A new survey of potential voters suggests the support is collapsing for those wishing to leave the EU.
A new survey found that 55% of likely conservative voters are planning on voting to stay in the EU while only 42% will vote to leave the union. Among all voters, the Remain campaign now has a 20-point lead with 58% planning on voting to remain in the EU. The new survey found that men, Tory voters and people over 65 are increasingly moving to the Remain side of the issue.
This suggests the worry over a Brexit has run its course. The European markets had a monster rally with several up more than 2%. The European rally carried over into the U.S. and our markets exploded at the open in yet another short squeeze.
Helping to push the U.S. markets higher was a larger than expected spike in new home sales. The April sales came in at an annualized pace of 619,000 compared to the March pace of 511,000 homes. Consensus estimates were for a rise to 522,500 homes.
The spike was a 16.6% increase and put April at 23.8% above April 2015. February and March sales were also adjusted significantly higher. March was raised from 511,000 to 531,000 and February rose from 519,000 to 538,000.
Sales in the Northeast rose by 52.8%, South by 15.8% and West by 18.8%. Sales in the Midwest declined -4.8%. The months of supply on the market fell from 5.5 to 4.7 months. The median home price rose from $295,200 to $321,700 and a record high. That was a 9% rise. The average price of a new home rose 13.5% to $379,800. There were 243,000 listings of new homes in April, up 17.5% from April 2015. The number of new homes sold but not yet under construction rose 29% from March and was 33.8% of the total sales.
The big surprise in home sales helped juice the market even higher when the numbers were released.
Unfortunately, not all the economic news was good. The Richmond Fed Manufacturing Survey declined sharply from April's +14 to -1 for May. The spike from -4 to +22 in March has been completely erased and the outlook is not positive. The order backlog declined to -13 and new orders were flat at zero. The gap between orders and inventories declined from +4 to -19.
With the index now in contraction territory along with the Philly Fed Survey, there is even greater likelihood the national ISM report on June 1st will also be in contraction. This is going to put a lot of pressure on the Fed to not hike rates with the manufacturing sector declining.
In this case, bad news may be good news for those hoping the Fed does not hike rates.
I am including the data from the Philly Fed Manufacturing Survey from last week for comparison. The shaded numbers are all negative.
Wednesday does not have any reports of market interest other than possibly the oil inventory report. The Trade Deficit is not a market mover. Thursday has the Kansas Fed Manufacturing Survey and it was in contraction last month at -4 so the outlook there is still negative. The pending home sales report should be positive since we are in the home selling season.
The big events are still the GDP and the Yellen speech on Friday. Yellen could calm the markets by disagreeing with the recent Fed presidents that are talking up rate hikes. In just the last weeks John Williams said, "2-3 hikes in 2016 is appropriate." Dennis Lockhart said to expect, "2-3 hikes this year." Eric Rosengren said, multiple "rate hikes are absolutely appropriate." Last but not least William Dudley said, multiple rate hikes "would be a reasonable assumption." If Yellen says something similar, we are going to have a rocky first week of June.
In stock news, Twitter (TWTR) was downgraded to a sell from neutral by MoffettNathanson saying hope is not a strategy. Monness Crespi Hardt slashed the price target from $22 to $18 but kept a buy rating. The analyst said "Twitter has been frustrating to cover, not only because of its declining share value, but more so because of its vast potential that is eroding by the day." Shares fell -2.6% on the news.
On a positive note, the company announced changes to its format to make it less confusing and erode the 140-character limit. In the future users will be able to retweet themselves if they felt the first post was ignored or they want to add additional comments. Media attachments such as photos, GIFs, videos and polls, will no longer count as characters in the 140-character limit. If you want to have a conversation with several people, their usernames will no longer count against your character limit.
Hewlett Packard Enterprise (HPE) reported earnings of 42 cents that matched estimates. Revenue of $12.71 billion beat estimates for $12.42 billion. They guided for the current quarter for earnings in the 42-46 cent range and for the full year at $1.85-$1.95 range.
The bigger news was the announcement of a spinoff of its IT services business and merge it with Computer Sciences Corp (CSC) in a merger of equals. After the spinoff, HPE expects to have $33 billion in annual revenue. HPE said the expected synergies of the spin/merger will exceed $1 billion in the first year after it closes. After the spinoff, 50% of CSC will be held by HPE shareholders. The company said there will be $900 million in separation charges and $300 million will be incurred in 2016. The spinoff is expected to be completed in early 2017.
The HP services division has about 100,000 employees and contributes more than a third of HPE revenue but lags in terms of growth and profit. By eliminating this division, HPE will be stronger and more profitable. After the merger, CSC should have revenue around $26 billion. HPE shareholders will get a special dividend of $1.5 billion and the 50% stake in CSC.
Shares of HPE rose 10% in afterhours and CSC shares rose 27%.
Intuit (INTU) reported earnings of $3.43 compared to estimates for $3.19. Revenue of $2.3 billion also beat estimates for $2.25 billion. The company guided for the current quarter to revenue of $720 to $740 million and analysts were expecting $718 million. Full year earnings are now forecasted for $3.63 to $3.65 per share with revenue of $4.66 to $4.68 billion. Shares declined -$2 in afterhours trading.
Apple (AAPL) shares rallied to $98 after suppliers said Apple had requested enough components to make 72-78 million iPhone 7s this year. Since analysts were modeling 55-65 million that was a significant increase. Rumors continue to swirl that there will be multiple cameras, more speakers and a faster processor but nobody knows for sure.
Apple is reportedly working on a smart device for the home like Amazon's Echo device. The device would be "Siri powered" but a lot smarter. Apple is reportedly opening the Siri app up to third party developers to give it more capabilities. The Siri development kit is expected to be released in June at the annual WWDC conference. The Siri speaker device has reportedly been in development long before the arrival of the Echo. The new device will be able to turn on/off any device supported by Apple's HomeKit platform.
Monsanto (MON) has rejected the unsolicited $62 billion offer from Bayer but said it was open to more talks. Bayer went public with the $122 per share cash offer on Monday and Monsanto said it "significantly" undervalued the company and was "incomplete and financially inadequate." That would be the largest all cash deal on record if it occurs. Monsanto said an integrated strategy would have substantial benefits to growers and broader society. The company said there could also be significant regulatory risks to the proposed transaction.
Bayer responded saying the $122 offer represents "full and certain value" for Monsanto shareholders but looks forward to engaging in constructive discussions with the company. "We are confident we can address any potential financing or regulatory matters." Analysts believe it would take something in the $135 range to entice Monsanto to agree to a deal. Previously Monsanto approached Bayer to see if they wanted to sell their crop science unit. ChemChina is buying Syngenta for $43 billion after Syngenta rejected an offer from Monsanto. Dow Chemical and DuPont are merging in a $130 billion deal. With those other mergers, it might make a Bayer/Monsanto combination easier to get regulatory approval.
Monsanto shares are trading at $109 so there is plenty of room for expansion into a $125-$135 offer.
Herbalife (HLF) shares were volatile today after the NY Post reported they had an agreement in principle with the FTC over their marketing program. The Post said an announcement could come as soon as Tuesday. Terms of the settlement were unknown other than there would be a significant financial penalty and no material change to the business model.
However, about midday other sources said there was no deal and discussions were ongoing. The FTC was meeting in Washington on Tuesday on an undisclosed law enforcement matter believed to be the Herbalife probe. Shares spiked $5 on the original news but gave back half the gains on the denial.
Under Armour (UA) has reportedly signed a $280 million, 15-year deal with the University of California, Los Angeles (UCLA). If true, this would be the largest college sports apparel deal in history. Footwear and apparel manufacturers are paying obscene amounts of money to put their logos on teams and sports. Nike recently signed a 15-year deal with Ohio State for $252 million, which was the largest ever at the time. They also signed Texas to a 15-year deal for $250 million and Michigan to an 11-year deal for $169 million. Nike also reportedly signed LeBron James to a $1 billion lifetime endorsement contract.
UCLA has 43,000 students and a large international population, which appeals to Under Armour. California has been a Nike controlled stronghold but the UCLA deal gives Under Armour a foothold in the state. The deal replaces Adidas, which has been the school's sponsor for twenty years. In the deal, all 25 of UCLA's varsity programs, the band and the spirit dancers will wear Under Armour apparel and footwear. UA will also open more retail locations all across Los Angeles.
Crude oil rallied to $49.25 in afterhours when the API inventories showed a decline of -5.1 million barrels for last week compared to estimates for a -2.5 million barrel decline. The EIA inventories out Wednesday morning are the numbers traders watch the most but the API decline has pushed WTI ever closer to that magic $50 level. I would be really surprised if we did not see a sell the news event when that level is reached.
Also lifting prices was news that demand was at the highest level in five years. Oil discoveries outside the U.S. in 2015 were the lowest since 1952 at 2.8 billion barrels. Iraq warned that production slowed from a record 4.78 mbpd in April to 4.5 mbpd because of infrastructure issues that could be resolved next month. The IEA believes there could be more than 3.0 mbpd of production offline because of numerous types of outages from fires to rebel militants to economic reasons. Venezuela oil production has declined 7% in 2016 as that country's economy self-destructs.
Oil is rising on the various outages despite the spike in the dollar to a new two-month high. Unfortunately, gold is crashing as the dollar gets stronger. The rising dollar is another problem for the Fed because it weakens the economy and makes our exports more costly overseas.
It was a short squeeze. Deal with it. I get emails asking me why the market surged so unexpectedly. Things happen unexpectedly. When everyone expects the market to go in a particular direction they plan accordingly in their trades. Over the last month all of that planning has been to add more short positions in anticipation of the sell in May cycle. That means everyone is leaning to the downside and when an unexpected headline appears we all get caught in the squeeze that follows. It is not fun but it is a fact of life when you invest.
The big news today was the impending death of the Brexit movement and the rally in the European markets. When the new home sales came out that threw gas on an already roaring fire. While Monday's volume of 5.7 billion shares was the lightest non-holiday volume of the year, today's volume of 6.9 billion shares was moderate. This was not the same short squeeze we are seen in the four prior events in May that occurred on low volume. That means either that there were more people short this time or there was more buying from funds that were relieved the Brexit issue was going to be resolved in the best possible way.
We cannot just assume that Wednesday's market will erase this squeeze like the last four were erased. There is the risk for the bears that more buyers will appear now that the Brexit roadblock has been dismantled.
The S&P stopped right at solid resistance and this would be the perfect place for the short squeeze to fail. While we cannot count on it, we should be prepared for a retracement. At the same time, we should be prepared for another retest of 2,100 if more buyers appear. I still do not believe we are going to set new highs ahead of the summer doldrums but we could retest resistance at 2,100.
Support remains 2,040 but that seems like a long way off tonight. I do believe if we test that support again it will fail convincingly. You can only test support and resistance levels so many times before they fail. Every test chips away at that level and eventually it breaks.
Like the S&P, the Dow stopped exactly at strong resistance at 17,750 and could be poised to roll over on Wednesday. If you have any doubt this was a short squeeze you only need to look at the American Express chart. All the gains were in the first 30 minutes and shares went sideways the rest of the day. AXP is a Dow component and they all look pretty much the same.
The Nasdaq was the hottest of the big cap indexes with a monster 95 point gain. The gainers list below is filed with the big cap stocks plus a healthy dose of biotech stocks. That sector rallied nearly 2% again to move closer to resistance at 3,250. The biotechs are in rally mode ahead of next week's ASCO cancer conference but they will more than likely fade once it starts.
The Nasdaq blew through resistance at 4,800 and is closing in on 4,900 and the highs from April at 4,965. It will not be a cakewalk for the Nasdaq to move higher but as long as the chip stocks, Apple component suppliers and the biotechs continue to rise there is always the potential for a Nasdaq rally.
The Russell 2000 exploded higher and moved significantly above the congestive resistance but it is far from out of danger. The same factors pushing the Nasdaq higher are also pushing the Russell. Plus, the small cap Russell stocks are normally heavily shorted going into the summer months. Today's squeeze was murder for those investors with small cap shorts. Critical resistance is now 1,150.
Wednesday should be interesting. It could be a directional indicator day. If we continue higher, there will be an entirely new round of short covering and a lot of price chasing by those investors and funds that are holding cash. The funds are facing the end of the month and they may try to mark up their holdings by investing in the market leaders in hopes of pushing prices higher. This is not a quarter end so that practice would not be very strong but it still exists.
If the market rolls over again and heads back to support, I would expect those shorts that were blown out today to jump back in with a vengeance. Volume is going to fall off a cliff starting tomorrow as traders get an early start on the holiday weekend. That means most of the action could start early and then dwindle in the afternoon. If anything the slowing volume could reduce the velocity of any directional move and we could simply wander between todays close and support for the next three days.
If you do not have to be in the market, I would probably recommend remaining in cash until next week. We could see a new directional move begin next Tuesday and I would rather not be on the wrong side of that move. Wednesday's market direction could give us a clue for next week but I would not bet the farm on it.
Enter passively, exit aggressively!
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