Weakness is setting in in Europe on concerns of a Greek exit. We're seeing a fairly clear flight to safety. German and French bond yields are plunging. The German 10-year is now yielding 2 basis points! Peripheral debt in Italy, Spain, and Greece is up by double-digits.
European banks are notably weak.
After the close in China, regulators instituted a crackdown on stock margin trading in over-the-counter stocks. Because the market was closed, the news was not reflected in the markets there.The Shanghai Index was up 2.2 percent. However, China ETFs trading in the U.S. are lower.
Also on Thursday, Blackrock, KeyCorp, Sherwin-Williams did the same. Earlier in the week, most of the big banks were also a bit light on revenue expectations: Bank of America, US Bancorp, and PNC Bank.
Wake up! There's a slow meltup going on.
I know, another snoozefest. Low volume, the CBOE Volatility Index at 13 and change, near the lowest level of the year.
But look around you. Earnings season has begun, but instead of falling apart because of the negative earnings environment, the S&P has rallied 1.25 percent since Alcoa reported earnings after the close last Wednesday.
1) The S&P 500 is at its highest level since early March, and only a few points from its historic closing high of 2,117.39 on March 2;
2) The Russell 2000 is at an historic high;
3) The S&P Midcap is also poised to surpass its old historic high of 1,539.61 on March 20
Oh sure, we've had several periods where there's been a few sharp sell off for an hour or so in the last few weeks, but it always bounces back.
As for earnings, the dreaded season is upon us. Bank of America was light on revenues, but it's only down fractionally. Charles Schwab talked about slower trading activity, but earnings were in-line, it's up fractionally. Delta talked about the problem of the strong dollar as revenues were a bit light, but it's up nearly two percent.
In other words, earnings are coming in-line with reduced expectations, and the market is shrugging them off.
Overbought: international and energy. One other thought: the action has been in global markets...that's where the money has been going. Huge inflows in China and Emerging Markets, and Europe.
But these are also dramatically overbought. Look at these countries year to date:
China (Shanghai) up 26%
Germany up 24%
Spain up 15%
Brazil up 9%
Heck, even BRAZIL is up almost double digits, compared to two percent for the S&P 500!
You really think there is a lot more room there?
Finally, here's the issue of the moment: what to do with the oil breakout? Much of the gains today are in energy, as oil (West Texas Intermediate) breaks to a new high for the year. Big Energy names like Halliburton, Anadarko Petroleum and Cabot Oil & Gas are up two to three percent again.
The problem is, all these stocks have been on a tear since oil bottomed in mid-March.
Bespoke, in a note to clients today, noted the double-edged sword: energy has broken the downtrend, but all the leadership stocks—including those above—are overbought, in many cases VERY overbought.
Bespoke's advice: "For names that you're interested in, wait for a cool-down period sometime in the next week or so, and then pounce on the long side."
Is this the week initial public offerings finally get going? It's been a lousy start to the year for IPOs. In the first quarter of 2015, there were 34 deals worth $5.4 billion, half of the 64 deals worth $10.6 billion in the first quarter of last year, according to Renaissance Capital.
That's pretty poor, but here's one important point: The IPOs that have been issued are doing well. The Renaissance Capital IPO ETF, a basket of roughly 60 IPOs that have recently gone public, hit a new high Monday.
This may be the week the number of issues finally starts picking up. There is roughly $1.2 billion worth of deals seeking to price, the second biggest of the year, after the week of Feb. 2, when $1.3 billion priced due to the large master limited partnership deal involving Columbia Pipeline Partners.
Read More Venture-backed IPOs hit lowest levels in two years
Overnight, Ottawa tech company Shopify filed for an IPO of up to $100 million in New York and Toronto.
Also overnight, a well-regarded cancer immunotherapy firm, Aduro Biotech, priced 7 million shares at $17, well above the initial talk of 5 million at $14 to $16. The company leverages patients' immune systems to slow the growth and spread of tumor cells.
On Wednesday evening, three other companies are pricing: Etsy, Party City, and Virtu. All of them (oddly) are from the New York City area. All three have market caps exceeding $1 billion—$2.4 billion for Virtu, $1.9 billion for Party City, and $1.8 billion for Etsy. And while all are in different spaces they all have similar, favorable characteristics: strong cash flow and a leadership position in their respective markets.
Hong Kong rallied to a 7-year high. The China H-shares—the Chinese shares listed in Hong Kong—have seen huge turnover recently. Mainland Chinese investors who have seen gains in the Shanghai and Shenzhen exchanges seem to be rotating out and into Hong Kong, which has lagged the mainland. There has also been very large volume in ETFs that track Hong Kong-listed shares.
1) Europe rallied after Greece paid off its IMF loan installment. Portugal's market is up 31 percent this year, French stocks have gained 21 percent, and the German DAX is up 23 percent.
2) Not many retailers still report monthly same store sales, but among the few that do, the results for March are a bit disappointing.
L Brands was a winner, posting comparable store sale that were up 9 percent, way ahead of expectations. Margins also improved, and the company's Victoria's Secret and Bath and Body Works brands both showed strength.
Costco reported negative 2 percent comps, its first negative comp since Aug. 2009. Obviously the gas priced decline was an issue for the retailer, but even excluding the crude impact, the core same store sales number was only up 4 percent, below expectations.
Overall, I'm a bit disappointed. We had a very early Easter, and when that happens, March is usually a bit loaded at the front end. Let's hope things turn around as the weather improves.
One item that was not disappointing: Constellation Brands, which not only beat but reported an 11-percent increase in beer sales (in constant currency). Some may have expected more, but that is a pretty good number. Mexican beer like Corona and Modelo is on fire!
Constellation stock at an historic high.
While Alcoa is not the big name it used to be, and it is arguable that the earnings season does not really start until banks begin reporting next week, it still represents the kickoff to earnings season, at least among old-timers.
And since we have a huge new data sandbox to play in, I asked our partners at Kensho what happens in the quarter when Alcoa reports earnings above or below expectations. Here's what the data revealed:
Since 2005, Alcoa beat 16 times, and missed 23 times.
When Alcoa did beat, the S&P 500 was up 75 percent of the time for quarter and averaged a return of 4.4 percent.
When Alcoa missed, the S&P 500 was up 65 percent of the time, but the average return was -0.24 percent.
In other words, an Alcoa beat does seem to correlate with a somewhat stronger S&P 500.
Earnings season does not look good, but are some stocks washed out and ready to bounce?
I've noted for weeks that we are in an earnings recession, with two consecutive declines now expected for profits in the S&P 500, according to FactSet. First-quarter earnings are expected to come in 4.7 percent lower, while second-quarter earnings are expected to come in 2.1 percent lower. Third-quarter earnings are expected to come in 1.6 percent higher.
Wall Street is gripped with this frenzy that earnings will be much weaker than expected even a month ago.
The good news is many stocks may be reflecting this disappointment already and may be ready to stabilize and even bounce.
Very strange day, since the futures were no indicator at all of the way we opened. We had one of the biggest opening rallies I have seen all year...S&P futures were at 2,044 at 8 a.m. ET, by noon we were over 2,070, with 3:1 advancing to declining stocks at the NYSE. Huh?
1) The big move up at the open suggests short covering, the "bad news is good news" crowd, as expectations for a rate hike get pushed further into 2015. The weaker dollar has been a big help for commodities and commodity stocks; we are back to $50 in West Texas Intermediate, which is that magic number that seems to make a lot of people more comfortable owning energy assets.
2) There was also fairly dovish comments from the New York Fed's William Dudley this morning.
3) Stocks moved up again at 10 a.m. ET on a stronger than expected ISM Services report, suggesting the March jobs print may be an anomaly. Remember the economy is 80 percent services, and the employment component also strong.
I know, stocks move up on "bad" jobs report news, than keep moving up on "good" ISM services news. Bottom line...don't give too much weight to pre-market trading!
Still, this does not address what I call the "growth-earnings problem," the fact that we are two percent from historic highs with earnings that look like this for the next two quarters:
S&P 500 Earnings:
Yikes! Two quarters of negative growth, and third quarter looks like it's going negative as well.
Here's the problem: we need growth to support earnings. We can't get the kind of crummy economic data we got in February, because weak economic data means lower topline growth.
And that's what the Street is starting to expect! You think earnings growth is weak, take a look at revenue growth:
S&P 500 Revenue Growth:
Yikes again! THREE quarters of negative revenue growth! And valuations are not cheap! One thing's for sure: it's going to be tougher to argue that the market deserves a higher multiple, say, 17 or 18 times forward earnings.
By definition, a higher multiple implies expectations of higher earnings growth. Not happening!
No, if the market is going to advance it has to find a way to improve topline.
That's why these numbers are so worrisome. Even with a dovish Fed, it suggests choppy, sideways action for 2015.
Which is exactly what we are seeing.
XOP, for example, was tooling along going into the close around $49.39, then the closing print comes in at $51.66.
That is about four percent away from the last trade. That's a big difference for a closing print, on the last day of the quarter.
Similar strange moves for XBI and XME.
What's strange is that immediately after that last print, XOP went back to trading at $49 and change in the after-hours.
In other words, the closing print was an outlier.
It's not clear what happened. Because these ETFs all started with an "X" in their symbol, it's possible this is related to earlier problems NYSE Arca reported with symbols in the range of UTG to ZSML on Tape B, which consists of most of the ETFs.
Beginning at 10:24 AM ET, Arca reported that trading was unavailable in those symbols, apparently due to a server glitch.
NYSE reported that all trading issues had been resolved at 11:05 AM.
As for what happened at the close, it's possible there was problems disseminating market on close imbalances related to the earlier glitch. If that's the case, the market makers would not know how much to pare off, which could lead to the strange closing prices that we saw.
After an historic 2014, the first quarter of IPO activity has seen a notable dropoff.
Thirty-four IPOs raised $5.4 billion, according to a report out today from Renaissance Capital. That's half the number of IPOs and roughly half the dollar amount raised in Q1 2014, making it the least active quarter by IPO count since Q1 2013.
The good news: Biotech IPOs continued strong, accounting for roughly half of all the deals.
The bad news: Technology and Energy saw a drop off.
What happened? The drop in energy IPOs is no surprise, but tech IPOs dropped off partly because so much private funding was available that valued the companies at high levels. That left little incentive for many companies to go public.
In Tech, there's too much (private) money chasing too few opportunities. But the public IPO market has a certain amount of discipline, and they are usually reluctant to bid things up to the moon.
Renaissance speculates—rightly so—that this may have caused some tech firms with significant venture funding behind them to delay their IPOs.
What about private equity (PE) deals? There were fewer of them as well: only five, the least active quarter for PE since 2009. The speculation is that the market has cycled through the big deals of 2005-2008, and is now pausing.
Here's what's strange: what did go public did fairly well. The average IPO traded up 15 percent during the first quarter. That may be because the market has been very disciplined, not allowing pricing to get into the stratosphere.
Why do I say that? Because a third of IPOs priced below the range. That's good news for buyers!
And IPO prices have held up fairly well longer-term. One good gauge is the Renaissance Capital IPO ETF (IPO), a basket of roughly 60 of the most recent IPOs, up seven percent this quarter, easily outperforming the S&P 500. The group includes Twitter , the largest holding, and Alibaba, the second largest holding.
GoDaddy, the world's largest domain registrar, will be pricing tonight and will trade Wednesday on the NYSE. Even though this is not a fast-growth tech company, it does have significant cash flow and will be a good test of investor appetite.
The outlook for the second quarter? It seems a bit cloudy. Energy IPOs will remain fairly small (except for MLPs). Tech is the big issue: there has to be some reconciliation between the easy money in the private market and the more disciplined crowd in the IPO market that wants a better deal.
The calendar is a bit slow because we are going into Easter, but Transunion, the big credit bureau, just filed Tuesday. That will be a fairly large deal.
And big names like Uber, First Data, iHeartMedia, Palantir, Snapchat, Pinterest, Dropbox, Airbnb, Ferrari, and Univision are also out there, all of whom haven't filed but everyone is expecting to file. These are IPOs with BIG valuations.
TheMonday rally was stronger than most traders expected. Whenever this happens, it pays to take a look at the trading action and try to determine what hypothesis best fits the facts.
Here's what I see:
China: gaps up, ends near high
Germany: gaps up, ends at high
U.S.: gaps up, highs for day
Hmm, there's a pattern here, and it's clearly global in nature. Comments from the People's Bank of China official that China has "room to act" in combating deflation and slow economic growth is yet another sign that some type of stimulus is coming.
And confidence indexes were strong in Europe, indicating that the ECB is having some kind of influence on investor attitudes.
Here in the U.S., three or four healthcare deals don't hurt, neither does much better than expected February pending home sales.
But still, is that it?
I think there's another crucial factor: it's the end of the quarter, with a lot of outperformance and underperformance. Just look at the performance spread between some of the S&P sectors:
Sectors, year to date
Healthcare—up 7.7 percent
Consumer Disc—up 5.1 percent
Industrials—down 1.0 percent
Energy—down 2.8 percent
Utilities—down 5.7 percent
This is for just one quarter, not a full year.
I look at the trading in the U.S. in the last week, and it sure seems like some people are moving some stocks around...buying losers (energy, some industrials) and lightening up on the winners (biotech).
It makes perfect sense to buy underperformers going into the end of the quarter, particularly if you think they have put in some kind of bottom.
This drop in energy stocks is the classic buy-the-dip. Traders simply refuse to believe that oil will remain in the $40s for any length of time.
There have been attempts to buy dips in energy ETFs like the S&P Oil & Gas Exploration ETF, where we saw volume spurts when oil dropped in January and mid-March.
Here's another seasonal factor: April starts on Wednesday, historically the best month for the Dow, up 1.9 percent on average since 1950, according to the Stock Trader's Almanac.
One final observation: traders have been waiting for this mythical 10 percent correction for several years, and it still seems a ways off, despite lower earnings and a Fed poised to raise rates sometime this year.
I do anticipate that the Fed tightening will have a dampening effect on stock multiples (the S&P is currently at roughly 17 times forward earnings, a bit high), but if it's just one rate hike this year, is that going to tank the market?
Not likely. Instead, choppy trading is the most likely path, flat for the year.
And if rate hikes are going to be slow and moderate, and economic growth is steady buy subdued, why not go back and focus on dividend payers, like everyone did last year?
My biggest worry remains the down earnings projections for Q1 and Q2. But, let's assume this is a washout year for earnings. If that's true, it's perfectly reasonable to expect sloppy sideways trading.
But once companies start increasing earnings projections next year, guess what happens? Anyone for a late-year rally?
The CBOE Volatility Index fell below 12 as Federal Reserve Chair Janet Yellen began speaking.
Fed Chair Janet Yellen stuck to her script Friday, even though traders had hoped CPI data would force her to give a nod to improved data.
Janet Yellen just added fuel to the fire that HFT is to blame for all the ill in the market. Trader Jack Boroudjian says that's just wrong.