The Dow changed directions seven times and traveled 1,149 points but ended the day only 12 points from where it started. Traders appeared unwilling to make any large bets ahead of Yellen's testimony on Wednesday.

Market Statistics

I am definitely not complaining about a relatively flat close on the major indexes. The Dow was down -145 at the lows and up +106 at the highs. The Nasdaq changed direction six times and traveled 434 points before ending the day with only a 14 point loss. Dip buyers were alive and well but sellers hammered every spike. In the end, there were more sellers than buyers but only slightly.

Global markets and especially European banks weighed on the markets early and crude oil impacted the trading in the afternoon. European markets declined about 1.5% on average today but they were all down over 3% on Monday.

Europe Today

Europe on Monday

The European banks are crashing on negative interest rates and high exposure to energy and commodity loans. With major companies like the UK miner Glencore with $30 billion in debt that is syndicated among all the major banks, the low commodity prices are creating bankruptcy worries. One of the big problems is that we really do not know what is on the balance sheets and loan portfolios of the European banks. The regulators in the U.S. have forced U.S. banks to bare all their secrets but Europe has not, at least to the same level of scrutiny. Banks in Europe have been trading as though there may be a Lehman event in the near future.

Deutsche Bank (DB) was the focus today after the CEO sent a letter to employees assuring them the bank was solvent. For him to do that was like yelling fire in a crowded theater. That acknowledged there was some doubt about its stability. Lehman's CEO said there was no danger until the bank collapsed. Shares crashed about 5% at the open and were trending lower during the day. At 2:PM another headline appeared saying they were considering buying back several billion euros of debt. They currently owe about 60 billion euros of debt. The bank said they would focus on senior debt of which it has about 50 billion euros or $56.44 billion. The story came from the Financial Times and DB would not comment on the headline. However, shares spiked about 6% on the news to lift DB back into positive territory but the rally was short lived. Without further qualification from DB we should expect shares to continue to drift lower. They have a 350 million euro debt payment due in April. They also have numerous legal problems left over from the financial crisis and will have to take additional charges to reserves in the future.

US banks declined as well because the exposure to European banks is unknown. There is a lot of derivative risk between U.S. and European banks.

Economic news was lackuster. The NFIB Small Business Survey saw the headline number decline from 95.2 to 93.9. The majority of the internal components declined. The plans to increase employment fell from 15 to 11. Those expecting the economy to improve declined from -15 to -21. Earnings trends and credit conditions worsened. This report was ignored.

The Job Openings and Labor Turnover Survey (JOLTS) for December showed job openings increased from 5.346 million to 5.607 million. Hires rose from 5.256 million to 5.361 million. This report was a lagging report for December and was ignored.

Wholesale Trade for December declined -0.1% after a -0.3% decline in November. This was the third consecutive month of declines. Estimates were for a -0.2% decline.

None of the reports for today were market movers. The real mover will be the Yellen testimony to the House at 10:AM tomorrow. With Europe and Asia crashing, negative interest rates, weak earnings and economics in the U.S. and falling oil prices will keep the fed from hiking rates in the near future. However, she may try to keep the pressure on by implying a March rate hike is still on the table. The Fed made a mistake in December and now they have to keep up the appearances. This could rile the market even more, depending on how she presents her views. She is normally dovish and she will be challenged in how she remains dovish but keeps rate hikes on the table. This will be a tightrope act for sure.

The morning earnings failed to move the market because it was already reacting to the European news. On top of Europe, there was news from Japan that interest rates had gone negative for the first time. The Nikkei declined -919 points or -5.4% for the day and approaching a 14-month low. This is another reason Yellen cannot raise rates.

In a flight to quality, bonds continued to rise with the yield on the ten-year treasury falling to 1.699% intraday and closing at 1.729%. These are 52-week lows and very close to three-year lows. Bonds are on fire as equities crash and burn. Recession worries are increasing daily.

The afterhours earnings were mostly positive. Akamai (AKAM) reported earnings of 72 cents compared to estimates for 62 cents. Revenue of $579 million also beat estimates for $569 million. The company also announced a $1 billion stock buyback program. The most important metric was the 16.4% growth in the cloud security business, which accounted for $286 million of the revenue. This should calm some of the fears generated by Tableau Software last week. The CEO, Tom Leighton, told analysts on the call he planned to buy $10 million of Akamai shares over the next six months. Shares were up +16% in afterhours to $46 after closing at a two-year low of $39.55.

Panera Bread (PNRA) reported earnings of $1.88 compared to estimates for $1.78. However, revenue of $692 million missed estimates for $695 million. Earnings declined -11% because of costs increased +8%. Same store sales were up +3.6% in Q4 and +6.4% in the first 41 days of Q1-2016. The company said they had completed the conversion of 410 stores to Panera 2.0, which involves kiosks, mobile an online ordering capability. Shares rose $5 to $190 in afterhours.

SolarCity (SCTY) reported a loss of -$2.37 that was better than analyst estimates for a loss of -$2.59. Revenue of $115.5 million, up +61% and beat estimates for $106 million. However, guidance for Q1 was light. They forecast production of 180 megawatts in the quarter compared to analyst expectations for 200 megawatts. During Q4, they installed 272 megawatts, up 54%. That also missed guidance for 280-300 MW. They guided for a Q1 loss of $2.55 to $2.65 and analysts were expecting -$2.36. Apparently, business is booming but they are losing money until they can sell these monster projects into the dividend company. Shares fell -30% to $18 in afterhours.

Disney (DIS) reported a record quarter with net income over $1 billion thanks to Star Wars and the theme parks. The company reported $1.53 compared to estimates for $1.45. Revenue of $15.24 billion beat estimates for $14.75 billion. This was their tenth consecutive quarter of double digit EPS. Revenue from the parks and resorts division rose +20%.

However, the profits from its cable empire fell -6%, due to an increase in the cost of sports-broadcast rights. Disney's sports bill is estimated to be 29% of the $130 billion media companies are contracted to pay for the rights to events like Monday Night Football and the NBA Playoffs. For instance, Time Warner agreed to pay $8 billion to broadcast the Los Angeles Dodgers baseball games. If subscription customers to sites like ESPN continue to decline at its current 1% per year analysts believe the profit growth for Disney could be cut in half within 4 years. In a post earnings interview CEO Bob Iger said Disney saw an uptick in cable subscribers after Q4 ended and he attributed it to increased sales by Dish Networks Sling TV bundle of online channels, which includes ESPN. Iger said "This notion that either the expanded basic bundle is experiencing its demise or that ESPN is cratering in any way from a subscriber perspective, is just ridiculous." He said they are exploring opportunities to sell ESPN into even more bundles that are cheaper than most pay TV packages today. Disney shares declined -$3 to $89.40 in afterhours.

Coca-Cola (KO) reported earnings of 38 cents that beat estimates by a penny. Revenue rose +3%.

Viacom (VIAB) reported earnings of $1.18 that met estimates but revenue missed estimates because film unit revenue was down -15%.

CVS Health (CVS) reported earnings of $1.53 that met estimates with revenue that beat estimates. Same store sales rose +5%.

Sears Holdings (SHLD) warned that Q4 earnings would be below estimates due to a "challenging" holiday season. The company is going to accelerate the closing of unprofitable stores.

Wendy's (WEN) reported preliminary earnings of 12 cents that beat estimates by a penny. Same store sales rose +4.8%.

Wyndham Worldwide (WYN) reported earnings of 98 cents that beat by a penny. They also announced a $1 billion buyback program and increased the dividend from 42 to 50 cents.

There were seven companies that raised guidance on Tuesday. There were 39 companies that guided in line with prior forecasts. There were 21 companies giving negative guidance.

Anadarko Petroleum (APC) fell -7% after the company announced it was cutting its dividend from 27 cents to 5 cents. They said the cut would give them an extra $450 million in cash to utilize during this stressful period. They warned last week they were considering a cut so this was no surprise but the stock still declined.

Oil prices fell to $27.74 intraday after the IEA said demand growth would "ease back considerably" in 2016. Demand growth peaked at +1.6 mbpd in 2015 and they expect that to decline to +1.2 mbpd in 2016. The IEA said stockpiles were "brimming" with oil and storage capacity was being pushed to its limits. The agency said economic slowdowns in Europe, Asia, Brazil and Russia were slowing demand growth.

Global production declined -200,000 bpd in January to 96.5 mbpd. Higher OPEC production offset some declines by non-OPEC producers. The IEA still believes non-OPEC supplies will decline -600,000 bpd in 2016. However, total OPEC production rose +280,000 bpd in January to a record of 32.63 mbpd. That is up +1.7 mbpd from January 2015. The IEA said Iran had restarted some production and Saudi Arabia had increased production to near record levels.

The IEA said the idea that OPEC and Russia would agree to cut production was pure "speculation" and OPEC was not likely to cut alone or in concert with other producers.

Due to current conditions the IEA said, "It is very hard to see how oil prices can rise significantly in the short term. The short term risk to the downside has increased."

Separately the EIA said U.S. production could decline -740,000 bpd in 2016 and slightly more than their prior forecast for -700,000 bpd. The rapid decline in active rigs and the sharp cuts in capex budgets were the reason.

After the bell today, the API reported a rise of 2.4 million barrels in crude inventories for the week ended on Friday. That was slightly less than expectations for a 3.6 million barrel gain. Gasoline inventories rose +3.1 million barrels. The EIA report on Wednesday is considered the most accurate and will move prices tomorrow.

Falling oil prices will weigh on the equity markets and without an OPEC production cut, we could see sub $25 pricing in the next 6 weeks.


There was little change from my weekend commentary. While the indexes did not make a big move today, they are holding in negative territory. The charts remain bearish and traders appear to be looking for the next big headline to take them lower. Yellen could provide a boost on Wednesday and Thursday or make matters worse.

There is no way to make the S&P chart bullish. We could rebound from here but there is significant overhead resistance and the outlook is for a retest of the August low at 1,812 or even the February 2014 low at 1,737.

The Dow is also struggling and resistance at 16,500 seems firm. The January low at 15,450 could be tested at any time and the August low at 15,350 appears to be a more likely target. Banks and energy should continue to weigh on the Dow and Disney will be a drag at the open on Wednesday.

There is no one reason why the Dow should decline. The chart is bearish and that is normally enough to convince investors to go to cash and sellers to continue to add to the decline.

The Nasdaq appears to be headed for a retest of the 4,130 low from October 2014. It has already at a 15-month low and there is no support before that 4,130 level. Miracles do happen but it would be hard to speculate on what could lift the markets this week other than Yellen. We failed to get a short squeeze today when the Dow was up over 100 points so shorts appear to be expecting lower lows. They failed to rush the exits and sellers ganged up on the close.

The Russell 2000 came within 3 points of retesting the June 2013 support low at 954 on both Monday and Tuesday. While this is a psychological win so far, a break below that level could be very bearish for sentiment. The next support level is 900. Small caps have been weak thanks to oil, banks and biotechs. A slight improvement in the biotech sector today probably kept the Russell from breaking down any further. Watch the Russell for your sentiment indicator.

I am sorry I do not have anything positive to tell you about the market. Sometimes we simply have to call a bear a bear and deal with it. We can try to "hope" it up as it passes through each support level but until sentiment changes the path of least resistance is down. We have to play the cards we are dealt until the next shuffle appears.

Enter passively, exit aggressively!

Jim Brown

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