The big cap tech stocks posted monster gains on Friday to power the Nasdaq to the largest one-day move since November 2016.
Amazon, Alphabet, Microsoft and Intel all beat the street on earnings after the bell on Thursday and stocks posted monster gains on Friday. The Nasdaq had been trending lower the first four days of the week on worries about those earnings reports. Traders were taking profits and some were entering short positions ahead of the events. Those on the wrong side after the close on Thursday paid a heavy price to cover those shorts on Friday.
Shortsqueeze.com said short interest on Amazon declined 15% on Friday from 6.342 million shares to 5.416 million. Alphabet short interest only declined -3% to 2.447 million shares. Amazon shares rose $128 and Alphabet gained $42.
There were quite a few aggressive traders going in the opposite direction on Microsoft and Intel. Microsoft short interest rose 11% to 50.228 million shares on 4.7 times average volume and Intel shorts rose 14% to 131.85 million shares on 3.5 times average volume. The QQQs saw short interest rise 3% to 57.0 million shares.
While there were a lot of traders covering at the open, there were also quite a few betting in the afternoon that the gains would not last. A lot of the index gains came from the buying in the QQQs with 3 times normal volume at 60 million shares. Sudden buying the ETFs requires managers to buy large volumes of the underlying stocks in order to keep the ETFs balanced.
Amazon traded 16.6 million shares worth $18.26 billion on 5.5 times the average volume. You will never be able to convince me that tens of thousands of investors saw the earnings and suddenly just had to have Amazon shares in their portfolio at $128 more per share than Thursday's close. This was almost entirely short covering. Nobody in their right mind would buy Amazon as an investment on this spike. Every knowledgeable investor would wait for a few days until the post earnings depression phase arrived and then buy it cheaper.
There were 1,709 advancers on the Nasdaq and 1,015 decliners. Total volume of 2.089 billion shares was only 311 million over the 1.878 billion from Thursday when the index closed down 7 points. For a day when the Nasdaq gained 2.2% or 144 points you would have expected the A/D line to have been 2:1 or even 3:1 in favor of advancers, instead of 1.7:1. Back on Sept 27th the Nasdaq gained 73 points and the A/D ratio was nearly 3:1 in favor of advancers.
The point I am trying to make is that this was not a broad market rally. In the morning hours is was almost entirely the Nasdaq big cap stocks but as the day progressed the activity broadened somewhat simply because of the improvement in sentiment. Booming markets make people want to buy something.
The Dow did not turn convincingly positive until after 11:00 and then traded back near the flat line at 1:30 and again at 3:30. It was touch and go on the Dow until the final minutes of trading.
Apple, Microsoft and Intel added 95 points to the Dow and it barely closed positive. This was not a broad market rally.
Do not get me wrong. I am thrilled the indexes closed positive on Friday and I hope they move higher. We just need to be observant and not get caught up in the market hysteria we saw on Friday. Next week is another busy week of earnings but the following week is where we could see trouble appear. There will be some post earnings depression. There always is and we should look at those periods as buying opportunities.
There were two economic reports on Friday and one was a shocker. That was the first look at GDP for Q3. The headline number was 2.99% growth and well over the 2.6% estimate. Analysts were convinced the hurricanes had knocked off at least a half a point or more from the 3.1% growth in Q2. Consumer spending did decline and contributed 1.62%, down from the 2.24% in Q2. However, that is expected to rocket higher in Q4 as the hurricane rebuilding shifts into high gear along with the holiday shopping season.
Exports contributed 0.41%, inventories 0.73%, business investment 0.49%and residential investment subtracted -0.24%. The BEA said the hurricanes impacted data collection but they did not quantify an impact to the headline number. Puerto Rico and the Virgin Islands are not included in the GDP so the damages there had no affect on the numbers.
The economy is on a roll and without another major disaster we are on track for greater than 3% growth in 2018. Fortunately, despite the growth there is no inflation in sight. The Fed is more than likely going to hike rates in December but that is already factored into the market.
The CME Fed Funds Futures are signifying a 100% chance of a rate hike from 100-125 Bps to 125-150 Bps in December.
The final reading for consumer sentiment for October declined only slightly from 101.1 to 100.7. This is still the highest level since 2000. The present conditions component rose from 111.7 to 116.5 and the six-month expectations component rose from 84.4 to 90.5. Those respondents saying now was a good time to buy a major household item rose from 78% to 81%. Those thinking it was a good time to buy a car rose 6% to 72%. Those who believe the country will see good economic times over the next 12 months increased 8% to 55%. Clearly, consumers are in a good mood.
The economic calendar for next week is crazy. This is the first week of the month and that means the payroll reports. Estimates have exploded higher with the Nonfarm Payroll forecast for 310,000 compared to the loss of 33,000 jobs in September. That was due to the hurricanes and I expect that to be revised significantly. The ADP number is forecast at 225,000 compared to 125,000 last month.
There is also a Fed meeting this week with the announcement on Wednesday. Nobody expects any changes to rates but they will likely comment on the expectations for December.
The House is expected to release their tax reform plan on Wednesday. That could be a good news/bad news event. Some features are likely to be bullish and some are likely to be bearish.
President Trump is expected to reveal his pick for the new Fed Chair on Thursday. The White House said it would be this week and before the president leaves on his China trip on Friday. Since the Fed meets on Tue/Wed and the tax plan release is on Wednesday, the obvious day for the Fed head announcement is Thursday. I would doubt it would be before the Fed meeting but you never can tell. The market seems to have settled on Jay Powell with Taylor as the second choice. Yellen has fallen out of contention based on the various polls. Powell would be seen as a continuation of Yellen's policies with a little more emphasis on normalization.
Apple iPhone X orders began at 3:AM ET on Friday and they were sold out within minutes. Within 30 minutes, the anticipated ship dates for online orders were well into December. If you did not order a phone on Friday morning, the odds are very slim that you will get it before Christmas. The two versions available online were silver or black in 64gb or 256gb models for either $999 or $1,149.
Apple released a statement saying orders for the iPhone X were "off the charts" and they were working to get this "revolutionary" phone into customer's hands as quickly as possible. This is probably the same statement they would have used regardless of the order volume. Apple also said the Bloomberg story about production delays and limited inventory was "completely wrong."
Cascend Securities conducted a survey in the 100 most populous markets in the US. In every case the iPhone X was sold out by 5:AM ET, 2 hours after orders opened.
Apple shares exploded higher after they said the Bloomberg report on supply shortages was completely wrong. Shares gained $5.64 and added 39 points to the Dow. Apple reports earnings next Thursday after the close and guidance will be critical.
Dow component Merck (MRK) reported earnings of $1.11 that beat the estimates for $1.03. Revenue of $10.33 billion missed estimates for $10.54 billion. Drug sales fell -3% to $9.16 billion. Gardasil sales fell -22% to $675 million and missed estimates for $776.4 million. Keytruda sales nearly tripled to $1.05 billion but slightly under estimates for $1.07 billion. The company guided for the full year for $3.91-$3.97, up from $3.76-$3.88 and revenue guidance rose from $39.4-$40.4 billion to $40.0-$40.5 billion. That did not satisfy investors and shares fell sharply. After the bell, the company said it withdrew an application for Keytruda in Europe and that caused additional questions about future sales.
Dow component Chevron (CVX) reported adjusted earnings of 85 cents that missed estimates for 98 cents. Revenue of $36.21 billion beat estimates for $34.5 billion. Production rose 8% to 2.72 million Boepd. Production in the US rose by 6,000 bpd to 525,000 Boepd. Gas production fell from 1,098 million cubic feet to 988 million cubic feet due to declines in existing wells and low gas prices. Chevron is reducing capex in 2018-2019 because the major expenses at the Wheatstone and Gorgon LNG facilities have been completed and production is underway. As production ramps up significantly over the next year, this will be a major source of cash flow for Chevron. Shares declined on the lack of guidance and weak production growth in the USA.
Dow component Exxon (XOM) reported adjusted earnings of 97 cents ($3.97 billion), up from 63 cents and beat estimates for 86 cents. Production rose 2% to 3.9 million Boepd. Shares took a 4 cent hit from the hurricanes. Revenue rose 13% to $66.17 billion and beat estimates for $63.51 billion. Capex spending rose 43% to $6 billion. Cash flow from operations rose 33% to $8.4 billion. They paid $3.3 billion in dividends.
Exxon won 12 block offshore Brazil representing 2 million high potential acres at competitive fiscal terms. The company also completed the Turbot-1 exploration well offshore Guyana and represents their fifth major discovery in that region. They signed a production sharing agreement offshore Suriname for 2.8 million acres. They added 22,000 acres in the Permian with 400 million Boe added to their existing resource base of 6 billion Boe in the Permian.
AbbVie (ABBV) reported earnings of $1.41 that beat estimates for $1.39. Revenue of $7.0 billion missed estimates for $7.04 billion. They guided for the full year for earnings of $5.53-$5.55, up from $5.44-$5.54, and increased their quarterly dividend by 11% from 64 cents to 71 cents. The company said sales of Humira, the world's largest selling drug, would bring in $21 billion in annual sales by 2020. That is up $3 billion from prior forecasts. Sales in 2016 were $16.08 billion. Sales of the arthritis drug in Q3 were $4.7 billion.
Here is the key point for AbbVie. The company said non-Humira sales are expected to rise from $9.6 billion in 2017 to $35 billion by 2025. The company is launching 20 additional products by 2020 with at least 8 of them expected to generate more than $1 billion in annual sales. These drugs will focus on Alzheimers, womens health and Hepatitis C.
Expedia (EXPE) was in the biggest loser category after reporting earnings of $2.51 that missed estimates or $2.59. Revenue of $2.97 billion rose 15% but missed estimates for $3.01 billion. Gross bookings rose 11% to $22.2 billion but that also missed estimates. Marketing expenses rose 21% and the company said it was being forced to lean more heavily into paid marketing channels. They blamed the hurricanes for their earnings weakness saying consumers avoided travel to the south for weeks after the storms. That excuse did not buy them any mercy from investors with a $24 drop.
Align Technology (ALGN) creator of the Invisialign braces reported earnings of $1.01 compared to estimates for 82 cents. Revenue of $385.3 million beat estimates for $359.7 million. They guided for Q4 revenue of $391-$398 million. The company is benefitting from Instagram and the selfie generation. Everyone wants straight teeth in their pictures. Shares rallied 16%.
Earnings expectations for Q3 took a sizeable jump upwards last week from 4.4% to 6.7%. Of the 273 S&P companies that have reported 74% have beaten estimates for earnings and 66.7% have beaten revenue estimates. Those are above the averages of 64% and 59% respectively. Next week there is one Dow component (AAPL) reporting and 135 S&P-500 companies.
Other notable earnings on the calendar include Facebook, Tesla and Alibaba.
On Friday, Tesla reportedly cut parts orders for the Model 3 by 40%. Production of the cars has not accelerated to the expected level and their parts inventory is overflowing. Parts order sets will be reduced from 5,000 per week to 3,000 per week starting in December. Tesla only produced 260 Model 3s between July-September and far short of the 1,500 goal. Elon Musk is blaming production bottlenecks and said there were no fundamental issues with the supply chain. In 2010 Tesla acquired the Nummi plant, which was a joint venture between Toyota and GM. In 2006, the last year of operation the plant produced 428,633 cars so there is plenty of capacity once Tesla gets all the bugs worked out of their process. Earnings are Wednesday after the close and they rarely do well after earnings.
Deckers Outdoor (DECK) said it has ended its efforts to sell itself after 90 prospective buyers turned it down. Throughout the process, the company continued to restructure and has been seeing success in its direct-to-consumer channel. International sales have also been rising. The CEO said they were looking forward to the holiday season with a stronger product lineup and cleaner inventories compared to a year ago. The company is projecting a 2% rise in revenue and earnings of $4.15-$4.30 that is 15-20 cents higher than prior guidance. They even authorized $335 million in additional buybacks to bring their outstanding authorizations to $400 million.
Crude prices rallied $1.50 after the Saudi Crown Prince Mohammad bin Salman said he backed an extension of the production cuts for 9 months until the end of 2018. Russia also expressed their support. The next OPEC meeting is November 30th and given the state of the oil market they may advance their plan for a formal agreement to come out of the November meeting rather than waiting until January as previously stated. Tensions in Iraq also contributed to the price rise. However, Iraq and the Kurdish Peshmerga agreed to a ceasefire late Friday. That could allow prices to fall on Monday.
Jefferies said an extension of the cuts would leave the market modestly under supplied until 2019 and facilitate the reduction of global inventories. Weak prices have caused supply growth estimates for 2018 to decline slightly. If all of this comes together, we could actually see higher prices late in 2018. However, OPEC is known to hedge on commitments. Current compliance with the 1.8 million bpd cut is only 86% and if the truth were known it would probably be even less than that.
The Dow posted another new high on Tuesday after about 15 days of gains but the AAII Sentiment survey that ended on Wednesday showed a dramatic shift from neutral to bearish sentiment. The bulls gained 1.7% but the bears saw a 5.1% jump. Those neutral on the market fell to 27.33% and the lowest level since March 9th. Apparently, investors are moving off the fence and taking a stand for November.
The S&P blew through resistance on Friday to gain 21 points and close at a new high. Having stocks like Amazon gain 128 points and Google 42 points will do wonders for a cap weighted index. All of the big techs with the exception of Priceline and Tesla were strongly positive.
The obvious key here is whether those big caps can add to their gains or simply hold those big gains. I suspect there will be some profit taking once the short squeeze wears off and that should happen by Monday's close. Traders are going to get their margin calls over the weekend and they will have to liquidate something to cover their short falls. That is not as simple as just closing their shorts. They will have to sell something else to cover the shortfall from those shorts.
The S&P has support back at 2,555 and I would be very surprised if we did not see that again in the days ahead. Opening gaps are normally filled and that would be 2,560 based on Thursday's close.
The Dow managed to close positive but it was a fight. Only 12 components were positive and the top four on the list added 118 Dow points. Even with that strong support, the index was barely able to remain positive ahead of the close. Art Cashin said there was $700 million in buy on close orders on the NYSE and that kept the index from closing in negative territory.
Apple is the only Dow component reporting earnings next week so there will be a distinct lack of earnings power to support the index. Apple does not report until after the close on Thursday so there will be no help for the first four days of the week. With all but five Dow components already reported, we are going to be heading into the post earnings depression phase.
Positive market forces next week could be the tax plan announcement on Wednesday and a Powell appointment as Fed chair on Thursday. Both should be market positive but they both could have negative results depending on the announcement details. Picking anyone other than Powell will be market negative.
The Nasdaq was the beneficiary of the monster short squeezes but it was also impacted by some major earnings losses as seen in the graphic below. Fortunately, the gains were larger but they were concentrated in only a handful of stocks. That means those outsized gains will likely be followed by declines.
The Nasdaq spiked to resistance at 6,700 and came to a dead stop. Support is well back at 6,555 and I doubt we will see that level in the near future. However, I seriously doubt the Nasdaq will continue to move much higher without first consolidating those gains.
The Russell 2000 rebounded back into its consolidation zone but failed to retest the prior high at 1,512. The index is still struggling to digest the 162-point gain from the August low. I would be surprised to see a breakout but I would also be thrilled.
In mid November the tax loss selling will increase. Investors will be selling losers to offset the capital gains from winners. Offsetting that could be stock buybacks. The passage of Q3 earnings kicks off the Q4 buyback cycle. Q3 buybacks declined but buyback announcements increased by 20% and once a company is out of their earnings quiet period they can begin buying again. Q4 is setting up to be a strong quarter for companies buying back their own shares.
Any reasonable investor would expect the indexes to rest next week. However, reasonable rarely applies to the market. Rallies can last well past where investors expect them to fail. In this case, a pullback would be a buying opportunity. With Q3 earnings expectations rising sharply, guidance for Q4 also improving, the economy growing at 3% or better, tax reform in the headlines and funds still under invested in equities, the odds are good we will see higher highs before the end of November. That does not mean the middle of November will not be bumpy but that will give us some additional opportunities.
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