The market bubble inflated again on Tuesday after Clinton appeared to win the first presidential debate.

Market Statistics

During the debate, Trump said the market was in a big, fat, ugly bubble that would collapse as soon as the Fed began to hike interest rates. He may not be too far off on that prediction but the claim did not impact the market on Tuesday.

I reported last week, since 1980, the week after the first presidential debate has been negative 83% of the time. The average decline is -1.8% for the Dow and -1.5% for the S&P.

However, I did not report the statistic that since 1992, the day after the debate the S&P was up an average of .8% according to research by Dan Clifton at Strategas Partners. The S&P rose .64% today so slightly under trend. If the long-term trend holds, the rest of the week through next Monday could be down. Obviously, this is "history" rather than a forecast. The apparent Clinton win on Monday could soften that potential decline because she represents a third term for President Obama and maintaining the status quo.

Helping lift the markets today was a blowout number on Consumer Confidence. The headline number rose from 101.1 to 104.1 and that is the highest level since August 2007. Analysts were expecting a decline to 99.0. The spread between those who believe jobs are plentiful and those who believe jobs are hard to find rose from 4.0 to 6.3 and the largest spread since August 2007.

The present conditions component rose from 125.3 to 128.5 and the expectations component rose from 86.1 to 87.8. Those respondents who believe jobs are plentiful rose from 26.8% to 27.9%. Those having trouble finding jobs fell from 22.8 to 21.6%.

However, there are always rough spots. Those expecting an income increase fell from 18.5% to 17.1% but those expecting an income decrease fell from 11.0% to 10.3%. Those planning on buying a car fell from 12.3% to 11.4%, homebuyers fell from 6.9% to 5.1% and appliance purchasers fell from 50.9% to 49.2%.


The Richmond Fed Manufacturing Survey for September improved slightly from -11 to -8 and the first time since November the survey has been in contraction territory for two consecutive months. All of the top line components contracted. The employment component at -13 is the lowest reading since 2009.

On a positive note the separate services survey rose from zero to 13 and the highest level since the reading of 15 in April. Services snapped back but that survey is highly volatile.



The Texas Service Sector Outlook Survey for September rose from 6.5 to 13.0 and a healthy rebound as well. The business conditions component rose from -5.0 to +4.7 and the highest level since July 2015. The employment component did weaken from 5.8 to 4.4 but still above the recent trend. This report is normally ignored.

The economic calendar for Wednesday is somewhat scary. With five Fed heads speaking plus Yellen's testimony to the House on financial regulation. They will probably discuss stress tests, banks trading commodities, Wells Fargo and executive compensation. Monetary policy and the impact of the election. Trump has accused her of being political and keeping rates low to keep the market high and keep democrats in power.

Yellen is probably going to maintain an even tone and try not to make waves on any topic in an effort to be nonpolitical. If Trump wins the election, I would expect her to resign shortly thereafter.

Actually, regardless of who wins, I would expect her to resign so she is not blamed when the Fed begins to raise rates and the next recession appears.

The next president, regardless of party is likely to preside over a bear market, recession, rising debt limits and rising interest rates, not necessarily in that order. There is a tremendous incentive for Yellen to announce her retirement once the new president is sworn in.

The expectations for a November rate hike have fallen to only 8.3% and the December chances have fallen to 47.6% and well below the 54.2% on Friday.



I added a new item to the calendar. The deadline for the Senate to approve at least a stop gap budget measure and avoid shutting down the government is midnight on Friday. An attempt to pass something on Tuesday failed 45-55 after weeks of negotiations. The democrats are demanding money to be allocated to fix the Flint Michigan water crisis. Republicans are promising to tackle the problem after the election in a separate Water Resources bill but democrats are objecting and want it in the U.S. budget bill. The proposed temporary funding bill would keep the government running through December 9th and provide $1.1 billion for fighting Zika. I find it hard to believe Senators would let the government shutdown only a month before the elections. That would bring people to the polls but they would be chanting "throw the bums out."

Another market mover could be the headlines out of the OPEC meeting on the sidelines of the Algerian energy conference. If talks break down, we could see $40 oil very quickly. Oil prices were down intraday but rallied after the close when the API inventories reported a decline for the fifth consecutive week. Analysts were expecting a 3 million barrel build and saw a -752,000 decline instead. Distillates declined -343,000 barrels and gasoline fell -3.7 million barrels.


In stock news, Twitter (TWTR) rallied to $23.75 after news broke that Microsoft (MSFT) and Disney (DIS) were also considering making an offer in addition to Google (GOOGL) and SalesForce (CRM). We exited the Twitter position in the Ultimate Investor Newsletter at the open this morning. I have very little confidence that a deal will be done at a significantly higher level. Even if one is announced, it will take months to close and shares are likely to weaken until nearer to the closing date. I know for sure that option premiums will evaporate instantly once Twitter announces a price and a deal. I would recommend not being greedy here if you are holding a position in Twitter.


Kite Pharma (KITE) shares rallied +9% after a clinical study of its lead cancer therapy met its primary goal. A mid-stage study showed that 76% of patients with Non-Hodgkin Lymphoma responded well to the treatment, while 47% showed a complete remission. The CAR-T treatment is the first of its kind to show significant progress and the company will now file for formal approval of the process with the FDA. Novartis (NVS) and June Therapeutics (JUNO) are also working on CAR-T therapies. The patient's own T-cells are removed and reengineered to identify and kill malignant blood cancer cells. The current treatment is by chemotherapy, which has an 8% response rate.


American Express (AXP) announced a 10% hike in its dividend to 32 cents payable on November 10th to holders on October 7th. The company also announced a 150 million share buyback program. However, that replaces a prior program that had 50 million shares not purchased so the net impact is only a 100 million share increase. After the recent stress tests the Fed approved the company's plan to buy back $3.3 billion in shares through the end of Q2-2017. The timing of the buybacks and the quantity are at the company's digression. Shares rose only fractionally.


Jelly maker JM Smucker (SJM) shares fell -$4 after a downgrade by Credit Suisse from outperform to neutral. Credit Suisse said commodity inputs have bottomed and the company would not get any further benefit from falling prices. The analyst singled out the pet food division where Nielsen tracking has shown a -2.2% decline in sales over the last four weeks compared to -1.4% over the last 12 weeks.


Shares of AutoZone (AZO) gained $20 after Morgan Stanley upgraded the company from equal weight to overweight. The analyst said the rising number of older cars on the road suggested AutoZone's business was going to improve since older cars need more parts to keep them running. More than 85% of AutoZone's inventory is failure and maintenance related products. Low gas prices tend to lead to more miles driven and more failures on older cars. Winter is hard on automotive components and it causes more failures and the need for replacement parts.


Deutsche Bank (DB) posted a fractional gain on Tuesday after making a historic low on Monday. Their problems are legion including a $14 billion fine from the U.S. Justice Dept over subprime loans. That may be the least of their worries. The bank is facing a steep capital raise and probably some extreme dilution at this level. People are warning of a potential Lehman type event at DB. Others do not believe DB will fail but they have significant problems and depositors are fleeing to avoid a European "bail in" where depositors and debt holders see their holdings cut to help liquefy the bank. With the yield on the German Bund at -0.08% it discourages savers from keeping money in the bank when they can get a higher yield almost anywhere else. These capital outflows are sinking DB. Chancellor Angela Merkel has said she will not bail out the bank. Meanwhile the European banks are sucking all the oxygen out of the European markets.

The Credit Suisse CEO said today that Q3 was going to be a tough quarter and would lead to 1,200 additional jobs on top of 4,800 already cut this year.


After the bell, Nike reported earnings of 73 cents compared to estimates for 56 cents. Revenue of $9.06 billion beat estimates for $8.87 billion. While the earnings were good, there was a problem. Future orders were 7% compared to estimates for 8.3%. Orders rose only 1% and analysts were expecting 5% because of the post Olympics ordering. That is the third consecutive quarter the company missed on future orders. Nike said it would no longer report futures orders with earnings. I guess if the number is bad then do not tell anybody. Adidas is said to be surging in the athleisure sector and Under Armour is also seeing rising market share.

Nike also said its profit margins fell -125 basis points compared to a 30-50 point rise in the prior quarter. Inventory levels also surged and they took a hit on their markdowns in an effort to exit the golf equipment business. Shares fell sharply to a 3-month low in afterhours.


Sonic Corp (SONC) reported preliminary earnings of 43 to 45 cents compared to analyst estimates for 47 cents. The restaurant chain expects revenue to decline -2%. They will not report actual earnings until Oct 24th and the warning caused a $2 drop in afterhours.


Tempur Sealy International (TPX) warned after the close that full year sales would decline -1% to -3%. In 2015, the company reported revenue of $880 million and analysts are expecting $911 million in 2016. A 3% decline would be in the vicinity of $853 million. The company also reduced EBITDA estimates from $525-$550 million to $500-$525 million. Shares fell -20% from $75 to $55.


After the debate Clinton was the assumed victor because of her calm, fact filled answers. Analysts had picked several stocks that would rise with a Clinton presidency and they were all up on Tuesday.

Deutsche Bank said buy FSLR, C, NFLX, UNH and FB.
Zacks said buy FSLR, LMT and PFPT.
Estimize said buy FSLR, UNH, FB, NFLX and CYBR.
InsiderMonkey said buy FSLR, CREE, TSLA, UNH and HUM.

Notice anything similar in those recommendations? First Solar was in every one. That stock is off to the races with a 5% gain today.


If you watched the debate, you probably have a clear idea who won. I thought Clinton won because she succeeded in getting in Trump's head and her responses were fact filled and presented rationally. I am not expressing any favoritism, just a rational view of the physical debate.

However, I must have been watching the wrong debate. The DailyMail.com, a UK website, collected all the available snap polls and published them on one page. Link Here

The polls show Trump won by a landslide. I was in shock. There are some obvious errors in the sampling since the Drudge Report and Breitbart are conservative leaning sites and therefore should have shown a preference to Trump. However, there are a lot of polls and even the ones with a liberal democratic bias like ABC had a respectable showing for Trump even though he did not win their poll. The CNN poll was very slanted. Conservatives call it the Clinton News Network because of their bias.

Which debate were you watching on Monday night?


The initial ratings are in at 81.4 million viewers but that will continue to rise because it does not capture all the cable channels or the streaming broadcasts. The S&P futures were down -5 points at 10 minutes before the debate started and then reversed back to positive territory 15 min after the debate started and Clinton was already starting to wear down Trump. The market clearly wants a Clinton victory and would prefer the republicans maintain control of the House and Senate so that nothing changes and we have four more years of the current administration.

Markets

The majority of the market gains were at the open and then again at 10:30 when the economic reports were released. The S&P hit a high of 2,160 at 12:00 and was perfectly flat the rest of the day to close at 2,159.86. The morning gains were all short covering in big cap tech stocks. IBM was the biggest gainer on the Dow.

The S&P ended the day right in the middle of the congestion range from the last two months. It closed above support at 2,150 but below resistance at 2,175. The S&P futures are down -5 as I type this so tomorrow could start off negative.


Despite having only one Dow component in negative territory the Dow failed to return to resistance at 18,250. The +133 point gain failed to erase the -166 point decline from Monday. The Dow is in a dangerous place. If it cannot rebound over that initial resistance in the next couple days, the probability of a retest of support at 18,000 will increase. The overall pattern is now negative and that suggests a retest would fail. I am not predicting that but if the historical trend prevails this could be a rocky week.



The Nasdaq 100 ($NDX) is the 100 largest cap stocks in the Nasdaq Composite. The top five stocks make up 40% of the weighting in the index with the other 95 stocks having 60% of the weighting. When AMZN, FB, GOOG, AAPL, MSFT are positive the index will be positive.

The Nasdaq rebounded 1% to 4,866 and only 25 points below a new high. If the NDX was able to break out to another new high, it could energize the rest of the market. Support is 4,800 and the old high from last Thursday is 4,891.



This was a big cap tech rally. The small caps barely moved. The Nasdaq 100 gained +1.02% and the small cap S&P-600 gained +0.16% and the mid cap S&P-400 gained +0.11%. That may have been portfolio managers throwing money at the big caps so the market does not run away from them but there were very few buyers in the small/mid caps. Until the portfolio managers begin moving back into small caps the market rally will lack conviction.



I would continue to caution not to be overly long until the market picks a direction. There is always another trade waiting as long as you have capital to invest when the volatility ends.

Make a shopping list of stocks you would like to buy at a lower level and you may get your chance.

Enter passively, exit aggressively!

Jim Brown

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