Multiple indexes tested support and they barely rebounded as the October trend begins to take hold.
With the Q3 window dressing over on Friday, the October window undressing is gaining speed. Typically, the first two weeks of October are negative and the indexes appear to be setting up for a support break. Buy the dip traders are probably going to refrain from jumping in immediately if those support levels break. The first two weeks of October have hosted some spectacular market declines over the years. While I do not expect any material crash, it is the one that we do not expect that causes the most damage. For weeks, I have recommended not to be overly long and to keep a shopping list handy of stocks you would like to buy at lower levels. That is even more important over the next ten days.
There were no economic reports to boost the market this morning. The CoreLogic Home Price Index showed prices rose +6.2% year over year in August compared to +6.0% in July. That was the 20th consecutive monthly price increase. New York posted the biggest gain at +1.7%, Las Vegas +1.2%, Houston at +0.7%, Dallas, Phoenix and Philadelphia rising +0.6% for the month. This report is normally ignored.
The ISM - New York for September rose from 47.5 to 49.6 but remains in contraction territory for the second month. The ISM has been in contraction for four of the last five months. The internal components were mixed but employment imploded with a drop from 54.9 to 33.9 and well into contraction. That is the weakest reading since the financial crisis. The August employment reading was the only positive number since January. The report was ignored.
The rest of the week is headlined by the employment reports and should the numbers come in as expected the market could breathe easier. Several of the recent Fed speakers have tried to revive the November Fed meeting as a possible rate hike and a hot payroll number over 200,000 could help stimulate those fears. The consensus estimate is a gain of 168,000. However, August came in at +151,000 and missed estimates by a mile BUT it is the most heavily revised number of the year. Upward revisions can be significant. If September comes in strong and August has a big upgrade it could bring the Fed back into focus even though the November meeting is only four working days before the election. The Fed normally tries to avoid movement in that situation in order to avoid appearing political.
The Sunday night debate could have a significant impact on Monday's market if it appears Trump recovers from the beating in the first debate. Surrogates are predicting an entirely different Trump. Clinton was on her game so it will be hard for her to improve. The market appears to favor a Clinton presidency and a divided government in hopes of retaining the status quo.
In stock news, Darden Restaurants (DRI) reported earnings of 88 cents compared to estimates for 82 cents. Revenue of $1.71 billion missed estimates for $1.72 billion. Same store sales of +1.3% were below forecast. They repurchased 3.2 million shares in the quarter. The board authorized a new $500 million buyback program compared to their $7.7 billion market cap. They finished the quarter with $114.7 million in cash compared to $274.8 million in the year ago quarter.
Darden guided for full year earnings of $3.87-$3.97 compared to prior forecasts of $3.80-$3.90 with same store sales rising 1% to 2%. Analysts expect $5.57 billion in revenue. Shares spiked $2.50 to $63.90 at the open but fall back to trade briefly in negative territory before the close. Weak comp store sales guidance was blamed for the decline.
Netflix (NFLX) shares failed to continue their big 4% gains from Monday on rumors Disney may be looking at acquiring the streaming company. Disney is also said to be considering a bid for Twitter (TWTR). Netflix is constantly talked about by the rumor mill as an acquisition target with Apple (AAPL) the most likely acquirer. However, Disney would be a good fit given all their content availability. It would take the pressure off the ESPN cord cutters and give the company a big jump into streaming. Disney's market cap is $150 billion and Netflix is $44 billion. Shares of Netflix punched through the resistance at $100 on Monday and held its gains today in a weak market.
Transocean Offshore (RIG) continued its decline after the company announced on Monday that Reliance Industries had cancelled a contract on the Discoverer India as of December 2016. The contract was supposed to run through January 2021. Transocean will receive a lump sum termination payment of $160 million. The daily lease rate was $528,000 so the termination payment was only a minor amount of the $771 million in payments left on the lease. On the positive side the Transocean Barents was awarded a new contract for $260,000 per day for 15 months but the contract does not start until Q3-2017.
Alphabet (GOOGL) announced its new smartphone called Pixel. Instead of licensing out production to be made and marketed by its prior partners, Google is contracting with HTC to make the Google branded phone. This will allow Google more control over what goes in the phone and they made a big point of saying it will not have any of the "bloatware" now common on Android phones. The manufacturers and carriers like Verizon put tons of software on the Android phones in hopes of getting you hooked and running up your data bills.
The Pixel comes with Google Assistant, which is their answer to Apple's Siri and supposedly an improvement to Google Now. The phone will come in two sizes (5.0 and 5.5 inch) and three colors (black, silver and blue). Google is also giving owners unlimited cloud storage at full resolution. That means any pictures you take will not be degraded by being compressed for storage. The 12.3 megapixel camera has a DxOMark rating of 89, which is the highest of any smartphone. A 15-minute charge will supply 7 hours of battery life.
The phone also comes Daydream VR ready and this time they have actual headsets rather than a cardboard contraption used in the past.
The phone starts at $649 and will be available on Tuesday in the U.S. and Canada. There is a 32 gb version and 128 gb and it has a headphone jack.
They also announced Google Home, a competitor to Amazon's Alexa device, Echo. Google Home will start at $129 compared to $179 for Echo. Home will be available November 4th. They also announced a new WiFi router and updated Chromecast Ultra.
After the bell Micron (MU) reported an adjusted loss of 5 cents compared to estimates for a loss of 12 cents. Revenue of $3.22 billion beat estimates for $3.13 billion. The company guided for actual earnings of 13 to 21 cents in Q3 compared to analyst estimates for 12 cents. Revenue guidance is now $3.55 to $3.85 billion and analysts were expecting $3.48 billion. Chipmakers are rebounding because of a surge in PC sales after years of steady declines. The successful implementation of Windows 10 has caused many consumers to finally make that upgrade decision. This decline created an oversupply of memory chips but the recent PC surge has sucked up much of the available inventory and chipmakers are seeing prices firm again. Volumes of DRAM chips rose +20% with a 12% rise in Nand chips. Despite the earnings beat and strong guidance the stock lost $1 in afterhours.
Acacia Communications (ACIA) shares rallied 8% after the bell when they guided for higher earnings. They raised guidance from earnings of 64-76 cents to 83-90 cents. Analysts were expecting 74 cents. The company also said it was going to do a secondary offering of 4.5 million shares of which 1.2 million will be sold by the company. This allows prior investors with previously restricted shares the ability to sell. The entire networking sector has been seeing raised estimates and strong performance. China is only half way through its upgrade to 100 gb infrastructure and U.S. carriers like Verizon are just beginning.
Sears Holdings (SHLD) spiked to $13.69 on news the company was taking bids on the Craftsman tool brand. Rumors have Stanley Black & Decker (SWK), Hong Kong based Techtronic Industries, Apex Tool Group and Husqvarna are making bids. Bloomberg said this could bring Sears up to $2 billion. Shares of SHLD shot up 17% and were halted for volatility. When trading reopened they crashed back to almost where they started.
Shares of Team Health (TMH) spiked 16% just before the close after the Wall Street Journal said the company was up for sale. They are reportedly in talks with the Blackstone Group and Bain Capital and could strike a deal this month. Team Health supplies outsourced medical services for medicine, emergency care, critical care and other areas to more than 3,000 healthcare facilities.
Crude oil prices rallied through resistance at $48.50 on continued chatter about the potential for an OPEC production cut. After the bell, the API inventory report showed a massive decline of -7.6 million barrels and prices continued to make gains. Analysts were expecting a weekly build of about 1.5 million barrels. The drop in inventories is most likely related to Hurricane Matthew. It has been brewing in the Caribbean for the last ten days and tankers headed for the Gulf would have lingered well out in the Atlantic while waiting for Matthew to move north and away from the entry points into the Gulf.
This week the path between Cuba and Florida has been closed and last week it was the southern route between Cuba and Mexico that was closed. The storm spent a week south of Cuba. There are probably close to 100 tankers parked well out into the Atlantic waiting for these storms to pass. The new storm headed for Bermuda is named Niccole.
The major indexes are all pulling back to critical support levels and trouble could be headed our way. The S&P dipped below initial support at 2,150 but managed to recover right at the close. On an intraday basis, there have been dips to the 2,140 level and that appears to be where the dip buyers were waiting. With the close at 2,150 today, they may not be so ready to buy another dip to 2,140 on Wednesday. If the early October trend is going to assert itself the dip buyers may pull back and look to test the waters again at 2,120.
I have said several times I think the 2,120 level will hold and I would be a buyer there on any apparent rebound. I would rather not catch a falling knife and wait to see if that level is going to hold. Getting in too late is far easier on the pocketbook than getting in too early.
I mentioned in the weekend newsletter than the higher low pattern on the Dow was ragged and far less promising than the one on the S&P. In fact the pattern of lower highs has become prominent and is suggesting the next material move is going to be back to support at 18,000 instead of up to 18,400.
I scanned the charts of the 30 Dow components and only about 7 actually have a bullish bias. Most of them are bearish rather than neutral. If there is going to be a period of firming before the earnings cycle begins it better begin soon or that 18,000 level is not going to hold.
The Nasdaq was the bright spot on Tuesday with only a -0.2% decline. The Composite Index is holding near its recent highs and not showing any indications of a potential decline. That could change in a heartbeat if something happens to the overseas markets or the payroll reports miss estimates.
Initial support at 5,255 has not been tested since last Thursday. That would be the first line of defense but it is also lighter support than the 5,200 level. Apple, Google, Netflix and Amazon have been supporting the market so far this week. The various headlines may have run their course and those gains could fade.
The Russell 2000 also has a pattern of lower highs and support at 1,235 is being tested almost daily. Any material bout of selling is likely to break that support and the next level is well down at 1,205. The small cap index is the market sentiment index and a support break could trigger additional selling in the larger cap indexes.
This is one of those situations where everyone is watching everyone else and waiting to see who is going to make the first move. There does not appear to be any volume buying. There are a few nibbles here and there but most of the big gains are coming on headline stocks.
Portfolio managers are likely to wait for a concentrated downdraft to clean out the weak holders before they go all in for the late October rally. I believe we have risk to the September lows. While we may not make it down to those levels, we need to be prepared just in case we do get a washout. Ships can sink in a quiet sea and stocks can fall for no reason in a low volume, no headline market.
Beware the payroll reports. Any material deviation from the estimates could cause market volatility in either direction. I would continue to urge not to be overly long and maintain a shopping list of stocks you would like to buy at a lower level. We may never get that chance but if we do, we need to be ready.
Enter passively, exit aggressively!
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