Sector Investing

[ReturntoSender]

Another big gap down today. Here are some reasons from Leavitt Brothers. RtS

http://leavittbrothers.com/blog/index.php/2016/01/06/before-the-open-jan-6-5/

The dollar is flat. Oil and copper are down. Gold is up, silver is flat. Bonds are up.

Today’s gap down will pretty much destroy the consolidation patterns the Dow, Nas and S&P 500 have been forming. The Russell small caps and S&P 400 have been in downtrends for several months, but the three former have enabled the bulls to cling to something. Not any more.

Oil is going to gap down and immediately test its low from a couple weeks ago.

I started putting together a list of things I don’t like about the market. It’s too long to put into one report, so I’m going to break it up in little bit size pieces and post a little each day. My reasons, which I’ll get into include:

Lagging small caps – this has been the case since last June. The small caps don’t have to lead, but they do need to keep up. It’s not a good sign when money flow into larger, safe-havens.

Weak breadth – I’ve talked about this weekly for many months. The AD line, AD volume line, new highs, bullish percent charts, percentage of stocks above their 200-day moving averages. Absent improvement, the market’s upside will be limited.

Deflationary pressures – declining oil is nice for a while, but eventually it causes problems. Cooper is very weak. So is gold, although I’m not sure if gold matters. A little inflation ideal. Lots of inflation is bad. Deflation is very bad too.

Falling junk bonds – a sign investors are losing confidence.

Higher rates – companies will have to refinance their debt at higher rates, and if it’s true that much of the market’s gains are due to M&A activity and stock buybacks, higher rates will make future gains much harder to come by.

High margin debt – this has been the case for a very long time, so it’s not a “tipping point” issue, but if the ball gets rolling, unwinding the leverage could get ugly.

Defensive leadership – last year’s leaders are starting to sputter while some defensive groups have perked up recently.

High percentage of unprofitable IPOs – you’ve heard about unicorns, start-ups valued at $1 billion. Right now we have the highest percentage of unprofitable unicorns since 2007…reminiscences of the dot com bubble days.

High percentage of stock ownership as a percentage of assets – despite the rebound in housing, the general public is heavily invested in the stock market, as a percentage of their assets. It’s not that people aren’t diversified, it’s that they’re much less diversified than historical norms.

Strong dollar – the dollar is in consolidation mode. If it breaks out and runs, the market will fall.

Bonds could break out – a breakout of TLT, signalling a preference for bonds over stocks, would be another tough hurdle for the market to overcome.

From a trading standpoint, weak breadth is what bothers me most. The market can’t move up much when a small percentage of stocks participate. Absent improvement, the market will move sideways and down. More after the open.

Stock headlines from barchart.com…

Apple (AAPL -2.51%) fell nearly 3% in pe-market trading after the Nikkei Asian Review reported that Apple would reduce Q1 output of its latest iPhones by about 30%.

Freeport-McMoRan (FCX +2.44%) tumbled over 4% in pre-market trading after Moody’s Investors Service placed the company’s debt under review for possible downgrade.

Oracle (ORCL -0.31%) was upgraded to ‘Buy’ from ‘Hold’ at Evercore ISI.

Landec Corp. (LNDC -0.34%) reported Q2 EPS of 7 cents, higher than consensus of 6 cents, although Q2 revenue of $140.4 million was below consensus of $143.2 million.

Pioneer Natural Resources (PXD +0.66%) fell over 2% in after-hours trading after it announced an offering of $10.5 million of common stock.

Gilead (GILD +1.28%) said it terminated a Phase 2 study of its Simtuzumab in patients with Idiopathic Pulmonary Fibrosis saying the study showed no evidence of a treatment benefit.

Sonic Corp. (SONC -0.10%) climbed over 1% in after-hours trading after it reported Q1 adjusted EPS of 24 cents, better than consensus of 23 cents.

NuVasive (NUVA +2.28%) said it will acquire Ellipse Technologies MGEC in a transaction valued at $410 million.

Acadia (ACAD -0.46%) slid 4% in after-hours trading after it proposed a $300 million secondary offering of stock.

Sirius XM Holdings (SIRI -1.27%) rose 1% in after-hours trading after the company said it added 2.3 million new subscriptions in 2015, more than expectations of 2.0 million.

Epizyme (EPZM -1.05%) slumped 10% in after-hours trading after it proposed an offering of $120 million in stock.

Conatus Pharmaceuticals (CNAT -2.05%) surged over 15% in after-hours trading after it said its Emricasan drug in a Phase 2 liver cirrhosis study showed significant reductions in liver biomarkers versus a placebo after 3 months of treatment.

Earnings and Economic Numbers from seekingalpha.com…

Today’s Economic Calendar
7:00 MBA Mortgage Applications
8:15 ADP Jobs Report
8:30 Gallup U.S. Job Creation Index
8:30 International Trade
9:45 PMI Services Index
10:00 Factory Orders
10:00 ISM Non-Manufacturing Index
10:30 EIA Petroleum Inventories
2:00 PM FOMC minutes

Today’s Earnings here

Other…

today’s upgrades/downgrades from briefing.com

this week’s Earnings

this week’s Economic