The Dow outperformed the rest of the market thanks to four stocks.

Market Statistics

I wrote several times that Tuesday would be a major volatility day for the Dow because of three major components reporting earnings before the bell. I certainly did not expect the gains we got and most of that was related to the monster spike in 3M, which added nearly 100 Dow points all by itself.

Three other stocks also contributed to the outsized performance with CAT, BA and GS also powering the Dow higher. Those four stocks added 179 points to the Dow and sent the index into even more overbought status.

Shorts were clearly in a lot of pain with the Dow gapping higher by 168 points at the open and it closed with that same 168-point gain.



Of the four Dow components reporting earnings on Tuesday, 3M (MMM) was the king of the mountain. They reported earnings of $2.33 compared to estimates for $2.21. Revenue of $8.17 billion beat estimates for $7.92 billion. 3M raised its full year guidance range from $8.80-$9.05 to $9.00-$9.10. 3M gets 60% of its revenue from overseas and the weak dollar added to its profitability. Obviously, a 12 cent beat and a minor top end hike on guidance does not merit a $17 intraday spike in the stock. This was a monster short squeeze after the stock closed at new highs over the prior three days. I get it that the global economy is growing and this is good for 3M but this is going to be a short magnet over the next couple of weeks until the $13 closing gain is neutralized.


Caterpillar (CAT) reported earnings of $1.95 that nearly quadrupled and blew past estimates for $1.22. That is the kind of earnings beat that should have spiked the stock $13 like MMM but given CAT's recent string of new highs over the last three months, a lot of excitement was already priced into the stock. Revenue rose 25% to $11.41 billion compared to estimates for $10.61 billion. Construction equipment revenue rose 37% with energy and transportation equipment revenue rising 12%. CAT raised guidance for the full year from $5.00 to $6.25 on revenue of $44 billion. Analysts were expecting $5.29 and $42.94 billion. This was a killer quarter for CAT and this confirms more than anything else that the global economy is beginning to surge.


McDonalds (MCD) reported earnings of $1.76 that only matched estimates. Revenue of $5.75 billion declined from $6.42 billion and matched analyst estimates. Global same store sales rose 6.0% and beat estimates for 4.6% with US sales rising 4.0%. This was a disappointing report. Many analysts, including myself, expected the company to post stronger results because of their new premium burger menu and the full implementation of the delivery program. McDonalds did say the premium burgers were responsible for its earnings growth along with the McPick 2 menu. That is where you get two low dollar items for $2.50 or two larger items for $5.00. The company returned $2.9 billion to shareholders in Q3 through share buybacks and dividends. I believe the bloom is fading from McDonalds after this report and the stock is likely to give back some of its pre earnings gains.


The last Dow component reporting today was United Technologies (UTX). The company reported earnings of $1.73 that declined -7.8% and beat estimates for $1.69. Revenue of $15.06 billion beat estimates for $14.98 billion. United raised full year guidance from $6.45-$6.60 to $6.58-$6.63 and revenue guidance from $48.5-$59.5 billion to $59.0-$59.5 billion. Investors were hoping for better news and shares declined just over $1 for the day.


Biogen (BIIB) reported earnings of $6.31 that beat estimates for $5.73. Revenue rose 4.1% to $3.08 billion. Shares fell sharply because sales of Spinraza for spinal muscular atrophy came in at $197.6 million and missed estimates for $242 million. The drug costs $750,000 for the first year of treatment and drops to $375,000 in subsequent years. Sales of the MS drug Tecfidera dropped -3.5% to $1.07 billion and missed estimates for $1.09 billion. The competition is increasing from Roche, Celgene and Sanofi. As their drugs gain market share, Biogen is going to suffer. Shares fell $13 on the earnings news.


GM shares closed at a new high after the company reported earnings of $1.32 and beating estimates for $1.11. Revenue declined from $38.89 billion to $33.62 billion but beat estimates for $32.18 billion. The company said it would introduce two electric vehicles over the next 18 months with AT LEAST 20 by 2023. Look out Tesla! Volume declined 26% to 268,000 units due to planned down time. That reduced dealer inventories by -160,000 vehicles to 821,000 as of the end of the quarter.


Stanley Black & Decker (SWK) reported earnings of $1.95 compared to estimates for $1.87. Revenue of $3.3 billion beat estimates for $3.16 billion. The company guided for the full year for earnings of $7.33 to $7.43, up from $7.18-$7.38. Sales of tools and storage rose 22.2% with a 9% rise in volume. Sales in the industrial segment rose 8.9% on an 8% rise in volume. The security segment saw sales decline -8.8% due to divestitures. Shares rose $7 on the news.


After the bell, Chipotle Mexican Grill (CMG) reported earnings of $1.46 that missed estimates for $1.63. The company said hurricanes cost them 13 cents a share and a security breach cost them 64 cents. It was still a big miss. Revenue of $1.13 billion missed estimates slightly of $1.14 billion. They guided for full year same store sales of 6.5% and below the estimate for 7.2%. They also said they were going to open fewer new locations than previously expected. They had guided for 195-210 in prior months and they said it would be at the low end of that range and they would open only 130-150 stores in 2018. Shares fell $25 in afterhours and closed at a 5-year low of $293.80.


AMD reported earnings of 10 cents compared to analyst estimates for 8 cents. Revenue of $1.64 billion rose 25.7% and beat estimates for $1.51 billion. Shares collapsed in afterhours after the company guided for a 12% to 18% decline in Q4 revenue to around $1.34-$1.44 billion and analysts were expecting $1.34 billion. Based on analyst expectations that lower guidance was not that bad but it is the principle of lower guidance that sends investors running for the exits.


Juniper Networks (JNPR) reported earnings of 55 cents that missed estimates for 56 cents. Revenue of $1.26 billion narrowly beat estimates for $1.25 billion. The company guided for the current quarter for earnings of 49-55 cents with revenue of $1.20-$1.26 billion. Analysts were expecting $1.35 billion. Shares fell to $24.50 in afterhours and a 52-week low.


There were so many earnings on Tuesday it would be impossible to cover them all. The next two days will be the same with a flood of companies reporting. There are three Dow components on Wednesday, BA, KO and V. Boeing is the only one that could be a real market mover. They closed at another new high today with a $3.68 gain. If their earnings are anything besides outstanding, there could be a major decline, which would be Dow negative.

Thursday is tech day with MSFT, INTC, AMZN and GOOGL. All of those are after the bell so Friday morning will see the resulting volatility.


Whirlpool (WHR) reported earnings after the bell on Monday. Earnings of $3.83 missed estimates for $3.93. Revenue of $5.4 billion missed estimates of $5.5 billion. They guided for full year earnings of $13.60-$13.90 and analysts were expecting $14.61. Today they announced they were no longer going to sell appliances through Sears. They have been selling their appliances there for the last century. Whirlpool said the two companies could not agree on prices the company needed to be profitable. Sears fired back saying Whirlpool sought to use its dominant position in the market to bully Sears into accepting a price hike. Sears represents about 3% of Whirlpool's revenue. The company manufactures Maytag, KitchenAid, Jenn-Air in addition to the Whirlpool brand. Shares fell $19.


Apple Inc (AAPL) survived another iPhone X manufacturing story on Tuesday and actually closed higher. The Nikkei Asian Review said Apple may only be able to ship 20 million X phones this year rather than the 40+ million previously expected. The article said the OLED screen problem had been resolved but the TrueDepth camera system was still causing problems. An article last week said Apple may only have 3 million phones on launch day. Apple is trying to counter all these leaks by putting out a press release saying the X phones will be in all their stores on launch day and if you want one you need to get there early. That caused some consternation among analysts. If you only have 3 million to sell, why tell everyone to get to the Apple stores early. That is only going to cause long lines and frustrated customers when the inventory runs out. However, 3 million phones could produce a lot of store inventory and that means the online buyers are the ones that will face a long waiting period. Drexel Hamilton warned that anyone not getting an early order or one of the phones at a store is likely not going to get a delivery until after the holidays.

UBS did a survey and found that 19% of respondents plan on buying a new phone in the next 90 days. Of those respondents 69% plan on buying an iPhone. Of those buying an iPhone, 43% plan on buying the model X. That suggests demand for the X will be huge even with an estimated average price of $1,150. Also, the 8 Plus is out selling the regular 8 so Apple's revenue is going to rise due to the average selling price (ASP) of most phones rising. < a href="https://www.appleworld.today/blog/2017/10/23/another-survey-iphone-x-demand-will-be-exceptional" target="new">Link UBS said the higher ASP could lift Apple's FY 2018 earnings to $11.40.


The API petroleum inventory report after the bell showed a gain of 519,000 barrels of oil compared to estimates for a 425,000 barrel decline. Oil prices rose in afterhours because gasoline inventories declined 5.753 million barrels compared to estimates for a drop of 2.3 million. Distillate inventories fell -4.949 million barrels compared to estimates for a decline of 2.05 million. The decline in refined products suggests oil inventories will decline as refiners ramp up production. However, we are at that time of year where refiners let inventories of refined products decline before they ramp up production of the winter fuel blends. We should not apply too much importance to these numbers.

Crude prices also rose on comments from the Saudi energy minister saying basically "We will do whatever it takes to support prices." The minister said Saudi Arabia was determined to end the oil glut. Prices also rose on his comments that the confrontation between Iraq and Kurdistan was creating concerns in the market.


On the economic front, the Richmond Fed Manufacturing Survey for October declined from 19 to 12. The 7-point decline was the largest since April but it was from a high level. While the survey continues to show economic expansion this was a broad decline in the main components.



The calendar for the rest of the week is headlined by home sales reports and the Kansas Fed manufacturing report. The third revision of the Q2 GDP is on Friday. None of these reports should move the market. Investor interest is focused on earnings.




Markets

The Dow was the outperformer with a 0.70% gain because of four Dow components. The Nasdaq only gained 0.18% and the S&P 0.16%. The Dow gains are simply not sustainable. The index is quickly going to run out of earnings reporters to power the gains. Once the post earnings depression phase appears, it could be ugly. Stocks and indexes that post outsized gains for an extended period, typically post outsized losses when that growth spurt ends.

I am afraid we are reaching that point on the Dow. None of the other indexes are confirming the Dow gains. The only reason they were barely positive today was market sentiment created by the Dow. Anyone short anything probably took some off the table with the Dow exploded out of the gate.


The S&P gained only 4 points and that was probably due to CAT, MMM, AMZN and NFLX. The index is not confirming the Dow's gains and is well off its recent high at 2,578 and the closing high at 2,575. This formation suggests we will see additional declines. Support is now 2,555.


The Nasdaq should have done better than an 11 point gain. The big cap tech stocks were mostly positive but the gains were not outstanding given the stock prices. Netflix would be the exception to that claim. A $3 gain on a $1,000 stock is noise and will not lift the index.

The tech earnings are clustered on Thursday after the bell and they better all be blowouts if the Nasdaq is going to rally on Friday. Given some of the misses and big stock declines from today, tech investors may be reconsidering holding over the coming reports.

The Nasdaq has support at 6,565 and resistance at 6,635.




The Russell 2000 closed right at prior support at 1,500, which may be turning into resistance. The index still has not seen any material profit taking from its 162-point rally so any lower close on the Russell would trigger additional selling.


While I do expect the market to move higher over the next month, I am very concerned that we are moving ever closer to a significant profit taking event. Stocks take the stairs up and the elevator down. Earnings for most stocks have been great but we are starting to see a larger percentage of misses as the earnings volume grows. If portfolio managers begin to worry about the post earnings depression phase, they could begin taking profits soon and plan to reenter once we get a decent dip to buy.

The Dow is going to rapidly run out of earnings fuel in three days. The majority of the index will have reported when this week ends. That means next week could be bumpy. Since most traders try to anticipate events, that suggests we could see some bumps this week as well.

We are rapidly approaching a new challenge. With the president declaring outright war on senator's Flake and Corker, that eliminates 2 of the 52 he needs to get tax reform passed. That leave vice president Pence as the tie-breaking vote but if we see another defection from the ranks that would kill the tax reform process. When your own soldiers are defecting, you cannot afford to whittle down the remaining ranks or the war will be lost. We are very close to losing tax reform and once investors see that as a possibility, they will take their chips off the table.

Keep some cash in your account in case we do get a buying opportunity because that is looking more likely with each passing day.

Enter passively, exit aggressively!

Jim Brown

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