The last several days has seen the major indexes trade in alternating directions with increasing intensity.

Weekly Statistics

Friday Statistics

On Tuesday I wrote about the increasing volatility in the Russell 2000 implying we were nearing a top. Last weekend I wrote about the potential for a head and shoulders on the S&P and the potential for a double top as we move into the Q1 earnings cycle. The bipolar market may be proving those scenarios.

Friday the Russell was the biggest loser at -3.6% and closed at a lower low and dangerously close to breaking below support at 1,500. The ten days of intraday volatility turned into a collapse on Friday.


The Dow fought against the Boeing losses all week and lost the battle to close at a 2-week low and the low for the day.


The 2,815 resistance level on the S&P was broken last Friday and survived the Wednesday support test only to be broken again on Friday.


The Nasdaq big caps led the market higher but on increasingly narrow breadth. Eventually we ran out of tech buyers in an increasingly overbought market.


Friday's economics in the US were positive, but nobody was paying attention after the bad news from Europe. The existing home sales in the US rose 11.8% in February. That was a record one-month gain. The prior three months saw declines averaging -1.8%. The South and West powered the gains with +1.9% and +16.0% gains respectively. The Midwest rose 9.5% and the Northwest was flat. Inventory on hand fell to 3.5 months of supply and a multiyear low. The median home price was flat at $249,500. The annualized rate of sales was 5.51 million and that exceeded analyst estimates for 5.10 million. Analysts pointed out that the 30-year mortgage rate has declined from 4.87% in November to 4.37% today and still dropping. The end of the government shutdown was also a factor because the FHA was able to begin processing the backlog of applications that stacked up during the shutdown. It was not that there was a rush of people buying homes, but it was a surge of paperwork that pushed the home sales numbers higher.


Wholesale inventories for January rose 1.2% and well over the 0.2% analysts expected. That followed a 1.1% increase in December. Durable goods rose 0.9% and nondurables rose 1.6%. The inventory to sales ratio rose to 1.34 and the highest level since 2016. This report was ignored.

The bean counters at the Atlanta Fed did not ignore the inventory numbers. The combination of inventories and home sales caused a sharp uptick in the real time GDPNow forecast for Q1 GDP from 0.4% to 1.2% growth. Residential investment growth estimates rose from -4.8% to +0.6% thanks to the existing home sales report.


Causing our market jitters overnight was the decline in the Eurozone composite PMI from 51.9 to 51.3 and missing estimates for 52.0. The French and German PMI numbers also disappointed with German manufacturing contracting for the third consecutive month. The yield on the German Bund turned negative for the first time since 2016.

The declining yields in European debt sent investors racing into US treasuries. As of Friday, there was more than $10 trillion in overseas debt with a negative yield. That makes the US treasuries the only place to go for a safe yield.

The yield on the ten-year fell to 2.418% intraday and closed at 2.455% and a 14-month low. When the Fed said it was halting plans for any rate hikes in 2019 and would stop the quantitative tightening in September, they sealed the fate for treasuries. The Fed blamed a slowing outlook for economic activity for the rest of the year.

The sudden drop in yields caused the 3-month yield to invert with the ten-year and that caused a headline panic in the market even though it was not a material event.


The EU agreed to grant Britain an extension to the Brexit date from March 29th to May 22nd. However, that came with a contingency. Parliament must accept Theresa May's current Brexit deal. Otherwise the extension expires earlier, and Britain will be forced into a hard Brexit on April 12th, three weeks from now. Parliament has previously rejected this deal twice, the first time by a record number of votes. The odds are slim they will approve it the third time except this time they have a hard deadline imposed by the EU with no alternative.

This is another challenge for the European economy because a hard Brexit will cause severe economic disruptions. The UK Parliament petition website crashed with more than 2.1 million people signing a petition over just a few hours hoping to force Parliament to approve the Brexit deal. Parliament had said they would consider a debate if they got just 100,000 signatures. It was the highest rate of signing for any petition ever.

Another headline weighing on the market was tariffs. President Trump warned the US would keep tariffs in place on $50 billion of Chinese goods even if a trade deal was reached. This is toughening the stance with China and a warning that compliance would be required or else. China's goal is to see as many of the $250 billion in tariffs removed as possible. The US does not trust China to follow through on their commitments. China does not trust the US to remove the tariffs. These comments seem to indicate Trump is reluctant to remove all of the pressure points until there is compliance. Trump said he thought we were getting close to a deal. "That does not mean we get there, but I think we are getting very close." Many analysts feel that China is making broad promises that will be nearly impossible to enforce.

The US is insisting we can reinstate any tariffs at any time without any input or retaliation from China if we believe they are not in compliance. China is rejecting this claiming it would compromise their sovereignty. Larry Kudlow suggested the tariffs would be removed a piece at a time as China complied with some portion of the agreement.

We have European economics declining, the Brexit disaster racing towards us and China backing away from an agreement with enough teeth that could force compliance. Those are some big bricks in the wall of worry.

We have a very busy calendar next week. We have four more regional Fed reports and three more housing reports. Add in the GDP report and personal income/spending and there is something for everyone.


There are some large companies reporting next week led by RedHat, Carnival, Lululemon, Paychex, McCormick and Accenture. KB Homes and Lennar also report. BlackBerry is not large, but they report on Friday.

For Q1 there have been 79 guidance warnings and 30 guidance upgrades. Earnings estimates for Q1 are projecting a decline of -1.7% and the low for this forecasting cycle. Estimates for Q2 are 3.0%, Q3 2.7% and Q4 9.1%.


Friday was a slow day for stock news with everyone focused on global economics and falling interest rates. There were a couple bright spots. Hibbett Sports (HIBB) reported earnings of 57 cents that easily beat estimates for 39 cents. Revenue of $306 million beat estimates for $280 million. Same store sales rose 3.8% compared to estimates for zero. They are planning on closing 95 stores in fiscal 2020 while opening 10-15 new stores. They guided for full year earnings of $1.80-$2.00 that easily beat estimates for $1.74. Shares soared 20% in a bad market.


Tiffany & Co. (TIF) reported earnings of $1.67 that beat estimates for $1.60. Revenue declined -1% to $1.32 billion and missed estimates for $1.33 billion. Same store sales declined -1%. Japan rose 3.0%, the US was flat, Asia-Pacific declined -3% and Europe fell -5%. Shares initially fell -5% but rebounded to post a gain after the company said it expected sales to improve in the second half of the year. They are launching an online sales program for China and expect e-commerce to rise from 7% of the total to as much as 15%. Shares rallied on the positive guidance.


Dow component Nike (NKE) was an anchor dragging the index lower after disappointing on earnings. Shares fell $6 and subtracted about 39 Dow points. Earnings of 68 cents beat estimates for 66 cents. Revenue of $9.6 billion rose 7% and matched estimates. North American sales rose 7% to $3.81 billion and missed estimates for $3.87 billion. A decline in sales of the Converse brand was also blamed. The company guided for "low single digit" revenue growth in the current quarter and analysts were expecting 6.1% growth. Their competitor Adidas warned they were suffering supply chain issues in the first half of the year and that should help Nike. Shares fell -6.6%.


Pinterest (PINS) filed for an IPO and is using an interesting ploy for share classes. The 184-page S1 said they had revenue of $273 million in Q4 with net income of $47 million. That was up from $173.3 million and $3.4 million in the year ago quarter. Full year revenue in 2018 rose 60% to $755.9 million but a net loss of 17 cents.

The company is going to have a dual class share structure with Class A shares sold in the IPO. Class B stock will be owned by the co-founder Ben Silbermann, president, CEO and several other executives and early investors. There was no description of how many votes are vested in Class B shares but there is a sunset provision. All Class B shares will convert to Class A shares 7 years after the IPO date with the exception of anyone who still owns at least 50% of Class B shares. That would be Silberman. In another twist, class B shares convert to Class A shares in the event of Silberman's death. The IPO did not list the amount of funds Pinterest is seeking to raise but there was a $100 million place holder, which will be changed later. The last round of funding valued Pinterest at $12 billion. I am surprised Facebook or a competitor of Facebook has not bought the company. There are more than 250 million "Pinners" and two thirds are women. That is a powerful consumer group.

Boeing was crushed again for a $10 loss after Garuda Indonesia said it had requested cancellation of an order for 49 737-Max jets. The order is worth $4.9 billion. Lion Air has also talked about cancelling their remaining orders.

The three US airlines that have 737 planes are sending representatives to Boeing this weekend to study a software patch that Boeing says is nearing completion. Southwest, United and American Airlines operate 737 planes. American pilots were scheduled to test the software fix using two simulators in Renton Washington. Southwest began moving all its 737s to a facility on the edge of the Mohave Desert. They said having all the planes in the same place would make it easier to perform maintenance and install the future software upgrades. The FAA has to approve the software update and new pilot training on the new procedures. This process will take weeks. Boeing shares erased 71 Dow points on Friday. Shares closed at a two-month post-crash low. I have wanted to buy Boeing shares but kept feeling there was another shoe to drop. There will be plenty of time once the planes are certified again.


Crude prices traded above $60 for three consecutive days but traders took profits on Friday in a weak market. When the broad market collapses you sell what you can to raise money to add to longer term positions. Oil rarely has any emotional attachment like shares of Apple or Nvidia might have for investors. That makes it an easy candidate for a quick sale, especially when it is trading at a 5-month high.

Inventories of both crude and refined products plunged last week. Refined products should continue declining because refiners are trying to reduce winter blend fuels in preparation for producing summer blend fuels. They need to empty those tanks so they can fill them with new blends.

Active rigs fell by 10 last week to 1,016 and the lowest level since April 20th. Producers are probably slowing down on drilling until the new pipelines from the Permian open later this year. They have already drilled hundreds of wells that are not yet completed because there is no way to transport new production out of the basin.

The IEA shows 4,004 drilled but uncompleted wells in the Permian at the end of February. That was an increase of 88 from January. This is a huge amount of production ready to come online once the pipelines open for business. Even more amazing is the 8,576 uncompleted wells nationwide. If they did not drill another well it would be a long time before they could frac and complete all of those wells. This also shows you how much oil production is going to spike in 2020 with two million bpd of new pipelines coming online over the next 24 months.






Markets

There was no joy on Wall Street at the close on Friday. There were dozens of analysts bring out their charts and predicting doom and gloom. The recession calls were constant. Everyone was whining about the inverted yield curve and how it always predicts a recession. They are right, it has predicted 15 of the last 9 recessions. If you got that joke you realize that an inverted yield curve is not infallible. Yes, there is normally an inverted curve before a recession but there are inverted curves that do not lead to a recession.

Just having an inversion for a couple hours on a particular day is not a signal. An inverted curve for a couple months would be a strong signal. We are a long way from that point in this economy. The curve inverted because the Fed took a pause on rate hikes for 2019 due to the global economy, not the US economy. Obviously, we all know that the US cannot disconnect from the global economy in the long term, but it can for short periods. The US economy is showing the impact of the trade war with China and weakness in Europe, but it is still growing. An orderly Brexit would help and the successful end to the Chinese trade talks would also help. However, even if the talks drag on, China is going to stimulate its way out of its current problem. They have unlimited cash and they are not afraid to use it. Mario Draghi is going to do the same with the Brexit problem. He is not going to let that exit collapse all of Europe.

I think investors are overly concerned about the recent headlines. Plus, the markets are very overbought. The big cap tech stocks led the rally from the Christmas bottom and the Nasdaq 100 is up 16% for the year. In any market that is overbought. The Nasaq Composite is up 15%, chip sector 21%, housing 17% and energy 16%. The Dow is the laggard with a 9% gain because Boeing has erased nearly 600 Dow points since March 1st. It is a miracle the Dow is not significantly lower.

The S&P fell back to round number support at 2,800. The 200-day at 2,755 and the consensus end of year target at 2,750 will also be support. We really do not need to worry until the dip low from March 8th at 2,743 is broken. That is the critical level.


We have a new line of resistance on the Dow at 26,000. Prior resistance was 26,191 but the lower high last week gave us a new plot point. Support is 25,180 followed by 25,000. Boeing will continue to be the single stock driver. With earnings over for the Dow components, there will be less of a supporting cast to offset Boeing's decline. The best thing that could happen to the Dow would be a quick software fix by Boeing.



The big cap tech stocks took it hard on Friday after a spectacular spike on short covering on Thursday. The market breadth has been narrow with these stocks leading so once sentiment changed they also led on the way down. Three of the FANG stocks sold off especially hard as did Apple. This was simply a sentiment reversal as investors were quick to pull the ripcord when Thursday's rally failed to continue.



This is the worst chart of the major indexes. The Russell made a lower low with a 3.6% decline. I wrote on Tuesday that the intraday volatility on the Russell was similar to that at market tops and bottoms. Friday's decline was confirmation and a break below 1,500 could quickly test 1,470 and threaten to take us back to the December lows. The Russell is supposed to lead the market both up and down and it has definitely taken the lead lower.


I am concerned about the health of the market. I have repeatedly warned about a potential head and shoulders or double top in the 2,870 - 2,930 range based on a sell the news event of a China trade agreement or a retest of the prior highs. Q1 earnings are just around the corner in three weeks and cautious portfolio managers may be ready to trim positions rather than wait for the possibility of retesting the highs. The summer doldrums begin after the Q1 earnings and that is about seven weeks away. That suggests we are moving into a period where fund managers will be faced with the annual "why buy" decision ahead of summer. I thought the lure of the prior highs would be enough to pull the markets higher for a retest but now that the China talks are dragging out and Brexit could happen as soon as April 12th, caution could win out over bullish sentiment.

Enter passively and exit aggressively!

Jim Brown

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"What you do today can improve all your tomorrows."

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