Weak economic data from China, a rate cut in Australia and a Fed head warning of a possible rate hike in June.

Market Statistics

Those events combined to push an already uncertain market sharply lower and erases the gains from Monday. In China, the Caixin purchasing managers index declined from 49.7 to 49.4 and the 14th month below 50, a level representing contraction. The official Chinese PMI declined from 50.2 to 50.1 for March. The Caixin numbers suggest the recent stimulus that lifted Q1 growth slightly, is fading. The Caixin gauge is considered more accurate than the government PMI because it focuses on private firms while the government number is heavily influenced by state owned companies. The government PMI is thought to be manipulated to remain positive.

The Reserve Bank of Australia cut interest rates to a record low of 1.75% in an effort to head off deflation. Australia is a commodity economy and has not seen the major economic problems of other countries until now. The Australian dollar crashed causing a ripple higher in the other global currencies.

The spike in the U.S. dollar accelerated the decline in equities and commodities. WTI declined -2.5% on the dollar strength and news that OPEC nations were boosting production even higher. After the close the API inventory report said U.S. crude inventories rose +1.3 million barrels with another 382,000 barrel rise at the futures delivery point of Cushing Oklahoma.

Gold declined from its high at $1,300 to $1,287 on the dollar spike.

Atlanta Fed President Dennis Lockhart said "June is a live meeting." Also, "two rate hikes are certainly possible. We have enough meetings remaining. June is a real option." He also warned that the Brexit vote in June was a real risk to the global economy. Bringing the Fed back to the forefront of the conversation put an additional cloud over the equity markets.

The ISM-NY report rebounded significantly with a sharp increase from 50.4 to 57.0 and a four-month high. This is material since the index was only 0.5 away from contraction in March. However, the six-month outlook fell from 65.0 to 53.1 and the lowest reading since 2009 and the financial crisis. The quantity of purchases fell from 57.1 to 48.2 and a three-month low. While the headline improved, the internals components were mostly lower. Only employment showed a dramatic improvement from 40.9 to 49.9 but still in contraction territory for 7 of the last 8 months.

Vehicle Sales for April rebounded to an annualized pace of 17.4 million after 16.6 million in March. This is 4% higher than April 2015. Auto sales rose from 6.9 million to 7.1 million and trucks/SUVs rose from 9.7 million to 10.4 million. All the major manufacturers posted gains except for Ford, which was flat at 2.8 million.

The first April employment report is due out tomorrow and expectations are for a 5,000 jobs decline to 195,000. If the ADP report comes in anywhere close to this number, it will be ignored. The Nonfarm Payrolls forecast has declined slightly and is now expected to show a decline of 15,000 jobs to 200,000. This would also be a Goldilocks number and the market would probably breathe a sigh of relief.

Dow component Pfizer (PFE) led the earnings parade today. Pfizer earnings jumped +27% to $3.02 billion due to higher sales and lower taxes. Adjusted earnings of 67 cents easily beat estimates for 55 cents. Revenue rose +20% to $13.01 billion and well above estimates for $11.97 billion. This comes only four weeks after Pfizer cancelled the $160 billion merger with Allergan. This was the sixth consecutive quarter of revenue growth despite an increase in generic competition. The company got a boost from the $15 billion acquisition of Hospira last September. That company supplied $1.2 billion in revenue for the quarter.

The company guided for full year earnings of $2.38-$2.48, up from $2.20-$2.30 in January. Revenue estimates rose by $2 billion to $53 billion. Pfizer also began an accelerated share repurchase program of $5 billion announced in March. The company has bought back nearly $51 billion since 2010. Shares rose to a six-month high at $34.

Molson Coors (TAP) reported earnings of 54 cents that easily beat estimates for 43 cents. Revenue of $657.2 million beat estimates for $602 million. TAP is made up of more than 65 leading brands of beer and operates in 30 countries. They have been struggling for several quarters because of weak economies in Europe, the USA and Canada. Sales declined as consumers cut back on beer purchases. To combat this decline the company launched multiple premium categories with higher prices and higher margins. Apparently this strategy has worked.

CVS health (CVS) reported earnings of $1.18 that beat estimates by 2 cents but that was the slowest earnings growth since Q4-2013. Revenue rose +19% to $43.22 billion compared to estimates for $43 billion. The company guided for earnings of $1.28-$1.31 for Q2 and that was lower than the $1.35 estimate. For the full year, they guided to earnings of $5.73-$5.88 compared to analyst estimates for $5.82.

Pharmaceutical company Mallinckrodt (MNK) reported earnings of $2.01 compared to estimates for $1.72. Revenue of $918 million also beat estimates for $874 million. The company guided for full year earnings of $8.15-$8.50, up from $7.85-$8.30. Sales in the specialty brands segment rose from $334 million to $535 million. However, sales of specialty generics fell -27.1% to 264.4 million. Shares spiked 7% or $4.40 but the chart remains mired in consolidation.

Clorox (CLX) may not be sexy as a growth stock but they reported earnings of $1.21 that beat the street by 11 cents. Revenue of $1.43 billion rose +2% and beat estimates for $1.41 billion. They guided for full year earnings of $4.85-$4.95 compared to prior guidance of $4.75-$4.90. Sales are expected to rise 4-5% on a constant currency basis. The company said it had completed the $290 million acquisition of Renew Life, the number 1 brand of natural probiotics. Clorox said that $10 billion digestive supplement market is very fragmented and growing 7% a year. Within that is the $1.3 billion probiotics category that is growing 15% a year. Does anyone else think it is strange a bleach company is going to clean out your digestive system? Actually, bleach only accounts for 15% of total revenue at Clorox.

American International Group (AIG) reported earnings of 65 cents that was well below estimates for $1.00. Net investment income fell -44% to $577 million. The commercial property and casualty business saw income fall -38.5% to $720 million. This was the third consecutive quarter of earnings below expectations. AIG did return $4 billion to shareholders in Q1. AIG is rapidly removing investments from hedge funds. They had been active investors until the market turned volatile a couple years ago and now the model no longer works for them. They received $1.2 billion in redemptions in Q1 and said it will be several quarters before they receive the rest of their investment back because of fund withdrawal restrictions. Shares declined slightly on the earnings news.

Mylan (MYL) reported earnings of $1.18 billion or 76 cents that beat estimates by a penny. Revenues of $2.19 billion missed estimates of $2.26 billion. The company affirmed full year guidance for $4.85-$5.15 with analysts expecting $4.90. Revenue is expected to be $10.5-$11.5 billion and analysts were expecting $10.6 billion. Mylan is one of the largest generic and specialty pharmaceutical companies in the world. They currently have over 1,400 drugs on the market. They expect to complete the $9.9 billion acquisition of Meda in Q3. Shares rose slightly on the minor beat.

After the bell, Zillow Group (ZG) reported a loss of 13 cents compared to expectations for a loss of 9 cents. Revenue rose 25% to $186 million and easily beat estimates for $177 million. The company raised full year guidance from $805-$815 million to $825-$835 million. Monthly average unique users rose to 156 million with a record number of visitors in March. Shares spiked 12% or $4 in afterhours.

Online craft site Etsy.com (ETSY) reported earnings of a penny that beat estimates for a loss of 2 cents. Revenue rose 4-% to $81.85 million compared to estimates for $75.2 million. Gross merchandise volume rose 18.4% to $629.5 million. They guided in line for revenue growth of 20-25% for the year. They currently have 1.6 million active sellers and 25 million active buyers.

Match.com (MTCH) rose $1 in afterhours after posting earnings of 11 cents that beat estimates for 9 cents. Revenue of $285.3 million also beat estimates for $280.5 million.

Overall the earnings calendar for Tuesday was rather bland. That will continue the rest of the week with Tesla and Priceline the two attention getters on Wednesday. Overall, the size and quality of companies reporting in the days ahead will dwindle. Excitement will focus on a couple of companies a day and next week it will be even slower.

Abercrombie & Fitch (ANF) former competitor Aeropostale (AROP) is reportedly preparing to file for bankruptcy. This came as no surprise to traders since the stock was delisted from the NYSE on April 22nd when its market cap declined below $50 million for a 30-day period. The Wall Street Journal said today they could file bankruptcy this week and will close 100 stores. This is just one more example of the dying malls. This store was a teen hotspot ten years ago but lost its attraction and sales have been imploding. Same store sales in Q4 declined -6.7%.

Valeant Pharma (VRX) saw a little daylight on Tuesday after both Moody's and S&P eased up on the negativity. S&P upgraded Valeant's CreditWatch rating from "developing" to "positive" suggesting the company could be upgraded from its current B rating. The analyst said an upgrade to B+ was possible once they have greater confidence in the 2016 operating trends.

Moody's raised the "probability of default rating" to B2-PD from Caa1-PD. They made the upgrade after Valeant filed the 10K on Friday and removed any possibility of default on a technical basis. Moody's said there were still significant challenges related to stabilizing operations and generating sustainable earnings growth without large acquisitions.

The dual upgrades powered the stock to a 10% gain and that is probably the first of many gains we will see once traders begin to feel the worst is over. The installation of Joe Papa as CEO on Monday was the first step and the replacement of the board is currently underway. Bill Ackman said he has no doubt he will get all his money back because the assets are there and the company is very profitable. They just need to wade through the skeletons and get back to business.

Apple shares rebounded $1.54 after eight consecutive days of decline. Support at $92.50 held and Tim Cook's appearance on CNBC brought investors back into the market. The 8-day decline was the longest streak of losses since 1991. I think investors are missing an important point or two. They reported revenue of more than $50 billion and earnings of more than $10 billion in Q1. No other company has earnings of $10 billion a quarter that are considered "bad." Apple is trading at a PE of 10. They have $230 billion in cash. Their market cap today is $521 billion and they have a stock buyback authorization for $250 billion. They are going to buy back roughly 50% of their stock between now and 2018. What other company is doing that?

Cook said massive innovations are coming. "We are going to give you new features on the iPhone that you will not be able to live without. You will wonder how you ever got along without them." Obviously, he would not disclose those features until the new product announcement in September. He said China was doing great. Cook said in 2007 when the first iPhone was released the middle class in China was 50 million people. Five years from now, it will be 500 million people. The switch rate from Android phones to Apple phones in China is 40%. In ten years, India will be the most populous country and nearly 50% of the population is under 25. That is the target generation for smartphones. Unfortunately, India is also a poor country and $700 phones are a real stretch for consumers. He believes that will be rectified in the years to come just like China's rapidly growing middle class.

There are more than 1 billion people currently subscribing to some Apple service like music, iCloud, etc. Services revenues have been growing at 26% and are accelerating.

I was already a convert on buying Apple at the current levels but Cook's comments convinced me even more. The bad news is already priced in and the good news is still ahead. The average analyst price target for 37 analysts is $126 with the high estimate at $185.


Tonight we are faced with a decision. The market sold off late last week and then rebounded strongly on Monday with a triple digit gain. Today there was a larger triple digit loss. However, the Dow was down -220 at the low and ended the day down only -140. Which day was the correct market direction? Was it the +117 Dow gain on Monday or the -140 loss today?

We will not know until later this week. As is always the case, the market tends to over react in both directions. However, the S&P put in a lower high at 2,111 two weeks ago and put in a lower low on Friday. While this may only be a period of volatility resulting from profit taking after seven-weeks of gains in March, it looks suspiciously like a topping process. Volume on Thursday was 8.0 billion and Friday was 8.99 billion shares on sharply declining days. Volume on Monday's rebound was 7.0 billion or -2 billion less than Friday. Volume today was only slightly higher at 7.7 billion. When in doubt follow the volume. The direction with the most volume is the right direction and that direction is to the downside. Declining volume was 4:1 over advancing volume today compared to 2:1 on Friday. Yes, volume was more negative today than Friday.

The key levels to watch this week are support at 2,040 and resistance at 2,100. We could chop around between those levels for several days. We could see an oversold bounce on Wednesday that completely negates today's losses. You may remember back in Nov/Dec we saw alternating triple digit gains and losses almost every other day. Volatility and uncertainty are always part of a topping process.

The Dow benefitted from the Apple rebound and the Pfizer earnings. Unfortunately, the Chinese economics and the Australian rate cut pushed the banks lower and JPM/GS were contributors to the decline. Falling oil prices from the spiking dollar pushed Chevron and Exxon lower as well.

The Dow decline came to a dead stop on support at 17,750 and that is a key level. Today's low at 17,670 was nearly equal to the lows on Friday and that means we should watch that level for a failure. A drop below 17,670 should target 17,500. Resistance remains 17,925 through 18,165.

With only a couple Dow components reporting earnings this week there is little to lift the Dow higher while post earnings depression could weigh on the index.

The Nasdaq lost 54 points and tested support at 4,750 again intraday. There are a lot of tech stocks with bearish charts. The tech stocks tend to suffer more post earnings depression than industrial or consumer discretionary stocks. Tech investors are fickle and are quick to move from one stock to another in search of a new earnings report.

The 4,750 level is critical for the Nasdaq with the next support down at 4,600. The Nasdaq failed to even come close to the relative levels of the Dow and S&P in late April and remains only about 1% out of correction territory. A break under 4,750 would put it back into correction again. That is hardly a bullish outlook.

The biotech index ($BTK) crashed again with -2.5% decline today and that weighed on the Nasdaq and the Russell 2000.

The Russell 2000 dropped -19 points to fall back below the 200-day average at 1,125 and to stop on prior uptrend resistance at 1,121. There are multiple converging support levels from 1,090 to 1,110 so further declines could be choppy as those levels are tested. The Russell failed to retest resistance at 1,165 and struggled to even make a print over 1,150. There is a good chance the Russell rally is over as we head into the sell in May cycle and the summer doldrums. Fund managers are not going to be excited about putting money into low liquidity stocks ahead of the very low liquidity summer months.

I am neutral on the market for Wednesday but I am bearish on the market for the weeks ahead. I think we will see lower lows as we head into late May and early June. Earnings are normally weak in Q2 and the current negative projection could become weaker as the Q1 earnings cycle plays out.

The worry over a June rate hike, weakness in China, sell in May and the election cycle will weigh on the markets. That is just my opinion but I think I am in good company.

Enter passively, exit aggressively!

Jim Brown

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