Traders took a nap during the Yellen testimony as they wait the next round of Brexit polls on Wednesday.

Market Statistics

Yellen said nothing of importance that we have not heard before. Yes, China is facing increased challenges. Yes, a UK vote to exit the EU could have significant economic impact resulting in a risk off move in the markets. She also said the Fed was not relying on forward guidance to direct the markets. Since they have been nearly 100% wrong, that is probably a good thing. She was asked when the Fed would begin to reduce their $4 trillion balance sheet. She said there was no timetable for liquidating those securities.

The market seemed to ignore her comments although there was a minor bout of selling at 11:20 but it just bought the Dow back into the narrow range for the day. The Dow's range for the day was only 78 points and it closed with a minimal 25-point gain.

There were no economic reports of note today. The Risk of Recession for May rose from 17% to 20%. That is the probability of the nation falling into recession over the next six months. Yawn.

On Wednesday we will endure another two hours of Yellen testimony where she tries to avoid giving specific answers that can be held against her in future sessions. However, you never know when she will suffer from foot in mouth disease and it has happened in the past. A stray off the cuff remark can have significant impact if she deviates from the established script.


What is not on the calendar above is the four surveys due out tomorrow on the Brexit vote. There were several surveys out today but they were inconclusive with different results in each. The Survation poll showed the stay camp had lost some momentum but it was still slightly ahead at 44.9% compared to the leave camp at 43.8%. The prior Survation poll published on Sunday had it 45% stay and 42% leave. The leave camp was picking up that momentum the stay camp was losing. The bottom line is that the vote will be very close.

The FT Poll of Polls is showing an average of 44% remain, 45% leave.

Recent Polls

There will not be any preliminary results published as in a general election. The exit polls are normally reported at 10:PM UK time, which is 5:PM ET. According to MarketWatch, here is the general timetable for the results in New York time.

Thursday Morning:
2:00 AM Polling stations open.
5:00 PM Polling stations close. No exit polls.
6:30 PM First announcements on voter turnout.
7:30 PM Results expected from the first counting areas.
11:00 PM Results from half of the counting areas.
Friday Morning:
12:00 AM About 80% of results will be counted.
2:00 AM All vote counting should be completed.
3:00-5:00 AM Official results expected to be reported.

Because there are no exit polls, hedge funds and investment banks have commissioned private exit surveys to give them a head start on trading. That means we should know what the result is by watching the S&P futures on Thursday night.

Stock News

After the close Tesla (TSLA) offered to buy SolarCity (SCTY) for $2.8 billion. Tesla said it offered between $26.50 and $28.50 for SolarCity, which represents a 25-35% premium to Tuesday's close. Elon Musk owns 19% of SolarCity but said he would recuse himself from voting on the deal. Musk said Tesla wanted to expand its clean energy business and the battery business would combine well with the solar business since you only get the real benefit from solar if you have a huge battery pack to store that energy. SCTY shares spiked in afterhours from $21 to $26 but faded back to $25. However, Tesla shares fell -10% from $220 to $195 and shed about $3.7 billion in market cap. Musk was probably not expecting that.



FedEx (FDX) reported adjusted earnings of $3.30 compared to estimates for $3.26. Revenue of $12.98 billion also beat estimates for $12.83 billion. However, the company said it plans to spend $5.1 billion to expand its ground network and buy more aircraft. As a result, they projected earnings of $11.75-$12.25 for the full year and analysts were expecting $12.17. They said the growth in online shopping was straining the existing shipping network. Shares dropped $2 in afterhours.


Adobe Systems (ADBE) reported 71 cents compared to estimates for 68 cents. Record revenue rose 20% to $1.4 billion and matched analyst estimates. Digital media revenue rose 26% to $943 million. Creative revenue rose 37% to a record $755 million. Creative Cloud annualized recurring revenue rose $285 million to $3.41 billion. Adobe Marketing Cloud revenue rose 18% to a record $385 million. Overall operating income rose +78%. Despite the good quarter they guided for Q2 for revenue of $1.42-$1.47 billion and earnings of 69-75 cents. Analysts were expecting $1.47 billion and 71 cents. Shares fell -5% in afterhours.


KB Homes (KBH) reported earnings of 17 cents that beat estimates for 16 cents. Revenue rose 18% to $811 million and beat estimates for $753 million. Deliveries rose 30% to 2,329 homes. The average selling price rose 2% to $346,700. Backorders rose 14% to $1.83 billion. Homes in the backlog rose 10% to 5,205. Net order value in the quarter rose 14% to $1.2 billion. Net orders rose 8% to 3,249. The cancellation rate fell from 25% to 21%. They ended the quarter with $278 million in cash and inventories of $3.53 billion. They controlled 47,283 lots of which 82% were owned. They repurchased 8.4 million shares for $85.9 million. Shares rose about 25 cents.


Hewlett Packard (HPQ) raised guidance for Q2 to 43-46 cents compared to analyst estimates for 39 cents. They reaffirmed full year guidance at $1.59-$1.69 and analysts were expecting $1.59. They see free cash flow of $2.0-$2.3 billion with net capital expenditures of $500 million. The company said it plans to use the gains from the divestiture of HPE to invest in the rapidly changing printer business. They plan to reduce inventory of printers and toner cartridges by $450 million over the next two quarters. Shares lost 40 cents on the news.


Carmax (KMX) fell -5% after reporting earnings of 90 cents on revenue of $4.13 billion. Analysts were expecting 92 cents on $4.19 billion. Sales of cars had slowed and credit was starting to be an issue. However, they did see third-party finance fees rise 30%, as they laid off some weaker credits to other finance plans. Used car prices were flat at $19,858 on average but wholesale prices were down -3% to $5,268. Overhead expenses rose and profit margins declined.


Lennar (LEN) shares spiked at the open after a big earnings beat but collapsed to a 1% loss. The company reported earnings of 95 cents that beat estimates for 87 cents. Revenue rose from $2.38 billion to $2.75 billion. Home deliveries rose 12% to 6,724 homes. One analyst speculated Lennar could be looking to acquire KBH.


Crude oil futures expired at the close at $49.95. The new August contract opened in the afterhours session at $50.29. That is not likely to hold over $50 unless the Brexit vote is to remain in the UK. An exit vote will cause low information traders to expect a decline in demand. The dollar will also rocket higher on an exit vote and that will push commodities lower.


Markets

There is really nothing intelligent to say about market direction other than watch the Brexit polls. The market will react to the polls released on Wednesday and we cannot do anything about it but watch.

However, the market does appear to be pricing in a vote to stay in the EU. If this upward bias continues on Wednesday and Thursday it could actually steal some of the impact of that vote. We could see an immediate rally on a stay vote that is met with a sell the news event.

I know it is impossible to actually predict anything. If we think the market is pricing in a stay vote then smarter institutional investors may have already figured that out and that is how we get a sell the news event. You could carry this to extremes like an old Abbot and Costello skit but since there is no real answer until we get to Friday we just have to go with the flow or wait on the sidelines.

The S&P failed at 2,100 on Monday and crept a little closer today with a 5 point gain to 2,088. However, that 2,100 and 2,116 resistance remains strong. If we did get an exit vote, the support at 2,040 is also strong. Until that range breaks in one direction of the other we are just passing time.


The Dow did not make it back to the 18,000 resistance on Monday despite the +270 gain at the open. It also crept a little higher today to close at 17,829 but the effort was lackluster. The Dow traded in a narrow 78-point range and closed only 29 points off the lows. The leaders were a mixed bag with Microsoft the biggest gainer followed by Apple, Chevron and Goldman. Boeing was the biggest loser despite signing a reported $25 billion order with Iran and a possible $4 billion order to build (10) 747-8 freighters for AirBridgeCargo.



The Nasdaq struggled and traded in negative territory much of the day only to gain 6 points at the close. The biotech sector was again the biggest drag. The Nasdaq is holding over the 4,800 level but just barely. Resistance at 4,968 remains the next target but that is 125 points away.



The weakest major index for the day was the Russell 2000 with a loss of 4 points. This is the early stages of the index rebalance that is coming on Friday as well as the weakness in biotechs. The stocks being deleted from the Russell are being shorted by speculators in hopes of getting ahead of the rebalance decline.


If you do not have to be in the market the rest of the week it would be a good idea to take a trading vacation and come back on Monday when the direction may be known and volatility should be lower. Volume was very low at just over 5 billion shares. All the smart money iw waiting on the sidelines.

At this point the market direction the rest of the week is a daily coin toss unless the Wednesday polls suddenly begin to widen with a clear outcome in sight. Even then, we cannot be sure what the market will do once the event occurs and whether or not the result will be what the polls predicted. I personally believe they will remain in the EU because I do not think there are that many people in the UK that are willing to vote in a recession. However, I cannot believe voters in the U.S. selected the two current candidates so obviously my logic does not reflect reality.

 

INDEPENDENCE DAY SPECIAL!

Welcome to our mid-year Independence Day Subscription Special. Save 50% or more on your subscription!

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see until December! There isn’t a minute to spare.  Order now.

Renew for as little as $249
for six months,
ONLY $1.38 per day


 

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now