The +221 gain on Monday was nearly erased by the -189 decline on Tuesday. The Dow closed at 16,431 and back under previously strong resistance at 16,500.

Market Statistics

The morning started negative after European markets posted an average decline of about -1.5% with Asia only slightly negative. The major driver for the U.S. markets was the drop in oil prices. The April futures contract became the front month and traded as high as $33.50 overnight after the March contract expired at $31.48 on Monday. That $2 difference was quickly erased after the Saudi Arabian oil minister Ali Naimi repeated more than once that there would be no production cuts. He said there will be no cuts because everybody would cheat. He also said a limit to production would have a minimal impact since limiting to the January level of 32.6 mbpd by OPEC would still leave a surplus of up to 2.0 mbpd on the market and Iran is not going to limit production. They plan to increase production by 700,000 bpd in 2016.

After the bell, the American Petroleum Institute (API) said U.S. crude inventories rose +7.1 million barrels and twice what analysts had expected. This further pressured WTI prices after the close and could weigh on the equity markets on Wednesday.

The Existing Home Sales for January came in stronger than expected but provided no lift to the market. Annualized sales came in at 5.47 million units and well above estimates for 4.35 million. That was also above the 5.45 million rate in December despite the monster snowstorms in January. Months of supply remained low at 4.0 months although up just slightly from the 3.9 months in December. The average for the prior six months was 5.0 months.

Bad news came in the form of the Richmond Fed Manufacturing Survey, which dropped back into contraction at -4 after a mediocre +2 in January. The Richmond area has now been in contraction 4 of the last 6 months. The order backlogs fell from +4 to -14 and new orders from +4 to -6.

The services sector also fell into contraction with a drop from +10 to -2 and the lowest level since 2013.

Consumer Confidence for February declined from 98.1 to 92.2 and the lowest level since July. The present conditions component declined from 116.6 to 112.1 and the expectations component declined from 85.3 to 78.9. Income expectations declined on both metrics. Prospective homebuyers declined from 7.4% to 5.3%, appliance buyers from 53.9% to 46.8% and auto buyers rose from 12.1% to 12.3%. The sharp decline in buying plans for homes and appliances suggests the retail sector is in for more pain.

The rapidly falling gasoline prices had no impact on confidence. I suspect the sharp decline in the equity markets took away the implied wealth effect making consumers more conservative in their plans. Also, with the presidential election cycle heating up there is a lot of complaining about the weak economy and that makes people focus on their lot in life instead of looking at the positive side.

The calendar for Wednesday has New Home Sales but that is not likely to be a market mover. The GDP on Friday along with Personal Spending will be the most likely reports to weigh on the market.

The earnings for Wednesday from LOW, GPS, BBY, ABBV and BIDU will have a lot more impact than the New Home Sales.

Home Depot (HD) tried to resurrect the Dow this morning by reporting earnings of $1.17 compared to estimates for $1.10. Revenue of $20.98 billion beat estimates for $20.39 billion. Same store sales were up +7.1%. Net earnings were $1.5 billion. Full year sales rose +6.4% to $88.5 billion with earnings rising to $5.46 from $4.71. The board authorized a 17% increase in the dividend to 69 cents. The company expects to earn $6.12 to $6.18 in 2016 on $88.08 to $88.84 billion. Analysts were expecting $6.16 and $93.12 billion so that is a huge revenue shortfall. Investors did not seem to care with shares rising $4 at the open. That faded in the negative market to +1.68 but still a gain. Analysts said those earnings projections target $140 in HD shares.

Over the last five years, Home Depot has bought back $30 billion in shares or 24% of the outstanding shares. Earnings have risen +167%.

Builder Toll Brothers (TOL) reported earnings of 40 cents that missed estimates by a penny. Revenue was $928.6 million that did beat estimates for $916.8 million. The company said orders rose +17.6% to 1,250 homes in their quarter ended January 31st. The CEO said the stock market seems to be pricing in a recession but we see no signs. Our business is strong. They narrowed their guidance for homes to be sold in 2016 from 5,600-6,600 to 5,700-6,400. Shares rallied $1 on the news. Shares are down sharply since December.

Macy's (M) reported earnings of $2.09 that beat estimates for $1.89. That was a -31.5% decline. Revenue fell to $8.87 billion but still beat estimates for $8.3 billion. Same store sales fell -4.3% but that was less than the -4.7% expected. They blamed the weak sales on warmer weather and the strong dollar. The company said there was a high degree of interest among parties they had approached about spinning off some of their real estate into some external vehicle including outright sale. Starboard Value estimates those assets to be worth about $21 billion. Shares rose +$1 on the news.

After the bell First Solar (FSLR) reported earnings of $1.60 compared to estimates for 80 cents. Revenue of $942.3 million beat estimates for $930.9 million. The company forecast full year 2016 earnings to be $4.00 to $4.50 per share with revenue in the $3.88 to $4.08 billion range compared to $3.58 billion in 2015. That was down slightly from their prior guidance for $3.9-$4.1 billion. Shipment guidance of 2.9 gigawatts to 3.0 gw was unchanged. Shares rose $2 in afterhours to $63.80.

Dreamworks Animation (DWA) rose 10% in after hours after reporting earnings of 55 cents that beat estimates for 15 cents. Revenue rose +34% to $319 million and beating estimates by 16%.

Avis Budget Group (CAR) reported earnings of 18 cents compared to estimates for 17 cents. Revenue of $1.9 billion missed estimates for $1.94 billion. They guided for 2016 full year earnings of $2.70-$3.30 compared to analyst estimates for $3.46. The company said that included a 17-cent impact for currency rates. They currently operate 11,000 locations. Shares were down -$4 in afterhours to $26.

Etsy Inc (ETSY) reported a loss of 4 cents compared to estimates for a loss of a penny. For the full year, they lost $54.1 million or 59 cents per share. Revenue of $87.9 million beat estimates for $86.6 million. They forecast revenue growth of 20% to 25% over the next three years. That forecast lifted shares $1 in afterhours to $8.47.

Western Digital (WDC) shares fell -7% after China's Unisplendor and Unis Union Information System dropped plans to acquire a $3.78 billion, 15% interest in the company. The deal was under review by CFIUS under the Defense Production Act and that gave either party a 15-day window to exit the deal. The CFIUS committee was worried that a new form of super fast flash memory under development by SanDisk (SNDK) may have been a prohibited product for transfer to China. WDC is buying SanDisk for $19 billion. CFIUS stands for Committee on Foreign Investment in the United States. They can block any transaction that may be contrary to national security.

Valeant Pharmaceutical (VRX) shares rose 4.4% after the company said it was going to restate earnings for 2014 and 2015 because of errors in the way it accounted for sales to former distributor Philidor. Earnings in 2014 are expected to decline by 10 cents and 2015 earnings are expected to rise 9 cents. The company said $58 million in sales to mail-order pharmacy Philidor were improperly recognized. The company said they should have been recognized when the patient received the drugs not when Philidor received them. Valeant had been criticized for accounting surrounding Philidor with analysts claiming that dumping drugs on Philidor was equivalent to stuffing the channel and it could be years before Philidor actually sold the drugs. Valeant cut ties with Philidor last year after it was learned that Philidor had created a network of phantom pharmacies to misdirect pharmacy benefit managers into buying Valeant drugs.

Shares rallied on the news but remain depressed because the CEO has been in the hospital for over a month and there is no date for his return.

JP Morgan (JPM) held an analyst day and was generally upbeat but the headlines that came out of the meeting were on energy. The bank said it would take another $600 million charge to reserves in Q1 for questionable energy loans bringing the total to $1.6 billion. If prices remain in the mid $20s for oil, they would have to double that to $3.1 billion. The bank has committed to $25 billion in investment grade loans on energy and $5 billion has been drawn. They have $19 billion in high yield energy commitments of which $9 billion has been drawn. CEO Jamie Dimon said he has been through these energy busts before and they are always tough but the bank always gets through them. Dimon was credited with creating the "Dimon Bottom" in the market on February 11th when he said he was personally buying $25 million of JPM shares. The stock immediately rebounded along with the market. Today he said he would buy more at this level if he could but there was a limit to his finances. Shares fell -$4 on the energy reserve news.


We were due for some serious profit taking. The only question was whether it was just profit taking or the return of the concentrated selling we have seen in 2016 and another retest of the lows.

It is far too early to make that call but there were quite a few stocks in the green today. My screen list of about 800 stocks was about one-third in the green. That is not concentrated selling and suggests today was just profit taking.

The recession proof stocks like PG and JNJ were not positive but their losses were minimal. The hard-core safety stocks like MO and RAI were positive as investors look for a high dividend and relative safety in times of economic stress. They have been up for a couple weeks so today was just the continuation of a trend rather than a sudden surge in buying. However, both closed at new highs.

The problem we are facing other than strong resistance is the lack of a catalyst to move stocks higher. We have downside catalysts like declines in oil and terrible earnings but nothing really major to push stocks higher. We are still a couple months away from the "sell in May" cycle but investors may be thinking this is a good time to exit in an election year that is normally rocky.

According to FactSet the S&P earnings for Q4 have declined -6.5% and that is down from expectations for a 15% gain back in January of 2015. For today there were 17 companies issuing positive guidance, 30 issuing in line guidance and 19 that issued lower guidance. Most of these were very small companies that do not move the market because we are late in the earnings cycle.

We get ourselves all excited about six days of gains when the long-term charts are still very negative. We are too focused on the short-term cycles rather than the long-term outlook. I believe everyone looking at the weekly chart below would develop a bearish bias that could last until the S&P is well over the resistance at 1,950 and 2,000.

However, if we look at a shorter term daily chart the main focus is on that strong resistance at the 1,950 level and not on the longer term view.

The 1,950 level is critical because the market cannot continue to heal until the index moves over that level. Right now, we are trapped in a 140-point range between 1810-1950 and nothing material is going to happen until we break out of that range. If we break to the downside then everyone will expect a bear market and a full 20% decline from the 2,130 high to roughly 1,704. If we break above that 1,950 level, we are still in danger of making a lower high only at a higher level around 1,990 or 2,020. Personally, I would rather face that problem than a target of 1,704.

The 24-point decline today is immaterial in a 140-point range. What will be material is whatever happens the rest of the week. We have traveled that range four times now and investors will be watching to see if initial support around 1,900 will hold and will we retest 1,950. If we do move under 1,900 I think we will fail at the 1,810 level on the third attempt.

The Dow broke through resistance at 16,500 on Monday but failed at 16,665. Today we broke back below the 16,500 and that level will return as weakened resistance on the next rebound. The new number to watch on the Dow is 16,665.

JPM, GS, CVX and AAPL were the biggest drags on the Dow. Apple is expected to lose the fight with the FBI and that could damage their potential sales overseas.

The continued decline in oil prices could weigh on Exxon and Chevron and cause them to drag the Dow lower. The same pressures will weigh on the banks because of their energy loans.

The Nasdaq Composite failed to return to the resistance at the 4,600 level and declined -67 points. The Biotech Index declined -2.3% and that hurt the Nasdaq and the Russell. Initial support on the Nasdaq is today's close at 4,500. A breakdown there could quickly retest the lows because it would damage sentiment for tech stocks.

The long-term chart for the Nasdaq looks worse than the S&P. The rebound off support at 4,330 was lackluster and that level has been penetrated multiple times. A continued move lower would target the clustered support around the 4,000 level.

The Russell 2000 has failed to return to the resistance at 1,040 but the -9 point drop today was only -0.9% and a smaller decline than the other indexes. Less selling in the small caps is always positive but one day does not make a trend. This chart is negative until we are over 1,040 and moving higher.

Despite the gloom I portrayed above there are some bright spots that suggest Tuesday was just profit taking and the flush in oil prices. The volume was very low at 7.0 billion shares. Declining stocks were 3:2 over advancers. Monday's volume was also very low at 7.1 billion shares and advancers were 3:1 over decliners.

The low volume means no conviction. With a third of the market posting gains today, the selling was not severe. This suggests the portfolio managers are in a wait and see period just like we are. Nobody has the conviction to buy or sell. On the negative side there was no dip buying at the close. The Nasdaq, S&P and Russell 200 closed at their lows for the day but on low volume.

I think Wednesday is a coin toss for direction. According to Bank of America, fund managers are sitting on a lot of cash and they want to buy a rally but they are afraid. There is no catalyst for direction. Until the market picks a direction and sticks with it for several days, we are all in a wait and see mode.

Enter passively, exit aggressively!

Jim Brown

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