If you are never supposed to short a dull market, what should we do with this one?

Market Statistics

Most of the major indexes spiked to new intraday highs except for the Dow. The Dow's high was 18,585 and missed the closing high of 18,595 before giving back all the gains and trading in negative territory just before the close. Short covering or buy the dippers helped lift it back into positive territory with a +3 point gain. That is hardly a rousing story of a bullish market trading at new highs.

The Nasdaq did close 4 points into new high territory at 5,225 thanks to a 6 point boost by Charter Communications (CHTR) and their +19 point gain for the day. The S&P squeezed out a 1-point gain but missed closing at a new high by one point.

There was very little excitement in the market and investors appeared unsure how to read the negative economic reports.

The Productivity report for Q2 came in at -0.5% and the third consecutive quarter in decline. According to UBS, there has never been three quarters of declines outside of a recession. The last time this happened was in 1974 and 1979 when interest rates were in the 15% range.

Output rose +1.2% while hours worked rose +1.8%. Hourly compensation rose +1.5% contributing to a 2% rise in labor costs. On a trailing 12-month basis, output per hour has fallen -0.4%.

Manufacturing output fell -0.2% as compensation rose +2.9% and labor costs rose +3.0%. The price deflator rose 2.4% and the strongest quarterly increase since 2011. A drop in productivity means workers are getting paid more but accomplishing less. That is not a good sign for the economy.

Morgan Stanley said the negative expectations for the quarter were exceeded with an even worse result.

Economy.com chart

Wholesale inventories for June rose +0.3% compared to consensus for zero and +0.1% rise in May. However, durable goods inventories fell -0.3% while nondurable goods rose +1.1%. Sales were strong with a +1.9% gain and that drove the inventory to sales ratio down from 1.35 to 1.33%. That is the number of months required to deplete inventories at the current rate of sales.

The NFIB Small Business Survey rose only +0.1 to 94.6 for July. That was the smallest movement in months. The expectations components rose slightly. Plans to increase employment rose from 11 to 12, inventory increases from -3 to zero and expectations for economic improvement rose from -9 to -5. The rest of the components were either flat or slightly lower. When we are excited about a report because the components are simply becoming "less negative" we have a long way to go.

There is a serious lack of any material reports for the rest of the week. The retail sales on Friday would be the most important and analysts expect only a minor gain. We have a bunch of dull reports to accompany our dull market.

The biggest news for the morning was a major earnings miss by Wayfair (W). The company posted a loss of 43 cents compared to estimates for a loss of 41 cents. The company has not reported a profit in the last 18 quarters and this was their biggest loss over that period. Revenue of $786.9 million rose +60% and did beat estimates for $782.4 million.

Wayfair ended the quarter with 6.7 million active buyers, a 65% increase. They processed 2.9 million orders in Q2, a 50% increase. Overall, this appeared to be a good quarter with all the sales metrics soaring. However, they have to eventually make a profit and investors did not like the report. Shares fell 19% on the news and weighed on all the consumer companies except Amazon.

Valeant Pharmaceuticals (VRX) reported adjusted earnings of $1.40 compared to estimates for $1.47. Revenue declined -11% to $2.42 billion compared to estimates for $2.46 billion. The company reaffirmed its full year guidance of $9.9-$10.1 billion and adjusted earnings of $6.60-$7.00 per share.

The CEO said they were exploring the sale of $8 billion in noncore assets with annual revenue of roughly $2 billion. They have sold the North American rights to the hereditary angioedema drug, Ruconest, to Pharming Group in the Netherlands for $181 million and potential future royalties of up to $329 million. Papa said they had received numerous unsolicited bids for various assets. He also said they were negotiating new terms with lenders to allow them some breathing room as they focused on rebuilding the company. Papa also said the company will be reorganized into three parts including Branded Rx, Bausch & Lomb and U.S. Diversified products.

Shares rallied 25% or $5.71 on the earnings. There were 29 million shares short and 106 million shares traded. Average volume is 27 million. The guidance and the debt sales were the big movers.

Endo International (ENDP), sometimes called a baby Valeant, reported earnings after the close on Monday of 86 cents that easily beat estimates for 75 cents. Revenue of $920.9 million also beat estimates for $878.3 million. The company guided for the full year for earnings of $4.50-$4.80 with revenue in the range of $3.87-$4.03 billion. Analysts were expecting $4.55 and $3.93 billion. Endo has been on an acquisition binge where it acquired drugs then raised the prices, exactly like Valeant. Endo shares rallied 22% on more than five times normal volume.

After the bell Dow component Disney (DIS) reported adjusted earnings of $1.62 compared to estimates for $1.61. Revenue rose 9% to $14.277 billion compared to estimates for $14.15 billion. Parks revenue rose 6% to $4.38 billion. Studio revenue rose +40% to $2.85 billion. Consumer entertainment fell -1% to $1.15 billion. They are exiting their game console business. Media revenue rose 2% to $5.91 billion. They announced they were acquiring a 33% stake in BAMTech for $1 billion paid in two installments from Major League Baseball and had the option to acquire a majority stake. BAMTech is separating from MLB Advanced Media in conjunction with the Disney investment. The stake will allow Disney to develop a new streaming media delivery platform that will deliver content for ABC, ESPN and other digital initiatives inside the Disney conglomerate. They also announced DirecTV will include Disney's top 7 subscription channels in its over the top service. Shares declined $1.50 on the news.

Yelp (YELP) reported earnings of 1 cent compared to estimates for a 7-cent loss. Revenue of $173 million beat estimates for $170 million. Shares rallied 13% in afterhours. The company saw a gain of 32% in total advertising accounts to 128,400. The mobile app was accessed by more than 23 million unique devices in Q2. That was a 27% gain. They guided for Q3 for revenue of $180-$184 million and beating estimates for $179.6 million.

Fossil (FOSL) reported earnings of 12 cents that beat estimates for 9 cents. Revenue of $685.4 million beat estimates for $674.1 million. They guided for full year earnings of $1.80-$2.65 per share compared to analyst estimates for $2.03. They also guided for revenue to decline between 1.5% to 5.0% in fiscal 2016. Comparable sales in the Americas fell -11% in the quarter. Overall comps fell -3% compared to estimates for a +0.7% gain. The company has announced its next generation smart watches that will go on sale in stores and online on August 29th. They start at $295 and the same price as an entry level Apple watch. They use the AndroidWear operating system. The Fossil Q lineup now offers more than 20 products that compete with Fitbit (FIT) and Apple.

IDC reported that Apple watch sales fell -55% to 1.6 million units in Q2 compared to 3.6 million in Q2-2015. Samsung shipped 600,000 watches in Q2.

SolarCity (SCTY) reported a loss of $2.32 compared to estimates for a loss of $2.44. Revenue of $186 million easily beat estimates for $146 million. However, they guided for a loss of $2.55 to $2.65 in Q3 and revenue of $155-$168 million compared to estimates for $2.26 and $175 million. They warned that as a result of the Tesla acquisition offer it had taken them longer than normal to finalize new project financing agreements. While this negatively impacted Q2, it will have a positive impact on Q3 according to the company.

Last week the company agreed to a take under with Tesla for $25.73 based on Tesla's share price at the time. Shares had been trading over $27 in anticipation of a higher offer. As part of the acceptance, the board cited the easier access to financing once Tesla was in control.

The Q2 earnings cycle is really slowing and the calendar for Wednesday is lackluster at best. On Thursday, there is Alibaba and Nvidia and both could produce fireworks. Nvidia has been setting a new high almost every day and they are either going to have blowout earnings or a major disappointment that tanks the stock. With their almost weekly new product announcements and immediate sell out of anything announced, I am betting on an earnings beat.

The primary volatility ETFs (VXX/VXZ) did a 1:4 reverse split after the close on Monday. The VXX went from a historic low at $9.30 to $36.57 at the close. The Daily 2x VIX Short Term ETN (TVIX) enacted a 1:25 reverse split that was also effective at the open this morning. Shares were trading for 92 cents before the split and $22.26 at the close.

The API reported a 2.1 million barrel build in crude oil inventories late Tuesday. Analysts were expecting a one million barrel drop. Crude declined to $42.74 on the news. More than 16,500 lots of WTI put options with a $40 strike price were traded before the news was released.

The IEA revised its forecast for production declines in the U.S. in 2016 from 820,000 to 700,000 citing an increase in drilling activity.

Morgan Stanley reiterated their outlook for crude saying "the bottom of our trading range remains $35. Despite the recent bounce we see the prospect for lower prices over the next 1-3 months and a deeper contango." They see that $35 level as a soft floor but still a critical level. The primary catalyst that could prevent a return to $35 is the potential for OPEC to try and talk prices up again with talk about a potential production freeze at the next OPEC meeting. Venezuela's President Maduro has already started making headlines calling for a new unity agreement to freeze production. He almost made it happen last time but Saudi Arabia backed out and the deal fell apart. With oil still hovering in the $40 range there is ample incentive for a new deal.

Marc Faber, the publisher of the Gloom, Boom and Doom Report, is even more bearish if that is even possible. He said on Monday that stocks are likely to drop 50% to 1,100 on the S&P. The S&P hit 2,185 about the time he made that call. He warned the market has not gone up because business is good but because of a couple trillion dollars in stock buybacks. Companies have been borrowing money at record low interest and using the money for buybacks. With stocks trading near a record PE levels, Faber says it is not the market that is pushing higher but a relatively few stocks driving the indexes. He warned that the excess liquidity generated by all the central bank easing and QE programs will eventually come back to haunt the market.

Faber has been wrong far more often than he has been right. However, on the "stopped clock is right twice a day" theory, as long as he keeps calling for a bear market he will eventually be right. He will have given up or lost millions in the years prior to the bear's appearance but he will eventually get to say "I told you so."

I have warned many times that the Fed has never successfully unwound a stimulus program without causing a market crash and this is the largest stimulus program they have ever created. What are the odds this will be the one they can unwind safely? I think I have a better chance with the PowerBall lottery.

I do NOT agree with Faber in this call. Even if the market did begin to correct there are far too many factors to hold it up rather than knock it down. Remember, "There is No Alternative" or TINA. This means with interest rates at record lows and $13 trillion in negative territory, investors and institutions have to buy stocks. That could change when the Fed actually begins to raise rates but that should not happen until 2017 at any sustained pace.


The S&P did not close at a record high but it only missed by 1 point. However, the market continues to be very over extended and could decline at any time. They say never short a dull market and this market is going on four weeks of dull with only one material short squeeze along the way. We could always move higher but eventually gravity will take hold. This is the weakest two months of the year for the markets and the second half lows normally occur in Sept/Oct. This is what the bears are betting on but the market refuses to die.

The three weeks of sideways consolidation on the S&P suggests investors believe we are not going lower. Every minor dip was bought and they are still buying the dips. When that trend changes it will be time to exit. The S&P has support at 2,160 and again at 2,150. If those levels break, I would move to the sidelines or get short. Until then, I would keep my stops tight because the market can continue moving higher if fund managers continue their defensive buying. They cannot afford to let other managers get ahead of them in the fund performance competition.

The Dow will not get any help from the Disney earnings tonight. Disney shares are down and they are likely to continue lower on Wednesday. The Dow tried to push higher at the open but was immediately stopped at 18,575 and then pushed lower into the close. Support at 18,400 and 18,250 was tested last week. The short squeeze lifted the index away from those levels but the Dow has only been able to hold those gains and not add to them. The top of the short squeeze on Friday morning was 18,520. The Dow closed at 18,532 today, 2.5 days later.

The Dow stocks are going through their post earnings depression phase and that means traders are taking profits and moving on to other candidates. Since the short squeeze, the Dow has had initial support at 18,500. A breakdown under that level would be the first warning the trend may be coming to an end. Similarly, a breakout over 18,600 would be a signal there could be another leg higher in progress.

There are no additional Dow stocks reporting earnings this week.

The Nasdaq is still making new highs but very slowly. On Friday, the gain was 3 points over the prior high. On Monday, the index gave back 8 points. Today the index made a new high by 4 points. These are not exactly rip-roaring gains that have investors racing to place their bets on tech stocks. The semiconductor sector was the support for the Nasdaq gains today as the $SOX closed at a new high.

The Nasdaq has initial support at 5,200 and then 5,115. A break under 5,100 would be very negative. There are no high profile Nasdaq stocks reporting earnings other than Ctrip.com, Alibaba and Nvidia. Those are not normally market movers. The biotech sector has been down for the last two days on profit taking from the recent run. We need the biotechs to catch fire again and provide some additional lift for the Nasdaq.

The Russell 2000 had a nice rebound from the 1200-1205 support and has streaked for 31 points in the Friday short squeeze and the 2 prior days. Since the squeeze stopped on Friday morning the index has stalled completely at that 1,231 level. Resistance is now 1,234 and support 1,228. That is a very narrow range. If that breaks to the downside, I would be looking at 1,200 once again.

I am neutral on the market. The lack of selling suggests everyone expects the market to move higher but expectations do not always come true. The volatility is nonexistent with the VIX closing at 11.66 after hitting a new 52-week low at 11.02 at the open. When the VIX is high, it is time to buy. When the VIX is low, it is time to go. The caveat there is that the VIX can stay low for some time but when it reverses, the moves can be dramatic. The biggest market losses come from events that are unexpected. Also, the market does not need a reason to correct. Sometimes it just happens for no obvious reason other than the rally has run its course.

I recommend keeping your stop losses tight, try not to be overly long and don't buy the first dip. Keep building your shopping list and the prices you would be willing to pay for each stock on that list. Sometimes Christmas does come in August/September.

Enter passively, exit aggressively!

Jim Brown

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