Weak earnings weighed on the market despite some major wins by several high profile stocks. The constant revenue misses and lowered guidance combined to knock more than -500 points off the Dow for the worst week since January. Without major wins by stocks like Amazon, the damage could have been a lot worse.

Market Statistics

The big cap indexes gave up a lot of ground but the small and mid cap indexes lost more and fell farther. The Russell 2000, S&P Midcap-400 and Small Cap 600 all closed at two-month lows.

On the Nasdaq 100 ($NDX) today the 75-point intraday gain by Amazon was offset by the 80-point loss in Biogen. Those two stocks with share values on Thursday of more than $400 each were the perfect example of the bipolar market.

Biogen ended the day with a loss of -$85 to $300 to lose -$18 billion in market cap. The company cut its growth forecasts by more than half because of slowing sales of the MS drugs Tecfidera, Tysabri and Avonex. The company now sees "extremely limited" patient growth for Tecfidera after the drug was reportedly linked to brain infections. Also weighing on shares was a study that showed an Alzheimer's drug in testing stages showed no significant slowing of mental decline.

On the flipside of earnings, Amazon shares were up nearly $100 early in the day after the company reported a surprise profit. When the market accelerated lower late in the day the stock gave back half its gains but still ended up +47. CEO Jeff Bezos ended the day $5 billion richer after being up +$8 billion at the open.

Amazon said revenue rose +19% to $23.18 billion and nearly $800 million more than consensus. If it were not for the strong dollar Amazon sales would have been up 27%. Earnings came in at +19 cents when analysts were expecting a loss of -14 cents. This equates to an operating profit of $462 million. Amazon Web Services (AWS) their cloud hosting division, saw sales rise +81.5% to $1.8 billion with a $391 million profit, up from $77 million in the comparison quarter, and a 21.4% profit margin. Analysts believe that AWS will be worth more than the rest of Amazon combined by 2020.

Free cash flow rose +69% to $8.98 billion over the last 12 months. This was an extremely strong quarter for Amazon and suggests how much profit Amazon can generate once it quits spending billions every year in building out its infrastructure. Amazon could easily produce billions per quarter in profits once expansion slows.

Morgan Stanley raised its price target on Amazon to $741 and the highest target on the street. Barclays said buy now, do not wait because the stock is going a lot higher. Wedbush raised their target to $700 saying Amazon could have 47 million Prime members by year-end, up from an estimated 35 million at the end of 2014. Amazon has more than 285 million active customers. Robert W Baird raised the target to $630 from $475. Cowen raised their target from $565 to $700 with an outperform rating. RBC Capital Markets raised the target from $500 to $650 with an outperform rating. RBC analyst Mark Mahaney said Q2 was an "inflection point quarter" and the first time in four years that Amazon had exceeded its guidance. Gross profit margins reached a high of 35%. JP Morgan raised the target from $535 to $710. Cantor Fitzgerald raised its target from $460 to $670. Jefferies raised their target from $465 to $730 saying "Amazon is one of the best large cap ideas in our coverage universe, with one of the most significant moats." Canaccord Genuity was the party pooper with a hold rating but did raise their target from $400 to $525.

Amazon shares are now up +26,939% since its IPO. Shares are up +37,824% from the closing low of $5.51 after the 9/11 terrorist attack.

On the economic front, the New Home Sales for June was a big disappointment. The headline number was 482,000 and well below the prior May reading at 546,000 and consensus estimates for 545,000. Unfortunately, the May number was revised down from 546,000 to 517,000. The Northeast region was the only region with increasing sales. Sales in the West fell -17%, Midwest -11.1% and South -4.1%.

The number of homes for sale rose from a 4.7-month supply in April to 5.4 months in June. The average selling price declined -1.8% to $281,800. Builders and analysts said buyers were suffering from price fatigue after two years of rising prices. The number of homes sold that were under construction fell -16.3% to 154,000.

The June sales were a seven-month low. However, sales were still 17.5% higher than June 2014.

News out of China also helped to weaken the U.S. markets. The preliminary Purchasing Managers Index (PMI) from Markit Economics declined from 49.4 to 48.2 for July. That is the lowest level in 15 months and worse than all 16 forecasts in a Bloomberg survey. This means the economic outlook for China has worsened. China continues to claim GDP growth of 7.0% but most independent analysts believe it could actually be as much as 2% less than that. In another report Chinese railroad freight traffic declined -12% in June. The economic news from China and anecdotal reports of falling demand for coal, iron and copper caused commodity prices to decline to multiyear lows.

Economic highlights for next week include the Richmond Fed Manufacturing Survey on Tuesday and the final reading on the Q2 GDP on Thursday. Q3 GDP is tracking about +2.3% growth according to the Fed's GDPNow analysis.

The big hurdle will be the FOMC meeting announcement on Wednesday afternoon. With earnings expectations declining, home sales weakening and U.S. manufacturing slowing because of the strong dollar, the Fed may be less likely to raise rates and send the dollar spiking higher. The Fed announcement will be parsed for every word that provides a clue above and beyond the face value of the press release.

The big news will of course be earnings. I have been writing market commentaries for Option Investor for more than 18 years. I cannot recall ever seeing an earnings week with this many companies reporting. There are more than 1,290 according to my quick count on Friday when I was preparing the earnings calendar. Out of that 1,290 I squeezed 128 in to my graphic and highlighted only 28 in yellow as important. That should give you an idea about how much media noise there will be next week as they try to cover those 1,290 companies.

The big name for the week will be Facebook on Wednesday but the others are important as well. It is just that Facebook will garner all the attention and investors will be hoping for an Amazon like spike rather than an Apple like decline.

There were some other disappointments on Friday. Trip Advisor (TRIP) reported earnings of 54 cents and analysts were expecting 56 cents. Revenue of $405 million also missed estimates for $413.2 million. After a YTD rise of 25% the shares gave back -13% on Friday or -12.50.

LogMein (LOGM) reported earnings of 35 cents compared to estimates for 33 cents. Revenue of $64.8 million beat estimates for $64 million. The company guided for Q3 revenue in the range of $68.8-$68.3 million and analysts were expecting $67.8 million. LogMein is a cloud based service company. Shares rallied +10% on the news.

Visa (V) was the biggest gainer on the Dow after reporting earnings of 74 cents compared to estimates for 59 cents. Revenue rose +12% to $3.5 billion and beat estimates for $3.4 billion. International transaction revenues rose +21% to $1 billion. Overall payment volume rose 11% to $1.3 trillion on more than 18 billion transactions. Shares rallied +4% on the news and added about 23 Dow points.

Starbucks (SBUX) rallied to $59.31 at the open after a big earnings beat. The declining market dragged the stock lower to gain only 75 cents at the close. The company said an expanded menu and improved technology helped them acquire more customers. Same store sales were up +7% globally with an estimated 23 million additional transactions than the comparison quarter. Same store sales in America rose +8%. New drinks like the "Flat White" and the "Smores Frappuccino" along with bistro boxes and breakfast sandwiches boosted sales.

The company said mobile ordering technology is now in place at more than 4,000 stores and was boosting sales and profits at those stores. The ability to preorder and pay online helped bring back customers that got tired of waiting in long lines. CEO Schultz said in stores with mobile ordering "the lines were shorter, service faster and operations were more efficient." Schultz said the technology should be available in all stores before the holidays.

Earnings rose +22% to 42 cents that beat estimates by a penny. Revenue rose +18% to $4.9 billion. Starbucks said the board had authorized the buyback of an additional 50 million shares.

Pandora (P) reported adjusted earnings of 5 cents compared to estimates for 2 cents. Revenue increased +30% to $285.6 million compared to estimates for $283.2 million. Mobile revenue rose +37% to $229.7 million. The company ended the quarter with 79.4 million active listeners, up only slightly from 79.2 million last quarter. The company is targeting 100 million active users. The company guided slightly higher than analyst estimates for Q3/Q4. Shares rallied +15% on the news.

Juniper (JNPR) reported earnings of 53 cents that beat estimates for 40 cents. Revenue of $1.22 billion also beat estimates for $1.11 billion. The company said they were expecting a large uptick in sales in the second half of the year from companies including AT&T, Telefonica and Verizon. They recently announced a lot of new products that compete with the cheaper routers that run brand-agnostic software.

The economic data out of China crushed commodities and copper sank to a new post crisis low. Gold collapsed to a five-year low at $1,080. Oil prices traded under $48 and are closing in on the lows for the year.

The sharp decline in commodities is causing margin selling not just by individual investor but large funds. A trader on the floor of the NYSE said there was evidence of persistent forced margin selling by several large funds. When you cannot clear your margin by selling your commodities, you are forced to sell stocks to make up the difference. This trader said part of the decline in equities was directly related to large margin calls on commodities.

The energy sector is also getting pounded by what is expected to be a very ugly earnings cycle and by the declining fundamentals in the energy market. The S&P Energy Select SPDR (XLE) is at two-year lows and dropping like a rock. Energy stocks are down 35%, 50% even 75% from their 2014 highs. The sector has been in a bear market for all of 2015. Several attempts to rally have failed and long-term holders of energy stocks are being forced to liquidate. Almost no analyst is recommending buying the dip in energy stocks. With more than $800 billion in high-yield energy debt we are going to reach a point where defaults begin to occur and most believe it will be in early 2016 if oil prices do not firm soon.

Crude prices fell under $48 on Friday as a result of active oil rigs surging by 21 rigs to 659. Natural gas rigs declined by 2 to 216 and a new eighteen-year low. Energy investors saw inventories rise by +2.5 million barrels on Wednesday and imports rise to 7.94 mbpd and the highest level since April 3rd. It is not enough that U.S. inventories are just under an 80-year high but imports are rising and rigs are being put back to work. Apparently producers are either expecting prices to raise later this year or they have found a way to produce oil profitably for less than $40. One other reason for the rise in rigs is that they have debt bills coming due and they need to produce oil at any cost just to increase cash flow.


It was an ugly week for the markets but it could have been worse. The Dow declined -518 points and it was almost entirely due to negative earnings surprises. The focus stocks missed estimates and once the direction was set the other Dow stocks followed them down.

The Industrials Sector select SPDR ETF (XLI) fell to a new nine-month low and the 100-day average is about to cross below the 200-day average. Needless to say the outlook here is bearish.

The S&P Materials Select SPDR fell to a nine-month low and the relative strength to the S&P is at a multiyear low. Compare that to the Energy Select ETF (XLE) in the lower chart. There are 30 materials stocks in the S&P and 43 energy stocks. Together they make up 15% of the S&P-500. The XLE is at the lowest level in 30 months.

The Dow Transports are closing in on the July lows and the downtrend low from March remains intact. With fuel prices falling the transports should be in rally mode but railroad shipments are also declining. This is not a sign of positive economic growth and it is bearish for the broader market.

The Biotech sector was also a major mover with nearly a -5% decline. Much of that was on Friday when Biogen fell -82 points. The Biotech Index ($BTK) has had these upsets fairly regularly over the last couple years. Since early 2014 the 100-day average has been support. With Biogen in freefall with horrible guidance we may not see that 100-day support hold on this decline. If that is the case the market could be in trouble. The S&P and the Russell 2000 both have a large contingent of biotech stocks. On the chart below you can see how the rally began to stumble after the March high and we could be due for a deeper drop.

Over the last three days, the volume has been rising and that is never good in a market decline. Volume on Friday was 7.3 billion shares and the highest since July 7th. Decliners were 3:1 over advancers and new 52-week lows spiked to 926 and the most since October 15th 2014.

The Bullish Percent Index on the S&P declined to 53% and the lowest level since October. That means only 53% of the S&P stocks have a buy signal on a Point & Figure chart.

Only 51% of the S&P-500 stocks are trading over their long-term 200-day average. A dip below 50% will be the lowest level in 2015. The Nasdaq is slightly worse at 47.7%.

The big caps had been leading over the last several weeks but the market breadth continued to narrow. As Art Cashin put it, "there are fewer horses pulling the wagon." Some of those remaining horses pulled up lame last week and the wagon began sliding backwards down the hill.

I mentioned on Wednesday that the hard stop at 2110 on the S&P and the positive gain on the Russell 2000 suggested the worst could be over as long as the negative earnings headlines faded. They did not fade and may have gotten worse.

So far 185 S&P-500 companies have reported earnings and 77% beat estimates on profits, thanks in part to aggressive share buybacks and cost cutting. However, only 51% have beaten revenue estimates. That number is much harder to game with financial engineering. Falling revenue eventually means lower earnings. Analysts were hiking earnings growth estimates two weeks ago and are now lowering those estimates based on results and guidance. Expectations are now for a -4.1% decline in earnings for Q2 according to a Bloomberg survey and a -4% decline in revenues. That would be the worst quarterly performance since 2009. Over the coming week 172 S&P companies will report and now that the largest companies have reported the earnings quality could be worse.

The S&P chart is in freefall. The decline did find support at the 2075 level but it may have only been because time expired in the trading session. Selling is occurring at a moderate pace. It is not like a crash where sellers overwhelm buyers and declining volume is 10:1 over advancing. A decline with the ratio at 3:1 is still a decline but at least there is some order to the selling. Nobody is jumping out of windows.

The key for Monday is the 2071 level and then 2050. With market direction definitely to the downside there may be some follow through next week.

Fortunately we are running out of Dow components reporting earnings. Without any big misses by Dow stocks it may be harder for sellers to set the trend. However, with revenue misses now normal and Q3 guidance quickly declining we may not need a focus stock to upset the wagon.

At this point I would be skeptical of any rebound in the S&P. We have failed at the 2130 level three times in three months and investors may be ready to wait for a real correction before buying the dip again. This is almost August and the Dow is negative for the year and the S&P has only gained +1%. I would not be surprised to see a flurry of analyst revisions on year-end S&P targets. Nobody wants to be quoting 2300 on the S&P with it trading well under 2100 with only six months to go. Two of those months, August and September, are historically the worst two months of the year.

The Dow crashed through 17,600 and could easily test 17,500 on Monday. The 18,100 resistance was rock solid again and the chart pattern is very lackluster. I would doubt we are going to retest that level in the near future. We are more likely to retest 17,150 and the closing low from January. Many of the Dow stocks are sick. The majority of the individual charts are in decline and the strong dollar and worries over the global economy are weighing on their guidance.

Even the banking stocks in the Dow are in crash mode with Goldman the biggest loser on Friday with nearly a -$4 drop. Add in the energy stock weakness with oil under $48 and lingering problems with IBM, UTX, BA, etc and it was a miracle the Dow only lost -163 points.

Support at 17,500 is the key for Monday. If that breaks we could see some cascade selling that takes us to 17,150. The Dow closed well below its 200 day average at 17,748.

The Nasdaq finally cratered on Friday. The declines earlier in the week had been minimal to moderate because there were big gains offsetting some big losses in individual stocks. The Biogen implosion on Friday was offset early by the monster gain in Amazon but once the market started to accelerate lower after lunch the $100 gain slipped to $47 and the Biogen $82 loss became the driver. It was also a catalyst for a greater decline. Biogen tripped up the entire biotech sector so Amazon's gains were offset by dozens of big declines in biotech stocks not just Biogen.

The Nasdaq declined -58 points to 5088 and blew through two levels of support at 5160 and 5100. Unlike the S&P and Dow the Nasdaq is still in an uptrend and can remain in an uptrend for about another 200 points. It may be ugly but until the 4900 level is breached the chart is still positive.

For those with short memories we were at 4900 just three weeks ago. If we were to visit that level again we may not see that support hold.

Initial support for next week is 4950-5000 with resistance at 5200.

The Russell 2000 imploded with a -19 point drop on Friday. This was primarily due to the large number of biotech stocks in the index plus the overall negativity of the market. The Russell closed at a two-month low and below support at 1230. The next material support is 1210 and then it would be a long drop to 1150. The 150-day average has been recent support and that was broken on Friday. Resistance is now 1240.

The S&P Small Cap 600 ($SML) closed at a two-month low and very close to the five-month closing low at 701.32. The small caps have entered a rough neighborhood and once the 700 level breaks it could be a long drop.

The S&P Midcaps ($MID) did close at a four-month low when they broke support at 1480. This is just another example of the big caps leading us higher but fewer horses were pulling the wagon. The market breadth of the small and mid caps was shrinking at a faster rate than the big caps and once those leaders rolled over the smaller stocks accelerated to the downside.

The NYSE Composite Index has more than 1,900 stocks of which more than 1,500 are U.S. companies with the rest are foreign ADRs. The broad index of a variety of companies from the largest like Exxon to the smallest of the small caps gives us a very good reading on market sentiment. Unfortunately, the Advance/Decline line on the NYSE fell below the 50-day average in early June and below the 200-day average last week. This is a dramatic visual of the declining market internals.

It is amazing to see how much market sentiment has changed in just one week. The S&P was testing its highs on Monday and down more than 50 points off those highs by Friday. It would be easy to launch into full bear mode because of the severity of the decline but markets never sprint in either direction without temporary pauses and intermittent short squeezes.

At some point traders will try to pick a bottom and the shorts will race to cover. What happens when that short squeeze occurs will be the key. It is lacks conviction, fails at initial resistance and then rolls over quickly; I would look for lower lows and possibly much lower lows.

If the rebound finds some traction on the second and third days then investors will begin to breathe easier and move back into the market.

Margin calls on commodities may have forced the sales of equities last week. Eventually the selling in commodities will end along with the forced selling of equities.

We are heading into the worst two months of the year for the market. I mentioned several weeks ago that after the first two weeks of the earnings cycle as we approached the FOMC meeting the combination of earnings, calendar and Fed expectations could weigh on the markets. I believe we have reached that point.

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Random Thoughts

The U.S. Mint said it sold the most physical gold in two years as the price of gold hit a five-year low. Three weeks ago, the mint ran out of silver on the day the price fell to $14.62 and the lowest price in 2015. On Friday, it declined to $14.33. The UK Royal Mint said they experienced twice the expected demand for Sovereign bullion coins from customers based in Greece.

As of July 24th, the U.S. Mint had sold 143,000 ounces of physical gold in the month of July, the most in more than two years. Gold Demand Rockets Higher

Hedge funds are holding their first ever net short on gold since the government began collecting data in 2006. Funds are net short 11,345 contracts according to the CFTC. Goldman Sachs said the worst is yet to come for gold and prices could fall under $1,000 an ounce. Hedge funds short gold

The Dow just broke another record. It has swung from positive YTD return to negative for the 21st time in 2015. The prior highs were 20 swings in both 1934 and 1994. With four months to go, the odds are good we will see several more swings to push that record number even higher. Dow Lacks Conviction

Ralph Acampora echoed those statements and warned that the markets have gone nowhere in 2015 and if the markets do not make and hold new highs soon we could be going a lot lower. Clock is Ticking for Stocks

The Fed meets next week and there is a zero chance of a rate hike at this meeting. The Fed is between a rock and a hard place. They want to see inflation as one of their requirements for a rate hike. Unfortunately, commodity prices are imploding and that is going to reduce inflation and possibly risk deflation in the months to come.

Nations that depend on commodity revenue for their income are going to be in trouble. That includes Canada, Australia, Brazil, OPEC nations, Peru, Mexico and even Russia. Currencies that depend on commodity revenue are already crashing. Mexico's peso was down to 15.734 to the dollar last week because of their falling oil revenue. The Brazilian real has fallen -45% against the dollar in the last 12 months.

Venezuela's currency fell another 32% in just the past month. Inflation is running at 772% annually and the government will not be able to pay its debts by the end of 2015, if it lasts that long. Soc Gen rates the probability of default in 2015 at 63% and rising. Venezuela is rapidly becoming the 57th hyperinflation event in modern history. There is no way for them to recover. Deflation is Winning

Emerging market currencies are in free fall. This Bloomberg chart shows currencies in a 15-year low against the dollar. This means everything from the U.S. costs more and will further slow our exports. Emerging Currencies Falling

Investor sentiment is a strange animal. Despite the worst week for the market since January bullish sentiment rose +1.7% and neutral sentiment declined 4.1%. Bearish sentiment rose ONLY +2.4%. Since the major declines in the indexes did not come until late in the week, the sentiment may not have caught up with chart. Next week should be interesting.

This is the 17th consecutive week that bullish sentiment has been below its historical average of 38.8%. This is the longest streak since July 2012.

Weekly Jobless Claims fell to 255,000 last week and that is important because it was a 42-year low. The vast majority of people reading this commentary were either not yet born or were not paying attention to economic numbers when that happened in November 1973. This is a crazy statistic because hiring is not that strong and the labor force participation rate is at a 35 year low. Apparently, very few companies are laying off workers and those with jobs are not quitting. What does that tell us about the economy? With consumer sentiment declining it suggests workers are doing whatever it takes to keep their jobs.


Enter passively and exit aggressively!

Jim Brown

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"Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence."

John Adams, Second U.S. President


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