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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