The Dow may have set another new high by +13 points but the market internals are fading along with the volume as we head towards a long holiday weekend. There is a lot of red on the graphic below and not what you would expect at new market highs.

Market Statistics

The Dow battled to overcome the loss in Walmart and Home Depot after both components reported earnings. Fortunately McDonalds and DuPont helped offset those losses and allow the Dow to close positive. Now all we need is for a new catalyst to appear tomorrow to duplicate the Dow's miniscule gains.

On the economic front the New Residential Construction report for April showed new home starts increased from an annualized pace of 944,000 to 1,135,000. That is +20.2% above the March numbers and +9.2% above year ago levels. It was a blowout report that may have put the Fed rate hike back on the table for earlier this year.

Housing permits increased from 1.038 million to 1.143 million. Housing permits rose +10.1% compared to a decline of -5.5% in March. Permits are seen as a preview of housing starts for the month ahead. Single family permits rose +3.7% while multi-family permits soared +20.5% after a -16.1% decline in March.

Housing completions also spiked from 819,000 to 986,000. Clearly the severe winter weather than lingered in March finally improved and builders took advantage of it by accelerating their activity.

Before anyone gets too excited about the data you need to realize that the numbers are simply back to where they would have been had there not been a sharp weather related drop in March. The weekly mortgage application index is still holding near its post recession lows. More than 50.9% of applications last week were for refinancing instead of new purchases.

The strong rebound in the housing numbers caused the dollar index to spike along with yields on treasuries. Dollar denominated commodities like gold and oil imploded with huge declines. Gold declined -$20 to $1,207 and oil fell -$2.15 to $57.26. This was also futures expiration for the June contract in oil so there was a double impact there.

After the Housing Starts and the Industrial Production report from Friday the Atlanta Fed GDPnow forecast for Q2 GDP is predicting only +0.7% growth. As of May 1st the consensus forecast of 20 Blue Chip economists was for +3.2% growth.

In Q1 the GDPnow ended the quarter predicting Q1 GDP at +0.2% and that is exactly what the BEA reported on the first estimate for Q1.

This suggests the Q2 consensus will rapidly fall to mirror the GDPnow but today's consensus has only fallen to +2.8% growth and that is a significant difference from the +0.7% in the GDPnow. If we get another flurry of economic reports with missed estimates we could easily see a contraction in Q2 GDP instead of growth. That would really mess up the Fed's rate hike desires and I am sure they are seeing the same thing we are today. The strong housing numbers were a rebound from an ugly, weather related March and not indicative of future improvement along the same lines.

The calendar for Wednesday has the FOMC minutes and given the spike in residential housing starts this will be even more critical for Fed forecasting. The Philly Fed Manufacturing Survey on Thursday is the last major report for the week. A decline there would kill the Fed's rate hike hopes.

The Dow suffered a blow this morning from Walmart (WMT) after the company reported earnings. The -$3.50 drop in Walmart shares knocked about 27 points off the Dow and kept the index in negative territory early in the day. The company reported a 7% decline in Q1 profits as a result of the strong dollar, increased spending on its online business and higher worker wages. Same store sales rose only +1.1% but it was the third consecutive quarter of gains after a long dry spell. Analysts had expected slightly more at +1.5%. Walmart raised the minimum wage for its hourly workers to $9 in April and will increase that to $10 by February 2016.

The company is spending $1.2-$1.5 billion this year to upgrade its online operations ahead of the launch of a preferred customer program for $50 a year to receive free shipping on anything they sell. This is to compete with Amazon's $99 prime membership.

Earnings of $1.03 missed estimates by a penny. Revenue of $114.83 billion missed estimates for $116.27 billion.

Dow component Home Depot (HD) started the day off with a bang and a spike to $116.50 after reporting earnings of $1.16 that beat estimates by a penny. Revenue of $20.891 billion beat estimates for $20.812 billion. Same store sales rose +7.1% and better than the +6.6% analysts expected. The company also raised full year guidance from $5.11-$5.17 to $5.24-$5.27 per share. Analysts were expecting $5.23. They raised revenue estimates from +3.5-4.7% to 4.2-4.8%.

The store said heavy late winter snow in March depressed sales but they rebounded in April. The items in demand in Q1 were tools, decor, lighting, plumbing and accessories. The company said the housing sector is alive and well and people are spending to upgrade/repair their homes.

Shares declined -$4 from the opening spike as sellers appeared all across the retail sector.

The retail sector was hurt after the Walmart earnings and the even bigger disappointment from Urban Outfitters (URBN). Shares of URBN fell -15% after the company reported earnings of 25 cents that missed estimates for 30 cents. Revenue of $739 million also missed estimates for $757.6 million. The biggest challenge came from the Anthropologies brand where sales rose only +1% and analysts were expecting +4.7%.

Another problem is the price point. Urban's prices are higher than some competing chains like H&M or Forever 21, which sell for about 50% of the price at Urban. Consumers can browse Urban and then buy the similar style at other retailers for less. Urban is seen as a style leader but in the fashion world that only buys you a couple months before everyone else has copied your fashions. The 18-28 year-old demographic that shops at Urban is also broke. They have less disposable cash today than in years past and that means they are looking for the stores with the best bargains rather than the trendy high priced clothes.

The cash strapped consumer is becoming a problem for all retailers and not just Urban. This is our new sign of the times.

After the bell Etsy Inc (ETSY) reported a loss of -84 cents compared to expectations for a profit of 3 cents. Revenue of $58 million matched estimates. Gross sales rose +28% to $531.9 million. Etsy only gets a fee off the merchandise it sells rather than counting its sales as revenue. Active sellers increased +26% and active buyers rose +36%. Unfortunately operating expenses rose +73% to $42.7 million. The company said it was going to increase the pace of spending in Q2. Shares fell -20% in afterhours trading.

Red Robin Gourmet Burgers (RRGB) reported earnings that rose +34% to $1.10 and well over estimates for 88 cents. Revenue rose +16% to $394.9 million compared to estimates for $395.5 million. The chain has 517 locations and same store sales rose +3.1% while the average guest check increased +2%. Shares rose +15% on the news.

Social network company Momo (MOMO) certainly gained some momentum after it reported a +383% increase in revenue to $26.3 million. Earnings jumped to $6.7 million, up from a $1.2 million loss in the year ago quarter and a $10.5 million loss in the December quarter. They predicted revenues in Q2 of $32 million, which would be a +275% rise. Monthly active users hit 78.1 million in March, up +83%. Shares rallied +27% on the news. This officially makes them acquisition bait.

Earnings for tomorrow are headlined by and Low's with Staples and Target filling up the calendar.

Yahoo (YHOO) shares fell -8% just before the close on worries the IRS could be changing the tax consequences of tax-free spinoffs. The proposed change would affect small businesses spinning off larger businesses. Yahoo owns 15% of Alibaba worth about $35 billion. That represents about 92% of Yahoo's market cap of $38 billion. Yahoo is planning to spin off its remaining 384 million Alibaba (BABA) shares later this year in a tax-free deal. If that tax-free status changes it would be a major blow for Yahoo. Starting today the IRS said it was putting any tax-free requests on hold until the issue is studied and a determination is made.

This could also impact Ebay's spinoff of PayPal later this year.

Computer Sciences Corp (CSC) said it was going to split into two companies. One will serve commercial and government clients globally and one to serve public sector clients in the USA. Existing shareholders will own both companies. They also said they declared a $10.50 special dividend as part of the split. The breakup will be completed by the end of October.

They also reported earnings of $1.26 compared to estimates for $1.20. Revenue of $2.91 billion was short of estimates for $2.96 billion as a result of the strong dollar. Shares rallied about $4.50 in afterhours.

Goldman Sachs (GS) has turned into a party pooper. In a note posted on Saturday they predicted the average price for 2015 for Brent crude would be $58, up from $52 and WTI would average $52, up from $48. While they did raise their forecast you probably noticed that it is about $10 below where crude was trading last week.

Goldman said WTI would remain pressured by excess production and Brent would decline over time to reach $55 by 2020. The "lower for longer" oil forecast was a serious drag on energy stocks and they downgraded the sector from neutral to cautious. Last week they said the rebound in oil prices was premature but nobody really paid any attention. This time everyone listened.

Goldman said the U.S. oil shale production would meet global demand needs for the next decade. I don't know what these analysts were smoking but I want some of it. This is probably the worst call Goldman has ever made. While U.S. shale production can continue to grow over the next two years the long term viability is very poor. Initial decline rates are in the 75% range in the first year and then 35% per year after that. We would have to drill wells at the early 2014 rate of about 9,000 per quarter forever to maintain production much less increase it past 2017. Unfortunately there are not enough prospective well locations to maintain that pace. Most shale drillers will have drilled their core locations by the end of 2016 and be forced to move to the fringe areas that produce less and deplete even faster.

I hope Goldman covers their shorts soon because I doubt any serious investor is going to believe this forecast. It will be interesting to see what OPEC does at its June 5th meeting.

Crude did decline -$2 today but the June futures also expired today and that normally produces a spike in volatility. The dollar also spiked on the housing starts and that means it takes less dollars to buy a barrel of oil.


This is not the way new market highs are normally formed. The Dow and S&P closed at new highs on Monday but just barely. Today the Dow barely squeezed out a gain of +13 points to close at a new high while the S&P lost a point. Typically new highs drag cautious fence sitting investors off the sidelines as the indexes surge higher. This is even more common when the old high was weeks in the past and clearly defined resistance.

Volume on Monday was only 5.38 billion shares and the second lightest day of the year. That is hardly a rousing burst of conviction on a day when the Dow and S&P are making new highs. Volume on Tuesday was slightly higher at 6.1 billion but it was roughly 2:1 declining over advancing volume. You want the higher volume on up days and lower volume on down days. That is not what we are seeing today and volume is only going to decline as the week progresses towards the long Memorial Day weekend.

While I would like to be bullish at the new highs the market internals are not confirming a bullish trend. On the S&P only 73.6% of the stocks are trading above their long-term 200-day average. That is hardly bullish. Only 63% of the stocks have a bullish Point and Figure chart.

Obviously these things can change for the better. What we are lacking is a catalyst that makes investors want to buy stocks ahead of the summer doldrums. I don't see what that catalyst will be. We already got news from Europe that they were going to front load their QE purchases so we can mark that off the list. EU officials have given Greece until May 29th to agree to a plan or else. I don't know what that "else" will be but there is an implied threat. Clearing up the Greek issue would be market positive to some extent but I think most U.S. investors have already discounted it and just wish it would go away.

MatlinPatterson's chief risk officer Ashwin Bulchandani said in a note on Monday, "Regardless of how the Greek impasse resolves itself, the global financial markets' ability to blissfully ignore Greece suggests that it expects one of two outcomes: (i) that a Greek default/exit is nowhere in the realm of possibility, or that (ii) even if Greece were to exit the Euro, the authorities have appropriately 'foamed down the runway' to curtail any contagion and the world will emerge largely unscathed from Grexit."

The earnings cycle is basically over. There are a couple of blue chips left to report but there is more downside risk than potential upside surprise. If Hewlett Packard surprised to the upside on Thursday would it really move the market?

The Nasdaq is lagging the other indexes even though the biotechs continue to surge. The tech excitement has left the building. The old tech giants like Microsoft, Intel, Qualcomm, Oracle, barely have a pulse. If it were not for the biotech rally the Nasdaq direction would significantly lower. One sector can't continue to pull the index higher forever. Eventually it will need help.

The S&P has traded above its March high of 2117.69 for three days now and only managed a 10 point gain over that level. This is positively lethargic as new high breakouts go. There were 249 decliners and 209 advancers on the S&P on Tuesday.

Initial support is now that 2117 level followed by 2100. Resistance is 2130 and 2150.

Remember the periods of volatility where the Dow was moving 200-300 points every day and in opposite directions. Just look at all the tall candles on the chart below and it will bring back those memories. Now look at the three tiny candles on the upper right where the Dow limped to a new high. That is hardly encouraging.

On Thursday the Dow closed at 18,246 and it closed at 18,313 today. That is a gain of +67 points and two of those days were new highs. The Dow is barely clinging to that 18,300 level. Of course we can blame Walmart for -27 points on the Dow today. Tomorrow it will be somebody else.

The Dow was also helped by McDonalds and DuPont and that rarely happens. McDonalds was up on falling bacon prices, down -45% at the wholesale level. Expect even more bacon burgers to be sold. They also sold 2 billion in bonds denominated in euros and launched another $2 billion sale in dollars in order to return cash to shareholders. OK, now that is old news. What is going to spike McDonalds tomorrow?

Initial support is 18,225 and then 18,050. Resistance is anything over today's high of 18,350.

The Nasdaq is struggling to move higher. As volume shrinks for the rest of the week it could find gains even more elusive. Stocks with problems are blowing up and the earnings reports that have produced some gains are disappearing. If the biotechs decide to take another rest it could be ugly.

Resistance is 5080 and 5110 with initial support at 5040 and 5000.

The small cap Russell 2000 has begun to inch its way higher but at a snail's pace. There is strong resistance at 1267 and 1272 with the historic high at 1275. The Russell has a tough path to a new high but it is not impossible. Investors simply have to come off the sidelines and start buying stock ahead of the summer doldrums. With investor sentiment 47% neutral something would have to change to make that happen. What would be the catalyst?

Last but not least the Dow Transports slipped again. They lost -66 points on a day when crude oil was down over $2 and Goldman is forecasting a return to $45. In theory they should have been surging higher on cheap fuel and the hope that the housing start rebound was the first sign of an economic rebound. Unfortunately that surge did not happen.

The transports are critical to Dow Theory and should be confirming the new high in the Dow Industrials with a new high of their own. While Dow Theory has been around forever the actual linkage between the two indexes has seemed to weaken in recent years. However, if the transports break below that support at 8600 I think we would immediately see that linkage return and the Dow Industrials decline as well.

While I am not bearish I am becoming concerned. Weak volume at new high breakouts is sending a lack of conviction signal that tells other investors they may be better off waiting on the sidelines a while longer.

Quite a few analysts believe at least a minor correction is imminent. Others are praying for a real correction of 10% to clear out all the uncertainty and produce a significant buying opportunity. Since the market exists to make the most fools possible at any given time I am still cautiously long until proven wrong. As we all know the market conditions can reverse in a heartbeat in either direction.

There is always the potential for the FOMC minutes on Wednesday afternoon to show that the Fed was easing off its "ready to hike" status because of the mixed signals coming from the economy. Whether a more dovish stance by the Fed would lift the markets ahead of the holiday weekend is unknown. However, with the weak volume any increase in buying activity could produce a decent spike. I can't say for sure but I would bet a bacon burger that there are plenty of investors loading up on short positions because of the lackluster gains in the market. Weak highs are bear bait. They always see the glass half full and are ready to pounce on weakness at any resistance. That also means there is a good potential for a short squeeze.

I would keep some powder dry, that is cash in your account for you northerners, just in case we get a buying opportunity in the days ahead.

Enter passively, exit aggressively!

Jim Brown

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