The Dow spiked to +282 at the open but quickly sold off to -142 at 17,498 before rebounding at the close to end the day at 17,611 and a -27 point loss. In case you are keeping track that is a 422 point intraday range and also another lower close.
The morning rally seemed to center on the positive earnings out of Alcoa and the expectations for a positive ruling on open market transactions (OMT) by the ECB in Europe. There was a court ruling due out late today and a decision that OMTs were illegal would also reflect negatively on QE by the ECB. Since the entire investing world is counting on the ECB launching a huge QE program on January 22nd a negative ruling would be a huge disappointment. Also weighing on the market was a warning from KB Home.
On the economic front there was little data to influence the market but what little we did have was positive. The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings rose to the highest level in 14 years in November. The number of open positions rose by +142,000 to 4.97 million. That is the most since January 2001. New positions in professional and business services, retailers and state and local government agencies rose the most. Hiring in leisure and hospitality and health-care firms declined.
There were 4.99 million hires in November, down from a seven-year high of 5.1 million the prior month. This reduced the hiring rate from 3.7% to 3.6%. The survey showed that 2.62 million people quit their jobs, down from 2.71 million the prior month. Total terminations fell from 1.76 million to 1.61 million.
The NFIB Small Business Survey Optimism Index rose from 98.1 to 100.4 for December. That was the third consecutive month of gains and an eight-year high. Those respondents planning on increasing employment rose from 11% to 15% and those expecting sales to increase rose from 14% to 20%. Overall seven out of the ten components saw increases.
The calendar for Wednesday has the Retail Sales for December and the Fed Beige Book for highlights. That is followed by the Philly Fed Manufacturing Survey on Thursday. All could be market moving. The reports highlighted in green are important but they tend to not move the market.
KB Homes (KBH) reported adjusted earnings of 27 cents compared to estimates of 52 cents. The company did not originally report an adjusted number and said earnings were $8.36 per share, which included an income tax benefit of $824.2 million. Shares rallied on the initial report but once the real number was produced on the conference call about 11:30 the shares crashed -16%.
Revenue did increase +29% to $796 million to beat estimates by about $20 million. However, on the conference call the CEO said they were seeing "soft demand" in some locations as the quarter progressed. The earnings miss and the soft demand comments tanked the stock. You have to ask yourself why demand is soft with 30-year mortgage rates near record lows and the relaxation of credit requirements. Why are people not buying new homes?
Tesla (TSLA) shares rallied $2 in regular trading but CEO Elon Musk dropped a bomb at the Detroit Auto Show after the close. He said sales in China had declined "significantly" because potential Chinese buyers don't believe the charging network is widespread enough to allow the cars to travel significant distances. He said they were working to change that impression and the Supercharger network is slated for large improvements in 2015 and 2016. Shares fell -6% to $190 in afterhours.
Musk said Tesla would be selling "millions" of cars by 2025 as they become a volume automaker rather than a niche producer. The Model-X gull wing SUV that is due out in late summer has already sold out for the entire year.
GoPro (GPRO) declined -12% on news that Apple had received a patent for a remote control camera. The camera can be controlled remotely through an iPhone or iPad. Since Apple is expected to have sold more than 270 million of their products in 2014 their entry into the GoPro space would be serious competition. GoPro sold 4 million cameras.
However, after analysts got a chance to review the patent they concluded it would not be serious competition for GoPro. Apparently it relates more to a camera that could be used for surveillance like a security camera or a baby monitor camera. The patent does state it could be a wearable camera with examples given as mounted on a bike helmet or a scuba mask so Apple does have other things in mind for the project.
Credit Suisse upgraded Apple shares from hold to outperform and raised their target from $110 to $130. The analysts said Apple was seeing "solid and sustainable iPhone volume." They expect Apple to sell 215 million iPhones in 2015 and 2016. He predicted higher margins as demand for the bigger phones increases and those sales lean towards the higher memory units with a larger number of apps and movie/music downloads.
The analyst also expected Apple to increase its cash-return program to $200 billion through 2017 with $165 billion in buybacks and $37 billion in dividends. He is also not including any material gains from the rumored 13 inch iPad, Apple TV, Apple Pay or the Apple Watch. If those turnout to be profitable he said his estimates could be revised higher.
The upgrade did not drive the stock price with Apple shares gaining only 97 cents for the day. Current Q4 earnings expectations are simply too high.
Amazon shares rallied +3% in the morning after Citigroup said the business would grow another 15% in 2015 compared to the industry average of 4%. The Citi analyst set a price target of $354 with the stock closing at $294. The gains faded with the market to end at only +3.33 for the day. The analyst said Amazon Web services could grow a whopping +35% this year. They are already the biggest cloud on the planet. He is expecting profits to have risen +25% in 2014 and margins to the highest level in 10 years. That is a pretty optimistic outlook.
Amazon also announced it had signed 79 year old Woody Allen to make his first ever TV series. The filmmaker will write and direct the 30 minute comedy series, which will premier in 2016. He has directed more than 40 films since his first in 1966 named "What's up Tiger Lilly." He has four Oscars to his credit and two Golden Globes. Amazon Studios was started in 2010 to develop full-length films and TV shows. Amazon spent nearly $2 billion on streaming rights and original content in 2014 according to Morningstar. Amazon has 13 new pilots that will be unveiled on Thursday to Prime members.
Earnings are on Jan 29th and they usually disappoint. I looked at buying puts on them over the weekend but the prices are astronomical since everyone expects them to disappoint.
Best Buy (BBY) was upgraded by Goldman Sachs from neutral to buy. The bank said a pickup in TV sales and good sector fundamentals should produce better than expected Q4 results. Shares were flat on the news.
Abbot Labs (ABT) was downgraded from buy to hold at Jefferies with a $50 price target. The analyst said this was a valuation call as the company lacks near-term visibility. Shares fell -1.6%.
Alaska Air (ALK) was upgraded by Deutsche Bank to hold from sell with a 12-month price target of $65. The bank said lower fuel prices should be positive. Shares gained about $1 to $61.
Franklin Resources (BEN) was downgraded by Bank of America from buy to neutral with a $60 price target. Company is facing multiple growth headwinds according to BAC. Shares declined 50 cents to $52.25.
E*Trade (ETFC) was upgraded by BAC from neutral to buy with a price target of $26. Core trends are improving and the company will likely return more capital to investors. Shares gained 28 cents.
Hewlett Packard (HPQ) was downgraded by Pacific Crest to neutral from outperform. It was a valuation call with shares up +145% over the last two years. Shares were down fractionally on the news.
Legg Mason (LM) was upgraded by BAC to buy from neutral with a price target of $62. Shares gained +2.6% on the news to $54.50.
Marathon Petroleum (MPC), not to confused with Marathon Oil (MRO), was downgraded by JP Morgan from buy to neutral with a price target of $97. Shares crashed -5% to $81 on the downgrade.
Sonic (SONC) rallied +4% to a new high after Piper Jaffray upgraded them from neutral to overweight with a price target of $38 with multiple growth drivers. Shares closed at $32.
Fresh Market (TFM) was downgraded by Piper Jaffray from overweight to neutral with a price target of $42 on worries over the CEO exit. Shares crashed -11.3% to $36 on the news.
We are right in the middle of the guidance warning season for Q4 as earnings reports accelerate starting next week. Companies giving positive guidance today were LLTC, ZLTQ, HTWR, MFLX, ISRG, NXTM and ELX. Inline guidance came from QTM, PRGS, GME, FLDM, ZIXI, DAN, BAGR, MVNR and ORBK. We saw negative guidance from SYK, DWCH, AAOI, IHS and HTCH. Relatively speaking the amount of negative guidance was minimal compared to the positive and inline guidance.
The flurry of earnings warnings so far this year has caused analysts to sharply lower their Q4 earnings estimates and this is also depressing the market. Q4 estimates have been cut from +8.1% growth to +2.0% and Q1 estimates have fallen from +9.2% to +2.8% and still falling. Analysts believe 2015 S&P earnings could fall -$6 to -$9 from prior estimates. Assuming a PE of 18 that equates to -108 to -162 S&P points. That means a year end estimate for 2,100 on the S&P could be cut to 1,940 to 1,992.
Estimates are just estimates and until we get 2-3 weeks deeper into the cycle we won't know if they are accurate or not. The market appears to be pricing in some earnings disappointments along with the worry over Europe and the strong dollar.
Crude oil helped push the market lower in the morning after WTI crashed to a new five-year low at $44.20 before rebounding to $46.45 at the close. At one point WTI was trading for more than Brent crude, which is the standard for waterborne crude pricing around the world. At one point in 2014 Brent was priced at more than $15 than WTI.
Despite the decline in energy equities today I continue to believe this is a twice a decade buying opportunity. Eventually crude is going to find a bottom and when it does the resulting move higher in equities is going to be violent. However, the Q4 earnings are going to be ugly. Current estimates are for a decline of -23.4% for Q4 and another -35% decline in Q1. This means we might be able to buy some energy stocks cheaper in February after earnings. However, if WTI finds a bottom in the coming days we could see a sharp rally in energy stocks before earnings and the post earnings drop could be minimal.
Bottom callers are breaking out all over with calls for $44, $43, $40, $38, etc. Most analysts believe any number that starts with a 3 is going to be the last straw for global producers. The financial crisis low was $33. Nobody wants to be the first producer to blink but the pain is immense for those countries that depend on oil exports for 50% or more of their revenue. One analyst jokingly said he would not be surprised if Russia nuked Saudi Arabia's big oil terminal to cut supply by 7 mbpd and blame it on terrorists. We are at the pain level where somebody is going to do something drastic soon.
Gasoline prices have now declined for 109 consecutive days to $2.11 today. That is an all time record streak. As long as oil prices continue to decline we can expect gasoline to decline as well. However, we are getting to the ridiculous zone. I am not sure how much further gasoline can decline and still be profitable for everyone in the retail chain. Gasoline futures set a new low at $1.26 today. My wife paid $1.599 for unleaded in Denver today at a Loaf & Jug. That does not leave much room for the refiners and retailers for profits. We could be nearing rock bottom.
The bond market is still telling us there is trouble ahead. The yield on the ten-year fell to 1.876% intraday and only .01 point above the intraday low of 1.868% back in October. The odds are very good we are going to see a lower low as treasuries remain a flight to quality.
The yield on the 30-year declined to 2.469% intraday and that is only a couple of bips above the July 2012 low at 2.452%. Anything below that 2.452% level is a 60+ year low. Think about that. Mortgage rates are at multi-decade lows and money continues to pour into treasuries. This is a warning on the state of the global economy.
The volatility today was huge. Selling off from a +282 open to -142 at 2:PM makes a very ugly candle and another lower high, lower low. It is very bad for sentiment. You expect big swings on a capitulation event where the market might drop -282 points and then explode higher as the dip buyers overwhelm the shorts. You rarely see the reverse where a big gain is wiped out in a matter of minutes into a triple digit loss.
Volume was 7.8 billion shares and fairly high for a Tuesday even in an expiration week. Volume was 2:1 negative, which given the magnitude of the move I am surprised it was not worse.
I warned in the weekend commentary if forced to pick a direction I would be shorting the Nasdaq 100 (QQQ) because they were leading the market. On Monday the NDX posted the biggest loss. Today it traded in a 118 point range from the opening high at 4,252 to the intraday low at 4,134 but rebounded to close negative by only 3.77 points. That is extreme volatility.
After pondering the index and stock charts for a couple hours tonight I am neutral for tomorrow. The big move up and down cleared a lot of buy/sell stops and I am pretty sure investors are in shock tonight. The focus is going to be on the bank earnings with JPM and WFC reporting on Wednesday. Traders will also be looking at Europe for direction ahead of the January 22nd ECB decision.
On the S&P the 100-day average is back in play at 2,007 with the low today at 2,008. The psychological 2,000 level is also a target after the dip to 1,992 last week. Resistance is now solid at 2,060 after two tests only three days apart. That gives even a newbie chartist a clear level to short.
The Dow may have traded in a 400+ point range but it closed with a lower low. Support at 17,500 was immediately bought with only a 2 point penetration. That occurred about the same time oil was rebounding so that could have been a factor. In the table below Chevron was the biggest loser with Exxon in the number 7 spot with only a fractional loss that was $1 off its lows.
Since JP Morgan is a Dow component they will influence the Dow's performance when they report earnings on Wednesday. Whatever they report will also impact Goldman Sachs and they are also a Dow component.
There were six Dow components making new 52-week highs this morning. Those were WMT, PFE, MRK, DIS, CSCO and UNH. If those stocks were not being offset by declines in XOM, CVX and others the day might have turned out different.
The double failure at 17,915 over the last four days makes that level strong resistance. The 100-day at 17,298 will be the level to watch on any further declines. The 100-day has been support on the last two declines even though the Dow is not normally reactive to moving averages.
The Nasdaq Composite dipped to 4,624 intraday but managed to rebound back over prior support at 4,650. The 100-day average, now 4,593 has acted as support on the last two declines. That gives us about 67 points of maneuvering room before a critical support test. There are a lot of big caps in the losers list below but on the winners side Google, Netflix, Biogen and Amazon kept the index from closing too far in the red.
The 4,750 level has now been strong resistance on the last two spikes higher so that is the clear level to watch on any future gains.
The NYSE Composite index was far weaker than the other majors and is confirming the lower high from last week. If it confirms a lower low under 10,400 we are in serious trouble.
The Dow Transports just barely held above the 100-day at 8,700. Any move below the 8,659 low from last week is going to trigger increased selling. The Transports are not supporting the Dow and odds are good they are going significantly lower.
The Russell 2000 was the only major index to finish the day in positive territory at 1,180 and most of the gain came in the final 30 minutes of trading. It is not enough for me to take my eyes off the Nasdaq 100 as my directional indicator this week. However, if the Russell moved over 1,200 I would immediately switch. The Russell rallied to a dead stop at 1,200 this morning before dropping back to 1,168 intraday.
I am still bearish until proven wrong. I am sure there is another short squeeze in our immediate future but after the shorts were cleared out at the open today they may be less anxious about launching a new set of plays tomorrow. However, if the market starts off negative they will regain their confidence very quickly.
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