Strong overhead resistance we have been watching for weeks held again and could be a preview of things to come.

Market Statistics

The Dow crashed into the resistance barrier on Wednesday with a very short term high at 17,790 on the opening gap. The Dow closed 76 points below that high. Today the Dow barely managed to edge over that 17,750 resistance level by only 5 points intraday before selling off again. I continue to believe that this will be major resistance. The range from 17,750 to 18,165 may only be 415 points but it is going to be a major roadblock to further gains.

The economic reports today did not help the bullish case. The Challenger Employment for March was slightly improved with layoffs declining from 61,599 in February to 48,207 in March. That March number is an improvement but it is still 32% higher than March 2015. For the entire first quarter, there were 184,920 announced job cuts, which was also 32% higher than the same period in 2015.

It was no surprise that energy layoffs the second highest sector at 7,747 with retail at the top with 8,490. Healthcare products cut 6,236, entertainment/leisure 6,212 and information technology at 5,003.

The weekly jobless claims rose +11,000 from 265,000 to 276,000. That is the third consecutive weekly gain. This could be a sign that job growth is slowing. The ADP Employment report on Wednesday showed a gain of 200,000 jobs, down slightly from the 214,000 in February.

The Nonfarm Payroll report on Friday is expected to show a gain of 205,000, down from 242,000 in February. That consensus number rose by 5,000 after the ADP report. March has a history of missing estimates by about 63,000 on average over the last decade. If the report did come in at 142,000 in line with the average miss, that would not be market friendly. In this case, bad news would actually be bad news now that the Fed is on hold until later in the year. A serious miss of the estimates would suggest the economy is declining and a recession is likely.

I am not expecting that large of a miss if there is a miss at all. The job market has been the strongest economic area for many months, even if most of the jobs are only part time service jobs.

The economy is declining as evidenced by the Atlanta Fed GDPNow real time GDP forecast for Q1. As of Monday the forecast is for +0.6% growth in Q1. That is down from 2.7% estimates in the middle of February. The forecast will be updated again on Friday after the payroll report and I will provide the update in the weekend commentary.

Minimal growth at 0.6% means the Fed will be on hold for a long time, at least until the second half of the year. Yellen's speech indicated the Fed would me more gradual in their rate hikes because of multiple factors in the U.S. economy and overseas.

Also on the calendar for Friday is the ISM Manufacturing Index for March. The estimate has risen back into expansion territory at 51 from the prior forecast of 49.5 from last week. Unfortunately, construction spending has declined from +0.2% to flat at 0.0% over the last week and Consumer Sentiment estimates have fallen -1.0 points to 90.5. All of these factors will weigh on the GDP forecast.

It was a disappointing day for Starwood Hotels (HOT). After two weeks of bidding on the acquisition of Starwood, the Anbang consortium withdrew their $14 billion all cash offer for the hotel chain. Starwood immediately reaffirmed their $13.3 billion deal with Marriott (MAR). The transaction will create the largest hotel chain in the world. The acquisition is expected to create $250 million in cost synergies and significant revenue synergies as the two firms cross-pollinate their existing customer lists and rewards programs. Starwood will hold a special shareholder meeting on April 8th to approve the sale.

The last Anbang offer was for $82.75 and all cash. There were growing concerns about their ability to raise the cash and whether or not they could get government approval for a Chinese consortium to own hotels outside U.S. military and government locations. There were growing concerns the internet and WiFi connections could be compromised to the benefit of Chinese owners. Current shareholders will receive a combination of cash and stock equal to $77.94 per share. Separately, they will receive shares in Interval Leisure Group (IILG) common stock when the entity is spun off from Starwood. That is currently valued at $6.13 per Starwood share making the total price to shareholders about $84.07 per share. Starwood has 1,300 properties in 100 countries. Shares declined -$3.50 in afterhours to $80.

Tesla (TSLA) shares were up strongly intraday but faded at the close on a sell the news trade. Tesla is unveiling the Model 3 tonight, which will sell for $35,000. Thousands of people have been waiting in line outside Tesla dealerships for days to put down a refundable $1,000 deposit and be first in line for the new cars. These are expected to begin delivering late in 2017. There is also a federal $7,500 tax credit for buying an electric car and some states offer credits as well. The unveiling is scheduled to occur at 8:30 PT tonight. Customers can also order online starting at 7:30 PT, an hour earlier than planned because of the strong demand. If the car is even halfway decent, Tesla could see major demand and waiting periods of a couple years.

It is not too late for Apple to buy Tesla and jumpstart their smart car project. Tesla's market cap of $30 billion is pocket change compared to Apple's cash hoard of $215 billion. They could pay a premium and still have $160 billion left. Elon Musk has had conversations with Apple in the past.

Target (TGT) was downgraded from buy to sell at Barclays and the price target was cut from $90 to $70 after Wednesday's close at $83.60. The analyst said Target guidance on same store sales and margin expansion are overly optimistic while it faces extreme competition from general merchandise stores and online competitors. Numerous analysts disagreed with the Barclay's downgrade. Last year Target had revenue of $73.8 billion with a 34% increase in e-commerce sales in Q4 alone. Operating margins were 7% and the highest level since 2013. Management is expecting 2.5% same store sales growth in 2016 compared to +0.5% at Walmart. Earnings are expected to grow 11-15% to $5.20-$5.40 per share. Target is expected to grow earnings at 11% a year for the next five years. Shares declined -$1.32 on the news but once they move over resistance at $84 I would be a buyer.

Medivation (MDVN) says it has no plans to sell but has hired JP Morgan (JPM) to handle inquires from potential buyers and suggest defensive measures. Medivation only has one drug on the market, prostrate drug Xtandi, and Bernie Sanders warned the drug was developed with government money and could be taken from the company and marketed at a lower price. That is not likely to happen. The company does have a pipeline of drugs that are expected to do well. One is a breast cancer drug and the other a blood cancer drug. A Jefferies analyst said a best case for a Medivation buyer would be in the $51-$54 per share range. However, if the company can hold out until it gets approval for its current drugs that jumps to $71-$75 per share. Shares spiked 23% on the news.

The first quarter is over and the Dow managed its biggest quarterly comeback since 1933. The S&P gained a measly 0.8% in Q1 and the Dow added +1.5%. However, that was a +14% rebound from the February lows. Since the Feb 11th low at 15,503 to Wednesday's high at 17,790 the Dow added +2,287 points.

The Nasdaq lost -2.8% for the quarter despite a 6.8% rebound thanks to the crash in biotechs. Gold had its best quarter since 1986 with a 16.5% rally. Crude oil rallied from a low of $26.05 to a high of $41.90 in late March for a 61% rebound. You can thank the rebound in oil for much of the gains in the Dow and S&P.

You can also thank the drop in the dollar for the rebounds in oil and gold. The dollar suffered its worst quarterly drop in five years. That means it takes more dollars to buy an ounce of gold or barrel of oil.

The $38.50 level on oil is prior resistance and it is acting as a price magnet ahead of the April 17th OPEC meeting in Doha Qatar. Crude prices have been fading since it is now clear Iran and Libya will not be a part of any agreement. Also, any agreement will not have any effect on the current oil glut. A decline in oil after the meeting could prevent the equity markets from rising through current resistance.

The yield on the ten-year declined -2.4% today to 1.78% and nearing a multiyear low. Yellen's cautions about economic conditions here and overseas caused a flight to quality that could continue for some time. A weak nonfarm payroll number on Friday could accelerate this decline. While recession fears have abated over the last month, they still exist.

We are rapidly heading into earnings season with earnings expected to decline -8.7% according to FactSet. However, Tom Lee of Fundstrat Global Advisors believes there is a rally ahead. Lee believes the pessimism is vastly overdone. When those estimates were being produced earlier in the quarter and companies were issuing guidance, oil was under $30 and the dollar was a lot higher. With the dollar a major impact to corporate earnings, most companies were projecting continued dollar strength into their guidance. Since January 29th the Dollar Index has declined -5.1% with the dollar closing at a five-month low today.

Lee believes estimates are too bearish and when companies begin beating those earnings there will be a race to buy stocks. He also pointed to the more than $1 trillion in short positions as rocket fuel once prices begin to rise again. That is more stocks short than in March of 2009 at the height of the market crash. Lee expects a new high on the S&P by the end of May. Let's hope he is right. The last high of 2,130.82 was on May 21st last year.

April is actually a bullish month for the markets. Typically, stocks rise ahead of earnings as investors make bullish bets on earnings reports. Over the last ten years, there has not been a loss for the month for the Dow. The average Dow gain is 2.8% in April and the S&P averages +2.62%. Since 1945, the Dow has been positive 69% of the time with an average 1.41% gain. Since past performance is no guarantee of future results, you have to take those statistics with a dose of reality. We are facing major resistance in a hotly contested election cycle with U.S. economics declining and Q1 earnings results in doubt. All of those factors could become bricks in a wall of worry for the market to climb or they could become weights to hold the market back.


The S&P has not yet reached the strong resistance that begins at 2,075, with 2,072 the high on Wednesday. The index is facing strong resistance and we will need a significant catalyst to push through the various levels. It is not impossible but it should be difficult. My problem is that I do not see a material positive catalyst on the horizon other than the potential for better than expected earnings. With economic estimates declining we could also rally if that situation were to improve but it will take more than one report to change the outlook. It will take several weeks of positive economic news to suggest a real improvement.

On the positive side, the Chinese markets are improving. That suggests economic conditions are also improving although we do not have confirmation of that just yet. While the Shanghai Composite is rebounding, it faces several resistance tests. The ECB is preparing to kick off a larger round of QE and that could depress rates further and force more money into equities.

In the U.S., the markets were slipping to their lows for the day at 3:00 when a flood of market on close buy orders appeared to the tune of $1.2 billion. The losses were erased and the indexes turned positive until just before the close when a surge of sell orders erased that buy imbalance. That could have been quarter end adjustments by funds or any number of events. We should not judge the market by the last 30 min of trading on the last day of the quarter.

The payroll report in the morning should not be a market mover. The Fed is on hold. Unless the number is off significantly in either direction, it should be ignored. Actually, the goldilocks number would be around 200,000 and that would not bring the Fed back into the picture or suggest the economy was weakening further.

The S&P would have to gain 15 points just to reach that initial resistance at 2,075. That suggests we are not going to break into that resistance band on Friday. Making large investments ahead of a weekend is rarely a good idea. There will be plenty of time on Monday to put quarter end funds to work.

The Dow benefitted from an upgrade on IBM by Morgan Stanley. The broker raised the price target to $168. That was good for a $3 gain on IBM and +23 Dow points, which prevented an even bigger loss at the close.

The Dow has touched resistance at 17,750 for the last two days and each day resulted in selling when that number was touched. It will take a significant catalyst to punch through that initial resistance level.

The Nasdaq is facing significant resistance at the 4,900 level but once through it has a clear shot to 5,100-5,160 and the historic highs. Whether that will happen or not probably depends on the Biotech Index. The $BTK gained +3% today and the Nasdaq barely closed positive.

The biotech sector could be poised for a rebound. The index rebounded to resistance at 3,000 once again after touching support at 2,800 on Tuesday. Since the sector is heavily shorted, any breakout over 3,000 could be powerful.

The Russell 2000 actually moved to a higher high today with a close at 1,114. Resistance is 1,120 and the 50% Fib retracement level. The 200-day is 1,141 and major resistance waits at 1,161. However, the index is moving with the support of the biotech sector and a rally in biotechs would push the Russell much higher. The relative strength oscillators have both improved.

I am not expecting much from the market on Friday. Next week could produce some fireworks as the quarter end money is put to work but it will be interesting to see how the indexes react to the various resistance levels. I would love to believe Tom Lee and see us set new highs in May but that is just a remote hope today. There are far more analysts that believe the resistance will hold and we will head lower into the summer. That does not mean we are not going higher over the next couple weeks. It may be choppy and on low volume. The super low volume over the last two weeks demonstrates a lack of conviction by traders on both sides. I seriously doubt that conviction is going to improve suddenly but I would be thrilled if it did.

Enter passively, exit aggressively!

Jim Brown

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