It was a volatile morning because of geopolitical headlines but the markets quickly rebounded from the panic lows. Iran and Russia were making geopolitical waves again but investors continued to use any dip as a buying opportunity.
News hit the wires shortly after the open that Iran had fired on, boarded and seized a U.S. Navy cargo ship in the Persian Gulf. The Dow immediately sold off from a gain of about 50 points to -122 at the lows. The rumor turned out to be untrue. Iran did fire on, board and seize the Maersk Tigris container ship and forced it deeper into Iranian territorial waters in the vicinity of Larak Island near the Strait of Hormuz. The ship was traveling from Jeddah in Saudi Arabia to Jebel Ali in the UAE.
When it was revealed that it was not a U.S. Navy cargo ship the market rallied off its lows. However, the Maersk vessel is carrying a Marshal Islands flag and the U.S. has "full authority and responsibility for security and defense of the islands" according to the State Department. The Marshal Islands did belong to the USA at one time but are now a sovereign nation under the protection of the USA. The Navy directed the destroyer Farragut to proceed at "best speed" to the location of the Maersk vessel and also sent aircraft to observe the situation. Source
This may be an operation by Iran to save face after their convoy of ships thought to be carrying arms for the Houthi rebels in Yemen was forced to turnaround after a flotilla of U.S. warships arrived on the scene to prevent that from happening. By seizing the unarmed Maersk vessel Iran can make some stupid claim about a violation of its international waters and try to remind countries in the region they still have a military and should not be ignored. Iran constantly threatens to shutdown the Strait of Hormuz as a "countermeasure to Western aggression" but rarely does anything other than talk about it.
With Iran and Saudi Arabia in a proxy war in Yemen this could have been an escalation of that war since the ship was coming from Saudi Arabia. The rules for transiting the strait were set out in a 1982 UN convention. Any vessel can use the strait as long as it proceeds without delay and it not polluting the waters.
I think the Persian Gulf countries are moving ever closer to a real shooting war rather than the proxy war in Yemen where Iran backs the Houthi rebels and Saudi Arabia backs the Yemen government.
Later sources claimed the vessel was seized by the Iranian Revolutionary Guard (IRGC), which is separate from the Iranian navy and is typically more provocative than the Iranian navy. The IRGC has its own fleet of boats that patrol the Strait of Hormuz.
Even later the Iranian Fars News Agency said the "American trade vessel" had been seized and confiscated for trespassing on Iran's territorial waters. No big surprise there since they need to justify the action in some form.
Overnight Finland dropped depth charges on an unidentified submarine off the coast of Helsinki after following the sub on Monday and again on Tuesday morning. The sub was thought to be Russian. The Finish Navy said the depth charges were the size of grenades and not intended to harm the sub but to warn that it had been spotted and should leave the area. Source
Sweden, Norway, Finland, Denmark and Iceland made an unprecedented hawkish joint statement several days ago citing the Russian challenge as grounds to increase defense cooperation. Moscow immediately responding saying moves by Finland and Sweden towards closer ties with NATO was of "special concern" to Russia.
The Dow shook off the Iranian news and rallied to gain +72 points and close right on resistance at 18,100. The Nasdaq gave back -5 to close at 5,055. The Nasdaq loss was due to continued declined in the biotech sector and a -$2 decline in Apple.
Also weighing on the market at the open was some negative economic news. The Consumer Confidence for April declined -6.2 points from 101.4 to 95.2 and a four-month low. Expectations for the labor market worsened and consumers said they were holding off on purchases of cars, appliances and vacations.
The present conditions component declined from 109.5 to 106.8. The expectations component declined from 96.0 to 87.5 and the lowest level since September. Those respondents who thought jobs were plentiful fell from 21.0% to 19.1%. Future income expectations also declined with those expecting an increase falling from 18.8% to 18.3% and those expecting a decrease in income rising from 9.7% to 11.2%.
Those planning on buying a car declined from 12.7% to 10.8%. Those thinking about buying an appliance or big screen TV declined from 49.6% to 46.8%. Those considering a home purchase rose from 4.8% to 5.2%.
Analysts remain confused on why consumers are not spending their gasoline savings. Retail sales remain weak and confidence is declining.
The Richmond Fed Manufacturing Survey rebounded slightly from -8 in March to -3 for April. New orders improved from -13 to -6 and unfilled orders improved from -12 to -8. This is the third consecutive month that new orders have contracted. Capital expenditure plans declined from 32 to 26 and the lowest reading for 2015. Analysts blame the strong dollar for the decline in manufacturing orders.
In the separate Services Survey the index declined from 12 to 2 and the lowest level since April 2014. Revenues contracted from +12 to -1. This is for April so you can't blame the declining activity on the weather.
The calendar for tomorrow is headed by the FOMC announcement at 2:PM. Analysts don't believe there will be a rate hike until September at the earliest because of the weak economic numbers but they do believe the Fed will further modify their statement to suggest it could come as early as June. This is the Fed trying to talk the market up and warn that time is growing short. They don't want the market to be surprised when the hike finally comes.
The GDP estimates continue to decline in the press but the consensus estimate remains in the +1% growth range. Since the Atlanta Fed real time GDPnow is projecting +0.1% it will be interesting to see what number really appears on Wednesday. Unless it is dramatically different from 0%-1% growth it probably will not phase the market. A weak number is already expected.
The market was roiled by Twitter (TWTR) earnings about 45 min before the close after they were inadvertently released early on the Twitter website. The market was made aware when Data scraper firm Selerity tweeted the numbers. Initially everyone thought there had been a leak but Selerity quickly pointed out that there was "no leak and no hack" as the data was on Twitter's website. The stock imploded and was eventually halted.
Twitter posted earnings of 7 cents compared to estimates for 4 cents. Revenue of $436 million missed estimates for $458 million. The company warned that "ad engagement growth" declined significantly. Twitter cut its full year revenue forecast from $2.3-$2.35 billion to $2.17-$2.27 billion. Analysts were expecting $2.37 billion.
The number of monthly active users rose +18% to 302 million compared with 20% growth in the prior period. Mobile users accounted for 80% of the traffic. Analysts reviewing the report were bearish saying it appeared Twitter was experiencing significant subscriber churn and could not keep new users. With their advertising model failing to grow revenue the outlook is worsening.
Shares declined -18% just before the close.
Aetna (AET) reported earnings of $2.39 that blew away estimates for $1.96. Earnings rose +21% and revenue rose +8% to $15.1 billion but missed estimates for $15.5 billion. They ended the quarter with 23.7 million members, up +4.2%. The company raised guidance from "at least $7.00" to a range of $7.20-$7.40. That is the second guidance raise in 2015.
GoPro (GPRO) reported adjusted earnings of 24 cents that easily beat the estimate for 18 cents. Revenue rose +54% to $363.1 million and beat estimates for $341 million. GoPro has posted record earnings and revenue in each of the three quarters since it went public. Shares declined initially in after hours to $43.57, -$4, but then rallied to $52 after closing the regular session at $47.
The company said it was acquiring Kolor, a French company and a leader in virtual reality and spherical media solutions. GoPro said the combination of several cameras along with the Kolor software would "transform entertainment, education and other industries."
UPS reported earnings that rose +14% to $1.12 that beat estimates for $1.09. Revenue rose +1% to $13.98 billion but missed estimates for $14.32 billion. UPS was hurt by a -5% decline in international revenue, which was due to the strong dollar. The company said it decided not to renew an undisclosed number of shipping contracts that were not profitable enough. They did not identify the shippers but said the packages were light weight and low revenue per box. They forecast full year earnings between $5.05-$5.30. UPS shares rallied $3.34 on the news.
Panera Bread (PNRA) crashed and burned after reporting a -25% decline in earnings to $1.20 per share. Revenue was up +7% to $649 million. Same store sales were up +2% for the current quarter. They reiterated their guidance for earnings to be flat to down in the mid to high single digit percentages from 2014. Shares initially fell -$15 but rebounded to close down -$5.
Buffalo Wild Wings (BWLD) reported earnings of $1.52 that missed estimates for $1.66. Revenue of $440.6 million also missed estimates for $453.9 million. The company said higher chicken wing costs squeezed profits. Wing costs rose +41% from last year and they are only going higher as a result of the 10 million chickens killed by the bird flu. Shares declined -$18 on the news.
Wynn Resorts (WYNN) reported earnings of 70 cents compared to estimates for $1.34. This was a major unexpected loss and shares were crushed in afterhours for a -$13 loss. Revenue of $1.09 billion was also well short of estimates at $1.21 billion. The casino company said a steep decline in betting in Macau was to blame. Steve Wynn said the depression in the VIP market in Macau was ongoing. The company cut its dividend from $1.50 to 50 cents with Wynn saying it was foolish to issue dividends on borrowed money. Revenue in Macau declined -38% to $705.4 million. They have another $4.1 billion property opening there in the first half of 2016. Do you think Steve is having second thoughts about that spending today?
Wednesday's earnings calendar is highlighted by Anthem, Mastercard, MGM and Time Warner. Thursday is the big day this week and then the number of earnings reports begin to decline starting next week.
Of interest to energy investors will be the Conoco and Exxon earnings on Thursday and Chevron on Friday. What they say about the prospects for production and oil prices could set the sector on fire or bury it under a ton of pessimism.
Crude oil continues to hover around the $57 mark ahead of the inventory report on Wednesday. The first time we have a draw from inventories instead of a build we should see crude prices begin to move higher.
The weak economic data finally pushed the dollar below support and this is strange since the Fed is probably going to try and talk up rates on Wednesday. Apparently investors are fixated on the constantly slipping date for the first rate hike. If the Fed itself actually says something about pushing the date farther into the future the dollar could decline significantly.
The falling dollar has lifted the price of gold by $36 in just the last two days. This will impact oil prices as well if the trend continues.
The S&P struggled to recover lost ground from Friday's high close at 2117.69 but was unable to do it. The index gained +6 points to close just under 2115 and remains under the resistance at 2120 for the last four days. The near instant recovery from the Iranian headline drop was encouraging but the constant drone of earnings and revenue misses is a heavy anchor. With the calendar counting down to the sell in May cycle any gain is appreciated.
The intraday decline to just below 2095 gives us a new support level to watch. As long as the lows remain above that level we can continue hoping for a breakout. However, today was a lower high so the chart pattern is slightly bearish.
The Dow managed to squeeze out a minor move over resistance at 18,100 with a close at 18,110. In the greater scheme of things this is insignificant. The solid congestion at the 18,075-18,150 range is going to continue to be a problem until there is a catalyst to catapult the index over congestion of slam it back down to lower lows.
IBM added about 25 points to the Dow by upping their dividend by 18% to $1.30 payable on June 8th to holders on May 8th. Merck added about 21 points thanks to their strong earnings. United Health added about 9 points on the Aetna earnings. UNH is thought to be the weakest in the sector. Apple removed about -15 points despite posting blowout earnings on Monday night. This is called post earnings depression. Expectations were so high it powered the stock to a new high early Monday and this is just profit taking.
There were no Dow components reporting after the bell today so Dow direction will depend on the Nasdaq and the earnings forces there.
The Dow has support at 17,915 and the intraday drop ended at 17,917. This suggests there are plenty of dip buyers still in play.
Nasdaq support is 5000 and the low today was 5006. The rebound covered +49 points but could not manage to make it back into the green. The two days of declines are related to profit taking on the big four names that were up so strongly on Friday. Amazon has declined -$16 since the $445 close on Friday. Google is down -12 and Starbucks -2. Microsoft is actually up about $1.50.
The Nasdaq is still being dragged lower by the biotech correction. You can see all the biotech names in the lowers list below.
The Nasdaq is still in an uptend as long as it remains above 5000. That is the new line in the sand and one that could be tested again soon.
The small cap Russell 2000 rebounded slightly today after dipping below the critical 1250 support level on the morning headlines. The rebound was immediate so the dip did not trigger a bunch of short sellers to pile onto the move. Dip buyers are still alive and active.
The Russell now has to recover the lost ground from the 1259 close to the 1278 high close from two weeks ago. This could be a challenge because there is a lot of congestive resistance between 1260-1275. Continue to watch the Russell for a break below support at 1250 as a sell signal.
There appears to be no fear of the Fed meeting tomorrow. I don't know if that is good or bad. It suggests everyone believes the Fed will say something dovish as a result of the weak economics and the impact of the dollar on this earnings cycle. The lack of consumer spending has got to be a problem for them and I can't imagine that they will hike in June. However, Yellen may want us to think she may hike and that is the danger in tomorrow's announcement.
I was encouraged by the quick rebound from the morning dip. That is not the kind of market action you would see from a market that is about to roll over as the sell in May cycle begins. That was evidence of dip buyers eager to get in at a lower level. That should continue to provide support as long as the headlines don't turn negative.
I have been cautious about holding too many longs and I am still cautious but somewhat encouraged.
Enter passively, exit aggressively!
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