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Stocks rallied 6% off their Feb. 11 low – accomplishing more in three days than they did in the prior 26 months. Here are a few reasons:
— An epic short squeeze, to be sure. Stocks that rose the most were the most shorted.
— A much-stronger-than-expected retail sales report on Feb. 12.
— Deutsche Bank’s surprise announcement that it wasn’t dead yet and would buy back debt.
— JP Morgan chief Jamie Dimon throwing down a $25 million bet on his company’s stock, and by extension pledging that he believes the violent bank sell-off has been overdone.
By the time the panting was over with the surge last week, the S&P 500 had recorded back-to-back-to-back 1% gains for the first time since October 2011. Now that’s what I call a Presidents’ Day, if you consider that U.S. currency is highlighted by the faces of presidents.
Yet there are reasons to be skeptical. Here are a few proposed by Bespoke Investment Group analysts:
— Since last May, there have been eight prior bounces that stalled out without making a new high.
— Prior periods where the S&P 500 has seen back-to-back-to-back 1% rallies have typically been followed by short-term weakness or consolidation (we can’t rally 1% every day).
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— Even after the big rally, the S&P 500 and the other major averages are still down on the month and below their 50-day moving averages. Therefore, however impressive the rally was to the upside, it didn’t match the magnitude of the decline that preceded it.
— Big gains like the ones we have seen are more often than not associated with periods of turmoil rather than sustainable uptrends. This is a topic we have covered often. All the big gains in market history have come in bear markets, not bull markets, which tend to feature steady but not flashy gains.
— All four major index charts still show a lot of technical damage. No highs since the middle of last year. All four also have downward sloping 50-day moving averages, which they are all trading below. And all four are trading under their 12-month averages as well.
— Volume has been weak, mostly due to the holiday weekend. Since the close of Feb. 11, not a single trading day has seen above-average volume. At five trading days and counting, this is the longest streak of below-average volume this year. Low volume is not necessarily a bad sign, but more is better for validation.
Buyers can bulldoze their way through each of these negatives if bears decide to stand aside and lure them into further complacency at higher levels, so we are now entering into a very exciting, dangerous, challenging part of the program.
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CATERPILLAR CRUNCH
Speaking of Bespoke, they like to keep close tabs on the fundamental business progress of Caterpillar (CAT), as it is such an important company at the crossroads of mining, machinery and energy. At this time, a closer look at CAT is merited because its strong stock action the past few days comes in stark contrast to its weakening actual business. I think that’s typical of many industrial titans now, so we can see it as a microcosm for what’s happening.
After a rally of about 10% off its early-February lows, shares of Caterpillar cratered Thursday, losing 1.9%. The main reason was another in a series of terrible monthly reports on its worldwide machinery sales. Of course it’s not Caterpillar’s fault completely, right? The global mining and construction business has been in a big slump due to crashing commodity prices, the slowdown in China, and the strong dollar.
But my goodness, the details. The monthly machinery sales totals from Caterpillar for the month of January show that its recent stunning weakness remains in place, according to Bespoke.
Globally, sales of machinery for Caterpillar were down 15% in January on a year-over-year three-month rolling average basis. Bespoke observes that this represents the 38th straight month of y/y sales declines. “When you have y/y declines spanning a period of more than three years, it really adds up” the analysts quip. This January, total sales were down 15% versus last January when sales were down 14%, vs. January 2014 when sales were down 8%, vs. January 2013 when sales were down 4%.
In other words, total sales from January 2012 through January 2016 dropped by more than 35%! Ugh. This month’s 15% decline in y/y sales was also the 15th straight month of double-digit declines, Bespoke reports, and right near the lowest levels of the last five years. In the last three years, 26 out of 36 months have seen double-digit percentage moves to the downside.
Some details: The pace of decline in sales of CAT equipment sank faster across the Atlantic as January sales in the Europe, Africa and the Middle East region declined 14% versus last month’s level of -12%. In the last three years, year-over-year sales have only been positive in two months, the Bespoke data shows.
And finally, thanks to China, sales of Caterpillar equipment in Asia have been consistently weak with 38 straight months of declines. In January, y/y sales fell by 22%, and have been cut in half in the last four years, according to Bespoke.
Bottom line: There is not simply a crisis of confidence in companies like Caterpillar. Business really, really sucks. And far from improving a little bit, it’s actually getting worse. Buyers of the stock now really have to figure that they have a sense that this data represents a trough. Of course, they could have thought that last year, too. Not to mention the year before. Beware.
Best wishes,
Jon Markman
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{ 9 comments }
Hi Jon
Good analysis. I don’t know what is going to happen next or even where in the world it will take place. My fund is now holding more liquid reserves than most other times in its history.
I’m hedging with FXY and SDS.
Overlooked in Caterpillar stories is that Cat expanded their business about a year or so ago. They acquired the former General Motors Electro-Motive Division (now Diesel) railroad locomotive builder. EMD developed the first full line of Diesel-Electric locomotives on the planet with the 1939 introduction of the FT freight haulers, but the idea originated with Rudolph Diesel and small switching locomotives were built in the early 1920’s. Although they are now behind GE in sales, historically EMD has built more locomotives than any other builder, and supplies power units to other locomotive builder worldwide in addition to their own units.
I’m not certain how much one stock reflects the overall markets, but I do notice something on the S&P500 chart. The topping curve is actually somewhat sharper than drawn on the chart. In the short term, the S&P could rise to 2000, or 2050 without violating a redrawn curve. A 250 or 300 point drop from there would be on par with recent drops, and would take it to between 1650 and 1800, which would violate several possible support levels. No guarantees, but worth a look. Actually, we should be getting a short term fall which may not get below the recent bottom, then a rise that could approach 2000 or more. Regrettably, markets don’t go straight up or straight down.
Stronger than expected retail sale? You certainly don’t need a Harvard degree to see this is really a lower number, considering that Super sales, Clearance, Hugh discounts started right after Christmas.
Some smart shoppers loaded up on lower prices. Easter sales will be nominal and thereafter
very flat. John Q. Public does not have the funds to keep retail sales afloat let alone himself.
Larry says gold should reach a – perhaps final – bottom in June. As other currencies have declined vs our Dollar, the metal has already reached all time highs in Canadian, Russian, and possibly other currencies. Would that mean the buck will begin it’s inflationary crash then, regardless of whatever the Fed might do?
tell me more about china yen . They seem to be buying alot of gold lately to boost there yen
Jon: I’d refrain from using words like “sucks” in your articles. You don’t need to resort to this and I think it lowers your brand as a journalist. Just my two cents. Thank you.
So much gibberish about lower lows and lower highs. Why is that fact so hard to understand?
This is exactly why I read this newsletter for amusement, not information. You get what you pay for.