The last week of March lived up to its seasonal trend with a decline in all the major indexes except for the Dow and NYSE.
The Russell 2000 was the leader for the week and it led to the downside with a -3.51% drop followed by the Nasdaq with a -2.83% decline. The Dow actually posted a small gain for the week as big caps were favored as a place to store cash in a weak market.
Historically the market declines in the last week of March just over 71% of the time. That historical trend just gained another data point after last week. Analysts attribute it to portfolio rebalancing before quarter end where managers finally take profits from those stocks they held over the December 31st tax year in hopes of squeezing out a few more gains. I think the main reason for the selling is the coming income tax deadline on April 15th. Investors are closing positions and taking cash out of the market in order to pay their taxes. That is probably the same reason for fund managers reducing positions. Investors are withdrawing money from funds to pay taxes and fund managers have to reduce positions to maintain cash positions. Whatever the reason for the seasonal end of March decline it was right on schedule.
Biotechs or bio-wrecks continued to be the weakest sector with another -6.67% decline. Critical support levels have broken and the dip buyers, including me, thinking the 100-day average would hold have taken additional losses. This continued implosion in the sector with the biggest gains would appear to support the tax selling theory. The bio-wrecks were up +66% last year and more than 31% YTD in late February and that gain has been cut to only +7.5% YTD. That is a major -17% decline from the high with no end in sight.
There was a weak slate of economic reports and they were ignored by the market. The final revision of the Consumer Sentiment for March rose slightly from 79.9 to 80.0. That is still the lowest level since December. The present conditions component rose fractionally from 95.4 to 95.7. The expectations component declined from 72.7 to 70.0 as the economic outlook for consumers seems to be deteriorating. Analysts immediately blamed the weather.
Employment issues continue to dominate sentiment. The Household Survey showed that nearly 7 million full-time workers were pushed to part-time status in February. That is the third worst month on record. That suggests consumers worked less hours and received less money on their paychecks in March. Add to that the increase in insurance costs and blue collar consumers are under pressure.
Next week has a very heavy economic calendar. This is the week for ISM and Employment. The ISM manufacturing is on Tuesday and it is expected to improve only slightly despite the warmer weather in March. Any improvement would be appreciated after dipping to 51.3 in January and rising to 53.2 in February. Any gain from here would be seen as strengthening in the manufacturing sector.
The ISM Nonmanufacturing Index will be on Thursday and it is expected to rise from 51.6 to 53.0. Warmer weather does help service businesses a lot more than manufacturing.
The employment reporting begins on Tuesday with the Intuit Small Business Employment followed by the ADP Employment on Wednesday. The consensus estimate for the ADP report is a gain of +193,000 jobs. The range for that consensus varied from 150,000 to 220,000.
The Nonfarm Payrolls on Friday is expected to show a gain of +206,000 jobs for March compared to +175,000 in February. The range on the estimates goes from 175,000 to 275,000. Clearly analysts believe the employment situation picked up significantly in March.
If the payroll reports fail to reach the consensus I doubt the market will really care since any shortfall will be blamed on the weather unless the number is dramatically lower. However, if the number is significantly higher we could see an adverse reaction because investors will immediately begin to factor in a rapid end to QE and the beginning of rate hikes. We need a Goldilocks number in the Nonfarm report of something in the +185,000 range. That is strong enough to suggest growth but not strong enough to suggest a rapidly improving economy. Slow and steady wins the race.
Also on tap for next week is the official China Manufacturing PMI. While the actual number is thought to be largely fictitious it could still upset the market if it is unexpectedly low. The HSBC China PMI fell to 48.1 last week but the government number will likely be more politically correct in the low 50s.
Janet Yellen will speak on Monday morning and the market will be watching to see if she tries to walk back the "considerable period = six months" comments from the post FOMC press conference. With Bullard trying to talk up rates she may try to push sentiment more in the opposite direction of lower rates for a longer time.
Lastly the ECB meets on Thursday to decide rates. There are some expectations they will do something to drive rates lower and possibly begin their own QE program. Officials from the German Bundesbank made comments last week suggesting they had dropped their objections to QE by the ECB. They had been vocal opponents and having them become converts could mean there is a coming change in the monetary policy by the ECB.
The market got a gift from a Fed head on Friday. Chicago Fed President Charles Evans said "I personally doubt the Fed funds rate is going to start to increase before the middle of 2015. It is more likely to be late, after the middle of 2015. I would actually like to hold off until early 2016 for the first rate increase." He added he expects the Fed funds rate to be at 1.25% at the end of 2016.
That makes him the second most dovish person at the Fed based on the long term projections released at the March meeting. The documents don't tell us who is more dovish only that they expect rates in 2016 to be .75%.
Evans warned that global economies were not ready for the Fed to normalize rates. He said "if we go out and pound that message repeatedly, then it gives every economy a chance to get their own house in order and deal with their own financial situation and we will all grow together." When the Fed raises rates it rapidly strengthens the dollar and sends bond yields higher. If other countries are not taking steps to offset the strengthening dollar then their economies weaken.
The comments by Evans offset the extremely hawkish comments by St Louis Fed President James Bullard earlier in the week. Bullard said he saw rates rising early in 2015 and ending the year at 3.0% with rates rising to 4.0% to 4.25% in 2016. Most Fed heads are expecting something in the 3% range at the end of 2016. Fed funds futures are projecting a 50% chance of the first rate hike being June 2015.
In stock news Tesla (TSLA) got some good news. The NHTSA board said an investigation into the two fires caused by a Model S running over large chunks of road debris had concluded. The NHTSA said there was no defect in the Model S and they ended the investigation. At the same time Tesla said they had made a change in all Model S cars made since March 6th. The new cars would have the addition of a titanium skid plate under the car to protect against road debris puncturing into the batter compartment. Tesla also sent notices to existing owners telling them they could come in and get the upgrade if they were worried about the problem. Tesla stressed it was not a recall but a voluntary upgrade for those that wanted it.
Late Friday the State of New York said Tesla could continue to operate its five company owned stores in the state but could not add more. The company won a similar deal in Ohio where it can keep the two existing stores and add one more.
Tesla shares rallied +$5 on the news in regular trading and another $2 in afterhours to $214.41.
This was IPO Friday and it was not a good day to go public. Everyday health (EVDY) priced at $14 and closed at $13.50. 2U Holdings (TWOU) priced at $14 and closed at $13.98 after dipping as low as $11.77. Aerohive Networks (HIVE) priced at $10 and traded down to $8.81 before rebounding at the close to end at $10.25. Bluerock Residential Growth (BRG) priced at $14.50 and closed at $14.55.
CBS Outdoor (CBSO) priced at $28 and closed with a small gain at $29.50. CBS Outdoor has 330,000 outdoor advertising signs in the U.S. and 26,200 in Canada and Latin America. After the IPO the plan is to convert to a REIT.
The winner was Energous (WATT), which priced at $6, opened at $9.50 and closed at $10.40 for a 76% gain. They produce wireless charging systems for tablets and phones.
Caesars Entertainment (CZR) fell -7.4% after saying it will offer 7 million shares worth $147 million. Shares fell to $19.52 and the lowest level since December 10th. Shares have fallen -25% this month. Caesars has $23 billion in debt and does not generate enough cash to pay its expenses. The company said it was going to close the Harrah's casino in Tunica Mississippi because of declining revenue. Gambling revenue in Las Vegas has declined -20% over the last month according to the Nevada Gaming Control Board. An affiliate, Caesar Growth Partners is trying to raise $2 billion in debt to purchase four casinos from Caesars Entertainment Operating Co. The company said it had received a letter from some debt holders challenging that asset transfer. The future is not bright for Caesars.
Red Hat (RHT) reported earnings Thursday night of 39 cents compared to estimates of 37 cents on revenue of $400 million. On the conference call the company disappointed analysts with their projections for 2014. Earnings forecast for Q1 was a range of 32-33 cents and analysts were expecting 37 cents. For the full year they guided earnings between $1.54-$1.56 and analysts were looking for $1.62. Shares declined -7% on Friday.
Restoration hardware (RH) reported earnings of 83 cents and revenue of $471.7 million compared to estimates of 83 cents and revenue of $493 million. That was a miss but they made up for it in their guidance. They guided for Q1 for a range of 9-11 cents and analysts were expecting 7 cents. For the full year they guided for $2.14-$2.22 compared to estimates for $2.17. That compares to previous guidance of $1.71-$1.74. Shares spiked +13% on the news.
Blackberry (BBRY) shares fell -7% to $8.40 after reporting a loss of 8 cents compared to estimates for a loss of 55 cents. Revenue was $976 million, down from $2.7 billion and missing estimates for $1.1 billion. CEO John Chen is getting plenty of praise from analysts but the stock is still tanking. Chen said Blackberry should be cash flow positive by year end and profitable next year. Where have we heard that before? Chen said Blackberry is probably a quarter ahead of schedule in its restructuring plans.
If Chen can return Blackberry to profits and just get the share price back over $20 he will be a hero. It would take a team of superheros to return it to its former glory at $148.
Visa (V) settled a class action suit over card swipe fees last December for $5.7 billion. Visa and MasterCard (MA) were charged with price-fixing and violating antitrust laws. About 8,000 retailers elected not to join in the settlement and seek their own remedy. Walmart (WMT) was one of those 8,000 companies. Walmart filed suit against Visa for $5 billion claiming the company charged excessive swipe fees. Other giants like Amazon (AMZN) and Target (TGT) also opted out of the settlement. The National Retail Federation (NRF) wants to overturn the settlement claiming Visa and MasterCard have begun levying excessive surcharges in lieu of the swipe fees and not in the spirit of the settlement.
Visa's future looks bad. Agreeing to settle for $5.7 billion is pretty much a guilty plea in the class action case. Although Visa probably did not have to admit wrong doing it won't be hard to prove using the data presented in the class action. That means Walmart and hundreds of those 8,000 companies that opted out of the settlement are going to win judgments. This is going to be in the tens of billions of dollars. The only bright side is that it will take years to wind through the courts.
Amazon (AMZN) has a big announcement scheduled for next week in New York and everyone believes it will be the long-rumored set-top streaming-video device linked to a subscription service. The Wall Street Journal said last week it would be a free service but an Amazon spokeswoman later said there were no plans for a free service. By acknowledging there would be no free service but not denying the announcement would be about streaming video she basically confirmed the rumors.
The streaming video service is rumored to include movies, commercials, television programming and music videos. This will probably be another benefit of the Amazon Prime subscription and available to others for a monthly fee. Prime members already have access to thousands of members using a PC or other device ported to their TV. The new service will give Amazon a new revenue stream and you can bet it will be at a discount to Netflix. I would not be surprised to see hundreds of commercials for Amazon products like the Kindle embedded in the video streams.
Amazon shares were caught up in the downdraft last week to close just under support at $340. They need a blockbuster announcement to push them higher. Meanwhile Netflix (NFLX) has lost -$100 since the $458 high on March 6th. Multiple competing announcements from Apple, Comcast and others have clouded the future for Netflix.
The AAII Sentiment Survey for Friday showed the number of bulls still outweighs the number of bears but those neutral on the market were in the majority. Bullish respondents were 31.2% and bearish 28.6% with 40.2% neutral. While the bullish and neutral numbers were about 10% off their long term averages the bearish camp was only 2% above normal. It seems you just can't convert a bull to a bear but you can confuse them enough to be temporarily neutral.
The social media sector has been decimated almost as bad as the bio-wrecks. The social media ETF (SOCL) is down -15% since the March 7th high. Facebook is down -17%, Twitter -20% and LinkedIn -12%. Google is down -9% and I list them here because of YouTube and Google Circles. I suspect Google's upcoming 2:1 stock split has also weighed on the stock price. The confusion over the class C non-voting stock investors will be getting next week is dragging the price lower.
Of the top ten sectors in the market only the Energy sector (XLE) and the Utility sector (XLU) posted gains last week. Utilities normally rise when investors expect the broader market to move lower. Investors wait out the expected correction while collecting dividends in the Utility sector. Seeing the XLU close near a new 52-week high suggests there are a lot of investors looking for a safe port in the coming storm.
The energy sector was up on rising oil prices and the constant talk about exporting oil and natural gas to help Europe escape the bonds of Russia. Apparently many investors don't understand the stupidity of those making the calls for exports. We import nearly 8 million barrels of oil per day for our own use. Why would we want to export oil to Europe when we don't have enough of our own?
We could export enough LNG to make a difference IF we had any export facilities and IF they did not take billions of dollars and 7-10 years to permit and build and IF we actually had a surplus of natural gas production of our own. None of those IFs currently exist. We hear constantly that the U.S. has 200 years of gas reserves and fracking has produced far more gas than we can use. Unfortunately that is mostly BS. Current gas supplies in storage are at 10 year lows. Active rigs drilling for gas are at 19 year lows. Gas production in 2013 was an average of 71.16 Bcf per day. Gas consumption averaged 71.33 Bcf per day and more than we produced. So exactly where is that gas going to come from to ship to Europe when we barely have enough for ourselves and any material export capability will not be completed until 2018-2020?
The broader markets were not as negative last week as it appeared on the surface. The majority of the damage was done in the Nasdaq and Russell 2000. The Dow actually closed positive for the week and the S&P only lost -9 points. However, the Nasdaq lost -121 points or -2.83% and the Russell -42 points or -3.5%. Unfortunately those two indexes were the leaders on the way up and now they are leading on the way down. Both closed near the lows for the week.
The S&P came very close to critical support at 1,840 and it is hard to believe the index set a new intraday high at 1,883 the prior Friday. The only bright point came from the vigorous rebound on Friday morning that lifted moods for a couple hours before the rebound failed and we drifted back towards the lows.
For next week the range to watch continues to be from support at 1,840 to resistance at 1,880. The percentage of S&P stocks under their 50-day average declined to 68.4%.
The Bullish Percent Index (BPI) for the S&P declined to 72%. That means 72% of the S&P stocks are still showing a buy signal on a Point & Figure chart.
The Dow gained +150 points at the open on Friday but then lost those gains to trade flat at 2:30. A short covering rally at the close lifted it back to a +58 point gain. Despite all the triple digit gyrations all week the Dow ended the week with a +20 point gain and closed right in the middle of the recent range.
There is nothing to be learned from the Dow last week. Dips were bought on low volume and spikes were sold on slightly higher volume. The Dow was not the battleground. All the fireworks were on the Nasdaq. The Dow has initial support at 16,200 followed by 16,050 with resistance at 16,400 followed by 16,450.
The Nasdaq lost -121 points for the worst week in 17 months. The index ended Friday with a +4 point gain on short covering ahead of the weekend. The index still closed near the lows for the week.
The low for the week was 4,131 and very close to critical support at 4,100. The prior support at 4,200 broke on Thursday and was then strong resistance on Friday. To say the bio-wrecks were the reason for the Nasdaq losses would be an understatement. On Friday only 3 of the top 25 losers were not a biotech or pharmaceutical stock. Eventually this group is going to find a bottom and traders will come roaring back into these former winners. Until then we watch and wait.
The 100-day average at 4,134 should be interim support followed by 4,100. Resistance is now 4,200, 4,250 and 4,325.
The Russell 2000 again proved to be our market sentiment indicator. I cautioned on Tuesday that Russell support at 1,172 was the key for the rest of the week. That support level failed at 1:PM on Wednesday and the rest is history. The index fell to 1,146 on Thursday, a level that was tested four times intraday with only small rebounds. The index spiked +16 points at the open on Friday but gave it all back to trade negative until just before the close where it gained +0.37 for the day. That is hardly a bullish sign.
The 100-day average at 1,146 is now support and that is also horizontal support from January. I don't have a lot of confidence it will hold but March is over and April is typically a bullish month. If the Russell can remain above this 1,146 level on Monday I would feel better about the rest of the week.
April was the first month to gain +1,000 Dow points in a single month according to the Stock Trader's Almanac. Since 2006 April has been positive every year with an average gain of +3.4% on the Dow. Let's hope this trend continues.
Focus on the Russell 2000 and the 1,146 level for guidance. Buy a rebound, sell a breakdown.
Let's not forget that the QE taper is actually a tightening of monetary policy. It may be from very accommodative to less accommodative but it is a tightening that is leading to a period where rates could be hiked. QE did help the markets. During QE1, which started in Nov 2008, the S&P rose +36%. Between QE1 and QE2 the S&P declined -9%. During QE2 the S&P rose +24%. Between QE2 and Operation Twist the S&P declined -12%. During Operation Twist the S&P rose +22%. QE3 began on 9/13/12 and Twist ended on 12/31/12 so there was no intervening period. During QE3 the S&P rose +24% until the taper announcement. Since the beginning of the QE taper the S&P has only risen +3% and it has been a very tough market.
As the taper progresses and QE shrinks the market is likely to weaken further. Since the recession the market has been fed with a solid stream of QE. When the Fed tried to end the various QE programs and put the markets on a diet they reacted negatively. The taper is just a way of ending the QE addiction without going cold turkey. QE and the accommodative Fed are going to end. The markets are going to react negatively. We can count on it.
Putin is trying to calm tensions surrounding the Ukraine. Late Friday he called President Obama and appeared to try and set the stage for a peaceful solution to the Ukraine problem. He has been massing troops, tanks and gunships on the Ukrainian border. As many as 100,000 troops have now been moved to the border area. President Obama said earlier on Friday the troops were not on exercises as Putin had claimed and it appeared he had ulterior motives and could be preparing to move into Ukraine. Obama warned that he had just met with the G7 and EU officials and serious sanctions would result if Putin moved into the Ukraine. A few hours later Putin called to chat.
Apparently the existing sanctions are causing problems for rich Putin backers and they are tightening the leash on their attack dog. In the chat with Obama he warned that Russia would have to invade Ukraine if the threats on Russian-speakers inside that country continued. Putin has received permission from the Russian parliament to send the armed forces into Ukraine if necessary.
That was the threat but the substance of the conversation was on a peaceful solution. President Obama quickly dispatched Kerry to meet with the Russian Foreign Minister to discuss a resolution. I believe Putin was playing his last card. "You calm the remaining voices over my annexation of Crimea and I will back off Ukraine." Putin is a strategic thinker. He already got what he wanted in Crimea and by bluffing an invasion of Ukraine he can negotiate from a position of strength. If he wanted all of Ukraine nobody could stop him. By giving President Obama and the G7 leaders a way to "win" on the Ukrainian situation they can claim victory on the sanctions and everyone backs down peacefully. Six months from now the sanctions can be quietly ended and the Crimean annexation will be history.
The "apparent" attempt in defusing the Ukrainian situation could give the markets a boost at the open on Monday. Whether that boost appears or lasts more than a few minutes with Janet Yellen scheduled to speak at 9:55 is the $64,000 question.
I wonder how many readers even remember the $64,000 Question quiz show from 1955-1958 where that was the top prize. I guess I need to update my references to something more recent so our younger readers can participate. In case you are wondering that $64,000 would be worth $560,000 today.
Enter passively and exit aggressively!
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"No possible rapidity of fire can atone for habitual carelessness of aim with the first shot."
Theodore Roosevelt, The Wilderness Hunter, 1893