The Dow moved in a 204 point range from +62 to -141 but the Nasdaq and Russell closed at new highs.

Market Statistics

The Dow gapped open to 16,520 on positive earnings from TRV, JNJ and VZ but that was the high tick for the day. Those three Dow components reporting earnings all closed significantly lower as analysts picked apart their earnings beats.

Another problem causing the Dow volatility is the recent additions. The Dow is a price weighted index and there are now 7 stocks over $100 and 18 stocks over $75. With a stock like Goldman (GS) at $175 it is easy for that stock to make a big move on some news event. Goldman shares declined -$3 today and that is roughly equivalent to -24 points on the Dow. Today it was Goldman -3.00, IBM -1.66, JNJ -1.03 and TRV -1.47 that dragged the index lower. Those were ending numbers and each was much lower intraday. It could have been worse but Visa (V) at $232 was flat for the day. If the market continues higher in 2014 the increase in share prices on the Dow will increase its volatility.

Apple had been discussed several times as a Dow addition but with a $560 stock price and $8-$10 daily moves the result on the Dow would have been dramatic. For the same reason a stock like Google could never be considered.

There were no economic reports today so investors were focused solely on earnings. Tomorrow will be the same with only the weekly Mortgage Applications being released. Thursday is the big day and the economics could distract traders from less than enthusiastic earnings.


Dow components reporting earnings combined to push the Dow lower. Johnson & Johnson (JNJ) posted earnings of $1.24 compared to estimates for $1.20. Revenue rose +4.5% to $18.36 billion and topping estimates of $17.95 billion. Gains would have been +6.3% had it not been for currency conversion issues.

Those were great earnings so why did the stock tank? Prescription drug sales rose +11.8% to $7.3 billion. However, CFO Domenic Caruso warned that the growth rate of prescription drug sales will "decelerate" this year as more drugs go off patent and new drugs in the market place compete for market share. He also said pricing pressures would crimp sales, especially in Europe. That was enough to knock -$2.50 off JNJ shares at the open although they did rebound to lose only -$1 at the close.


Travelers (TRV) reported adjusted earnings of $2.68 compared to estimates of $2.16. The CEO said a slower hurricane season helped lower catastrophe losses to $53 million compared to $1.05 billion in the year ago quarter. He said insurers handled $12.8 billion in claims in 2013 compared to $29.4 billion in 2012 thanks to Hurricane Sandy. While Travelers easily beat estimates it was due to price increases after Sandy. With no storms in 2013 the company is being forced to cut back on some of those increases to remain competitive in the market. That was the kiss of death for analysts and the stock sold off.


Verizon (VZ) posted earnings of 66 cents and beat estimates by four cents for a profit of $5.07 billion. Revenue rose a miniscule +3% to $31.07 billion. Along with earnings the company said it was buying some TV assets from Intel. Analysts were not excited about Verizon adding to its TV business when Intel had failed on those assets. Verizon also said it would complete the $130 billion acquisition of Verizon shares held by Vodafone on Feb 21st. Vodafone owns 45% of Verizon's wireless division. Verizon shares fell -$1.50 at the open but rebounded to close down -65 cents.


Dow component Goldman Sachs (GS) fell -$3 after Deutsche Bank (DB) reported a huge loss of 1.2 billion euros over the weekend. What hurts DB is also expected to hurt GS so this was a sector sell rather than something specific to Goldman. Goldman shares have been in decline since they reported earnings last week. This was just an acceleration of that decline. The $3 decline was the biggest loser on the Dow.


While those stocks above created the Dow swoon on Tuesday we will be watching IBM create another drop on Wednesday. IBM reported earnings after the close of $6.13 compared to estimates of $5.99. However, revenue was light at $27.2 billion compared to estimates of $28.27 billion. That was the good news.

The bad news came in many forms. The $6.13 earnings beat came after a tax audit lowered IBM's tax rate to 11.2% in the quarter compared to 25.5% in the year ago quarter. Hardware revenue fell -26% to $4.26 billion. Services revenue fell -3.6% to $9.92 billion. Software revenue increased only slightly by +2.8% to $8.14 billion. Overall it was an ugly report.

IBM did guide to "at least" $18 in earnings for 2014 and analysts were looking for $17.97 so not a big upgrade there. IBM expects to earn $20 in 2015 compared to the $16.28 they earned in 2013.

IBM shares fell -$5 in afterhours to $183. If that carries over to Wednesday's open it would mean a roughly 40 point decline in the Dow. IBM was the only Dow stock to lose ground in 2013. It heads the Dogs of the Dow list for 2014. The stock put in a nice double bottom at $172.50 after the equally horrible Q3 earnings. I believe the worst is over for IBM. They are well managed and they will find a way to rebound from this soft patch.

IBM is suffering from the NSA scandal. Ever since it was learned that the NSA had backdoor entrances to some American made equipment like PC, routers, switches and servers, sales have been crashing in the emerging markets and Europe. Nobody that has secrets to hide wants to buy American hardware that may come complete with a NSA spy entrance.

It was announced over the weekend that Lenovo is in talks with IBM again to buy its server business. In the 2013 talks Lenovo wanted to pay $2.5 billion and IBM was holding out for $4.5 billion. The talks broke down and everyone went home. It was confirmed again this weekend that the talks have restarted and are in the final stages. One report said a deal could be reached this week. IBM has been trying to divest itself of its low margin businesses to concentrate on the software and services sector. After two quarters of horrible hardware sales IBM may be willing to meet Lenovo at a lower price point and I think that would be outstanding for IBM.

I would be looking for a bounce in IBM shares but it may take some time for the sellers to exit before the buyers show up in quantity. Nobody really expected IBM's hardware sales to recover in Q4 and they still bought the stock in December to push it to a three month high. I think this dip will be bought.


After the close Texas Instruments (TXN) reported earnings of 46 cents that matched analyst estimates but the company later said it included a 3 cent restructuring charge that had not been disclosed to analysts. Earnings were up +100% from the 23 cents earned in the comparison quarter. Revenue rose to $3.03 billion and slightly ahead of estimates at $2.99 billion. While the earnings were decent the guidance was not. The company forecasted earnings of 36-44 cents and analysts were expecting 44 cents. Shares declined slightly in afterhours but activity was light.


Chipmaker Xilinx (XLNX) reported earnings of 61 cents compared to estimates of 54 cents. Revenue rose +15% to $586.8 million but missed estimates of $600.6 million. The bad news came from the guidance. They projected revenue of $598.5 to $622 million for the current quarter and analysts were expecting $621.1 million. Xilinx also said gross margins would decline from 69.2% to 68%. The company said its industrial, aerospace and defense business decreased -5%. Shares of XLNX declined -$2 in afterhours.


Ameritrade (AMTD) reported a +30.6% increase in earnings on a +24% increase in revenue. Earnings were 35 cents compared to estimates of 33 cents. Revenue rose to $752 million and ahead of estimates for $735.9 million. Ameritrade said "client engagement has trended upward following continued improvement in the macroeconomic environment." (It really does pay to read those dry economic reports in my nightly commentaries.) Trading activity was at the highest level in more than two years. Client assets rose +24% to $596 billion.

The problem I have is how do you rationalize buying a chart like this? You have to wait for a pullback and I think that is what is wrong with the market. Everyone is waiting for a pullback in their favorite chart but it never comes.


Amazon was in the news again today for multiple reasons. They filed for a patent for what they called anticipatory shipping. By analyzing purchasing trends they have developed a program to ship inventory to a location near you before you actually order it. They are analyzing buying patterns by location and shipping inventory in advance so it is ready to deliver the next day when you buy it. For instance if they know X number of people are buying diapers every two weeks they can position those diapers right around the corner so when you do buy them they appear instantly.

The same could be true with people who buy the next John Grisham novel every time one is released. They know who you are and they can stage the appropriate number of books in the local warehouse to deliver it when you click it. Amazon can do this because they have the complete buying history of 350 million customers. They can mine their big-data hoard and anticipate what you are going to buy. When they preposition inventory in your city they save on freight. They spent $4.3 billion on shipping in 2013 so freight savings is a high priority.

Amazon was also in the news as having approached the three major networks about content for a pay TV service they are considering. This would be an enhancement to the current Prime membership video service. I have long thought Amazon would eventually offer a NetFlix type service and at one point I would not have been surprised if Amazon made an offer for NetFlix. It makes sense for Amazon to offer TV since they can run commercials for Amazon products on their service. This is similar to their Kindle tablet offerings which are just an external cash register for Amazon because of the advertisements and shopping convenience.

Amazon shares gained another $7 on the news. Amazon will report earnings on Jan 30th. Expectations are for 71 cents.


Earnings for tomorrow are headlined by EBAY and NFLX plus Dow component UTX.


Iran supposedly opened its nuclear doors to IAEA inspectors on Monday and began disconnecting the equipment required to enrich uranium to the 20% level and just under the level required to make a bomb. Whether this actually happened or not we will find out over the next couple weeks. A team of ten inspectors arrived in Iran on Saturday but they will only be let into the plants in teams of 2-3. I know what you are thinking and I am sure most of the world is thinking the same thing. Iran is playing the age old game of hide and seek and they can manage 3 people wandering through the halls but not ten. It should be an interesting six months and I am betting the deal falls apart before then.

In other news two Iranian warships set sail for the Atlantic Ocean on Tuesday. It will be the first ever mission there and comes amid an ongoing push by Iran to project power across the Middle East and beyond. The two ships will be on a three month mission to "secure shipping routes" and train new personnel. Last year Iran said it aims to put warships in international waters off the U.S. coast within the next few years and extend its reach as far south as Antarctica.

Let's see, the largest supporter of state sponsored terrorism, nuclear weapon capable in 2-3 months, warships off the U.S. coast. What could possibly go wrong?

Thailand declared a 60 day state of emergency in Bangkok and surrounding provinces following months of protests in the capital. The interior minister announced new measures giving security forces new powers to ban political gatherings, censor news media, impose curfews and detain subjects without charges. Protestors are trying to block elections and prevent corrupt officials from ceasing more power. Remember 1997 when the implosion in the Thai baht currency started the uncertainty that led to the collapse of Long Term Capital Management? Sometimes small countries do matter.

Markets

The markets on Tuesday presented two pictures of health. With the Dow falling -141 points it appeared on the surface that the three week decline was worsening. However, we know that was a tale of four stocks rather than a real washout of the Dow. At the same time the Nasdaq and Russell 2000 were struggling to set new highs and the afternoon rebound by the Dow allowed them to do just that. The S&P, the real health indicator of the big cap market, dropped sharply to 1,832 then rebounded to gain +5 points and close at 1,843. Compared to the +28 point gain on the Nasdaq and +7 point gain on the Russell the S&P gain was anemic and it closed right in the middle of its recent congestion range.

The 1,843 level as indicated by the dashed red line in the chart below has been neutral territory since late December. We have traded above and well below that level but we seem to keep coming back to rest on that resistance. For the last three weeks I have recommended investors not get too excited about adding a bunch of long positions until the S&P moves over 1,850 and that is still my recommendation today. With the Dow holding the S&P back we never know if the next Dow drop is going to be the one that drags the S&P down with it. The Dow decline today pulled the Nasdaq and Russell into negative territory temporarily but they overcame the negative impact to push higher. That may not always be the case.

The S&P has traded below 1,820 already in 2014 and the dip today had a lower low than the dip on Friday. Lower lows are predictive of a future decline but we need more than 1-2 days to make a trend.

On a standalone basis the S&P is not bullish. The main deviations from the norm have been to the downside. However, it has been consistent in returning to that 1,843 level where it is just a handful of points away from a new high. It remains to be seen what future event will push the S&P to a new high but we can never discount the possibility. The futures were sharply negative after the IBM earnings but they have recovered to be nearly flat as I write this. If we do tick higher on the S&P on Wednesday I would watch that 1,850 level as the key indicator of market strength. A move over 1,850 would produce some serious short covering so be prepared. I would also watch for another lower low below 1,832 and that would be a warning of growing weakness.


The Dow dropped to 16,316 intraday and that was exactly to downtrend support. The rebound to close just slightly over the 16,400 level was the result of recoveries in those 4 stocks that sent it to the lows. The rest of the Dow was neutral with 12 advancers to 18 decliners. Take out Goldman and the total points lost by the other 29 components was only -3.79. That is hardly a negative day. In fact the total advancers across the entire market at 4,360 were almost twice the decliners at 2,460. Investors have got to quit looking at the Dow as the market now that high prices stocks make up so much of the index.



The Nasdaq closed at a new 13 year high after opening there at +30 and then being dragged back to -6 intraday. The rebound from 4,193 to close at 4,225 was powerful when you consider the Dow was significantly negative all day. The technology sector is being led by the biotechs and momentum stocks like Tesla and Amazon. The major decliners were led by a lot of stocks that nobody knows while the advancers are all the common momentum stocks.

I view the Nasdaq breakout, small as it was, as a bullish signal that the market is going higher in spite of the Dow. The Nasdaq is using prior uptrend resistance as support and that 4,200 level looks pretty solid. However, we need to watch for EBAY, NFLX, SNDK, MSFT, JNPR and FFIV earnings to either poison that sentiment or enhance it.



The Russell 2000 closed at a new high after a very short dip and I view that are strongly bullish for the overall market. Despite the market volatility over the last three weeks the Russell is trending higher. That means fund managers are not afraid of a future dip. They are putting money to work in the small caps and that is what counts. The Russell is 2,000 stocks and the Dow is 30 so the Russell is the market where the Dow is the flag flying over it.


Investors and many analysts are in denial. Probably 65% of analysts are expecting a correction but the market keeps moving higher. Nobody wants to buy those stocks with vertical charts but they just keep moving higher as shorts are forced to cover. In the Option Writer newsletter yesterday I pointed to the chart of Illumina as the picture of a perfect shorting opportunity or at least that is what it looks like. How many investors would buy this chart? Probably very few but the stock keeps going higher because the shorts are getting squeezed.

Everyone wants to see a big drop in ILMN and others like it because they want a buying opportunity. Instead they find themselves chasing the price higher. Eventually we will have a correction. Next week, next month or next quarter but it will come. Stocks like ILMN could run another $20 before the correction hits and then only decline $10 in the selling. Sometimes we have to bite the bullet, jump in and hang on. Unfortunately I can't do it on stocks like this and there are hundreds of charts like this. We need to be patient and we will get a buying opportunity. Until then we need to buy those individual stocks that have already corrected and are rebounding from the lows.


Enter passively, exit aggressively!

Jim Brown

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