The Dow dropped -180 points at the open and maintained those losses until somebody bought the dip at 10:30 to rebound the Dow +150 points in only 20 minutes. The index traded sideways for the rest of the day in a tight range from about 18,050 to 18,115. The ten-year yield hit a six-month high yield of 2.335% at the open.

Market Statistics

The selloff in treasuries was blamed on everything you can think of. Some blamed European yields but there was no smoking gun that traders could talk about other than weakness in Europe.

The swoon in equities was blamed on the spike in yields as well as continued profit taking from the Friday short squeeze. In reality the market is doing exactly what it has been doing for the last two months and that is trading in a range with a significant number of reversals for no apparent reason. The uncertainty in the market is rising rather than abating. Eventually a trend will appear.

The economic calendar today was not a factor. The NFIB Small Business Survey Optimism Index rose from 95.2 to 96.9 for April. The internal components were mostly positive but the gains were small. The employment component rose from 10 to 11, job openings rose from 24 to 27, capital expenditure plans rose from 24 to 26. However, those respondents expecting the economy to improve rose from a net of -7% to -6% and hardly a rousing vote of confidence. Those that expected sales to improve declined from 13% to 10%. This report was ignored.

The Job Openings Labor Turnover Survey (JOLTS) showed job openings declined from the 3.5% rate in February to 3.4% in March. Job openings declined from 5.144 million to 4.994 million. However, hires rose from 5.011 million to 5.067 million. Separations rose sharply from 4.793 million to 4.983 million. That is a huge increase and suggests workers are becoming more confident about changing jobs. Layoffs rose from 1.688 million to 1.793 million. That was +6.5% higher than the same period in 2014. This was a lagging report for March and was ignored.

Thanks to everyone paying their taxes the government had a budget surplus in April of $156.7 billion. Since this is a once in a year event I would not get too excited about the government having more money than it spent. They will catch up. April revenue rose +14% to $471.8 billion and spending increased by +2.5% to $315 billion. We are now 7 months into the government's fiscal year and the cumulative deficit is now -$282.8 billion after that "surplus" in April. Net interest payments on the debt grew by +3.4% from the prior April. Social security payments rose +4.3% and Medicare spending rose +1.4%.

Thanks to the dozens of recent tax increases individual tax payments are up +13% and corporate tax payments are up +12%. We are facing another debt limit ceiling that will have to be negotiated before the end of this fiscal year on September 30th. Since we are headed into the 2016 election cycle the battle over the debt ceiling will likely be more subdued and no government shutdown will occur.

The calendar for Wednesday will be focused on the retail sales for April. With warnings from multiple retailers in recent days there is a strong possibility it will miss estimates.

The oil inventories will also be important since last week was the first decline in inventories in 17 weeks and crude prices rebounded back over $60 today in anticipation of further inventory declines. Energy equities spring back to life after several days of declines and that helped support the market today.

Verizon's got mail! The big news in the equity world this morning was Verizon (VZ) buying AOL for $4.4 billion or $50 a share. I know what you are thinking. Why would Verizon buy AOL? They did it to get their mobile advertising capability, cross platform advertising capability and streaming video. The mobile advertising will let Verizon push ads to its millions of cell phone customers. AOL was cheap at $4.4 billion compared to Verizon's $203 billion market cap. AOL generated about $856 million in revenue in 2014.

Verizon wants to push mobile video to its customers because bandwidth is a profit center for Verizon. AOL is one of the biggest video download sites in the USA. If you watch videos you will eat up your monthly data allotment and you have to buy more or pay the overage fees. AOL recently announced a deal with NBC Universal to play video clips from their networks like Bravo, E!, Esquire, NBC and USA. The partnership will also co-develop original online video series.

This is not your father's AOL. That one was sold to Time Warner for $164 billion in 2000 and is considered the worst deal ever. Time Warner stock declined so much ahead of the deal that the value fell to $103.5 billion when it closed. The market cap of the merged companies declined another $100 billion in next 18 months. The companies split again in 2009 and now AOL has been acquired for $4.4 billion or only 2.6% of its Time Warner acquisition price.

AOL is still the 41st most popular website according to The AOL owned Huffington Post ranks higher at 30th. AOL also owns TechCrunch and Engadget. Those entities are probably going to be sold because they don't fit the Verizon business.

AT&T (T) is buying DirecTV for $49 billion and regulators today said they had almost completed their review and it was "unlikely" they would rule against it. There will be some as yet unannounced conditions. One analyst felt it would be related to how AT&T will deal with streaming video. Ironically the Verizon/AOL deal could help get the AT&T/DTV deal done.

Pall Corp (PLL) rallied +19% on news that an auction for the company could conclude soon. Reportedly Danaher (DHR) and Thermo Fisher Scientific (TMO) are in the running for the winning bid. UBS said a win by TMO could create a bio-production powerhouse. Pall has about $1 billion in biopharma business that would enhance the $600 million owned by TMO. Pall manufactures and markets filtration, separation and purification products and integrated systems worldwide. The Life Sciences segment provides technologies that facilitate the process of drug discovery. Final bids are due later this week with an expected price tag of $13 billion or more.

Humana (HUM) rallied +$7 after Barron's said a bid by Aetna (AET) could be imminent. The article also suggested Cigna (CI) could also be in play. Aetna is turning into a powerhouse in this sector having raised guidance twice already in 2015. The speculation followed an investor meeting. Leerink Partners said Aetna could conceivably offer $200 a share for Humana. The analyst raised his price target for Aetna to $135.

Cal Maine Foods (CALM) rose another 3% on expectations for higher profits as a result of the bird flu epidemic. Research firm Sidoti & Co raised the price target to $67 from $51 on the potential for an increase in pricing power. The bird flu has been confirmed in the 15th state, mostly northern and Midwest states. Cal Maine is an egg producer with operations mostly in southern states. Nearly 30 million birds have been slaughtered because of the disease. An egg shortage is looming. Bakery companies are being squeezed from this shortage. Post Holdings said last week that chickens at one of its suppliers had tested positive for the disease. The latest discovery was in Indiana and so far there have been three strains of the disease identified in North America. Shares of CALM are up nearly 25% in the last two days.

On the earnings front GoDaddy (GDDY) reported a loss of 34 cents that beat by a penny. Revenue rose +13.7% to $498.7 million. The company raised guidance for Q2 to a midpoint of $392.5 million, up from $390.07 million. Fully year guidance rose slightly from $1.59 billion to $1.595-$1.605 billion. Shares were volatile and slightly lower in the afterhours session.

Zillow (Z) reported adjusted earnings of 5 cents that were much better than the expected 12 cent loss. Revenue rose +92% to $127 million but missed estimates for $135 million. They reiterated guidance for the full year. Q2 guidance was fractionally below estimates. The Zillow earnings now include Trulia and the combined companies saw about 140 million unique viewers in March alone. Shares rallied 5% in afterhours but declined after some comments on the conference call. They ended the afterhours session down about 50 cents.

Rackspace (RAX) reported earnings of 20 cents that were in line with estimates but revenue of $480 million was slightly lower than estimates for $482 million. The earnings did not really shake up the stock but the guidance did. The company projected revenue growth of 1.5% to 2.5% in Q2 due to a delay in enterprise bookings and "slower customer installations and customer churn." Multiple analysts downgraded the stock and shares fell -13%.

The earnings cycle is winding down with only three headliners on Wednesday. Shake Shack (SHAK) could probably be included in that list but it has only a narrow but faithful audience.

Crude rallied $1.33 in the regular session and it is up another 65 cents in afterhours to $61.40. The prior resistance at $58 worked perfectly as support on the three days of profit taking. Goldman Sachs must be frustrated today because they just released a report saying the oil rally was premature and we should expect a continued decline. They said the rebound from the lows was probably the result of speculators and current prices were expensive given the fundamentals.

The analysts said unfinished wells (fraclog) could cause shale production to spike again if prices were to rise too quickly. Currently there are about 4,600 drilled but not completed wells in the USA. Drilling is 50% of the cost of a well and fracturing and completing the well is the other 50%. Producers are saving money today by not completing the wells. They cap them and move on to the next hole. This keeps their contracted rigs busy and they avoid paying penalties for sending the rigs back to the owners. In theory when oil prices rise the producers can quickly complete the wells and put them into production. In reality that is not as quick as you would expect. There is a tremendous amount of scheduling for crews, equipment, material, sand, water, etc that has to all come together for each well. Some analysts believe it could take more than 12 months to complete all the drilled wells. Crews have been laid off and equipment moved to holding areas. Plus, the crews that are active will be working on completing new wells that are still being drilled.

This link is a picture of Halliburton fracking a well.

Goldman argued that even after a -56% decline in active rigs that would only stabilize production rather than reduce it. They believe production will not decline significantly until 2016. However, if prices rise over $65 it could prompt drillers to put rigs back to work on expectations for higher prices in the future. Goldman pointed out that low prices have forced low cost producers like Russia, Saudi Arabia and Iraq to increase production in order to replace revenue lost by those low prices.

Wednesday is inventory day and another decline in inventories could lift prices higher.


The European markets had a bad day because their bonds were selling off hard. If you have not been paying attention 30% of the countries in the eurozone had negative yields on their short term bonds. At negative yields they finally ran out of buyers. A correction in bonds began and yields were up sharply. European markets were down 1-2% overnight. This carried over into the U.S. markets with the ten-year treasury selling hard at the open and the yield rising to a six-month high. Goldman exaggerated the situation in Europe with a note saying bonds were in a bubble. Goldman said, "Overblown expectations for the ECB's QE plan helped to push global debt valuations to extreme levels, triggering a large and vicious selloff in European bonds that has infected other markets." The U.S. equity markets started the day off with the same decline as Europe. Once the buyers in treasuries began to appear the equity market stabilized.

Fed heads Bill Dudley and John Williams were also out making comments negative to the market. Dudley said "the beginning of higher rates in the US will reflect a regime shift in thinking and the markets." John Williams said he is for hiking rates "a bit earlier" than other FOMC members.

There was also some concern about Greece defaulting on the 750 million euro payment that was due today. They scraped together enough cash to pay the IMF and put off their eventual demise until another day. While this did not fix their problem it did kick the can a little farther down the road and the market breathed a sigh of relief.

The Dow dropped to 17,925 at the open and the S&P fell to 2085. For the S&P that is still about 17 points above last Wednesday's low of 2068 so it was not a crash but more about headline volatility. The Dow decline to 17,925 was still about 192 points above last week's low at 17,733.

While nobody wants to be holding equities when the Dow drops -180 at the open it was not a disaster. The markets have been making these triple digit moves in alternate directions 2-3 times a week for the last two months. Holding positions in these swings is practically impossible if you are maintaining a strict discipline with stop losses.

Monday's volume at 5.6 billion shares was the fourth lowest day since January. Today's volume was only slightly higher at 5.9 billion shares. There is no conviction in the market in either direction.

Whatever appeared at 10:30 to rebound the Dow +150 points from its lows is to be thanked for saving the day. It appeared to be a buy program because of the speed of the rebound and the weak volume. Up volume in the SPY during the 20 min rebound was only half the down volume in the first 20 minutes of trading. However, the volume in the Dow ETF (DIA) was about 30% higher on the rebound than the decline. If you want to juice the market the best way to do it is to spike the Dow.

I will leave the conspiracy theories to others smarter than me and just say whatever provided the 20 minutes of concentrated buying at 10:30 rescued the market from a bad day.

Tuesday was just one more day in the cycle of volatility we have been trading for the last six weeks. The rebound helped but it did not cure the illness with the S&P stopping right in the middle of the recent congestion range at 2100. Add 20 points and you have significant resistance at 2120. Subtract 20 points and you have significant support at 2080. The close was right in the middle of neutral territory.

Until we get a move that takes us out of this range we are just passing time and driving ourselves crazy trying to trade it. Traders are eventually going to lose patience and move to the sidelines until a direction appears.

The Dow is a similar picture with the 18100/18200 level continuing to be strong resistance and the 17800 level strong support. Only one stock on the Dow gained or lost more than $1 and that was Goldman Sachs. Of course the picture was a lot different at the open and the fractional moves at the close were just stocks returning to neutral territory.

There is no magic number for the Dow or some stock to watch for direction tomorrow. The Dow is suffering from the uncertainty flu and until it passes we just have to watch from the sidelines.

The Nasdaq is no different than the Dow and S&P. The index remains stuck below resistance at 5000, only the Nasdaq is declining less on the down days than the other indexes. The biotechs are holding up the index while the chip stocks are wallowing in their own congestion range.

Support remains 4950, 4900, 4850. Resistance 5000, 5020, 5070.

In case you can't tell from the underlying frustration in my words I am tired of fighting this market. This is just like playing the tables at Vegas. Some hands you win but you lose more often than not. The games of chance have mathematical rules behind them that favor the house. Depending on the game and the bet you can win 35% of the time to as much as 49% of the time. The casinos know if they can keep feeding you a few small wins from time to time they can drain your pockets with the house percentage advantage. You can't win long term. You may have a good run but the house just keeps nipping away at your bankroll.

A choppy market like this is chipping away at our accounts. Win 1 lose 2, win 3 lose 5. There is no future in trying to outsmart a choppy market. This is where the intelligent investor can swing the odds into his favor by not playing the market's game. Step to the sidelines and wait for a fat pitch. It will eventually appear. It may be days from now or even weeks from now but the market can't continue to trade sideways in this current volatility range. It will eventually pick a direction and that will be our signal to move back into the market.

Enter passively, exit aggressively!

Jim Brown

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