The Dow was well on its way to another record close when a headline appeared to dash those hopes.

Market Statistics

The Dow started negative but quickly reversed direction to move sharply higher. The index hit 22,179 and +63 points before crashing back -122 points to 22,057 and the low of the day. Somebody bought the dip at the close but the rebound was lackluster.

The headline credited with reversing the market was a statement from President Trump that further threats from North Korea would be "met with fire and fury." Earlier in the day a headline broke saying North Korea had successfully created a miniaturized nuclear warhead that would fit on its ICBMs. If that is the case, the time for critical decisions has arrived. People claim Kim Jong-un could not be stupid enough to actually attack the USA. They are uninformed because many times, he has displayed irrational behavior and refugees have said he would carry it out if provoked. While all his bluster today is calculated to create a nuclear defense to prevent his reign from coming to an untimely end, he is rapidly reaching a point where that risk could come true. If attacked, he could retaliate much like a cornered animal.

We should not be worried about his missile borne nukes. They are a long way off, he could only have a handful and we can shoot them down. We should be worrying about the two Korean satellites that cross the U.S. every 94 minutes. If those satellites have nuclear weapons, he could cause extreme damage with an EMP attack on the U.S. where tens of millions would die. Details Here

I personally believe the Trump comments were blamed but they were just a convenient excuse. Many times when markets are overbought, traders are looking for a reason to take profits. They are constantly pushing up their stop losses and they are nervous about the potential for a decline. They seize on the first headline that appears and the initial selling begets more selling. The lack of a material rebound at the close is troubling. The candles lengthened as volatility increased but buyers were unable to cause a rebound.


There were only two economic reports on Tuesday. The NFIB Small Business Optimism Index for July rose from 103.6 to 105.2 and the highest level since February. This was the first increase since February and suggests optimism is rebounding despite the lack of any major legislation in Washington. The percentage of businesses that expect better economic conditions ahead rose from 33% to 37%. The current job openings component rose from 30% to 35% and those planning on hiring rose from 15% to 19%. Those expecting higher sales rose from 17% to 22%. Those planning on raising prices rose from 19% to 23% and that should please the Fed.

The Job Openings and Labor Turnover Survey for June (JOLTS) showed a surge in new job openings from 5.702 million to 6.163 million. Those actually getting new jobs declined from 5.459 million to 5.356 million. Separations declined from 5,245 million to 5.224 million. Layoffs increased slightly from 1.673 million to 1.701 million. This confirms the robust job market where there are 15% more jobs than hires and it is difficult to find qualified workers. This is a lagging report for the June period and it was ignored.

The calendar for Wednesday has no reports that are likely to move the market. The oil inventory report would be as important as the others because of the decline in the API inventory tonight.


The earnings on Wednesday will be led by Jack in the Box, Mylan and Netease. Thursday is the big day with Nvidia and a flurry of retailers. Blue Apron and Snap Inc will also confess and those will be watched out of curiosity rather than investment potential.


After the bell, the API inventory report showed a whopping decline of -7.839 million barrels compared to estimates for a 2.27 million barrel decline. Despite the big decline, oil prices were stable at $48.95. If the EIA report on Wednesday shows a similar decline then prices should retest $50.


Internet retailer Wayfair (W) reported a loss of 26 cents that beat estimates for a loss of 46 cents. Revenue of $1.12 billion, up from $786.9 million, rose 42% and beat estimates for $1.06 billion. Active users rose 43.1% to 9.5 million and the average order rose from $244 to $258. I do not understand why Amazon has not bought them yet. With a $4 billion market cap, they would be pocket change for Amazon. They are growing so fast they are carving out a niche where Amazon does not currently compete.


Retailer Michael Kors (KORS) reported earnings of 90 cents that beat estimates for 62 cents. Revenue of $952.4 million beat estimates for $919.0 million. The only fly in the soup was a decline in same store sales of -5.9% but analysts were expecting -9.2% so it was still a beat. The company guided for the current quarter for revenue of $1.04-$1.06 billion with same store sales in the mid-single digit range. Earnings are expected to be 80-84 cents. Analysts were expecting $1.01 billion and 78 cents. They guided for the full year for revenue of $4.28 billion and earnings of $3.62-$3.72. Analysts expected $4.19 billion and $3.54. Shares spiked 21% on the news.


Retailer Ralph Lauren (RL) reported earnings of $1.11 and beat estimates for 96 cents. Revenues fell 13% to $1.347 billion and missed estimates for $1.349 billion. They blamed the decline on exiting a brand, promotional activity and soft consumer demand. North American revenue dropped -17% with Europe down -14%. They guided for the full year for 8-9% decline in net revenues. For the current quarter, they expect a decline of 9-10%. Given all the gloom and doom, you would have expected shares to trade lower. Instead, they rallied 13%.


Valeant Pharmaceuticals (VRX) reported earnings of $1.05 compared to estimates for 97 cents. Revenue of $2.23 billion missed estimates for $2.24 billion. The company cut full year revenue guidance from $8.9-$9.1 billion to $8.7-$8.9 billion. The company said it was on track to reduce debt by $5 billion. Unfortunately, they still have $25 billion to go. If they succeed in paying off that $5 billion by February 2018, they have no significant maturities remaining before 2020 and that gives them a couple years to restructure and raise cash. Shares rallied fractionally on the debt news rather than the earnings beat.


Avis Budget Group (CAR) reported earnings of 30 cents that missed estimates for 42 cents. Revenues were $2.238 billion, which beat estimates for $2,227 billion. They said revenue in the U.S. declined due to a 4% reduction in time and mileage revenue per day. International revenues rose 4% mostly due to a 6% benefit from the FranceCars acquisition in December. They guided for full year revenues of $8.8-$8.95 billion with earnings of $2.40-$2.85, down from prior guidance of $2.85-$3.50.


Disney (DIS) reported earnings of $1.58 compared to estimates for $1.55. Revenue of $14.2 billion missed estimates for $14.4 billion. Shares fell $4 in afterhours.

The company said it was cancelling its licensing deal with Netflix (NFLX) and would launch its own streaming service that would launch in 2019. They will also launch a streaming service for ESPN videos in 2018 that will feature about 10,000 events a year. The service will have content from MLB, NHL, MLS, collegiate sports and tennis Grand Slam events. Disney will acquire a majority interest in BAM Tech for $1.58 billion. They bought a 33% stake in the company in 2016. BAM was spun off from MLB Advanced Media in August 2016. Netflix shares fell -5% in afterhours.



Priceline (PCLN) reported earnings of $15.15 that beat estimates for $14.25. Revenue of $3.02 billion beat estimates for $3.0 billion. Unfortunately, they guided for full year earnings of $32-40-$34.10 and analysts were expecting $34.42. Bookings were $20.8 billion and analysts were expecting $21.05 billion. Shares fell 6% (-$135) on the news.


Fossil Group (FOSL) reported an adjusted loss of 61 cents that missed estimates for 28 cents. However, revenue of $596.8 million missed estimates for $619.5 million. They guided for the current quarter for a loss of 26 cents to earnings of 7 cents. For the full year, they guided for earnings of 35 cents to $1.15. Revenue is expected to decline 4.5% to 8.5% with a GAAP loss of $6.62-$7.42 in Q3. They also announced the resignation of their CFO. Shares fell 23% in afterhours.




Markets

Despite the midday reversal in the indexes, the markets were fairly quiet today. With earnings slowing there is little to interest traders. The very low volume of 5.3 billion shares on Monday was a symptom of August trading. Investors are busy cramming in last minute vacations and getting kids ready to go back to school. Volume would have been low today as well except for the sharp midday reversal. Volume rose to 6.3 billion shares, which is still only moderate. Tomorrow could be significantly different.

The S&P futures are down -9 as I type this with the Nasdaq futures down -31 and Dow futures -48. The combination of declines in Disney, Netflix and Priceline are going to be a toxic mix for Wednesday.

The S&P spiked to 2,490 intraday after starting the day with a minor loss to 2,475. The afternoon decline knocked it back to 2,479 and it lost 6 points for the day. This outside reversal day is a negative indicator. Even without the hits from those three stocks I mentioned, we would have probably traded lower on Wednesday. With those hits, the severity of the potential decline should be worse.

Traders have wanted a real market drop as a buying opportunity. We may just get one. Since Aug/Sept are typically weak, the traders have been looking for a short opportunity to carry them into that weakness. This could be it. The key will be whether dip buyers appear in volume on Wednesday. If they rush into the gap then the damage could be minimal. If they step back to see where the market goes, then the August decline may have begun.

The closing level on the S&P is not a problem. That is right in the middle of the recent consolidation range. We could easily muddle around at the 2,470 level for a couple days and then make another run at the top. The real directional indicator would be a close under 2,465. That could trigger additional selling.


The Dow only had one major gainer today and that was a break in the recent trend. Apple rallied because a rumor site showed actual pictures of an iPhone 8 and said it would be announced in September with the model 7s. This is the iPhone 8 below. The pictures are copies of copies and are not to scale.


The Dow could be challenged on Wednesday because of the magnitude of its recent gains. There are a lot of uncaptured profits and support is well back at 21,500.



The Nasdaq broke through resistance at 6,395 to hit 6,423 but crashed back to close at 6,370. Critical support remains 6,335. If the Priceline/Netflix combo poisons sentiment on Wednesday, we could easily crash through that support level. The next logical target for any continued decline is 6,100.



The Russell 2000 had a similar chart but minimal damage with only a 4-point loss. However, the Russell futures are down -9 tonight and any material drop in the big cap indexes is likely to worsen in the small caps.


Doubleline Capital's Jeffrey Gundlach said on CNBC today, "Being long the VIX is free money" because there will be at least a 3-5% decline between now and November. I completely agree on the decline. We are really stretching our luck without any extended decline since Q3. We have had some one-day wonders with follow up volatility but most of the damage was done in the first drop.

The S&P has now traded 75 sessions without a 1% gain. That is also very rare. This is part of the low volatility environment. Gundlach offered as an analogy the height of Nevada's Telescope Peak at 11,331 and Death Valley at -282 feet below sea level. They sit right next to each other. He said that was the same with the VIX. A period of very low volatility often ends with a period of very high volatility. They go hand in hand. If volatility were normal, the peaks would be minimal. Very low, as we have today, tends to end with a very high volatility event.


I would not be a buyer of the first dip on Wednesday. I would recommend waiting until we see where the day takes us. Actually, it could take several days to settle out since we are in August and the sentiment is turning bearish.

Do not forget this is National Sneak Some Zucchini Into Your Neighbor's Porch Day. Google it.

Enter passively, exit aggressively!

Jim Brown

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