Tuesday was a shocker for most traders after the Nasdaq 100 closed at a new high on Monday.

Market Statistics

You can never take anything for granted in the market. Today was a prime example of why you should monitor your stop losses every day. Big gains like those we saw on Monday can be erased just as easily the very next day.

The market has continued its string of alternating gains and losses as the October volatility increased. There were as many opinions about why the market fell sharply today as there are investors. The most common reasons were the strong dollar, falling oil prices, treasury selling, worries over China, Q3 earnings, election uncertainty, rate hikes and there are probably at least a dozen more. Just remember the first two weeks of October are normally negative and volatile and this is the second week and we have three days to go.

There was only one economic report today and it had no bearing on the market. The NFIB Small Business Survey for September declined from 94.4 to 94.1 and a four-month low. The internal components were mixed but flat with August. There was not enough change to bother listing them here.

The big event on the calendar for Wednesday is the FOMC minutes. Analysts will be trying to decide if the Fed is going to pass on hiking in November or is that really a live meeting. This could be a volatile report depending on the content.

The rest of the week will be more focused on earnings than economics. Yellen's speech on Friday is not expected to contain any rate hike comments but you never know in advance.

A lot of the major banks report earnings on Friday and that will be an inflection point for the market. Bank stocks have been rising on rate hike expectations and earnings could either accelerate those gains or stop them entirely.


One of the major factors impacting the market at the open was the earnings warning from Illumina (ILMN). The company warned after the bell on Monday that revenue for Q3 would be in the range of $607 million, significantly lower than their prior guidance of $625-$630 million. Analysts were expecting $628.1 million. They also warned that Q4 revenue would be flat to only slightly higher sequentially. They blamed the shortfall on fewer than expected orders for their gene sequencing instruments. That new revenue number is still a 10% increase from the comparison quarter. Shares crashed from the $185 close to $133.80 at Tuesday's open. Shares traded sideways the rest of the day between $135-$140.


The drop in Illumina upset investors all across the biotech sector. Stocks totally unrelated to Illumina were down hard. For instance, Flexion (FLXN), a company that makes pain medication for arthritis fell -7%. The Nasdaq losers list was almost entirely biotech names. The Biotech Index ($BTK) dropped -3.7% and crashed through support at 3,250. This biotech weakness knocked the Nasdaq and the Russell 2000 for big losses.


This morning before the bell Seagate raised its revenue and margin guidance and several brokers issued positive comments on the stock and sector. However, Seagate shares fell -7.5% and Western Digital (WDC) shares fell -4.5%. There was nothing in the upgraded guidance that could have caused the selling. This was purely a sell the news event. Portfolio managers probably though, "ok the good news is out, let's move on to something else." It is very tough to trade around these kinds if events. Good news is supposed to be good news.


After the bell Fortinet (FTNT) warned that Q3 revenue would be in the range of $311 to $216 million, down from prior guidance of $319-$324 million and below consensus of $322.4 million. They also lowered earnings guidance to 15-18 cents from 17-18 cents. Analysts were expecting 18 cents. Total billings will now be in the range of $343-$348 million, well below prior guidance of $372-$376 million. The company blamed "the lengthening of deal cycles as enterprise customers become more strategic with their purchasing decisions and buying with less urgency than last year." Peer stocks in their sector include FireEye (FEYE), Palo Alto Networks (PANW) and Checkpoint (CHKP). FTNT shares fell from $34 to $28 in afterhours. Shares of PANW fell -$7 to $148.50.



Apple shares were up strongly at the open on news Samsung had permanently discontinued the Note 7. As the biggest competitor to Apple's iPhone, this is a windfall for the iPhone 7. Tens of millions of Samsung customers will be forced to either buy an older model Galaxy or jump ship and move to the iPhone. I can just visualize Apple CEO Tim Cook walking down the halls at the Apple complex, high fiving everyone he passes.

This is a major blow for Samsung because it means they will basically be forced to skip a model year and go back to the drawing board to figure out why the phones are blowing up, then reengineer them for 2017. With tens of millions already produced, this is going to be very expensive.


Twitter (TWTR) was one of the few stocks that posted gains today after news broke they are still in talks with SalesForce.com about the acquisition. Reportedly, CEO Tom Dorsey, is sending out companywide memos extolling the virtues of remaining an independent company. He is also trying to keep employees from jumping ship on worries nobody will buy the company and it will fail. In his memo he called Twitter, "The Peoples News Network."

"We're only limited by our sense of urgency. Life is short. Every day matters. And the people who use Twitter every day deserve our best. They are why we're here. So let's show them what we're made of and deliver a better Twitter faster than they thought possible. We can do this every day. We can do this!," he wrote in the memo.


Before the bell Alcoa (AA) reported earnings of 33 cents that missed estimates of 35 cents. Revenue of $5.21 billion also missed estimates for $5.33 billion. The company said global automotive production would only rise between 1-4% in 2016 and aircraft deliveries will be flat to +3% for the year. This will be their last earnings report before splitting into two companies in November. Shares fell -11.4% from $32 to $28. The earnings miss contributed to the negative sentiment in the markets.


Fastenal (FAST) reported earnings of 44 cents that missed estimates for 45 cents. Revenue of $1.013 billion also missed estimates slightly. The company said OEM and construction fastner sales remain "relatively weak" reflecting the continued weakness in the heavy equipment and construction markets. Shares fell -5% on the news.


On the positive side Barracuda Networks (CUDA) reported earnings of 21 cents that easily beat estimates for 13 cents. Revenue of $87.9 million rose 12% and beat estimates for $85.2 million. Active subscribers rose 14% to more than 298,000. Shares spiked 10% in afterhours.


Treasuries have been selling off for more than a week on expectations for an eventual rate hike. While November may not be likely, the odds for December increase with every passing day. Furthermore, comments from other central banks suggest the global easing cycle may be coming to an end. The Fed will be the first central bank to hike rates and that anticipation is lifting yields and the dollar. We may be setting up for the "great rotation" where hundreds of billions of dollars currently sitting in the bond market suddenly begin moving back into equities.

The rising dollar is going to weigh on commodities and could easily blunt the OPEC oil rally.



Oil prices saw another boost on Monday after Putin said Russia was ready to join OPEC in reducing production. I will caution everyone once again, this is just talk, timed to lift oil prices over the normally weak October period.

OPEC is not going to meet until November 30th and even if they do announce an agreement to reduce production, no OPEC member is actually going to cut a significant amount of production. They may say they will cut but they have never stuck to the terms of any prior agreements.


The political uncertainty did not ease after Sunday's debate. If anything, it actually became even more uncertain. The voting public is becoming increasingly hostile towards the opposition candidates and the rhetoric between the candidates is becoming even harsher. The republicans are self-destructing and that just makes them more frantic to pull down Clinton. The next four weeks are going to be ugly and the market does not like increased uncertainty. There is a credible threat that the democrats could potentially take back the senate and reduce the amount of gridlock. That could produce rampant spending and send the $20 trillion in debt to even higher levels.

Markets

On Tuesday, the market broke out of its complacency range and plunged to test resistance across the board. The S&P dipped to 2,128 from Monday's high of nearly 2,170. The selling was constant until 2:30 when a few dip buyers finally appeared. The support at 2,145 was soundly broken and that puts the mid September support at 2,120 firmly in focus.


The Dow dipped to below 18,100 intraday but the pattern break was not as start as the S&P. The Dow has seen some wide ranges and today was just a continuation of the wider range. However, the close at 18,128 puts the Dow within range of critical support at 18,000.

The Dow chart does not scare me because there are other indexes that present a bigger problem. Friday is when the Dow components begin reporting and continuing through next week. If the earnings from the Dow components are similar to those we have seen from Honeywell, Dover, PPG and Alcoa, we are in big trouble.



The Nasdaq 100 closed at a new historic high on Monday, eclipsing the old high by 2 points. Today, all the gains for the last two weeks were erased with the drop back to nearly 4,800 and critical support. This was caused mostly by the crash in the biotech sector as a result of Illumina. There are no material tech earnings this week but next week is a full calendar and we need them to be positive.

A break below 4,800 targets 4,700 but I am not expecting that this week.



The small cap indexes scare me more than the big caps. Both the indexes broke lower support and moved to new levels. This was due to the large number of small cap biotechs but it is still a problem. If they continue lower, it would be very bearish for market sentiment.



I would like to believe the Tuesday sell off was triggered by Illumina and Alcoa in an already volatile market. However, we are in the second week of October and historically a very volatile week with a downside bias. Those earnings disasters could have just been the straw that broke the market's back or they could have just been one more factor in an already confused market.

I would continue to urge not to be overly long and maintain a shopping list of stocks you would like to buy at a lower level. We may never get that chance but if we do, we need to be ready.

Enter passively, exit aggressively!

Jim Brown

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