The S&P futures were up sharply before Home Depot released its earnings. It was all downhill from there.

Market Statistics

Home Depot beat on earnings and revenue and raised guidance but the stock was knocked for a $4 loss to erase 28 Dow points. Adding to the retail disaster was Advanced Auto Parts, Coach and Dick's Sporting Goods. It was a cross section of retailers and the entire sector crashed, even stocks that were not even remotely related to those specific retail categories. G-III Apparel (GIII) fell -9% on no news. They just happened to be in the wrong sector.


The economic reports were positive across the board. The NY Empire Manufacturing Survey for August rose from 9.8 to 25.2 and well over the 10.0 consensus. That is the strongest reading since September 2014. New orders rose 7.3 points to 20.6 and a five-month high. Backorders were still a drag at -4.7 after an identical reading in July. Employment rose slightly from 3.9 to 6.2.


Retail sales for July rose +0.6% after a revised 0.3% rise in June. Previously the June number showed a decline of -0.2%. Strength was broad based with nonstore retailers seeing a 1.3% rise and motor vehicles and parts a 1.2% rise. Building materials were up 1.2%, food and beverages +0.4%, sporting goods +0.3% and food service and bars +0.3%. The decliners were electronics and appliances -0.5%, gasoline stations -0.4% and clothing -0.2%. This was good news but it was ignored because of the retail earnings disaster in progress.

The NAHB Housing Market Index rose from 64 to 68 with buyer traffic component edging up slightly from 48 to 49. The component for current single-family sales rose from 70 to 74 and the six-month outlook rose from 73 to 78. Despite the high prices for homes, there are still a lot of buyers.

Low mortgage rates and strong employment are the main drivers. Builders are having trouble keeping up with demand because they do not want to end up with a lot of excess inventory if the trend changes. They are managing their production, which is smart because that allows prices and profits to rise.


Business inventories rose 0.5% in June after a 0.3% rise in May. Analysts were expecting 0.4%. Because the report is lagging for the June period, it was ignored.

Import and export prices rose +0.1% in July after a -0.2% decline in June. The gain matched estimates. This was the first gain in 3 months and second in five months. Transportation fuels rose 0.5% after a -2.6% decline in June. This was due to a 2.5% rise in prices for imported oil. The report was ignored.

After the bell, the API Crude Inventories were released and showed a decline of -3.6 million barrels for the week ended on the 11th. Gasoline inventories rose 301,000 compared to expectations for a decline of -1.5 million.

Oil prices declined for the day because OPEC production rose 172,600 bpd in July. Total daily production rose from 32.696 mmbpd to 32.869 mmbpd. If the EIA numbers on Wednesday show a big decline we could see prices rise slightly. Libya reported some of their production was offline due to worker stoppages. That should help the overall glut if it last for several weeks.


The calendar for Wednesday is headlined by the FOMC minutes at 2:PM. Analysts will be combing over them with a fine toothcomb looking for clues about potential actions at the September meeting. Quantitative tapering is sure to be mentioned.


Dow component Cisco Systems reports after the close and Wal-Mart reports before the open on Thursday. That suggests there could be some Dow volatility on Thursday. Alibaba also reports before the open on Thursday and that report is already generating a lot of buzz.


Alibaba is growing faster than Amazon. Alibaba ships an average of 12 million packages a day compared to Amazon's 3 million. China has 143 cities with a population of more than 10 million and the U.S. only has 10 cities. Those stats came from David Seaburg at Cowen & Co. Twice in the last months I have tried to initiate a position on Alibaba and both times, I was stopped out on the dips below $150. I seriously considered adding another one tonight to hold over earnings but the premiums are too expensive and the risk too great. Alibaba traded more than 150,000 option contracts per day.


The biggest hit to the market came from Home Depot even though they beat on earnings, revenue and guidance. The company reported earnings of $2.25 compared to estimates for $2.22. Record revenue of $28.11 billion beat estimates for $27.83 billion. Same store sales rose 6.3% and easily beating estimates for 6.3%. They guided for full year revenues to rise 5.3% and earnings growth to rise 13% to $7.29. Back in May, they raised guidance for an 11% earnings increase to $7.15. The company is also in the middle of a $7 billion share buyback program. Home Depot is regarded as Amazon proof because you can't order plywood, concrete and roofing materials and have Prime deliver it to your jobsite for free in two days. The number of customer transactions rose 2.7% and the average ticket rose 3.6% to $63.05.

I am seriously confused by the drop in HD shares. Some analysts were warning that the housing boom was going to slow and that would hurt HD sales. Currently there are supply shortages of construction materials and as I mentioned earlier in the NAHB report, builders are actually seeing a rise in sentiment. HD tried to talk down those fears saying spending on home improvement is actually rising. They also said the demand from contractors remained strong.

I would be a buyer of HD on any further decline. Support is $146 and should the market turn negative, we could see that level again.


Advanced Auto Parts (AAP) reported earnings of $1.58 and revenue of $2.26 billion. Analysts were expecting $1.67 and $226 billion. Same store sales were flat. For the same quarter last year, the company reported $1.90 in earnings and $2.26 billion in revenue. Apparently, the earnings juggernaut has lost an axle. They guided for the full year for same store sales to decline 1% to 3%. They also guided for a reduction in operating income of 200 to 300 basis points. Analysts were expecting $6.36 and $9.54 billion. Shares crashed 20% on the news.


Dick's Sporting Goods (DKS) reported earnings of 96 cents compared to estimates for $1.00. Revenue of $2.16 billion missed estimates for $2.17 billion. Same store sales rose +0.1% and missed their own guidance for 2%-3% growth. They guided or full year earnings of $2.80-$3.00 per share and well below estimates for $3.64. The CEO created an investor panic when he said the retail industry is in "panic mode" and currently undergoing the "perfect storm." With more than 6,300 retail store closures already announced in 2017, traditional retailers are struggling to maintain traffic to mall based stores. He said stores are trying to win over customers with "irrational prices" and "unpredictable promotions." He said Dick's was going to be aggressively promotional the rest of the year and double down on their best price guarantee. If anyone is selling it for less they will match those prices.


Coach (COH) reported earnings of 50 cents that beat estimates for 49 cents. Revenue of $1.13 billion missed year ago numbers and estimates for $1.15 billon. Same store sales increased in the "mid single digit range" and beat estimates for 3.6%. So why did they not just say what their SSS were? I do not trust these earnings number games. They guided for next year for earnings growth of 10-12% to $2.35-$2.40 and $5.8-$5.9 billion. Analysts were expecting $5.03 billion and $2.40 on earnings. Shares fell -23% on the questionable numbers.


Urban Outfitters (URBN) bucked the trend when they reported earnings of 44 cents compared to estimates for 37 cents. This report was still significantly below the 66 cents in the year ago quarter. Revenue was $873 million, down from $891 million but neat estimates for $862 million. Same store sales declined -4.9%, because of "negative retail store sales" but offset by online sales. Shares rose $3 in afterhours.




Markets

The major indexes opened the day higher but the selling was immediate. The Dow was up 35 points at the open but declined 67 points intraday before rebounding slightly to close with a 5-point gain. I would say there was a lack of conviction but actually conviction appears to be strong on both sides. Sellers are waiting in volume at the intraday highs but buyers are eagerly jumping into the dips. When the Dow can trade just under its recent high and only move 67 points intraday, the buyers and sellers appear equally matched.

The three big gainers offset the three big losers and traders fought to a draw. Real support is still 21,500 with short term resistance 22,000 and new high resistance at 22,120.



The S&P traded in a very narrow 7-point range and most of that came from the early morning futures spike. Like the Dow it is evenly matched between buyers and sellers. Even the retail implosion at the open failed to push it materially lower. Support is 2,463 and resistance 2,467. That is microscopic for the S&P and suggests any material event that pushes the index one way of another could trigger a directional move.


The Nasdaq Composite has declined from high to low, -247 points and rebounded to recover about half of those points. The FANG stocks mostly decline with the exception of Apple. I am not counting that 25-cent gain on Facebook.

Resistance remains about 6,340 and initial support just over 6,200 followed by 6,100.




The Russell 2000 was the weakest index once again and it is well below the critical support at 1,400. Retail stocks were the main reason the Russell declined but it has been the weakest index for the last couple weeks.


A Bank of America survey out today found that 46% of retail traders believe the market is overvalued. That means any future rally will be powered by the 54% who still believe there is life left.

The S&P futures are flat as I type this so there is no rush to sell overnight. With North Korea reconsidering its plans and saying it is no longer going to fire missile at Guam, the biggest risk for Wednesday is the FOMC minutes.

Even though the buyers and sellers are evenly matched, I am still concerned about the normal Aug/Sep weakness and the political battles in mid September over the budget and debt ceiling. If you can deal with that small of a window then trade away but try to trade in the direction the market is moving. Today there was no direction.

I apologize for the shortness and the lateness of the commentary tonight. The grandkids spent the weekend with us and brought all their grade school bugs with them. I caught an ugly one.

Enter passively, exit aggressively!

Jim Brown

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