The markets finally posted a decent day where every index participated and the Nasdaq was roaring.

Market Statistics

Today's rally was remarkable for one major reason. Five Dow components reported earnings. Those were MMM, DD, JNJ, TRV and VZ. Of those five companies, four of them were the biggest losers for the day. Those four stocks knocked more than 56 points off the Dow and that would have normally been enough to turn the direction negative for the day. Instead, IBM and DD combined to add more than 55 points to the Dow and completely erase the earnings negativity. This was a rare day indeed. Note that it only took a combined gain of 16.48 actual points to lift the Dow +112.86 points. That is the crazy part about a price-weighted index.


There was a flood of positive economic information this morning that helped lift the markets.

The Existing Home Sales for December came in slightly lighter than expected at 5.49 million with analysts expecting 5.50 million. The November headline number was 5.61 million on an annualized basis. This was still a good number for a winter month. The minor drag came from a slowdown in condo sales. Single-family home sales were 4.88 million, a decline of only 9,000 units. Condo and co-op sales were 610,000, down -70,000 from November. The homes on the market declined sharply to only 3.6 months of inventory at the current rate of sales. That was 4.7 months of supply back in July. The median home price declined from $234,400 to $232,200 but with the rapidly declining inventories, that price is sure to rise.


The Richmond Fed Manufacturing Survey continued to improve with the headline number rising from 8 to 12. The internals components, especially the new orders and employment added significantly to the headline number. The backorders declined but the inventory to order gap moved sharply higher suggesting more activity will be seen in the coming weeks.

That headline number was higher than all but one month in 2016. It is also the first time since July 2015 that the index has posted three consecutive months of gains.

In the separate services survey the headline number jumped from 4 to 15. That is the highest reading since October 2015.



The North American Semiconductor Industry (SEMI) Book-to-Bill ratio for December rose from 0.96 to 1.06. That means $106 in orders were received for every $100 of product shipped. In December, companies received $1.987 billion in orders compared to $1.865 billion in shipments. This is the last time SEMI will produce this report. They said a change in the way some companies report/track orders and billings was responsible.


The calendar for the rest of the week is uneventful except for the GDP on Friday. Traders will be focusing on the Fed meeting next week and the rate decision on Wednesday.


Dow component DuPont (DD) reported earnings of 51 cents that easily beat estimates for 42 cents. However, revenue of $5.211 billion missed estimates for $5.246 billion. They guided for Q1 earnings to decline roughly 18% year over year but that includes a 15-cent charge for the costs associated with the Dow Chemical merger. Their adjusted earnings should rise 8%. The company pushed back the anticipated date for closing the merger to the end of June and three months later than expected. The company needs the extra time to address concerns by regulators that the merger will restrict new pesticide discoveries. The EU granted them an extension until March 14th to provide additional data for review. DuPont shares soared 4.5% on the news.


Dow component Verizon (VZ) reported earnings of 86 cents that missed estimates for 89 cents. Revenue of $32.3 billion narrowly beat estimates for $32.1 billion. Wireless revenues declined -1.5% to $32.4 billion. Wireless Ebitda margins of 36.9% missed expectations for 40.2% by a wide margin. The company did not provide any update on the Yahoo acquisition other than to say they were pushing the date out another three months while they assess the impact of the multiple data breaches. The CFO said they have not reached any final conclusions yet. Shares fell -4.4% on the report.


Dow component Travelers (TRV) reported earnings of $3.20 that easily beat estimates for $2.80. Revenue of $7.19 billion also beat estimates for $6.07 billion. The earnings beat was driven by a settlement of a reinsurance dispute and higher returns from investments. Shares declined -1% on the news.


Dow component Johnson & Johnson (JNJ) reported earnings of $1.58 that beat estimates for $1.56 per share. Revenue of $18.11 billion barely missed estimates for $18.12 billion. They guided for 2017 to earnings in the range of $6.93 to $7.08 and analysts were expecting $7.11 per share. Revenue guidance was $74.1 to $74.8 billion with analysts expecting $75.1 billion. The company said the strong dollar was going to be a problem in 2017. Shares fell -2% on the news.


Dow component 3M (MMM) reported earnings of $1.88 compared to estimates for $1.87 per share. Revenue of $7.33 billion missed estimates for $7.37 billion. They guided for full year earnings $8.45 to $8.80 per share. Analysts were expecting $8.64 per share. The company beat on earnings thanks to some aggressive cost controls rather than rising sales. Revenue only rose from $7.298 billion to $7.329 billion. The strong dollar reduced sales by 0.8% and they expect the pressure to continue. Shares fell -2.50 on the news.


Lockheed Martin (LMT) reported earnings of $3.25 that beat estimates for $3.05 per share. Revenue of $13.75 billion also beat estimates for $13.03 billion. For all of 2017 the company expects earnings of $12.25 to $12.55 and that is below estimates for $12.88. Revenue guidance for $49.4 to $50.6 billion was above estimates for $49.5 billion. Shares fell -4.57 on the news.


Alibaba (BABA) reported adjusted earnings of $1.30 compared to analyst expectations for $1.15 per share. Revenue of $7.67 billion rose 54% and beat estimates for $7.48 billion. Part of the revenue surge came from a record breaking Singles Day in November. Shoppers spent $17.4 billion and Alibaba said at one point it was processing 175,000 orders per second. Alibaba does not report revenue on items sold by third parties but only on the commission received from those sales. The company is projecting 53% sales growth in 2017. That is up from the prior forecast for 43% growth. They reported 443 million annual active buyers last quarter. The monthly active "users" rose from 393 million to 493 million. Cloud computing revenue rose +115% to $254 million. Digital media and entertainment revenue spiked +273% to $585 million. Shares rallied 3% on the news. I wonder if Jeff Bezos and team are always grouped together in a conference room waiting for the BABA earnings so they can pour through them looking for strengths and weaknesses?


On the topic of Amazon, Consumer Intelligence Research Partners (CIRP) said the company sold 3.1 million Echo devices in Q4 and 8.2 million in 2016. They would have sold more but they ran out of inventory in the first week of December. For comparison, Google Home has sold about 500,000 units. With more than 3,000 branded skills for the Echo, Amazon has a big head start in monetizing the product. A skill would be something like "Alexa, schedule me an Uber ride to the airport at 10:AM on Thursday." Another example would be "ask CNBC for the latest headlines" or a "stock quote on IBM." In the future, these will not be free for the brands. Amazon earnings are Feb-2nd.


After the bell, Seagate (STX) reported earnings of $1.38 compared to estimates for $1.07. Revenue of $2.89 billion beat estimates for $2.82 billion. That was up from 82 cents in the year ago quarter. The company also announced a 63-cent dividend payable April 5th to holders on March 22nd. Analysts are going to have to come up with some new price targets. The consensus target was $39.73 and shares spiked to close at $42 in afterhours. The company guided for current quarter revenue of $2.7 billion compared to forecasts for $2.61 billion. They guided for full year earnings of $4.50 per share.


Cree Inc (CREE) reported earnings of 30 cents compared to analysts expectations for 8 cents. Revenue of $347 million also beat estimates for $325 million. However, for the current quarter they guided for revenue of $285 to $315 million and earnings of 9 cents. Analysts were expecting $315 million and 8 cents per share. Shares spiked to $30.50 on the earnings but collapsed back to $28 on the guidance.


Only two Dow components report earnings on Wednesday with three on Thursday. The Thursday calendar is strongly tech weighted and that means Friday's market open could be volatile.


Bob Evans Farms (BOBE) said they were selling their restaurants to PE firm Golden Gate Capital for $565 million. The company would then be free to focus on its refrigerated foods grocery business. They will use a portion of the proceeds to pay a special onetime dividend of $7.50. The sale is the result of a long running fight since 2013 with activist investor Sandell Asset Management to separate the BEF Foods. Separately the company is buying Pineland Farms Potato Co for $115 million. Both transactions are expected to close by the end of April.


Barclay's downgraded Apple (AAPL) from overweight (buy) to equal weight (neutral) saying there is no growth potential for Apple. The analyst said Apple would be weighed down by sluggish smartphone sales in general, not just slowing iPhone sales. Barclay's reduced the price target from $119 to $117 saying the company's sticky ecosystem and large cash holdings could continue to support the stock price near term. Currently there are 35 buy ratings, one hold rating and one sell rating on Apple shares. I expect better things out of Apple later this year when they release the 10th anniversary iPhone. I expect those sales to be strong. Apple's current challenge is resistance at $120.


Crude prices rose only fractionally thanks to a minor decline in the dollar on Monday. Today's market action was neutral. WTI declined -27 cents in afterhours to $52.91. There is no future in trading crude for the next several weeks. All the movements will be headline related and they are likely to contradict from headline to headline.



Markets

Tuesday was a very interesting day. With a couple Dow stocks outweighing four major post earnings decliners we saw a strong short squeeze in the morning hours. The S&P and Nasdaq rallied to new highs but the Russell and Dow, despite their gains, remain below resistance.

Wednesday could be even more interesting. With the S&P slightly above 2,280 we could see some more short covering. It that is strong enough it could trigger the start of a new leg higher for the S&P. Volume was strong at 7.0 billion shares and advancers were 5,266 to 1,863 decliners. New highs totaled 588 and the strongest day since December 13th, when the Dow pushed through 19,950 intraday for the first time. We have been moving sideways ever since.

The close above 2,280 was just enough to claim the statistic but not enough to really trigger any further buying. The intraday high was 2,284.63 and that was not enough to punch through that new high resistance. We need to see the S&P trade over 2,285 and hold it to convince the shorts it is time to cover and switch to longs. The S&P futures are only fractionally positive and there is no sign of buying overnight despite the Asian markets being up strongly.


The Dow finally rebounded back into its recent range but the 19,912 close is still about 88 points below the 20,000 level and as we have seen in the past, there is a lot of resistance between here and 20K. The more Dow components that report earnings, the weaker the Dow should become. The week or two of post earnings depression that follows each report is going to be a drag on the index. That is especially true if those companies continue to miss on earning, revenues and guidance.

The critical levels for the rest of the week are 20,000 and 19,800.


The Nasdaq closed with a major gain of 48 points and a real breakout to a new high at 5,600. That is a big round number so it will be interesting to see if the gains continue. The rally was a combination of chips, biotechs and the FANG stocks. Note that Apple is not in the list.

There is nothing negative about the Nasdaq chart. It was a clean breakout and is now well above that 5,530 support I wrote about for the last two weeks.



The Russell 2000 posted a strong 21 point gain but that was only enough to get it back over support but not enough to even touch that resistance at 1,375 that held all last week. The small caps appear to have relinquished their leadership role to the Nasdaq for the time being.


I wrote all last week that the Nasdaq and S&P appeared to be preparing for a breakout. Now that it has happened, we need a couple more days of gains to pull the Dow through 20,000 and help the Russell move to a new high as well. The sentiment in the market is improving on a daily basis. It appears the Trump honeymoon may have been revived. He is turning into the energizer bunny with nonstop meetings and pro growth comments. If he can keep that up for the first 100 days, we could be a lot higher by summer.

JP Morgan CEO, Jamie Dimon, not originally a fan of Trump during the primaries has turned into a convert. Almost daily, he points out the multiple positives that will push the market higher. He said something this week to the effect of "investors have not seen anything yet if Trump can actually get some of this stuff accomplished." Add to that the rebound in the global economies and Dimon expects solid 3% to 4% GDP growth ahead. That is the kind of talk that can push investors off the sidelines and back into the market.

Enter passively, exit aggressively!

Jim Brown

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