Tuesday's market was a prime example of how we feel when we go back to work after a long hectic holiday weekend.
We can always get that second, third or even fourth cup of coffee to wake us up and keep us from falling asleep at our desks. The market needed someone to inject some monetary caffeine in the form of buying new positions and there simply were not enough traders back at work to accomplish that task. A large number of traders typically extend that first summer weekend with the kids out of school and get summer off to a good start. Those traders will begin coming back to work on Wednesday and volume will increase slightly. Volume Friday of 5.2 billion shares was the lowest since December and today's volume of 5.7 billion shares was only slightly better.
The Dow gapped lower at the open thanks to Goldman Sachs and a $4 decline. Goldman said it bought $2.8 billion in bonds on Venezuela's state owned PDVSA oil company for 31 cents on the dollar due in 2022. Historically, 31 cents is the average price of a defaulted bond so Goldman is buying at the lows in anticipation of the current government being overthrown and economic conditions improving over the next 5 years.
Unfortunately, the opposition currently trying to overthrow the existing government did not appreciate the good deal and said Goldman, with its stature as a global bank, was actually supporting the current regime. The opposition said Goldman was "financing the dictatorship" of President Maduro. The backlash against Goldman caused a $4 decline and knocked nearly 40 points off the Dow at the open.
On the economic front the Consumer Confidence for May fell sharply from 120.3 to 117.9. That is the second monthly decline from the peak of 124.9 in March. The Trump optimism is fading with each new flare-up in Washington. The present conditions component rose slightly from 140.3 to 140.7 but the expectations component fell from 105.4 to 102.6. Those planning on buying a car declined from 14% to 12% and homebuyers fell from 6.4% to 5.8%. Potential appliance buyers fell from 52.9% to 48.7%.
Despite the recent declines, the confidence levels are still at highs not seen since 2001. The employment components remained solid. The under 35 yr old respondents were still optimistic while the over 55 yr age group lost confidence in the potential recovery.
Personal spending for April rose +0.2% after a 0.3% rise in March. Durable goods spending rose 1.1% with motor vehicles at 1.5% and recreational goods and vehicles at 1.5% to lead the spending. The leadership of those two categories should tell you how confident consumers are about the future.
Personal income for April rose +0.4% after a +0.2% rise in March. Wages and salaries rose 0.7% and rental income +0.9%. Income is up 3.7% over year ago levels.
The Core PCE Deflator, an indicator of rising inflation favored by the Fed, rose +0.2% for April after a -0.2% decline in March. The indicator is up 1.5% over year ago levels and its lackluster growth has been a persistent thorn in the Fed's side.
The Fed is widely expected to hike rates at the June 14th meeting with a 91.2% chance as indicated by the CME Fed Funds Futures.
The Fed Beige Book on Wednesday is not expected to be a market mover because the recent economic reports constantly confirm that growth is moderate. This report will echo that theme.
The ADP Employment report on Thursday is expected to show a gain of 185,000 jobs, which would be the Goldilocks number of not too hit and not too cold. The same number on the Nonfarm Payrolls on Friday would be perfect. This would give the Fed confidence that another quarter point hike would not rock the economic boat.
The stock news was almost non-existent today as well. You could tell everyone was still on holiday time. Ambarella (AMBA) was cut from overweight (buy) to sector weight (neutral) by Pacific Crest. The analyst said Ambarella's largest customer, DJI, may have incorporated technology from a competitor in its latest $499 Spark drone. That could be a major problem for AMBA in future earnings reports. Shares fell -7.4% on the news. Ambarella was in the midst of a nice rebound and had made it to the resistance at $65. By dropping the rating at that resistance level, the analyst got the most bang for his ratings buck.
Barclays raised their price target for McDonalds (MCD) from $155 to $164 and reiterated their outperform rating. The analyst touted their new focus on delivery and the expanded menu. MCD shares closed at another new high.
Yum Brands (YUM) rose to a new high after Deutsche Bank raised the price target from $68 to $71 while reiterating a hold rating. The analysts said the recent investor day pointed out that two-thirds of existing franchisees are expanding and there is a potential for expansion in China, India, Canada and Brazil. At the same time Cowen raised the price target from $80 to $85 with an outperform rating.
Credit Suisse upgraded PVH from neutral to outperform. This follows a JP Morgan upgrade from neutral to overweight on Thursday and Citigroup upgrade from neutral to buy on Wednesday. Leon Cooperman said this week that PVH is one of his top picks because of their exposure to Europe. Shares were up slightly today but down slightly from the dual upgrades last week.
Morgan Stanley reiterated an overweight weighting on Micron (MU). The analyst said the tight supply of memory chips was showing no signs of slowing down. "Conditions remain robust and we expect above cycle earnings to persist." He referenced several other analysts that expect demand to actually increase in July. He raised his full year earnings estimate from $4.01 to $4.23. His bull case was for the stock to rise to $42.
Western Digital (WDC) shares broke out to a new high on a report they may be changing their strategy on the Toshiba memory bid. They have been unsuccessful in trying to bull their way through the proceedings even though they have the law on their side. A report out today suggests they may be ready to partner up with a group of Japanese investors plus the private equity firm KKR to put forth a joint bid. Joining forces with a couple of Japanese investment firms is a big plus because the government of Japan does not want to give control to Foxconn, a Chinese firm, which is the current high bidder. WDC does not have the cash or the clout to match the reported $20 billion bid but together with the Innovation Network of Japan, the Development Bank of Japan and KKR, they would have no trouble matching the top bid or at least close enough that Toshiba would have to let them have it. WDC already owns 50% of the business and has first right of refusal but Toshiba is trying to sever that right and just take the high bid. WDC could be adding temporary partners in hopes of buying them out eventually.
Android co-creator Andy Rubin and his new firm Essential Products announced a new top of the line smartphone called the Essential Phone. The phone has an edge-to-edge screen, titanium and ceramic case, dual cameras, 4K video, an Android operating system and sells for $699. The phone is targeting the high-end phones from Apple, now expected to be over $1,000 and Samsung at $899.
They also announced a new digital assistant called Home. Rubin said you will be able to choose your digital assistant for the device using either Alexa, Google Assistant or Siri. He has not explained how you will be able to choose between those three since Siri has not been available for dispersing in embedded devices in the past.
Rubin sold Android to Google in 2005 and worked at Google until 2014. The phones will be assembled by Foxconn, just like the iPhones. The phones are designed to work on all four major U.S. networks. Unlocked phones will work on any carrier. A delivery date has not yet been announced. They have a nice website to introduce the phone. Here
Amazon (AMZN) won the race. The stock traded over $1,001 intraday to beat Alphabet (GOOGL) to the $1,000 mark. However, as expected, that became a sell the news level and sellers appeared right on schedule. The stock posted a minor gain but the real goal will be to close over $1,000.
Nvidia (NVDA) continued to surge higher on a flurry of new headlines on hardware and new partnerships. I will not bore you with their details again but if you get a chance, buy a dip!
Crude prices have not recovered from the Thursday decline. WTI was down slightly again today but energy equities are down significantly more. Because of the holiday, the regular API inventory report on Tuesday evening will not be released until tomorrow. The EIA inventories in the morning are going to be critical for the price of WTI recovering. Inventories have declined 19 million barrels over the last 7 consecutive weeks. We need that string to continue.
Other than the gap down at the open, the big cap markets were dormant. The Nasdaq 100 managed to post a gain thanks to Amazon, Nvidia, Google and Tesla. The S&P gapped down slightly but actually recovered somewhat during the day thanks to those same four stocks.
The 2,420 level is now resistance after two days of trying to move higher and failing. The minor decline on the S&P is not material. This was a throwaway day for the market. Today's action should be ignored.
The Goldman Sachs decline knocked the Dow back to prior resistance at 21,000, which should now be support. The index rebounded slightly to close at 21,029. The 21,000 level is now the line in the sand that we need to watch for market direction. If the index dips below that, it would be a caution. If it dips below 20,900, it would be a warning that conditions are changing.
The Nasdaq 100 big cap index closed at a new high. All of the usual suspects helped to power the index higher. The Nasdaq Composite declined slightly with much of the weakness from the biotech sector. The Biotech Index declined 60 points or -1.7%. The biotechs should be positive this week with the ASCO conference starting on Friday but conventional wisdom is proving to be wrong this year. Support on the $BTK is 3,475.
The Nasdaq Composite benefitted from the rise in the chip stocks with several hitting new highs. Were it not for the weakness in the biotechs the outcome would have been a lot different.
The Russell 2000 small cap index declined -0.8% to 1,372. Initial resistance at 1,388 and secondary resistance at 1,400 are both well above and the Russell is headed in the opposite direction. This is likely due to the Russell rebalance in late June and the hedge funds selling the stocks that are going to be removed from the index. This may not improve for the next couple weeks.
The S&P-600 small cap index is not as weak and that lends credibility that the rebalance is a factor.
There is no reason to sell. At least that is what we are seeing from institutional investors. There is still money on the sidelines waiting for any material dip to buy and the big caps tech stocks just keep powering higher despite their overextended charts.
Conventional wisdom would suggest waiting for a dip to buy but that dip could be from much higher levels. If you were going to buy this market going into the summer slow season, I would do it with reduced position sizes. Markets can continue to be overbought for a long time. The trend is your friend, until it ends.
Enter passively, exit aggressively!
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