The markets were relatively well behaved despite the highest volume day in 2017.

Market Statistics

Stocks sold off on worries over the president's speech tonight. The selling was not heavy and more of a lack of buyers and a minor bit of profit taking. However, volume was very heavy at 7.9 billion shares. Declining volume was 5.5 billion to 2.2 billion shares of advancing volume. Declining stocks were 5:2 over advancers right in line with the volume.

Investors are afraid the president will either say too much about the wrong topics or not enough about the right topics and there could be a sell the news drop on Wednesday if that was the case. With the market so overbought, everything is prices to perfection with an average of about 500 stocks making new highs every day. That means there is a significant risk of major profit taking if investors do not hear what they want.

The president is not a polished public speaker so it will be harder for him to impress investors with economic optimism is already at maximum.

On the positive side, the market could have sold off a lot more today and did not even with the heavy volume. That means the dip buyers are alive and well and will probably buy any volatility dip on Wednesday.

The Dow did break its string of record closes with a minor decline today. The Dow tied the prior record at twelve days and one more day would have been the longest ever.

Note the somewhat rounding top on the Dow chart below. The gains over the last week have been minimal so there is some concern being shown despite the record string. Now that the string has broken, there is a stronger possibility of further weakness.


It was a busy day economically. The GDP revision for Q4 was unrevised at 1.9% and the same as the initial reading. The analyst consensus was for a rise to 2.2% and Moody's expected 2.3%. This compares to a 3.5% growth rate in Q3. Consumer spending contributed 2.05% of that headline reading.


The Richmond Fed Manufacturing Survey for January rose from 12.0 to 17.0 and the highest level since last March. New orders were especially strong with a rise from 15.0 to 24.0 and the highest level in seven years. Backorders rose slightly from 4.0 to 8.0. Expectations for future shipments rose from 50 to 53 and expectations for new orders rose from 44 to 53. Manufacturers are definitely turning bullish.

The separate services survey was flat with January at 15. The expected demand component rose from 38 to 51 and a 12-month high. Expected retail demand rose from 51 to 69. Overall, the service sector improved, only the headline number remained flat.



The Texas Service Sector Outlook Survey for February declined from 16.2 to 14.1. Optimism appeared to decline slightly. The expected selling prices component fell from 12.5 to 5.2 and capital expenditure plans fell from 10.9 to 9.8. With the energy sector rebounding, the Texas service economy should be improving because of the thousands of people going back to work. The report was ignored.

The U.S. Trade Deficit for January expanded from $65.0 billion to $69.2 billion. Exports fell -0.3% to $126.2 billion with imports rising 2.3% to $195.4 billion. This report was also ignored.

The big report for Wednesday is the ISM Manufacturing Index. This is a national number compared to the various regional surveys by the Fed. The Beige Book is also important because it covers all the Fed regions.


Starting the morning off was an earnings miss from Target (TGT). The company reported earnings of $1.45 compared to estimates for $1.50. Earnings declined -4.6% over the year ago period. Revenue of $20.69 billion fell -4.3% and missed estimates for $20.746 billion. Same store sales fell -4.3%.

Target guided for full year earnings of $3.80-$4.20, down from $5.01 in 2016 and $69.5 billion in revenues. Analysts were expecting $5.35 and $70.51 billion. For Q1 they guided for earnings of 80 cents to $1.00. Same store sales are expected to decline in the low to mid single digits for 2017.

Target said to fight the sales decline they would lower prices, add brands and invest more in some of its stores and e-commerce channels. Shares fell -12% for the biggest single day decline ever.


Valeant Pharmaceutical (VRX) reported adjusted earnings of $1.26 that beat estimates for $1.20. Revenue declined from $2.7 billion to $2.4 billion but beat estimates for $2.3 billion. The CEO said they reduced debt by $519 million in Q4 and agreed to divest a "number" of assets. They guided for 2017 for revenue of $8.9 to $9.1 billion. They are targeting $5 billion in debt repayment in 2017. Investors were not impressed and shares fell -14%.


Autozone (AZO) reported earnings of $8.08 that missed estimates for $8.20. Revenue of $2.29 billion rose 1.4% but missed estimates for $2.35 billion. Same store sales were flat for the quarter. They opened 33 stores in the U.S. and four internationally in the quarter. They currently operate 5,872 stores. Inventory rose 8.7% to $665,000 per store. They repurchased $198 million in stock in the quarter with $585 million left on the authorization. Shares declined only slightly on the news.


Perigo (PRGO) shares crashed 12% on news it was going to sell its royalty stream on the MS drug Tysabri. The royalty stream is being sold to RPI Finance Trust for $2.85 billion with $2.2 billion in cash and up to $650 million in payments based on future net sales. The company also preannounced 2016 earnings with a range of $7.10 to $7.25. They guided for 2017 earnings of $6.30 to $6.65. They also announced the CFO had resigned effective immediately. The CFO quit to join another pharmacy company. Immediate resignations are never positive for company shares.


Tenet Healthcare (THC) shares fell -15% after they reported adjusted earnings of 6 cents compared to estimates for 20 cents. Revenue of $4.86 billion missed estimates for $4.97 billion. For the current quarter, they expect a loss of 45-60 cents per share. They guided for revenue of $4.75-$4.95 billion and analysts were looking for $4.95 billion. Shares fell -15%.


After the close Palo Alto Networks (PANW) fell -18% after a huge earnings miss. The company reported adjusted earnings of 63 cents that beat by a penny. Record revenue of $422.6 million missed estimates for $429.6 million. That was the slowest revenue growth in four years. They announced a new $500 million share repurchase to bring outstanding authorizations to $1 billion. They guided for Q1 of 54-56 cents on revenue of $406-$416 million. Authorizations are worthless unless they actually spend the money and PANW had not spent any on its prior authorization.


Salesforce.com (CRM) reported earnings of 28 cents compared to estimates for 25 cents. Revenue of $2.29 billion barely edged over estimates for $2.28 billion. They guided for 2017 for revenue of $10.15 to $10.20 billion, up from $10.10 to $10.15 billion. For Q1 they guided for $2.34-$2.35 billion, a 22% increase and earnings of 25-26 cents. Analysts were expecting 30 cents and $2.37 billion. The light guidance caused the stock to decline in afterhours.


Earnings highlights for Wednesday include Broadcom, Best Buy and Mylan followed by Costco and Sears on Thursday.


Shares of Signet Jewelers (SIG) fell 13% after a report of widespread sexual harassment at the Sterling Jewelers subsidiary. According to a report Sterling paid female workers less than males, promoted them less frequently, and male executives engaged in rampant sexual harassment for years demanding sexual favors for raises and advancement. A private arbitration committee ruled that 69,000 current and former female employees can sue for discrimination and back wages. This will go to trial in the fall and could be a major hit for Signet.


Apple shares shrugged off the weak Nasdaq and remained fractionally positive after UBS boosted the price target from $138 to $151 and Guggenheim raised their price target to $180. Both analysts said the iPhone 8 and its new features could be a blockbuster for Apple that could lead to several years of new sales growth.

There was additional confirmation that the iPhone 8 will have a curved OLED screen and much larger memory capacity. It may also have wireless charging and a USB port. Another report said Apple had more than 1,000 engineers working on augmented reality for the iPhone. This is going to be a good year for Apple if only half the claims and events come true.


Amazon Web Services suffered a major outage in its Simple Storage System or S3 and thousands of websites were knocked offline or rendered ineffective. The S3 system is where corporations and websites store large volumes of files for later retrieval. For instance a publisher could store the digital texts of thousands of books that may not be reviewed or even recalled for months but need to be online. That archival storage does not need to reside on a more expensive cloud server used for every day operations. The files are there if they are needed. Ironically one of the systems knocked offline was Amazon owned Audible.com. All those stored audio books were not available for download for several hours. Some of Apple's systems were offline as well as some Facebook systems. Amazon is the biggest cloud provider and when they have a hiccup it affects thousands of companies.


Another factor has slowly risen to impact market sentiment. The chance for a March rate hike has risen sharply from 17.7% a week ago to 62% at today's close. The comments from the FOMC minutes and from various Fed speakers has tilted the outcome significantly. Suddenly, sooner rather than later, has come back to bite investors.

As of February 17th.

As of today's close.

Oil prices declined to $53.18 intraday on headlines suggesting additional OPEC production cuts. Those headlines faded in the afternoon when the actual production numbers quoted showed a minor decrease from 29.96 mbpd in January to 29.87 mbpd in February. WTI rebounded to close at $54.01. After the bell, the API inventory report showed a gain of 2.5 million barrels to lift U.S. inventories to a new record high.



Markets

The markets weakened on worries over the president's speech. The market is worried the president will either say too much about the wrong topics or not enough about the right topics and there is a very good chance there would be a sell on the news event. Tonight should be interesting.

Given the sharp rise in volume the market actually held up rather well. That suggests it could take a major blunder in the speech to reall knock the market lower. Minor issues could be overlooked and lead to a monster blowout at the open. Obviously everything is speculation and we will not know which way the market is going until 10:AM on Wednesday.

I am very worried about a gap down open that clears all the stop losses and then rebounds sharply. I would recommend everyone reevaluate their own risk profile and make a rational decision about how they want to handle opening volatility on Wednesday.

I am skimping on market analysis tonight because market direction tomorrow is totally dependent on the speech.

The S&P declined slightly despite the high volume and remains above initial support at 2,350 and stronger support at 2,300. The S&P did set a record today. The average intraday range for the last 50 trading days is the lowest in history.


The Dow traded in a very narrow 60-point range despite the high volume. No Dow components gained or lost $1. The Dow is showing a potential rounding top but we still have a pattern of higher lows. That suggests a benign speech could propel the index higher.

The new target is 21,000 and we closed 188 points away from that level.



The Nasdaq has a pattern of lower highs since the record high last Tuesday. The techs stocks were the most overbought so it makes sense they were big losers ahead of the speech. The 5,800 level is decent short term support and the level to watch on Wednesday.



The Russell 2000 gained 1% on Monday and gave back -1.5% today to close at a two-week low. Small cap investors were racing to the sidelines to avoid a possible disaster on Wednesday. If the speech is successful, we could see this decline completely erased tomorrow. The small caps have been volatile from day to day but relatively flat since the 21% post election rebound.


I am not going to speculate on the speech any further than I have over the last several days. The market is at extreme risk but a successful performance could avoid a sell the news event and potentially propel the Dow to 21,000 this week.

There are so many political factors in play, the technicals do not seem to matter. Remember the cartoon from the weekend newsletter. Buy the dip.

Enter passively, exit aggressively!

Jim Brown

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