A spurt of buying at the bell lifted the Dow back into positive territory and avoided a negative close under 16,000. The Nasdaq was not so lucky as the biotech sector continued to be a drag.

Market Statistics

This was a very slow news day as the quarter draws to a close and companies are in their quiet period ahead of earnings. The indexes started off positive but faded as the day progressed. The biotech sector continued to be the drag on the Nasdaq and S&P but the rate of sector decline slowed slightly.

Several analysts reiterated buys on various biotech stocks and called the decline a buying opportunity. So far, investors have not taken that advice. Other analysts claim the sector has another 10% to fall.


The huge decline in the Asian markets failed to translate to declines in the USA. Japan declined -4% and China -2%. Europe was negative but not as bad as Asia.



The economic reports in the U.S. were positive but the big events start on Wednesday. The Consumer Confidence for September rose from 101.3 to 103.0 and the highest level since January's 103.8 reading. Analysts were expecting a decline to 98.0 with Moody's expecting a drop to 96.5. Falling gasoline prices were credited as the driver.

The present conditions component rose from 115.8 to 121.1. The expectations component declined slightly from 91.6 to 91.0. Those who felt jobs were plentiful rose from 21.7% to 25.1%. Those expecting an increase in income rose from 16.2% to 19.1%. Consumers planning on buying a car rose from 10.8% to 12.7%, prospective home purchasers rose from 4.4% to 6.3% and the highest level in 2015 but appliances purchasers declined from 49.5% to 48.0%.


The Texas Service Sector Outlook Survey for September rose from 2.1 to 3.6. Respondents generally saw conditions improving slightly. Texas has been hard hit by the energy decline and will not recover until the price of oil begins to rise. The future outlook component for the next six months rose only slightly from 9.7 to 9.8.

The big events begin tomorrow with the ADP Employment report for September. Expectations are for a gain of +191,000 jobs, up only 1,000 from August. The Nonfarm Payroll report on Friday is expected to show a gain of +203,000 jobs, up +30,000 from August. These reports will have a direct impact on the Fed meeting in October.

Janet Yellen will get another chance to hone her rate hike speech at 2:PM on Wednesday and China's PMI revision is due out after the market closes.

The national ISM Manufacturing on Thursday is also going to be important for the market. With regional manufacturing reports erratic with some showing declines, the national version will be important.

The speaker list for the Fed is very heavy this week with Friday the biggest single day schedule I have ever seen.


In stock news Keurig Green Mountain (GMCR) released its cold beverage maker called appropriately the Keurig Kold. The drink machine is not cheap at $369 with the individual drink capsules ranging from 99 cents to $1.25. This is significantly higher than the $100 Sodastream device. Available drinks include Coke, Diet Coke, Sprite and Fanta. Vitaminwater and energy drinks will be added next. Keurig expects to spend $100 million over the next year to market the new drink machine.

Keurig shares are down significantly from the $159 level it saw in November. Coke (KO) owns 16.8% of GMCR.


Apple (AAPL) sold a record 13 million iPhones over the weekend and saw an analyst upgrade today as well as positive mention by Carl Icahn. Sterne Agee initiated coverage on Apple with a $150 price target. Unfortunately, that did not help the stock. Apple shares declined -$3.38 after Google announced some new phones to compete with the iPhone and Google's phones start at $379.

The Nexus 5X has a 5.2-inch screen, 1920x1090 resolution, 2GB, a 12.3 megapixel rear camera, 5 megapixel front camera and 2,700 mAh battery. The Nexus 6P has a 5.7-inch screen, a full aluminum body, USB Type-C port that charges twice as fast as the iPhone. The resolution of 2560x1440 is also better than the 6S+ at 1920x1080. The starting price is $499 compared to $799 for the 6S+, the 6S at $649 and Samsung Galaxy S6 at $679.

Google also announced a high-end tablet with a detachable keyboard. The new Pixel C has a 10.2 inch touch screen with 32 GB of storage and starts at $499. The new tablet is based on the Android operating system rather than the Chrome operating system.

Google also updated its Chromecast device, which allows users to stream content from their tablet or phone to a non-smart TV. They introduced a second version that streams audio to any speaker with a $35 dongle that attaches to the speaker. You can stream music from any smartphone app such as Spotify to any connected speaker. Google has sold more than 20 million Chromecast video devices.

Google shares also declined along with the Nasdaq.



Chesapeake Energy (CHK) announced a layoff of 740 workers after the company reported a loss of more than $4 billion for Q2. The layoffs represent about 15% of their workforce. After the cuts, the company will employ about 4,000 workers. The CEO said in a letter to employees that the current energy environment represented a challenge for Chesapeake and the industry. The terminated employees will receive up to a full years pay depending on their age, pay level and years of service.

Chesapeake is only one of dozens of companies that have cut workers because of oil prices. Analysts estimate more than 100,000 workers have lost their jobs.


Commodities producer Glencore rebounded +17% after several banks came to their defense. On Monday shares fell -27% after an investment bank warned the company could fail because of its $30 billion in debt. Commodity prices are below the cost to produce them in many cases. Citigroup said there was nothing to worry about because Glencore had excellent banking relationships and the commodity crush would pass. Glencore said it was planning on reducing its debt in 2016 by more than $10 billion through planned asset sales.

The crash in Glencore helped to crush the European markets because of major margin calls when the stock fell more than 75% over just the last several weeks. Investors were forced to sell other shares to make up for losses in Glencore.


On Monday, GoPro (GPRO) announced a new $200 camera called the Hero+, which will fill a gap between the entry level Hero at $130 and the Hero+LCD at $300. The new camera can record 1080p video at 30fps compared to the more expensive version at 60fps. The company now has six cameras between $130 and $500. They also lowered the price of the Session camera by -$100 to $300 ahead of the holidays.

Sterne Agee initiated coverage with a price target of $45 compared to today's close at $30. The analyst said a smartphone would never be a competitor for a GoPro camera because it was not built for the same purpose and nobody will want to risk their $700 phone to take an action picture. He said, "Consumers don't just want an action camera. They want a GoPro camera." The name is synonymous with the market. The company is expected to launch the HERO5 camera series in 2016 along with a consumer drone product line. Shares rose fractionally on the news.


Tesla (TSLA) is set to deliver its first Model X to consumers this evening as CEO Elon Musk hands over the first set of keys to a lucky buyer in Fremont California. This will be the first time the company has two models in production at the same time. Tesla has not even released the final pricing on the Model X series but customers are still putting down deposits. More than 32,000 people have put down $5,000 to place an order. However, the fully loaded Signature Edition will cost about $132,000. The Model X has three rows of seats and will seat 7 adults.

The drawback to the SUV other than price is the gull wing doors. Those prevent a top mounted luggage rack for bikes, skis, etc. It also prevents parents from loading the car in some garages because of the space needed to open the doors. Tesla shares declined -1.78 today.


Casino stocks dove again after Macau's biggest junket promoter, Neptune Group, said it might have to halt or reduce operations if VIP gamers continue to avoid the region. Junket operators facilitate loans to VIP gamers and those customers accounted for 70% of Macau revenues. The junket operators said revenue had declined to a five-year low. While Neptune may not completely leave the Macau area their financial stress suggests many less capitalized junket operators could be pushed out of business. That would mean even less revenue for the casino operators like Wynn Resorts (WYNN) and Las Vegas Sands (LVS). Macau gaming revenues have been declining at about -35% per month over the same period in 2014.

Several weeks ago, there was a major theft by a junket operator at a Wynn casino. It was originally reported as $258 million but later reduced to $34 million. Stricter controls are also causing a slowdown in VIP trips.


Crude oil rose today as it does on nearly every Tuesday ahead of the inventory numbers from the API and EIA. After the bell tonight, the API reported a +4.6 million barrel gain in inventories for last week. These gains should now be common since we are out of the summer driving season and refineries are shutting down for maintenance. WTI declined to $44.91 after the report. The API numbers are not considered reliable and traders are more focused on the EIA inventories on Wednesday morning.


Markets

Last week somebody bought 50,000 contracts of the SPY June $186 puts at $1,100 each or roughly $55 million. Since then another 90,000 puts were purchased for the June $184 strike at $1,100 per contract or roughly $100 million. Either somebody knows something we do not or there are some really large portfolios that were hedged. The $55 million purchase would hedge about a $1 billion portfolio so double that for the 90,000 contracts.

As a portfolio hedge, the June premiums will decline slowly in case of a market rebound. If a typical market bottom is formed in early October and the market rebounds strongly the put owners can exit those positions with minimal losses in premium. If we did get another leg down in the market and those puts went deep into the money they could sell them for a profit to offset losses in the individual stocks.

While I understand the mechanics of this process, I am still concerned when I see put purchases this large. This requires a significant level of fear regarding a potential decline and confidence that a decline will recover. Otherwise, they could simply sell their positions and plan to buy the dip. Obviously, there may be tax concerns that could make selling the positions not a real option.

Can you imagine the look on the market makers face when he sees an order to buy 50,000 high dollar puts show up on his screen?


Goldman Sachs revised their yearend estimate for the S&P from 2,100 to 2,000. Tony Dwyer at Canaccord cut his yearend estimate from 2,340 to 2,150. Apparently, the bullish bias is fading.

There has been a lot of chatter in the last several days about a retest of the August lows at 1,867 and almost as much talk about the potential to retest the October lows at 1,820. The S&P declined to 1,871 today and only 4 points away from the August low. The rebound was lackluster and you would have expected a bigger bounce after coming that close to a successful retest. In most circles, a 4-point miss would have been good enough to trigger a flood of buyers. The lack of buyers is troubling.

This suggests there are lower lows ahead. However, tomorrow is the end of the quarter and there may have been a calendar consideration in the case of funds. The calendar is working against us in another way because of the historical trend of market lows in the first ten days of October. Portfolio managers may be thinking they can get a better price if they hold out for another week. There was also the worry over the ADP Employment report due out in the morning and the Nonfarm Payrolls on Friday. Why step in front of economic traffic if you do not have to?

All we need is one more of those big market flush days to knock the S&P down to 1,820. While that would be a convenient level for a rebound, it may not be the final level if the global economy is going to continue to decline. There is risk of a global recession or even deflation if commodities fail to find a bottom soon. That could turn this correction into a bear market with a drop to the 1,700 level. I am not predicting that but we need to be aware of the possibilities.

For tomorrow, resistance is 1,900 and support 1,867. Should either level be broken I would expect a continued move in that direction that could possibly be violent.



The Dow has already exceeded the October lows in the August dip back to the January 2014 levels at 15,350. Tuesday's dip under 16,000 was the low for the month the August low appears to be the target. The Dow got some unexpected help from upgrades to McDonalds and Johnson & Johnson. 3M is still gaining from its deal with AstraZenaca and an upgrade from Credit Suisse. The rest of the gains appeared to be limited short covering on the late day bounce.

The October low at 15,855 would be support but after the bigger plunge in August, it should have less influence on the index.



On the Nasdaq support at 4,500 was tested and pierced by 11 points before the end of day rebound began. This decline was due to the continue drop in the biotechs, which lost -1.4% for the day. Until the biotech sector finds a bottom the Nasdaq will continue to bleed points.

Once the 4,500 level breaks the next material support point is the August low at 4,292 and then the 4,130 level from October. This means the Nasdaq could see some seriously negative days if conditions do not change soon. Resistance is 4,600.




The Russell 2000 hit a milestone today with the dip to 1,082. This is support from January and May in 2014. All prior support levels are now well into the rearview mirror and a failure here targets 1,050. The Russell is the sentiment indicator for the market and it remains bearish. Any further decline could accelerate to bear market levels at 1,036 and a -20% decline. This could contaminate the other indexes and cause additional selling.


The possibility of continues weakness in biotechs from fund managers racing to capture their remaining gains, makes me bearish for the rest of the week. The seasonality of market lows in the first week of October is also a factor because investors may wait to see if they can get a better price next week.

The nearness of the Russell small caps to a bear market low is also a factor. This is the sentiment index for the market and sentiment is bearish.

All of these factors could be reversed in the blink of an eye with a major short squeeze but there is still considerable risk. I would be careful about loading up on a bunch of longs, or shorts, because market movement over the next 10 days could turn violent. Continue building your list for long term buys and put in orders at ridiculous prices. Sometimes you will be surprised at what you can buy during a volatility event.

However, sometimes the best trade is the one you don't make.

Enter passively, exit aggressively!

Jim Brown

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