Nobody should have been surprised with Nasdaq 5,000 triggering a sell the news event. It was a major psychological level and a good place for bulls to take profits and bears to launch new shorts. Now the battle is in progress to see which side is the eventual victor in this tug of war.
The Nasdaq traded over 5,000 for about 45 minutes on Monday and closed at 5,008.10 on a closing day short squeeze. This is the equivalent of a runner breaking the tape at the end of a race. The goal was achieved and now it was time to rest. The profit taking was minor and no harm was done.
On the economic front there was nothing to depress the market. The ISM New York for February actually rose from 671.1 to 677.5 after a minor -2 point dip in January. The current conditions component soared from 44.5 to 63.1 while the six-month outlook component rose slightly from 66.9 to 71.7. However, the employment component declined from 55.4 and into contraction at 49.3. The quantity of purchase component collapsed from 69.0 to 54.8.
Analysts blamed weather for the weakness in the internals and this time I believe them. Weather in the northeast was terrible in February.
The vehicle sales data for February disappointed with a decline from 16.7 million to 16.2 million. Analysts were expecting 16.7 million. Auto sales declined from an annualized rate of 7.5 million to 7.2 million. Light truck sales declined from 9.1 to 9.0 million. The weakness was blamed on weather and I think everyone would agree with that. It is tough to sell cars in 20 degree weather and blowing snow. Sales are expected to rebound in March and April as spring weather brings out the buyers in force.
The big economic reports begin on Wednesday with the ADP Employment and Fed Beige Book. Estimates are for a minor decline in jobs from 213,000 to 210,000. I promise you if job gains decline any estimate miss will immediately be blamed on weather. That is the catch all excuse this month and I am sure we will see it used several more times this week.
We report on the economic reports every week and I am sure most readers skip the boring economic section. However, everyone should be paying attention this week. Since February 2nd there have been 42 reports where the numbers came in weaker than expected and only 7 where the numbers met or beat estimates. In any normal market this would be big news but the race to Nasdaq 5,000 and the various geopolitical events and Fed testimony seem to have attracted the most attention.
How stable can the economy be where an entire month of reports missed estimates? The Atlanta Fed is now projecting Q1 GDP will grow only +1.2% and half what the consensus is expecting at +2.4%. Also, their forecasts are still declining.
ZeroHedge List of Reports that Missed Estimates:
1. Personal Spending
2. Construction Spending
3. ISM New York
4. Factory Orders
5. Ward's Domestic Vehicle Sales
6. ADP Employment
7. Challenger Job Cuts
8. Initial Jobless Claims
9. Nonfarm Productivity
10. Trade Balance
11. Unemployment Rate
12. Labor Market Conditions Index
13. NFIB Small Business Optimism
14. Wholesale Inventories
15. Wholesale Sales
16. IBD Economic Optimism
17. Mortgage Apps
18. Retail Sales
19. Bloomberg Consumer Comfort
20. Business Inventories
21. UMich Consumer Sentiment
22. Empire Manufacturing
23. NAHB Homebuilder Confidence
24. Housing Starts
25. Building Permits
27. Industrial Production
28. Capacity Utilization
29. Manufacturing Production
30. Dallas Fed
31. Chicago Fed NAI
32. Existing Home Sales
33. Consumer Confidence
34. Richmond Fed
35. Personal Consumption
36. ISM Milwaukee
37. Chicago PMI
38. Pending Home Sales
39. Personal Income
40. Personal Spending
41. Construction Spending
42. ISM Manufacturing
Reports that Beat Estimates
1. Markit Services PMI
2. Nonfarm Payrolls
4. Case-Shiller Home Price
5. Q4 GDP Revision (but notably lower)
6. Markit Manufacturing PMI
In stock news Target (TGT) is planning $2 billion in cost cuts over the next two years through corporate restructuring and other improvements. The company will eliminate "several thousand" headquarters positions over the next two years. The company also plans to invest about $2.1 billion in capex including a $1 billion investment in technology and supply chain improvements. The company will reduce the focus to a handful of key product lines and bolster its online business.
The company said it would earn between $4.45 and $4.65 in 2015 and that compares to analyst estimates of $4.51. Same store sales in 2015 are expected to rise 1.5% to 2.5%. Sales in 2016 are expected to rise +10% and they are projecting $2 billion in share buybacks in 2015 and $3 billion a year every year beginning in 2016. Shares rallied $2 at the close.
Shares of Seagate (STX) declined -4.5% after Bank of America put an underperform (sell) rating on the disk drive maker. Shares of Seagate have been weak since December and they missed on earnings in late January.
Tivo (TIVO) shares rallied about 7% in afterhours after they reported earnings of 7 cents compared to estimates for 4 cents. Tivo said net subscriber additions in Q4 rose +340,000 compared to 319,000 in the year ago quarter. This was the fourth best quarter in the last seven years in terms of net subscriber additions. Also, expenses incurred in acquiring these subscribers declined -25%. Revenue rose +7.3% to $114.1 million and blew away estimates for $89.9 million.
Orexigen Therapeutics (OREX) shares rallied +32% after the company said their diet pill also had positive cardiovascular benefits. Patients on the drug Contrave had fewer major adverse cardiovascular events and fewer cardiovascular deaths than patients on a placebo. The study covered 8,910 obese patients. The drug is designed to reduce appetite and control cravings. The positive cardiovascular results were unexpected and appeared to be unrelated to weight change. The FDA has asked the company to organize another study to confirm the results.
Alibaba (BABA) shares fell again with a -3% drop on news Taiwan had told Alibaba it had six months to get out of the country because it did not confirm to the country's reporting rules. Alibaba had registered in Taiwan under an alias that was registered in Singapore. Taiwan said the company had "hidden" its status as a mainland based company by using the Singapore based alias.
There was also a Wall street Journal article claiming that some Alibaba sellers had been faking orders to make their products appear more desirable. Fake orders, called "brushing" in China, involves paying people to pretend to be customers and allowing vendors to inflate sales figures and boost their standing in the marketplace. Alibaba gives high volume sellers prominence on the website. The fake orders are basically a form of false advertising, which is prohibited in the U.S. and China.
With almost daily headlines that reflect badly on BABA and the 429 million share lockup expiration on the 18th the stock is really under pressure and it closed at a new low.
Human resource service company TriNet Group (TNET) reported earnings of 26 cents compared to estimates for 37 cents. Shares of TNET hit a new high in regular trading to close at $37.88 but that was quickly erased in afterhours with a -$6 drop to $31.75. Their earnings release was filled with accomplishments but traders were not impressed. After increasing revenues +33% in 2014 they predicted +15% growth for 2015.
Sharea of Ambarella (AMBA) rallied +$3.50 in afterhours to a new high after the company reported a +161% increase in earnings to 68 cents compared to estimates for 48 cents. Revenue of $64.7 million beat estimates for $56.6 million. Ambarella makes the video compression chips for GoPro cameras. The company is already looking past GoPro cameras for other niche markets and they are focusing on drones, wearable cameras, security cameras and automotive cameras that take HD video. Ambarella already makes video chips used in broadcasting TV programs worldwide. On Monday Chinese smartphone manufacturer Xiaomi will launch its own Yi wearable action camera using Ambarella's chips. Shares of AMBA should be bought on any decent pullback.
Lumber Liquidators (LL) tried to rebound today after a -40% drop since Wednesday. The program 60 Minutes did an story on them over the weekend claiming they were buying wood from China that did not meet California EPA rules for chemical content. Excess chemicals like formaldehyde then evaporate into the air in the home and can cause cancer and other diseases. LL claims the testing used by 60 Minutes personnel was not accurate and did not conform to California laws.
Janey Capital upgraded the retailer to buy saying the 60 Minutes claims were overblown and the sell off was overdone. Montgomery Scott also issued a buy rating for the same reasons. The Janey analyst said even if the claims were true the net benefit to LL from buying the cheaper wood was in the range of only $4-$6 million and he doubted the company would have risked the future of the company and possible jail time for the officers for that small amount of money.
Morgan Stanley removed their price target on LL saying we don't know what the company is worth today. Either the accusations are untrue and LL will survive or they are true and the 100,000+ suits that will appear will put the company out of business. There are already suits being filed demanding the flooring be torn out and alternate flooring installed. With more than 100,000 homes in California with LL flooring that would be a terminal disaster for LL.
Nearly all analysts that commented said even if the story proved to be untrue the reputation risk for LL would hamper sales for a long time.
If for no other reason readers should look at the chart as a good reason to always have a stop loss on any position.
Best Buy (BBY) raised its dividend by 21% to 23 cents and will pay a one-time special dividend of 51 cents using the proceeds from some legal settlements over LCD pricing. The payouts will be on April 24th to holders as of March 24th. The company also said it increased online sales to 9.8% from 7% of total sales. Net income rose +77% to $519 million or $1.48 per share for the quarter. Analysts expected $1.38. Revenue of $14.21 billion just missed estimates of $14.41 billion. Same store sales rose +2%. Best Buy expects to buyback $1 billion in shares over the next 3 years. Remember this was a chain facing bankruptcy just a couple years ago.
Thank you President Obama. That is probably what Smith & Wesson (SWHC) employees say to themselves as they leave work every day. The president has prompted the biggest increase in the sale of firearms of any other person. Every attempt to ban something or comment about gun control send buyers racing to the store to buy more while they still can. Smith posted earnings of 20 cents for Q4 compared to analyst estimates for 11 cents. Revenue of $130.6 million also beat estimates for $124.6 million. S&W raised guidance for the current quarter to a range of 29-31 cents. Analysts were expecting 27 cents.
On a side note President Obama has been unsuccessful in attempting to ban modern sporting rifles so now the ATF is trying to ban the ammunition for those rifles. This will not only cause every available bullet to be immediately bought off retailer shelves but also cause another round of frantic gun buying before the next executive order hits the headlines.
The markets pulled back from their record highs on Tuesday but it was a small decline. This was expected as I cautioned last week. However, the indexes finished well off their lows. The Dow nearly -150 points at its lows and rebounded to lose only -85. The S&P rebounded +9 from its lows to lose only -9 for the day and close at 2,107.
With the markets at record highs after four weeks of gains we should expect 2-3 days of profit taking and consolidation. The S&P dipped to support at 2,100 and resistance is still strong at 2,117. That gives us a narrow range of movement and I would not be surprised to see us trade down to 2,085. I believe the dip buyers are alive and well and we will see further gains over the next couple weeks. However, once option expiration arrives I do expect another dip that could be substantial. We have not had a real 10% correction on the S&P since 2011 and with the economic reports weakening and earnings expected to fall in Q1 and Q2 there are plenty of reasons for portfolio managers to tread lightly heading into summer.
The Dow rallied to a new high at 18,288 on Monday with a gain of +155 points. After giving back -85 today that means we are still up +70 for the week. We really can't complain. The big decliners today were the big winners on Monday. That is the way it is supposed to work. Most of the Dow components traded relatively flat and it would be hard to say today's sell off was broad based.
This was simply profit taking that could last a couple more days. With the payroll numbers this week, the bank stress tests and the Fed Beige Book there is plenty of uncertainty to cause cautious investors to pocket some profits.
Initial support is now 18,130 and resistance 18,260.
The Nasdaq declined but Apple did not. Apple has refused to dip below $128 for the last three days and that is positive for the Nasdaq. As long as Apple refuses to give back more of its gains the Nasdaq will have support to help fight off any further losses by other companies. Unfortunately Apple could easily stand to give back another $10 of the February gains. It just depends on how strongly the Apple faithful feel about next week's new product announcement. Historically Apple shares decline after announcements on a sell the news event.
The Nasdaq Composite has pretty decent support at 4,950 and today's low was 4,956. We know where resistance is and that is 5,000 and 5,048 the record high close. The Nasdaq could easily move sideways for a couple days before mounting another run at the record high and I doubt anyone would complain.
The Russell 2000 small caps are holding their gains and that is positive for market sentiment. The index gave back -8 points to 1,234 but still held above support at 1,230. As long as the Russell does not break down it suggests fund manager sentiment remains positive.
I continue to have a positive bias on the market as long as the S&P remains above 2,085. We were due for some profit taking and we basically gave back half of Monday's gains. I don't see that as a problem. I believe the dip buyers are alive and well until proven wrong. Any weak payroll numbers should be chalked up to severe winter weather and ignored.
I have to share this news headline because it is so unbelievable that it makes my head spin. America needs to organize a coalition that will actively pursue ISIS until they are eliminated. A mother braved almost certain death to find her son that was being held hostage by ISIS. She went to ISIS headquarters and asked to see him. Instead of just killing her outright they rolled out their "red carpet" and asked her to relax and have a meal while her son was being brought to her. They brought her cups of tea and a meal of rice, meat and soup. She thought they were being especially kind. After the meal she asked to see her son. They laughed and said, "You have just eaten him." They had butchered him on her arrival and prepared the meat for her meal. Somebody needs to kill these people and do it quickly. Link to story
Enter passively, exit aggressively!
Send Jim an email