After two consecutive days of major gains, will there be a third?

Market Statistics

It appears the bulls have broken out of the range bound corral and are stampeding into greener pastures. The positive earnings by multiple Dow components sent the Dow rocketing higher. The breakout ran into trouble at the big round number of 21,000 but there were no real sellers. With multiple Dow stocks up $7, there was plenty of support.

Unlike Monday, the indexes gapped open and then continued to rise slightly. Tuesday's market saw some additional buying in tech stocks as the day progressed but the Dow and S&P saw muted gains after the morning highs.


Dow component DuPont (DD) reported earnings of $1.64 compared to estimates for $1.38. Revenue rose 4.6% to $7.74 billion as seed sales spiked 12.3% to $1.24 billion. The company said it was on track to merge with Dow Chemical is expected to close in August. Once complete the combined company will split into three separate public companies with one on agriculture, one on material science and one on production and sale of specialty products. Shares spiked sharply on the news to add 19.45 points to the Dow.


Dow component Caterpillar (CAT) reported blowout earnings of $1.28 compared to estimates for 62 cents. Revenue of $9.822 billion was well over estimates for $9.27 billion. CAT raised guidance for the full year for revenue of $38-$41 billion, up from $36-$39 billion previously. They raised earnings guidance from $2.90 to $3.75 and analysts had been looking for $3.25 and $38.24 billion.

CAT said revenue in Asia rose 11% with a 23% rise in construction industries. Latin America revenue rose 12%. The company said the global economy was improving and that was good news for the market. Shares of CAT rose $7.61 to add 52.12 points to the Dow.


Dow component McDonalds (MCD) reported earnings of $1.47 that beat estimates for $1.34. Revenue of $5.68 billion also beat estimates for $5.53 billion. Same store sales rose 1.7% in the U.S. and +4.0% globally. The launch of the all day breakfast menu in Canada and Europe was a big driver along with the Big Mac and specialty beverage promotions. CEO Steve Easterbrook has vowed to transform the oldest major fast food restaurant into a "modern, progressive burger company." McDonalds has banned antibiotics in U.S. chicken and they are adding self-service kiosks, mobile payments and "smart" menu boards. MCD shares rallied $7.47 to add 51.16 points to the Dow.


Dow component 3M (MMM) reported earnings of $2.16 compared to estimates for $2.07. Revenue of $7.69 billion also beat estimates for $7.49 billion. The company guided for full year earnings of $8.70-$9.05, up from $8.45-$8.80. Revenue guidance rose from 1%-3% to 2%-5%. Since 2012, the company has divested 14 businesses and reduced its businesses from 40 to 26 in an effort to focus on high quality growth and earnings. The gains in MMM were muted compared to the other Dow reporters and shares rose only 69 cents. 3M only added 6 points to the Dow.


Dow component Coca-Cola (KO) reported earnings of 43 cents that missed estimates for 44 cents. Revenue of $9.12 billion did beat estimates for $8.89 billion. The company guided for the full year for earnings to decline -1% to -3% from the $1.91 earned in 2016. That is slightly better than the prior guidance of -1% to -4%. The company said it was cutting 1,200 jobs due to shrinking global demand for carbonated drinks. Global sales fell -1% in Q1. They increased their cost-cutting target by $800 million in annualized savings and expect to save $3.8 billion by 2019. Shares declined fractionally on the news.


Also helping to lift markets higher was a positive group of economic reports. The New Home Sales for March rose from 587,000 to 621,000 on an annualized basis. New home sales rose 25.8% in the Northeast, 16.7% in the West, 1.6% in the South and fell -4.5% in the Midwest. The existing supply of new homes rose to 270,000 but the months of supply fell from 5.4 to 5.2 months and the lowest since September. The median price for a new home rose 7.2% to $312,800. Sales of homes over $300,000 rose from 47% to 56% of the total while sales of homes under that level declined from 52% to 44%. Analysts credited warmer weather in March for the surge in shopping and purchases.


Consumer Confidence for April dipped slightly from 124.9 to 120.3. This is still the second highest reading since December 2000. The present conditions component fell from 143.9 to 140.6 and the expectations component fell from 112.3 to 106.7. Potential homebuyers declined from 6.2% to 5.8% but auto buyers rose from 13.8% to 14.2%. Potential appliance buyers rose from 51.5% to 52.8%. Those who believe jobs were plentiful declined from 31.8% to 30.8%.

Expectations over the failed healthcare launch and fading hopes for a major tax cut weighed on consumers.


The Richmond Fed Manufacturing Survey for April declined slightly from 22 to 20 but remains at multiyear highs. New orders were still strong at 26.0 but order backlogs and employment expectations declined sharply. The report was still positive and suggests the manufacturing sector is experiencing a resurgence over the last six months.

In the separate services survey the headline number surged from 9 to 22 and hiring plans nearly doubled from 16 to 30. The wage index also spiked from 38 to 55. The big-ticket sales component jumped from 14 to 41.



The Texas Service Sector Outlook Survey for April declined from 13.2 to 9.0 for the third consecutive month of declines since the high at 21.2 in January.

The Case Shiller CoreLogic home price index for February showed prices rose 5.9% across the top 20 cities surveyed. The FHFA Purchase Only Home Price Index rose 6.4%. Homeowners are celebrating while homebuyers are suffering.

The calendar for the rest of the week is highlighted by the Q1-GDP on Friday and the potential for a government shutdown if a funding bill cannot be passed by midnight.

The consensus GDP expectations have risen slightly from last week from 0.8% to 1.1% growth. However, the Atlanta Fed real time GDPNow forecast remains stuck at a 0.5% projection. This is the last update before the actual GDP on Friday. If the number comes in significantly lower than the consensus it could be market negative. However, if it comes in significantly higher, it could also be market negative because it would raise the chances for a Fed rate hike in June or possibly even at the May meeting next week.


The French election event risk will come back to haunt us the following weekend if Le Pen begins to rise in the polls. As long as Macron remains the clear front-runner, the runoff will be ignored.

The Iranian election on May 19th has started to rise in importance. The prior president Mahmoud Ahmadinejad was disqualified by the Guardian Council and cannot run again. That makes the current president Hassan Rouhani an odds favorite but there are other problems. Ebrahim Raisi, a hard line mullah involved in the 1988 massacre of more than 30,000 political prisoners is running along with two other candidates. Rouhani is considered a moderate and given the rising tensions with Iran, it would be in the world's best interest if hard line Raisi was not elected.


Eli Lilly (LLY) reported earnings of 98 cents that beat estimates for 96 cents. Revenue of $5.23 billion missed estimates for $5.215 billion. The company reaffirmed its prior guidance of $4.05-$4.15 in earnings. That would be a growth rate of 15% to 18%. Revenues are expected to be $21.8 to $22.3 billion. Analysts were expecting $4.11 and $22.14 billion. Shares fell more than $2 on the news.


Centene (CNC) reported earnings of $1.12 that beat estimates for $1.05. Revenue rose 69% to $11.72 billion and beat estimates for $11.42 billion. The jump in revenue was due to the $6.3 billion purchase of Health Net last year. The company raised its full year guidance from $4.40-$4.85 to $4.50-$4.90. Shares rallied $1.50 on the news.


Ryder Systems (R) reported earnings of 82 cents and analysts expected 84 cents. Revenue of $1.75 billion also beat estimates for $1.69 billion. Those numbers were not bad but the guidance was horrible. They guided for Q2 earnings of 87-97 cents and analysts were expecting $1.36. They guided for full year earnings of $4.25-$4.55 and analysts were expecting $5.23. The company said a surplus of available used trucks was depressing the truck market and that is one-third of their business, managing fleets for other companies. Shares were crushed for a 14% loss.


After the bell, Chipotle Mexican Grill (CMG) reported earnings of $1.60 compared to estimates for $1.28. Revenue of $1.07 billion rose 28.1% and beat estimates for $1.05 billion. Same store sales reportedly rose 17.8% and above their own guidance for 15.5% growth. This is the first time comps have risen since the E-Coli and Norovirus outbreaks in 2015. For the rest of the year they are projecting high single-digit sales growth and the addition of 195-200 new stores.

An analyst bearish on CMG said we should not believe the numbers. Apparently, they include new stores in the same store sales numbers so we are comparing apples and oranges. They also have $2.5 billion in off balance sheet debt that most analysts do not consider.

Shares rallied $16 in afterhours.


Wynn Resorts (WYNN) reported earnings of $1.24 compared to estimates for 98 cents. Revenue jumped by nearly 50% to $1.48 billion and beat estimates for $1.34 billion. The casino earnings were bolstered by a resurgence in gambling in Macau, which rose 13% to $7.92 billion in Q1 and the strongest quarter in the recovery that started last August. Revenues from the Wynn Macau were $587.0 million with EBITDA of $181.1 million. Shares spiked $4 in afterhours.


Shares of US Steel (X) were crushed in afterhours falling 19% to $25 after reporting a loss of 83 cents compared to expectations for a profit of 30 cents. Revenue of $2.73 billion also missed estimates for $2.92 billion. Declaring a 5-cent dividend did not slow the decline. The company said "challenges at our Flat-Rolled facilities prevented us from benefitting from improved market conditions."


AT&T (T) reported earnings of 74 cents on revenue of $39.4 billion. Analysts were expecting 74 cents and $40.5 billion. The company said it added 2.7 million net new customers. AT&T said it would no longer provide guidance due to the unpredictability of the wireless handset sales.


Of all the companies reporting on Tuesday, 49 affirmed guidance, 10 raised guidance and 8 warned on future earnings. Those warning included CREE, X, DD, OESX, TRN, R, HUBB and CPLA.

Earnings results so far this quarter have seen 11.4% growth with 6.9% revenue growth. This is the best quarter since Q3-2011. Through Monday's close 79% have beaten on earnings and 14% have missed estimates. That is well above the averages.

There are three Dow components (BA, PG, UTX) reporting on Wednesday but I would not expect major blowouts like we saw today. Thursday will be a key day with a handful of megacap tech stocks reporting after the bell. This could fuel some volatility for Friday.


Netflix (NFLX) shares soared after a report the company will finally begin releasing original content in China after signing a licensing deal with iQiyi.com. Netflix has had problems breaking into China because foreign films and TV are routinely censored and streaming services are subject to strict data usage regulations. iQiyi.com is backed by Baidu and is currently one of China's largest streaming companies. Netflix guided in their earnings for subscriber growth in Q2 of 3.2 million new subscribers compared to analyst estimates for 2.4 million. It is unclear how the new deal with iQiyi.com will impact those numbers but the company announced last week it had passed the 100 million subscriber mark. As a result of that announcement analysts now believe Netflix was intentionally downplaying subscriber growth during the earnings report.


Markets

I would bet a lot of money that we are not going to see a third day of short squeezes and another 200-point gain on the Dow. However, President Trump is scheduled to unveil his "massive" tax reform package on Wednesday with a 15% corporate tax and 10% repatriation tax. While I personally do not think it would have a ghost of a chance of passing, there may be a few retail traders thinking they hit the jackpot.

That announcement could add to Wednesday's bullish bias even if it is panned by the press. The announcement that could really turn the market bullish would be an agreed budget compromise that could be passed quickly without the threat of a government shutdown. You cannot turn on the news today without that threat being discussed even though Trump has reportedly given up on forcing wall funding into this particular piece of legislation.

The markets have gone from two-month lows on the Dow five days ago to new highs on the Nasdaq and threatening new highs on the Dow, S&P and Russell 2000. This has been a very rapid reversal of fortunes and almost all of it was due to short squeezes on 3 of the last 4 days. Short squeezes are great but they rarely lead to new sustained rallies. It does happen from time to time but you cannot count on it.

The S&P gapped right up to resistance at 2,388 in the first 30 minutes of trading and then closed at that same level six hours later. There was no material buying after the initial spike. The next resistance level is 2,395 then round number resistance at 2,400.


The Dow gapped open to 21,003 then traded sideways all day to close at 20,997. All the gains were in the first 30 minutes of trading. The top six gainers on the Dow added 167 Dow points. This is the fallacy of having a narrow price weighted index. Only a few stocks can cause a significant whipsaw in direction. On Wednesday, Boeing has the best chance to push the Dow higher with UTX and PG having a lesser impact because of their lower prices.

I am sure you have heard many times before that gaps are normally filled. That means when a stock or index gaps up significantly, there is normally an eventual reversal that brings the price back down to the starting point to fill that gap. If you look back on the chart to late January and again on March 1st, those gaps were short squeezes that were eventually filled. The bigger the gap, the more likely it will be filled.

It is entirely possible for this suddenly bullish bias to be contagious and have the Dow continue higher to that 21,115 high close from March first but the first chart pattern that comes to mind if that happens is a potential double top.



The Nasdaq Composite has exploded well away from its consolidation range of 5800-5900 to make a new high over 6,000. Today's gap higher was followed by some additional buying but it is impossible to tell if investors suddenly decided to chase techs higher or there were just a lot of reluctant shorts slow to cover. There were not any major tech earnings this morning and most of the FAANG stocks were not participating with the exception of Netflix and Google. FB +1.02, AAPL +.89, AMZN +.21, GOOGL +9.91 on their new fake news announcement and NFLX +8.33 on their entry into China.

There were 297 new 52-week highs on the Nasdaq so the gains were fairly broad based. There were also 56 new 52-week lows. Advancers were 2:1 over decliners.



The biotech sector was on fire with the Biotech Index spiking 1.74% to 3,603. That is not a 52-week high but it is getting close. Biogen (BIIB) earnings helped with the stock spiking $10 on the news. This supported both the Nasdaq and the Russell 2000.


The small cap Russell 2000 traded at a new high at 1,415 intraday but faded slightly at the close. If the Russell can hold these gains and move out to a new high this would be very bullish for market sentiment. They have outperformed for the last week.


Generally, bullish sentiment is contagious regardless of what caused the initial outbreak. In order to reach the contagion stage it normally requires a week or more of strong gains. That is enough to squelch the naysayers and convince the investors on the sidelines the move is real and they are going to miss out if they do not get in immediately.

The Dow has been up 3 of the last 4 days after declining for the prior two weeks. We may not be at that stage where the naysayers are convinced the rally is real. There is also that class of doubters that believe every new high is just a selling opportunity until that trend comes to an end.

The Nasdaq breakout should be convincing but the magnitude of the gains, both on gap up short squeezes, will probably deter additional buyers until there is a pause to regroup.

As I said earlier, if lawmakers can pass a compromise on government funding and avoid a government shutdown, it would be bullish for the market. That could be the extra push we need, along with the tax plan, to convince retail traders it is time to board the train.

Not to be a wet blanket but we are approaching the "Sell in May and go away" cycle. It will be interesting to see if the sellers appear this year.

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