The large cap indexes ended the day with only minimal losses but the small cap indexes posted big losses and closed at the lows for the day.

Market Statistics

The small cap stocks, which compose two-thirds of the market, are breaking down. The Russell 2000 and the S&P-600 both posted large losses and closed well under recent support. It appears those indexes, which have been the weakest since early December, are finally giving up some gains and that could trigger selling in the big cap indexes like the S&P-500.


There were no important economic reports this morning. The CoreLogic Home Price Index for January showed prices rose 6.9% year over year and a slightly lower rate than the 7.2% in December. This is a lagging number and it was ignored.

The Trade Deficit for January increased from $44.3 billion to $48.5 billion and the largest deficit since March 2012. Analysts claim the early Lunar New Year may have pulled forward some imports and the number will return to its $44 billion average by the end of March. Otherwise, this would have a significant impact on Q1 GDP. Imports rose 2.3% in January and exports declined -0.6%. Exports totaled $124.0 billion and imports were $189.4 billion. The stronger dollar is going to continue to weigh on exports as the Fed returns rates to normal. Also, a border adjustment tax will impact the imports significantly.

Moody's Chart

Consumer Credit additions for January declined to $8.8 billion from $14.2 billion in December and $25.8 billion in November. Revolving credit fell -$3.8 billion and the first drop in a year. It was the biggest decline since 2012. Nonrevolving credit rose $12.6 billion. The drop in the headline number is just one more piece of evidence that the December/January shopping season was very bad. Based on the pattern above I would expect the tax refund checks to go to paying down debt rather than a shopping splurge. The report was ignored.

The first employment report is due out on Wednesday. The consensus expectations have risen from 175,000 to 190,000 over the last two days. The nonfarm estimates rose by a similar amount.

Yellen said if employment remained steady, the Fed was going to raise rates in March. That is the condensed version of her statement. Analysts believe any nonfarm number over 175,000 will be considered steady and guarantee a Fed rate hike. However, should we get an unexpected decline and the Fed did not raise rates that could negatively impact the market. I know that seems like the opposite of reactions to prior meetings, but it would suggest recent employment was a bubble and the Fed might have to remain on hold for several more months.

While the market appears to be overly optimistic, the economy is not as strong as you would think. The Atlanta Fed real time GDPNow for Q1 has declined from a forecast of 3.4% growth to only 1.3% over the last four weeks. The economic reports have not been as strong as they appear on the surface. The Fed will look at this forecast before they decide to raise rates. The Fed funds futures are currently predicting an 84.1% chance of a rate cut. With the GDP forecast this low, will they actually pull the trigger?




President Trump tweeted this morning that he was working on a new system to lower drug prices. The only thing that came down was the price on drug stocks. The Biotech Index ($BTK) gapped lower and ended the day with a -1.4% loss. Several high profile drug stocks fell sharply before rebounding in the afternoon. This tweet was a major reason the markets opened lower. The futures were already negative overnight but fell again on the tweet. Multiple analysts were scratching their heads on the tweet and wondering what it meant. Citigroup said "It is unclear to us what a 'new system' would entail." Evercore said, "The question really is: what does this mean?" Evercore suggested Trump might be referring to Medicare Part B where there are no pricing tiers. Trump has said multiple times he wants drug companies to enter competitive bids on drugs sold to Medicare.



It was a boring day in the earnings cycle. Dicks Sporting Goods (DKS) reported adjusted earnings of $1.32 compared to estimates for $1.29. Revenue of $2.48 billion barely edged out estimates for $2.47 billion. Same store sales were up 5%.

Dick's guided for Q1 for earnings of 48-53 cents and analysts were expecting 61 cents. They guided for same store sales of 3% to 4%. Dick's expects full year earnings of $3.65-$3.75. Shares fell 9% on the weak guidance.


Michaels (MIK) reported earnings of 96 cents compared to estimates for 95 cents. Revenue of $1.75 billion rose 4.1% but missed estimates for $1.81 billion. The sales growth came from the acquisition of 19 stores from Lamrite West. Same store sales actually declined -0.5%. Michaels predicted the same sales trend for 2017. While other retailers are closing stores, Michaels plans on opening 17 new stores this year to bring their total to 1,220. They guided for full year earnings of $2.05-$2.17 and analysts were expecting $2.04. Shares rallied 2% on the news.


Navistar (NAV) reported a loss of 76 cents and analysts were expecting a loss of 51 cents. Revenue of $1.66 billion missed estimates for $1.75 billion. The company completed a $256 million equity investment from Volkswagen last week. Some analysts believe it will lead to a complete takeover of the problem plagued Navistar. The equity investment gives Navistar access to Volkswagen technology.


H&R Block (HRB) reported a loss of 49 cents that was slightly better than the 52 cents analysts expected. Revenue fell from $475 million to $452 million but still beat estimates for $427 million. The company normally reports a Q4 loss because of tax filing seasonality. They said they gained market share in the quarter and repurchased $100 million in stock. They have repurchased $317 million in the current fiscal year. IRS reported a 10% decline in E-filing so far in 2017.


Bojangles (BOJA) reported adjusted earnings of 28 cents that beat estimates for 21 cents. Revenue of $139.4 million just missed the estimates for $140.4 million. They guided for the full year for earnings of 87-93 cents and revenue of $560-$569 million. Same store sales rose 2.4%. Company owned stores rose 1.1% and franchised stored rose 3.2%. They opened 21 stores with 9 company owned and 12 franchised to bring their total to 716. They plan to open 57-62 stores in 2017. Shares collapsed on the news.


Earnings are winding down and Thursday is the last set of headliners. Sears, Staples and Ulta Beauty are the ones to watch.


Snap Inc (SNAP) shares continued to collapse with a 10% decline. I warned on Sunday once the IPO shares were settled and available for shorting, there would be a big hit to the stock price. Helping the slide was an investor group asking index providers S&P Dow Jones and MSCI to bar SNAP from being included in the indexes because the IPO shares were non-voting. S&P Dow Jones said they would not add any company until 6-12 months after the IPO and would use that time to study Snap's structure. MSCI said SNAP does not currently qualify for inclusion but the decision would be reviewed in May. There are now 5 analyst recommendations, two holds and three sells. One of those is an underperform, which I classify as a sell. Who wants to hold an underperforming stock. Been there, done that.


GEO Group (GEO), a REIT operator of private prisons, announced a 6 million share secondary after the close. They plan to use the proceeds to repay amounts under their existing revolving loan and for general purposes. Shares fell $3 on the news. They have been an outperformer since the election.


Dish Network (DISH) will replace Linear Technology (LLTC) in the S&P-500 on Monday. LLTC is being acquired by Analog Devices (ADI).



Markets

Was 100 the round number investors were watching? Today was the 100th day since the S&P has lost more than 1% in a single session. Is that the trigger for a sell off? I seriously doubt it. That only makes it the 12th longest streak since 1950. Those types of streaks rarely have any impact on the market.

The S&P has traded within 1.5% of its high for the last 79 days. That is how little downside volatility we have had. The index could not even put a couple days together to add up to 1.5%.

The TD Ameritrade Investor Movement Index (IMX) is setting records. The sentiment index was invented in 2010 and is currently at historic highs. The index is calculated by surveying positions and cash held in investor accounts as well as the amount of trading activity by those accounts. Ameritrade has more than 6 million investor accounts so it is a broad sampling. Having the index at a historic high is another piece of data indicating the market is overbought. This could be called the irrational exuberance index.


Volume today was 6.5 billion shares and down volume was more than twice up volume despite the minor index losses. Decliners of 4,918 vastly overcame advancers at 2,096. New 52-week lows of 153 beat new highs at 146 for the first time in 2017.

As of Monday's close, the Dow was up +14.2% since the election. The S&P +10.9%, Nasdaq +12.5% and the Russell 2000 +15.8%. Those are remarkable gains for less than four months of trading and without a 1% single day decline.

The S&P has erased the post speech gains and is closing in on decent support at 2,360. A break below that level could trigger the sell off everyone has been expecting. With the futures down -5 Tuesday night and the markets down for two consecutive days, we could be setting up for a real decline.


The Dow has traded in a narrow range for the last three days with slightly lower highs and lows. The doji candles represent indecision and lack of conviction by both buyers and sellers. The Dow is the most overbought index and the least supported. There was very little movement in the individual Dow components.



The Nasdaq has also erased the Wednesday gains and is closing in on strong support at the 5,800 level. The small bodies on the last two candles represent indecision and Tuesday's candle closed near the lows.


The small cap Russell 2000 closed at the low for the day and well under support at the 1385-1388 level. The index has been the weakest link and it could be leading the large caps lower. The sharp decline in the biotech sector was a major factor in today's drop.


There are multiple things weighing on the market. We have the economic slowdown in Asia, warnings over the South China Sea, North Korea and Iran firing missiles, the impending French election and the sporadic tweet storm. Add in the uncertainty over the FOMC meeting next Wednesday and the expiration of the debt ceiling.

Last night the republicans released the draft of the new American Healthcare Act and it appears to be dead on arrival. More than 20 republican senators and representatives have said they will not vote for it and the list is growing.

The new administration cannot do tax reform, which is what the market really wants, until the healthcare reform is passed. With everyone choosing sides before the bill has even moved into the first committee, it is going to be a long hard fight and it may not happen before the August recess. That means overhauling the tax system may not happen in 2017. That is a major sentiment killer once it becomes apparent to the retail and even institutional investors.

The market has had dozens of reasons to sell off and failed to do so. Every minor dip has been bought. Now after two days of minor declines there is a growing feeling that a volatility event is imminent. We will have to wait and see if this is just a new wall of worry that can be scaled or is this the Great Wall that proves to be too high without a running start from a lower level.

Enter passively, exit aggressively!

Jim Brown

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