The Dow spiked 73 points at the open but it quickly evaporated.

Market Statistics

The Dow rose on the strength of Apple and declined on the weakness in McDonalds. Apple added 18 Dow points and McDonalds subtracted 20 Dow points. This was the Dow's 4th consecutive loss after 9 consecutive days of gains. Intraday, Janet Yellen was alternately dovish and hawkish in her speech and that confused the market. I am paraphrasing, "Maybe we need more policy accommodation, no wait, maybe we need to continue hiking rates, the Fed really does not know what inflation is doing." The Dow closed 85 points below its intraday high.


The economic news was mixed without any high profile reports. State personal income for Q2 rose +0.7% after a +1.0% in Q1. Utah and Nevada had the highest growth at 1.3% and 1.1% respectively, thanks to high activity in the construction business. The two worst performing states were Iowa and Nebraska because of losses by farmers.

The Case Shiller 20-City Home Price Index rose 5.8% for July, up from 5.7% in June. This was the first gain in prices in four months. Housing inventory is currently at 4.2 months, up from the decade low of 3.5 months back in January.

New home sales fell from 580,000 in July to 560,000 in August. The median sales price fell from $326,500 to $302,100. New homes under $300,000 accounted for more than 50% of sales. The inventory on the market rose from 5.7 months to 6.1 months. There are 284,000 homes listed for sale, up 3.6% from July and 17.8% from August 2016.


Consumer confidence for September declined slightly from 120.4 to 119.8. The present conditions component declined from 148.4 to 146.1 and the expectations component rose from 101.7 to 102.2. Those respondents who thought jobs were plentiful declined from 34.4% to 32.6%. Respondents expecting to buy a car declined from 12.9% to 12.1%. Homebuyers declined from 7.3% to 6.9% while potential appliance/TV buyers rose from 50.5% to 54.0%.


The Richmond Fed Manufacturing Survey for September rose from 14 to 19 and the highest level since February. New orders rose to 20 and the highest level since April. Backorders fell from 11 to 8 and the lowest level in 3 months. Employment fell 2 points to 15. Overall, the report suggests activity remains sluggish but increasing slowly.



After the close, the API inventory report showed oil supplies unexpectedly fell by 761,000 barrels. Gasoline inventories rose 1.5 million barrels but distillates fell by 4.5 million barrels. There is a strong recovery cycle in progress on refined products and exports are increasing significantly with Brent prices $5 over WTI prices.

Crude prices were up on worries the Kurdish election results could create some oil production and transport problems in Iraq. Some Iraqi oil is transmitted through Kurdistan and the Kurds took control of some northern Iraq oil fields when they were threatened by ISIS and Iraq could not defend them. The results from the Kurdish vote on independence on Monday have not been announced but it is widely expected to be overwhelmingly in favor of creating a new country.

Turkey, Iran and Iraq are very hostile to that outcome and Iraq is threatening military action, demanding airports be immediately returned to Iraqi military control and they are demanding all money from oil revenues to be returned to Iraq. Iran setup missile batteries on the border. Turkey is threatening to move troops into the region to overthrow any rebellions. They are also threatening to prevent any oil from flowing across the Kurdistan border into Turkey. Iraq has halted international flights into the region. The Kurdish government is democratic and the surrounding countries are afraid a vote to create a new country could cause unrest in the neighboring countries which are ruled by dictatorial regimes, with the exception of Iraq.


The calendar for Wednesday does not have any market moving events. The Pending Home Sales Index is informational but normally ignored. The oil inventories could lift energy stocks if the EIA report shows a decline in inventories.


There were a few earnings events today and Darden Restaurants (DRI) reported before the bell. The company reported earnings of 99 cents that beat estimates by a penny. Revenue of $1.94 billion barely beat estimates of $1.93 billion. They guided for the full year for earnings of $4.38-$4.50. However, shares declined on weak same store sales of 1.7%, which missed estimates for 2.1%. Olive Garden sales rose 1.9% compared to estimates for 2.5%.


FactSet (FDS) reported earnings of $1.90, beating estimates by a penny but significantly lower than the $3.55 in the year ago quarter. Revenue of $326.6 million rose 14% from the comparison quarter. The company added 115 clients to raise their total to 4,750. Users rose 2,800 to more than 88,800. Shares spiked $9 on the news.


After the bell Dow component Nike (NKE) reported earnings of 57 cents that beat estimates for 48 cents. Revenue of $9.10 billion narrowly beat estimates for $9.08 billion. Gross margins fell -1.8% to 43.7%. Inventories rose 6%. Revenue from North America declined -3% and the first decline in 10 quarters. Sales in Europe rose 5%, China 12%, Asia 6% and Middle East/Africa 4%. The company is suffering after Sports Authority and Sports Chalet filed bankruptcy earlier this year and eliminated two major outlet chains. Nike said sales revenue in Q3 would grow in the low single-digit range. Shares spiked immediately after earnings but finished the session down -$1.20.


Micron (MU) reported earnings of $2.02 that beat estimates for $1.84. Revenue of $6.14 billion rose 90.8% and beat estimates for $5.96 billion. Prices for DRAM rose 5% and NAND 3%. Volumes sold rose 8% and 5% respectively. Shares rose $1.30 in afterhours.


Twitter (TWTR) shares rose fractionally in afterhours after the company said it was testing a doubling of the characters in a tweet from 140 to 280. The company said it was starting with a random sampling of users in most languages. Twitter said it still wanted to focus on brevity in messages but some thoughts will not fit in 140 characters. Previously Twitter tested tweets as big as 10,000 characters but passed on that upgrade. The current test will run for an "unspecified number of weeks" in all languages except Chinese, Japanese and Korean.


Alibaba (BABA) said it was raising its stake to 51% in logistics unit Cainiao and would invest $15 billion to create a global logistics giant. Cainiao had been losing money and Alibaba already had a 47% interest. Alibaba said the goal was to build the most efficient distribution network in China and around the world. Cainiao had been under investigation by the SEC related to Alibaba accounting issues.




Markets

The market had several problems today and one of them was the biotech sector. The Biotech Index fell -1.1% to close at a four week low. This weighed on the Nasdaq and the Russell to some extent. The index has been declining since the high at the end of August.


The S&P continues to struggle to hold its gains but it is doing a good job. The index only posted a fractional advance but it is still clinging to the psychological 2,500 level. For three weeks now, the S&P has traded in a very narrow 18-point range with daily gains and losses of only 2-3 points. There are no sellers but buyers lack the conviction to push the index to a new high. It is as though everyone is just waiting for September to be over before they put new money to work.


The Dow struggled almost immediately after the 75-point opening spike. The prior winners were losers and losers were winners but not in big numbers. Apple rebounded with a nice gain to keep the index from closing significantly lower. McDonalds and the entire restaurant sector declined after the Darden earnings and weak guidance. The hurricanes in Texas, Florida and Puerto Rico are expected to depress restaurant sales for Q3 and investors are fleeing before the earnings.

Oil was flat for the day and energy stocks gave back some of their prior gains. I have to point out that only two Dow stocks gained or lost more than $1. There was no heavy selling and there were buyers nibbling on the dips but no volume on either side.

The Dow is slowly building new resistance at 22,350 after three days of testing that level and closing lower. Above that will be the round number resistance at 22,500.



The big cap techs were mostly positive but only slightly. There were no major gains or major losses. Everything was just trading in place while we wait for September to end. After the major drops on Monday, tech traders were probably still in shock.

Monday

Tuesday


The index traded down to 6,350 on Monday and rebounded. That rebound continued this morning but the index could not punch back through resistance at 6,400 and closed 25 points below its intraday highs.


The most bullish event for the day was the spike on the Russell 2000 to nearly 1,461 when prior resistance was 1,452. That was a major push after five weeks of decent gains. The Russell has outperformed the big cap indexes and is now at a breakout high. I have a hard time thinking this will continue without a pause because of the strength and duration of the recent rally. However, I am sure the shorts are being squeezed and there is no telling where it will stop. This is bullish for the market because it means portfolio managers are not scared of any future decline. I am sure there is some rotation in progress from the big caps with massive profits into small caps for the Q4 rally.


Despite the minor declines from day to day in the various indexes, the market appears to be bulletproof. There have been numerous things that could have caused a significant decline and the market keeps shaking them off and crawling slowly higher. The Dow's 9-day rally has been followed by a 4-day decline. That is not a big deal in my book. I would take that 650-point gain for a 128-point decline over 4 days every time.

I would continue to keep some cash in reserve just in case a buying opportunity does appear. The next 13 days are typically the most volatile of the year.

Enter passively, exit aggressively!

Jim Brown

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