Sometimes there are some bad eggs in the basket and two appeared this morning.

Market Statistics

The earnings miss by Goldman Sachs and Johnson & Johnson knocked the Dow to a -173 point decline intraday. The dip buyers appeared but in far less volume than normal. They tried to buy the opening dip and were hit with another sell cycle. That one held at 20,475 for 2 hours before they were able to lift the Dow off its lows but it still lost -113 points.

Goldman was a big hit accounting for -73 Dow points. JNJ subtracted another 26 points so the -113 point decline at the close was almost all because of those two stocks. Unfortunately, IBM shares died after the close with a 9-point drop that will be -63 Dow points at the open on Wednesday.



Goldman Sachs (GS) reported earnings of $5.15 that missed estimates for $5.31. Revenue rose 27% to $8.03 billion but missed estimates for $8.45 billion. Investment banking revenues rose 16% to $1.7 billion, led by a surge in equity and debt underwriting. At the same time, a decline in merger activity led to a 2% decline in advisory revenues. Overall trading revenue fell -2% to $3.36 billion. Goldman's stock trading business saw a 6% decline in revenue. The bank blamed it on low levels of volatility over the first three months of the year. Operating expenses rose 15% to $5.49 billion. The bank repurchased 6.2 million shares for $1.5 billion in Q1.


Johnson & Johnson (JNJ) reported earnings of $1.83 that beat estimates for $1.77. Revenue of $17.77 billion missed estimates for $18.02 billion and caused the sharp decline in the stock. A decline in drugs sales offset a rise in medical device sales. The company raised its full year guidance to $7.00-$7.15, up from $6.93-$7.08. Analysts were expecting $7.05. Revenue guidance rose from $74.1-$74.8 billion to $75.4-$76.1 billion.

Sales of Remicade, a blockbuster drug for arthritis, fell -6% because of a copycat drug hitting the market and it is only going to get worse as the biosimilar drug gains traction. Other drugs, Xarelto and Invokana, also saw sales decline. Cowen & Co called the overall earnings an "underwhelming performance." Shares fell $4 on the report.


The last Dow component reporting before the open was UnitedHealth (UNH). The company reported earnings of $2.37 that rose 35% and easily beat estimates for $2.17. Revenue rose 9.4% to $48.73 billion. The company said it added 2.5 million subscribers but that was offset by a loss of 900,000 who were in individual Obamacare plans. The losses from Obamacare removed $1.6 billion in revenue. Profits rose sharply after UNH cut participation in Obamacare from 34 states to 3 states for 2017. Last year they warned they expected to lose $800 million on Obamacare plans. UNH said it was planning for the 3% Obamacare tax on all healthcare premiums to restart for 2018. The tax had been halted temporarily because of losses for Obamacare insurers but restarts for 2018.


On the economic front, the new residential construction for March declined sharply from 1.303 million to 1.215 million. With the warmer weather in February, builders got a jumpstart on the season meaning fewer starts in March. Single-family starts declined from 875,000 to 821,000 and multifamily fell from 428,000 to 394,000. Housing completions rose from 1.168 million to 1.205 million.

April could show good numbers because permits rose from 1.216 million to 1.260 million. Multifamily construction has begun to slow as markets reach saturation points. Single-family homes continue to rise at a slow but steady pace overall.

Industrial production for March rose 0.5% after a +0.1% rise in February. The numbers were skewed due to weather patterns with low utility output in January and February followed by an 8.6% spike in March as some winter weather returned. The report was ignored.

The calendar for the rest of the week is highlighted by the Fed Beige Book, Philly Fed Manufacturing Survey and Existing Home Sales. None of those should be market movers.

The French election on Sunday and the government funding fight all next week will be the market drivers.


Other stocks reporting earnings this morning included Bank of America (BAC). The bank reported earnings that rose 44% to 41 cents. Analysts were expecting 35 cents. Revenue rose 7% to $22.25 billion and beat estimates for $21.5 billion. Investment banking fees rose 37% to $1.6 billion. Sales and trading revenue rose 23%. Provisions for credit losses declined 16% to $835 million. Shares ended the day fractionally negative.


Harley-Davidson (HOG) reported earnings of $1.05 compared to estimates for 99 cents. Revenue of $1.33 billion missed estimates for $1.35 billion. The company guided for Q2 shipments of 80,000-85,000 and analysts were expecting 91,025. Shares fell 4% on the news.


United Continental (UAL) reported earnings of 41 cents that beat estimates for 37 cents. Revenues of $8.42 billion rose 2.7% and beat estimates for $8.362 billion. Passenger revenues rose 2.6% to $7.174 billion while cargo revenues rose 13.4%. Average fuel costs rose 41.3% to $1.71 per gallon. The odds are good the Q2 earnings are going to be lower than expected because of the boycotting of United after the passenger was forcibly removed. Shares fell 4% on the earnings.


Cardinal Health (CAH) said it agreed to buy certain Medtronic (MDT) businesses for $6.1 billion. The business has 23 product categories and include brands found in nearly every U.S. hospital. The negotiations have been in progress for some time. As a result, they updated their 2017 guidance for earnings of $5.35-$5.50 and analysts were expecting $5.42. The company blamed the guidance on deflation in the pharmaceutical business caused by a surge in generics. Cardinal said the deal should close by early 2018 and would add at least 21 cents in earnings in 2018. The company still guided for flat earnings in 2018 due to some "company specific discrete items" that it did not identify plus generic deflation. Shares collapsed 11% on the weak guidance.


After the bell, IBM reported earnings of $2.38 compared to estimates for $2.35. Revenue of $18.16 billion missed estimates for $18.39 billion. This is the fifth year of declining quarterly revenues. The company guided for full year earnings of "at least 13.80" per share. Cloud computing revenue on a trailing 12-month basis was $14.6 billion while "Cloud as a Service" revenue was approaching an annualized rate of $8.6 billion. Shares fell from the $170 close to $160.90 in afterhours. That will be a 63-point drag on the Dow on Wednesday.


Intuitive Surgical (ISRG) reported adjusted earnings of $5.09 compared to estimates for $4.90. Revenue of $674.2 million beat estimates for $660.6 million. The company shipped 133 Da Vinci robotic surgery systems in Q1 compared to 110 in the year ago quarter. Shares rallied about $30 in afterhours.


Ultragenyx Pharmaceutical (RARE) spiked sharply in afterhours after reporting positive Phase III results for Burosumab for X-linked hypophosphatemia, leading to bone deformity. Patients reported significant improvements in stiffness, physical function and pain.


Lam Research (LRCX) reported adjusted earnings of $2.80 that beat estimates for $2.54. Revenue of $2.15 billion beat estimates for $2.13 billion. The company guided for the current quarter to earnings of $2.88-$3.12 and analysts were expecting $2.63. Revenue guidance of $2.2-$2.4 billion also beat estimates for $2.18 billion.


Crude prices declined slightly in the regular session ahead of the EIA inventories on Wednesday. Expectations are for a decline in inventories but apparently, traders were taking profits from the big rally just to be safe. They are also fighting a forecast from the EIA for U.S. oil production in May to rise by 124,000 bpd.


The yield on the ten-year treasury just keeps moving lower with a close at 2.179% and a five-month low. The geopolitical concerns have not gone away and there is an increasing number of headlines about a possible government shutdown next week. Stocks rarely rise when bond yields are falling sharply.


Markets

Volume was a little stronger today at 6.1 billion shares but that is still considered light. It was significantly better than the very light 5.3 billion shares on Monday's big +180 point Dow rally. Investors are being cautious ahead of the funding battle and potential government shutdown.

The big cap indexes posted losses and gave back about half their gains from Monday. The small cap indexes posted fractional gains but we should not read too much into that divergence. The big cap indexes are influenced by only a few stocks while the Russell 2000 has 2,000 stocks.

When Goldman and JNJ tanked at the open, they dragged the index ETFs down with them. That causes selling in the other stocks in those ETFs. Overall, I am pleasantly surprised that the selling in those individual stocks did not spread to the broader indexes. The day was tame even though the Volatility Index spiked to 15.5 at the open.

The S&P failed to move over prior support at 2,350, which has become resistance. The S&P chart is still bearish even if we have a couple more days of minor gains. Until the index moves back over 2,370, the short-term bearish trend will remain intact.

I would expect Tuesday's Goldman related decline to be bought on Wednesday assuming there are no adverse headlines overnight.


The Dow almost made a new low intraday with the dip to 20,462 when Thursday's two-month low was 20,453. That would have been a serious sell signal. It is hard to derive much market direction from the Dow during earnings season. The GS/JNJ earnings this morning were a prime example. When two stocks can knock 100 points off the index, it gives a false picture of the rest of the market.

The market was not as weak as the -113 close would indicate. Unfortunately, the declines in those two stocks may not be over and IBM is going to add to the weakness on Wednesday.

Support is now 20,450 and resistance 20,600 and 20,750.


The Nasdaq Composite lost only 7 points and that was mostly due to the biotech sector which fell -1.3%. Amazon was the only one of the FAANG stocks to post a gain. Apple is starting to weaken. Shares have been trending lower since the high at $146 on April 5th. Support has formed at $141 but the rebound attempts are slowing. With Apple earnings not until May 2nd, it is a little early to be running for cover. I suspect funds have a lot of built up profit in Apple and they are afraid of the potential government shutdown next week. They are slowly trimming positions. Where Apple shares go, the market follows.


The Nasdaq avoided a decline below support at 5,800 last week but it has not rebounded sufficiently to keep that from happening at any time. Mild resistance has formed at 5,850 and the index is still safely inside its congestion pattern. If that 5,800 level were to break, we could see a lot of sell stops hit.



The Russell 2000 remains in a sideways pattern as it has been for the last four months. There is a short-term downtrend but until/if it breaks below 1,340 the sideways consolidation trend takes precedence. If I had to predict the market, it would be difficult to do from the Russell chart. It is showing us exactly how flat and choppy the market has been but giving no clue as to future direction other than the recent decline to support.


This week should be neutral for market direction because of the money being withdrawn from the market to pay taxes and the dark clouds hovering over next week's funding battle. This "should" give it a bearish bias by Friday but as we saw today, the dip buyers are alive and well.

Even if the unthinkable happens again on April 29th and there is a partial government shutdown that craters the market, I expect that dip to be a buying opportunity. I suspect nearly everyone else see it the same way. That means they will not be putting new money to work this week in hopes of a better opportunity in the weeks ahead.

Also lingering in the back of everyone's mind is the problem with North Korea. There were reports this afternoon that the USS Ronald Regan and USS Nimitz carrier strike forces have been ordered to the region to meet up with the USS Carl Vinson. Source The U.S. has not put three carrier strike forces in the same region since WWII. This appears to be at least a strong bluff suggesting that little Kim pack up his toys and begin behaving in a civilized manner. That is not likely to happen. When you push a crazy person into a corner, you better be prepared for a violent reaction. The other leader with small man syndrome, Putin, sent Russian bombers to overfly Alaska today and they were escorted away by U.S. fighters. Putin sent bombers to Japan a couple days ago and it took 14 scrambled fighters to convince them to leave.

Enter passively, exit aggressively!

Jim Brown

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