But the entire healthcare complex is weak Monday: medical equipment companies like Stryker, hospitals like Tenent , HMOs like Healthnet or drug distributors like Cardinal Health are all down 1.5 to 3 percent.
This isn't too hard to figure out: biotech is the highest profile subsector of healthcare. Healthcare is the best performing sector of the S&P 500 this year (up over 7 seven percent), so the consensus among traders is there's a bit of "sell the leader."
Which brings me to why Biotech is so weak Monday. The main issue is that this is the biggest leveraged long play on the Street.
With that understanding, I see several issues:
1) God help you if you disappoint. Did you see Celadon Monday, a smaller biotech that is down 80 PERCENT on the failure of its gene-therapy drug Mydicar for heart failure? Or Aerie Pharmaceuticals , which is down more than 60 percent in the last two trading sessions after announcing that its lead product, a treatment to lower eye pressure in glaucoma patients, had failed to meet its objectives in a late-stage trial. Biogen also had disappointing earnings at the end of last week.
2) Mylan rejecting the Teva offer is certainly taking some of the takeover premium out of the healthcare sector, but I think another soured deal is just as important: Applied Materials announcing it was calling off its merger deal with Tokyo Electron, due to problems with the U.S. Department of Justice.
This was an even bigger surprise than Mylan. There were a lot of traders long AMAT.
My point is this: killing both of these deals is causing de-risking in other sectors and stocks where there are "consensus longs."
Finally, the big-cap S&P 500 has joined the small cap Russell 2000 in record-closing territory. This is a great relief to everyone who worried that the market could not possibly advance once the Fed stopped its quantitative easing program, and certainly not within a few months of the Fed raising rates, which certainly seems like a strong possibility.
With the Federal Open Market Committee meeting this week, the big issue is, how will the central bank characterize the economy? Will the Fed statement be enough to get us decisively out of the trading range we have been in?
The economic data has certainly been choppy, with first quarter GDP now expected to grow a measly 1 percent.
However, I think there is a good chance the Fed will say the three factors that have been moving markets—weather, weak oil and a strong dollar—are all likely temporary, and are now reversing.
That may increase the chances of a September rate hike (I think likely) but it will also take some pressure off the recent worry about earnings.
Indeed, they are reversing: West Texas Intermediate crude oil is near its high for the year, while the dollar's rise has stopped and even declined since peaking in mid-March.
The strong dollar in particular has been a mess for multinational companies. Just look at the difference in earnings between the big-cap S&P 500—where many companies get more than half of their revenues overseas—and the small-cap S&P 600, where most get little if any revenues overseas:
S&P 500: down 3.4 percent
S&P 600: up 5 percent
We are talking about a difference of more than 8 percentage points!
Competition in stock exchanges coming.
It's been known for some time that dark pool IEX, which was prominently featured in Michael Lewis' "Flash Boys" book, aims to become a stock exchange later this year. It will be known as Investors' Exchange.
Late last night Patrick Healy announced that he would be joining IEX. Healy ran Issuer Advisory Group, which advised companies on where they should be listing and also acted as a general advocate for those companies.
Healy didn't say what he will be doing, but it's pretty clear that Investors' Exchange is bringing in Healy to get new listings for the nascent exchange.
Despite the weak equities business, NYSE/ICE still gets a significant portion of its revenues from listings (about 12 percent), so this is a sign that Investors' Exchange is going to be going after the listings business of both NYSE and Nasdaq.
Separately, BATS Global Markets, the third exchange, this week hired Laura Morrison, who until last week was the NYSE's head of ETFs.
New BATS CEO Chris Concannon has made no secret that he wants to beef up his ETF trading business (several ETFs already list on BATS), and this is a sign he is very serious about increasing the already substantial trading of ETFs on BATS.
Competition is alive and well in the equity space!
Still, you can't help but notice the continuing impact of the strong dollar on revenues. Here's Amazon and Google's revenues, then reported in constant dollars:
These are huge differences, 7 percent in the case with Amazon. With Amazon, you're dealing with $22 billion in sales for the quarter. Google reported revenue of $14 billion.
Starbucks, which reported an amazing 18-percent increase in revenues, noted that its EMEA (Europe, Middle East, and Africa) segment reported net revenues down 10 percent, largely due to "unfavorable foreign currency translation."
Breakout! S&P 500, Nasdaq, and S&P Midcap are poised to close at historic highs.
All year, there have been groans from the trading community on the technicals: 1) we're in a trading range! 2) the volume is terrible! 3) there's no volatility!
It's true we have been seeing low volume and low volatility, but we are on the verge of breaking out of a trading range we have been in all year.
Then there are groans on the fundamentals: 1) the valuations are high!, 2) the economic data is not as strong as it should be! 3) earnings are poor!
But I'm not sure that gets you to a change in direction. I'm not sure this alone means we are on the cusp of a lasting bear market.
What about earnings? Here, I am concerned by the prospects of at least two, and possibly three, quarters of flat to down earnings growth, on top of negative revenue growth from the strong dollar.
But can we make a CONVINCING case that earnings are peaking? Right now, we can certainly argue that earnings have stalled, largely due to strength in the dollar and weakness in oil.
But I'm not sure this is the start of some kind of secular decline in earnings.
Two final points: 1) market psychology remains bearish. You don't usually get a major market peak with this kind of psychology, often considered the most hated stock rally of all time. You usually get a lot more exuberance.
2) There is no alternative to stocks. Every trader I talk to says, what will do with our money if we sell stocks? The alternatives are so unpalatable that it makes the bar much higher for the bears. It takes a lot more to convince people.
So, for the moment, I am not willing to call a market top.
Traders are getting disappointing economic reports from Japan, China, and the euro zone.
I thought a weaker euro would support exports? Yet eurozone PMI data was below expectations, as new orders slowed.
And what about China? Its PMI fell to its lowest level in a year, to 49.2 from 49.6 in March. A reading below 50 indicates contraction.
That means more stimulus. On Sunday China's central bank cut the reserve requirement ratio for banks, which frees up more money for lending.
It sounds like a cut in interest rate is coming next.
This was a bit of a curve ball. Five years after the flash crash, the Commodities Futures Trading Commission has filed a civil complaint alleging a man named Navinder Sarao manipulated the Chicago Mercantile Exchange's E-mini futures contract by using spoofing tactics, that is, efforts to place and cancel hundreds of thousands of orders with no intention of executing them.
This apparently went on for some time, beginning in June 2009, and lasting intermittently until the present.
What's getting attention is the CFTC is alleging that Sarao was active on May 6, 2010, the day of the flash crash.
Simply put, they are alleging that Sarao used a "layering algorithm" that set large sell orders in the E-mini order book, all at different price levels above the best asking price. There was very little chance the orders would ever be executed because they all kept moving as the market moved, but because these orders were so large they allege he was as much as 40 percent of all active sell-side orders on some days.
Now to the manipulation part. They allege he overloaded the sell side, which lowered prices. Then, when he stopped overloading the sell side (when he turned the layering algorithm off), the price rebounded. He profited from this temporary price volatility by trading the E-mini contracts. His daily profits on 12 specific days he was active, including the day of the flash crash, was approximately $6.4 million, or $530,000 a day.
There are additional spoofing allegations, but you get the point: Sarao attempted to cause a price drop, then took advantage of the drop by repeatedly selling the E-mini contracts and buying them back at a lower price. When the layering algorithm was turned off, he bought and sold the contracts as prices rebounded.
Bear in mind, there's nothing wrong with layering an order book with sell orders. Traders do that all the time.
However, it is different if you are putting out orders that represent false supply that is pushing the market down to cover your short orders. These were not bona fide orders, the CFTC is alleging. He had "cancel and close" orders, that is, as soon as the market came close to the order, it was cancelled.
It's not just the scheme, it is the size of it: on many days, the CFTC alleges that Sarao accounted for approximately 20 percent of total sell-side orders, and sometimes as high as 40 percent.
On the day of the flash crash, the CFTC alleges, Sarao put in orders representing about $170 million to $200 million in the morning and early afternoon, representing 20 to 29 percent of the sell-side order book. The orders were replaced or modified more than 19,000 times before being cancelled at 1:40 p.m., Central Time.
The CFTC's point: Sarao was at least partly responsible for the severe imbalance between buy and sell orders that was believed to be a major factor in the flash crash.
The SEC, in its report on the cause of the flash crash, named several factors, but also placed significant blame on an imbalance between buy and sell orders that caused a dramatic drop in liquidity on both the E-mini futures contract and the S&P 500 ETF.
However, a principle reason for the imbalance, the SEC report said, was that a large fundamental trader of a mutual fund complex initiated a program to sell a total of 75,000 E-Mini contracts (valued at some $4.1 billion) as a hedge to an existing equity position. The "mutual fund complex" sold these contracts with little regard for price or time... it just executed the order very quickly.
In other words, the "mutual fund complex" used a lousy algorithm. This caused a severe imbalance between buy and sell orders.
This is what bugs me: the SEC says this lousy algorithm sold $4.1 BILLION in E-mini futures. That makes the $170 million-$200 million in sell orders that Sarao allegedly put in seem like small potatoes. And remember, Sarao's orders were cancelled!
What's this all mean? My first reaction is, what took them so long? Five years to look into this? Even with the understanding that researching this kind of stuff is very difficult, it was an absurdly long time.
Second, looking for a single cause of the flash crash is fruitless. As Dave Lauer at KOR Group has noted many times, the stock market is a complex system.
All we can do is talk about contributing factors:
1) There was great fear on that day about the European debt crisis, with the euro going into a sharp decline about 1 p.m., Eastern;
2) there were very severe buy and sell imbalances midday, which were likely caused by several factors and participants;
3) liquidity dried up as some participants chose to back away from trading, or route orders to other venues;
4) market structure was rickety, with circuit breakers differing between the exchanges.
One thing is pretty clear: regulators need to get more sophisticated in how they analyze the market. How? Lauer (who has founded Healthy Markets, a nonprofit advocacy group for market structure reform) and others have described what is needed: take the data from the equities, futures, and options market, including dark pools and hidden orders, then have everyone synchronize their clocks to the microsecond, so everyone is on the same time.
Then you have a quick, easy way to find and police the markets quickly. You can't now because the data is in a million different places, with different time stamps. And no one knows what they're looking for!
We are finally in the heart of earnings season, and two clear trends are emerging:
1) Earnings have stopped dropping as more companies than normal beat estimates, and
2) Revenues are bad and getting worse.
Almost to a company, weak revenues are being mostly or largely blamed on the strong dollar, and with some justification: the Dollar Index rose almost 10 percent on the quarter, an amazing move.
I've held back on making broad comments on this because we haven't had many companies reporting. But now roughly 90 of the S&P 500 companies have reported. On Tuesday, we are seeing comments from several multi-industry companies that sell internationally to many different businesses.
And I don't like what I am hearing:
Dover, which makes drilling equipment, pumps, and refrigeration & food equipment, says revenues are 4 percent lower because of the stronger dollar;
Kimberly-Clark said foreign exchange would cut their 2015 operating profit by 9 to 10 percent;
Illinois Tool Works, which makes automotive parts, food equipment, and electronics all over the world, is reducing its 2015 full-year earnings guidance by 15 cents a share to reflect current exchange rates;
United Technologies said earnings of $1.58 would have been 7 cents higher were it not for the impact of the dollar;
Harley Davidson said sales fell 4 percent, hurt by currency and lower shipments; Morningstar estimated negative currency reduced revenues by 3.5 percent.
Dupont said sales were down 9 percent, with the majority of the drop due to the strong dollar.
Here's what's alarming: the impact on revenues from the strong dollar is much more significant than analysts had estimated.
That's why revenue estimates for the S&P 500 keep dropping. They are now expected to decline 3.3 percent for this quarter, on March 31 they were expected to decline only 2.6 percent, according to Factset.
It's unusual for earnings or revenue numbers to keep dropping once the quarter begins.
How did this happen? The analysts are not currency strategists: they have no idea what the exchange rate will be in the next few months.
When analysts estimate earnings, they typically use a static exchange rate...that is, whatever it is that day.
And the dollar has significantly strengthened since many analysts made their estimates.
When companies report, they will use a weighted average exchange rate for the period they are reporting for. But unlike the analysts, they already know what the currency effects are when they report.
Here's the issue: "the dollar is killing us" has become "the dog ate my homework" excuse for every company missing on revenues; can we sort it out?
I think we can. Factset has looked at the revenue from companies that get more than 50 percent of their sales outside the U.S. There is a very clear hit to revenues from companies that get a majority of their sales overseas:
Q1 S&P 500 revenues
More than 50 percent of sales outside the U.S.: down 10.8 percent
Less than 50 percent of sales outside the U.S. up 0.1 percent
Wow. Multinational corporations—those with more than 50 percent of sales outside the U.S.—are clearly having bigger revenue hits than those that operate largely in the U.S.
The conclusion: the stronger dollar has made U.S. multinationals less competitive.
That, as Nick Raich at Earnings Scout and others have noted, is why U.S. stocks are lagging their global peers in 2015.
Confusing markets: if the trend is your friend, what is the trend?
The Dow was down 279 points on Friday, and on Monday at midday it's up more than 200 points. Huh?
Here are three explanations I have heard for the market action in the last two days:
1) Stocks cannot stay down for long because there are no palatable alternatives.
2) Why were we down on Friday in the first place? Greece, China? China made it clear it's going to keep stimulating when it announced a cut in the reserve ratio.
3) We're actually not moving much at all, we have been stuck in a trading range all year, between roughly 2000 and 2120 on the S&P 500.
My point: if you're not a bit confused, you're not paying attention.
Take China. I've noted that Chinese monetary authorities have made it clear they are going to keep stimulating, but Chinese regulatory authorities seem afraid the stock market is in a bubble, and they ban margin financing in over-the-counter stocks. Confusion!
Or take Apple. Apple closed below its 200 day moving average on Friday, with lots of hand wringing. On Monday, it shoots the lights out, up 2.5 percent midday.
Then we have earnings. I've said several times that analysts appear to have "wet the bed" and reduced earnings estimates too aggressively. Now the numbers are coming in and many more are beating than usual.
What to do? For the moment, the best advice I am hearing is to sell rallies and buy declines, until the range breaks one way or another.
Over the weekend China reduced the reserve requirements for banks by 1 percentage point, from 19.5 percent to 18.5 percent. That will allow more funds held by banks to be available for lending; estimates are it could free up 1 trillion yuan (about $160 billion).
What's not clear is how much of that money would find its way into the stock market.
This is the second time the Chinese have cut the reserve requirements this year. The People's Bank of China reduced it from 20 percent to 19.5 percent on Feb. 4.
Next up is a likely cut in interest rates. The Chinese cut the one-year lending rate on Nov. 21, 2014 by 40 basis points, from 6 percent to 5.6 percent, then again on Feb. 28 by 25 basis points, to 5.35 percent.
That November cut, the first in more than two years, coincided with the great rally in Chinese stocks which began at the same time.
That's when the Chinese started talking aggressively about "stimulus," which is being carried out by lowering rates and reserve requirements.
So why was the Shanghai Index down 1.6 percent in China? It's likely because of the continuing fallout from last week's announcement that regulators would ban margin financing in over-the-counter stocks.
This is part of the problem: Policymakers talk stimulus, which encourages money to go into stocks, but they don't want the market to get too hot, so they pull back in other areas.