China's Shanghai Composite fell another 6.2% last night on worries that China was going to devalue the yuan once again. Other Asian countries followed China's markets lower on currency war fears.

Market Statistics

Chinese regulators have their work laid out for them in preventing a meltdown in the equity markets. They said last week they would be supporting the markets for "years to come." After that monster rally in less than a year, the odds are good they are going to be fighting sellers in every session.

With China's economy slowing in every sector, the commodity speculators are getting killed. Prices for commodities are declining because of lack of demand. In China commodities have been used as security for margin loans to buy stocks. With commodity prices hitting six year lows some of those loans are being called and investors have to sell both equities and commodities. This is a recipe for a continued slow motion train wreck.

Copper, sometimes called Dr Copper for its ability to foretell economic direction, is at a six-year low. Global demand is crashing and mines have been slashing output to support prices. Apparently it is not working. Dr Copper is telling us that global manufacturing is slowing. Since copper is part of almost every electrical item as well as wiring for cars, homes, buildings, planes, transportation infrastructure, etc, the slowing demand is an economic warning.

Other Asian countries are crashing and that decline has accelerated since the yuan devaluation. Thailand is at an 18-month low. Malaysia and Indonesia shares are falling off a cliff. If the Fed hikes rates the dollar will spike and all these countries will plunge even farther. The U.S. markets are weak because of the turmoil in the emerging markets and the worry about our own economics. What is a Fed head to do?

In the U.S. the NY Empire Manufacturing Survey on Monday was the weakest since 2009. The survey declined from +3.9 to -14.9 with both new orders and shipments falling by double digits. New orders declined from -3.5 to -15.7. Inventories fell from -8.5 to -17.3. Shipments declined a whopping -22 points and the biggest drop since 2001. All the components were weak and suggest the Fed is going to have a tough time justifying a rate hike in September. It is not that the market is not prepared for a rate hike after nearly a decade but it is not prepared for a hike with economics this weak.

There was only one economic report today. The New Residential Construction for July showed housing starts rose from 1.174 million to 1.206 million. That was well over the consensus for 1.190 million. While the headline number was strong, the internals painted a different story. Housing permits, a gauge for what starts will look like in the future, declined sharply from 1.337 million to 1.119 million. That was a -16.3% decline. Single family permits fell -1.9% and multifamily declined -31.8%. Single family starts rose +12.8% while multifamily starts fell -17%. Completions rose +2.4% to 987,000.

Analysts blamed the expiration of permit tax subsidies in New York and other Northeast states for the decline in permits. The subsidies expired at the end of June.

The big item on the calendar for Wednesday is the FOMC minutes. Investors will be looking for a clue about what to expect at the September 16th FOMC meeting. In the April minutes, the clue said "many participants saw a June rate hike as unlikely, while a few favored a move that month." While we are not likely to see such a blatant clue in these minutes, you never know what they will insert to direct market expectations.

In past minutes, the Fed said they wanted to see "some further improvement in employment." The word "some" was added to the sentence from the prior statement. So, what is the meaning of the word some? Jobs have declined for two consecutive months from the high of +260,000 in May to 231,000 in June and 215,000 in July. I don't see ANY improvement there but the Fed's prior guidance was they wanted to see jobs over 200,000 for several months. So what are we going to see in the minutes this time around? "Some improvement" suggests better than before and we have not seen that.

Since the last Fed meeting the situation in the emerging markets has gone from bad to worse. They are the markets that will be hurt the worst by a rate hike and the upward impact on the dollar. However, in previous statements the Fed has said they are the U.S. central bank, not the global central bank. Unfortunately the Fed cannot work in a vacuum whatever they do will have consequences. This is why the FOMC minutes on Wednesday are so important.

After the crash in the NY Manufacturing Survey the Philly Fed Manufacturing Survey on Thursday is going to be very important. This will show us whether the NY number was an outlier and specific only to New York or a symptom of a larger problem.

The Dow was pushed and pulled by two of its components this morning. Home Depot (HD) shares broke out to a new high at $123 after reporting earnings that beat the street. The company reported earnings of $1.73 that beat estimates for $1.71. Revenue of $24.8 billion barely edged out estimates for $24.7 billion. The average sale rose +1.7% to $59.42 and the number of transactions rose +2.6%. Transactions over $900 rose +6.3%. U.S. same store sales rose +5.7% and international sales +4.2%. HD also raised full year guidance to $5.31-$5.36 compared to estimates of $5.27. HD added 24 points to the Dow.

Walmart (WMT) shares lost ground after the company reported earnings of $1.08 compared to estimates for $1.12. This was also down from the $1.21 earned in Q2-2014. The company blamed the miss on shrinking margins in the pharmacy section. Drug costs are rising and Walmart always tries to be the lowest price. The company also said labor costs were rising as minimum wages are raised around the country. Walmart said it paid 24 cents a share for higher wages, training and hiring additional sales people. Walmart shoppers have complained for over a year that the shelves were not stocked and many items were missing. Walmart has pledged to fix that.

Walmart lowered full year guidance from $4.70-$5.05 to $4.40-$4.70. The consensus was for earnings of $4.77 per share. Same store sales rose +1.5% and that was the fourth consecutive quarter of sales growth. Walmart is planning on opening 60-70 supercenters and 160-170 Neighborhood Markets in 2015. Walmart's drop erased 19 points from the Dow.

Sandisk (SNDK) was cut to a sell by Bank of America Merrill Lynch and the price target was lowered from $75 to $40. SNDK closed at $57. Apparently, BAML cannot make up their mind because they just raised SNDK from neutral to a buy on July 23rd or less than a month ago. The analyst said a sudden increase in excess capacity has become a concern.

Micron (MU) announced on Friday it was raising capex spending in 2016 from $3.6-$4.0 billion to $5.3-$5.8 billion. However, Micron said some of that money is coming from third parties like Intel.

Hynix said it was considering a $39 billion investment in factories but there was no time frame specified.

BAML said sell Sandisk and Micron on the capex news. Yesterday Wells Fargo upgraded Micron. Wedbush cut Micron to a neutral. Lots of conflicting opinions on chip stocks.

A slow motion Chipwreck appears to be in progress. The Semiconductor Index ($SOX) is down -17% since the June high at 751. The chip stocks have been a crowd favorite for several years but the bloom is quickly fading from the rose.

Dow component Disney (DIS) was slammed by Wells Fargo with a cut from buy to neutral and cut its target range to $112-$119. The bank cited a lack of visibility combined with negative sentiment on cable networks. The Well Fargo analyst said he was a little more cautious now. "We love Disney as a company and we do not think ESPN is broken as some have suggested. Yes, it has slowed, which is important since ESPN is 50% of operating income, but it really is not broken." The analyst raised earnings estimates for 2016 saying they did not give the company enough credit for the strong slate of movies other than Star Wars. I strongly disagree with the downgrade on Disney given all the sources of income they have today and those they are building for the future. I cannot imagine Disney will not be a lot higher a year from now. Disney shares erased -16 points from the Dow.

Dicks Sporting Goods (DKS) reported earnings of 77 cents compared to estimates for 75 cents. However, revenue of $1.82 billion missed estimates for $1.83 billion. The company raised guidance for the full year to a range of $3.13-$3.21 per share. The company added 45 stores in the last 12 months to bring their total to 619. Gross margins rose to 30.4% as the result of adding their own branded merchandise to the mix.

TJX Companies (TJX) was the big earnings winner. The company reported earnings of 80 cents compared to estimates for 76 cents. Revenue of $7.4 billion beat estimates for $7.3 billion. Currency issues subtracted 4% from sales or the revenue would have been a lot higher. Same store sales rose +6% compared to +3% in the year ago quarter. That is the fifth consecutive quarter of same store sales improvement. TJX raised guidance slightly from $3.21-$3.27 to $3.24-$3.28 per share. That was still below analyst estimates for $3.32. They guided for the current quarter to a range of 80-82 cents and that was below estimates for 89 cents. The weak guidance did not have any impact on the stock with a +7% gain.

Headline earnings out on Wednesday include Lows, L Brands, Staples and Target.

Crude oil continues to hover over support at $42. Shares were up this afternoon on short covering ahead of Wednesday's inventory report. On 9 of the last 11 Tuesdays WTI has closed higher on short covering. Nobody wants to be caught short if there is a big drawdown in inventories.

Energy equities continue to find a bid but they are no longer rising. The brief spurt we saw last week has faded only slightly and they are holding their gains. However, should crude oil decline into the $30s as most analysts expect the equities are likely to decline as well. The analyst consensus is to buy now knowing that oil could drop another $5 before it rebounds. At this point $5 is a lot and I think equities will feel the pain. The next two months are typically negative for oil prices.


Volume over the last three days has averaged about 5.3 billion shares. Friday's volume at 5.17 billion was the lowest day of the year. Today's volume at 5.46 billion was definitely lackluster.

With low volume comes a lack of conviction. This is option expiration week and volume should be higher than next week. That means the next 13 trading days could be very boring. With the earnings cycle drawing to a close there will be little in the way of headlines to power the market. Historically the last week of August is negative. Labor Day is not until September 7th so the entire first week of September will also be lackluster ahead of the holiday weekend. Investors will be focused entirely on the payroll report on Friday Sept 4th and then on the FOMC meeting announcement on Thursday the 17th.

With nothing to power the market over the next two weeks, we could be highly susceptible to geopolitical headlines and whatever stray article hits the news in the USA. With earnings fading, we should not have any high profile earnings misses to dodge.

This suggests we are going to be at the mercy of whichever side feels the most conviction. Buyers have been weak but sellers appear to be exhausted after those major downdrafts we saw over the last two weeks. If they could not force a breakdown with multiple 200-point losses then they may not have enough firepower left to try again in the days to come.

Recently we have seen the dips bought with a little more enthusiasm. That suggests buyers may be feeling a little more conviction than sellers. With recent events putting pressure on the Fed to stand still we could see buyers gain a little more confidence in a calm market. Corporations are in buyback mode at this point in the cycle. That means their purchases will increase on every dip.

On the negative side the resistance at 2100 on the S&P remains firm. We traded over that level intraday but sellers appeared at 11:00 and it was downhill from there. The resistance at 2100-2110 could be a serious hurdle to cross.

We did have several tests of support at 2080 after the Wednesday rebound so that is now the line to watch for direction.

The Dow was unable to retest resistance at 17,600 and remains in a downtrend. That was an admirable rebound from the 17,150 level but it may have run out of steam. Fortunately, there are no further Dow components reporting earnings this week.

The winners and losers were almost evenly matched and that simply emphasizes the lack of conviction by either side.

The Nasdaq also failed to retest resistance at 5100 and gave back more than half its gains from Monday. The biotechs rallied for +2.5% on Monday and gave back -1% today. With the chip stocks crashing and biotechs weak the Nasdaq did not have a chance. Support is now 5020 and resistance remains 5100.

The Russell 2000 gained +1% on Monday and gave back -0.8% today. That is 5 steps forward and 4 steps back. We are not going to gain any ground unless the small caps show some strength. Resistance at 1230 remains untested and support at 1200 remains critical. The index closed right in the middle of that range at 1215.

I am neutral on market direction for the rest of the week. Our direction will most likely be headline driven and those headlines are yet unknown. With very low volume we could see some dramatic moves but that would require a big headline to provide motive power.

Nearly all the noted analysts are still expecting to see a 2015 close in the 2225-2250 range on the S&P with some higher and some lower. That would be a significant move and it could be violent once the short covering begins as resistance levels are broken. However, forecasting a closing level does not make it happen. We need to trade what the market gives us not what we want to see. However, given the strong rebounds of late I would be a buyer of any decent dips.

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Enter passively, exit aggressively!

Jim Brown

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