Tech earnings have been in focus over the past week, and the results have not been exactly electric. On the positive side, Twitter (TWTR) surged 16.4 percent on a top- and bottom-line beat and upward guidance.LinkedIn (LNKD) gained 10.7 percent on solid revenue. On the downside, extreme sports and drone camera maker GoPro (GPRO) snapped 13.3 percent on disappointing guidance, Pandora(P) dropped 17.2 percent on missed revenue and Yelp (YELP) plunged 21 percent on slower user growth.
Quick note on the latter: Personally I lost all my faith in review sites like Yelp and TripAdvisor (TRIP) after discovering you could go on Fiverr.com and pay for freelancers to swarm your restaurant or service with positive reviews. Here’s a lady on Fiverr who provides “natural” customer reviews on video for your website for $5. Or here’s a person who will provide Google or Amazon.com reviews for your product or service for $5; her grammar is not great, which I suppose is considered naturalistic. Can’t help but notice these fake reviewers have reviews on their pages, which I guess you have to assume are fake too!
While the big indexes were strong last week, they did not break through their overhead resistance on Friday despite the good jobs news, having been emphatically rejected like a Hakeem Olajuwon in pinstripes at the 2,075 level of the S&P 500 and the 17,950 level of the Dow.
The most ominous rejection by the way is on the Nasdaq 100, as shown above. Unlike its sister indexes, the NDX has suffered the indignity of three straight highs that were lower than previous highs, a classic pattern of despair. As you can see, this happened three other times in the past two years just before the bottom really dropped out.
The notoriously puckish hedge fund manager and market historian Vic Niederhoffer likes to say that such patterns only become obvious the moment they are about to change. So in that spirit, I will note that a Powershares QQQ Trust (QQQ) above 105 probably, and above 106 certainly, would bust the bearish pattern and break the spirit of sellers.
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A recovery in oil, driven by a rebound in the euro (and drop in the U.S. dollar), was the primary driver for West Texas Intermediate crude posting its best one-week performance since 2011. This, in turn, powered a short-covering surge in energy stocks and helped lift the overall market, including the QQQ.
Another catalyst has been a positive reaction to falling U.S. drilling rig counts even though analysts say that producers are merely focusing fewer rigs on more productive fields. Baker Hughes data showed that rig count was down 30 percent since October to levels not seen since December 2011.
Analysts at Merrill Lynch warned that much lower oil prices would be necessary to generate production cuts, suggesting this is merely a dead-cat bounce ahead of deeper declines. Morgan Stanley also noted that the rigs pulled so far were mostly low-yield vertical rigs. And Citigroup highlighted that despite the falling rig count, production and inventories continued to grow.
Earlier in the week, government data showed that crude inventories ended at the highest level in about 80 years, so it all fits together into a mosaic that suggests more crude-oil surprises and volatility likely lay ahead.
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To be sure, the labor market’s recent accelerated progress is great news for Main Street, with workers on the verge of enjoying leverage over employers for the first time since the Great Recession. But investors worry this will gut corporate profitability and accelerate monetary policy normalization. Count on Wall Street, in other words, to see the cloud behind every silver lining.
Stocks are certainly not acting like they want to rip higher, as tech bull favorites like Facebook (FB), Gilead Sciences (GILD), Alexion Pharma (ALXN), Tesla(TSLA) and Intel (INTC) are mired down in heavy mud, while there are only a handful of major growth names showing any vitality; the latter includes retailers Costco(COST), Home Depot (HD), CVS Health (CVS) andKroger (KR); techs NXP Semiconductor (NXPI) andElectronic Arts (EA); and defense contractorsTransDigm (TDG) and Northrop Grumman (NOC).
Bulls may find their courage now that the interest-rate hike outlook is becoming more clear, oil prices are firming up and bonds are pulling in. My research suggests that they should find a way to break through resistance and move higher, but there could well be some more churning first. After all, when you’re in a range, the most likely scenario is more range-bound action that frustrates bulls and bears equally.
Here are two above-and-below markers to watch: A close in the S&P 500 above 2,094 would lead to panic buying and a good old fashioned melt-up, with bears screaming all the way. A close below 99.50 in the QQQ could lead to panic selling and a swift 5 percent-plus move lower.
Best wishes,
Jon Markman
