Should we be worried when every daily headline mentions the length of a streak or the magnitude of the gains?
The Nasdaq 100 ($NDX) RSI reading rose again to 84.71 when 70 is considered overbought. Monday was the highest reading since January 9th, 1992 when it hit 86.39 after a 20% gain in the Nasdaq in only 13 days consecutive days. That move was followed by a six-month decline.
We know how this movie ends but we do not know if it will be this week or next month but the bull will eventually stumble.
There was only one economic report on Tuesday. The PMI Manufacturing for February fell from 55.1 to 54.3 to slightly slower growth but still a decent number. The flash PMI for services declined -2 points to 53.9. The PMI service sector outlook has faded back to where it was just before the November election. Respondents were reporting slower growth and cautious clients. This report was ignored.
The hurdle for Wednesday will be the FOMC minutes for the February meeting. With conflicting statements from Yellen and her merry band of bankers, analysts will be paying rapt attention for clues about a March rate hike.
The next market cliff could be President Trump's address to the joint session of Congress next Tuesday evening. He will be under pressure to disclose details on a potential tax deal and he will undoubtedly mention some other topics that will not be received well by the market. There is the potential for a Trump bump after the speech but there is greater potential for a sell the news event. The market could anticipate this and see increased volatility heading into the speech.
The market opened strongly positive after earnings from Walmart and Home Depot, both Dow components. Walmart (WMT) reported earnings of $1.30 compared to estimates for $1.28. However, revenue of $130.94 billion missed estimates for $131.1 billion. The company guided for the full year to $4.20-$4.40 per share.
Same store sales rose 1.8% and beat estimates for 1.3% with Sam's Club showing a 2.4% increase. This was the best same store sales for Walmart since July 2012.
E-Commerce sales rose 29% after they bought Jet.com in September.
The company took a shot at the proposed border adjustment tax saying "The border adjustment tax, for us, is a concern. Clearly anything that would potentially raise prices for our customers in the US is a concern for us."
Walmart also raised their dividend 2% to $2.04 for the year. The first installment of 51 cents will be paid on April 3rd to holders on March 10th. This is their 44th consecutive year of dividend increases.
Shares rallied 3% to resistance at $72 but closed well off their highs.
Home Depot (HD) reported earnings of $1.44 compared to estimates for $1.34. Revenue of $22.21 billion rose 5.5% and beat estimates for $21.8 billion. Same store sales were very strong at +5.8% compared to estimates for a +3.7% increase. The company guided for full year earnings of $7.17 and a 4.6% rise in revenue. The number of customers and the average ticket price both rose 2.9%. They ended the quarter with $2.538 billion in cash. They generated $9.783 billion in free cash flow in 2016 and expect $11.3 billion in 2017.
The company said it was benefitting from a strong home market with rising property values as well as increased productivity. They said the unseasonably warm weather allowed contractors to continue working on outdoor projects all through the winter.
They increased their targeted dividend payout from 50% to 55% of net earnings. They increased the current dividend by 29% to 89 cents payable on March 23rd to holders on March 9th. This is the 120th consecutive quarterly dividend. They announced a new $15 billion share repurchase program that will replace the existing program. Shares gained $2 on the news.
Expeditors Intl (EXPD) reported earnings of 61 cents compared to estimates for 59 cents. Revenue of $1.64 billion rose 3% and beat estimates for $1.62 billion. Shares finished the day slightly negative.
Advance Auto Parts (AAP) reported earnings of $1.00 that missed estimates for $1.09. That was also a -18% decline from the $1.22 in the year ago quarter. Revenue of $2.08 billion did beat estimates for $2.01 billion and $2.03 billion in the year ago quarter. The company operated 5,062 stores and services 1,250 Carquest stores as of the end of the quarter. They will open 75 to 85 stores in 2017. The CEO presented a five-year plan in November and they are just getting started in the restructuring and aggressive cost reductions. Shares were fractionally lower.
Macys (M) reported earnings of $2.02 that beat estimates for $1.97 but declined from the $2.09 reported in the year ago quarter. Given the weak holiday shopping season, I think these earnings were respectable. They guided for the full year for $2.90-$3.15 compared to the $3.11 earned in 2016. Revenue of $8.515 billion missed estimates for $8.582 billion. Same store sales declined -2.7%. For 2017, they are projecting a decline in same store sales of 2% to 3%. Shares were flat because nobody expected them to do well.
First Solar (FSLR) reported adjusted earnings of $1.24 compared to estimates for 97 cents. Revenue of $480.4 million beat estimates for $391.8 million. For the full year, they guided in a range from a loss of 80 cents to earnings of 50 cents with revenue around $2.85 billion. Analysts were expecting 41 cents in earnings and $2.53 billion in revenue. The unadjusted GAAP earnings had a pre-tax charge of $729 million related to restructuring actions. They ended the quarter with $2.0 billion in cash. The company is moving forward with the conversion from Series 5 to Series 6 panels. They said their conversion efficiency on their best products was above 16.9%.
Tronox (TROX) reported an adjusted loss of 14 cents on revenue of $548 million. For the full year, the company narrowed its loss to $59 million or 50 cents per share. Tronox is a producer of titanium ore and titanium dioxide. They also announced the acquisition of the same business from Saudi Arabian company Cristal for $1.67 billion in cash and stock. This will make Tronox the world's largest producer of titanium oxide with 11 plants in 8 countries. Shares spiked 35%.
Texas Roadhouse (TXRH) saw its shares fall $5 in afterhours after reporting earnings of 29 cents compared to estimates for 37 cents. Revenue of $484.7 million missed estimates for $496.6 million. Revenue growth rose only 7% compared to prior growth at 10%. Earnings also fell -10%. Same store sales rose 1.2%. They blamed higher employee costs that exceeded declining food costs. They opened nine new restaurants in the quarter.
The earnings headliners for Wednesday are Tesla, Hewlett Packard and Jack in the Box. I would look for JACK to raise guidance. They recently raised prices on some items by as much as 35%. As long as sales did not tank as a result of the higher prices they should be doing really well in the current quarter.
The market does not seem to be paying attention but Q1 earnings growth estimates have declined -2.7% from the beginning of the quarter. For 61% of S&P-500 companies earnings growth estimates are slightly lower than analysts originally expected. This is typical but the pace of the decline is accelerating. For Q4, growth estimates declined -2.2% and Q3 -1.9%. This is not a big deal but it is important. For instance if analysts expected S&P earnings to rise 8% in Q1 and now they are expecting 7.8% growth, it is still decent growth. They are simply becoming less excited about the future. Offsetting this is the normal better than expected results when the quarter actually reports. If analysts are expecting 8% growth at the end of the quarter, typically we will see 9% or even higher when the results are announced.
Verizon (VZ) and Yahoo (YHOO) announced they had reached an agreement on the acquisition. Verizon will pay $4.48 billion in cash, a discount of $350 million from the original price as a result of the hacking scandal. The two Yahoo data breeches affected more than 1 billion user accounts. The two companies will split any liability arising from the two events. Shares of both companies were fractionally higher.
Popeye's Louisiana Kitchen (PLKI) agreed to be acquired by Restaurant Brands International (QSR) for $1.8 billion. QSR will pay $79 for each PLKI share. That is a 19% premium to Friday's closing price. QSR was formed in 2014 when Burger King bought Tim Hortons for $11 billion. Popeye's started 45 years ago as a "Chicken on the Run" fast food restaurant in New Orleans. PLKI now has 2,600 stores in 26 countries. The acquisition is expected to close in April.
Natural gas prices fell -9% in the regular session after forecasters said winter was over. This came after a 7% decline last week. The warmer than normal winter has left gas in storage well above normal levels and we could actually see an injection into storage this week more than a month ahead of the normal pattern. Forecasters also said there was evidence of El Nino forming in the pacific and that would mean a cooler than normal summer for the North East. Reportedly temperatures in the North East over the winter were 5 to 8 degrees above average with lower than normal snowfall.
Crude prices rose 1.2% to close just over $54 and right at two-month resistance. OPEC reported that its proposed production cuts had reached 90% compliance, which would be a record high if that number were correct. Normal compliance would be 50% to 70% of announced cuts. IF, and that is a big IF, they do maintain 90% compliance and agree to continue for an additional six-months starting in July, we could see inventories begin to deplete and prices rise to as much as $65 in midsummer. While I would love to see that happen, I am not holding my breath.
There is not much to say about the markets. They are overbought and nobody seems to care. Investors are buying stocks at new highs after weeks of gains. I am excited to see the gains but there is a cloud of dread over my desk. Markets do not go straight up and the Dow has posted 8 consecutive days of gains. If you do not count the one day with a 4-cent decline on the Nasdaq 100, it is up for 13 consecutive days. We know there is a cliff in our future but for now, investors are still racing up the mountain.
The S&P surged through three-day resistance at 2,350 to close at 2,361 and a nice 14-point gain. The S&P is now higher than more than half of the blue chip analyst forecasts for the end of 2017.
Year End 2017 Forecasts:
2,275 Fundstrat, Tom Lee
2,300 Bank of America, Savita Subramanian
2,300 Credit Suisse, Lori Calvasina
2,300 Goldman Sachs, David Kostin
2,300 Morgan Stanley, Adam Parker
2,300 UBS, Julian Emanual
2,325 Jefferies, Sean Darby
2,340 Canaccord, Tony Dwyer
2,350 BMO, Brian Belski
2,350 Deutsche Bank, David Bianco
2,400 JPMorgan, Dubravko Lakos-Bujas
2,400 Barclays, Jonathan Glionna
2,400 Societe Generale, Roland Kaloyan
2,424 Piper Jaffray, Craig Johnson
2,425 Citigroup, Tobias Levkovich
2,450 Oppenheimer, John Stoltzfus
2,500 RBC Capital Markets, Jonathan Golub
The Dow posted a strong gain thanks to Home Depot, Walmart, Boeing and UnitedHealth. Only six Dow components were negative for the day. All the Dow components have now reported earnings so stimulation will have to come from some other source.
Dow 21,000 is the new target and we are only 257 points away. This could be a very fast move from one thousand-point level to another. The Dow has gained +2,855 points since the November 4th close at 17,888.
The Nasdaq Composite is only slightly less overbought than the big cap index. The Composite index gapped open to 5,850 and closed at 5,853 with a 27-point gain but that open/close is significant. The entire gain was short covering at the open and the lack of a material intraday range left us with a shooting star candle which is normally bearish. If Wednesday were a down day, the candle pattern would be an evening star also suggesting the end of the surge.
Neither of those means it is the end of the rally. They are just formations suggesting we could have seen a temporary top in the Nasdaq today.
A bullish event for today was the breakout of the small cap indexes on the S&P-600 and Russell 2000. I have said several times, if the small caps begin to make new highs, the broader market could continue significantly higher. On the S&P-600, the 7-point gain to 862 was just barely a breakout over 860 so I am not ready to start targeting 900 just yet.
I hate to be a wet blanket but we know the recent market moves are too good to last without at least a couple days of weakness to allow sidelined traders an opportunity to get back in the market.
That does not mean we are going to crash on Wednesday but we should be cautious about adding a lot of new long positions. I know the animal spirits are running wild but like the running of the bulls in Pamplona Spain, the outcome can be erratic and painful if participants are in the wrong place at the wrong time. Try not to be overly long until we get a new buying opportunity.
We have been exceptionally lucky because of a lack of negative headlines that could impact the market. This is not normal and not likely to last.
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.