The market has lost its catalyst and cannot find its way.

Market Statistics

The Dow and S&P posted minor gains and the Nasdaq traded in negative territory several times before squeezing out a gain at the close. With earnings winding down and economic reports weak, there was nothing to energize the market. There were worries over the FOMC minutes on Wednesday and what the Fed might say about selling off the positions acquired in QE.

Without a catalyst, the markets were left to wander but at least they had a positive bias. The S&P tried to trade over 2,400 twice bout could not hold the gains. Volume was only 5.9 billion shares and the S&P traded in a narrow 4-point range after noon.

New Home Sales for April fell 11.4% from 642,000 to 569,000 and well below estimates for 619,000. Sales declined in all four regions. Sales fell -7.5% in the Northeast, -13.1% in the Midwest, -4.0% in the South and -26.3% in the West. The median home price fell from $316,300 to $306,200. Despite the decline in sales, the outlook is still strong. On 33% of homes sold the construction had not yet started, up from 28% in March. The percentage of sales for homes currently under construction was 35.9%. Completed homes accounted for 31.1% of sales.

The Richmond Fed Manufacturing Index for May fell off a cliff. The headline number declined from 20.0 to 1.0 and the first time in five months to be in single digits. New orders fell from 26 to zero. Order backlogs dropped from 4.0 to -15. The shipments component fell from +25 to -1. This suggests the post election optimism in manufacturing sector is crashing.

The separate services survey rose from 22 to 34 but that is more a function of warmer weather and more outdoor events than a sudden surge in business activity. A troubling component was shopper traffic that fell from 27 to 7 and expected demand fell from 96 to 73. Inventories fell from 24 to 1.

Wednesday we get existing home sales for April and they are expected to have declined.

The biggest problem for the week is the FOMC minutes. The Fed is widely expected to have discussed reducing their $4.5 trillion balance sheet. Depending on how they decide to do this it could be market negative. Currently, they are still replacing treasuries that have matured by acquiring new treasuries. This is keeping the supply of treasuries tight and interest rates low. If they elect to stop replacing the matured securities, it would still take many years for all their positions to mature and roll off the books. There are no conversations about actually selling treasuries back into the market. That could happen a couple years from now but not in the current plans.

The best thing for the market would be for the Fed to limit repurchases rather than halt entirely. Assuming there was $40 billion in maturities next quarter; they could limit repurchases to $20 billion and buy the shorter durations. That would begin to shorted the overall duration of the portfolio and allow for a faster roll off a couple years from now when the economy is expected to be stronger. Reducing their portfolio would have the desired effect of raising interest rates without actually announcing a rate hike. By allowing market supply to increase, it would increase rates very slightly.

After the FOMC minutes the market is likely to go dormant as volume crashes ahead of the holiday weekend. Volume is already under 6.0 billion shares and the lowest since April 17th and everyone is just waiting for the minutes so they can dress their positions and head for home.

In earnings news, AutoZone (AZO) reported earnings of $11.44 compared to estimates for $12.00. Revenue of $2.62 billion also missed estimates for $2.17 billion. Same store sales fell -0.8% and well below estimates for 2.7% growth. The company blamed the weak performance on the delay in tax refunds. However, the CEO said for whatever reason those refund dollars never seemed to show up. He also blamed the weak sales on the weather. That is always a convenient excuse. Shares were crushed for a -12% decline of $78.

Take-Two Interactive (TTWO) reported earnings of 83 cents compared to estimates for 59 cents. Revenue of $571.6 million easily beat estimates for $407 million. They guided for full year earnings of $4.25-$4.65 per share. On a negative note, they delayed the release of the highly anticipated western, "Red Dead Redemption 2" from fall 2017 to spring 2018. This is the first game built completely from the ground up to take advantage of the new class of gaming consoles. Their Rockstar development unit is known for being focused on perfection and this game is no exception.

Toll Brothers (TOL) reported earnings of 73 cents that rose 40% compared to estimates for 62 cents. Revenue of $1.36 billion beat estimates for $1.25 billion. They delivered 1,638 homes, up 22% in dollars and 26% in units. The average price was $832,400. They signed contracts for 2,511 units for $2.02 billion. Their current order backlog is 6,018 units and $5.0 billion. In the current quarter, they expect to deliver between 1,675-1,975 homes. Shares rallied at the open but faded into the close.

DSW Inc (DSW) reported earnings of 32 cents that missed estimates for 34 cents. Revenue of $691.1 million beat estimates for $685.3 million. Same store sales fell -3.0% but was slightly better than the expected -3.4% decline. They guided for the full year to earnings of $1.45-$1.55 and analysts were expecting $1.55. Shares fell 8% on the news.

After the bell, Intuit (INTU) reported earnings of $3.90 that beat estimates for $3.87. Revenue of $2.54 billion also beat estimates for $2.5 billion. They guided for revenue in the current quarter in the range of $795-$815 million and analysts were expecting $772 million. Full year guidance was $4.38-$4.40 and revenue of $5.13-$5.15 billion. Shares spiked from the $129 close to end the afterhours session at $141.

The highlights for the rest of the week are Hewlett Packard on Wednesday and Costco on Thursday. Best Buy and Lowes will also be watched.

Steel stocks spiked on expectations for the Commerce Dept to give some clues on steel import rules at a hearing on Wednesday. The department was supposed to determine if steel imports from China and elsewhere could pose a threat to national security through quality issues or because of U.S. capability shrinking due to the reliance on imports. The initial report claimed 26% of steel imports came in at unfair prices because of subsidies.

Bunge (BG) shares spiked 18% after an article in the WSJ claimed that Glencore approached the company about a takeover. After the close, Bunge issued a statement saying it was not involved in business combination discussions with Glencore and will continue to execute its own global agri-foods strategy.

After the bell the API reported crude inventories declined -1.5 million barrels last week but that was less than the expectations for a 2.3 million barrel decline. Gasoline inventories fell by -3.15 million barrels. Distillate inventories fell -1.85 million barrels.

Prices were up in the regular session after the Kuwait oil minister said OPEC was considering even deeper cuts when they meet on Thursday. Kuwait has already said they would support the Saudi Arabian - Russian agreement to extend cuts through March 2018. "All indications so far show that most countries, if not all, back the extension of this agreement." The minister also said four other non-OPEC countries, Egypt, Norway, Turkmenistan and Indonesia, could join the production cut. Shortly thereafter, Norway's energy ministry said it had no plans to reduce output. Prices rose to $51.50 in the regular session.


The markets traded in a daze after the noon high. Everyone is waiting for the FOMC minutes and hoping they will say nothing that will upset the market. If the minutes are tame, trading will come to an immediate halt and volume will die for the rest of the week. Without a catalyst, this market is going nowhere.

There is a slight upside bias but it is very slight and resistance is strong. The S&P tried to trade over 2,400 intraday but both attempts were immediately rebuffed.

The resistance is strong and without a catalyst, I would be surprised to see a major breakout. The post earnings depression phase is in full swing and the market is being lifted by an ever-shrinking number of big cap stocks.

The percentage of S&P stocks with a buy signal has fallen to 68.4% and the low for 2017.

The Dow gained 43 points and it was thanks to three stocks. Goldman, Caterpillar and JP Morgan. The rest of the components were evenly matched. Yesterday it was Boeing, 3M and Unitedhealth and BA/MMM were at the bottom of the losers list today. Fame is fleeting.

The index eased over the 20,900 resistance level thanks mostly to Goldman and the opening gap higher. The index is now facing much stronger resistance at 21,000. Since volume is a weapon of the bulls and volume is expected to be light the rest of the week, I would not be surprised to see that 21,000 level hold until next week.

The Nasdaq traded in negative territory multiple times throughout the day. With the exception of Google the FAANG stocks were absent from the winners list below. Amazon was only fractionally positive and Apple and Facebook were negative.

The Nasdaq is nearing its recent highs and there are probably some sellers waiting at the 6,150 level. The lack of excitement is evident and that should be with us the rest of the week.

The small caps are limping along but this was the fourth consecutive day of gains. The Russell has a long way to go to return to the pre crash resistance at 1,400.

The biotech sector is uncharacteristically calm ahead of the big ASCO conference next week. Typically, companies presenting at the conference are seeing their stocks rise. The weak biotech sector is holding back the Nasdaq and the Russell.

Why buy? Investors are probably asking themselves that question this week. Without any catalyst and with only a minor upside bias, there is no reason to rush into the market. The dip last week was a buying opportunity but hedge funds are not chasing stocks higher. Those stocks that did rebound sharply have now begun to fade.

Facebook is an example. The stock declined $5, rebounded $5 then resumed its original trend with a slightly negative bias. I scanned my entire watch list of 850 stocks and there were hundreds where the previously bullish charts were rolling over with post earnings depression. There is no reason to rush into the market this week. I would wait until after the holiday and see if traders come back refreshed.

Enter passively, exit aggressively!

Jim Brown

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