Today's drop proves that stocks can be sold. Many of us were beginning to wonder.
This was a busy day for economics and there was another burst of headlines from Syria but there was nothing specific that caused the decline. Early in the day the market reporters blamed it on a report that Syrian planes were bombing targets inside Iraq and that was the reason for the market decline. While that is an interesting development I seriously doubt it impacted our markets.
Reportedly Syrian planes bombed ISIS convoys on two separate occasions with help from Iranian intelligence. That report was confirmed by two senior U.S. defense officials. The report was both bullish and bearish. It was bullish because they were bombing ISIS convoys. Regardless of which direction they were headed it was positive for Iraq. It was bearish because Iran provided the intelligence on the targets in Iraq and it was a foreign country bombing in Iraq and they killed more than 50 people. No word on whether those were 50 ISIS troops or 50 civilians.
What we did hear that was bearish for the markets was a move to evacuate the U.S. Embassy locations in Iraq. The U.S. is positioning ships in the Persian Gulf to assist in the event of an evacuation. Reportedly more than 1,000 embassy workers in Baghdad are already being moved to other locations including Jordan. The Iraq embassy is the largest U.S. embassy in the world with 5,000 workers. Moving to evacuate workers suggests the U.S. expects the conditions to worsen rather than improve.
Also weighing on the markets were comments from Philly Fed President Charles Plosser that the Fed may need to move faster and hike rates sooner to offset rising inflation. Analysts believe it will be mid to late 2015 before the Fed begins to hike rates. If the Fed suddenly said they were considering a shorter waiting period after the end of QE the market would react negatively.
However, even if Plosser is right and the Fed did decide to move earlier it would still be well into 2015 before that action would be announced. Selling stocks because of Plosser's comments today would be stupid. Investors will file his comments away for future review but it really depends on what the Fed says along the way.
The busy economic calendar should have been bullish for the market with multiple positive reports. The reports may have been so bullish that traders began to worry Plosser was right and the economy was accelerating too quickly.
New Home Sales spiked from 425,000 to 504,000 and the fastest pace since mid-2008. This was a +18.6% rise since April and +16.9% over April 2013 and months of inventory declined from 5.3 to 4.5 months. Home prices have risen +6.9% year over year. The snapback in home sales definitely arrived. The consensus estimate for a drop to 400,000 was really wrong and that contributed to the early morning spike in the markets.
Consumer confidence for June soared from 82.2 to 85.2 to the highest level since the recession. The present conditions component rose from 80.3 to 85.1 and a six-year high. The expectations component rose from 83.5 to 85.2, which was also a decent move. Auto buying plans rose from 11.6% to 12.3% of consumers surveyed. Home buying plans rose from 5.0% to 5.4%. Appliance buying plans like kitchen appliances and big screen TVs rose from 45.2% to 50.2%. Apparently the snapback in the consumer sector is also alive and well. However, only 18.8% of respondents expect business conditions will improve over the next 6 months. More than 16.3% thought available jobs would increase but 18.7% believe available positions will worsen.
The weekly chain store sales rose +2% and the biggest gain in four weeks. This follows a +0.4% gain last week and -2.8% drop the prior week. This report is normally ignored but today it was punctuation for the other bullish reports.
However, there was a bear in the house today. The Richmond Fed Manufacturing Survey declined from 7.0 to 3.0 and a three-month low. The internal components were generally negative. Backorders fell into contraction territory from +1 to -3. Employment declined from 10 to 3 and inventories fell from 14 to 4. New orders were a positive component with a minor rise from 3 to 4 and the average workweek rose from 3 to 7.
The Richmond Services Survey declined from 13 to 9 mostly as the result of a sharp decline in retail. If you exclude retail from both months it would have been a rise from 7 to 13. The six month outlook component declined only one point from 13 to 12.
The decline in the Richmond activity was minimal and nothing in the components suggests there is a slowdown in the long term trend. However, we have seen some weakness in several of these regional reports so the outlook is still cloudy.
The Case Shiller home price report showed prices rose in April 10.8% over year ago levels. That is down from +12.4% for the prior month. The FHFA Purchase Only House Price Index showed a gain of +5.9% in April compared to 6.4% in February. These are lagging reports for the April period and were ignored.
The big report for the week is the GDP due out on Wednesday. Analysts are currently expecting a downward revision to -1.9% for Q1. Most investors are going to be shocked when this number is released if it is anywhere close to the forecast. With estimates for the rest of the year now declining every week the negative start for the year could be bad for sentiment.
The Fed lowered their full year growth forecast last week from 2.9% to 2.3% because of the negativity in Q1. They blamed it on the weather and nobody blinked.
After Plosser's comments today the speech by Richmond Fed President Jeffery Lacker on Thursday is sure to draw attention.
I had several emails about the Russell index rebalance on Friday and asking about what to expect from the Russell in the following week. Basically the Russell should be negatively influenced by the rebalance through Friday. The majority of fund selling and buying will be done with market on close orders on Friday. However, traders will try to front run the funds by selling all week. Early next week fund managers will try to even out their new positions based on the final weightings released by Russell. This means there will be a minor amount of follow on buying to bring their positions into compliance with the new Russell weightings. In theory this should provide a slightly positive bias for the Russell indexes next week.
Since the indexes being reconstituted involve the top 3,000 stocks in the U.S. this positive bias is market wide. However, there are only about 165 stocks being added. Depending on the market cap of those 165 stocks the positions in the other 2,835 stocks will have to be adjusted. For instance if Facebook were being added with a $131 billion market cap it would cause ripples in the entire index structure. Even a little ripple can be felt because there is $7.5 trillion indexed to the Russell indexes.
I scanned the additions list, See the list of additions here, and I did not see any giants. However, there are a lot of midrange companies and some popular new IPOs. Companies of interest were GRUB, TYC, TRUE, PLUG, FRSH, LQ, FWLT, KODK, ARWR and ALLY. The two in that group that stood out the most were Tyco and Ally Financial. ALLY has a market cap of $12 billion and TYC is $21 billion. Strangely most of the small cap additions I looked at were moving lower. That may have just been the market pressures for this week.
Yahoo CEO Marissa Mayer really ticked off a lot of people when she showed up more than two hours late to a key meeting with some very important advertisers. The mistake came at the Cannes Advertising Festival where companies like Yahoo get some face time with the people who make decisions about spending tens of millions of advertising dollars.
In this case Interpublic Group (IPG) had arranged a private dinner at the very posh L'Oasis restaurant to meet executives from Mondelez International (MDLZ) home of Kraft Foods, Nabisco, Maxwell House, etc, MillerCoors and yogurt maker Chobani. When Mayer did not show up for more than two hours the CEO of IPG and several of the other executives had already left.
Mayer told attendees she had fallen asleep. Analysts said it would have been better if she had lied and blamed an unavoidable conflict. Since Yahoo's advertising revenue is declining every quarter Mayer should have been very interested in not only being on time but alert and engaged. After the story broke numerous employees and past employees came forward and claimed she is extremely late for meetings all the time. While I don't think Mayer will lose her job over this I suspect the board will make her understand that relationships matter and respect or disrespect from the C-suite goes a long way. Just because she earns $500,000 a week it does not mean she can show up at meetings whenever she wants.
Is anyone worth $500,000 a week?
Micron (MU) reported earnings of 79 cents that beat estimates of 70 cents. Revenue spiked +72% to $3.98 billion and beating estimates of $3.89 billion. They raised guidance for current quarter revenue to $4.1 billion and slightly ahead of estimates. Micron said estimates for falling chip prices were wrong and DRAM and NAND prices were stable and demand was strong. DRAM PC/Server memory accounted for 69% of revenue with NAND flash memory at 28%.
SanDisk is still outperforming Micron with a new generation of chips called TLC or three level cell. Micron is working on widening its product base but right now it is the low cost producer of the generic memory and business is good. Micron is expected to partner with a hard drive maker like STX or WDC to make a major push into SSD drives.
Vertex (VRTX) shareholders were handed a long awaited gift today when the company announced the results of some drug trials on cystic fibrosis. Lumacaftor, when used in conjunction with an existing Vertex drug was shown to improve lung function, patients quality of life improved and they gained weight. People with this disease normally die in their mid 20s. Goldman Sachs expects the drug to peak at $5 billion a year in revenue, up from the $370 million for the companion drug. This is a windfall for Vertex and they have a couple more drugs in the pipeline to further enhance the patient response. Analysts expect VRTX shares to rise as high as $150 once they get FDA approval in 2015.
This drug trial announcement had been expected for some time and Vertex said it would be out at the end of June. You could not buy options on VRTX for the last several weeks without paying an obscene premium. I tried on Monday to find a way to play it for maximum impact and I could not make the numbers work. Near the money calls at $15 and puts at $12 on a $66 stock did not work for me. The reason was the potential for either a pass or fail trial. If the trial had failed we could have seen the stock in the $20s, down from the close at $66 on Monday. This was an all in bet. Red or black, pass or fail, hero or zero. Those with faith in the outcome were richly rewarded. Shares rallied +40% to $94.
Web.com (WWWW) shares fell -20% after Google said it was testing a service for finding and registering domain names. If Google leaps into this sector the cannonball splash is going to empty the pool. There has been some serious consolidation over the last several years and every time I log into my registrar I expect to see some new name on the webpage.
Registering domain names is a lucrative business. I own about 700 and even using an inexpensive registrar is expensive because they have to be renewed every year. I loaded up on website and newsletter names over a decade ago and have been slowly selling them off one at a time. I sold Jon Najarian the OptionMonster.com name way too cheap! (If anyone wants to start their own website/newsletter just email me and I will partner with you. Need a newsletter name, I have it.)
Google could quickly dominate the market if it decides to jump in. Google has sold domains through resellers in the past so they have experience in the process. It is not a hard business and with Google's IT staff they should be able to develop a compelling offering. They announced yesterday they are working with website builder Wix.com (WIX) and shares of WIX spiked 13%.
The energy sector was the biggest loser today after being the biggest winner for the last month. Shares of the big momentum stocks were down hard on no news. CLR lost -$5, EOG -4, HP, -4, WLL -4, OXY -4, etc. However crude prices were positive most of the day around $106. The sector may rebound tomorrow because something happened after the bell to send crude prices to $107.50 and while I could not find the headline I would bet it had to do with Iraq.
The Dow lost -119, Nasdaq -18 after being up +30, the S&P -12 and the Russell 2000 -11. Those are decent declines but only a blip in the longer term trend. The S&P only declined -.6% and added one more day to extend its streak to 44 days without a 1% move in either direction. That is the longest since 1995. We should not be concerned about a -12 point drop especially when the trend since January has been rally for a couple weeks, decline for three days and repeat.
The S&P hit a new intraday high at 1,968 this morning before falling to close at 1,950. That round number close was convenient but support is still another 20 points away around 1,930. If the 1,925-1,930 level breaks we should become very concerned because it would be a change in the trend.
The historical trend for the week after June expiration is down for 21 of the last 24 years. We are well on our way but the week is not over.
The Dow chart worries me. The Dow high in early June was 16,970.17. The intraday high today was 16,969.70. The difference is only .47 or less than half a point. Can you say "double top?" Normally double tops are farther apart in time but it would be tough to argue with today's performance. The fly in this soup is the intraday high on Friday at 16,978. It only happened for a few seconds before falling back below 16,960 the rest of the day. However, the chart still looks the same.
The failure at the 16,970 level multiple times is a warning. If uptrend support just under 16,800 were to fail this decline could accelerate quickly. As long as the existing tend is not broken buyers will eventually return. However, this close to summer it would not take much to sour sentiment. Nobody wants to leave a bunch of positions open in a falling market as they head to the beach.
The Nasdaq Composite soared past resistance at 4,371 at the open but the hang time above that level was very short. The decline began almost immediately and the Nasdaq went from +30 at the open to -18 at the close. In reality all it did was give back three days of gains but it was ugly on an intraday chart.
The 4,350 level is a critical support point after falling below the short term uptrend support. However, we could dip to the 4,300 level without significant damage. I don't want to go there but it is not my choice.
The Nasdaq 100 spiked through the 3,800 resistance level that has held it back for two weeks but it was instantly sold to knock it back below that prior resistance. Note the very tight range under 3,800. That suggests the buying pressure is growing.
The Russell 2000 was up +9 points in the morning and declined to lose -12. The dead stop at 1,193 and resistance from April could have been a determining factor but I am betting on the Dow being the lead dog today. However, the MACD is rolling over along with the RSI. We need that 1,160 support level to hold or we are in big trouble.
Let's review the facts. We were overbought and struggling to make incremental new highs every day. The Dow may or may not have been the major factor for the decline when the early June highs proved to be too much resistance to overcome. This week has been down in 21 of the last 24 years. The situation in Iraq took a turn for the worst. A Fed head was trying to roil the market and succeeded.
One day does not make a trend. Our recent history of dips lasting only three days is a trend. Let's hope it holds.
There were 275 new highs on the NYSE and Nasdaq and only 53 new lows. That is hardly bearish.
The S&P only traded in a narrower range than it did on Friday and Monday ONE day in the last 20 years. We were due for some volatility.
Table from Business Insider - MKM Partners
Traders are so used to watching the market overcome all obstacles and move higher that a strong down day flushed out a lot of weak holders.
Thanks to QE making money cheap in the first quarter stock buybacks totaled $160 billion and the second highest quarter ever. If you add dividends the cash back to shareholders totaled $241.2 billion. Only Q4-2007 was higher. When QE ends this free money scenario could also end. With this statistic being repeated almost daily and Plosser predicting a quicker arrival of rate hikes investors may have decided to take some money off the table.
We never know why a market declined until it is over and we have the benefit of hindsight. Let's hope our rear view mirror next week shows another three day dip and rebound to new highs. If this dip turns into something else then we will deal with it as it happens. Remember, stocks do go down as well as up. We should remain in buy the dip mode until proven wrong.
Enter passively, exit aggressively!
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