The big cap indexes shook off some high profile earnings disasters and the Dow posted a new nine-month high.

Market Statistics

A falling dollar, rising oil prices and a continued short squeeze in energy stocks and earnings from Dow components Goldman Sachs and United Health helped to overcome some big decliners. IBM dropped -$10 intraday to knock about 70 points off the Dow but the gains in GS, UNH, JNJ, DIS and CVX helped to erase that deficit.

The Nasdaq was not so lucky with Netflix (NFLX) and Illumina (ILMN) losing -$14 and -$41 respectively. Google, both of them, lost more than $10 each and Amazon sank -$7.50 to knock -20 points off the index.

Traders also shook off some negative economics to start the day. New residential construction for March came in at an annualized rate of 1.089 million homes and missing estimates for 1.170 million by a wide margin. The February rate was 1.178 million making March activity an -8.8% decline.

Given the relatively warm weather in March, this was a major miss for new housing starts. Single-family starts declined from 841,000 to 764,000 and multifamily starts declined from 353,000 to 325,000. New permits, normally a gauge for future activity also declined. Single-family permits declined from 736,000 to 727,000 and multifamily permits declined from 441,000 to 359,000.

The only bright point was a rise in completions from 1.025 million to 1.061 million or +3.5%. Housing starts, even at this depressed rate, are still 14.2% higher than March 2015. Single-family starts were up +22.6% from the prior March. The biggest decline in new construction came from the Midwest with a -25.4% decline.


After the close today, the API reported weekly crude inventories rose by 3.1 million barrels and higher than the 1.6 million estimate. The EIA forecast for Wednesday is for a 3.5 million barrel build. Crude futures sold off slightly on the report to $40.50, a -57 cent decline. May WTI futures expire at the close on Wednesday. This is why prices have been up this week. All those shorts ahead of the Doha meeting on Sunday had to cover their positions before the futures expire. Next week could be a different story for price direction.

The inventory build was expected to be light because the 590,000 bpd Keystone was closed for a week to fix a leak. That kept nearly 4 million barrels from moving south and into the refinery system.


Tomorrow we will get existing home sales as we head into the spring selling season. For sale signs are popping up all over my neighborhood where there have not been any for the last three years. This suggests homeowners may be sensing a top in prices and have the urge to cash out. There may also be an increasing trend to downsizing as the baby boomers look for smaller and cheaper homes closer to doctors.

The next big economic hurdle is the FOMC meeting next week. Nobody expects the Fed to move but everyone is still cautious ahead of the event.


Goldman Sachs (GS) reported the worst quarterly results in four years because of volatile markets that kept clients from trading and investing. Q1 revenues declined -40% from $10.62 billion to $6.34 billion. Fixed income, currency and commodities trading revenue fell -47%. Equity trading revenue declined -23%. Earnings fell -60% to $2.68. Analysts were expecting $2.48 on revenue of $7.11 billion. In the year ago quarter Goldman earned $4.68 on revenue of $7.27 billion. Despite the big decline in earnings, Goldman shares rose +$3.63 on the news. This was definitely a case of "less bad" results generating a relief bounce.


UnitedHealth (UNH) reported adjusted earnings of $1.81 compared to analyst estimates for $1.72. Revenue rose +25% to $44.53 billion. The company raised guidance for the full year to $7.75-$7.95 compared to analyst estimates for $7.73. Shares rose +$2.69 on the news.

UnitedHealth said they were exiting the Obamacare exchanges in all but a handful of states because they were not profitable. They expect to lose $475 million on the public exchange business in 2016, down from a $700 million loss in 2015. UnitedHealth now offers exchange plans in 34 states and said those would be reduced to a "handful" for 2017. Arkansas, Georgia and Michigan are already confirmed drops and there will be many more states disclosed in the coming months. United said the higher risk profile of this market segment means we can no longer serve it on an effective and sustained basis.


Johnson & Johnson (JNJ) reported earnings of $1.68 ($4.69 billion) that beat estimates by 3 cents. Revenue rose +0.6% to $17.48 billion and matching estimates. The strong dollar cost them 3.3% of revenue growth otherwise it would have been a blowout. In the consumer segment currencies reduced revenue by 9.3%. The company raised revenue guidance by $400 million to $71.2-$71.9 billion and earnings by 10 cents to $6.52-$6.68 per share.


Harley Davidson (HOG) reported earnings of $1.36 compared to estimates for $1.29. Revenue rose from $1.67 billion to $1.75 billion. International sales rose +4.5% but U.S. sales slowed due to increased competition. Sales in Latin America fell -26.5%. The company guided to deliveries of 269,000-274,000 motorcycles in 2016, up +3% from 2015. Shares opened up initially but declined -2.5% for the day.


After the bell, Intel (INTC) reported earnings of 54 cents that beat estimates for 48 cents. Revenue of $13.702 billion was short of estimates for $13.8 billion. They guided for Q2 revenue of $13.5 billion give or take $500 million. Analysts were expecting $14.2 billion. The company said they were going to continue to restructure and would cut another 12,000 jobs globally over the next year. They will take a charge of $1.2 billion in Q2 for the layoffs. The CFO is also moving to head sales and manufacturing and out of the CFO position. The CEO said Intel is evolving from a PC company to a company that powers the cloud and billions of smart connected and computing devices.

Intel expects PC sales to decline in the "high single digits" in 2016. However, servers and datacenter demand for high-end chips is robust. When asked if PC sales would decline so much that Intel would no longer be able to invest in other parts of the business the CEO said he was not worried because the restructuring would make the company more profitable and other business areas were expanding rapidly. Shares declined about 70 cents in afterhours.


Yahoo (YHOO) reported earnings of 8 cents compared to estimates for 7 cents. Revenue of $1.09 billion beat estimates for $1.08 billion. There was a news story out last week that Yahoo was buying traffic from other search engines and websites in order to keep overall revenue numbers higher until after the company was sold. Organic revenue was reportedly declining as Yahoo's once popular pages became stale.

They guided to Q2 revenue from $1.05-$1.09 billion and that missed estimates for $1.1 billion.

Reportedly, only two companies actually submitted bids to acquire Yahoo out of the 40+ that had expressed interest. Verizon and YP Holdings, formerly known as Yellowpages.com actually submitted bids. Time Inc, Alphabet, Comcast, AT&T and IAC Interactive stepped out of the bidding at the last minute prior to the Monday deadline. There was no word on what prices were bid but analysts believe the core business is worth $3-$5 billion and Yahoo is reportedly asking $10 billion. Given the two bidders, Verizon is likely to be the winner if a sale is completed. Yahoo shares rose 30 cents after the bell.


Discover Financial (DFS) reported earnings of $1.35 and beat estimates for $1.29. The company said charge card volume rose +4%. Shares rose +3% in afterhours.

Intuitive Surgical (ISRG) reported earnings of $3.54 compared to estimates for $3.43. Shares rose +2% in afterhours.

Shares of VMWare (VMW) rose nearly 6% after reporting earnings of 86 cents compared to estimates for 84 cents. Revenue of $1.59 billion beat estimates for $1.57 billion.


Myriad Genetics (MYGN) was crushed today after Medicare said it priced a hereditary breast cancer test at $622 compared to a similar test from Myriad at $2,180. InVitae (NVTA) had requested a price of $950 on the new test, which was already less than half the current rate. While Myriad's test is slightly more comprehensive and does not have the same Medicare code, the impact was to sentiment as Medicare tries to cut costs. MYGN fell -7% on the news and NVTA was unchanged.


Viacom (VIAB) shares fell -8% after the company warned viewers of Dish TV that Viacom channels including MTV, Nickelodeon and Comedy Central could be blacked out after today because of a contract dispute. This impacts 14 million subscribers. Viacom has been trying to renegotiate a contract with Dish at a lower price and Dish has refused. A blackout could cost Viacom 15% of its revenue. Viacom began running notices on its programming warning a blackout was possible. Dish replied back saying "We regret that Viacom has chosen to involve customers in a business negotiation when time remains to reach an agreement." Multiple cable TV operators have dropped Viacom over the last year. The Dish CEO, Charlie Ergen, is a former professional poker player, so I would say the odds favor a resolution in the favor of Dish.


Lexmark (LXK) announced after the close it had agreed to be acquired by a consortium led by Apex Technology, Legend Capital Management and PAG Asia Capital for $3.6 billion. The all cash deal for $40.50 per share. This was a 17% premium to the share price. The deal is expected to close in the second half of the year pending regulatory approval. While the three purchasers are in China, the company headquarters will remain in Lexington Kentucky.


Dow components American Express (AXP) and Coca Cola (KO) report earnings on Wednesday along with a bunch of tech stocks plus US Bank, United Continental and Yum Brands.


Markets

The rally that refuses to die continues to climb the bricks in the wall of worry to progressively higher levels. From a technical point of view, this should not be happening. Resistance has proven to be almost invisible and weak economics and earnings are being ignored. This is the new high syndrome in full bloom. The closer we get to the prior highs the less the fundamentals matter. As Spock would say, "Jim, it is not logical." If you want logic, you should not look in the stock market.

The S&P rallied to close just over 2,100 and over the initial resistance band from Q4. The next hurdle will be the 2100-2115 range and then the upper band at 2116-2128. With the S&P only 29 points from a new closing high it would appear the fix is in. It would take a significant change in sentiment to send the market lower today. The big declines in Netflix, Illumina, the Google(s), Tesla, Amazon and Priceline today barely dented the Nasdaq for a -20 point loss. The Nasdaq 100 lost -32 but the Composite is the index in focus.

The Dow shook off a 10 point decline in IBM for -70 Dow points and still closed positive thanks to "less bad" earnings from Goldman Sachs and some help from JNJ and UNH. That is all the proof you need that the prior highs are going to be tested.


The Dow has almost touched the sky with its high at 18,103 today. The high close last May was 18,312 and it is very close. The pesky resistance from 18,110 to 18,165 has to be crossed first but in this rally that is almost a given.

Eventually fundamentals and economics will matter and that will probably happen when the new high is made. Traders typically lose interest once the high is made and they immediately begin making plans for the next leg down. We could be setting up for a very wide double top but we will deal with that formation once it appears.

There are still ten Dow components to report this week but none should have the impact of IBM and Goldman. Support is now 17,750 followed by 17,600.



The Nasdaq has traded over resistance at 4,900 for the last five days but it cannot seem to seal the deal with a move over 4,950. Once over that level the real resistance is 5100-5160 and then the historic high close at 5,218. The Nasdaq has been lagging the other indexes because of the impact from the biotech sector. The Biotech Index lost -2% today due to various headlines from the cancer conference currently in progress.

Nasdaq futures are -9 tonight as a result of the Intel earnings and there are some big names reporting over the next couple days that could also sour sentiment. I am not as convinced the Nasdaq will make a new high as I am the Dow will complete the task. Time will tell.




The Russell 2000 sprinted over downtrend resistance and the 200-day average and has not looked back. All the small cap, mid cap indexes are outperforming. If the Russell can move over resistance at 1,165 that could produce some additional bullish sentiment for the broader market.


By all rights, the market should be declining. S&P futures are down -4.50, Nasdaq -9.50 and Dow futures -38 as I type this. In theory, that should mean a negative open but we were down -14 on Monday morning and rebounded into a major short squeeze. That energy squeeze has one more day to run. Some energy stocks are up more than 10% over the last two days because shorts are being squeezed. If WTI rolls over after the expiration at Wednesday's close, that short squeeze will fade and we could be looking at a different market.

The euphoria over "less bad" earnings will eventually run its course as well but probably not until the Dow makes a new high. I would be very cautious over adding new longs at this point but I would not back up the truck on new shorts until the new highs are reached. The sell in May cycle is still several weeks away so pace yourself. There is no rush to add positions in either direction.

Enter passively, exit aggressively!

Jim Brown

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