The streak of positive gains on the Nasdaq Composite ended at 10 days.
The Nasdaq consecutive 10-day winning streak was the longest since July 2013. The index was due for a negative day. Despite the 2-point decline, the index is still bullish and poised to move higher next week with a flood of tech earnings. The following 2 weeks could be a different story.
Friday was not bothered by a bunch of economic reports. The Industry GDP for Q1, a lagging indicator at best, came in at 1.06% growth. Mining and energy contributed 0.32%, manufacturing 0.54%, construction 0.23%, wholesale trade 0.21%. Retail trade subtracted -0.21%, utilities -0.10%, entertainment, food service and lodging -0.04%. The report was ignored.
Personal bankruptcy filings for Q2 rose +0.8% and the first year over year rise since 2010. The average decline over the last two years was about -6.0% per quarter. Business filings remain near the 2006 lows. Banks have noted the change in personal finances and have begun to pullback sharply on auto loans. The report was ignored.
The calendar for next week is highlighted by the OPEC production meeting on Monday and the Fed's post meeting policy announcement on Wednesday. Saudi Arabia has been talking about cutting another one million barrels of production to hasten the decline in global inventories but nobody believes them. The post meeting headlines could move oil prices.
The Fed is not expected to make any changes to rates. There is only a 3.1% chance of a rate hike. They could begin to implement the end of QE with their first taper statement but analysts do not expect that until September. With the dollar crashing, the Fed is pretty much on hold.
The first look at the Q2 GDP is on Friday. The current estimate is for 2.5% growth, which is what I have been saying for months. The Atlanta Fed real time GDPNow has fallen to projections for 2.5%.
The home sales reports are not expected to change materially. This is for the June period and sales should have remained brisk since that is one of the best months of the year for consumers to move. They can buy/sell and get moved and settled before the kids go back to school.
The most important calendar for next week is the earnings calendar. With Alphabet/Google, Facebook, Amazon and PayPal leading the charge on tech stocks we could see a volatile Nasdaq depending on the reports. There are also 9 Dow components with the big day on Tuesday. All 5 companies will report before the open so there will be volatility.
In addition, there are 190 S&P companies reporting this week. When this week is over, we will know within a few percentage points how the quarter's results will end.
The current earnings forecast for Q2 has risen to 9.6%. Of the 97 S&P companies that have reported, 74.2% have beaten estimates, which is above the 64% average of the last four quarters. Of those companies, 72.2% have beaten on revenue, which is above the average of 59% over the last four quarters.
General Electric (GE) was drag on the Dow Friday morning after reporting earnings of 28 cents that beat estimates for 25 cents. Revenue of $29.56 billion beat estimates for $29.12 billion. Shares fell -5.4% at the open but recovered to lose only -2.9%. GE's small stock price of $26 meant that decline did not materially impact the Dow with only a 5-point drag on the index. Shares are down 18% year to date and closed at the lowest level since September 2015.
CEO Jeffrey Immelt ended his 64th quarter as CEO with the largest post earnings decline in four years. The drop in the stock came on weaker guidance to the bottom of the $1.60-$1.70 range for earnings in 2017. During his reign as CEO, GE has lost $170 billion in market cap.
The new incoming CEO is doing a "deep dive" into all the GE businesses and hopes to present a new forecast with the Q3 earnings.
Honeywell (HON) reported earnings of $1.80 that beat estimates for $1.78. Revenue of $10.078 billion beat estimates for $9.835 billion. They raised their earnings guidance from $6.90-$7.00 to $7.00-$7.10 with revenue up from $38.6-$39.5 billion to $39.3-$40.0 billion. Operating cash flow rose 25% and free cash flow rose 39%. Shares rose $1.40 for the day.
Honeywell is a slow grower but it is dependable growth. This is not a rocket stock but one you can look back on a year later and say, dang, I wish I had bought that last year.
The Swedish maker of auto safety systems, Autoliv (ALV) reported earnings of $1.44 compared to estimates for $1.48. Revenue of $2.54 billion missed estimates for $2.57 billion. Organic sales rose only 0.2% and well below the prior guidance for 2.0%. Guidance for Q3 was light and reflected slow production volume in North America and China. Shares fell 8% on the news.
The actual earnings on Friday were few and the stock reactions to earnings after the bell on Thursday were the bigger news.
Microsoft beat earnings on Thursday and shares rocketed $4 in afterhours to $77.24 but declined sharply before Friday's open. The stock lost 43 cents in regular trading to close at $73.75.
Visa (V) beat on earnings on Thursday and shares gained $1.49 to a new high in trading on Friday. The company reported 86 cents and analysts expected 81 cents. This was up from 17 cents in the year ago quarter. Payment volumes rose 12.1% to $840 billion. They forecast net revenue to grow 20% for the quarter ending on Sept 20th, up from prior guidance of 16-18%.
Capital One (COF) shares rose 8.5% after reporting earnings of $1.96 compared to estimates for $1.90. Revenue of $6.7 billion beat estimates for $6.67 billion. Shares were up strongly because the bank did not have to write down a large percentage of its loans. Analysts were worried the $582 million they have in Taxi Medallion loans would take a huge hit. In New York taxi medallions, the permit needed to operate a taxi, have sold for as much as $1.3 million. Since the advent of Uber and Lyft, those have fallen to $240,000. However, these loans represent only 0.24% of COF's outstanding loans. We also do not know how much they actually loaned on average on those medallions so we could be looking at pennies on the dollar and the loans are still viable.
There are currently 13,587 taxis in NYC and more than 50,000 Uber/Lyft cars. The average hourly earnings for a taxi driver in NYC is $30.41 not counting tips.
E-Trade Financial (ETFC) reported earnings of 52 cents on revenue of $577 million. Analysts were expecting 48 cents on $554.3 million. The company also said they authorized a $1 billion stock buyback program. They added 41,000 accounts during the quarter. Shares spiked 5% on the news.
Intuitive Surgical (ISRG) reported earnings of $5.95 per share on revenue of $756 million, a 13% increase in sales. Analysts were expecting $5.79 and $722 million. They shipped 166 da Vinci Surgical Systems in Q2 compared to 130 in the year ago quarter. Globally da Vinci procedures rose 16%. They announced a new model called the da Vinci X, which allows some of the most advanced procedures at a lower price point. Shares fell 5% or -$44.
In other news, Amazon (AMZN) was hit by a probe by the FTC after a complaint from the group Consumer Watchdog. The complaint said they looked at 1,000 items on the Amazon site and the reference price from which the discounts were calculated was not correct. The group said 61% of the items had sold for less than the reference price over the prior 90 days. Personally, I do not think it matters. If a Crock Pot has a manufactures list price of $29.95 and that is what Amazon is using as the reference price to calculate their discount, that should not be a problem. Even if they sold it on the website for $27.95 six weeks ago, so what? Everyone knows that nobody sells anything for the suggested retail price.
The real worry comes from the FTC probe in general. The current administration has dumped on Amazon in speeches multiple times. If the FTC is directed to "find something" then the probe could grow and grow and grow.
Secondly, with lawmakers urging a deeper review of the Whole Foods acquisition by regulators, this could cause even bigger problems getting that approved.
Everyone realizes that Amazon is the main driver behind the lack of retail price inflation in the U.S. and we are all thankful for it. If you are not an Amazon shopper, you may feel otherwise but you are still benefitting.
Amazon Web Services is also under attack but from another tech giant not the government. Microsoft cloud services rose 56% in Q2 and beat estimates by about $2 billion. KeyBanc said, "The sheer size and accelerating pace of cloud growth increases our confidence in the bull-case scenario that Microsoft Cloud can quickly scale north of a $50 billion segment by 2021." This could eventually allow Microsoft to bypass Amazon as king of the cloud. Microsoft cloud revenue is now 20% of their total revenue compared to 5% three years ago.
Whole Foods set August 23rd as the date of the shareholder meeting to vote on the Amazon acquisition. Given the 27% premium to the prior share price, this should be easily approved.
Amazon has begun offering meal kits similar to Blue Apron and Plated and the Amazon price is cheaper. With Amazon, you can order a single meal at any time without restrictions as a Prime customer. With Blue Apron and others, you have to commit to a monthly subscription of $60 or more and order a week in advance. The Amazon cost for a 2 serving meal was between $16-$20 plus a $10 delivery charge. For orders over $40, there is no delivery charge. Order 2-3 meals at once and you are set for several days. One analyst said he did not see the benefit in ordering "work in a box" when you could stop by a restaurant on the way home or order delivery.
Amazon earnings are next Thursday after the close.
Plug Power (PLUG) signed a new deal with Wal-Mart (WMT) where the company will install up to 30 more of its hydrogen fueling station and fuel cell energy solutions at Wal-Mart stores in North America. They have already installed 22 of these systems at Wal-Mart stores in the first deal with 5,500 Plug Power fuel cells at Wal-Mart distribution centers. As part of the deal Wal-Mart will buy up to 55,286,696 PLUG shares. Wal-Mart currently operates the largest fleet of fuel cell powered vehicles in the world. PLUG shares spiked 15%.
In a rare occurrence, two different brokers downgraded a Dow stock to a sell rating on the same day. Atlantic Equities and BTIG both downgraded Johnson & Johnson (JNJ) to a sell rating. BTIG put on a price target of $110 and the stock closed at $135. JNJ trades at a PE of 23 and set a new high on Thursday. It will be really interesting to see what happens to the stock over the next several weeks.
Netflix (NFLX) is not slowing down. The stock added another $5 on Friday in a weak market. With multiple upgrades after their earnings with several analysts targeting $200 and RBC targeting $210, the stock looks determined to hit those levels next week.
Alphabet (Google) reports earnings after the bell on Monday. The company is expected to report $8.25 per share. However, the company will have to report a $2.74 billion charge against earnings for the EU fine on prioritizing Google products above those being offered by non-Google sellers. It is not tax deductible so it will directly impact earnings. MKM Partners believe it will be a charge of $3.89 per share. Revenue is expected to be $20.9 billion, up from $17.5 billion. Paid clicks rose 44% last quarter so that will be the metric for comparison this quarter. Canaccord believes Google is facing a problem with ad load, meaning they have run out of places to put new ads and ad growth may be unsustainable. With Google reformatting ad placement in Europe as a result of the fine, they may have even less ad space available and Europe has been 30% of Google's revenue in past quarters.
The Volatility Index ($VIX) closed at 9.36 on Friday and a 24-year low. That is only 5 cents away from the 9.31 prior low in December 1993. The VIX has closed under 10 for the last seven days. To say this is abnormally low is an understatement. Some people claim the VIX is broken because of the switch to passive investing. Year to date more than $250 billion has flowed into ETFs according to Bank of America and that is a record. Others claim it is a factor of trading by computers. They do not have emotions that cause individual traders to think, "This market is getting overbought, I need to buy some puts."
Fundstrat Global Advisors just completed some research on the VIX and the question of low volatility. Fundstrat's Sam Doctor said after the research we believe the correlations are still there and "the divergence will be resolved in the coming months and could lead to a 10% decline in the S&P-500." They found since 1991 there have been 12 major volatility spikes and the correlation spreads collapsed. "According to our model, we see a 50% chance of a 10% correction in the S&P over the next several months, accompanied by a sharp spike in volatility." They recommend being overweight defensive large-cap growth stocks such as healthcare, telecom and staples. What could go wrong with this scenario? They said "The correlation spread divergence has persisted for over 7 months so far, and it could persist longer than we expect before resolving itself. In 2000, it persisted for 9 months before normalizing." Source
The dollar has imploded and the rate of decline is accelerating. The dollar index closed at a new 12-month low on Friday at 93.85. The Dollar Index has declined -6.4% this year. Against the euro, the dollar has fallen more than 10% and more than 15% against the peso. This is going to be a boon to companies that do business internationally and should boost earnings over the next few quarters.
August has not been kind to the market. Over the last 20 years the average August decline is -1.2%. That may not seem like much but there have been some dramatic declines that were offset by a few good years.
August 1990 - Kuwait invasion
August 1997 - Asian debt crisis
August 1998 - Russian debt default
August 2011 - U.S. debt ceiling, loss of AAA credit rating
August 2015 - China devaluation concerns
Those events caused declines of 5% to 15%. However, even in normal years, August is not kind. There are multiple reasons given by various analysts. The most common is that summer is fading, parents are getting kids ready to go back to school and they are trying to cram some late summer vacations in before that school bell rings. Volume is low as is interest in trading. Since Aug/Sep are the worst months of the year for the market, Sep/Oct are seen as the best months of the year to buy the dip.
October is known as the "bear killer" month because so many bear markets end with a low in early October and the dips are bought ahead of the best six months of the year strategy. November-1st to May-1st are the best six months of the year so everyone wants to be long when November arrives.
I explained these points to emphasize that traders should not be overly long once we enter August. We need to enjoy any continued gains but be ready to exit if the music suddenly stops.
Oil Prices crashed again on Friday despite a decline in active rigs. OPEC is meeting on Monday to discuss the progress of the production cuts but nothing is expected to change. There are cracks appearing in the fragile coalition between OPEC and non-OPEC producers and it will be a challenge just to retain the current level of cuts. Russia and Kazakhstan have both said they would not be part of any future cuts. Ecuador has pulled out of the agreement and is raising production and Iraq wants to increase production by 500,000 bpd. Saudi Arabia has talked about an additional cut of one million barrels on its own. This is highly doubtful since they are already carrying most of the load for the January cuts.
Nigerian production is up to 1.75 mmbpd, up about one million bpd since January. Libya's production jumped 500,000 bpd last month according to RBC Capital. Those two countries almost completely erased the 1.8 mmbpd the coalition agreed to cut starting January 1st. Fortunately, Nigeria is close to full production and cannot increase much further. Libya has room to grow but the easy gains are over.
Francisco Blanch, an analyst at Bank of America, said OPEC is boxed in. "They cannot get out of this problem very easily. It is either a fast death, slow death or death by a thousand cuts." If they kill the deal and increase production, it is a fast death. If they keep the deal, it is a slow death because production is still rising. If they cut production further they give away market share to U.S. shale producers and it becomes a long term death by a thousand cuts.
U.S. production rose 32,000 bpd last week to 9.429 million bpd and a post crash high.
Schlumberger (SLB) reported earnings last week. They said U.S. land revenue rose 42% from Q1 and almost twice the 23% rise in the rig counts. Revenue from fracking rose 68%. They said completion activity was accelerating and demand was "robust." They said U.S. activity has been leading the gains but they are suddenly seeing a burst in international activity among OPEC nations and other producers both onshore and offshore.
It appears to me we are not going to be seeing any material gains in energy prices in the near future. They will more than likely be volatile but with rising production at every turn, there is going to be a surplus of oil for the foreseeable future.
The U.S. onshore rig count declined by 2 last week. That was 1 oil rig and 1 gas rig. However, the offshore rig count rose by 2 to 23. There are several big projects in the Gulf that have been on hold but recent investment decisions have been made to proceed rather than lose the money already invested.
Friday's market movement was meaningless. It was expiration Friday in the summer earnings cycle. There were $550 billion in S&P options expiring. I wrote last weekend that the large number of call options in the 2450-2480 range could lead to hedging that would keep the markets flat within that range for the week. The S&P gained half a percent or only 13 points for the week despite all the indexes setting new highs on Wednesday. The market action over the last two days was expiration related plus a few earnings disappointments.
The S&P continues to climb slowly higher but Wednesday was the only real gain for the week. The S&P gained 14 points on Wednesday and 13 points for the week. That shows you the positive gain for the week was really only one day. Now that July expirations are over, we could see a little more movement next week. I would not expect it on Monday because that is expiration settlement day, which is rarely directional. Tuesday will be the turning point based on the 5 Dow components that report before the open.
The new target on the S&P is 2,500. This is the big round number that will draw traders like a flies to a picnic. It may also be the summer peak. Big numbers once hit tend to create a softness in the market because traders don't know what to do next. If we were to hit that level as we move into August, it could produce a sell the news event.
Support is now 2,450 and the index closed at 2,469. That gives us plenty of room to roam in both directions without causing any immediate change in sentiment.
The Dow rebounded from a low of -108 to end with a minor loss of 31 points. The intraday low was a higher low from Tuesday. However, the new resistance at roughly 21,650 has held on multiple attempts. The Dow chart is still bullish as long as we keep seeing those higher lows. Initial support is about 21,470. That gives the Dow about a 180-point range to traverse without triggering a breakout or a breakdown.
Tuesday will be the critical day with 5 Dow components reporting before the open. Monday is settlement day after expiration and is not normally directional but recent norms have not been following the historical patterns.
The Nasdaq Composite only gave back 2 points after ten days of gains. That is very good relative strength and with additional big tech earnings this week, we could see further gains. Alphabet is after the close on Monday so that will be the first hurdle to cross. Facebook is Wednesday and Amazon on Thursday.
Current initial support is 6,365 followed by 6,308. Resistance is 6,395. That 6,400 round number resistance will also be a factor but not as strong as the 6,500 target for the current move.
The small cap Russell 2000 had a good week with a record high close on Wed/Thr and a record intraday high on Friday. The index gave back only 6 points after a monster gain on Wednesday. As long as the Russell continues creeping higher, the big caps will eventually follow.
There are signs the markets should be positive this week but nothing is guaranteed. It is the two weeks after that concerns me because of the historical trend. I would still maintain a bullish bias for this week but starting next week I would tighten my stop losses. We may only get random volatility and that would be fine compared to the potential for a steeper decline.
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There was a big jump to the bullish camp last week. With all the major indexes closing at new highs on Wednesday, the same day the survey ends, the bullish sentiment saw a whopping 7-point jump. They came from the undecided and from the bearish contingents. This is almost a contrarian indicator that so many investors switched sides on the breakout or what could be near a top.
Google is in the mosquito raising business. The Verily business unit deals with health care issues and one of their recent accomplishments is mosquito breeding. Why do we want to breed millions of mosquitoes a week? In order to wipe out the population. The mosquitoes Google breeds are then infected with the Wolbachia bacteria. This prevents any reproduction activity from being successful. The males go from female to female performing their function but the resulting eggs do not hatch.
The idea is to keep mosquitoes from transmitting Zika, Yellow Fever, Malaria and other diseases. More people are killed every year by mosquitoes than any other animal or insect.
Google has perfected a way for robots to raise millions of mosquitoes a week and sort them by male and female. Only the female of the species actually bite. The males are harmless to humans and are the only mosquitoes released. They are sorted by computer with a picture taken of each mosquito to determine its sex. The project is called MosquitoMate and Debug Fresno.
Intrexon (XON) has been working on a similar program for several years but it involves introducing a genetically modified mosquito into the wild and there could be unforeseen consequences in the future. Google's mosquitoes are not modified. They just carry the Wolbachia bacteria that kills the eggs. Therefore, there is no risk to future generations. Once the males die, the bacteria disappears as well.
Google is aiming on reducing the mosquito population by 90%. People ask why not 100%? Because we do not know if the mosquitoes have a yet undiscovered positive impact on humans, animals, etc. Who knew Google was a mosquito breeder?
Hawaii is preparing to be nuked by North Korea. Missile attack drills will begin in November and citizens will be told to "get inside, stay inside and stay tuned." Students will begin practicing evacuation drills similar to "active shooter" drills. North Korean missiles cannot yet reach Hawaii but the regime has promised that they will be able to reach any part of the U.S. very soon.
If satellites detected a missile launch from Korea, Hawaiians would have about 8-12 minutes to react after the time it would take to recognize a launch and plot the course to a probable target. The total flight time would be about 20 minutes.
Hawaiian officials want to be careful and keep the preparations low key to avoid scaring away tourists.
JP Morgan raised its yearend forecast for the S&P by 150 points to 2,550. They said tax reform and the weaker dollar would produce a meaningful earnings surprise later this year.
If you subtract those 150 points from the target, you get 2,400 and their old target. Actually, the median S&P yearend target from 16 major analysts is, drum roll please, 2,450 which was surpassed last week. That is why that level was so critical. Currently Morgan Stanley is projecting 2,700, they just upped it last week to the highest on the Street. The lowest target is Fundstrat at 2,275 with Wells Fargo second lowest at 2,280.
Having the median target at 2,450 should concern us. If only a couple analysts were projecting that level it would not be material. When the majority are averaging 2,450, it suggests the Aug/Sep period could be rocky because professional portfolio managers are going to be cautious over that level.
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"We are winning, they are losing."
Sec of Defense James Mattis when asked how the ISIS fight was progressing.