A calm day in the markets was interrupted with a triple digit intraday drop on an email revelation.

Market Statistics

The markets were posting minor gains and moving slowly higher until 11:AM. That is when Donald Trump Jr tweeted copies of an email exchange where a friend of a friend offered to set up a meeting with a lawyer for the Russian government that wanted to give Trump some dirt on Hillary Clinton's dealings with Russia. The algorithmic computers read the headlines and the market crashed. The Dow dropped -159 points from its 11:AM high to trade at 21,279. The other indexes followed suit but with less of a decline.

Almost immediately, the trade reversed when the facts showed all the "Russia" comments came from the friend and were incorrect. The lawyer had no dirt, was not connected with the Russian government and only wanted the intro to Trump to discuss Russian adoptions. I am sure the "friend" is no longer a friend after the bogus setup and now the feeding frenzy in the press over the potential for something to have happened had the claims been real. If the lawyer had produced some dirt, the outcome could have been a lot different.

Regardless of what happened at that meeting or what will happen after the various Russian investigations get done pouring over the facts, the market crashed intraday and then rebounded back to where it started.


The morning economics were mixed. The NFIB Small Business Survey for June declined from 104.5 to 103.6. While the decline was slightly larger than expected, the Optimism Index is still well above pre election levels. The individual components were mostly lower but only slightly. Those respondents planning on increasing capex rose from 28% to 30% and those planning to increase inventories rose from 1% to 4%. Those planning on increasing employment declined from 18% to 15%, expect the economy to improve fell from 39% to 33% and those expecting higher sales down from 22% to 17%.

Moody's Chart

The California Manufacturing Survey for Q3 declined from 62.2 to 61.0. That is still a healthy expansion level despite the decline. The new order component declined from 63.5 to 62.8, employment from 61.2 to 58.2, production from 65.7 to 65.5. This report was ignored.

The Job Openings and Labor Turnover Survey for May fell from a 4.0% openings rate to 3.7%. The number of available jobs fell to 5.666 million from April's peak of 5.967 million. Hires rose from 5.043 million to 5.472 million. Separations rose from 5.008 million to 5.259 million. Quits rose from 1.605 million to 1.661 million. This is bullish for the jobs market because people do not normally quit their jobs unless they are confident they can find a better job rather quickly or have already been hired elsewhere. This was a lagging report for May and it was ignored.

Wholesale inventories for May rose 4% after a -0.4% decline in April. This was the strongest inventory build since December. Durable goods rose +0.6% and nondurable goods were flat.

Inventories rose sharply because of a -0.5% decline in sales. Durable goods sales fell -0.1% and nondurable goods sales fell -0.9%. This was the third consecutive month of sales declines. The inventory to sales ratio rose to 1.29 and the first rise in five months.

The Atlanta Fed real time GDPNow for Q2 declined to 2.6% growth after the payroll report on Friday and the Wholesale Inventories today.


The calendar for tomorrow revolves around Yellen's testimony. Her opening statement will be released to the press at 8:30 and her testimony will begin at 10:AM. Traders are worried she could attack stocks again as being overvalued. There have been multiple comments from her about that over the last couple weeks. Traders are hoping to avoid a repeat of the Alan Greenspan "irrational exuberance" comment like the one he used to tank the market on December 5th, 1996 when the Dow fell -3.4% the next day. Whenever the Fed is trying to talk down the market, traders will listen.

Yellen gets two chances with her testimony on Wednesday and then the repeat performance on Thursday.


There are no material earnings until Friday when the major banks report. Expectations are high for the bank results and even more so after the Fed approved their capital return programs. There could be a sell the news event if the details are not outstanding.


PepsiCo (PEP) was the only major earnings report on Tuesday. Pepsi reported earnings of $1.50 compared to estimates for $1.40. Revenue of $15.71 billion also beat estimates for $15.64 billion. The company guided for the full year for earnings of $5.13, up from $5.09 but that was still a penny below analyst estimates at $5.14. Gross margins declined 55 basis points and operating margins declined 20 basis points. Shares declined sharply at the open but recovered to end the day with only a 53-cent loss.


Michael Kors (KORS) shares fell 7% after MKM Partners reiterated a sell rating and $26 price target. Shares closed the day at $33.25. The analyst said KORS was to slow to innovate and make changes to the merchandising and promotional strategy. She said they were overexposed to wholesale and they needed to invest more in the online business and the product mix was shifting to lower margin categories. Operating margin has declined 900 basis points since 2013 and the analyst is expecting another 430 bp decline in FY 2018.


Barclay's cut Toll Brothers (TOL) to underweight from equal weight, which is the equivalent of neutral to sell. The analyst said a June survey showed moderating buyer traffic and they expect builders to post disappointing results and guidance for the quarter. "Our buyer traffic index decreased from 61 in May to 53 in June. Within builder's primary markets, our weighted index declined from 53 to 47, and falling below expectations for the first time in 2017." Toll Brothers declined -2% but that was minimal compared to their long string of gains. The entire sector decline with the exception of CAA and NWHM.



Ulta Beauty (ULTA) shares fell -5% on zero news. The retail sector is dragging down every company regardless of product or sales method. If they depend on a mall for revenue, they are being sold. Put buying is rampant and short interest is up 49% and at the highest level in nearly a year.


Snap Inc (SNAP) is now the second most hated stock on the street behind Blue Apron (APRN). Snap fell below its $17 IPO price today after their underwriter, Morgan Stanley, downgraded them from overweight to equal weight. MS said Snap's ad business was struggling. They blamed Facebook's Instagram product, where the company is giving away free ads with every post. They also warned that user growth was slowing more than expected. MS said Snap's ad products are taking longer to evolve and competition is peeling away potential advertisers. Instagram has more than 450 million daily active users compared to Snap's 166 million.


Blue Apron (APRN) shares fell -12% after Northcoast initiated coverage with a sell rating and a $2 price target. The Amazon acquisition of Whole Foods is depressing an already questionable IPO. Whole Foods has fresh food and Amazon knows how to ship it fast. That means a potential competitor for the fresh food space that will be an 8,000 pound gorilla the day they decide to compete. If you can borrow these shares, it should be an easy short.


If you did not know it was Amazon Prime Day, you are obviously not a Prime subscriber. Amazon expects to sell $2 billion in advertised specials today and all of those products will be delivered by Saturday. Yesterday my postman said they were adding some workers on Thr/Fri to handle the expected deluge of packages.

One analyst said there would be $10 billion in lost productivity on Tuesday as a result of the time spent looking at the Amazon bargains. He calculated that using the estimated 85 million Prime subscribers spending only 1 minute each looking at ads while at work. Obviously, he is not paying attention. With more than 100,000 discounted products popping up with a new set of ads every 5 minutes, there is far more than 1 minute wasted by Prime subscribers.

If you do not know what Amazon Prime is or just want to see some of the specials, just click the Prime Day image below.

Amazon shares declined slightly, which is normal. For the last three years, they rose into the event and then suffered a sell the news drop on the actual day.


Alibaba (BABA) shares rose $2 because they are benefitting from the hype around Amazon. Alibaba's Singles Day in November is expected to bring in $20 billion in sales compared to Amazon's $2 billion.


Crude prices rallied after the close when the API inventory report showed an 8.133 million barrel decline for last week. Analysts were expecting a decline of -2.99 million barrels. Gasoline inventories declined -801,000 barrels and distillate inventories rose 2.079 million.

Goldman Sachs warned that crude prices were going to fall under $40 without a shock and awe production cut by OPEC. That is not likely to happen.


Tesla's Elon Musk bought back his first domain from PayPal. That domain was X.com. Ebay got the domain when they acquired PayPal from Elon Musk and Peter Theil. PayPal kept it when they were spun off from Ebay. Musk said he has no plans for it today but we all know he will probably come up with a new business just so he can use the name. He said it had sentimental value to him.

PayPal (PYPL) shares declined slightly after an analyst made the case for them buying Square (SQ). Square shares rose 6.3% on the news. The analyst said PayPal could make significant inroads into the brick and mortar businesses with their strength behind Square.


Markets

If it were not for the email crash at 11:AM, it would have been a boring day in the markets. Nobody wants to jump in front of Yellen with a bunch of longs just in case she attacks high equity prices as the reason they need to continue raising rates.

On a positive note, the Fed's Lael Brainard said the Fed may have reached its limit on rate hikes due to the lack of inflation but they could begin to taper their QE purchases as soon as the July meeting. Those comments about 11:30 helped to lift the markets off the email lows.

Volume was only 5.9 billion shares but would probably have been a lot less without the email crash in the middle of the day. That drop triggered a lot of sell stops and active traders bought the dip. Those were trades that would not have happened with the headline.

The S&P dipped to 2,412 on the headline and rebounded to 2,429 where it ran into downtrend resistance and came to an immediate halt. This is a likely resting point until the Yellen testimony on Wednesday. We have a clear support level in the 2410-2415 range from the last several declines and solid resistance at 2,440.


Only three Dow stocks had moves over $1. Other than the morning drop, the session was very quiet. The rebound from the 21,279 low came to a dead stop at downtrend resistance at 21,440. This level is going to be a challenge unless Yellen utters some kind words to lift bullish sentiment.



The big cap tech stocks were positive with the exception of Amazon and Adobe. The Nasdaq closed well above prior resistance at 6,175 and is testing the 6,200 level. We need a close over 6,250 to really generate some short covering and price chasing. Once we exceed that level, traders will begin to believe in a summer rally scenario.




The small caps were neutral today. The Russell closed right in the middle of its recent congestion with neither a bullish or a bearish bias.


Wednesday and Thursday will be governed by Janet Yellen. Traders will be calmly waiting for the news and assuming she does not attack stock valuations, we should see a positive bias into the earnings cycle that begins on Friday. There is no rush to load up on bullish or bearish positions. We will have plenty of time to do that next week once the testimony headlines fade.

There will always be another day to trade if you have capital in your account.

Enter passively, exit aggressively!

Jim Brown

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