A much stronger than expected payroll report caused traders to believe a rate hike in June was almost guaranteed. The Fed may be forced to rethink their "data dependent" guidance or be forced to raise rates sooner rather than later.

Market Statistics

After a month of weak economic data the analyst community had pretty much written off the chance of a June rate hike and moved the consensus forecast to September or even into 2016. Surprise, surprise! The sudden appearance of strong jobs data upset the applecart and now the forecasts are racing back to June. This will make the Fed post meeting statement on the 18th extremely critical for the market.

The Nonfarm Payroll report for February showed a gain of +295,000 jobs compared to the consensus estimate for +240,000. There were a large number of recent estimates for numbers under 200,000 and as low as 150,000 because of the severe winter weather and the massive layoffs in the energy sector. For the number to come in at 295,000 given those factors it means March could be much higher once the weather improves. January was revised lower from 257,000 to 239,000.

We are looking at a significant improvement in employment trends. The average for the last four months is +319,000 and typically there is a dip in Jan/Feb that did not happen this year. This suggests March could be really strong.

The unemployment rate fell to 8.7 million or 5.5%. The real unemployment rate that includes those who have exhausted their benefits and dropped off the roles and those forced to take a part time job because full time was not available declined from 11.3.0% to 11.0% after adjusting for seasonal factors. The number of persons employed part time for economic reasons was 6.6 million.

The average hourly wage barely budged with a +0.1% gain and the average work week remained flat at 34.6 hours for the fifth month. Private employment registered almost the entire job gain at +288,000 with government employment rising only +7,000. The services sector exploded higher with 266,000 jobs compared to the manufacturing sector adding only 29,000 jobs.

Leisure and hospitality added +66,000 jobs, which are mostly part time. Education and healthcare added +54,000, professional and business services added +51,000. Construction additions fell from 49,000 in January to 29,000 in February.

Energy/Mining jobs declined -8,000 but it is likely mining gains offset the declines in energy. Challenger, Gray and Christmas said there have been 39,621 layoffs in the energy sector so far in 2015 with 16,339 in February. Those are the jobs that are specific to the energy sector and does not include the related jobs in areas like housing, restaurants and other service businesses that cater to the oil field workers.

The strong jobs report runs contrary to the economic conditions. JP Morgan (JPM) just revised its GDP forecast for Q1 from +2.5% to 2.0% growth with the comment that revision risks continue to be skewed to the downside. Just like last year the analysts are slashing their forecasts for Q1 because of the continued severe weather that is closing stores and businesses and has cancelled more than 50,000 airline flights in February. Last week I shared a chart showing the Atlanta Fed is now predicting only +1.2% growth.

The market cratered on Friday because traders suddenly expected the Fed to fast forward their rate hikes. If the Q1 GDP is in the 1% range or even lower there will be no rate hikes. The problem is that the real GDP forecasts are not as widely known and most traders are still thinking 2.5% to 3.0% because that is where they were a couple months ago when the Q4 GDP revisions were in progress. The first Q4 reading was +2.64% and the second reading +2.19% and most of that was because of Obamacare spending and rising healthcare costs.

Also, the last reading on the CPI declined -0.7% in January after a -0.3% decline in both November and December. Year over year inflation was -0.2% but that was due to a -20% decline in energy over the same period. There is no inflation and certainly nothing near the +2.0% Fed target. Yellen expects the energy factors causing inflation to decline to ease over the next 12 months but definitely not by June.

The dollar spiked +1.38% on Friday alone on expectations for a rate hike. We have seen how destructive this is for earnings for U.S. companies and an actual rate hike would spike it even further. With S&P earnings expected to decline in Q1 and Q2 our U.S. companies don't need the currency headwinds that a June rate hike would bring.

New orders for U.S. factory goods declined -0.2% in January after a -3.5% decline in December. Excluding transportation orders the number declined -1.8%. Economists were expecting a +0.2% gain. This is the sixth consecutive month of declines and the rising dollar was blamed. Yellen does not need to accelerate this trend by pushing the dollar higher.

The ECB is launching its 60 billion euros of QE starting on Monday and extending to September 2016 or longer. This is going to push the interest rates in Europe to even lower lows and push the euro currency to a new 10-year low. A plunging euro and soaring dollar will make it even more difficult for the Fed to raise rates even by a minor amount.

While I understand the knee jerk reaction to the strong jobs numbers I believe cooler heads will prevail in the days to come. A strong jobs number is just ONE factor out of dozens that the Fed considers when making rate decisions. We know the Fed wants to normalize rates but their commentary suggests it will happen over a 2-3 year period with early hikes maybe only an eighth of a point rather than the normal quarter of a point. I believe the instant concern over future rate hikes has been greatly exaggerated.

The economic calendar for next week is rather light. There are several reports of note but none of them are normally market movers. The real problem will be the FOMC meeting the following week. There will be a lot of hand wringing and digital ink spilled over the potential for the Fed to remove the word "patient" from the post meeting announcement and thereby unofficially project June as the first potential rate hike. As long as the word patient remains in the release the Fed has said it would be "at least two meetings" before a rate hike would occur.

The actual sentence states, "Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy." If that sentence disappears the market is going to be really upset. At the same time if the sentence remains there should be some other "comfort" language to soothe nervous investors. They will have to address the jobs data in relation to their "data dependent" guidance.

The one thing we can be absolutely sure of is that the Fed will telegraph its rate moves well in advance. Until that happens all this uncertainty in the market is just a tempest in a teapot.

This time last week it appeared the Nasdaq was on track to be making new highs on Tuesday to correspond with the 15 year anniversary of the all time high in 2000. It does not look like that is going to happen after Friday's crash but it did close only 73 points from Nasdaq 5,000 so it is technically possible for a rebound to a new 15 year high to happen. Technically possible is a long way from likely.

Monday is the six-year anniversary of the recession low at 1,265. Don't you wish you had backed up the truck and loaded up with Nasdaq stocks six years ago?

The Dow declined -278 points on the same day it was announced that Apple (AAPL) would replace AT&T (T) in the index at the close of business on March 18th. That just happens to be the day that Visa (V) the heaviest weighted stock in the Dow is splitting 4:1. That will lower Visa's weighting in the index to 2.5%.

AT&T was initially added to the Dow on Oct 4th, 1916 so this is the end of an era for that stock. Bette Midler tweeted: "Apple is replacing AT&T in the Dow. They tried to call AT&T for comment but the call kept getting dropped."

The Dow Industrial Average was first calculated on May 26th, 1896. Let's hope that the Dow's consumption of Apple does not follow the same scenario from the Garden of Eden.

Apple set the stage for being included in the Dow when it split 7:1 last year. With Apple shares at $126.59 at the close it will only carry a 4% weighting when it enters the Dow. The index is price weighted so higher prices stocks have a higher weighting. Apple has a market cap ($737 billion) that is more than twice the next largest stock in the index, which is Exxon at $359 billion.

After Visa splits the top weighted stocks will be as follows based on Friday's prices.

7.0% Goldman Sachs (GS) $187
6.2% 3M (MMM) $164
6.0% IBM (IBM) $158
5.7% Boeing (BA) $153
4.7% Apple (AAPL) $127

This will also change the weighting by sector. The addition of Apple will not push technology to the top but it will be close.

20.28% Industrials - MMM, BA, UTX, CAT, GE
17.11% Technology - IBM, AAPL, MSFT, INTC, CSCO, V
16.25% Financials - GS, TRV, AXP, JPM
15.43% Consumer Discretionary - HD, DIS, MCD, NKE
11.42% Health Care - UNH, JNJ, MRK, PFE
 7.76% Consumer staples - PG, WMT, KO
 7.06% Energy - XOM, CVX
 2.89% Materials - DD
 1.80% Telecom - VZ

Today a $1 move in any Dow component adds about 6.5 Dow points. The 4:1 split on Visa will reduce that number but the replacement of AT&T by Apple will compensate for Visa's decline and change the factor to 6.75 Dow points per $1 increase in any stock. If Apple had been in the Dow on January 16th its +27 point sprint to $133 would have added +175 Dow points.

Recently the addition of a tech stock to the Dow has been the kiss of death. Microsoft (MSFT) and Intel (INTC) were both added in November 1999 and they have been a drag on the Dow instead of a lift. Microsoft has declined -43% since inclusion and Intel has declined -52%. Cisco was added in 2009 and has declined -16%.

There is a fallacy in the market that the addition of a stock to the Dow means it will spike as index funds are forced to buy the stock. In theory that is correct since the Dow does have some tracking ETFs but overall the impact is minimal. Historically when a stock is added to the Dow it tends to gain about 3% over the next month. The problem is that the amount of dollars indexed to the Dow is trivial compared to the more than $7 trillion indexed to the S&P-500. If you want your stock to move higher get it added to the S&P.

You would also think that stocks removed from the Dow would decline as the attention was removed from their symbol. That is also not true. Since 1929 stocks removed from the Dow have typically posted gains in the year following their removal.

In stock news Lululemon (LULU) was downgraded to sell by Goldman Sachs. The bank said competition was increasing for athletic-leisure wear. Nike, Under Armour and Athleta.com were some of those named. The bank also said their Canadian sales had stalled and strong dollar issues were becoming a problem. Goldman is expecting a 500 basis point hit to EBIT margins.

Foot Locker (FL) reported earnings of $1.00 that beat estimates of 91 cents. That was a +22% increase in earnings and a +22% gain in the prior quarter as well. Revenue increased +6.7% to $1.911 billion. They have posted double digit earnings gains in all but one of the past 17 quarters. Foot Locker controls 45% of the basketball shoe market. Shares rallied +4% on a bad day in the market.

Life Time Fitness (LTM) shares rose +15% on Friday after news broke that it was in advanced talks with KSL Capital and another unnamed private equity firm on taking the company private. The bidding is expected to end next week. The company operates 113 fitness centers and is considering converting its land holdings into a REIT to enhance value. Revenue rose +7% in 2014 to $1.29 billion.

Medical device maker Cooper Companies (COO) reported earnings of $1.75 and beat estimates by 22 cents but missed on revenues. They raised earnings guidance for 2015 but lowered revenue guidance. Earnings for 2015 are now expected to be in the range of $7.40-$7.70. Shares rose +9%.

The active rig count in the U.S. declined -75 to 1,192. Oil rigs declined by -64 to 922 and gas rigs fell -12 to 268 and another 18 year low. Total rigs have declined -687 (-35.6%) from the 1,931 high in September. U.S. production spiked +39,000 bpd last week to 9.324 mbpd and the highest level since 1972. U.S. crude inventories rose +10.3 million barrels to 444.4 million and a new 80 year high. Several analysts are now expecting existing storage capacity to run out by the end of March. This is why oil prices refuse to move over $50. There is still a shoe waiting to drop until inventory levels peak and begin to decline. Memorial Day is the beginning of high demand season in the USA. Refineries are in maintenance mode now and will be converting to summer blend gasoline in the coming weeks.


The markets experienced normal profit taking midweek but sentiment changed completely on Friday. The Dow was down over -300 points just before the close and there was very little short covering ahead of the weekend. The common excuse was that investors were running scared after the strong jobs report. However, there were quite a few question marks suggesting there was something else afoot.

Volume rose only about one billion shares over the 6.3 billion run rate for the first three days of the week. There were some sub-indexes being rebalanced at the close and some of that volume was related to the rebalance. That means the -300 point Dow drop occurred on very little increase in volume.

Art Cashin remarked just before the close that there was $1 billion in market on close orders to sell but the market was not crashing like it should have in the last 15 minutes if that was really the case. The low actually came at 3:40 and the Dow rebounded +30 points into the close despite the supposed order imbalance.

There were suspicions from several traders/analysts that the Friday decline was due to high frequency traders capitalizing on the rate headlines. Momentum was achieved early and it lasted all day. HFT volume is normally low but steady and tends to extend market trends. Others speculated that fund managers were lightening their exposure to stocks ahead of the Fed but the lack of volume disputed that theory.

There are two Fed heads speaking on Monday. I think it is the last day they can actually make public comments before the quiet period ahead of the FOMC meeting. If those Fed speakers want to put they market at ease this is their last chance. Unfortunately Mester does not speak until 2:25 and Richard Fisher is at 7:30. Neither will be much help for Monday's market.

We went the entire month of February where bad economic news appeared to be good news for the market. Suddenly on Friday the situation reversed and good news became bad news. I expected a market decline after option expiration. We were overextended and due for a short term pullback. Up until the jobs numbers on Friday morning everything was going according to plan. They say the best laid battle plans last only until the first shot is fired. Friday was the first shot. If it was an accidental discharge then we could get the all clear on Monday. If it was the equivalent of the revolutionary shot heard around the world then our troubles are just beginning.

I may be suffering from bias syndrome (BS) and I am looking for reasons to discount the selling. Friday just did not add up for me.

Whether we believe the reasons for the decline or not we have to respect it. Far too many people have gone broke from betting on what they thought should be happening instead of what is really happening.

The S&P broke below critical support at 2,085 and closed at 2,070. Next level support is 2,065 followed by 2,050 and then a long drop to 2,015 and 1,985. The key for Monday will be the open. If the S&P drops sharply to 2,065 or even 2,050 and firms I would expect the dip buyers to appear. Bullish sentiment did not disappear just because prosperity may be breaking out.

Of course traders don't need an external reason to sell. The psychologically important Nasdaq 5,000 level could have simply been a signal to take profits. Many analysts and high profile traders were running around saying the market was very overvalued even though the forward PE on the S&P is only 16.5. There is an old saying. If enough people say you are drunk you should sit down. Maybe if enough people say it is overvalued the market actually becomes overvalued for a short time. Everything is a matter of perception.

I said on Tuesday I would remain bullish unless the S&P broke below 2,085. We closed at 2,070 so now what? I think we should watch the market for clues.

I think we have to watch the market action and trade in the direction of the trend. While I would like to see a dip to 2,050 or 2,065 and a V bottom rebound I have found that what I would like rarely matters to the market. If we get that additional drop I would be buying the dip.

March 9th is the six-year anniversary of the 666 bottom on the S&P in 2009.

All 30 Dow components were negative on Friday and the Dow closed at a new three-week low. Support at 17915 failed with a close at 17856. Next support is 17775 and 17700. Fifteen of the Dow components are in a downtrend and a handful are trading sideways with only about 5 attempting to preserve their gains and move higher. Normally only 5-6 of the components actually do the heavy lifting and the rest are evenly divided between those that simply remain positive and those that are weak because of their own issues. The Dow internals today appear to suggest further weakness but that could be erased in a heartbeat on a news headline. Those stocks in a downtrend would see an initial short squeeze and help lift the average on the first day.

If we do get an additional decline I would probably be a dip buyer at the 17700 level. Resistance is 18100-18150.

The entry of Apple into the Dow at the close on the 18th will add some volatility in my opinion. Apple shares are almost never dormant. They are constantly moving up and down and not always in a trend.

Nasdaq 5000 turned into the market top everyone was fearing. The close at 5008 on Monday was the high for the week and we closed -81 points lower on Friday at 4927. It is notable that 55 of those points were lost on Friday and only 26 on the prior three days. Friday's flush appeared to be a combination of stop loss selling and program trading.

If you look at the short term chart the index consolidated in a range both before and after the Monday spike and the pattern failed to the downside. In retrospect this appears to have been a distribution pattern. The obvious target on a continued dip would be 4900. Any movement below that level and we move into a correction bias rather than a short term dip.

There was no common thread in Friday's selling. It was not a sudden drop in semiconductors or biotechs or Internet stocks, etc. It was broad based and no specific sector was the cause. This suggests there was a lot of ETF selling rather than specific stocks.

Resistance is 4990 and 5000. Support just over 4900.

Back in the day, Dow 10,000 was a big deal and hundreds of Dow 10K hats were handed out on the floor of the NYSE. Nasdaq 5000 hats were never popular because you only get to wear them one day per decade.

The Russell 2000 actually held up rather well until Friday. The small caps were holding their own until the bottom fell out. With several levels of near term support I think it would take some concentrated selling to push the index back under 1190.

The Dow Transports finally returned to resistance at 9200 but were immediately rejected and they have been in a confirmed downtrend since February 25th. The transports are not confirming any further Dow gains and are actually projecting further Dow losses. Support is now 8600 and the low from February 2nd. This decline bears watching as a sentiment indicator for the Dow.

To summarize the Friday decline was out of character for the recent market. I believe there was a program trading component and I am sure there were a lot of stop losses hit. When the market goes up for several weeks without a material dip it is susceptible to a sudden downdraft because of trailing stop losses used by traders to protect profits.

I am not really buying the "oh heck, the Fed is going to raise rates, run for the hills" scenario. Who in their right mind did not know that the Fed is eventually going to raise rates and June has been a common target in the press for months.

Market dips occur on headlines but that does not mean the world is coming to an end. Until this decline is confirmed with continued losses we should look at it as temporary. If Monday continues the downtrend then trade in the direction of the trend.

Daylight savings time is Sunday. Spring forward at 2:AM on Sunday.

Random Thoughts

In September 2007 he spacecraft Dawn was launched from Earth and over the last 8 years it has traveled more than 3 billion miles to reach a couple of dwarf planets called Vesta and Ceres. The ship is powered by a revolutionary ION drive that relies on electrically charged ions to push the ship through space and enabled it to reach the speed of 10 kilometers per second. Dawn arrived at Ceres last week and this picture snapped from 29,000 miles away shows two unexplained bright dots that are "unique in the Solar system" according to NASA.

Dawn will eventually find out what those dots represent but for now the entire scientific community is excited beyond words to find something that is so far unexplained. Some scientists theorize it is ice reflecting sunlight or steam from internal geysers or a mineral deposit left by a small meteor impacting inside the existing crater. X-Files theories abound including a spaceship from some other solar system, an alien mining colony, a giant solar array setup by extraterrestrials, etc. Dawn is still establishing orbit and is on the dark side of Ceres now and will not be able to send back additional photos until early April. Eventually Dawn will orbit as close as 230 miles so any object in the crater will be clearly visible. Now we wait.

The Baltic Dry Index is still holding at multi-year lows indicating there is still no demand for commodities of almost any flavor. China lowered their growth outlook last week from 7.5% to 7.0% and it could possibly be even lower by the end of 2015. Europe is bordering on recession/depression. The Middle East is in budget lockdown mode because of the drop in oil prices. We will know the global economy is improving when shipping rates begin to rise and not until then.

The strong dollar is pressuring commodities and making some unprofitable to mine at today's prices. More than 20% of today's mined copper is unprofitable today. A global copper surplus of more than 500,000 tons is expected in 2015 and the first time since 2009. Mine output is expected to rise +4.3% and demand only +1.1%. Copper is used in almost every manufactured product from plumbing to cars and computers to solar panels and smartphones. Miners are being forced to produce more in order to generate the same income from lower prices and that just adds to the glut.

Bloomberg reported that 304 U.S. companies now have more than $2.1 trillion in cash parked overseas waiting for a tax holiday to bring it home and put it to work. The amount of cash overseas rose +8% in 2014. Microsoft, Apple and Google each boosted their overseas profits by more than 20% in 2014.

Alan Greenspan is still stirring up trouble as he turned 89 on Thursday. Greenspan said Fed QE lowering the real rate of interest "has been responsible for the rise in P/E multiples... and when rates normalize, that will reverse," adding that "we can't argue that we are extremely overvalued in the marketplace." Also, he pointed out that "the annual rate of increase in entitlement payments is 9% per year and that the people that receive it believe it is their money and they have a right to it." Eventually this will end badly because the 9% per year increase is unsustainable.

Apple will launch its new Apple Watch this week and the features are being leaked out everywhere. Every time somebody finds a fact they rush to the web to post it. Here is the most comprehensive list so far. Apple Watch

There was a troubling factoid making the rounds last week. Margin debt on the NYSE has suddenly taken a turn downward and that suggests investors are worried about the future. Since the peak in February 2014 at $466 billion the debt has fallen to $455 billion in January 2015. That may not sound like a big decline but $11 billion in margin could buy up to $25 billion in stocks depending on various factors. In March 2009 total margin debt was only $182 billion.

Chart from Mark Hulbert

Lord Rothschild warned investors last week the geopolitical situation is the most dangerous since WWII. His comments below.

Our policy has been clearly expressed over the years. Simply put, it is to deliver long-term capital growth while preserving shareholders' capital; the realization of this policy comes at a time of heightened risk, complexity and uncertainty. The economic and geopolitical environment therefore becomes increasingly difficult to predict.

The world economy grew at a disappointing and uneven rate in 2014 after six years of monetary stimulus and extraordinarily low interest rates.

Stock market valuations however, are near an all-time high with equities benefiting from quantitative easing.

Not surprisingly, the value of paper money has been debased as countries have sought to compete and generate growth by lowering the value of their currencies – the Euro and the Yen depreciated by over 12% against the US Dollar during the course of the year and Sterling by 5.9%.

In addition to this difficult economic background, we are confronted by a geopolitical situation perhaps as dangerous as any we have faced since World War II: chaos and extremism in the Middle East, Russian aggression and expansion, and a weakened Europe threatened by horrendous unemployment, in no small measure caused by a failure to tackle structural reforms in many of the countries which form part of the European Union.

Notably, equities are not well supported by current valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero...exposing equities to a potentially sharp correction.

In July 2014 the dollar began a spike that would add +21% to the dollar index. At the same time crude oil began to decline sharply from the $107 level. Since oil is priced in dollars a stronger dollar means it takes fewer dollars to buy a barrel of oil. As much as $28 in oil's decline was related to the rising dollar strength.

Think Amazon is just a great place to shop for items that will be delivered to your door in 2 days for free? Think again. Amazon now sells hotel rooms just like Expedia and Priceline. The service is just getting started but knowing Jeff Bezos he will undercut everyone until there is no profit left and the buyer will get a cheaper stay. Amazon understands e-commerce and user experience and they are very good at building consumer loyalty. Look for a big advertising splash in the near future.

The Stock Trader's Almanac pointed out that the fourth longest bull market in history turns six-years old next week. The bull market narrowly avoided an abrupt end in October 2011 when the S&P declined -19.4% but avoided the 20% threshold necessary to signal the start of a new bear market. So far the Dow has gained +179.3%, S&P +213% and Nasdaq +294.8% since the march 2009 lows. As bull markets go this has been spectacular.

Enter passively and exit aggressively!

Jim Brown

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"I am not Spock. However, if given the chance to pay any character I would play Spock. I respect and admire him."

Leonard Nimoy