A sell program knocked the Dow to a -105 point loss in the morning but dip buyers were ready and waiting.

Market Statistics

The sell program was brief and could have been timed to coincide with the normal pre-FOMC bounce. Historically the day before a Fed-meeting announcement the market is positive. Launching a sell program into that positive market would be one way to unload some stocks without crashing a low volume market. Whatever the reason for the drop the dip buyers were waiting and the rebound was immediate. The Russell 2000 was a big gainer with a close at a new 52-week high. That is strongly bullish for the broader market.

The economic news was also good and helped to power the market higher. The New Home sales for June rose from 551,000 to 592,000 for a 3.5% rise. Analysts were only expecting a rise to 560,000. The Midwest saw sales rise 10.4% and West +10.9%. However, the Northeast saw sales decline -5.6% and the South declined -0.3%. The months of supply on the market shrank to 4.9 from 5.1 and a high of 5.5 months in the Jan-Mar period. The median home price rose sharply from $288,500 to $309,900 for a 7% increase.

Record low interest rates are helping this sales boom. Let us hope the Fed does not do anything to upset this trend when they release their meeting announcement on Wednesday.


The Richmond Fed Manufacturing Survey rebounded back into positive territory with a July headline number of 10, up from -9.6 in June. All of the internal components were positive for the first time in more than a year. New orders spiked from -17.3 to +15.0 and order backlogs rose from -12.1 to 1.0.

In the separate Services Survey, the headline number rose from zero to 8.0 for July.



Consumer Confidence for July declined slightly from 97.4 to 97.3. However, that June number was revised down from 98.0. The present conditions component rose from 116.6 to 118.3 and the expectations component rose declined from 84.6 to 83.3. Those respondents planning on buying a car declined from 12.7% to 10.8%. Homebuyers rose slightly from 4.8% to 4.9% and appliance shoppers rose slightly from 48.1% to 48.3%.


The big event on the calendar for Wednesday is the FOMC announcement and the potential for them to turn hawkish in their statement and increase expectations for a rate hike in September. Currently the market is not expecting a rate hike until early 2017 so any hawkish tone would be market negative.

Friday is the next hurdle day with the Bank of Japan stimulus announcement, the stress test results for the EU banks and the first look at the Q2 GDP. Since the core S&P earnings peak on Thursday for this cycle, the market could be fragile and react to those headline events.


It was all earnings, all the time on Tuesday. Even though Apple (AAPL) was the last to report I will discuss them first. They reported earnings of $1.42 compared to estimates for $1.38. Revenue of $40.4 billion narrowly beat estimates for $40.1 billion. They sold 40.4 million iPhones and slightly more than the 40.1 million expected. All of those estimates had been lowered dramatically over the last quarter. IPhone sales were down 17% but still beat those lowered estimates. For comparison, in the year ago quarter Apple had earnings of $1.85 and revenue of $49.61 billion.

iPad sales hit 10 million and the first gain in 10 quarters. Estimates were for 9.14 million. Mac sales were 4.3 million compared to estimates for 4.39 million. Services revenue rose 19% to $6 billion. Tim Cook said services revenue would be the size of a Fortune 100 company in 2017. Since Northwestern Mutual is the smallest company on the Fortune 100 with revenue of $28.1 billion I think Cook meant to say the Fortune 500. The 400th company on the Fortune 500 is Symantec with revenue of $6.5 billion.

Tim Cook said new customers switching from other carriers accounted for the largest percentage of quarterly iPhone sales Apple has ever measured. Apple is closing in on the sale of its billionth iPhone.

For the current quarter, they guided to revenue of $45.5 to $47.5 billion and analysts were expecting $45.94 billion. Sales in China fell -33% to $8.8 billion. Cook still bragged about the China business but it is becoming very competitive and having the highest priced phone is going to be a volume loser in the end.

Shares spiked $5 in the afterhours session to close at $101.88.


Twitter (TWTR) reported adjusted earnings of 13 cents compared to estimates for 12 cents. Revenue of $602 million missed estimates for $605.5 million. For the current quarter, the company guided to revenue in the range of $590-$610 million and analysts were expecting $682.8 million. While that guidance sounds bad, they basically guided for the same revenue as they just posted in Q2. Twitter has a lot of things in the pipeline that will not really get off the ground until Q4. They plan on live streaming one NBA and one NHL game per week along with a nightly sports highlight show covering 120 sports. They also contracted to live stream 10 NFL Thursday night games. There are dozens of other events they have lined up but most do not start until very late Q3 and early Q4.

Twitter is moving in the right direction and advertiser demand is very strong for their new services. However, they cannot book the sales until the events arrive. Average monthly users rose slightly from 310 to 313 million to break the decline streak over the last several quarters. The CFO said they were seeing sequential growth in monthly active and daily active users because of their change in format.

Shares fell $2 in afterhours trading.


Panera Bread (PNRA) reported earnings of $1.78 compared to estimates for $1.75. Revenue of $698.9 million barely beat estimates for $698.3 million. They guided for full year earnings in the range of $6.60-$6.70 per share. Analysts were expecting $6.68 per share. The CEO said, "At a time when other restaurants are feeling the impact of a slowing consumer environment, we are maintaining our momentum." Same store sales were up 4.2% to barely beat estimates for 4.1%. For the full year, the company is guiding for 4-5% sales growth. Shares rallied $7.89 in afterhours after being down -9.38 in the regular session.


The morning session was very busy for earnings with McDonalds the biggest loser and the biggest impact on the Dow with a loss of -$5.69. The company reported earnings of $1.25 that missed estimates of $1.38 by nearly 10%. Revenue of $6.265 billion also missed estimates for $6.281 billion. McDonalds blamed the strong dollar and weak international currencies for the miss.

Revenues at company own stores declined -8% to $3.917 billion but revenue at franchised locations rose 5% to $2.348 billion. Global comps rose +3.1% but that was less than the 6.2% rise last quarter. U.S. comps rose only 1.8% and was much lower than the 5.4% last quarter. The breakfast all day bounce is wearing off. McDonalds is trying to wean customers off the former $1 menu that hurt sales and profits. They are stressing the McPick 2 for $5 menu and some customers are converting.

The nearly $6 drop in MCD shares knocked around 40 points off the Dow. Were it not for a strong showing by Caterpillar with +$4 gain the damage would have been a lot worse.


Dow component Caterpillar (CAT) reported adjusted earnings of $1.09 compared t estimates for 96 cents. That was down from a revised $1.40 in the year ago quarter. Revenue was $10.3 billion, down from $12.3 billion. Management is cutting costs like crazy to offset the global decline in sales. The cut estimates for full year revenue to $40.0-$40.5 billion, down from $40-$42 billion. They cut earnings guidance from $3.70 to $3.55. The company said despite the guidance cuts and falling sales they were still optimistic about the global outlook although it was a tough economy and currency issues were a challenge.


Dow component United Technology (UTX) posted earnings of $1.82 that easily beat estimates for $1.68. Revenue of $14.87 billion also beat estimates for $14.7 billion. The company said backorders were growing rapidly. They now have more than 8,200 orders for Geared Turbofan aircraft engines. The company raised earnings guidance on the low end by 15 cents to $6.45-$6.60 per share. Revenue is expected to be $57-$58 billion compared to prior guidance for $56-$58 billion. They are working on cutting another $1.5 billion in costs, which will add $900 million in annual savings. Shares rallied $3.24 on the news.


Dow component 3M (MMM) reported earnings of $2.08 compared to estimates for $2.07. Revenue of $7.66 billion missed estimates for $7.71 billion. They lowered full year guidance from $8.10-$8.45 to $8.15-$8.30. Analysts were expecting $8.23. Shares were at a 52-week high and sold off on the lowered guidance.


Under Armour (UA) reported earnings of 1 cent that included a 3 cent charge for the Sports Authority bankruptcy. That matched analyst estimates. Revenue of $1.0 billion rose 28% and were in line with estimates. The company reiterated its guidance for full year revenue for $4.925 billion and a 24% increase. Earnings are expected to rise 8-9% to $440-$445 million. In an effort to replace Sports Authority they have entered into an agreement with Kohl's (KSS) to sell apparel, accessories and footwear at more than 1,100 stores all across the U.S starting on March 1st. Currently UA is sold in 11,000 stores in the U.S. compared to 24,000 for Nike. Kohl's said more than 400,000 customers searched the Kohl's website last year looking for the Under Armour brand. This could be a good deal for UA revenue but it may cheapen the brand since Kohl's is a low price discount retailer.


Gilead Sciences (GILD) reported earnings of $3.03 that beat estimates for $3.02 but were lower than the $3.10 in the comparison quarter. Revenue of $7.78 billion missed estimates for $7.85 billion and was down -5.7% from a year ago.

The company cut full year revenue guidance by $500 million to $29.5-$30.5 billion citing challenges in the Hep-C market including fewer patients and shorter treatment duration. This combined to produce lower revenue per patient. Shares suffered multiple downgrades.

The company is trying to increase sales of its HIV drugs as the Hep-C drugs decline in cost and usage. Sales of Hep-C drugs were down -32% in Europe but up 13% in the USA. Harvoni sales declined -28.9% but the replacement drug Sovaldi rose 5.2%. The newest Hep-C drug, Epclusa was only approved in late June but should see a sharp rise in sales in the coming quarter because of its lower side effects and single pill dosage.


Facebook and Boeing are the high profile stocks to watch on Wednesday as the earnings cycle rolls on. Thursday is the big day with Amazon and Google and the peak of the Q2 earnings cycle.


Analog Devices (ADI) said it was buying Linear Technology (LLTC) for $14.8 billion in cash and stock worth about $60 per share. That is a 24% premium to Monday's closing price on LLTC. The combined companies will be worth about $30 billion. The announcement hit the wires about 30 min before the close and shares of LLTC immediately jumped from $49 to $62 as shorts were forced to cover. That has got to be painful.


Crude prices continue to tumble on oversupply of refined products and the return to glut status for crude production. The API inventory report after the bell showed a 1.4 million barrel build in crude at Cushing Oklahoma along with a 2.3 million barrel decline overall. Crude prices declined to $42.65 on their way to $40. Some analysts now believe they could return to $35 but the general consensus is in the $38-$40 range. This will continue to weigh on energy equities. If the Fed turns hawkish and the dollar strengthens again it would be bearish for crude prices.

Morgan Stanley (MS) made a big splash in the oil market this morning when they said crude prices could spiral down as low as $30 this fall. They correctly repeated that the spike in prices was due to outages in Canada, Libya, Nigeria and elsewhere and those have mostly been resolved and the outages will not last forever. MS pointed out that the pace of production declines in the U.S. had slowed significantly and rigs were rushing back to work over the last four weeks.


Markets

The S&P rebounded from the 10-point decline this morning to close fractionally positive at 2,169. The current historic high is 2,175 from Friday. The S&P has traded in a narrow range from 2,155 to 2,175 over the last nine trading sessions. That is extremely narrow and the lack of volume suggests it is a controlled consolidation rather than a distribution phase. The difference is that a consolidation suggests there will be an upside breakout while a distribution phase suggests there will be a downside breakout. A distribution phase is generally accompanied by higher volume with advancing/declining volume roughly even. We are still averaging only about 5.85 billion shares a day and that is very light. Everyone is waiting for something to happen so they can trade in the direction of the trend.

The Fed decision at 2:PM on Wednesday could be a make or break event. If they maintain their lukewarm bias from the prior meeting, the market could move higher. If they turn more hawkish because of the stronger jobs and manufacturing reports, the market could turn lower. While nobody expects a rate hike in 2016 a hawkish tone could put the September meeting back into focus.

Hedgeye captured it perfectly in this cartoon. The rally is not over until Yellen turns hawkish.


Despite the fractional close on the S&P today the indicators are signaling weakness. They have not completely turned negative yet but they are suggesting the rally's strength is ebbing. A slip back to 2,115 or even 2,100 could be positive because it would allow some profit taking and the opportunity for new buyers to jump in.

However, the strength of today's rebound showed the dip buyers were ready and waiting so assuming the Fed does not spoil the party the market path may still be higher at least until the peak in the Q2 earnings cycle on Thursday.


Over the prior 8 days, the Dow had only traded in a 151-point range. That is very narrow for an index in the 18,500 range. On Tuesday that expanded after the -105 point drop after the morning sell program but the rebound put it right back into that prior range.

The number of Dow components reporting caused the early volatility and that is now behind us. There are still some components left but they are not the high profile variety.

The Dow established a new support level today at 18,400. That is the critical level to watch on future declines. A second break of that level may not be bought so quickly. Resistance is now 18,600 and support at 18,400. That is still a narrow range so any breakout could be significant after two weeks of dormancy.



The Nasdaq is still fighting the initial resistance band starting at 5,100 and has only managed to gain 10 points into that band. The large number of high profile tech earnings starting with Apple tonight and ending with Amazon and Google on Thursday should produce some extra volatility depending on how they report. The Apple earnings boosted the Nasdaq futures to a +29 point gain tonight but the S&P futures are holding at about +3 so not quite as bullish.



The Russell 2000 closed at a 52-week high with the breakout well above the 1205-1210 resistance level. This is a sentiment indicator for the broader market. If the Russell can add to its gains, the rest of the indexes should power higher as well.


I would not be adding new positions ahead of the Fed. There is too much risk they can say something that will cause significant volatility and possibly a market decline. I would be looking to buy a Fed generated dip once it appears to have run its course but not before Thursday. The post Fed markets have a tendency to swing in both directions before picking one on the day following the event.

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