2014-07-16



DOW 17060.68 +5.26 (+0.03%), NASDAQ 4416.39 -24.03 (-0.54%),
S&P500 1973.28 -3.82 (-0.19%)

The data calendar and earnings calendar gets heavy tomorrow. Three DOW components will report before the open – GS, JNJ, JPM. A fourth – INTC, reports after the close.

Hold on tight. It’s going to go wild!

Direction for Tuesday 15 Jul: DOWN▼

That was… absolutely wild. The numbers don’t show it, but that was a 100-point swing on the DOW. And well, when things go wild, people tend to let go.

And wild it was… Good numbers from JPM and GS, disappointing Retail Sales, Yellen singling out Biotech & Social Media as sectors that were overvalued, Portugal hitting the headlines in Europe… I could go on. What else?

But our job is to filter the noise, so let’s see what this market is telling us.

Market Summary

Economic Data & News

Technical Analysis

Market Internals

Bonds, Currencies & Commodities

Preview

Market Summary

Industry Watch

Strong: Financials, Telecom Services, Utilities
Weak: Consumer Discretionary, Consumer Staples, Energy, Healthcare

Other Market Moving Factors

Dow components Goldman Sachs (GS) and JPMorgan Chase (JPM) report better than expected results

Biotech and social media names on the defensive after Monetary Policy report singles out the two as areas of stretched valuations

June retail sales miss expectations (0.2% versus Briefing.com consensus 0.7%), but May reading was revised to +0.5% from +0.3%

[BRIEFING.COM] The major averages posted modest Tuesday losses after being unable to hold their opening gains. Small caps displayed relative weakness throughout the session, which resulted in the Nasdaq Composite (-0.5%) and Russell 2000 (-1.0%) ending behind the S&P 500 (-0.2%) and the Dow Jones Industrial Average (+0.03%).

Equities appeared to be on track for an upbeat session after the financial sector (+0.7%) got out to an early lead thanks to better than expected earnings from Goldman Sachs (GS 169.17, +2.17) and JPMorgan Chase (JPM 58.27, +1.98). The two influential sector components gained 1.3% and 3.5%, respectively, but their strength was not enough to keep the benchmark index out of the red.

The S&P 500 slumped to lows in the late morning after supplemental remarks to Fed Chair Yellen’s semiannual testimony on monetary policy singled out biotechnology and social media stocks as groups that have had their valuations stretched. Appropriately, stocks from both arenas responded by pacing the late-morning retreat.

Most notably, the iShares Nasdaq Biotechnology ETF (IBB 252.43, -5.67) lost 2.2%, which put the ETF back near its lowest levels of the month. For its part, the health care sector (-0.9%) was the weakest performing group.

Meanwhile, another countercyclical sector—consumer staples—also ended near the bottom of the leaderboard. The sector lost 0.8% with tobacco names exerting pressure as Lorillard (LO 60.17, -7.05) tumbled 10.5% after agreeing to be acquired by Reynolds American (RAI 58.84, -4.34) for $68.88 per share. The deal announcement was followed by news that Moody’s is reviewing ratings of both names for potential downgrades.

Outside of consumer staples and health care, the other two countercyclical sectors fared well. The telecom services sector rose 0.7% and utilities added 0.5%.

Turning back to the cyclical side, financials remained in the green throughout the day, while the industrial sector (+0.1%) crept into positive territory during the afternoon. Transports contributed to the rebound (Dow Jones Transportation Average +0.4%) with JB Hunt (JBHT 76.94, +2.65) leading the pack. The stock rallied 3.6% after reporting in-line results this morning.

Elsewhere, the top-weighted S&P 500 sector—technology (-0.2%)—underperformed intraday, but caught up to the S&P 500 ahead of the close. Social media names lagged, but were able to trim some of their losses. Facebook (FB 67.16, -0.73), Twitter (TWTR 37.88, -0.43), and Yelp (YELP 69.02, -2.09) lost between 1.1% and 2.9%.

Treasuries ended the day little changed after alternating between gains and losses. The 10-yr yield finished the day at 2.55%.

Participation bucked the recent trend with an above-average 716 million shares changing hands at the NYSE.

Global Markets

Asia

Markets rallied across Asia

Japan’s Nikkei (+0.6%) finished near its best levels in five and a half months after the Bank of Japan kept policy on hold and downgraded its economic assessment. The central bank trimmed its growth forecast for the current fiscal year ending March to 1.0% (1.1% previous) while keeping its 2015 and 2016 forecasts at 1.5% and 1.3%, respectively

China’s Shanghai Composite (+0.2%) advanced to a one-month high ahead of tonight’s GDP report

Hong Kong’s Hang Seng (+0.5%) also gained

India’s Sensex (+0.9%) rallied after yesterday’s cooler than anticipated Wholesale Price Index report

Australia’s ASX (UNCH) held just shy of six-year highs following the RBA minutes release that suggested, “the most prudent course was likely to be a period of stable interest rates”

Indonesia’s Jakarta Composite (+1.0%) gained for the first time in three days as last week’s presidential election remains in limbo

Europe

UK’s FTSE: -0.5%

Germany’s DAX: -0.7%

France’s CAC: -1.0%

Spain’s IBEX: -1.2%

Portugal’s PSI: -1.1%

Italy’s MIB Index: -1.3%

Irish Ovrl Index: + 0.2%

Greece ASE General Index: + 0.2%

Economic Data

from Briefing.com

Economic Data is listed as Actual vs Consensus. Prior Data is given in brackets. If Prior Data has been revised, revised data will be given instead, together with an indication whether it was revised upward or downward.

Retail Sales – 08:30 : 0.2% vs 0.7% (Prior 0.3%)

Retail Sales ex-auto – 08:30 : 0.4% vs 0.6% (Prior 0.1%)

Empire Manufacturing – 08:30 : 25.6 vs 13.2 (Prior 19.3)

Export Prices ex-ag. – 08:30 : -0.3% (Prior 0.1%)

Import Prices ex-oil – 08:30 : -0.1% (Prior 0.0%)

Business Inventories – 10:00 : 0.5% vs 0.6% (Prior 0.6%)

RETAIL SALES

Highlights

Retail sales increased 0.2% in June following an upwardly revised 0.5% (from 0.3%) increase in May. The Briefing.com consensus expected retail sales to increase 0.7%.

Excluding motor vehicles, retail sales increased a 0.4% in June, which was the same growth rate following an upward revision (from 0.1%) in May. The consensus expected these sales to increase 0.6%.

Core retail sales, which exclude auto dealers, gasoline stations, and building material and supply stores, increased 0.5% after increasing 0.3% in May. Sales of those goods correlate more closely with overall consumption trends and suggest demand is moving slightly higher.

Key Factors

The June employment report signaled a strong increase in aggregate earnings and motor vehicle sales for the same month exceeded 17 mln SAAR for the first time since July 2006. Both of those factors were expected to drive retail sales growth in June, yet failed to provide the oomph needed to accelerate consumer demand.

It seems likely that consumers pocketed some of the extra earnings in June and increased their savings rate.

The motor vehicle data were the most frustrating. Sales at motor vehicle and parts dealers fell 0.3% in June following a 0.8% increase in May. According to the per unit sales data, motor vehicle sales should have increased closer to 1.8%.

Trends in June were not much different than May, with the exception of the clothing sector, which rebounded from a 0.5% decline in May and increased 0.8% in June, and restaurants, which fell 0.3% in June after increasing 0.9% in May.

Big Picture

A possible uptick in savings likely prevented a strong increase in retail sales.

BUSINESS INVENTORIES

Highlights

Business inventories increased 0.5% in May following an unrevised 0.6% increase in April. The Briefing.com consensus expected business inventories to increase 0.6%.

Key Factors

Inventories for manufacturers (0.8%) and merchant wholesalers (0.5%) were known prior to the release. Only retailer inventories, which increased 0.2% in May after increasing 0.5% in April, were unknown.

Motor vehicles and parts dealer inventories increased 0.6% in May, down from a 1.2% increase in April. Furniture inventories fell 0.5% after increasing 2.2% in April. Inventories at general merchandise stores were up 0.3% after falling 0.5% in April.

Total business sales increased 0.4% in May after increasing 0.8% in April.

The inventory-to-sales ratio remained at 1.29.

Big Picture

Business inventories include wholesale inventories, manufacturing inventories, and retail inventories. Inventories are a component of GDP, and thus are of interest to economists, but the financial markets don’t pay much attention to this release. Over the long term, the inventory-to-sales ratio has been declining, due to improving techniques for inventory management. Inventories are likely to decline over the near term to bring inventory-to-sales ratios back into line with company desires.

FED CHAIR YELLEN’S TESTIMONIAL

If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned. Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.

Although the economy continues to improve, the recovery is not yet complete. Even with the recent declines, the unemployment rate remains above Federal Open Market Committee articipants’ estimates of its longer-run normal level. Labor force participation appears weaker than one would expect based on the aging of the population and the level of unemployment. These and other indications that significant slack remains in labor markets are corroborated by the continued slow pace of growth in most measures of hourly compensation.

Inflation has moved up in recent months but remains below the FOMC’s 2 percent objective for inflation over the longer run. The personal consumption expenditures (PCE) price index increased 1.8 percent over the 12 months through May. Pressures on food and energy prices account for some of the increase in PCE price inflation. Core inflation, which excludes food and energy prices, rose 1.5 percent. Most Committee participants project that both total and core inflation will be between 1-1/2 and 1-3/4 percent for this year as a whole.

Read Full Speech

In Other News…

HEADLINE NEWS

CVS Caremark (CVS) to purchase Navarro Discount Pharmacy; financial terms of the agreement were not disclosed

DISH Network (DISH): Court of appeals upholds DISH Hopper ruling

Eli Lilly (LLY) reports new data shows cognitive impairment precedes and predicts subsequent functional impairment in patients with mild alzheimer’s disease

FedEx (FDX) discloses that the DoJ will pursue previously investigated asbestos matter as a criminal case; any loss expected to be immaterial

Lions Gate Entertainment (LGF) and Alibaba (BABA) form strategic collaboration to offer Lionsgate Entertainment World Service in China

Lockheed Martin (LMT) F-35 grounding order has been removed, according to reports

Lorillard (LO) to be acquired by Reynolds American (RAI) in a cash-and-stock transaction currently valued at $68.88 per LO share, or a total of $27.4 bln, including the assumption of net debt

Roche Hldg (RHHBY) FDA grants Genentech’s Avastin priority review for certain types of cervical cancer

Rockwood Holdings (ROC) to be acquired by Albemarle (ALB) in cash and stock transaction valued at ~ $6.2 bln; transaction values ROC at $85.53 per share

Zions Bancorp (ZION) discloses it agreed to a two week extension of time for the Federal Reserve to complete its analysis of the company’s Capital Plan

EARNINGS/GUIDANCE

Bank of the Ozarks (OZRK) reports EPS in-line

Comerica (CMA) beats by $0.03; NIM increases 1 bp QoQ to 2.78%; sees 4-6% average loan growth in FY14

Goldman Sachs (GS) beats by $1.04, beats on revs

Johnson & Johnson (JNJ) beats by $0.11, beats on revs; raises FY14 EPS guidance, in-line

JPMorgan Chase (JPM) beats by $0.16, beats on revs

Peregrine Pharma (PPHM) beats by $0.01, beats on revs

Valero Energy (VLO) sees Q2 adjusted EPS of $1.10-1.25 vs $1.37 Capital IQ Consensus Estimate

Wolverine (WWW) beats by $0.04, reports revs in-line; reaffirms FY14 EPS guidance, sees FY14 revs at low end of prior range

ANALYST ACTIONS

Upgrades

Applied Materials (AMAT) upgraded to Buy from Neutral at B. Riley & Co.; tgt $25

Diamond Offshore (DO) upgraded to Mkt Perform from Underperform at BMO Capital Mkts

Kimberly-Clark (KMB) upgraded to Neutral from Sell at Goldman

Kroger (KR) upgraded to Outperform from Mkt Perform at BMO Capital Mkts

Mead Johnson Nutrition (MJN) upgraded to Buy from Neutral at Goldman

Noble Corp PLC (NE) upgraded to Mkt Perform from Underperform at BMO Capital Mkts

Progressive (PGR) upgraded to Equal Weight from Underweight at Evercore

Rowan Cos (RDC) upgraded to Mkt Perform from Underperform at BMO Capital Mkts

Twitter (TWTR) upgraded to Neutral from Underperform at Macquarie

Downgrades

Campbell Soup (CPB) downgraded to Sell from Neutral at Goldman; tgt lowered to $39 from $41

Kellogg (K) downgraded to Sell from Neutral at Goldman; tgt lowered to $59 from $64

Time Warner (TWX) downgraded to Equal Weight from Overweight at Evercore; tgt $75

Initiations/Resumptions/Other

Apple (AAPL) target raised to $115 from $104 at Susquehanna; Positive

Citigroup (C) target raised to $68 at Oppenheimer

Seagate Tech (STX) initiated with a Positive at Susquehanna; tgt $75

Western Digital (WDC) initiated with a Positive at Susquehanna; tgt $130

Technical Analysis

DOW JONES INDUSTRIAL AVERAGE
17060.68 +5.26 (+0.03%)
Volume: 101.7M (above average of 77.0M)
Range: 17006.36 – 17120.34



NASDAQ COMPOSITE
4416.39 -24.03 (-0.54%)
Volume: 445.3M (below average of 457.0M)
Range: 4389.70 – 4451.93



S&P500 INDEX
1973.28 -3.82 (-0.19%)
Volume: 544.6M (above average of 454.3M)
Range: 1965.34 – 1982.52

Feels like we’ve been here before. DOW bouncing off 17000, NASDAQ off 4400, S&P500 off 1960. Except this time we’ve got a strange increase in volumes.

Not too sure how to look at it for now, except that – we don’t buy at a high.

Market Internals

NYSE:
Higher Volumes than the day before – 731.0M vs 592.1M
Decliners outpaced Advancers (adv/dec): 1051 / 1992
New Highs outpaced New Lows (highs/lows): 95 / 22

NASDAQ:
Higher Volumes than the day before – 1722.1M vs 1558.4M
Decliners outpaced Advancers (adv/dec): 760 / 1921
New Lows outpaced New Highs (highs/lows): 42 / 52

VOLATILITY S&P500 (VIX)
11.96 +0.14 (+1.18%)

Decliners outpaced Advancers by 2.16 on higher volumes than the day before (+302.6M +14.07%).

It’s the 3rd time in slightly over a week that we’re seeing the NASDAQ internals turn absolutely bearish with the New Lows outpacing New Highs. When NYSE internals start showing the same… we’re going to be in very very very bad shape.

The VIX got rejected off 12.50, as if the market is saying that it isn’t that afraid yet. I don’t think you can control fear, can you?

Treasury Bonds, Currencies & Commodities

from Briefing.com

Treasury Bonds

Treasuries End Mixed Following Yellen Testimony:

Treasuries finished little changed amid a choppy trade.

The complex held small gains into the cash open before slipping to fresh session lows following the mixed retail sales (0.2% actual v. 0.7% expected) and Empire Manufacturing (25.6 actual v. 13.2 expected, 19.3 previous) data.

Business inventories (0.5% actual v. 0.6% expected) fell short of estimates, but participants were focused on the text of Fed Chair Janet Yellen’s Senate Banking Committee testimony, which crossed the wires at the same time.

Ms. Yellen indicated a ‘high degree’ of accommodation is likely to remain in place for the foreseeable future and that a Fed Funds Rate hike could occur sooner than anticipated if the labor market sees a more rapid recovery than the Fed is anticipating.

Ms. Yellen refused to rule out the possibility the Fed, at some point in the future, would restart QE purchases.

Maturities slumped to session lows after an initial snapback to session highs, and drifted little changed for the remainder of the session.

Light buying at the long end dropped the 30y -0.2bps to 3.366%. The yield on the long bond tested resistance in the 3.375% area, but was held in check.

The 10y ended flat @ 2.549%. Early selling provoked a test of the 50 dma and resistance near 2.580%, but was unable to penetrate the level.

The belly lagged with the 5y adding +1.7bps to 1.691%. Resistance at the level is all that is preventing a move back towards the June highs near 1.750%.

A slightly flatter curve took hold as the 2-10-yr spread narrowed to 208bps.

2Yr 0.49 (+0.01), 5Yr 1.70 (+0.02), 10Yr 2.56 (+0.01), 30Yr 3.37 (+0.01)
2/10 Spread: 207bps (unch); 2/30 Spread: 288bps (unch)

Currencies

Dollar Nears Three-Week Highs: 10-yr: unch..2.542%..USD/JPY 101.67..EUR/USD: 1.3566

The Dollar Index presses session highs near 80.40. Click here to see a daily Dollar Index chart.

Today’s bid has run the Index above both its 50 and 200 dma and has action contending with its best close in three weeks.

EURUSD is -55 pips @ 1.3565 as trade dips to its lowest levels since June 18. The single currency saw some early weakness following the eurozone and German ZEW Economic Sentiment misses, and continued lower in early U.S. trade as continued fears of a default by Portugal’s second largest bank weigh. Key support rests in the 1.3500 area.

GBPUSD is +60 pips @ 1.7145 as action contends with its best close since October 2008. Sterling saw an early boost on the heels of this morning’s hot CPI reading, and saw some follow through buying after Bank of England head Mark Carney suggested his previous comments on rate hikes were said to make markets more aware of the risks. However, trade has slipped off its best levels and is attempting to hold minor support near 1.7135. Britain’s claimant count change, unemployment rate, and average cash earnings are scheduled to cross the wires tomorrow.

USDCHF is +40 pips @ .8955 as trade has reclaimed both the 50 and 200 dma. The pair saw little reaction to this morning’s cooler than anticipated PPI print as action remains closely correlated with the euro. Swiss data is limited to ZEW Economic Expectations.

USDJPY is +15 pips @ 101.70 as buyers remain in control for a second session. Overnight, the Bank of Japan kept policy on hold while tweaking its current fiscal growth forecast to 1.0% 1.1% previous). Resistance in the 101.80 area is guarded by both the 50 and 200 dma.

AUDUSD is -25 pips @ .9365 as action slips to a one-month low. The hard currency has been offered throughout the day despite the latest Reserve Bank of Australia minutes suggesting, “the most prudent course was likely to be a period of stable interest rates.” China’s GDP, industrial production, and fixed asset investment are due out tonight.

USDCAD is +50 pips @ 1.0760 as trade nears one-month highs. Resistance in the 1.0800 area is also home to the 50 and 200 dma. Canada’s manufacturing sales will be released tomorrow ahead of the Bank of Canada rate decision.

Commodities

Closing Commodities: Crude Oil Drops Again, Settles Below $100/Barrel

Precious metals were under pressure today as the dollar index advanced during Fed Chair Janet Yellen’s Senate testimony.

The Fed Chair’s comments stayed in-line with her prior message as she was optimistic about the direction of the economy and employment but remained cautious on the page of the recovery.

Aug gold fell into negative territory below the $1300 per ounce level from its session high of $1313.20 per ounce set in early morning pit trade. It traded as low as $1292.60 per ounce and eventually settled at $$1297.20 per ounce, or 0.7% lower.

Sep silver also retreated into the red after trading as high as $21.13 per ounce in early morning action. It brushed a session low of $20.67 per ounce and settled with a 0.1% loss at $20.89 per ounce.

Aug crude oil fell below the $100.00 per barrel level as the stronger dollar index pressured prices. The energy component traded as low as $98.99 per barrel in morning action and eventually settled with a 1.1% loss at $99.86 per barrel.

Aug natural gas pulled back from its session high of $4.15 per MMBtu set in early morning pit trade and traded as low as $4.09 per MMBtu. Unable to gain momentum, it settled with a 1.2% loss at $4.10 per MMBtu.

NYMEX Energy Closing Prices

Aug crude oil fell $1.13 to $99.86/barrel

Crude oil fell below the $100 level today as a stronger dollar index pressured prices. The energy component traded as low as $98.99 in morning action and eventually settled with a 1.1% loss.

Aug natural gas fell 5 cents to $4.10/MMBtu

Natural gas pulled back from its session high of $4.15 set in early morning pit trade and traded as low as $4.09. Unable to gain momentum, it settled with a 1.2% loss.

Aug heating oil fell 3 cents to $2.85/gallon

Aug RBOB fell 3 cents to $2.90/gallon

CBOT Agriculture and Ethanol/ICE Sugar Closing Prices

Sep corn fell 8 cents to $3.74/bushel

Sep wheat settled unchanged at $5.39/bushel

Aug soybeans fell 15 cents to $11.81/bushel

Sep ethanol fell 2 cents to $2.00/gallon

Sep sugar (#16 (U.S.)) rose 0.20 of a penny to 24.55 cents/lbs

COMEX Metals Closing Prices

Aug gold fell $9.50 to $1297.20/oz

Gold fell below $1300 today as the dollar index advanced during Fed Chair Janet Yellen’s Senate testimony. The Fed Chair’s comments stayed in-line with her prior message as she was optimistic about the direction of the economy and employment but remained cautious on the pace of the recovery. The yellow metal fell into negative territory from its session high of $1313.20 set in early morning pit trade and traded as low as $1292.60. It eventually settled with a 0.7% loss.

Sep silver fell $0.03 to $20.89/oz

Silver also retreated into the red after trading as high as $21.13 in early morning action. It brushed a session low of $20.67 and settled with a 0.1% loss.

Sep copper settled unchanged at $3.25/lbs

Preview: Wednesday 16 Jul

Economic Data

Economic Data is listed as Consensus by default. Prior data will be given in brackets. If Consensus Data is not available, Prior data will be given without brackets.

MBA Mortgage Index – 07:00 : Prior 1.9%

PPI – 08:30 : 0.2% (Prior -0.2%)

Core PPI – 08:30 : 0.2% (Prior -0.1%)

Net Long-Term TIC Flows – 09:00 : Prior -$24.2B

Industrial Production – 09:15 : 0.4% (Prior 0.6%)

Capacity Utilisation – 09:15 : 79.2% (Prior 79.1%)

NAHB Housing Market Index – 10:00 : 50 (Prior 49)

Crude Inventories – 10:30 : Prior -2.379M

Fed Beige Book – 14:00

Corporate Earnings

BMO : ABT ASML BAC BLK SCHW FRC GLYC IGTE MTG NTRS PNC STJ TXT USB

AMC : ADES HAWK CNS EWBC EBAY EPB GHL HNI KMI KMP LVS NQ PTP PLXS RLI SNDK SCSS URI UFPI YUM

Other Events of Interest

Fed/Treasury/Political Events

Fed Chair Yellen Testifies before House – 10:00

San Francisco Fed President John Williams to speak – 11:20

Dallas Fed President Richard Fisher to speak – 12:00

Economic Events

Bank of Canada Rate Decision – 10:00

Analyst/Investor Meetings

None

Conclusion

Tomorrow is another data heavy data with Yellen speaking at 10:00. Her prepared remarks should be no different from today’s. On an earnings front, there are no DOW components reporting, but earnings from Bank of America (BAC) and Charles Schwab (SCHW) will be of interest.

I suspect we’ll continue going lower without much fuss. Nothing much to fuss about anyway.

Direction for Wednesday 16 Jul: DOWN▼

Daily Directional Accuracy (from 14 May 2014): 28/42 (66.67%)
Weekly Directional Accuracy (from 16 May 2014): 4/8 (50.00%)

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