Last Tuesday we saw a +221 Monday gain nearly erased by a -189 point decline. Today we saw a -123 point Monday drop erased by a +348 point rebound to put us over recent resistance.
The big gain came from an overnight rebound in Asia and Europe along with some better than expected economic numbers in the USA. Oil prices rose to more than $34 after China lowered the bank reserve rate on Monday and hopes for a successful production freeze in the Middle East. Reports from some U.S. producers said they were cutting production to conserve cash flow rather than produce at a loss.
The February Manufacturing ISM rose from 48.2 to 49.5 and almost back into positive territory. This is the fifth month in contraction for the sector. The new orders were flat at 51.5 but backorders improved from 43.0 to 48.5 but still in contraction. Production rose from 50.2 to 52.8 and employment improved from 45.9 to 48.5.
Imports declined from 51.0 to 49.0 and export orders declined from 47.0 to 46.5. Overall this was a "less bad" report but still in contraction. Analysts were beating the drum because the headline number had risen for two consecutive months up from 48.0 in December and 48.2 in January. While that is positive, I think they are grasping at straws. Still the market celebrated the improvement in the sector.
Construction spending soared +1.5% for January and well over the 0.4% estimate and the +0.1% gain in December. That was the biggest gain since May. Private construction spending was $831 billion, public spending $309 billion and total spending at $1.141 trillion. Public construction spending rose +4.5% with private spending up +0.5%. Spending on highways and streets rose +14.7% for the month to severely distort the headline number. Total spending is now up +10.4% over January 2015.
Auto sales for February continued at a 17.54 million annual pace. This is down slightly from the 17.6 million pace in January. These are outstanding numbers since January and February are the two slowest months of the year. Auto sales were on pace for 7.4 million and light trucks/SUVs at 10.1 million.
Ford's sales rose +20%, with its SUV rising +28% thanks to the low fuel prices. Car sales rose +19% with the Ford Focus compact up +4.7%. GM said overall sales declined -1.5%. Sales to rental companies declined -16,500 from 2015. Toyota said sales rose +4.1% and Chrysler +12% thanks to Jeeps and Ram trucks. Honda sales rose +13% and Nissan +10.5%.
Despite the market reaction to a better than expected ISM and Construction Spending report the Atlanta Fed GDPNow real time forecast declined -0.2% to +1.9% growth because of a markdown in real consumer spending growth from 3.5% to 3.1% because the continued contraction in the ISM.
The calendar for Wednesday has the first major jobs report from ADP and the Fed Beige Book with a recap of activity in all Fed regions. The Nonfarm Payroll report on Friday is the biggest report for the week and could weigh on the market depending on what the ADP report shows. A weak ADP report could suggest a weak Nonfarm report. A really strong Nonfarm could put the Fed back in play for their meeting on the 16th.
In stock news, Dollar Tree (DLTR) reported earnings of $1.01 that missed estimates for $1.04. Revenue of $5.365 billion rose +116.7% thanks to the acquisition of Family Dollar but still missed estimates for $5.425 billion. They now operate more than 14,000 stores. The company guided to full year revenue of $20.76 to $21.11 billion. Revenue for Q1 is expected to be $5.05 to $5.12 billion. Same store sales are expected to grow in the low single digits. Earnings are projected to be 75-83 cents for Q1 and $3.35 to $3.65 for the full year. Analysts were expecting 81 cents for Q1 and $3.78 for the full year. Shares dipped $2 at the open but rebounded to gain $2.
Medtronic (MDT) reported earnings of $1.06 and revenue of $6.93 billion that matched analyst estimates. However, they reiterated full year estimates for $4.36-$4.40 per share before seeing low double digit to mid teens earnings growth in 2017. Analysts were expecting $4.38 and the mid range of those forecasts. However, the company expects revenue to decline 5.0 to 5.5% in 2016 because of the strong dollar. The foreign currency impact is expected to be -$200 million in the current quarter. Analysts and investors saw the earnings as lackluster and shares declined -5%.
Autozone (AZO) reported earnings of $7.43 per share and 15 cents above estimates. Revenue was $2.26 billion and matched estimates. Gross profits were a whopping 52.7% of sales. Same store sales rose +3.6%. They opened 30 stores in the U.S. to bring their total to 5,193 and 5,676 stores globally. Autozone said low gas prices had produced more miles driven and therefore more wear on auto components. Shares rallied $16 on the news.
Kate Spade (KATE) reported earnings of 32 cents that missed estimates by a penny. Revenue rose +7.6% to $429 million but also fell short of estimates for $443.9 million. However, same store sales spiked 14% or 9% excluding e-commerce sales. Analysts expected 10.8%. The company lowered full year earnings guidance to the range of 70-80 cents and revenue of $1.39-$1.41 billion a rise of 14 to 16%. Investors apparently liked what they heard with shares up +11%. That probably translates into a lot of short covering after KATE broke through resistance at $21.
United Technology (UTX) shares fell after Honeywell (HON) said it was it was no longer pursuing the $90 billion acquisition. Honeywell said it strongly disagreed with United's position that the deal would have a tough time being approved by regulators. CEO David Cote said, "We made a full and fair offer that would have greatly benefitted both sets of shareholders. However, continuing to try and negotiate with an unwilling partner is inconsistent with our disciplined acquisition process." RBC upgraded UTX saying the company is "now in play" despite its rejection of the Honeywell offer. RBC did not say who might be considering an offer but there could be several candidates.
Tesla Motors (TSLA) shares fell after short seller Citron Research tweeted that "Citron shorting TSLA. Supply and demand problems should take the stock down to $100 by the end of 2016. News flow all around does not look good for the stock." Citron is notorious for picking on high flyers and causing significant pain for shareholders. Tesla has had some manufacturing challenges on the Model X
Valeant Pharmaceuticals (VRX) rebounded from an intraday dip to $60 after a $26 drop over the last three days on multiple headlines. The company was downgraded by RBC to neutral after news of a new investigation by the SEC. Hillary Clinton released a new campaign ad specifically naming Valeant and citing "predatory pricing" and pledging to fix those kinds of problems with prescription medicines.
The SEC is investigating VRX for financial misrepresentation surrounding its relationship with Philidor. Yesterday Valeant said it was postponing its earnings because of accounting errors surrounding Philidor. Today the company said it would not meet the regulatory deadlines for its quarterly filings.
Citron attacked Valeant several months ago questioning their accounting and helping to cause the massive drop in the stock price.
After the close Weatherford International (WFT) announced a secondary offering of 80 million shares with the proceeds to be used for general corporate purposes including the repayment of debts. Shares were $6.18 at the close. This is one more oil company resorting to the last option available to them to avoid defaults and bankruptcy. In late January, Pioneer Natural Resources (PXD) floated 12 million shares at $117. Earlier this week Marathon Oil (MRO) announced a 145 million share offering at $7.65. Duke Energy offered 9.25 million shares at $74. AEP Resources (QEP) offered 33 million shares at $10. Newfield exploration (NFX) offered 30 million at $23.
The bigger companies are surviving by cutting their dividends and selling assets. The smaller companies with weaker balance sheets are selling shares and diluting existing shareholders. We can expect more of this in the months to come.
Oil prices rose today but after the close the American Petroleum Institute (API) reported an inventory build of 9.9 million barrels for the week ended on Friday. That was the biggest build in 11 months and well over expectations for a gain of +3.6 million barrels. Cushing Oklahoma, the WTI futures delivery point was already within 3 million barrels of capacity and they added 1.8 million to pretty well max them out.
Crude futures declined to $33.90 after closing at $34.43. If the EIA report on Wednesday confirms this build, I am sure we will see lower prices. I have warned for weeks that the inventory build season does not end until the end of March or early April. Once refineries begin to draw down inventories, the prices should begin to stabilize at a higher level.
Everybody loves a short squeeze unless of course if you are short. The factors combining to cause today's squeeze included month end fund flows, rebounds in Europe and Asia, better than expected economics, rising oil prices and the idea that Super Tuesday sometimes produces bottoms in the market depending on the outcome of the vote. Having a lot of sellers pile on to the MSCI rebalance decline on Monday did not hurt either. They just added more fuel to the fire today.
In 1996 the market declined -2.9% the week before Super Tuesday. Bob Dole swept the contests to seal his nomination and the market rallied +2.3% the next week. In 2012 the S&P dropped -2% in the five days prior to Tuesday, Mitt Romney had a solid win and the market rose 4% over the next week. The key is a strong winner. If the contests end up with a mixed result, the markets tend to continue lower because of the lingering uncertainty.
Whatever the reason for the rally I am thrilled. The rally lifted the major indexes well above prior resistance and hopefully high enough that we will not have to revisit those levels. The strong gain also suggests the worst is now behind us and we are not likely to retest the lows.
Volume on Tuesday was 8.8 billion shares and relatively heavy. Advancing volume was 3:1 over declining volume. Advancers were a little more than 3:1 over decliners at 5,533 to 1,585. On a big +348 point day, we would have liked to see those numbers a little more lopsided in favor of the advancers.
The S&P surged past resistance at 1,950 and the 50% retracement level at 1,963 to close at 1,978. It would take some serious selling to return us to 1,950 but that 1,963 level is in play. In theory, those levels should now be support on any future decline.
You know there is a decline in our future. We cannot soar 348 points without some profit taking. Whether it is a little or a lot remains unknown and a lot of it revolves around the Asian markets tonight, payroll reports, Fed Beige Book and Fed speaker comments.
The next resistance is the 1,999 retracement level and the psychological hurdle of 2,000.
The Dow industrials were powered higher by short covering in more than half of the components. The banks were the leaders because the better than expected economics suggested the Fed could hike sooner rather than later and rising interest rates are good for banks. Apple rallied after the law enforcement lost a case in New York to unlock an iPhone in a non-terrorist investigation. FBI Director Comey and the attorney for Apple gave testimony in the House and it appeared Apple won the day but maybe not the war.
The Dow surged through the 50% retracement level at 16,718 and closed 150 points over that level. This was a strong day and also suggests we will not be going back to retest any lows.
The Nasdaq could be the problem child. The Nasdaq composite rose to exactly the 50% retracement level at 4,691 and came to a dead stop. It was a +131 point gain of +2.88% so we really cannot complain. What this means is that we could have some backing and filling on the Nasdaq before it moves over that 50% retracement level. Apple was a main supporter but Amazon, Priceline, Google and even Netflix contributed to the rally.
Prior resistance at 4,600 should be support but that would be a 90-point decline and I really hope we do not see that level again.
The index I am most happy about is the Russell 2000, which broke through not only 1,035 but 1,050 as well. If the Russell can hold its gains, we could be off to the races. The semiconductor, financial, energy and even biotech sectors all posted gains that supported the Russell. Keep your fingers crossed.
Regardless of who wins the Super Tuesday contests I expect some retracement of the gains. It is only natural. The real key will be how far back we drop and whether investors buy the dip.
I would not be looking to add to any positions on Wednesday. I would be raising stop losses on any position with profit you do not want to lose. As we have seen in recent weeks, the market can take back its gains even faster than it produces them. I would look to buy any decent dips.
Enter passively, exit aggressively!
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