The Dow rebounded from Tuesday's decline thanks to earnings from MCD, CAT and DD.

Market Statistics

We were very fortunate there were five Dow stocks reporting earnings this morning. McDonalds, Caterpillar and DuPont offset declined in United Technology and 3M. The MMM decline of -$10.61 points knocked nearly 73 points off the Dow. The UTX decline of $2.71 erased another 18.56 Dow points. Without the winners, it would have been a significantly different day.

Even with the winners offsetting the losers, the Dow was unable to break through resistance at 21,650 that has held for two weeks.


The economic news helped to lift the broader market but could not help the Nasdaq, which was suffering under the large decline in Google shares. The Richmond Fed Manufacturing Survey for July rose from the previously reported 7 to 14 on the headline number. That 7 in June was revised up to 11. The biggest news was the rise in the unfilled orders from -4 to +11. New orders also improved nicely. Employment jumped from 5 to 10.



Worries that consumer confidence might be declining after the first six months of a Trump presidency, appear to be unfounded. The confidence for July rose from 117.3 to 121.1 and halfway back to the March peak at 125. The present conditions component rose from 143.9 to 147.8 and the expectations component rose from 99.6 to 103.3.

Consumer buying plans were almost flat with June but still strong. The percentage of respondents planning on buying an auto rose from 12.6% to 12.7% and home 6.0% to 6.7%. Those planning on buying an appliance or big screen TV declined from 52.1% to 46.1%. That is the lowest in a year but still strong.

Confidence rose in the 35-54 and over 55 groups but declined in the under-35 age group.


The home price indexes rose slightly for May. The FHFA Purchase Price Index rose from 6.8% to 6.9% but that was well over the 5.9% analysts expected. The Case Shiller home price index was flat at 5.7%. These were lagging numbers for May and the reports were ignored.

The calendar for Wednesday is headlined by the Fed meeting announcement. Nobody expects any change in rates but a few analysts believe they could begin tapering their QE purchases. Since late 2014, the Fed has been reinvesting the proceeds from any securities that matured in order to keep their balance sheet at roughly $4.5 trillion. Back in early 2014, the Fed began to "taper" their purchases in the QE3 cycle and that resulted in the famous "taper tantrum" in early 2014.

Nobody expects another taper tantrum when they begin tapering their QE reinvestments because they have laid out in recent releases how they plan to do it and it will be very gradual. However, the market has never been known for rational reactions.


The New Home Sales are expected to rise slightly since this covers the June period. The existing home sales on Monday for the same period declined from 5.62 million to 5.52 million, annualized. We could see weakness in the new home sales because of the rising prices.


The Dow leader for the day was McDonalds (MCD). They reported earnings of $1.70 per share compared to expectations for $1.62. Revenue of $6.05 billion beat estimates for $5.96 billion but was down from the $6.27 billion in the year ago quarter.

Same store sales were up 6.6% internationally, up from 4%, and 3.9% in the U.S. Analysts were expecting 2.9% in the USA. McDonalds said their discounted cold beverage promotion and the new Signature Crafted sandwiches were responsible for the sales and increase in traffic.

Shares rocketed $7.22 to add 49 points to the Dow. This came after a $2 decline on Monday and a five-week closing low.


Caterpillar (CAT) reported earnings of $1.49 compared to estimates for $1.26. Revenue of $11.33 billion rose 9.6% and beat estimates for $10.99 billion. They guided for full year revenue of $42-$44 billion, up from $38-$41 billion and earnings of $5 per share, up from prior guidance at $3.75. Sales rose at all three units but mining/energy reported the biggest gain.

The CEO said a construction boom in China and gas compression business in North America were the highlights. Sales from Asia Pacific rose 23% thanks to China. The Beijing backed infrastructure push and increased investment in China's "Silk Road" project were responsible. U.S. sales rose 7% thanks to a rebound in mining and energy. Shares spiked $6.36 to add 43.5 points to the Dow.


Du Pont (DD) reported earnings of $1.38 compared to estimates for $1.29 per share. Revenue of $7.42 billion rose 5.1% and beat estimates for $7.26 billion. The company is benefitting from a resurgence of farming and they will get a bigger boost when the $75 billion merger with Dow Chemical completes next month. Farmers sowed a record soybean crop. Seed sales jumped with new varieties of soybeans and pesticide sales spikes on demand for fungicides and insecticides. Shares rose $1.14 to add 7.8 points to the Dow.


3M (MMM) reported earnings of $2.58 compared to estimates for $2.59. Revenue of $7.81 billion missed estimates for $7.88 billion. Revenue in electronics and energy rose 7.5% with industrial sales up 2.5%. They guided for full year earnings of $8.80 to $9.05 compared to the prior guidance of $8.70-$9.05. They expect organic sales will rise 3-5% compared to prior guidance for 2-5%. Shares were knocked for a 5% drop or -$10.61 to erase 72.7 points off the Dow.


United Technology (UTX) reported earnings of $1.85 that beat estimates for $1.78. Revenue of $15.3 billion rose 3% and matched analyst estimates. They guided for full year revenue of $58.5-$59.5 billion, up from $57.5-$59.0 billion. They guided for earnings of $6.45-$6.60, up from $6.30-$6.60. Shares declined -$2.71 to erase 18.5 points off the Dow.


Biogen (BIIB) reported earnings before the bell of $5.04 compared to estimates for $4.37. Revenue of $3.08 billion beat estimates for $2.81 billion. They raised their guidance due to faster than expected acceptance of the Spinraza drug for spinal muscular atrophy. The new guidance is $11.5-$11.8 billion in full year revenue and earnings of $20.80 to $21.40, up from $20.45 to $21.25. Shares spiked at the open but faded to lose $1.74 for the day.


After the bell, Amgen (AMGN) reported earnings of $3.27 compared to estimates for $3.11. Revenue of $5.81 billion also beat estimates for $5.67 billion. For the full year, they guided for earnings of $12.15 to $12.65 up from $12.00 to $12.60. Unfortunately, that midpoint of $12.40 only matched analyst expectations. Revenue is expected to be $22.5 to $23.0 billion and in line with estimates for $22.69 billion. Shares declined $4 on the news.


Chipotle Mexican Grill (CMG) reported earnings of $2.32 compared to estimates for $2.16. Revenue of $1.17 billion missed estimates for $1.19 billion. Same store sales of 8.1% were strong but missed estimates for 9.5%. The company said the recent norovirus outbreak in Virginia was due to a sick employee. The store offers paid sick leave but workers claim they are routinely forced to work even when they are sick. They are adding cheese queso to the menu in 350 stores because of constant requests. Some analysts believe this could add 2-3% to sales because consumers want it and traffic could increase when it is added. Shares rallied $9 in afterhours.


Texas Instruments (TXN) reported earnings of $1.01 compared to estimates for 96 cents. Revenue of $3.69 billion beat estimates for $3.57 billion. Shares rose $2 in afterhours.

AT&T (T) reported earnings of 79 cents compared to estimates for 73 cents. Revenue of $39.84 billion barely beat estimates for $39.79 billion. The company lost 89,000 subscribers in the quarter but analysts had been expecting a loss of 256,000. AT&T added 178,000 prepaid subscribers. Shares rose $1 in afterhours.

Wynn Resorts (WYNN) reported earnings of $1.18 compared to estimates for $1.19. Revenues of $1.53 billion beat estimates for $1.45 billion. Revenue in Macau rose 6.8% but industry revenue in Macau rose 22%. Shares declined $6 in afterhours.


US Steel (X) reported earnings of $1.07 compared to estimates for 40 cents. Revenue rose 22% to $3.14 billion beating estimates for $2.98 billion. They guided for full year earnings of $1.70 compared to estimates for 90 cents. They declared a 5-cent dividend payable September 8th to holders on August 9th. Shares rallied $2.50 in afterhours.


Advanced Micro Devices (AMD) reported earnings of 2 cents on revenue of $1.22 billion. Analysts were expecting zero earnings and revenue of $1.16 billion. They guided for annual revenues to increase by mid to high-teens percentages compared to prior guidance for low double-digit growth. Shares spiked about 10% in afterhours. This should be a preview of Nvidia's earnings, which are expected to be strong.


Earnings for Wednesday are headlined by Facebook and Paypal. There are two Dow components with Boeing and Coke reporting. Boeing could be a market mover but Coke is not likely to impress. Amazon follows after the bell on Thursday. Apple closes out the FAANG earnings next week.


With the Fed announcement on rates on Wednesday afternoon, the dollar recovered slightly from its 12 month low. The falling dollar is going to be beneficial to stocks that do business internationally. Currently about 40% of S&P earnings are generated overseas. A low dollar will increase those earnings.


The yield on the ten-year treasury jumped 3.2% or 7 basis points to 2.326% on strong earnings and the potential for a positive healthcare vote. Stocks are starting to be preferred over treasuries leading to a mild bout of selling in the fixed income sector.


Crude prices rose $2.25 in regular trading and helped lift energy equities. The outcome of the OPEC meeting on Monday was positive and Halliburton said they were seeing a plateau forming in the U.S. rig count. That suggests the rapid pace of new production could slow.

The API inventory report after the bell showed a drop of 10.2 million barrels for last week. Gasoline supplies rose 1.9 million barrels and distillates were down -111,000 barrels. Crude prices gained an additional 47 cents to trade over $48 on the API news. If the decline is repeated in the EIA inventories on Wednesday, we could see another sharp spike higher.


The Volatility Index ($VIX) came very close to dipping below 9 today. We are already at historic lows with the December 1993 low close at 9.31. We closed at 9.36 on Friday and dipped as low as 9.04 today before rebounding in the afternoon. This was the 9th consecutive day for the VIX to close under 10. There will be a volatility event in our future. We just do not know what or when but it will be painful. Fundstrat said "go long volatility" because there is a 50% chance of a 10% correction in the S&P over the next three months.





Markets

The markets saw a boost from the Dow component earnings and from the Fed meeting trend. Typically, the day before a Fed announcement sees a positive market as short positions are trimmed and long bets taken.

The S&P gained 7 points to close at a new high and just over resistance at 2,475. The close was not high enough to take us out of the gravitational pull from that resistance so this could have been just a temporary high close. If the earnings cycle remains strong and there are no unexpected headlines, I would not be surprised to see an attempt to tag 2,500 before the week is out. I would be a seller on the SPY at $249.50.


The Dow was the index leader today along with the Russell 2000. The Dow added 100 points but failed to close above resistance at 21,650. We did trade over that level intraday but the declines UTX/MMM were too strong and we could not achieve liftoff. With only one material Dow component with earnings on Wednesday, there may not be enough fuel to break through that resistance level. Initial support remains 21,500.



The Nasdaq Composite closed at a new high by one point. This was due to the drag by Google and the biotech sector. The Biotech Index lost -1.2% to erode support for the tech index. The Nasdaq 100 Index lost 10 points because it was impact much more by the Google loss.


The big cap techs were mixed but it was clearly Google causing all the trouble. The single point gain on the Composite Index is not enough to lift it out of congestion. Facebook could accomplish that task on Thursday if their earnings are strong on Wednesday night.





The Russell 2000 broke over uptrend resistance and held the gains. The 1,450 close could be a psychological stall point but we will not know until this week is over. The small caps are doing great after six months of consolidation.


The FANG stocks had pulled back into a tight group as they moved to new highs but Google clearly broke free and began a decline. If Facebook and Amazon can manage to post big gains and breakout to the upside it would do wonders for the broader market sentiment.


Wednesday morning could be calm with a slight upside bias assuming Europe and Asia do not spoil the party. The volatility after the Fed announcement should be light since no change is expected. However, it all depends on the wording of the statement.

I continue to recommend not being overly long as we move into next week. The high profile earnings will be behind us with the exception of Apple. That report has the potential to disappoint. We could see the post earnings depression phase begin next week. Be prepared if it appears.

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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