Traders were just passing time today as they await the ECB and payroll reports later in the week.
Despite some good economics at the open the markets dipped slightly on some minor profit taking and then traded sideways on very low volume the rest of the day. With the ADP Employment on Wednesday and the expected bazooka out of the ECB on Thursday followed by the Nonfarm Payrolls on Friday the rest of the week is a minefield of economic reports. With the low volume and minor profit taking it appears traders are going to hold what they have and wait for the reports. Even with all the major indexes finishing in the red the VIX remains below 12 with only a .29 point rise. There is rampant complacency and no fear in the market.
The weekly chain store sales snapped back from a -1.2% reading the prior week to a huge +2.9% gain last week. These numbers have a lot of noise and are not normally followed but the big gain did attract attention. Obviously the Memorial Day weekend disrupted spending patterns and provided a holiday bounce. ICSC Research expects same store sales for May to rise +3.0-3.5%.
The Intuit Small Business Employment Index rose +0.16% compared to +0.12% in April. That equates to a gain of +30,000 workers for the month. The internal components showed that hours worked and worker compensation rose sharply. The gains were the strongest since March 2013.
The ISM New York report for May showed business conditions rose at the fastest pace in four months to 630.1, up from 627.4 in April. The internal components showed some nice gains. The six-month outlook rose from 58.8 to 69.7. The current conditions component rose from 50.6 to 55.3 and employment rose from 43.1 to 50.3. The quantity of purchase component soared from 41.7 to 58.9. Expected demand rose from 62.5 to 68.0. This strong rebound came after the worst performance in 10 months in April.
Factory Orders for April came in at +0.7% compared to +1.5% in March and +1.7% in February. While that represented some slowing from the prior months it was well above the +0.2% consensus estimates. However, ex-aircraft orders declined -1.2%. Backorders rose only +0.1% to 0.9% suggesting not much order flow other than aircraft.
New orders for durable goods rose only +0.6% after rising +3.7% and +2.6% in the prior two months. Computer and electronics orders fell by -1.3%.
U.S. Auto Sales for May came in at 16.8 million on an annualized basis and well above the estimate for 16.0 million. This was the fastest pace since February 2007. However, there is a qualification. May had five weekends and auto companies always have major sales and promotions over the Memorial Day weekend.
Kansas City Fed President Ester George made investors happy with a call for the Fed to shrink its balance sheet by allowing holdings to mature before the Fed considers raising interest rates. This "passive runoff" as holdings mature and are redeemed is going to be a major point in the eventual normalization of rates. The Fed owns too many securities to sell them back into the market or rates would rocket higher. They can just let them mature but that is going to take 5-7 years to make a major dent in the Fed's balance sheet. The potential for another recession during that period are about 100%. We average a recession about every 5 years and our five years are already up.
The big reports for Wednesday are the ADP Employment, ISM Services and the Fed Beige Book. The ADP is probably the most critical since it will give everyone an idea what to expect in Friday's Nonfarm Payrolls. A big ADP number should mean a big Nonfarm number and this would suggest the economy is in growth spurt mode. A low number would suggest a low Nonfarm and bring the economic doubt back into the picture.
I can't imagine that the Beige Book will be negative. The trend has been to tout rising activity and without a black hole in some region pulling down the metrics they will continue to tout any gains in activity regardless of how small.
Thursday has the highly anticipated ECB decision and while it won't have any direct impact on the U.S. the implications for growth in Europe will impact our markets. If the ECB lowers rates already at zero it will start a new round of financial engineering experimentation. The problem is that even with rates at zero the banks are not putting the money to work in the economy. Forcing them to pay interest on their reserves rather than earn interest is an unproven tactic although it has been tried in limited tests around the world with mixed results.
If the ECB follows through on a rate cut it will only make U.S. treasuries more attractive for banks looking for yield. This could have been the reason for the treasury rally last week. European banks expecting the rate cut may have moved into treasuries ahead of the event.
Friday's Nonfarm Payrolls are expected to show a gain of +215,000 jobs. Anything over 180,000 should be market neutral and over 225,000 bullish for the market.
Art Cashin alerted me to some work done by Dan Clifton at Strategas concerning the recent drop in treasury yields. Clifton pointed out that the Fed is purchasing a larger share of treasuries today than at any other time during QE. The reason for this is the government is issuing debt at a slower pace than the Fed is tapering QE. Over the last two months the amount of outstanding treasuries has been reduced by $100 billion while the Fed was in the market buying $58 billion. The government was reducing debt at the same time the Fed was buying treasuries from that shrinking base. On a six-month rolling basis the Fed has purchased 73% of new treasury issuance. That leaves very little for normal investors to buy and a good reason the yields have been falling.
There was very little stock news today. We are right in the middle of the earnings cycle where Q1 earnings are over and Q2 warnings won't begin for several more weeks. This is the quiet period where companies have nothing to say.
Clovis Oncology (CLVS) fell another -20% after Citigroup offered a competing opinion on their CO-1686 drug for certain non-small cell lung cancer patients. I believe the Citi analyst was preaching his own book because the data from the trials and the comments from the Clovis CEO on Monday contradict the Citi statement.
Clovis shares declined -$3.50 on Monday after news broke at the ASCO cancer conference that "some" of the patients taking their new cancer drug CO-1686 saw a rise in blood sugar. The press immediately jumped on the news claiming the drug caused diabetes but according to the CEO that is not true. "We do not cause diabetes" he said in an interview.
He was interviewed at the conference and said only a few patients had exhibited hypoglycemia problems and those were easily handled with the oral drug Metformin. He reminded everyone that ALL cancer drugs have side effects and any effect that can be handled with an oral pill is the best kind.
These patients have lung cancer. They are terminal without treatment. He said 95% of patients show improvements in quality of life and "progression free survival." That means the cancer does not worsen and longer life spans are expected. In 65% of patients the improvement in quality of life was "startling" and progression free survival was greatly extended according to the CEO.
In only 22% of patients did they see the appearance of minor hypoglycemia. He said if the problem was bad patients would be dropping out of the trial. To date there have been ZERO patients withdraw from the trial due to the hypoglycemia.
What would you do? Take an oral pill to suppress it or stop the drug and die?
Mizuho said the data from CO-1686 looks superior on progression free survival compared to AstraZeneca's AZD9291. The firm reiterated a buy rating on CLVS with a $100 price target. Citi said today the AstraZeneca drug AZD9291 appeared superior because early stage cardiovascular side effects were unfounded. However, in the current trial any patients with any cardiovascular problems were rejected. In prior trials there were increases in QTc that are associated with heart problems that cause sudden death.
So, the options are to take a drug that may cause sudden cardiac death if you have any cardiac risk or take a drug that provides "startling" improvements in progression free survival and 20% of patients may have to take an oral supplement to eliminate the hypoglycemia? I think the answer is clear.
The stock was pummeled for a -20% decline because the Street's Adam Feuerstein reported the drug is "turning patients into diabetics", which is completely untrue but the unsubstantiated claim was being repeated by Citigroup. I believe this sell off is a huge buying opportunity.
Tesla (TSLA) CEO Elon Musk dangled the potential for doing "something drastic" to accelerate the acceptance of electric cars. While he did not say what the majority of analysts believe it has something to do with his patents. If he volunteered his patents to other manufacturers line Ford and GM they could quickly ramp up a successful electric car program. Tesla has already announced a partnership with Toyota but until they can increase battery availability those plans are on hold.
Musk made these comments at the Tesla shareholder meeting today. He said there are roughly 2 billion cars on the road and 100 million new ones sold every year. Tesla only sold 22,000 in 2013 and they expect to sell 35,000 in 2014. He also said he would stay on as CEO of Tesla for at least 4-5 years "through volume production of a third-generation car" for the mass market in the $35,000 range. He said "Nobody is a CEO forever. Eventually they carry you out."
He said they have not yet picked a site for the "Gigafactory" to mass produce batteries. They have narrowed it down to a "few sites" but they planned on doing a "down-select" for a primary site around year-end. Musk said they were shooting for a 30% decrease in battery costs but thought they could probably do better than that.
Tesla is constrained by the supply of batteries it can get from partner Panasonic. They expect enough to build 35,000cars this year but the goal with the gigafactory is to ramp up production to supply 500,000 cars per year. Panasonic said they expect to be the "sole manufacturer" in the battery factory. The company noted Tesla is looking for a $3 billion investment in addition to the $2 billion Tesla will put up. Tesla hopes to begin battery production in 2017. The company announced in February that Arizona, Nevada, New Mexico and Texas were in the running for the site. However, California is pushing to be considered as well. Musk said he is planning on pitting 3 states against each other in the final selection process. Musk is requiring states in the competition to have all plans and permits finalized and approved before they can be considered in the finals. This probably leaves out California since they can't get anything done in a reasonable period of time especially environmental plans approved. Some analysts believe Nevada has an edge with the site near the Reno-Stead general aviation airport that would make visitations and deliveries easier.
An R.W. Baird senior analyst, Ben Kallo, said Tesla was his top stock pick for the second half of 2014. "We have a quarter that is lined up nicely for a solid beat. Production is very good. We were out at the factory 3 weeks ago and I think they are ahead of their targets for the quarter."
Hillshire Brands (HSH) authorized takeover talks with Tyson Foods (TSN) and Brazil's JBS Sa. The bidding war in the $6.7 billion food fight over Hillshire is entering a new stage. Hillshire was previously called Sara Lee before it spun off some of its tea and coffee products in 2012.
Pilgrim's Pride (PPC) raised its offer to $55 or $6.7 billion after Tyson offered $50. Pilgrim's Pride is 75% owned by JBS. Both offers from PPC and TSN require Hillshire to terminate its $6.6 billion bid to buy Pinnacle Foods. JBS slaughters and packages beef and poultry and buying Hillshire would give it an entry into the prepared meat market where profits are higher. JBS said that would open up the international market using the Hillshire brands. HSH shares gained another 9% today.
Krispy Kreme (KKD) shareholders are probably reliving nightmares from the past when earnings misses were a regular event. The company reported earnings that were in line with estimates but missed on revenue. Then they lowered full year estimates from 73-79 cents to 69-74 cents. Analysts were expecting 78 cents. They blamed the winter weather for the weak guidance. The company said their store count rose 3.3% to 855 and same store sales rose +2.3% in the USA but declined -2.2% overseas. Shares declined -15% on the news.
Volume today across all exchanges was 5.2 billion shares, up only slightly from the 4.88 billion on Monday. The low volume is reducing volatility and the trading ranges. The S&P traded in a very narrow 7 point range today and the Dow range was only 46 points. Trades are simply waiting for the economic events later in the week and they are not trading.
Traders are covering shorts and reducing their longs. The lack of a real direction is causing a serious bout of uncertainty. With the markets only a couple points under their historic highs there is no rush to be long. Traders are slowly taking profits but at the same time there are funds nibbling at stocks on every dip.
The stealth rally of the last two weeks is still concerned about the weakness in the Russell 2000 and the Nasdaq but not too concerned or they would be buying puts. The New York Fed President Bill Dudley warned last week that the extremely low volatility may be giving investors the wrong impression of the markets and this was something that concerned the Fed.
One thing I am sure of is what the Fed will do about it. If they believe the low volatility is making the market too complacent they will do something to shake it up. It is only a matter if time.
A couple of weeks ago I warned about the resistance at 1,925 and that is exactly where the S&P has stopped its gains. That may only be a temporary stall but for the last two days it has been rock solid with the afternoon rise into the close coming to a stop right at that level.
We can have a stealth correction just like we can have stealth rallies. The S&P can continue to wander around in the 1,920-1,925 range for several more days as positions are rotated but I doubt that will happen. Economic events are going to power the market one way or another.
Initial support is now 1,910 and resistance 1,925. The 50-day average is rising about a point a day and is now 1,877.
The Dow closed at a new high at 16,743 on Monday and only gave back -21 points today. The trend is still higher and the next resistance level is 16,800 once we get over Monday's intraday high at 16,756.
The majority of the Dow stocks were pretty tame on Tuesday with Goldman the leader and Visa the laggard.
The Nasdaq 100 ($NDX, QQQ) continues to languish just below critical upper edge resistance at 3,740. Apple shares declined sharply on Monday after the WWDC kickoff but recovered today on positive analyst comments about the new iOS and the pending 7:1 stock split. If Apple continues to remain positive it could be our best chance to the NDX to break over that resistance. Beware next week when Apple trades post split. The post split depression period for Apple could be severe.
The Nasdaq Composite has stalled in a 40 point range for the last six days just below the 4,250 level. No major gains and losses only a slow rotation inside the major Nasdaq stocks. Momentum stocks have stalled and recent winners are taking a break. There is nothing to be determined from the chart except that resistance has held but traders have prevented a material sell off. The deadlock is sure to be broken soon and without any materially negative headlines I would expect it to move higher.
The Nasdaq has only lost -3 points in total over the last five days. There is plenty of dip buying but no price chasing.
The Russell 2000 remains the weakest link. The Russell closed down again to close at a six-day low. The rebound rally has lost traction although there is buying on every dip. It is enough to lift the index off the lows of the day but not enough to turn it positive. Eventually these buyers are going to get tired of lower lows and ignore the dip so they can see how far it drops.
The 1,120 support level at the 200-day average was breached intraday but quickly bought to close at 1,126. Another lower low on Wednesday could put it below that 1,120 level and that would be a sell signal.
As long as the Russell remains above the 1,120 level my market bias is slightly bullish. However, as we have seen numerous times in the past there can be huge sell programs launched whenever a critical economic event is perceived to be bullish. It happens regularly although we have not seen any recently. As we approach the summer doldrums and increasingly lower volume the potential for a sudden sell program reversal is growing. Investors are simply too bullish and too complacent. I would be cautious about being too long until after Friday's Nonfarm Payrolls. Trading the market this week is a coin toss for direction. Do you really want to risk your trading capital or retirement funds on a coin toss?
Enter passively, exit aggressively!
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