The Dow gapped open to 21,988 but could not move higher as traders hit the sell button.

Market Statistics

The Dow sold off immediately from that first attempt at 22,000 but tried again at 11:AM and again at noon. Both attempts stopped just under that round number resistance. After the initial morning volatility, the Dow traded in a narrow 50-point range the rest of the day. Apple gained $9 in afterhours and that would add about 50 points to the Dow if the gains hold overnight. That would lift the Dow over 22,000 based on the 21,960 close but I really doubt we will see a breakout. The likely scenario would be an opening touch of that level and then a fade as traders sell the news.


There was a heavy economic calendar this morning but none of it impacted the market. The CoreLogic Home Price Index for June rose from 6.6% to 6.7% as the gain over June 2016. The surplus of home price reports means they are all ignored.

Construction spending for June declined -1.3% compared to zero in May and analyst estimates for a +0.8% gain. Public construction spending fell -5.4%. Private construction spending fell -0.1%. Residential spending fell -0.2% and removing home improvement spending drops that to -0.3%. To put this in perspective U.S. construction spending was still $1.21 trillion with private construction at $940.7 billion. Highway spending fell -6.6% and spending on educational buildings fell -5.5%.

The ISM Manufacturing Index for July fell from 57.8 to 56.3. Analysts expected 56.5. The average for 2017 is 56.4 so we are right in the range. New orders declined from 63.5 to 60.4 and order backlogs declined from 57.0 to 55.0. Production slipped from 62.4 to 60.6 and employment fell from 57.2 to 55.2. Analysts fear a slowdown in auto manufacturing over the next several months will drag on the ISM and the GDP. Manufacturers are expected to extend the down time as they retool for the new model year. This is typically how they deal with excess inventory. Plants will remain closed after the retooling until inventories deplete.


Annualized auto sales for July were 16.8 million compared to the 16.7 million in June. This was the fifth month in this range and represents a plateau of sorts. Light truck sales fell from 10.72 million to 10.55 million and -1.6% lower than year ago levels. This is the first time that has happened since 2011. Auto sales rose from 5.98 million to 6.21 million but that was 12.5% lower than June 2016 and the lowest level since 2011. The average selling time for a new car/truck at a dealer was 76 days and the longest since 2009. Incentive spending/discounts averaged $3,900 per vehicle. According to JD Powers, that was a record for July.

For months, I have been writing about the declining credit availability for auto loans. Banks are seeing 3% delinquencies on existing loans and the highest since 2011. Some banks are no longer doing auto loans and the Fed has mentioned this credit tightening in recent months.

Personal income was flat in June and the lowest since November. Analysts expected a 0.4% rise. If rental income had not risen +0.6% the headline number would have been negative. Obviously, the vast majority of workers do not have rental income. Employee compensation rose +0.4% but proprietors income declined -0.1% and income on assets fell -1.8%. May's total personal income rose $53.2 billion but June income declined -$3.5 billion.

Personal spending was also flat after a +0.2% rise in May. Durable goods spending declined -0.1%, motor vehicles and parts -0.8%, household furnishings -0.1% and recreational spending -0.1%. Spending on clothing rose 0.7% and gasoline +1.2%.

Analysts believe the tight labor market is going to cause wages to rise along with spending but the increases are slow to appear. Rising wages will pull disenchanted workers back into the job market and their spending will increase significantly.

The PCE Deflator derived from those reports above, was flat at zero inflation for June. This came after a -0.1% decline in May. With zero inflation for the last two months, the Fed is going to struggle to justify another rate hike unless there is a dramatic change in inflation soon. The Fed continues to claim the low inflation is "transitory" but their time frame for rising inflation has now lengthened to "the next several years." That sounds more like wishful thinking than actual data.

Tomorrow we see the ADP Employment for July. The expectation is for a gain of 186,000 jobs. ADP estimates have been much higher than the real numbers over the last several months. Let's hope analysts got it right this time.

The Nonfarm Payrolls on Friday are expected to show a gain of 182,000 jobs, down from 222,000 in June. The nonfarm estimates have been low for the last several months.

The numbers are not going to matter unless there is a very large miss in either direction. The Fed is on hold until December so other than some minor volatility, the numbers will be ignored.


The calendar that matters is the earnings calendar. Tesla reports on Wednesday after the close with Yum and Activision Blizzard on Thursday. After this week is over more than 425 of the S&P 500 companies will have reported and the pace of the remaining reports will decline significantly.


The 800-pound gorilla that will determine Wednesday's market direction reported earnings after the close. Apple reported earnings of $1.67 ($8.72 billion) compared to estimates for $1.57. Revenue of $45.41 billion beat estimates for $44.71 billion. They guided for the current quarter to revenue of $49-$52 billion. Analysts were expecting $49.15 billion. Apple sold 41.03 million iPhones compared to estimates for 40.7 million. For Q2-2016 they sold 40.4 million. CEO Tim Cook had previously said Q2 might be a little sluggish as people waited for the iPhone Pro/8 to be announced.

The guidance seems to indicate that there will be an announcement in September. It is a good guess that the iPhone 7 and 7s Plus will be updated in September with the SE seeing a possible update in August. The guidance did not lend any credibility to a potential manufacturing delay in the Pro/8 but they also did not put the fears to rest.

Apple also sold 11.42 million iPads compared to estimates for 9.03 million. They shipped 4.29 million Macs and missed estimates for 4.33 million.

If Apple can hold the gains through the open on Wednesday, they could power the Dow to touch 22,000. Whether the Dow will hold that level is another question.


Under Armour (UA) reported earnings before the bell and it was not pretty. The company reported a loss of 3 cents compared to estimates for a 6-cent loss. Revenue of $1.09 billion rose 8.7% beat estimates for $1.08 billion. They guided for earnings of 37-40 cents for the full year, which was lower than the 42-cent estimate. They guided for revenue growth of 9-11% compared to prior guidance of 11% to 12%.

The company said it was launching a restructuring plan and would close facilities, existing leases and cut jobs. They will take a full year charge of $110-$130 million. They have already closed 33 factory outlets and 23 UA stores in the last 12 months.

Footwear sales declined -2.4% compared to the 40% growth in Q2-2016. This chart from Quartz, shows the progression of footwear revenue over the last 13 quarters. Sales are plunging and so is the stock price.


Shares of UA fell -10.4% to a historic low. The declines are likely to continue.


Lumber Liquidators (LL) rocketed higher after posting earnings of 16 cents that beat estimates for 8 cents. That reversed a 45 cent loss in the year ago quarter. Revenue rose 11% to $253.5 million and beat estimates for $256 million. Shares rose 36% on the news. This was the best quarter since the scandal over the Chinese flooring.


Shopify (SHOP) reported a loss of 1 cent that easily beat estimates for a 6-cent loss. Revenue rose 75% to $151.66 million and beat estimates for $143 million. The company said a record number of retailers joined the platform and more than 500,000 retailers in 175 countries now used the service. Cash on hand rose from just under $500 million in March to more than $932 million. More than 131 million people have purchased from a Shopify store in the last 12 months. Shares rallied 13% on the news.


Xerox (XRX) reported earnings of 87 cents compared to estimates for 80 cents. Revenue of $2.57 billion missed estimates for $2.62 billion. The company guided for full year earnings of $3.20-$3.44 compared to estimates for $3.32. Xerox completed a 1:4 reverse split in June.


Snap Inc (SNAP) will not be eligible for inclusion into the S&P-500 and Russell indexes because of new rules requiring voting rights for shareholders and prohibiting companies with multiple share classes. This will not impact existing companies including Google, Berkshire Hathaway. The Russell indexes passed a rule last week requiring unaffiliated investors to have at least 5% voting rights in order to be in a Russell index. The S&P indexes followed suit with the multiple share class restriction. Existing companies with multiple classes are grandfathered under the new rule.

The SNAP IPO gave investors in their multiple share classes little to no voting rights. The two founders retained 88.6% of the voting rights. Alphabet (GOOGL-GOOG) started the craze in 2014 when they did a 2:1 split where the new shares had no voting rights in order to protect the founders from being diluted. When Facebook went public, Zuckerberg retained the preferred shares with 10 votes each while regular shareholders only received 1 vote.

The SNAP lockup expiration has begun with 400 million new shares available to trade. On August 14th another 782 million shares will be free to trade. Shares closed at a new low on Tuesday.


After the bell AMC Entertainment (AMC) shares fell -25% to $15.70 after the company warned it expected to report a loss of $1.34-$1.36 per share for the quarter. That compares to earnings of 24 cents in the year ago quarter. The big hit will come from a $202.6 million impairment charge on its investment in National CineMedia LLC. The results also include a 4.4% decline in the U.S. box office results. The company also warned of "lower estimates for a very challenging third quarter." They plan on raising an additional $30 million through higher prices, promotions and adjustments to operating hours and staffing levels. They recently completed the $1.2 billion acquisition of Carmike Cinemas. They will report earnings on August 7th.


Oil prices fell more than 2% after a Bloomberg News survey showed that OPEC production rose another 210,000 bpd in July after a 393,000 bpd increase in June. We also learned that compliance with the 1.8 mmbpd production cut enacted in January by OPEC and non-OPEC producers, fell from 90% to 78% in July. That is the lowest compliance for the year. To do the math for you, that means they only cut 1.4 mmbpd in July or 400,000 bpd less than their promise.

After the bell today, the API inventory report for last week showed a surprise rise of 1.779 million barrels compared to expectations for a -2.8 million barrel decline. If the EIA report on Wednesday shows an increase as well, we could be headed back to $45 oil.




Markets

The S&P posted the biggest gain in a week at +6 points but it failed to retest resistance at 2,485. The index traded in a very narrow 7-point range and all the gains came at the open. There was some morning volatility but that ended at noon and the range shrank to 2 points for the rest of the day. This is NOT a bullish sign. Obviously, everyone was waiting for Apple to report before putting new money to work. Unfortunately, the S&P futures are only up 2 points in afterhours. Now that the excitement is over, does that mean the sellers will appear? Only time will tell.


The Dow "should" be on track to touch 22,000 on Wednesday. However, even with Apple's big $9 afterhours gain, the Dow futures are only up 42 points. Immediately after the Apple spike the futures rose to 22,025 but they have since declined to 21,948. That does not suggest Apple is going to push the index over that 22,000 level but there is still a lot of darkness before the market opens. Anything is possible.

Personally, I would not be surprised to see the 22,000 level touched but then get hit by a sell the news event. These big round number targets act as magnets but once touched they can reverse polarity and repel the index just as quickly.



The Nasdaq only gained 15 points today despite being well off its highs and posting three days of declines. This was a very lackluster session but obviously, everyone was waiting for Apple. Now that Apple has reported, investors are free to place bets in the direction of their choice. The Nasdaq futures are up +44 points and the majority of that is Apple's 9 point gain. If the Nasdaq rolls over and breaks support at 6,335 it could be a long drop. Conversely, if Apple's gains energize the sector there is very strong resistance at 6,400 and 6,460.



The small cap Russell 2000 posted a gain but it was also lackluster. The index barely moved over the critical 1,425 level and it definitely was not a bullish bounce.


With the futures well off their highs, I am concerned we could get a sell the news event on Wednesday. I would be happy if I am wrong but the market feels heavy despite the broad gains on Tuesday. Volume was only moderate at 6.3 billion shares and now that Apple has reported, the earnings excitement will fade along with the volume.

There is no reason to rush into the market. There is always another day to trade if you have capital in your account. Retail traders normally turn bullish right at the top in the market and exactly at the wrong time. Be patient. Let's see what Wednesday brings.

Enter passively, exit aggressively!

Jim Brown

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