The Dow declined -145 points at the low, S&P -20, Nasdaq -62 while the Russell 2000 gained 10 points.

Market Statistics

The rotation out of the big caps and into small caps would normally be bullish for the long-term health of the market. However, with the big cap indexes threatening to break through support, the eventual outcome is unknown. If the Dow breaks below support at 20,500 and S&P at 2,340 and they close below those levels it could poison the bullish sentiment lifting the small cap stocks higher.

The Nasdaq indexes both lost 62 points intraday and they failed to rebound as strongly as the Dow and S&P. The big cap tech stocks were weak, led by a sharp decline in Apple. The Nasdaq indexes had been holding at their recent highs and should this weakness persist, we could at some point see a sudden flurry of profit taking. The tech sector has already been fading for the last 6 days.



The small cap stocks were helped by the NFIB Small Business Survey for March. The Optimism Index declined slightly from 105.3 to 104.7 but remains near the 43-year high of 105.9 set in January. The elevated optimism began after the election and it is not letting up. The headline numbers were back near 94 prior to the election and trending sideways after hitting a low of 92.6 in March.

Small business is severely impact by government regulations and President Obama instituted 81,640 pages of regulations in 2016. The U.S. Manufacturers Association said that cost businesses and consumers $2 trillion a year in added expenses, higher prices, reduced employment and business closures. Small businesses today are hopeful that President Trump will follow through on his pledge to significantly cut regulations. That should be a target rich environment.

The NFIB survey found that 22% of respondents felt now was a good time to expand while 29% planned on increasing capital expenditures. Another 16% planned to increase employment. The uncertainty index rose from 86 to 93 as plans to replace Obamacare failed to pass in the House.

The Job Openings and Labor Turnover Survey (JOLTS) for February showed that job openings rose slightly from 3.7% to 3.8%. The number of people hired declined from 5.424 million to 5.314 million. Job separations fell from 5.247 million to 5.071 million. Quits declined from 3.186 million to 3.084 million. Employers advertised for 5.74 available positions in February, up from 5.63 million in January. This report was for February and was ignored as lagging data.

The calendar for Wednesday is light but we do get a handful of earnings reports. Thursday is the big day with six big banks reporting before the open. This will produce the last flurry of volume before the weekend. By 10:AM the market will be dormant, assuming there are no geopolitical headlines.


Geopolitical concerns are back and weighing on the markets. Putin is saying the U.S. faked the chemical weapons attack so they could bomb Syria and said the U.S. was preparing more fake chemical attacks so they launch attacks against Assad personally.

The U.S. said there were indications Russia knew in advance about the chemical attacks and suggested Assad bomb the hospital where the victims were being taken in order to cover up the chemical attack. That second attack destroyed the hospital and killed more civilians. A Russian drone was seen following the vehicles with wounded to the clandestine hospital. Once the drone discovered the hospital's location, the planes appeared to bomb it.

Russia has dispatched several additional warships to the Mediterranean to offset the U.S. forces offshore of Syria. That is just one more opportunity for a trigger event that escalates the tensions.

The situation around North Korea is also heating up with Trump tweeting an implied threat to China to help eliminate the North Korean nuclear threat or the U.S. would do it alone. Since North Korea is an ally of Syria and China, U.S. bombing of NK would further incite hostility from those countries.

Adding to the geopolitical concerns, the headlines are building about a potential government shutdown on April 29th. Lawmakers do not return from the Easter recess until the 24th and they have five days to pass a funding bill and raise the debt ceiling before funding expires on the 28th.

The yield on the ten-year treasury closed at 2.298% and a four-month low on the concerns listed above. Bonds are being bought and equities are weak. That is a recipe for an equity decline if tensions do not recover soon.


Gold prices spiked $20 in the regular session to a five-month high on the geopolitical issues. The flight to safety trade is in full bloom with an $80 gain since early March.


Apple (AAPL) added to the market weakness since it is in both the Dow and the Nasdaq. The stock declined $3 intraday after Qualcomm sued them for an unspecified amount claiming they were not paying their licensing fees. Apple sued Qualcomm three months ago saying their licensing scheme was illegal and required fees for items not included in the license.

Qualcomm said Apple bought modem chips from both Qualcomm and Intel for the iPhone 7. When Apple realized the Intel chips were inferior, they hobbled the phones with the Qualcomm chips so that both phones operated equally. Apple then threatened Qualcomm about making claims the Qualcomm equipped phones were faster.

Apple also declined on news it was going to start producing its own chips for use in its iPhone and iPad devices. The company taking the heat was German company Dialog Semiconductor, which was cut to a sell rating by Bankhaus Lampe. Dialog makes power management chips and Apple reportedly wants to produce its own so that it can control the battery usage better. Dialog fell -16%.

What hurt the market other than the $3 drop in Apple was the corresponding drop in all the other chipmakers that provide components for Apple. This was a knee jerk reaction since nobody knows which chips Apple would eventually replace and it would take at least until 2019 before the company could ramp up production of its own components. Broadcom (AVGO), Skyworks Solutions (SWKS), Cirrus Logic (CRUS), Qorovo (QRVO), Analog Devices (ADI) and InvenSense (INVN) shares were all lower. When the semiconductor sector crashes, it always drags the Nasdaq with it.


Apple shares topped out with a climax close at $144.77 on the 4th and have declined daily since that high. They rebounded to erase half of their intraday low today but could be weak in the days ahead on uncertainty.


The biggest mistake of the week goes to United Continental (UAL) for the way they handled the overbooking problem on the Chicago to Louisville flight over the weekend. I am sure everyone has seen the video of Doctor Dao being physically dragged off the plane with blood streaming down his face. It took three days and multiple press releases before United finally said they were sorry on Tuesday afternoon. While United was justified in removing the passenger from the plane, their method of removal and the follow up press releases have cost them millions of dollars and will continue to cost them millions for months to come.

Here are the facts. The airlines have a right to deny boarding or passage to anyone. Read the fine print. There were four passengers randomly picked and asked to leave the aircraft. The names of three of them are unknown because they simply took the $800 and the overnight hotel room and left peacefully. The only reason Dr Dao's eviction turned into such an international incident is because HE physically resisted. He accidentally hit his face on an armrest during his resistance.

On the 12 major airlines over 40,000 passengers are either denied boarding or removed from aircraft in the U.S .each year. While that sounds like a lot, there are more than 434,000 travelers who voluntarily give up their seat and accept payment from the airline for taking another flight. That is roughly 1,200 travelers a day. United had 3,800 involuntarily denied boardings in 2016 out of 86 million passengers. That does not count the passengers that accepted payment for taking another flight.

Delta has implemented a bump question when you buy a ticket online. They ask you to click a box from $200 to $500 for what price you would agree to accept another flight. That way when an overbooked condition occurs they just select the cheapest category of passenger and pay them their agreed bump price.

United could have paid more money. They are authorized to offer up to $1,350 plus a hotel room but they stopped at $800. By not raising the bump offer that extra $550 they are going to incur millions in losses for months to come from passengers booking other carriers instead of United. Because Dr Dao was Chinese, an entirely new problem was created and Chinese travelers are now boycotting United.

Note to Dr Dao. It is not wise to cause a stink and get your name in the headlines when your background is easily found to be questionable. In 2005 Dr Dao was charged with 98 felony counts of "illegally prescribing and trafficking in painkillers and exchanging drug prescriptions for sex." He also received five years probation for six counts of illegally obtaining drugs. His license was suspended. In 2015 the suspension was lifted and he is allowed to practice medicine only ONE day a week at an outpatient facility. This has absolutely no bearing on his treatment on the flight but if you do not want your dirty laundry aired in public do not make a scene. His wife and four of his children are also doctors. Dr Dao


Western Digital (WDC) shares spiked after JP Morgan raised the rating from neutral to overweight and hiked the price target from $80 to $116. The analyst said NAND memory prices were still going higher and the PC market was stabilizing. Over the last quarter, Micron said memory prices had risen about 20% due to a shortage of components and high demand. The analyst raised his revenue estimate for 2017 by 6% to $19.7 billion and earnings to $10.24. He raised the FY 2018 earnings target to $11.13 and well above consensus of $9.36.


Goldman Sachs put Disney on their conviction buy list with a $138 price target. The company cited their best upcoming calendar of movies ever. In FY 2018, they have 4 Marvel films, 2 Star Wars films and 3 animated films. Goldman expects record profits from the studio in 2017 and 2018. The analyst said Disney was seeing accelerating profit growth at ESPN and record profits from the theme parks. Avatar Land, Toy Story Land and Star Wars Land all making debuts over the next couple years, the parks are going to be flooding the company with cash. Disney has also filed for patents on humanoid robots suggesting they may be considering a Westworld exhibit as well.

According to the patent filing, the robot has soft, squeezable skin that supports "playful physical interaction," posable joints, and pressure sensors that "sense contact and provide protection to the child and robot while interacting." Disney's droids are meant to be "huggable and interactive," so that children at the park could play with them in a fun and safe manner. Their parts will be 3D printed, just like in the TV series Westworld.


After the bell, shares of Tractor Supply (TSCO) guided for Q1 to revenue of $1.56 billion that missed estimates for $1.58 billion. Earnings guidance for 45-46 cents also missed estimates for 53 cents. They said same store sales declined -2% in Q1 driven by weak sales of seasonal merchandise. Shares fell $3 in afterhours.


Oil prices rose 32 cents in the regular session and another 14 cents in afterhours to trade at $53.50 after Saudi Arabia reportedly told OPEC it wanted to extend the production cuts for another six months. This is hearsay by somebody "in the know" according to the WSJ but it did lift prices. Inventory levels are expected to decline in Wednesday's EIA report and that will also help lift prices.


Markets

This was a rocky day for the big caps and S&P futures are down -5.50 as I type this. The Volatility Index spiked to nearly 16 intraday and closed over 15. If we were to drop again at the open on Wednesday we could see the VIX spike over 16 with the geopolitical tensions rising. Today's close was a five-month high.


The volume was stronger at 6.4 billion shares than the 5.47 billion on Monday. The sharp downdraft and then the corresponding rebound added to the volume. There were 4,087 advancers to 2,907 decliners with 209 new 52-week highs.

The S&P dipped below 2,340 intraday and a two-week low. The rebound from -20 to -3 lifted the index back over critical support at 2,350. The chart is bearish until we get a close back over 2,380 so that would take at least a couple days of strong gains. If the decline continues and closes below that 2,340 level it would project a potential dip to 2,250 but without a government shutdown on April 29th or rockets fired into North Korea, I do not see that as likely. The dip buyers are alive and well as we saw today.


This Dow decline was brought to you by Apple and Goldman with some help from DuPont. Together they subtracted 23 Dow points. The Dow is barely holding over 20,600 on a closing basis and traded down to 20,512 intraday before rebounding +140 points to close almost positive. The Dow is under pressure from the financial stocks with earnings on Thursday. Add in some weak tech stocks driven by the decline in the Nasdaq and it is a wonder the index did not close lower.

Resistance remains 20,750 and weak support at 20,600.



The Nasdaq indexes were consolidating just under resistance and today's intraday dip was reactionary rather than market driven. The rebound to the middle of the recent range is encouraging but support was weakened by the intraday drop. The dip buyers showed up in force but down volume of 884 million shares still beat up volume of 658 million.

Real support is well below at 5,800 and the Composite Index closed at 5,866. Resistance is well above at 5,915.



The small cap indexes were strongly positive with the S&P-600 gaining nearly 1% in a very weak market. If this continues, it could offset some of the bearish sentiment beginning to build in the large cap indexes.


Today's decline was more than likely positioning for the rest of the week and for events later in the month. There is a lot of profit that has not been captured since the election. With April 15th just a few days away there will be some money extracted to pay taxes. That normally creates some volatility a couple days after the date as well.

The biggest problem remains the potential for a government shutdown on the 29th and the chance for a confrontation in North Korea. Their biggest holiday of the year is founders day, also on April 15th, and they like to do things like explode bombs and launch missiles to commemorate that day. With the carrier strike force sitting offshore this year in a "threatening position" according to North Korea, there is the potential for an event that could roil the markets.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now