historic high. While the major indexes can still decline while the NYSE remains relatively stronger this is still a positive indicator. The other major indexes are plagued by heavy weightings of specific stocks and the NYSE is not. That will be slim comfort if the Dow and Nasdaq fall into a bear market while the NYSE remains near the highs.

I warned in the weekend commentary that the end of month retirement contributions would fade on Monday and the real market would appear. Those month end contributions typically provide support for the first three days of the month.

Now we have fading earnings, weak economics and constant headlines out of Ukraine. There is nothing to provide lift for the market until the situation plays out in Europe. We do have the Yellen testimony on Wednesday that could provide a bullish lift but I am not sure it will do the trick this time.

I would be cautious of new long plays until the S&P closes above 1,900 or successfully retests the 1,840 level.

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Enter passively, exit aggressively!

Jim Brown

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