A trio of retailers disappointed investors this morning to set the tone for the day.

Market Statistics

The market started off in a hole after multiple earnings disappointments and after a brief attempt at buying the dip around 11:00 the sellers gained the advantage and the bottom fell out once again. Most of the market commentators began blaming the Fed's Charles Plosser for the decline. He did not speak until 12:30 and the Dow was already down -111 points at the time. However, one commentator said the text of the comments was released at noon and that is when the serious drop occurred. After Plosser and Dudley spoke the decline picked up speed.

There were no economics today so we can't blame it on some weak report. However, the weekly Chain Store Sales snapshot was down -1.3% and the third weekly decline for a total of -3.4%. That report has a lot of noise and is normally ignored. Coupled with the weak retail earnings it might have gotten a little more attention.

The calendar for Wednesday has the biggest report for the week and that is the FOMC minutes. That afternoon release at 2:PM will be the signal for traders to leave for the weekend. Volume is already ridiculously low and it will only get worse after the reaction to the minutes.

Thursday has several key reports but there will be nobody around to see them.

Charles Plosser, a noted hawk at the Fed, said rising inflation and strengthening economy may force the Fed to hike rates "sooner rather than later" to stay ahead of inflation. He said the Fed is at risk of "falling behind the curve" in its efforts to control inflation. "The U.S. economy is on the firmest footing it has been on since the recovery began" despite the weather related weakness in the first quarter. He expects unemployment to drop below 6% by year-end driven by a rebound in the housing market. He is expecting 3% GDP growth for all of 2014. He said the current pace of QE reductions of $10 billion a month may be too slow.

Plosser has stated his position numerous times over the last year so it should come as no surprise to traders that he wants to hike rates faster. Unfortunately traders tend to have a short memory on some things and they react to Plosser restating his position every few weeks.

New York Fed President William Dudley spoke after Plosser and while Dudley is more dovish on rates he did have some new comments to provoke the market. On the positive side he said inflation should drift up slowly towards the Fed's 2% target and a swift climb in inflation was unlikely. When the fed does decide to tighten rates it would come "after a considerable time" and "the pace of tightening will probably be relatively slow."

The conventional wisdom is that the Fed will allow the treasuries it is holding to run off or mature rather than sell them back into the market. Retail investors expect this run off to occur before the Fed begins to hike rates. However, Dudley said the maturation process will take too long and the Fed will be forced to hike rates while the Fed is still holding a large amount of treasuries. Anyone who has thought about the Fed unloading its $4 trillion in treasuries has realized it is going to take a long time. Far longer than the "considerable period" between the end of QE and the beginning of the rate hike process. Janet Yellen said the considerable period clause in Fed statements would be around six months. Any trader reacting negatively to Dudley's comments simply had not thought through the process.

Dudley did say the broad lack of volatility in the markets was a worry for the Fed. He felt this period of calm was "breeding complacency" in some investors. I would say that was an understatement. With the Dow declining nearly 170 points intraday the VIX remained relatively calm at 12.90. I don't know what it is going to take to shock investor out of the buy the dip focus on the big caps but when it appears it could be earth shaking.

Home Depot (HD) reported earnings this morning that missed estimates on EPS and revenue. The company reported adjusted earnings of 96 cents and revenue up +2.9% to $19.7 billion. Analysts were expecting 99 cents and $19.97 billion on revenue. U.S. Same store sales rose +3.3%. They currently operate 2,263 stores.

The company blamed the weak quarter on the weather and this is one company where I really believe it. Harsh weather prevents those outside renovation projects. I was in a Home Depot a couple times in Q1 when there was snow on the ground and it was very quiet. The company said Q2 was snapping back with sales in May classified as "robust." They expect full year sales to rise +4.8% but they raised guidance for earnings growth from 16.5% to 17.6%. The full year guidance rose from $4.38 to $4.42. They plan on repurchasing $3.75 billion in stock in 2014. The raised guidance and share repurchase forecast pushed shares up +1.46 for the day in a bad tape.

Staples (SPLS) reported earnings of 18 cents, a -44% drop, compared to analyst estimates of 21 cents. Revenue declined -3% to $5.65 billion and analysts were expecting $5.61 billion. International sales declined -4%. The real problem came from a lowered forecast for Q2 of 9-14 cents and analysts were expecting 15 cents. Staples said they were closing 140 of its 1,846 stores due to low sales.

TJ Max (TJX) reported earnings of 64 cents that missed estimates of 67 cents. Revenue rose +4.9% to $6.49 billion but that missed estimates of $6.59 billion. They guided for Q2 at 70-74 cents compared to estimates at 74 cents. The full year guidance was lowered to $3.05-$3.17 compared to estimates for $3.19. The company said they felt good about the rest of the year because of low inventory levels and the opportunity to make some opportunistic inventory buys they are seeing in the marketplace. Investors were not feeling the love and shares fell nearly -8%.

Dicks Sporting Goods (DKS) reported earnings of 50 cents compared to estimates of 52 cents. They blamed weakness in golf equipment and hunting gear for the earnings miss. Q2 guidance was cut to 62-67 cents compared to consensus at 82 cents. The company dramatically lowered full year guidance from $3.05 to $2.85 compared to analyst estimates for $3.08. Offsetting the negative news was a rise in online sales from 5.8% to 7.0%. Shares fell -18% on the lowered guidance.

There was one critical point in their guidance. The decline in golf and hunting was NOT weather related. It is ongoing and they are reducing floor space in those categories to adjust for the decline. Golf equipment and firearms are expensive. I believe this is another symptom of a weakening consumer. Walmart sales have declined for six quarters. That factoid along with the Dicks news is an economic warning.

After the bell SalesForce.com (CRM) reported earnings of 11 cents that beat estimates by a penny. Revenue rose +37% to $1.23 billion compared to estimates of $1.2 billion. Deferred revenue rose +34% to $2.32 billion. Sales and marketing costs rose +37% while R&D costs rose +43%. For the current quarter they guided for 11-12 cents, up from 9 cents and analysts were expecting 12 cents. Revenue of $1.285 billion would be slightly ahead of estimates at $1.27 billion. They raised revenue guidance for the full year by +30% from last year to $5.32 billion. Analysts were expecting $5.29 billion. They guided on earnings for 49-51 cents and analysts were at 50 cents. Shares rose about 30 cents in afterhours.

Earnings on tap for Wednesday include Lowes and Target. American Eagle also reports and could face a tough crowd if their results mirror those retailers today.

Tiffany will be interesting since their customers are better off financially than the Walmart or Target crowd.

Caterpillar (CAT) reported its rolling three-month sales numbers and it was not pretty. Sales were down -13% with Asian sales down -25%. Asian sales were down -17% in February and -20% in March so the pace of the sales decline is accelerating. Chinese sales in 2013 declined from $65.88 billion to $55.66 billion and apparently they are still declining. This is not a good sign for the Chinese economy and for the global recovery. Shares of CAT fell -3.6% on the news and caused about -32 points of the Dow's decline.

The market bears are coming out of hibernation. The number of analysts turning bearish are increasing daily. In just the last week Steve Grasso, David Tepper, Dennis Gartman, Peter Boockvar, David Rubenstein, Ralph Acampora and Quincy Krosby have made comments about an impending correction. Gartman warned that back in the 70s there was a broad market decline but the Nifty Fifty big cap stocks refused to decline. Investors saw the relative strength and poured money into them but eventually they crashed as well. Gartman cautioned that when the broad market is declining as it is today the pockets of strength will continue to shrink until they eventually fail as well.

Marc Faber has been warning for weeks the market is setting up for a worse correction than we saw in 2008. However, Faber is historically bearish so his warnings are more or less ignored and they are longer term rather than over the next month.

Piper Jaffray, normally a very bullish house, warned last week of the potential for a 10-15% decline. That was out of character for them. Bank of America said a fund manager survey showed they have the most cash on hand since June 2012.

Douglas Borthwick of Chapdelaine & Co believes the economy is falling into recession starting with Q1. He pointed to a set of facts that were very convincing but the odds of Q2 declining from 3.5% GDP growth to negative growth over the next month are very slim in my opinion.

When everyone is bullish you should sell stocks. When everyone is bearish you should buy stocks. With bears racing out of the forest to warn about the coming correction it could be a contrary indicator. As one analyst put it the "correction anticipation trade" is alive and well but gaining no traction. This suggests there are still more "buy the dip" investors than sellers.

Another warning sign came from today's volume. On Monday, the day after option expiration when everyone is settling up their exercised option positions, there were only 4.9 billion shares traded. That is the lowest non holiday volume this year and the market was up slightly. Today, when the market was down hard the volume was 5.7 billion or nearly a billion shares more. That is still anemic volume but you don't want to see a large increase on a down day.

The fate of the market may depend on this mystery chart. Which way will this pattern break? It is clearly setting up for a major move as the trading range narrows almost daily. This is spring compression and when the spring releases it could be a huge move. I will disclose the name of the chart later.

Despite the large intraday decline all the major indexes posted a higher low. In other words they did not decline to the levels we saw last Thursday. We also have a lower high so it is hard to draw any conclusions from the day's activity. What we did see was a sharp decline in the internals with 5,172 decliners to 1,725 advancers. New highs were 104 to new lows at 130.

The S&P rallied to exactly prior resistance of 1,885 on Monday and that is where it closed. The afternoon dip today punched through initial support at 1,870 for a few minutes before closing at 1,873. That close is right in the middle of the congestion pattern since early March. Again, we can't draw any conclusions from that performance.

Resistance is now 1,885 and support 1,870 and 1,860. It would be really beneficial if we could get a drop to 1,840 to clear out some weak hands but there are no indications this is imminent.

The Dow had a nice pattern of higher lows in progress but today's decline dropped to the lowest point since April 28th. That damaged the pattern but until we get a dip to 16,300 the longer term trend is still intact. The Dow decline stopped at 16,350, below the 50-day at 16,403 but above the 100-day at 16,287. The Dow it not very reactive to moving averages so I don't put much faith in them halting a decline.

If you draw a trendline from the February and April lows it intersects exactly at the Dow close for today. That makes tomorrow a little more important for market sentiment. The Dow is down -400 points from last Tuesday's high. That seems ominous to me.

The Nasdaq Composite continues to trade in a range with a slight downward tilt but the closing price was right in the middle of the congestive pattern. Like the other indexes the Nasdaq did not make a lower low so it is hard to draw any conclusions.

Critical support is 4030-4040 with resistance 4130-4150.

The Russell 2000 continues to be the weakest link but it avoided correction territory at 1,087 for one more day. The critical support at 1,096 continues to hold on a closing basis but the down trending pattern is still intact. All we need it one more sharp decline and we could see a breakdown below support and produce a new sell signal.

The Russell rebounded on Monday to the 200-day average at 1,117 and that is exactly where it stopped. The decline today took it out of range for another attempt without a major rebound.

The mystery chart was the Nasdaq 100 ($NDX). The pennant pattern historically produces some major moves because of the spring compression theory. With the strong pattern of higher lows and incrementally higher highs suggests it is going to break out to the upside. However, if you Google bear flags/pennants and bull flags/pennants you can see dozens of conflicting opinions and examples of movements in either direction. The only sure thing, if there a sure thing at all, is that the eventual breakout should be strong.

I said the broader market may depend on the eventual direction of this chart because the Nasdaq and Russell have been the leaders to the downside. The Nasdaq 100 is similar to the Dow. It is a narrow index of big cap stocks. Google, Apple, Microsoft and Amazon account for 25% of the index. Big caps have been attracting money while the small caps sell off. If the NDX breaks out to the upside it could provide a sentiment boost to the Nasdaq Composite and lift the broader market.

The risk to the NDX is the Apple 7:1 split on June 9th to holders on June 2nd. Funds and institutional traders typically sell shares they get in a stock split because the extra shares are normally classed as a dividend and they can sell them at a lower tax rate. That means Apple shares could decline after the split. However, the declining share price from $600 to $85 is a strong incentive for retail traders that could not previously afford Apple to load up on shares. It will be interesting to see how Apple shares react and their impact on the Nasdaq after the split.

I am neutral to slightly bearish for the rest of the week with worries over how the market will react to the FOMC minutes on Wednesday and what should be very low volume for the rest of the week. I have been recommending for the last month to avoid loading up on long plays until the S&P declines to 1,840 or closes above 1,900 on decent volume. Neither of those events appears likely this week.

The energy sector has been leading the market for the last month. Click the advertisement below for a free trial to the OilSlick.com newsletter.

Enter passively, exit aggressively!

Jim Brown

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