The Nasdaq big caps kept the broader market from collapsing intraday.

Market Statistics

All of the indexes opened higher with the Dow rising to 21,046 and the S&P 2,404. Those two indexes rolled over and headed back into negative territory but the Nasdaq toughed it out and managed to remain positive and then regain the highs. The Dow declined -75 points intraday and the S&P -9 points after their early gains. The rebound in the Nasdaq helped to lift those indexes again and the markets ended the day neutral.

The computers are keeping the markets from making any major moves. Everyone has heard about the move from active to passive investing and the surge in ETF trading by computers. With more than 60% of our daily volume done by computers, they have learned how to range trade. Rips are sold and dips are bought. Buying and selling millions of shares of ETFs causes those stocks represented by the ETFs to also rise and fall fractionally. We are in the midst of a computer war but we cannot see it other than the flat charts.

The Dow and S&P have traded in lock step for the last three weeks. Prior to today, the Dow traded in a .02% intraday range or less on 8 of the last 9 days. Today makes it 9 out of 10 days.


The sharp afternoon drop was caused by the North Korean ambassador to the UK. He said "We are ready to turn into ashes any available strategic assets of the US." He also said North Korea was prepared for their sixth nuclear test as soon as Kim Jong Un gave the order.

After the close, President Trump fired FBI Director James Comey on the recommendation of Attorney General Jeff Sessions and Deputy Attorney General Rod Rosenstein. In Trump's letter to Comey he said it was time to find somebody that could restore public trust in the agency. Shortly thereafter Senate Democratic leader Chuck Schumer called for a special prosecutor in the investigation between Trump's campaign and Russia. Schumer said the pattern of dismissals of people critical of the Trump administration was troubling. Acting Attorney General Sally Yates was terminated and former super star U.S. attorney Preet Bharara was also dismissed. According to Schumer, the Comey termination suggests the administration is trying to cripple the Russian investigation. S&P futures crashed -5 points almost immediately after the two headlines.

In the economic news, the NFIB Small Business Optimism Index declined fractionally from 104.5 to 104.5. That remains at multiyear highs despite the -1.4 point decline over the last three months. The index average in 2016 was 95.3. However, the percentage of small businesses that expect the economy to improve over the next six months fell from 46% to 38%. The current job-opening component rose from 30 to 33. A net of 16% of companies plan to increase employment but 33% said they had jobs that were hard to fill. The uncertainty over Obamacare and the AHCA and what will eventually be passed is causing business owners to tone down their post election expectations. The promise was to repeal Obamacare and that has not yet happened and it is looking more likely every day that some portions will remain in force in some form.

Moody's Chart

The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings remain steady at a 3.8% rate in March. There were 5.743 job openings, 5.260 million hires and 5.088 million separations. There were 3.116 million quits and 1.615 million layoffs. The hiring rate was unchanged at 3.6%. Because this was a lagging report for March, it was ignored.

The Atlanta Fed real time GDPNow forecast opened the quarter forecasting 4.3% GDP growth for Q2. After a week of soft economic reports, that has declined to 3.6%. This morning's Wholesale Trade report for March showed inventories rose +0.2% with durable goods rising +0.6% and nondurable falling -0.5%. Sales were flat. The weak inventory build caused the GDP forecast to weaken.


The calendar for the rest of the week is led by the Retail Sales on Friday and the price indexes on Thr/Fri. Unless there is a dramatic miss of the estimates, none of those should move the market.


After the bell the API inventory report for crude oil showed a decline of -5.789 million barrels compared to estimates for a -1.8 million barrel decline. The API report showed a -4.158 million barrel decline last week but the EIA report only showed a drop of 900,000 barrels. If the EIA report tomorrow were to catch up with the API numbers and show something well over a 5 million barrel drop, we should see prices begin to recover from the multi-week decline.

Over the weekend Saudi's oil minister, Khalid al-Falih, said "after conversations with participants, I am confident the production cut agreement will be extended for another six months and possibly beyond." The OPEC meeting is May 25th and we should be getting almost daily headlines ahead of that event.

That tease about "possibly beyond" is their attempt to start building some excitement over a potential production cut extension that is not limited to six months. Crude prices are still lingering in the $46 range and they did not rebound after the API numbers.


Valeant Pharmaceutical (VRX) reported earnings of $1.79 compared to estimates for $1.08. However, that includes a onetime tax benefit. Revenue of $2.11 billion missed estimates for $2.18 billion. The company blamed lower volumes in U.S. diversified products and branded products as the cause. They also blamed "challenging market dynamics." They did raise their forecast for adjusted earnings to a range of $3.60-$3.75 billion, up from $3.55-$3.70 billion. Shares spiked 24% on the news.


Allergan (AGN) reported earnings of $3.35 that beat estimates for $3.31. Revenue of $3.57 billion also beat estimates for $3.53 billion. The company said revenue from facial aesthetics, Botox, eye care and other products were responsible for the revenue growth. They guided for full year revenue of $15.8-$16.0 billion with adjusted earnings of $15.85 to $16.35 per share. Analysts were expecting $15.9 billion and $16.03 per share. Shares declined $3.50 on the news.


Online retailer Wayfair (W) reported a loss of 48 cents that beat estimates for 56 cents. Revenue of $960.8 million rose 29% and beat estimates for $939.2 million. The company said the number of direct retail customers had risen 45%. In the home shopping category that is hard to do. They hired 1,800 new people in 2016 and formed them into teams to attack various categories in their addressable market where they were smaller relative to perceived potential. Apparently it worked. Selling furniture is not going to be something Amazon charges into in the near future because of the shipping problems. However, Amazon could do it through a third party marketplace where the manufacturers are responsible for the shipping. Wayfair is attempting to capitalize on their narrow lead in this area. Shares exploded higher for a 21% gain.


Apple (AAPL) shares continued to hit new highs and lift the Nasdaq and the Dow after an SEC filing showed that Warren Buffett nearly tripled his holdings in the company. Buffett disclosed he owned $19.2 billion in Apple shares, up from $7.1 billion on March 31st. That makes Berkshire Hathaway the 4th largest owner of Apple shares at roughly 133.65 million shares. Apple currently has 5.1 billion shares in circulation. The stock rose to close over $803 billion in market cap and definitely on their way to become a trillion dollar company if everything continues to work in their favor.

Also helping Apple shares was a report in DigiTimes that the iPhone 8 production is "on schedule" which is contrary to multiple supplier and press reports over the last month. Taiwan semiconductor is reportedly ready to ramp up production of the A11 chip that powers the phone starting in June. Circuit board manufacturers Zhen Din Technology and Kinsus Interconnect Technology have reportedly "managed to improve their yields of the board" enough to move into volume production in June. Lastly, Foxconn, Wistron and Pegatron, the actual assemblers of the phones, are ramping up recruitment and training of new workers in China in preparation of the new phone.

However, there was no word on the delay in the 3D sensors or whether Apple had resolved the overheating problem from the wireless charging process. There is also worry that Samsung will not be able to produce enough OLED screens to satisfy both Apple and the other manufacturers using the same screens. There are still risks that final manufacturing concerns could mean certain rumored features could be scrapped and that would be negative for sentiment. There are rumors the fingerprint sensor may have to be moved to the back of the phone and that would be a mistake.

Given all the moving parts that have to come together perfectly to sell 80 million iPhones in Q4, there is always the potential for some specific part to spoil the party. So far, Apple has been very fortunate in the past models that they have escaped this challenge. We saw a similar event with the cordless ear buds, which were delayed significantly. If that were to happen to the iPhone 8 it would be a disaster for the stock.


After the bell, my favorite company, Nvidia (NVDA), reported earnings of 79 cents that rose +126% and easily beat estimates for 66 cents. Revenue of $1.94 billion rose 48% and even beat optimistic analyst estimates for $1.91 billion. In one fell swoop all the recent critics of Nvidia were left standing on the sidelines while the stock spiked $15 immediately after the release.

Analysts had said Nvidia's gaming revenue was on the decline because PC games were not selling as well so high dollar graphics cards were fading. The company said gaming graphics revenue rose $687 million to $1.03 billion. The only thing fading is analyst credibility. Datacenter revenue rose +186% from $143 million to $409 million. Automotive revenue rose from $113 million to $140 million.

The CEO said demand for AI chips was exploding and Nvidia GPUs were by far the choice for those leading the charge into the AI future.

Nvidia will hold its GPU Technology Conference next Wednesday and it is expected they will unveil more details about its next generation architecture, called Volta, which will be another giant leap for mankind. Sorry Intel.


Dow component Disney (DIS) reported earnings of $1.50 compared to estimates for $1.41. Revenue of $13.34 billion missed estimates for $13.41 billion. Cable network revenue rose 3% to $4.1 billion but operating income fell -3% to $1.8 billion because of lower revenue from ESPN. The determining factor was higher programming costs. There was also a shift in the college playoff game schedule that skewed revenue. Disney also suffered from the pre-release costs for Beauty and the Beast but none of the revenue, which is in Q2. Comparisons were also difficult because of Star Wars and Zootopia in the year ago quarter. CEO Bob Iger continued to claim that the worry over ESPN cord cutting is "highly exaggerated" saying the company has taken numerous steps to prevent any material decline in revenues. Shares fell $3 in afterhours.


Shares of TripAdvisor (TRIP) rose $3 in afterhours after reporting earnings of 24 cents that missed estimates for 28 cents. Revenue of $372 million rose 5.7% but missed estimates for $378.7 million. They announced an agreement with GrubHub (GRUB) to integrate the service into the TripAdvisor websites to allow customers to order from more than 4.2 million restaurants in more than 1,100 cities.


Yelp (YELP) needs some help after reporting earnings of 19 cents that beat estimates for 16 cents. Revenue rose 24% to $197.3 million and just below estimates for $198 million. The problem came from lowered guidance. The company said it now expects full year revenue of $850-$865 million and analysts were expecting $889 million. Yelp said it was facing an advertiser revolt as smaller businesses failed to compete well with larger corporate advertisers. Small emerging businesses were getting lost in the advertising shuffle. Shares imploded on the news.


Priceline (PCLN) reported earnings of $9.88 compared to estimates for $8.83. However, given Priceline's history of big beats, that was almost considered a miss. Revenue of $2.42 billion missed estimates for $2.43 billion. They guided for the current quarter to earnings of $13.90-$14.00 and analysts were expecting $15.49. Shares fell $60 on the news.


Earnings highlights for Wednesday are SnapChat, Symantec, Whole Foods, Mylan Labs and Netease. SNAP will probably get the most headlines since this is their first public earnings report.


Markets

The S&P futures have recovered slightly from the -5.50 low to trade at -3.50. There is still a lot of darkness before the dawn and anything can happen. The market is suffering from erectile dysfunction and we need the equivalent of a stock Viagra to pump it up. With the earnings cycle slowing the lack of more than 2-3 high profile companies per day with good earnings, is not enough to keep the optimism going.

While Nvidia soared tonight, their gains are easily offset by the drop in Priceline shares. Nasdaq futures are negative as well. The Nasdaq big caps have been supporting the market for the last three weeks or longer. The top ten Nasdaq stocks are also in the S&P and three in the Dow so while they were leading the Nasdaq higher they were also providing support for the other big cap indexes. Eventually Apple is going to fall from its tree and waken the bears sleeping below. One or two of the FAANG stocks cannot support the market. It has to be a group effort. Google and Facebook were negative today and Apple, Amazon, Netflix were only barely positive relative to their dollar value.

Since the Nasdaq has supported the market, it is the Nasdaq that will eventually crash the market when profit taking finally appears. The Composite Index closed at a new high at 6,120 after finally breaking over initial resistance at 6,100. Unfortunately, it is still battling uptrend resistance at the 6,130 level.

The Nasdaq 100 has broken out to a new high over that same uptrend resistance mostly thanks to Apple's recent spike. I showed the Apple chart earlier and it is extremely over-extended. The September iPhone announcement is a long way off and anything can happen over the next four months.

The $NDX has support at 5,610 should it decide to rest.




The small caps did not decline and that is a positive. They did not rally either so the overall impact is neutral. The S&P-600 has solid resistance at 850 but it is not declining from that battle.


The Dow rebounded from the -75 intraday low but could not make it back to resistance at 21,000. With Disney down after the close, it could start out negative on Wednesday. The Dow futures are only down 40 points so there is no real decline. There are no other Dow components reporting this week so the Dow stocks will have to get their energy from some other source. Support is 20,900.



The S&P traded over 2,400 to 2,404 but fell back to 2,390 intraday. The index is trying to move higher thanks to the Nasdaq big caps but it may face some headwinds on Wednesday. Support is well back at 2,380.


I am worried the Nasdaq bullish streak could be due for a rest. Apple is due for some profit taking and most of the big cap tech stocks have already reported earnings. We are moving into the "sell in May and go away" cycle and once the MACD on the S&P gives a sell signal, we will see whether this cycle will be material in 2017. Given the strong earnings for Q1, the impact could be negligible.

The termination of FBI Director Comey and the call for a special prosecutor by Chuck Schumer, could be the events that finally spoil the market sentiment. Only time will tell but I would be cautious about adding new positions until the market actually picks a direction other than sideways.

Enter passively, exit aggressively!

Jim Brown

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