We can thank Netflix, UnitedHealth and Goldman Sachs for Tuesday's rally with those stock helping to create a minor short squeeze.

Market Statistics

Netflix (NFLX) beat on earnings but the real beat came in the number of new subscribers. The company added 50% more subscribers than analysts expected. They added 370,000 U.S. customers compared to estimates for 309,000. They added 3.2 million subscribers internationally compared to estimates for 2.01 million. This brings their total subscribers to 86.7 million compared to estimates for 85.5 million.

Their forecast for Q4 was also robust. The company expects to add 1.45 million U.S. subscribers compared to estimates for 1.27 million. They guided for 3.75 million new international subscribers with estimates at 3.32 million. If they hit those numbers, they will end the year with about 92 million subscribers. That would be roughly $915 million a month in subscription revenue. In comparison, they posted record revenue in Q3 of $2.29 billion, up 31.7%.

The company said it was going to spend $6 billion on content in 2017, up from $5 billion in 2016. This compares to ESPN at $7.3 billion in 2016, NBC $4.3 billion and CBS at $4.0 billion. They produced 600 hours of new content in 2016 and that will rise to 1,000 hours in 2017.

There are more than 1 billion pay TV subscribers globally. With Netflix at just under 90 million streaming accounts, they have a very large addressable market just in the pay TV area. Add in the millions of people around the world that get their content on mobile phones, tablets and PCs and Netflix subscriptions are not likely to slow down in the near future. They added 130 countries in January and the service is now available in 22 languages. It took a few months for the product to catch fire in those 130 countries but now it is really taking off.

Netflix added 8 points to the Nasdaq 100 index and was responsible for a minor short squeeze in many tech stocks.


In the economic news the Consumer Price Index (CPI) for September rose +0.3% after a +0.2% increase in August and in line with estimates. The vast majority of the gain came from a +2.9% spike in energy prices. The core CPI, excluding food and energy, rose only +0.1%.

On a trailing 12 month basis the headline CPI is up +1.5% and the core CPI is up +2.2%. Apparel prices declined -0.7% with men and boys apparel falling -1.3%. Footwear fell -0.5%, toddler's apparel -1.2%, jewelry & watch prices -2.4%, new vehicle prices -0.1% and used vehicles fell -0.3%. This report will have no impact on the Fed's rate plans because the majority of the gains came from energy.


The NAHB Housing Market Index for October fell from September's 11 month high at 65 to 63 but this is the beginning of the slow season and that is still the second highest reading of the year. With mortgage rates likely to rise and the winter months ahead, the builder optimism is beginning to fade. Long-term expectations did rise slightly from 71 to 72. This report was ignored.

The calendar for Wednesday has new residential construction, the Fed Beige Book and the last presidential debate. The debate is the most important with Clinton well in front in the polls. This is her race to win or lose based on the debate outcome. If she can keep her answers brief and to the point and not get into a mudslinging contest with Trump she should win the race. Once the post debate polls are out next week, the market could pick a direction. That could happen earlier if the debate is lopsided in her favor. A word to the wise, do not count Trump out until the last votes are counted. He has more lives than 100 cats.

On Thursday, Mario Draghi will hold the ECB post meeting press conference and that could also be a market hurdle if they decided to slow down on stimulus.


After the bell, Intel (INTC) reported earnings of 80 cents compared to estimates for 73 cents. Revenue rose +9.1% to $15.78 billion and beating estimates for $15.58 billion. However, for Q4 they guided for revenue of $15.7 billion plus or minus $500 million. Analysts were expecting $15.86 billion. Shares fell -5.3% in afterhours. Stacy Smith, EVP, said the worldwide PC supply chain was full and Intel expects dealers to reduce their inventory. Intel did this to themselves. They raised Q3 revenue estimates in September for the first time in two years. That caused analysts to raise future quarters as well and now Intel is guiding below those estimates.

Revenue from the server business rose 9.7% to $4.54 billion. They warned that Q4 gains would be in the high single-digits, suggesting it would be less than the 9.7% in Q3. Revenue from PC sales tose 4.5% to $8.89 billion.


Yahoo (YHOO) reported earnings of 17 cents after the bell compared to estimates for 11 cents. Revenue declined -14% to $857 million. That was the fourth consecutive quarter that revenue declined more than 10%. They only beat earnings because of massive cost cutting and the layoff of 2,200 workers or one-fifth of their workforce.

Yahoo did not hold a conference call citing the tense negotiations with Verizon. I am sure they did not want to be forced to answer any tough questions that could worsen the hostile environment over the $4.8 billion deal. Verizon signaled last week they may be thinking about walking away from the acquisition because of the unknown damage that could result for the hack of 500 million customer accounts. With multiple class action suits claiming gross negligence on the part of Yahoo, the court could easily fine Yahoo or award the class plaintiffs a remedy of $20 or more each. That would be a $10 billion hit and Yahoo's sales price was only $4.8 billion. Verizon would be crazy to take on that kind of liability from a company that is only making $150 a million a quarter in profits with revenue in a sharp decline. Even if Verizon thought it could remake Yahoo into a profitable business, that $10 billion settlement potential is a deal killer.

Needham cut Yahoo to a hold this morning because of the potential for Verizon to walk away or drop the price significantly. None of the other bidders are going to be coming back if Verizon walks because they were not excited about the acquisition in the first place and they will be less interested with the hacking liability. If Verizon kills the deal, Yahoo shares will quickly implode because the business is shrinking and that liability could cause serious problems. Yahoo still owns $30 billion of Alibaba and Yahoo Japan stock but that was not part of the Verizon deal. The idea was to sell the core operating business and leave a shell company that simply owned that foreign stock.

Several analysts stated they were no happy with Yahoo not holding a conference call because it was an expression of weakness and the need to avoid answering tough questions. There will probably be further downgrades in the near future.


Intuitive Surgical (ISRG) reported earnings of $6.19 a 26% rise compared to estimates for $5.13. Revenue of $682.9 million rose 18% and beat estimates for $647.6 million. They shipped 134 da Vinci Surgical systems, up 14.5%. The company guided for full year procedure growth of 14-15% and shares fell on the news. Procedures completed with the da Vinci systems rose 14% in Q3 in the U.S. and 25% internationally. Intuitive received about $1,870 per procedure. Shares initially spiked on the earnings news to $747 but fell back to $710 on the guidance after closing the regular session at $722.


Linear Technology (LLTC) reported earnings of 53 cents that missed estimates by a penny. Revenue of $373.9 million also missed estimates for $377.6 million. They guided for the current quarter to revenue growth of 7.0-8.5%. Shares had been in a holding pattern while investors wait for the takeover by Analog Devices (ADI) to be completed. Shares did fall about $1 after the earnings.


Hawaiian Holdings (HA) reported earnings of $1.92 compared to estimates for $1.82. Revenue of $671.8 million beat estimates for $669.9 million. The company ended the quarter with $694 million in cash. Shares were unchanged in afterhours.


Earlier in the day, Goldman Sachs (GS) reported a 57.9% rise in earnings to $4.88 compared to estimates for $3.82 per share. Revenue from commodities, currencies and fixed income trading rose 34% to $1.96 billion. Total revenue rose 19% to $8.17 billion. Shares rallied $3.63 on the news.


Johnson & Johnson (JNJ) reported earnings of $1.68 compared to estimates for $1.65. Revenue of $17.8 billion barely beat estimates for $17.74 billion. Domestic sales rose +6.7% and international sales +1.5%. The company guided for full year revenue of $71.5-$72.2 billion compared to estimates for $72.16 billion. Earnings guidance was $6.68-$6.73 and estimates were $6.69. Shares fell -$3 to a three-month low on the news.


Dow component UnitedHealth (UNH) reported earnings of $2.17 compared to estimates for $2.08. Revenue of $46.3 billion beat estimates for $45.9 billion and was up 11.6% from the comparison quarter.

The company guided for full year earnings to $8.00 from the prior range of $7.80-$7.95. Shares spiked $9.26 on the news and added about 65 points to the Dow.


Dominoes Pizza (DPZ) reported earnings of 96 cents on estimates for 90 cents. Revenue of $567 million beat estimates for $543 million. Revenue was up +16.9% thanks to opening 316 stores in Q3. Same store sales rose +13% for the 22nd consecutive quarterly rise. Shares rose $7.50 on the news.


Harley Davidson (HOG) reported earnings of 64 cents that beat estimates by a penny and were down from the 69 cents in the comparison quarter. Revenue declined from $1.32 billion to $1.27 billion and missed estimates. They issued a lot of sector guidance and investors must have liked the combination because shares rallied 9% despite the earnings misses.


The only Dow component on the earnings calendar for Wednesday is American Express. Ebay is the biggest tech stock and the rest of the reporters are not going to move the indexes.


Markets

I wish I could say the end of October rally was off to a rousing start but today's gains were brought to you by Netflix, UnitedHealth and Goldman Sachs. Netflix added 8 points to the Nasdaq 100 index and UNH/GS combined added 94 points to the Dow. Since the Dow only gained 75 points for the day, you can blame IBM/JNJ/MCD for removing roughly 58 points and the other 25 components accounted for the rest.

The index short squeeze was big cap driven and volume was very low at 5.6 billion shares. Monday was even lower at 5.1 billion. There is no conviction in the market and everyone is waiting for the events on the economic calendar to play out.

Support on the Dow at 18,100 was not touched today after dipping below that level on Monday. The rebound was lackluster and resistance at 18,250 was not even touched. With only one Dow component reporting on Wednesday, I would not look for a big gain in the index. Resistance remains intact and support is being pressured.



The S&P gapped higher at the open to 2,138 and after moving sideways most of the day, it closed at 2,139. That is a classic short squeeze pattern. Resistance at 2,150 remains intact and support at 2,120 is critical. The 2,139 level is being watched by technical analysts as the go no-go level. Closing above that level this week indicates the buyers are coming back and below that level it favors the sellers.


Despite the big Netflix gain, the Nasdaq gapped open to resistance at 5,250 and then faded slightly as the day progressed. Support at 5,200 was tested on Monday and then resistance at 5,250 today. We have traded in that range for four consecutive days so that is now the levels to watch. Any further gains over 5,250 targets a new high at 5,339 and any breakdown targets a retest of 5,100.



The Russell 2000 small cap index is trapped in the same narrow range as the Nasdaq with 1,210 support and 1,232 resistance. The small caps were the least reactive to the earnings news and are still indicating potential market weakness ahead.


I am not expecting a big market move on Wednesday but that does not mean it cannot happen. I expect investors to hold off on any bullish commitments until after the debate and the ECB announcement on Thursday. This may be the first week of the best six weeks in Q4 but that does not mean the rally fuse has been lit. Be patient and trade what you see rather than what you want to see.

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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