The "Pre-FOMC Announcement Drift" was in full swing today with the major indexes up strongly. Rising energy stocks helped to lift the market as oil rose $1 intraday.
The Dow gained +156 for the day but it still finished -101 points off its highs and the Nasdaq closed -26 points off its high but with a respectable +43 point gain. The markets gapped open after a strong day in the overseas markets. With all the markets seriously oversold, it was a global short squeeze.
It was surprising for the Dow to be up so strongly at the open after a warning from 3M (MMM) sent that stock down -$9.50. That equates to about -65 Dow points. The company said the revisions reflect "the realities of a continued slow-growth global economy." Even worse, the company said global demand for smartphones and other electronics had weakened.
3M cut guidance in October from $7.73-$7.93 to $7.73-$7.78. Today they cut the outlook to $7.55 with full year revenue growth of 1% compared to 1.5% to 2.0% in October. The analyst consensus was $7.77. For 2016, the company guided to $8.10-$8.45 and analysts were expecting $8.40.
Apple shares lost -$2 on the 3M comments about slower smartphone sales. Market tracker IDC said iPhone sales growth would slip into single digits for the first time in Q4 and will decline in 2016.
Chipmaker Dialog Semiconductor (DLGNF), an Apple supplier, warned after the close that revenue would be in the range of $390-400 million compared to prior guidance for $430-$460 million. They blamed the drop in revenue on "weaker than expected demand." Analysts believe the impact from Apple will be in Q1 rather than Q4 since those chips were sold a long time ago. This would suggest iPhone sales could be down 9% in Q1. Some analysts have speculated in recent days that we could see a -15% iPhone decline in Q1.
Susquehanna Financial cut iPhone sales estimates for Q4 from 75 million to 70 million and Q1 sales from 58 to 55 million. Consensus estimates are for 77 million and 60 million.
On the economic front the Consumer Price Index (CPI) for November was flat with no gain after a +0.2% gain in October. Food declined -0.1% and energy -1.3%. Core CPI, ex food and energy, rose +0.2%. Goods declined-0.2% and services rose +0.3%.
Year over year the headline rate is up only +0.4% while the core rate is up +2.0%.
The NY Empire State Manufacturing Survey for December rose from -10.7 to -4.6 but remains in contraction for the fifth consecutive month. Conditions seem to be improving. New orders rose from -11.8 to -5.1 and back orders rose from -18.2 to -16.2. However, employment fell from -7.3 to -16.2.
While the headline number posted the biggest gain since February, it remains in contraction territory and suggests manufacturing in New York is recovering very slowly. There is light at the end of the tunnel but it is too soon to know if it is daylight or a train. The report was ignored.
The NAHB Housing Market Index for December declined from 62 to 61 and the second monthly decline since the ten-year high at 65 in October. Analysts had expected a +2 point gain. Buyer traffic fell from 48 to 46 but that is typical for the fall months. All regions declined except for the South, which was flat at 62. The report was ignored.
All of the economic reports were ignored because everyone is focused on the FOMC announcement on Wednesday afternoon. In the latest survey, 95% of those surveyed expect the Fed to hike rates. I cannot remember a time when the market would rally this strongly ahead of an almost certain rate hike.
The two reports on Wednesday morning will also be ignored unless there are some really ugly numbers. All we have to worry about now is whether there will be a sell the news event or a buy the news event at 2:PM on Wednesday. Quite a few analysts believe the rate hike is priced in and we could see a sell the news event. Regardless of the eventual direction, we know there will be some significant volatility on the announcement and press conference that follows.
In stock news, Sirius XM Holdings (SIRI) shares surged at the open on news Howard Stern had signed another five-year contract. No numbers were given but it is estimated he will get a bump from his current $80 million a year to $90 million. This was a self-defense move by Sirius. Howard is their number one draw and should he decide to retire it would be very painful for Sirius.
Intercept Pharmaceuticals (ICPT) spiked 17% on short covering after a rumor surfaced saying Shire Plc (SHPG) might be interested in acquiring Intercept. There was no real news, only the rumor in trading circles. Intercept has a promising pipeline of drugs that could make it a takeover candidate. However, shares have been plunging since $497 high in 2014. Shares hit $315 in May of this year and closed at $139 yesterday.
Expedia (EXPE) shares rallied almost $9 intraday after the company said it had completed the HomeAway acquisition. That company is a competitor to AirBnB and with Expedia's advertising and market reach it should be a huge boost to their business. Expedia said 63,068,486 shares of HomeAway stock or 64.8% were tendered in the share exchange offer.
Baker Hughes and Halliburton (BHI/HAL) were halted intraday on news the Dept of Justice may not approve the $35 billion Baker Hughes acquisition. The deadline for approval was today. The companies said they met with the DOJ and jointly extended the deadline until April 30th. The DOJ informed the companies that the antitrust remedies they have proposed to date are insufficient to address the competitive concerns of the DOJ. The companies said they would reassess and present some additional options in January.
Australia has delayed its decision until Dec 17th after asking for more information. Brazilian regulators challenged the transaction on Dec 7th and a final decision could take as long as another 240 days. The transaction has been approved in Canada, Columbia, Kazakhstan, South Africa and Turkey. Halliburton has agreed to divest $7.5 billion in assets. The value of the deal, announced in November 2014, has declined from $34.6 billion to $26 billion because of the delay and the drop in oil prices. Halliburton will have to pay $3.5 billion as a breakup fee if they cannot get regulatory approval. Shareholders of both companies have approved the transaction.
Stamps.com (STMP) rallied +6.50 to a new high on no news. The fourth quarter is normally a good quarter for STMP because of all the package shipping done through their postage application. Apparently, investors were looking for some winners to stuff into their stockings and a short squeeze was born.
Lumber Liquidators (LL) spiked +25% to $17.50 after short seller Whitney Tilson changed his view. The hedge fund manager had been leading the charge against LL after he found out there were excess levels of formaldehyde in the LL flooring it bought from China. Tilson said the stock was going to zero and shares plunged from $70 to $13. In a blog post Tilson said he had covered his short after he "received information" that the company's management was not aware that the product they were selling contained those high levels. Originally, he thought the product was bought with full knowledge because it was cheap.
Tilson said the company was "sloppy and naive, but not evil" as he had previously claimed. While it would appear the problem is over for LL that is far from the case. More than 10,000 customers have demanded replacement floors and there will be consumer litigation. California regulators are still testing the various wood samples and floors that were sold and there will probably be some fines there as well.
The high yield implosion claimed a third fund on Monday but the major ETFs were up today. How quickly investors forget bad news when it does not concern them. Some analysts were calling the drop in HYG and JNK a buying opportunity.
The original fund that started the crisis was the Third Avenue Focused Credit Investment Fund (TFCVX). That fund is closed to redemptions and shares closed at $6.48 on Friday. The high for the fund share was $12.30 in June 2014.
Boeing (BA) rallied more than 2% today after they raised their dividend after the close on Monday by 20% to $1.09 and increased their stock buyback plan from $12 billion to $14 billion. The dividend will be paid March 4th to holders on February 12th. Friday morning China Postal agreed to buy 10 next generation 737 freighters. No financial details were released.
Valeant Pharmaceuticals (VRX) rallied +16% after it struck a deal directly with Walgreens to distribute its drugs. This eliminates the middlemen in the drug distribution network. Valeant will cut prices 10% to Walgreens for branded drugs. Generic drug prices will be reduced from 5% to 95%. The deal is structured for 20 years and covers more than 8,000 Walgreen's locations.
Oil producer Magnum Hunter Resources (MHR/MHRC) filed for Chapter 11 bankruptcy in a plan to slash debt after the company ran out of cash. The company entered into a prepackaged deal to convert $1 billion in debt into equity. Other companies that have filed bankruptcy this year include Samson Resources, Sabine Oil & Gas, Quicksilver Resources and Energy & Exploration Partners. MHR changed symbols in October to MHRC.
Qualcomm (QCOM) said it has decided not to split up its business. The company was planning to separate into a chipmaking company and a technology licensing business. After a six month review forced by Jana Partners they elected to pass on the split. The company also raised its earnings guidance to "at or modestly above" the high end of prior forecasts. Those forecasts were for a profit of 80-90 cents.
Yelp (YELP) shares fell -9% after Facebook debuted a competing service that does essentially the same thing. The new service will help users find local businesses based on customer reviews. Facebook has not yet announced the service but it is up and running at this LINK
Late in the afternoon Advance Auto Parts (AAP) rose +6% or $8 to $157 on speculation it had been approached by a buyer. StreetInsider reported the company had been approached and was exploring a sale. The prospective price mentioned was $200 a share. However, shares crashed back to $146 right at the close of the afterhours session on no news. I would speculate that the company told someone there was no truth to the rumor but that would be speculation. AAP shares traded over $200 in November.
Tesla's CEO Elon Musk is out there on the leading edge once again. He warned that World War III could block the colonization of Mars. He warned that the colonization of Mars could be delayed, possibly indefinitely, if not done soon. He said "there is a window that could be opened for a long time or a short time where we have an opportunity to establish a self-sustaining base on Mars..before something happens to drive the technology level on Earth below where it is possible."
Musk believes a major cataclysm on Earth, natural like a solar storm or man-made like a world war could happen in the near future. Having a human colony in space would ensure the long-term survival of mankind. "You back up your hard drive, maybe we should back up life, too."
You have to give Musk credit he is always thinking out of the box. Paypal, Tesla, SolarCity, SpaceX, Hyperloop, Gigafactory, etc, and that is just a few things he has created.
Crude oil rebounded from Monday's seven-year lows at $34.53 to an intraday high of $37.88 in a flurry of short covering. However, prices declined at the close to $37.32 and then another -50 cents in afterhours to $36.86. There is no reason for crude oil to rise. The inventory decline reported last week of -3.6 million barrels was a bad number. The refinery inputs declined -150,000 bpd rather than increased and the imports rose +270,000 bpd. There is no way inventories could have declined that much. These things happen sometimes where an inventory report from a refiner or pipeline company gets overlooked and the numbers come out wrong.
After the bell today, the API Inventory showed a build in inventories of +2.3 million barrels for the week ended on Friday. This caused oil prices to decline in afterhours ahead of the more important EIA report on Wednesday morning.
As I have reported before, crude futures tend to rise on Tuesdays ahead of the inventory reports as traders cover their shorts.
There are a growing number of analysts that are now expecting oil to dip under $30. Not by much and not for long but they are expecting the dip. The recession low was $32 and that is pretty much a sure thing. The under $30 forecast is possible and I think it would mark a bottom at $30.
I explained the "Pre-FOMC Announcement Drift" in the weekend commentary. Given how oversold the market was on Friday I am not surprised to see a decent rebound ahead of the announcement. However, as I mentioned above there is always the chance for a sell the news event. I believe that would happen if the Fed did not hike. I am leaning towards a post announcement rally this time "depending" on the commentary that surrounds any rate hike.
The general consensus is a 25 point hike and then three more in 2016, probably on a quarterly basis. If Yellen lays out a slow path to normalization, I think the market will breathe a sigh of relief and probably continue higher. If the Fed tries to be cute and tease with the timing of the next hike, I think the market will react negatively.
The S&P came very close to support at 1,990 on Monday and then rebounded back over prior support at 2,020. Tuesday's +21 point gain put the index back over higher support at 2,040. I would be very pleased to see this trend continue at 2,060 and 2,080 but the Fed is a huge hurdle to that scenario.
Those levels now represent resistance with 2,080 the strongest.
The Dow performed amazingly well given the 3M anchor knocking off about 65 points. The index rebounded to resistance at 17,600 and came to a dead stop. That was about a +250 point intraday gain and somewhat over extended. The Dow has decent resistance at 17,700 area give or take a few points. The Monday dip to 17,130 was strong support and the rebound was instant.
I would like to tell you the Dow was going to break over that level and retest downtrend resistance at 17,850 but it all depends on how the market reacts to the Fed decision.
The Nasdaq Composite spent most of the day over 5,000 but could not hold it at the close. The high was 5,026 and that will be our first resistance point on any continued rally on Wednesday. Real resistance is 5,100 and that is not likely to be broken easily.
The majority of our gain today was short covering. The Nasdaq gapped open from 4,950 to almost 5,000. That is not because investors suddenly wanted to buy tech stocks. The big market gains overseas had the S&P futures up +12 points in the early morning hours and it grew from there. Anyone short at the open lost money.
On Sunday, I said I would be a dip buyer of QQQ calls at 4,500 on the Nasdaq 100. On Monday, the index dropped sharply at the open to 4,478 giving everyone a perfect opportunity to take advantage of that recommendation.
The NDX gapped open to 4,607 today and spent all day above 4,600 until a sell program at the close knocked it back to 4,597. That makes our intraday high at 4,636 resistance on the next move higher with 4,700 the really tough resistance to break.
The best news of the day was the +16 point rebound in the Russell 2000. It was looking very grim at the close on Monday and the late December Russell rally was still a no show. The +1.4% rebound was the most of the major indexes. However, it has a long way to go before we can claim a recovery. One day does not make a trend. One day is just short covering.
The biggest market mover for the day was the Biotech sector. The $BTK rallied +3.3% after two weeks of constant decline. I looked at dozens of biotech stocks and quite a few had multiple dollar moves and most were gaps at the open. The BTK gapped up +100 points at the open so it was definitely short covering. I hope it continues since it provided a lot of motive power to the Russell and the Nasdaq.
There is no way to speculate on the market for Wednesday. The futures have been positive and negative since the close but none of that counts. The only factor for market movement on Wednesday is what happens at 2:PM when the Fed decision is released. Despite today's short squeeze, we are still somewhat oversold. That could give us a slight upward bias when the volatility kicks in. Normally there is a spike in both directions immediately after the announcement regardless of what that announcement says. That could trigger some additional short covering but any spike will also be bear bait.
I know it is tempting to bet on the market direction after the announcement. I would recommend against it. This is effectively a coin toss and you are probably betting money you could use for your retirement. I have found that it is easier to overcome the urge to bet the outcome if you just make it a game and buy one contract of something and realize that if you are wrong you will lose and it is not a big loss. If you bet right, then take your wife to dinner and tell her how smart you were. (grin)
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