Two major events in the biotech sector had the index down -6% intraday and caused a major drag on the Nasdaq. Add in the weak healthcare sector and the major averages had a tough day.

Market Statistics

DNA sequencing company Illumina (ILMN) warned that it would miss on sales for both Q3 and Q4. The company blamed the disappointing sales on Europe and weakness in the Asia-Pacific region. The company said Q3 revenue would be $550 million and below forecasts for $569 million. Q4 guidance was cut to $570 million from $603 million. Shares of ILMN declined -20% at the open (-$33) but struggled back to end the day down -10% or -$17 at $145. Since the biotech crash began, ILMN is down from a high of $242.


Exact Sciences (EXAS) is less than half the stock it used to be after the FDA downplayed its colon cancer drug Cologuard and named it an "alternative choice" not a primary treatment. The draft recommendation was far less bullish than analysts were expecting and shares declined -46% to close at $10. FDA Recommendation


The news on EXAS and ILMN reminded investors that biotech stocks are risky investments and many cashed out rather than waiting for bad news in the Q3 earnings cycle. The ARCA Biotech Index ($BTK) was down more than 6% intraday. This was a major drag on the Nasdaq.


All eyes were focused on stock news because the economic news was minimal. The CoreLogic Home Prices for August showed a +6.9% rise over the same period in 2014 and that was the same level as July. The report was ignored.

The International Trade deficit for August rose from -$41.9 billion to -$48.3 billion and well over consensus estimates for -$45.3 billion. This was the biggest deficit since March's -$52.2 billion. Imports rose +$2.8 billion to $233.4 billion. Exports declined -$3.7 billion to $185.1 billion.

Food and beverage exports declined -2.5%. Industrial supply exports fell -5.9%. Automotive exports declined -3.8% and consumer goods fell -3.5%. The import numbers surged because of a +8.4% rise in consumer goods. Petroleum imports declined -6.7% to 280 million barrels. The trade deficit with China rose +14.6% from $28.7 billion to $32.9 billion. The strong dollar was blamed for the slowing exports. This report was also ignored.

The calendar for Wednesday is devoid of any market moving reports. The next hiccup could come from the FOMC minutes on Thursday.


The Dow started off with a gain after DuPont (DD) shares gained +$7 on news the CEO, Ella Kullman, will retire at the end of next week. Kullman had successfully fought off a challenge by activist investor Nelson Peltz back in May. It was a hard fought battle and investors eventually sided with Kullman. The fight caused the company to consider options for improving shareholder returns and they spun off The Chemours Company in May. DuPont is also on tract to reduce annual expenses by $1.3 billion by the end of 2016. Apparently the retirement is seen as an open door for Peltz or others to attack DuPont again in an effort to produce higher returns.

The $7 rally at the open added about 54 points to the Dow. The gain shrank to $4 at the close or roughly 30 Dow points.


Chevron (CVX) added another 23 points to the Dow with a $3 gain as oil prices exploded higher by +5%. Oil prices surged after the EIA said U.S. production declined -120,000 bpd in September. While that is old news for any Option Investor readers it was apparently news for some investors. Production is down from 9.61 million bpd in April to 9.096 million bpd last week. That is a decline of -516,000 bpd since April.

Also pushing prices higher was the increasing tensions in Syria. Turkey has repeatedly warned Russia about fighters intruding on Turkish airspace. Russian fighters have locked weapons radar on Turkish planes and remained in Turkish space for extended periods of time. Turkey is a member of NATO and NATO issued a stern ultimatum to Russia to stay away. Russia is claiming it has no MIG fighters in the area.

Russia is also claiming there are no Russian soldiers in Syria. However, Putin has said he would not prevent volunteers from traveling to Syria and aiding the Syrian government. This is similar to the Ukraine annexation. Putin always said it was army volunteers taking their vacation time to fight in Ukraine and Russia had not assigned any troops to the Ukraine. Of course, you have to wonder how those volunteers got permission to drive as many as 500 Russian tanks and artillery pieces to Ukraine. Hey, Vladimir, I am going on vacation for the next month and my car is in the shop. Can I drive one of your tanks? Can I also have ammo for target practice?Russian Aircraft in Turkey

This situation in Syria is rapidly accelerating to a conflict point. Russia also installed numerous radar jammer vehicles that jam radar and communications from US AWACs planes along with a large number of surface to air antiaircraft missiles. Since ISIS does not have aircraft, it is clear they are not to prevent ISIS from attacking Russian assets.

Oil prices will continue to rise as long as the Syrian situation continues to escalate.


After the bell, Adobe (ADBE) warned on full year revenue and earnings. The software company said full year revenue would be around $5.7 billion and earnings of $2.70 per share. Analysts were expecting $5.93 billion and $3.19 per share. Shares fell from the $85 close to a low of $74.30 before rebounding to cut the losses.


Yum Brands (YUM) fell -18% after reporting adjusted earnings of $1.00 compared to estimates for $1.07. Revenue of $3.43 billion also missed estimates for $3.68 billion. The company said the Chinese division was recovering slower than expected. Same store sales in China rose only +2% and well below the +9.6% rate analysts had expected. The company also said foreign exchange headwinds were worse than expected after China devalued the yuan. Shares of YUM declined from the $83.42 close to $68 in afterhours.


Nuskin (NUS) warned that Q3 revenue would be in range of $570-$573 million due to the strong dollar and slowing sales in China. Analysts were expecting $622 million. The dollar alone is expected to reduce full year revenue by $60 million. Earnings will be released on November 5th. Shares collapsed from the $46.57 close to $40 in afterhours.


PepsiCo (PEP) reported earnings of $1.35 that beat estimates by nine cents. Revenue declined from $17.22 billion to $16.33 billion due mostly to foreign currency translation. The company took a $1.9 billion charge for operations in Venezuela. The company is rapidly failing and hyperinflation is rampant. The country has instigated capital controls that prevent money from leaving Venezuela and this is impacting operations. If you cannot buy raw materials from outside the country and the price of your products is fixed at below your cost it is very hard to conduct business.

In the U.S., the company is expending profits by reducing package sizes. The traditional 10-ounce bag of potato chips is now 8 ounces. However, non-carbonated drink sales rose +10% while carbonated beverage sales declined -1.9%. Regular carbonated beverages declined -1% while diet beverages declined -6.5%.


Monsanto is the heavyweight announcing earnings on Wednesday. Acuity Brands (AYI), Constellation Brands (STZ) and Global Payments (GPN) round out the rest of the notables.


Team Inc (TISI) warned on revenue guidance for the current quarter. The company cut its forecast from $1.1 billion to $1.05 billion but earnings of $2.15 will remain the same. Analysts were expecting $2.15 and $1.08 billion. Shares declined -3% on the news.

Allegheny Technologies (ATI) warned it now expects a Q3 loss of 27-32 cents per share. Consensus estimates were for a 17-cent loss. The announcement came after the close and shares did not move.

O2Micro (OIIM) warned that revenue for Q3 would be in the range of $13.5-$13.8 million, down from guidance of $15.0-$16.2 million. Analysts were expecting $15.8 million. Shares fell -14% on the news.

Infinity Pharmaceuticals (INFI) cut revenue guidance from $105-$125 million to $100-$120 million. Analysts were expecting $130 million. Shares fell -9% on the news.

Quantum (QTM) warned that revenue for Q3 would be in the range of $116-$118 million compared to prior guidance in July of $120-$130 million. Shares declined -5% on the news.

Brinks (BCO) cut earnings guidance from $1.55-$1.75 to $1.40-$1.50 and blamed it on the weak economy in Brazil and the strong dollar. Revenue for 2016 is now expected to be $3.0 billion, down from prior guidance of $3.4 billion. Shares declined sharply at the open but recovered to end the day down only -1.2%.

Tesla (TSLA) shares declined -4.69 to $241 after Morgan Stanley cut their price target from $465 to $450. Yes, you read that correctly. They cut a price target that is nearly twice the current share price by only $15. Clearly, it was a publicity move rather than an actual downgrade. The average price target on Tesla is $288.

The analysts said Tesla's Model X was priced too high at $132,000 and they thought that would limit sales in 2016 to 20,000 units. Tesla said the current "Signature" models are fully priced because of the luxury trim and they would be rolling out some less expensive models in the coming months. Analysts claim the price is $10-$15,000 higher than expected and could cause some sticker shock. I believe anyone that was ready to write a check for $120,000 is probably not going to be deterred by an extra $12,000 because the trim is more luxurious than they expected.

The analysts cut their delivery estimates for the Model X in 2015 from just over 3,000 to 1,500 and down from 25,000 in 2016 to 20,000. Tesla delivered 2,400 cars in 2012 and another 22,480 in 2013. In 2014, they raised production to 31,800 and they are expected to deliver over 50,000 this year. Estimates for 2016 are for 80,000 cars.

Elon Musk said the debut of the Model X has caused a spike in orders for both the X and the S models. At last count, there were 32,000 Model X orders with $5,000 deposits. If Tesla is going to fall short on deliveries in 2016, it will be because of manufacturing problems rather than weak sales.


Disney (DIS) raised ticket prices again. The season passes are now over $1,000 and have blackout dates for busy periods. A new pass for $1,049 offers year-round access but has limited extra benefits. Another pass costs $849 with two weeks of blackout dates during the winter holidays. Individual single day passes are now $99, up from $50 ten years ago. Disney said the number of people that hold passes has risen +250% since 2001. Disney shares were flat for the day.

Markets

I was actually somewhat encouraged by the lack of a broad market crash today after the big gains on Monday. The S&P halted right at resistance at 1,990 on Monday and closed at 1,979 today. The various earnings disasters after the close only knocked the futures down about -5 points and they are recovering as I write this.

Given the dramatic moves in the biotech sector today we could have easily seen a material decline in the S&P. Instead, there was only a sharp decline at the open and then some cautious buying as the day progressed. It could have been a lot worse.


The S&P has not yet ventured into the strong band of resistance but it is close enough for a serious attack if buyers were to appear. Support appeared at 1,973 from yesterday morning and again today. That would be the initial line in the sand if we were to head lower. After Monday's huge spike on short covering, it could be a big drop if that initial support fails. The 1,900 level would be the next material support and that is a long way down.


The Dow was saved from negative territory by Du Pont and Chevron. Even Caterpillar got into the act with a $1.65 gain. Those three stocks accounted for 65 Dow points and the Dow closed up only +14.

The Dow punched through resistance at 16,666 on Monday and came to a stop at 16,750. That resistance held today despite the gains from those three stocks outlined above. A decent break above that level could attract some price chasing and additional short covering.




It was a miracle the Nasdaq did not decline more than 33 points. If you look at the size of the losses on the losers list below compared to the size of the gainers it is a serious mismatch. The majority of the losers were biotechs but there were a few odd stocks in the mix for variety.

The Nasdaq has resistance at 4,785 and 4,835. Support is well below at 4,700 and 4,565. The biotech implosion may not be over. The constant barrage of negative headlines is convincing investors that maybe the biotech bubble has finally burst for good. That could weigh on any attempted Nasdaq rebound this week.




The Russell 2000 ran into unexpected resistance at 1,140 and the biotech weakness turned into a major drag. The Russell declined almost exactly the same amount as the Nasdaq at -0.68% so there is nothing we can derive from its performance. It was not stronger or weaker and therefore not a signal.


The Dow Transports declined as expected given the big spike in oil prices. The 100-day average on the transports is now strong resistance and without some positive economic reports and weakening in oil prices, the path of least resistance is definitely lower.


I am somewhat encouraged by the lack of a significant decline after the biotech implosion and mostly negative earnings. However, ships can still sink in a calm sea. Futures are still down -5 at 8:PM ET but showing no signs of deterioration.

I would continue to be calm about adding new long positions until the resistance on the S&P has been broken or we return to the lows for another retest.

Sometimes the best trade is the one you do not make.

Enter passively, exit aggressively!

Jim Brown

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