Despite a minor dip at the open this morning, the buyers are still in control. The major indexes are creeping ever closer to the May highs with the Nasdaq 100 leading the charge with a breakout on Monday.
Mixed economic reports failed to weigh on the markets for more than a few minutes at the open and a high profile call by Evercore to buy energy stocks helped power the indexes higher. David Terreson at Evercore said BP, Chevron and Exxon were buys today because the bottom was behind us and the large integrated oil companies would continue to benefit from their refining capacity. Dow components Chevron rallied over $3 and Exxon $2 to add a combined +35 Dow points. Visa rebounded from Monday's drop to gain +$3 and add more than 20 Dow points.
The New York ISM for October exploded higher to 65.8, up from 44.5 and the largest single month increase in more than a decade and the fourth biggest increase ever. That is a three-month high after a sharp dip in Aug/Sep. The six-month outlook rose from 62.8 to 74.0 and the second highest level in 2015.
However, all the internal components remain in contraction territory suggesting the bullish outlook is not justified. Employment rose just over a point from 44.9 to 46.3. The quantity of purchases component rose slightly from 43.8 to 46.2. Prices paid fell sharply from 58.8 to 46.2 while prices received declined from 50.0 to 40.9.
Factory Orders for September declined -1.0% after falling -2.1% in August. The consensus forecast was for a drop of -0.8%. Nondurable orders declined -0.8% and -1.2% for durable goods. Backorders declined -0.5% for both categories. Total orders are now -7.2% over year ago levels with durable goods down over -5%.
The best news of the day came from the Vehicle Sales for October. Reported sales came in at a pace of 18.2 million per year. That was the second consecutive month at that level. Analysts were expecting a decline to 17.5 million. Auto sales rose from 7.9 million to 8.0 million. Light truck sales declined for the first time in four months from 10.3 to 10.2 million. General Motors sales rose +12.4%, Chrysler +11.8% and Ford +11.7%. Low gasoline prices are helping to fuel sales of larger cars and SUVs.
The economic calendar heats up on Wednesday with the ADP Employment, ISM Services and Yellen's testimony to the House. While the ADP Employment is important, it is just a preview of what to expect on Friday when the Nonfarm Payrolls are released. That report can remove the threat of a Fed hike in December if the report is weak or cement a hike if the report is strong. If the report is strong, it will be interesting to see how the market reacts to the potential Fed action.
Tuesday was light on high profile earnings reports with the bigger names coming after the close. Starting the day was Washington based logistics company Expeditors International (EXPD). The company reported earnings of 62 cents compared to estimates for 59 cents. However, revenue of $1.65 billion missed estimates for $1.81 million. Airfreight revenues rose +3.9% to $659.6 million. Ocean freight revenues declined -6.7% to $560 million. Shares declined -2% on the news.
Specialty chemicals company Cabot Corporation (CBT) reported earnings of 78 cents compared to estimates for 66 cents. However, revenue of $672 million missed estimates for $707.8 million. They repurchased 460,000 shares to bring the full year total to 2.3 million. They announced a restructuring to reduce costs by $50 million in 2016. Shares rallied +14% on the results.
Amag Pharmaceuticals (AMAG) reported earnings of $1.02 but that was a huge miss of estimates for $1.18. Revenue of $96.2 million also missed estimates for $112.4 million. Shares declined -23% to knock off $240 million in market cap. Amag has acquired two companies in the last 18 months for more than $1.3 billion and today AMAG has a market cap of less than $1 billion. It has not been a good summer for AMAG with shares declining from $78 to $31.
Sprint (S) reported a loss of 15 cents that was worse than analyst expectations for a loss of 8 cents. Revenue declined -6% to $7.98 billion and missed estimates for $8.14 billion. The company said heavy price cuts on promotions helped increase customers but reduced profits. Sprint said Q4 revenue would be at the bottom of its prior forecast of $7.2-$7.6 billion. Sprint added 1.1 million new customers and +237,000 prepaid users. That is the first increase in the subscriber base in two years. If you sell something cheap enough the customers will come. Sprint shares fell -7% on the news.
Mosaic (MOS) warned on fertilizer sales for the rest of the year but investors ignored the warning. The company reported earnings of 62 cents compared to estimates for 53 cents. However, revenue fell -6.5% to $2.11 billion and missed estimates for $2.33 billion. The CEO said cost cutting and share buybacks powered the earnings. Mosaic is on a five-year program to cut $500 million in costs and 550 jobs. Shares spiked +6% on the news.
Mobileye (MBLY) reported earnings of 15 cents compared to estimates for 13 cents. Revenue of $70.6 million also beat estimates for $64.5 million. The company makes automation software and vision technologies for automobiles. Their systems are either in the majority of new cars made or are being designed and implemented for future versions of those cars. More than 20 manufacturers are including Mobileye systems in their new cars. Shares rallied 3% on the news.
Red Robin Gourmet Burgers (RRGB) fell -8% after reporting earnings of 58 cents that beat estimates for 53 cents. Revenue of $283.4 million missed estimates for $286 million. Same store sales rose +3.5%. However, it lowered same store sales guidance for Q4 and the full year.
After the bell, Tesla (TSLA) reported a loss of 58-cents but said it expected to deliver more cars than previously forecast. Analysts expected a loss of 53-cents. The company said it delivered 11,603 vehicles in Q3, up from 7,785 in Q3-2014. Tesla expects to deliver between 15,000-17,000 cars this quarter. Revenue rose +10% to $11.24 billion and beat estimates for $1.21 billion. Operating expenses rose +43% and included $52 million in stock based compensation. The company said it was on track to unveil the lower priced Model 3 in March. Much of the increase in expenses was the ramp up to production for the Model X.
The company said that although the Gigafactory was still under construction they were already making batteries there. Those batteries are for the recently announced grid system. Previously these were made at the Fremont California factory but in early Q4 they relocated production to an "automated assembly line at the Gigafactory." That is more than a full quarter ahead of schedule. Elon Musk said they already had more than $1 billion in orders for the grid batteries and all the anticipated 2016 production is already sold out. Battery sales are expected to be $45 million in Q4 but accelerate to $400-$450 million per quarter in 2016. By 2017, he expects it to be "a few billion a year." Shares of TSLA spiked +$20 in afterhours to $229.
Etsy (ETSY) reported a loss of 6 cents that was in line with estimates. Revenue of $65.7 missed estimates for $66.4 million. Gross merchandise sales rose +21.7% to $568.8 million. The company blamed the revenue miss on the strong dollar saying it removed 3-4% of revenue. Marketing expenses rose a whopping 97.8%. Shares fell to an all time low at $10 after the report.
Zillow Group (ZG) reported a loss of 7 cents on revenue of $176.8 million. Analysts were expecting a 3-cent loss but there is some confusion on what was included in the 7-cent number so it may not be apples to apples. The combined network of Zillow, Trulia, StreetEasy and HotPads saw peak users of 150 million in July and during Q3 had monthly active users of 142 million. Shares fell -10% in afterhours.
The earnings out tomorrow will be led by Facebook, Fireeye, Wholefoods Market, Time Warner, Sodastream and Michael Kors.
Candy Crush video game maker King Digital (KING) agreed to be bought by Activision Blizzard (ATVI) for $5.9 billion. Activision is the maker of Call of Duty and World of Warcraft. Activision said Warcraft subscribers fell -100,000 in Q3 to 5.5 million and they will no longer report subscriber data for that individual game. More than 100 million individual accounts have been created for that game that started in 2004. It holds the record for the most revenue generated of more than $15 billion.
King Digital said it agreed to be acquired by Activision because ATVI needed more games that were not Warcraft or military battle like Call of Duty. Activision believes they can attract more women and kids. Also, the combination of ATVI/KING will allow the company to spread its games over more devices from mobile, PC, game stations and online.
The combined company will have more than half a billion monthly active users in 196 countries and generate more than $36 billion in revenue in 2015. They are expected to grow by 50% by 2019.
Chip maker Ambarella (AMBA) rallied +10% after a +5% gain on Monday. FBN securities initiated coverage with an outperform (buy) rating and a $70 price target. Ambarella sank in September after a shipping cycle change by GoPro moved revenue from one quarter to another. Shares appear to have bottomed at $49. I would be a buyer here on any dip from today's highs.
Ambarella customer GoPro (GPRO) is lingering near its IPO price of $24 after the owner of Polaroid patents sued GoPro for patent infringement. C&A Marketing alleged that the Hero4 Session infringes patents on shape and functionality of the Polaroid Cube. C&A is asking for an injunction to halt marketing of the Hero4 and a turnover of all the profits. In the picture below the Cube is on the left and the Hero4 on the right.
Crude oil rallied +$1.65 today or +3.5% on no news. Typically crude prices rally on Tuesday afternoon as shorts cover ahead of the API inventory reports at 4:30 and the EIA report on Wednesday morning. After last week's dip to $42.58 there were plenty of shorts that needed to cover. The API inventory showed a gain of +2.8 million barrels but the real numbers come from the EIA in the morning. There can be vast differences between the two reports because of reporting deadlines and issues. The EIA report also shows production numbers and refinery utilization and those numbers move the market. WTI is down slightly overnight but just fractionally.
I feel like I am standing on the wrong side of the fence on oil prices. The fundamentals do not support the rise in WTI or the rise in energy stocks. Unfortunately, sometimes fundamentals do not matter in the short-term if the investing public is determined to buy something. Fundamentals did not matter in the dot.com bubble when stocks like Qualcomm reached $1,000. Eventually fundamentals did matter and QCOM traded back down to $11. Eventually oil fundamentals will matter and we could see another dip back towards $40.
November marks the start of the best three and six month periods of the year. The first week of November is typically the best week in the fourth quarter. There has been no window undressing yet and with the market going up daily I would expect everyone to play the cards they are currently holding. There is no reason to change positions until the market runs out of steam.
The S&P battled with resistance at 2,105 all morning and then moved up to 2,116 late in the day before a few sellers appeared at the close. The S&P only gained +5 points for the day but I think we would all be happy if that continued all the way to Thanksgiving.
The range from 2,105 to 2,135 is solid congestive resistance and includes several tops from May, June and July. While everyone is concentrating on new market highs by Thanksgiving, I think we should be concentrating on that solid resistance and how the S&P reacts with every touch higher.
I am not going to try and predict a failure point because the entire range is resistance. While I would like nothing better than to see a breakout and surge over 2,150 we need to trade what the market gives us rather than what we want to see. I would be cautious about adding to longs unless you buy a dip.
The Dow came very close to 18,000 with a high at 17,977. Dow components Chevron, Visa and Exxon were the main drivers but IBM, Apple, Home Depot and Goldman Sachs were strong support. Apple and Home Depot could climb higher but Goldman Sachs is facing some very strong resistance at $192. IBM's gains were out of character for its chart and could reverse tomorrow.
The two energy stocks were up on short covering after an upgrade by Evercore and it remains to be seen if they can continue higher if oil prices decline after the inventory report on Wednesday.
The Dow's major resistance begins at 18,100, a couple more days of decent gains should take us to that level but then we will be lacking a catalyst to move higher. Disney earnings on Thursday could help but it is only one stock.
Initial support is 17,650 and initial resistance is psychological at 18,000.
The Nasdaq 100 ($NDX) continues to make new highs and those big cap tech stocks are dragging the market higher. Eventually the six horsemen powering the index will become over extended and the surge will lose traction.
The Nasdaq Composite touched the electric fence at 5,160 today and the recoil was nearly instant but it was not dramatic. The index dropped back -18 points from the highs but still ended with an 18-point gain. No complaints here.
Nasdaq advancing volume was 2:1 over declining while advancers were 3:2 over advancers.
The Nasdaq Composite has to launch itself over that 5,160 level with enough force to make the move stick and it has 15 points of runway to develop speed to do it. All we need is a catalyst and all the major Nasdaq earnings on Wednesday are after the close.
When the calendar flipped to November the Russell 2000 took off. The index has gained 30 points in the last two days. That moved the critical resistance level from 1,165 to 1,194 and a level that held twice in the last three months. If the Russell can continue its gains, it could power the broader market higher on positive sentiment.
I would be cautious about buying the top of this rally after a nearly 11% gain by the S&P. With the first week of November typically the best week of the quarter that suggests next week could produce a dip. I would be a buyer of dips rather than a buyer of the highs. Nothing prevents us from moving higher but big multi-week gains tend to be followed by decent bouts of profit taking.
Important Limited Time Offer - ONE WEEK ONLY
Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 18 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. Once the special actually begins on Black Friday the price will revert to the normal price.
CLICK HERE FOR ADDITIONAL $50 OFF EOY SPECIAL
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.