An implied downgrade to Apple based on production cuts at Asian suppliers knocked the Dow to a lower low at the open but it was purely an Apple related drop.

Market Statistics

Apple (AAPL) shares declined -$3.80 to knock about 28 points off the Dow and poison market sentiment at the open. Once it became evident that the rest of the Dow components were not going along for the ride the Dow clawed its way back to positive territory in the afternoon.

The overall market traded like it was sedated with no material movement and low volume after the economic reports failed to provide any boost. The NFIB Small Business Survey for October came in at 96.1 and exactly the same level as September. The internal components were mostly unchanged with an equal number rising 1 point as those that lost 1 point. The earnings trend component was the biggest change falling from -13 to -16 and suggesting business conditions were softening. This was a lagging report for October and was ignored.

The Intuit Small Business Employment Index for October rose +0.1% compared to the -0.1% decline in September. The internal components were also mostly unchanged and the report was ignored.

Import prices for October declined for the fourth consecutive month. Prices fell by -0.5% after a -0.6% drop in September and -1.8% decline in August. I guess you could say prices were stabilizing at a slower decline rate but they are still dropping. This will negatively impact inflation in the months ahead.

The main driver was a -2% decline in fuel imports following a -5.4% decline in September. Fuel import prices are now down -46.6% for the year. Nonfuel prices declined -0.3% and they have increased only 1 month in all of 2015. The rising dollar will continue to pressure prices in the months ahead.

Wholesale inventories in September rose +0.5% after a +0.3% rise in August. Durable inventories fell -0.4% with nondurables rising +1.9%. Durable sales rose +0.7% with nondurable sales rising +0.3%. This report was also ignored.

Friday remains the most important day of the economic calendar with the retail sales report for October. With retailers singing the blues, the report could easily be disappointing. The consensus estimate is for a +0.3% rise. The Producer Price Index could also disappoint to the downside and estimates are for a +0.2% gain.


Credit Suisse was the blame for Apple's nearly $4 decline today. The broker said Apple cut its November orders by about 10% for iPhone components. The reason given was to account for slowing iPhone demand in Asia where the cheaper Android phones are the hottest sellers. The analyst consensus was for only a -5% cut in orders after projections fell over the last two weeks.

CS analyst Kulbinder Garcha cut his 2016 earnings estimate for Apple by 6% to $9.81 but kept his outperform rating and a price target of $140. The problem is the lack of "must have" features in the current upgrade version of the 6 and 6+. This is slowing sales growth and will make tough comparisons against the Q4/Q1 sales from last year when the 6 was new.

Garcha is still predicting iPhone sales of 80 million for the holiday quarter and that is about 4 million over the year ago quarter. Sales are expected to decline to 45-50 million for Q1 and that is normal. He said Apple is still a buy because even at a slowing growth rate the installed base grows 20-25% per year and more than 70% of existing iPhones in use are 5C or older. That means there is a large number of people that will eventually upgrade and iPhone users typically upgrade to new iPhones. Garcha expects a -5.5% decline in sales in the current fiscal year to 222 million from 242 million. In 2017 he sees a 6% rise in unit sales to 235 million because of the new model.

If Apple announces the iPhone 7 in September with some new features, Garcha expects the cycle to repeat with even higher sales in Q4-2016. FBR analyst Daniel Ives said Apple has a bull's-eye on its back with analysts firing their typical bearish bullets and worry over tough comparisons. Apple will probably prove them wrong again this cycle but eventually the bears will be right.


Apple suppliers saw their shares hit hard on the news of production cuts. Cirrus Logic (CRUS) shares dropped -9%, Qorvo (QRVO), Broadcom (BRCM) and Invensense (INVN) lost -3%. NXP Semiconductors was the least damaged with a -1% drop.

Avago (AVGO) lost -5% despite an upgrade to buy from Drexel Hamilton. Skyworks Solutions (SWKS) declined -5% but there was an extra push after news broke that PMC Sierra (PMCS) was favoring Microsemi's improved acquisition bid of $11.88.


There was a lack of positive market sentiment at the open because there was a lack of any material earnings reports. There were plenty of reports but none were high profile.

Canadian Solar (CSIQ) posted adjusted earnings of 79 cents compared to estimates for 28 cents. Revenue was $849.8 million compared to estimates for $733.9 million. In theory, you would have expected this to cause a monster short squeeze in the stock. However, shares fell as did most of the solar sector. Analysts claimed the good results were expected.

It is more likely that Canadian Solar's results were tarnished by the drop in SunEdison (SUNE). SunEdison lost 92 cents compared to expectations for a 60-cent loss. Revenue was a beat at $476 million compared to estimates for $452 million. The problem with SunEdison is that their spinoffs, called yieldcos, reported results that disappointed. The solar companies are spinning off their installed projects into a high yield vehicle where the parent company can get paid for the project and the yieldco investors get a high yield over time.

Yieldco TeraForm Power (TERP) reported a loss of 3 cents compared to expectations for a gain of 28 cents. TeraForm Global (GLBL) also reported a loss and missed on revenue. SunEdison pioneered the yieldco model.


DR Horton (DHI) reported earnings of 64 cents that beat estimates for 62 cents and it was a 42% increase over the comparison quarter at 45 cents. Revenues rose +28% to $3.09 billion and a slight beat over $3.06 billion estimate. Sales orders rose +19% to 8,477 homes. That is huge by any standard. Closings rose +23% to 10,576 homes. The sales backlog at the end of the quarter rose +7.8% to 10,662 homes with the value rising +10% to $3.15 billion. Horton raised its cash dividend +28% to 8 cents. Shares rallied +8%.


Rockwell Automation (ROK) reported earnings of $1.57 compared to estimates for $1.78. Revenue of $1.61 billion was below estimates for $1.69 billion. The earnings were not the big problem. The company said 2016 earnings could decline to $5.90-$6.40 on revenue of about $6 billion. Analysts were expecting $6.71 and revenue of $6.41 billion. Rockwell said industrial markets including oil and gas have not yet stabilized and the strong dollar is making a significant impact on overseas business. Rockwell said they do not expect to see sales growth until later in fiscal 2016. Shares fell -3%.


Wayfair (W) reported a loss of 13 cents compared to estimates for a loss of 24 cents. Revenue of $594 million easily beat estimates for $522 million. Direct retail revenue rose +91% to $545 million and that was well over guidance at $475 million. The stock imploded after management warned that Q4 would have to measure up to an "extremely strong" 2014 holiday quarter and he wanted to provide a "thoughtful" forecast. That forecast failed to impress analysts and projected 70% growth, down significantly from year ago levels. While 70% growth is still an amazing achievement no investor ever wants to hear that growth is slowing and comps are going to be tough to beat.


Zebra Technologies (ZBRA) reported adjusted earnings of $1.39 compared to estimates for $1.22. Revenue of $916.3 million narrowly missed estimates for $917.6 million. Guidance for the current quarter of $1.38 to $1.63 per share disappointed because of the wide range with the midpoint below analyst expectations. Shares fell -9% on the news.


The Gap (GPS) reported earnings on Monday after the close and slowing sales caused shares to decline today. Same store sales fell -3% overall with Gap stores falling -4% and Banana Republic sales falling -15%. Only the Old Navy brand posted a gain of +2%. Gross sales fell from $1.26 billion to $1.20 billion in October and $3.86 billion in Q3. Analysts were expecting $3.94 billion. Gap blamed part of the decline on the strong dollar. The company guided to earnings of 62-63 cents in Q4 but analysts were expecting 67 cents.


We have another weak earnings calendar for Wednesday with Macy's (M) the highlight ahead of the monthly retail sales numbers on Friday. Thursday has several retailers along with Dow component Cisco. Thursday will be the last major earnings day for this cycle.


Oil service company Flotek Industries (FTK) lost 50% of its value this week after an article claimed there were errors in the company's FracMax fracking software. The company did review the article and their software and admitted the reviewer had found a minor bug that affected the reporting of post fracking production. The bug was only a reporting error not an error in the actual fracking process. I believe the sell off was seriously overdone and the stock fell back to support from 2012. I would be a buyer here once it appears a bottom has formed. I do not want to catch a falling knife but once that knife hits bottom I would pick it up. Flotek is a quality company that is taking advantage of the tough economic times in the oil patch to add customers at the expense of others.


Valeant Pharma (VRX) may have found a bottom at $80. The stock has moved sideways for four days and the company held another conference call today to calm investors. The biggest news was that short seller Citron Research had covered a significant portion of their short. The firm had predicted a $50 price target but when questioned today they dodged the answer and said maybe a few months from now. That sounds like they are done with this project and are moving on.

That new project is Mallinckrodt (MNK). Citron said the problems at MNK could be even worse than the ones at Valeant. However, when questioned repeatedly the Citron rep could not really pin the tail on the donkey with a material reason. Shares had declined to $53 ahead of the interview and then rebounded to $63 when there was no smoking gun.

Citron also called out Wayfair (W) as a failed business model and the weak guidance today as a preview of things to come.



A report out today claims it was Anadarko Petroleum (APC) that approached Apache (APA) with a buyout offer that Apache rejected. The buyout offer was more than likely a self-defense ploy. Anadarko has been rumored for months to be a potential takeover candidate by Exxon.

Secondly, Apache has 3 million acres in the Permian Basin that Anadarko would really like to acquire. Anadarko had previously mentioned to analysts that it was looking to acquire more Permian acreage. The Anadarko CEO said a couple of weeks ago that they had bid on numerous assets but have been continually outbid by private equity buyers that seem to think the land is worth more than it actually is. Anadarko has a market cap of $35 billion and Apache $20 billion. Apache has a lot of gas assets, which are not highly desirable in the current market. Their offices are about 30 minutes apart in Houston.

While the offer for Apache may have put the company in play by others, I would not be a buyer of Apache today. I think the company is close to fair value given their gas weighting. However, the drop in Anadarko makes them a decent buy today. If they are running from Exxon that drop in price could force Exxon to go public. Even if they are not acquired, they have about 2.86 billion barrels of oil equivalent reserves making them a prime target for appreciation when oil prices eventually recover.



Alibaba (BABA) is in the middle of the biggest shopping day of the year called Singles Day in Asia. Analysts expect their single day sales to reach as high as $11 billion this year. Last year Alibaba did $9.3 billion in sales in 278 million orders over the 24-hour period. Sales on Singles Day this year will exceed both Black Friday and Cyber Monday sales combined.

The original 11/11 singles day celebration (the date chosen because it is a group of 1s) started in the 1990s, which morphed into buying stuff for yourself, is called a "24-hour orgy of consumption." Alibaba hijacked the day and turned it into a monster promotion. More than 6 million products are for sale from 40,000 vendors. In the first 90 minutes of the sale, which started at midnight in Beijing, the gross sales exceeded $5 billion with 72% of sales from mobile phones. Singles Day was started by Alibaba six years ago and it has spread to other retailers such as JD.com, which has about 25% of the Chinese ecommerce market.


Markets

The short description for today's market is that nothing happened. It was as though everyone was on valium or suffering through a giant hangover. On the positive side the big decline from Monday did not continue. The early morning weakness was minimal and the Dow and S&P shook off the streak of five consecutive declines.

Only five stocks accounted for the majority of the decline on the Nasdaq, the only index that closed in negative territory. The S&P found support at 2,068 on Monday and 2,069 today before rebounding back over 2,080. The rebound ended the day with a gain of only +3 points but that was +13 points off the lows.

While the market weakness may not be over at least we have a new range to watch from 2,068 to 2,115. Those are the key levels for the rest of the week.

Resistance remains 2,090, 2,105, 2,115 and 2,128.


The early Dow weakness was solely Apple with the $4 drop knocking roughly 30 points off the Dow. The late day rebounds in those top gainers below suggest the selling may be fading.

The Dow is not far from the highs from last week despite the -180 point decline on Monday. It would only take one good day of short covering to put it back near that 18,000 level. Only one Dow component reports this week and that is Cisco on Thursday after the close. That means any impact will be on Friday.

I am expecting the Dow to recover from its dip and finish higher for November. The banks should continue to provide upward lift as we move closer to the December FOMC meeting.

Without any Dow components reporting on Wednesday, we do not have any risk of disappointment. Support is 17,650 and resistance 18,000.



The biggest impact to the Nasdaq came from MSFT, AAPL, AVGO, TSLA and QCOM, which knocked a combined 12 points off the Nasdaq 100 ($NDX), which was only down -14 for the day with the Nasdaq Composite down -12.

With so many of the solar and semiconductor stocks declining it is a wonder the Nasdaq did not fare worse. The Biotech sector is in rally mode again and the $BTK gained almost 1% for the day.

There are no major Nasdaq stocks reporting on Wednesday and there were none after the close today. The Nasdaq futures are down -4 at 8:PM and the S&P futures are down -1.50. Neither decline is material.

The Nasdaq big caps led the S&P and Nasdaq 100 to their recent highs. With Apple shares crashing on the production cuts it may be difficult for the Nasdaq to lead us higher but as long as the broader market is positive the Nasdaq should be able to keep pace. Today was an outlier with Apple down -4 and weighing on the index.

Support at 5,050 was tested with a dip to 5,051 today and the rebound was almost immediate. Resistance remains 5,092 and 5,160.



The Russell 2000 rebounded +10 points from the morning low to end with a +3 point gain at 1,187. The battle line at 1,200 remains solid but within reach. The farther we move into November the stronger the small caps normally become. Let us hope this year follows the trend.


In the weekend newsletter I said I was in buy the dip mode and we got a great dip to buy on Monday. While we cannot be sure that Monday low was the bottom of the profit taking and window undressing process, it did make a good entry point. If we get another dip with a lower low, I would buy that one also.

The historical trend is our friend even if November turns out to be a weak gainer after the strong October. There is no investment alternative. Nobody wants to buy bonds ahead of a Fed rate hike five weeks from now. That makes stocks the preferred investment vehicle and we are in the best two-month period of the year. There are plenty of reasons to be bullish despite the weak Q3 earnings and the projections for Q4. Buy the dip.

Enter passively, exit aggressively!

Jim Brown

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