The alphabet soup in that title was instrumental in keeping a lid on the markets on Tuesday.

Market Statistics

The big weight on the market was the expectations for Apple's earnings after the close. The worry over a big miss that would drive the indexes lower kept traders on the sidelines on Monday as well with volume the second lowest of the year at 5.9 billion shares. The lowest day of the year was Monday after Easter so that day does not really count.

Apple disappointed as did Twitter and Chipotle Mexican Grill. Immediately after the reports, the S&P futures were down hard at -7.50 and the Nasdaq futures at -61. Wednesday's open may not be pretty.

The morning economics were mixed but traders were not paying attention. They were too focused on the coming Apple event. The Richmond Fed Manufacturing Survey for April declined from 22 to 14 but at least it was still positive. New orders declined from 24 to 18 but back orders rose from 1 to 11. Employment slid from 11 to 8 and capital expenditure plans improved from 15 to 22.

Activity in the Richmond area grew slower than in March but it was still a good report. Manufacturing has been weak in the area for the last year and this could be a sign growth is returning.

In the separate services survey the headline number rose from 9 to 15 and the highest level since October. The three-month moving average doubled to 12 suggesting this recovery has legs and is picking up speed.



The Consumer Confidence for April declined from 96.1 to 94.2 and pushing the three-month average to the lowest level since December 2014 at 94.7. The expectations component fell from 83.6 to 79.3 and the lowest since February 2014. The present conditions component rose from 114.9 to 116.4. Those that felt jobs were plentiful declined from 25.4% to 24.1% but those that felt jobs were hard to get also fell from 25.2 to 22.7%. Potential homebuyers fell from 6.3% to 5.4%, appliance buyers from 50.5% to 49.5%. Car buyers were basically flat at 11.7% after 11.8% in the prior report.

With gasoline prices rising and political campaigners telling consumers daily how bad things are, it is not surprising to see confidence decline.


The Durable Goods orders for March rose from -3.1% to +0.8%. Unfortunately, analysts were expecting +1.8%. Over the last 12 months orders are -2.5% below year ago levels. If you subtract defense orders that falls to -1.1%. Nondefense orders are now down -11.6% from year ago levels. Shipments declined -0.5% and backorders improved only slightly from -0.4% to -0.1%. The manufacturing sector is still in decline and the strong dollar is keeping it in decline.

The calendar for Wednesday is stacked against the market. There are several U.S. reports, the Fed meeting announcement, which could be hawkish, and the full boat of Japanese economics including the BOJ monetary policy. There is downside risk for Wednesday and Thursday's GDP could also be a risk if it comes in with negative growth.


Dow component Procter & Gamble (PG) reported earnings of 86 cents compared to estimates for 82 cents. Organic sales rose +1% but net sales declined -7% to $15.76 billion. That also included a 5% negative impact from foreign exchange rates. The higher earnings came on the back of significant cost cutting rather than rising sales. This was the seventh consecutive quarter of revenue declines. However, there is a reason for this. P&G is shrinking its vast portfolio of products to focus on the most profitable items while selling off the low margin products. However, analysts believe that focusing strictly on high margin items will provide earnings growth in the short term but provide limited growth of both revenue and earnings in the long term. The company expects full year earnings to decline 3-6% but that was slightly better than the 3-8% drop they predicted in January. Shares declined -2% on the news.


Dow component 3M (MMM) reported earnings of $2.05 that easily beat estimates for $1.92. Revenue declined -2.2% to $7.409 billion. The strong dollar reduced revenue by -3%. Revenues from the energy and electronic segments were down -13.6% to $1.1 billion. 3M is also in a restructuring phase where they are selling off non-core products to concentrate only on the most profitable operations. They cut their business from 40 to 26 segments since 2012. Shares declined $2.30 on the news.


Dow component DuPont (DD) reported a 6% decline in revenue to $7.4 billion. Much of the decline, -4%, was due to the strong dollar. Earnings of $1.39 beat estimates by a whopping 22 cents. However, the company raised guidance for the full year from $2.95-$3.10 per share to $3.05-$3.20 per share. They said the dollar would not be as big an issue in Q2 with only a 2% impact. DuPont still believes the $130 billion merger with Dow Chemical is on track but there will be significant regulatory issues. The deal would create one company called DowDupont and then split into three independent public companies focused on agriculture, material science ans specialty products. DuPont shares rose 2.4% on the news.


Whirlpool (WHR) reported GAAP earnings of $1.92, down from $2.38 in the year ago quarter. Adjusted earnings of $2.63 missed analyst estimates for $2.68. Revenue of $4.6 billion saw a -$750 million hit from currency issues. They guided for the full year to earnings of $14.00 to $14.75. Shares fell $6.60 on the news.


Hershey (HSY) reported earnings of $1.10 and beat estimates of $1.05 by a nickel. Net revenue of $1.83 billion missed estimates of $1.91 billion. Revenue declined -5.6% with a -1.2% impact from the strong dollar. The company said revenues declined due to a shorter Easter selling season because of the position on the calendar. Sales in North America declined -4.3% to $1.63 billion. Sales in the international segment fell -15.4% to $195.3 million. Currency impact reduced those sales by 7.3%. Sales in Mexico rose 4.2% and 9.6% in Brazil. Chinese sales fell -37% due to problems with sell-in related to the Chinese New Year items. HSY shares fell -2% on the news.


After the bell Twitter (TWTR) reported earnings of 15 cents compared to estimates for 10 cents while revenues of $595 million rose +36% but still fell short of estimates for $608 million. Twitter said it expects Q2 revenue of $590-$610 million and analysts were expecting $678 million. Monthly active users rose only 3% to 310 million compared to estimates for 308 million. The company said major advertising brands cut back on spending in the quarter. The company said they were developing and would deliver additional features for advertisers later this year, including more detailed demographic targeting and verification, and offer frequency planning and purchasing. Twitter shares collapsed from the $17.75 close to trade at $15.35 in afterhours.


Apple (AAPL) shares collapsed to $96 from a $104.35 close after the company reported earnings of $1.90 that missed already lowered estimates of $2.00. Revenue of $50.56 billion missed estimates for $52 billion and was well below the $58 billion in the comparison quarter. iPhone shipments were 51.2 million, down -16% from 61.17 million. Analysts were expecting 50.3 million. Analysts had cut estimates so many times they were overly bearish. Apple raised the dividend 10% and added $50 billion to the stock buyback to lift it to $250 billion.

The company sold 10.3 million iPads, down -19% but beating estimates for 9.4 million, and 4.03 million Macs, -12% and missing estimates for 4.6 million. Service revenue rose +20% to $6 billion. "Other" revenue which includes the watch was $2.2 billion. Apple guided for the current quarter to $41-$43 billion in revenue and analysts were expecting $47 billion and that was the already dramatically lowered estimate. This guidance is very bearish. Tim Cook said Apple was only in the "early innings" of the iPhone cycle. Despite having Apple streaming turned off in China, he still felt good about the future for iPhone sales there saying the Chinese economy was "stable."

The bearish guidance for the current quarter is going to hit all the Apple suppliers and this should weigh on the Nasdaq on Wednesday. Nasdaq futures are down more than 60 points in afterhours.


Chipotle Mexican Grill reported a loss of 88 cents compared to estimates for a loss of 95 cents. Revenue declined 23.4% to $834.5 million and transactions declined -21.1%. Same store sales declined -29.7%. This was expected after a series of food problems at multiple stores. The company gave out more than six million free burritos and one million chips, salsa and guacamole orders in an effort to bring customers back into their stores. All this free food caused the average ticket to decline up to -5%. During the quarter, they opened 58 new stores and expect to open 220-235 stores by the end of this year. JP Morgan predicted their comps would not return to normal until Q1-2018 and that earnings growth would double in 2017. They expect 20% earnings growth through 2020. Chipotle did not give guidance for earnings, saying it would depend on the rate of recovery. Shares declined -$25 to $427 in afterhours trading.


Ebay (EBAY) reported earnings of 47 cents that beat estimates by 2 cents. Gross merchandise volume rose 1% to $20.45 billion. Active buyers rose +3.8% to 162 million. The company guided to current quarter revenue of $2.14 to $2.19 billion and earnings of 40-42 cents. Full year revenue is expected to be $8.6-$8.8 billion compared to the prior forecast of $8.5-$8.8 billion. Shares spiked to $26.25 in afterhours but fell back to $24.75 and a gain of only 25 cents.


Chinese regulators shutdown the content partnership between Alibaba (BABA) and Disney (DIS) called DisneyLife. The over-the-top streaming service was just launched in late 2015. The mouse shaped receiver cost $123 (799 yuan) and only needed an internet connection. This came after regulators shutdown Apple's streaming content service last week. Alibaba would only say the service was down for an upgrade but they immediately began issuing customer refunds. The Disney cartoon characters were in shock over the move to censor cartoons.


After the bell, the API reported a decline in crude inventories of -1.07 million barrels. However, inventories at Cushing rose +1.9 million. Gasoline declined -400,000 barrels and distillates fell -1.0 million barrels. Crude prices rallied 40-cents on the news but it will depend on the EIA numbers on Wednesday to see if the gain will stick.

WTI rallied a whopping 4.7% during the regular session and completely erasing the drop to $42.50 yesterday. The Monday decline came after Bank of American warned that the recent rally lacked any fundamental underpinning and could collapse at any time. Saudi Arabia announced a financial restructuring program based on $30 oil. All of those headlines evaporated when the dollar sank to a three-day low at the open. The dollar recovered into the close but the short squeeze in oil was already in full bloom. If the Fed gives a dovish statement tomorrow afternoon, the dollar could weaken again.



Markets

The markets traded sideways on low volume of 6.4 billion shares while they waited for the Apple earnings to pass. The small caps ignored the danger and the Russell 2000 and S&P-400 both gained more than 12 points with the S&P-600 adding 9 points. The NYSE Composite Index, which contains a high number of small and mid cap stocks, added 57 points while the Dow only garnered +13 and the S&P +4.

The resurgence of the small caps is good for market sentiment but Wednesday is likely to be a big cap day. The drop in Apple is going to impact the Dow, Nasdaq and S&P. However, it is only one stock and there could be a relief bounce by the rest. S&P futures are still negative at -6 and -50 on the Nasdaq so we should start off in the hole unless something changes by morning.

The S&P has gone dormant below resistance at 2,095 and above support at 2,075. As each day passes and more companies report, it will become more difficult for the index to move higher. As each company reports they are normally followed by a period of post earnings depression even if the immediate reaction is positive.

A break below 2,075 could test 2,042 and a break over 2,095 targets the 2,111 resistance high from last week.


The Dow was helped by a couple of component headlines today. Those positive reactions will begin to evaporate tomorrow. PG and MMM reported earnings but suffered large losses to drag on the index. Boeing was up strongly after receiving a large order from China. Caterpillar was up on an upgrade to buy from Argus Capital.

Apple will be a roughly 65 point drag on the Dow at the open thanks to its -$9 drop in afterhours. It would take a couple of really good earnings reports from Boeing and United Technology to offset the drag from Apple on Wednesday.

The index is stuck between resistance at 18,165 and support at 17,925. The old adage "the path of least resistance is down" has never been truer but the new high syndrome is still in place. Traders may try to reach that new high before they give up on the long-term direction.



The Nasdaq will be the battle ground on Wednesday. If investors realize how bad the Apple guidance really was there could be lower lows for the company on Wednesday. I mentioned last week we could see $94 on Apple and that is entirely possible if not lower. However, some analysts are recommending a dip buy here because of the 10% increase in the dividend and the additional $50 billion added to the stock buyback. We could see investors rush into the void but I would be surprised. I would personally want to see if a bottom appeared before committing new money to the company.

The Nasdaq has closed at resistance at 4,900 for three days and it should start the day off under 4,850 on Wednesday. That will make resistance at 4,900 that much stronger on the next rebound.



The Russell 2000 closed at a four-month high and just below resistance at 1,165. This was an outstanding performance for the small cap stocks and suggests underlying market strength despite what the big cap indexes are projecting. The Russell has a long way to go to a new high with the 1,165 and 1,200 resistance likely to be formidable.


I am neutral for the market on Wednesday. We know we are going to start negative unless a miracle happens overnight to lift the futures. The worry over a potentially hawkish Fed statement could keep investors on the sidelines until after 2:PM. Uncertainty over the potential Bank of Japan actions overnight could also keep them on the sidelines. I would pick Thursday as a directional day after all the various headlines are dissected. I still believe the big cap indexes are facing significant resistance but I am glad to see the small and midcaps leading the market with gains. The Dow Transports were also up strongly with a 91-point gain. That confirms the strength in the small caps. We just need the big caps to shake off the earnings weakness but that may be too much to ask. Apple will continue to be a key stock. If Apple rebounds from its opening drop then market sentiment would improve significantly.

Enter passively, exit aggressively!

Jim Brown

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