After five consecutive days of declines, the sellers finally relented and began to cover ahead of the FOMC announcement on Wednesday. Recent history has seen the market rally around a Yellen controlled Fed meeting and the market was very oversold. That was a recipe for a short squeeze.
The pace of buying was gradual and it was not a typical "gap and flat" where the Dow opens up 150 points and then holds that level the rest of the day. I think there were quite a few traders that were not convinced there would be a pre Fed rally this time. However, once the initial bounce was sold at 10:AM and there was not a big decline the buying accelerated gradually until about 2:30 when the bids began to evaporate.
The market also breathed a sigh of relief when several companies had positive earnings before the open. UPS reported earnings of $1.35 that beat estimates for $1.26. However, revenue of $14.1 billion did miss estimates for $14.5 billion. Investors gave UPS a pass since revenue took a -6.4% hit due to the strong dollar. In constant currency terms that meant revenue was closer to $15 billion. International revenue growth rose +17.2% and supply chain and freight revenue rose +17.6%.
The company reiterated full year guidance in the range of $5.05-$5.30 with EPS growth at the higher end of the range. Operating income in the U.S. for the first half is up +6.3% while revenue rose only +2.7%. This was due to a change in the pricing structure that eliminated some of the excessively large packages and charged more for those that were shipped. Shares spiked 5% on the news.
The positive earnings from UPS and others helped fuel the positive sentiment at the open. Unexpectedly decent economics also lifted spirits. The Richmond Fed Manufacturing Survey for July rose from the previously reported 6.0 to 12.6 and the highest level since August and the biggest monthly gain in more than a year. June was revised higher from 6.0 to 7.5. As you can see in the graphic below, the individual components have been steadily improving. The exception is the employment component which is slowly declining.
The separate Services survey rose from 19 to a very strong 32. That is the highest level since my data capture began in September 2012. However, the retail component fell from -4 to -22. The six-month outlook for retail fell from -9 to -36. Shopper traffic fell from +15 to -25 and the big-ticket sales component fell from +27 to -25. Those are some seriously negative numbers in the outlook. Let us hope they do not come to pass.
The Texas Service Sector Outlook Survey rose slightly from 4.1 to 7.9. The internal components were mixed and I will not bore you with the details. This survey is normally ignored.
On the negative side, the Consumer Confidence for July imploded. Confidence declined from 101.4 to 90.9 compared to analyst estimates for 100.5. That is a ten-month low. The present conditions component declined from 110.3 to 107.4 but the big damage came in the expectations component. That dropped from 92.8 to a 17-month low of 79.9. Respondents saw a worsening job market and expectations for pay raises declined.
Those planning on buying a vehicle fell from 13.1% to a ten-month low of 10.8%. Potential appliance purchasers rose from 47.4% to 52.2% and homebuyers rose slightly from 5.6% to 5.9%.
It is not a good sign for the economy for consumer confidence to be falling so dramatically. Worried consumers do not spend money.
The big hurdle on Wednesday is of course the FOMC announcement at 2:PM. Two-thirds of analysts polled still believe the first rate hike will be in September with one-third expecting December. There are a few stragglers looking for October and January but the bulk are Sept/Dec.
The slowdown in China will be a concern but it will be offset by the fact that Greece is not being allowed to sink into the ocean. The crisis in Europe is being resolved by the Troika but long term they are just kicking the can down the road again. It is the short term the Fed is worried about and they can check Greece off their list of problem areas.
With earnings coming in mixed for Q2 and economics improving slightly the Fed will probably continue to say a future rate hike in 2015 will be appropriate. Since the September meeting on the 16th is only six-weeks away, investors are likely to begin worrying as soon as the July meeting is over. Couple that with August/September being the worst months for the market the July announcement may be the starter's gun for portfolio rebalancing.
The last update on the Q2 GDP on Thursday should not be a problem as long as the number is close to the 2.6% growth expectations. This is the last revision and sometimes they are volatile.
Reynolds American (RAI) announced a 2:1 split with earnings. The split date is a long way off on August 31st. UnderArmor has not yet announced their split date. We are waiting for board approval.
Honeywell (HON) agreed to buy the Elster unit from Melrose Industries for $5.1 billion. Elster is a maker of gas, electric and water meters. The Honeywell CEO, Dave Cote, had said his goal was $10 billion in acquisitions by 2018. He is now halfway there.
Cote said he wanted to spend the company's cash hoard on acquisitions to expand the company's business rather than on dividends and buybacks. The company reaffirmed their 2015 forecasts and said the deal will close in Q1-2016. Elster employs 6,800 people. The transaction is the largest since Honeywell was acquired by Allied Signal in 1999 for $16.1 billion. Shares rose +2.50 on the news.
Anadarko (APC) continued the recent trend of energy companies beating drastically lower estimates. Anadarko posted adjusted profits of a penny but that was well above analyst estimates for a loss of 53 cents. Revenue of $2.64 billion also beat estimates for $2.57 billion. Production volumes of 846,000 Boepd were flat with the comparison quarter but 18,000 Boepd higher than guidance because operating improvements boosted margins and allowed the company to drill more than 100 new wells so far in 2015.
BP Plc (BP) reported adjusted earnings of 43 cents compared to estimates for 49 cents. Revenue of $61.8 billion easily beat estimates for $54 billion but was drastically lower than the $94 billion in the comparison quarter. The CEO said oil prices could fall even further based on their view of the market. He said "I am confident that positioning BP for a period of weaker oil prices is the right course to take."
Events in Libya forced a $600 million write down. Also included was a previously reported $6.1 billion charge for the Gulf oil spill. Total charges for that spill are up to $54 billion. BP has finally settled with all the state, local and federal governments relating to fines and penalties for that spill. Capex spending declined -20% to $4.7 billion in Q2. The company is forecasting $20 billion for all of 2015, down from $24 billion in 2014.
Merck (MRK) reported earnings of 86 cents that beat estimates for 81 cents. Revenue of $9.79 billion declined -11% and was only slightly below estimates for $9.81 billion. Currency issues deducted 7% from the revenue numbers. The company raised its full year guidance from $3.35-$3.48 to $3.45-$3.55. Shares initially declined but rebounded slightly on the raised guidance.
Pfizer (PFE) reported adjusted earnings of 56 cents and beat estimates by 4 cents. Revenue of $11.85 billion beat estimates for $11.42 billion even after a $1 billion hit because of the strong dollar. Pfizer raised full year guidance from $1.95-$2.05 to $2.01-$2.07. Sales of cancer drugs rose +25% for the quarter to $713 million. Sales of Lipitor still totaled $509 million for the quarter to put it at a run rate of about $2 billion for the year. At its peak Lipitor sales reached $13 billion in annual sales.
After the bell the fireworks began to fly. Twitter (TWTR) posted earnings of 7 cents that beat estimates for 4 cents. Revenue of $502 million beat estimates of $481 million. Monthly active users (MAU) rose from 302 million to 316 million. The company raised full year revenue guidance from $2.17-$2.27 billion to $2.20-$2.27 billion. Life was good and after rising +1.84 in the regular session to close at $36.50 shares spiked to $41 in afterhours.
Unfortunately, fame is fleeting. Shares crashed back to close at $33 after the conference call. Apparently, the MAU number contained 12 million of SMS Fast Followers and the real MAU only rose +2 million to 304 million. A SMS Fast Follower is just a receiver of tweets in their SMS texting application. They do not have to have a Twitter account to follow specific twitter users. SMS followers do not have the image rich (advertising) screens that actual Twitter users have.
Interim CEO Jack Dorsey said the growth rate was unacceptable since it was the slowest growth since Twitter went public in 2013. The CFO said we do not see "sustained meaningful growth in active users until we start to reach the mass market."
Investors were not happy with the call and shares crashed to $33 in afterhours.
Gilead Sciences (GILD) reported adjusted earnings of $3.15 that rose +23%% compared to estimates for $2.71. Revenue of $8.24 billion rose +26% and was well above estimates for $7.61 billion. Hep-C drugs sales totaled $4.9 billion, which was also above estimates for $4.31 billion. Harvoni has only been on the market for ten months and brought in $3.61 billion. The company said they are preparing to launch the Hep-C drugs in Japan and several other countries. Roughly 2.7 million Americans have Hep-C and that rises to more than 150 million worldwide and Harvoni cures it 90% of the time. Gilead raised its full year revenue guidance from $26-$27 billion to $29-$30 billion. This company can do no wrong and they are building up a pile of cash to acquire additional drug pipelines. Shares rose about $4 to $117 on the news.
Yelp (YELP) posted adjusted earnings of 2 cents compared to estimates for a 1-cent loss. Revenue of $134 million barely beat estimates for $133 million. However, the company lowered guidance and the Chairman, Max Levchin, is stepping down. The CEO, Jeremy Stoppelman, said he was confident Yelp would be producing $1 billion in annual revenue by 2017. That is more than double the projected $545-$550 million for 2015. Shares were crushed in the afterhours with a decline from $33.50 to $27.85.
Express Scripts (ESRX) posted adjusted earnings of $1.44 compared to estimates for $1.40. Revenue of $25.45 billion was well under estimates for $26.15 billion. The company guided for earnings in a range of $1.41-$1.45 for the current quarter and analysts were expecting $1.43. Shares gained $1.60 in afterhours.
Reynolds American (RAI) reported adjusted earnings of $1.02 that beat estimates by 8 cents. Revenue rose +11% to $2.4 billion. They raised guidance from $1.83-$1.90 to $1.90-$2.00 for the full year. They also announced a 2:1 stock split to occur on August 31st. They raised the dividend by 7.5% to $1.44 annually on a post split basis. Shares spiked $5 on the news.
Earnings in the spotlight for Wednesday include Anthem, Facebook, Humana, MasterCard, Marriot and Solar City to name a few. Facebook is of course the report everyone will be watching.
Crude prices rose 75 cents but you would have thought it was $7. Oversold and heavily shorted energy stocks exploded higher and helped power the market rally. Dow components Chevron (CVX) gained $3.85 and Exxon (XOM) +$3.22 and together added more than 50 points to the Dow. More than one analyst immediately said this was a perfect selling opportunity.
In the WTI chart below, the days gain does not even register on the far right. It is lost in a sea of red candles from the last three weeks. It would be a huge stretch of the imagination to claim a crude rebound had begun.
Short S-q-u-e-e-z-e. Today was simply an oversold bounce/squeeze ahead of the Fed announcement. The early earnings news was not that exciting and there was only a dribble of market news. With recent Fed days positive, there was a good reason to exit shorts and maybe nibble at some longs ahead of the event.
Volume was decent at 7.4 billion shares and advancers were 5:2 over decliners. It was a good day in the market regardless of the reason for the rebound. It was driven in part by the grossly oversold energy sector and a huge rebound in biotechs. Biogen (BIIB) was actually positive with a $10 gain and that took the pressure off the sector and the NYSE Biotech Index ($BTK) rallied +2.2%.
The rebound on the S&P stalled at 2095 after closing at 2068 on Monday. This +25 point gain was very nice but it was a dead stop at the 100-day at that 2095 level. The rebound did not change the overall negativity in the S&P with the Bullish Percent Index rising only 0.4% to 50.6%.
Resistance remains 2095-2100 and getting back to the highs at 2130 could be a challenge.
The Dow rebounded from a six-month low at 17,440 with a +189 point gain. That only brought it back above prior support at 17,585. While it was a big day, the index was down -650 points since the highs the prior week. It has a long way to go. Other than short covering, there is not a lot to move the Dow on Wednesday with no Dow components reporting. If you look at the Dow chart below is that a chart you would want to rush to buy? I doubt it. One day does not make a trend.
Resistance is 17,750 and 17,800. Support is yesterday's lows at 17,400.
The Nasdaq rebounded thanks to the biotechs with help from TSLA, PNRA and PCLN. It was a challenge because Baidu (BIDU) missed on earnings and took a -30 point header into the cheap seats and a new 52-week low.
Amazon, Google and Netflix were no help on Tuesday. Shares in those big caps were flat to down suggesting the big caps leaders are not going to lead us higher.
Resistance at 5100 was almost touched with the high at 5097.69. That 5100 level is the number to watch on Wednesday. A move over 5100 will find additional resistance at 5150 and again at 5200. There are not a lot of high profile Nasdaq stocks reporting on Wednesday so headlines will be scarce until Facebook reports after the close.
The small cap Russell 2000 rebounded +10 points and was the smallest gain of all the major indexes. The rebound failed to recover the 1230 resistance level with a high of 1226. This appears to be simply a dead cat bounce because of the very oversold conditions and the short covering ahead of the Fed. The Russell has a long way to go to prove itself and help rebuild investor sentiment.
At the risk of repeating myself too many times I don't believe today's rebound was material. I view it as an oversold short squeeze ahead of an event that has produced market gains for the last several meetings.
I warned in the weekend newsletter that a short squeeze was imminent and what happened after the rebound was the key. If we continue higher after the fed announcement then I am positioned to enjoy those gains. If the market rolls over after the Fed then we could be looking at significantly lower declines.
Depending on what the Fed says the market is going to be positioning itself going into the August/September doldrums and the potential for a September rate hike. We all know a rate hike will have no real impact on the market but it is the perceived impact that shakes up investors. Once past the first hike we could have a decent Q4 rally if the global economy does not tank. The average analyst estimate for the end of December is 2,231 on the S&P. I would love to see that come to pass.
Enter passively, exit aggressively!
Send Jim an email
If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.