A sharp decline in oil prices greased the skids and the Dow slid back to negative territory after a +143 point intraday gain.

Market Statistics

The drop in oil prices helped power the Dow Transports to a +2.6% gain but that was also well off the highs. The markets roared off to strong gains at the open but could not hold them after Germany slashed its economic outlook for 2015.

Spiking to +143 intraday and then falling back to negative territory is a bearish event suggesting the selloff is not over despite the S&P and Nasdaq finishing slightly positive.

The only economic report this morning was the NFIB Small Business Optimism Index. The headline number declined in September from 96.1 to 95.3 and a 3-month low. Those businesses planning on making capital expenditures declined from 27% to 22%. Those planning to increase employment declined to a five month low down from 10% to 9%. The high was 13% in July. Those expecting earnings to improve declined to -19% and the lowest level since April.

This was not a positive report. Nearly all of the components declined slightly. The two positive components were "a good time to expand," which rose from 9% to 13% and those expecting the economy to improve rising to a net of -2% and the highest level since May. Available employment openings also declined from 26% to 21%. That is the lowest level in 8 months.

Overseas economic news from China was also weighing on the market. Light truck sales in China declined -16% in September. A competitor to Caterpillar said Q4 sales could be down -70% to -80%. China is clearly slowing and the government is refusing to add additional stimulus.

The economic calendar for Wednesday is highlighted by the Fed Beige Book, an update of the economic conditions in each of the Fed's districts.

The Producer Price Index (PPI) is expected to be flat to only slightly higher by +0.1%.

The Philly Fed Manufacturing Survey on Thursday is expected to decline from 22.5 to 19.5 in October. This is also a critical report considering the worries over slowing global economies.

The rest of the week has a flurry of Fed speakers with five on Thursday alone.

Crude prices plummeted again to levels not seen since June of 2012 for WTI and August 2010 for Brent. There were multiple catalysts but fears about shrinking global demand was the underlying theme. Germany cut its expected growth rate for 2014 from +1.8% to +1.2% and slashed 2015 estimates from +2.0% to +1.3%. With Germany the strongest economy in Europe the outlook for all of Europe is not good. The IEA cut its global growth estimates to 3.3% for 2014 and 3.8% for 2015, down from 3.4% for 2014 and 4.0% for 2015.

The IEA cut demand estimates for 2014 by -200,000 bpd to 92.4 mbpd. This is still a rise of +700,000 bpd for the full year. They cut 2015 demand growth estimates from +1.4 mbpd to +1.1 mbpd.

Global supplies rose +910,000 bpd in September to 93.8 mbpd and +2.8 mbpd more than the same period last year. Non-OPEC supply has risen sharply in 2014 by +2.1 mbpd. OPEC output surged to a 13-month high at 30.66 mbpd thanks to a recovery in Libya to 800,000 bpd and higher output from Iraq. Non-OPEC supply rose +495,000 bpd in September to 56.7 mbpd.

However, global refinery demand for crude oil rose to record highs in August to 79 mbpd, up +1.4 mbpd from the same period in 2014.

Demand is rising despite the headline cut by the IEA. They only cut their demand "growth" estimates. The problem today is more of a fear over global economic weakness and the potential for Europe to fall back into recession for the third time since 2008. Recessions weaken oil demand. China is also slowing and they are the second largest consumer of oil.

Saudi Arabia and Iran traded shots last week saying they were going to discount oil to Asia by the most since 2008. With Saudi discounting rather than cutting production to support prices it means a price war has begun. Saudi Arabia needs $86 a barrel to make their budgets and with prices under $86 they will have to produce more to make up the difference. More oil on an already flooded market will only push prices lower if they are serious about causing Iran and Russia pain. By pushing prices lower they are also going to pressure the U.S. shale market and retard future investment in drilling. If crude goes much lower it will force marginal producers to curtail production.

Iran and the six western nations meet again next week to discuss the nuclear problem. Iran claims it is not going to back down from its desire to continue enriching uranium and dissidents continue to claim Iran is working on a bomb in secret. The deadline for an agreement is November 24th and the western nations have said there will be no extension. If no agreement is reached the sanctions will immediately return and Iran's ability to ship oil will be drastically curtailed. This could help support oil prices but that is still over a month away.

The sharp drop in oil is great news for consumers because gasoline prices will be under $3 nationwide in the near future. This will put more money in their pockets for the holiday shopping season and increase profits for companies like the airlines where oil is a major expense.

The weak global economy and the sharply rising dollar continue to weigh on commodities in general. This will lower inflation pressures and make the Fed's job harder to hit their inflation targets at 2%. Once the current equity market weakness ends the metals prices will weaken and further depress the commodity index.

The sinking global economics and comments from Fed vice Chair Stanley Fischer sent treasuries to new highs and yields to new 15-month lows. The ten-year closed at 2.2% but several noted analysts said they expect this to be the high for bonds as long as U.S. economics continue to improve. I would not hold my breath on that with the rest of the world sinking.

The Q3 earnings cycle shifted into second gear today with several high profile reports. JP Morgan (JPM) reported adjusted earnings of $1.36 ($5.6 billion) compared to consensus estimates of $1.39. Legal costs knocked -26 cents off their earnings per share. Revenue rose +5.4% to $25.2 billion and beating estimates for $24.4 billion. Investment banking revenues declined -6% to $2.7 billion. Equity trading revenue declined -1% to $1.23 billion. Fixed income trading revenue rose +15% to $6.11 billion.

CEO Jamie Dimon said the bank would probably double its $250 million a year cyber-security budget within five years after hackers stole personal information from 76 million household accounts. Shares declined on the earnings news.

Citigroup (C) saw earnings increase +6.6% to $3.44 billion or $1.15 per share on an adjusted basis. Analysts were expecting $1.12. Consumer loans rose +2.8% and credit card debt rose +1.1%. Revenue from fixed-income markets rose +5% to $2.98 billion. Total trading revenue rose +6.7%. Equity trading revenue rose +14% to $763 million. Global consumer banking revenue rose +4.4% to $9.64 billion with North America bringing in $4.99 billion. Shares were up +$1.57 on the news.

Wells Fargo (WFC) reported earnings of $1.02 ($5.41 billion) despite completing 40% fewer home loans. They added $48 billion in mortgage loans and they projected lower volume for Q4 as well. Credit card balances rose +11% to $28.3 billion. Overall loans rose by +3.7% to $838.9 billion led by a +13% increase in commercial and industrial loans. Profits from the wealth management, brokerage and retirement segment rose +22% to $550 million. Investment banking fees declined -7% to $371 million. Shares of WFC fell -3% on the report.

Johnson & Johnson (JNJ) posted adjusted earnings of $1.50 ($4.75 billion) on a 5% rise in revenue to $18.47 billion. Consensus estimates were for $1.42 per share. The company sold more than $2 billion YTD in its new blockbuster Hepatitis C drug Olysio with $800 million in Q3. However, Olysio was taken in conjunction with Gilead's Sovaldi treatment and Gilead just released a new drug, Harvoni, which will no longer need the addition of Olysio. That is going to weigh on Olysio sales in the future. However, JNJ raised full year guidance for the third time to $5.92-$5.97, up from the July forecast of $5.85 to $5.92. Shares declined -$2 on the news to a six-month low.

After the bell Intel (INTC) reported earnings of 66 cents (+12% to $3.32 billion) compared to estimates of 65 cents. Revenue rose +7.9% to a record $14.6 billion and beating estimates of $14.4 billion. Intel said analyst estimates for Q4 may be low due to a strong refresh cycle in the corporate PC world. Intel is expecting revenue of $14.7 billion +/- $500 million. Analysts were expecting $14.5 billion. Gross margin is expected to be 64% compared to estimates of 62%.

The company shipped more than 100 million processors in Q3 and the first time over that 100 million level. Revenue for the PC processor division rose +8.9% to $9.19 billion. Server processor revenue rose +16% to $3.7 billion. Notebook processor revenue jumped +21% with desktops rising +6%. IDC reported last week that PC shipments fell -1.7% in Q3 but it did not appear to hurt Intel. Sales of desktops are increasing now that Windows XP is no longer supported. Intel is on track to ship more than 40 million tablet processors in 2014. That is a new market for Intel. They are giving manufacturers subsidies to entice them to use Intel chips. Those subsidies caused a $1.04 billion loss in that division in Q3. The CEO said they are about to begin shipping a new and faster tablet processor that will not include a subsidy. Shares rose about 50 cents in afterhours.

CSX Corp (CSX) reported earnings of 51 cents, up +12%, compared to estimates of 48 cents. Revenue rose +8% to $3.2 billion. Revenue and earnings were both records. CSX said it expected to "sustain double-digit earnings growth and margin expansion in 2015. Freight volumes rose +7% helped by shipments of oil, coal, drilling pipe and frac sand. Agriculture shipments rose +13%, autos +8% and coal +7%. He said they were moving 3 oil trains a day away from shale fields while delivering pipe and sand back to those fields. CSX operates more than 21,000 miles of track in 23 eastern states. Shares rose about 60 cents in afterhours.

The earnings cycle is just getting started and guidance has not been exciting. So far in October 17 companies have given positive guidance and 34 issued negative guidance with 30 reporting in line with estimates.

October Earnings Guidance

Earnings for the rest of the week are headlined by GS, EBAY, NFLX, GOOG, IBM and SNDK. However, all the companies reporting on Thursday are important to the overall earnings picture.


The Dow rallied from the open to +143 by noon and then rolled over on no specific news. The Dow declined to close down -6 points and was the weakest index. The S&P rallied to +25 points and then declined to close with only a +3 point gain. The Nasdaq rallied to a +68 point gain only to slide into the close with only a +13 point gain.

The Russell 2000 was the big winner with a +1.2% gain of +12 points. However, that was well off the +26 point intraday high. The spike in the small caps energized the market in the morning but it did not last. The small caps were also the most heavily shorted so any positive news would affect them the most.

The opening rally across all markets was mostly short covering. Numerous oversold stocks were up strongly at the open in typical short squeeze fashion but then faded quickly when there was no follow through.

There could have been some Intel earnings fear in the market after the very bearish forecast by Microchip Technology last Friday. Saying the semiconductor industry was entering a 2-3 quarter correction crushed the markets on Friday. With Intel reporting tonight there could have been a large number of investors afraid Intel was going to confirm that forecast. However, after the Intel earnings and positive comments the S&P futures were up strongly at +9 for a few minutes suggesting tomorrow's open will be positive. They have since faded to +6 and there is still a lot of darkness before the dawn.

The S&P broke below the 200-day average on Monday and did not even come close to that 1,905 level in today's rebound with the high at 1,898. The longer we stay under the 200-day the stronger that resistance will become. If we end the week under the 200-day it would suggest a much lower decline ahead.

The lack of any meaningful gains on the S&P is bearish. The lack of follow through on Monday afternoon's decline is somewhat bullish. However, giving back the intraday gains tilts the scales into the bearish category. The positive futures after Intel's earnings are the wildcard for Wednesday.

In technical speak the S&P made another lower high and lower low at 1,871 and that means the sellers were still active. The S&P is very short term oversold but nothing prevents it from becoming more oversold. We are due for a real short squeeze bounce instead of the half hearted one at today's open.

Resistance is going to be today's high at 1,899, round number resistance at 1,900 and the 200-day at 1,905. Initial support should be today's low at 1,871 followed by 1,865 and 1,840 if the initial support fails.

The Dow chart is also negative with another lower high, lower low. Support at 16,368 has failed and the next material support is 16,025. The key will be whether any opening bounce on Wednesday is sold. Traders defended yesterday's low at 16,310 with some dip buying at the close to end at 16,315. The Dow was helped by Boeing, 3M and Caterpillar and dragged down by Chevron, Johnson & Johnson and Visa.

If you looked only at the Dow chart without considering any external factors like Intel's earnings I would not be a buyer. The double close under 10,368 is bearish. Fortunately external events do matter and Intel will be a positive influence at Wednesday's open.

The Nasdaq set a new low by .05 of a point at 4,212. I don't think that qualifies as a technical breakdown. If anything that is a successful defense of Monday's support low. I know I am grasping at straws here but I will take what I can get. Prior support at 4,250 is now resistance and the high today was 4,246. Nasdaq futures are up +13 points late Tuesday and that is hardly a roaring reaction to the Intel earnings but it is positive.

If we move down from here there is little support before the 4000-4040 level. There is a lot of congestion between 4050-4150 that could act as eventual support but no clear levels exist at least in my opinion.

The Russell 2000 may have been the strongest index but it was also the most oversold. That means a short squeeze would lift it the most. The Russell could find weak support at 1,040 followed by 1,010.

The Russell is down -13% from its highs and could decide to rebound at any point now that the technical correction has been achieved. However, any further declines from here could target the bear market level at 966.

If the futures hold in positive territory overnight we should see a rebound at the open. The key question will be whether that rebound is sold again as it has been over the last two days or will it be the start of a recovery. We will not know that until next week.

I would not bet the farm on any new long positions but I feel the distinct need to nibble on longs at this level. However, I would close those positions if we start to make new lows on the S&P.

Enter passively, exit aggressively!

Jim Brown

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