The flurry of headlines over the next two days is likely to produce new market volatility.

Market Statistics

Wednesday alone had a week's worth of headlines packed into a single day. The minor market gains on Tuesday continued the established trend of a positive market the day before a Fed announcement. Nobody knows what causes it but it has been tracked and studied for the last decade. What happens after the announcement is a different story and normally the initial direction is wrong.

Tuesday's gains were lackluster with the S&P adding only 2 points and trading in a narrow 6-point range.

The economic news on Tuesday was about as lackluster as the market. The consumer confidence for October rose 5.4 points from 120.6 to 125.9. That was the highest level since 2000. The present conditions component rose from 146.9 to 151.1 and the highest level since July 2001. The expectations component rose from 103.0 to 109.1 and the highest level since March. Those who felt jobs were plentiful rose from 32.7% to 36.3%. Prospective homebuyers declined from 7.4% of respondents to 6.0%. Prospective appliance buyers declined from 53.8% to 48.9%. Auto buyers rose from 12.1% to 13.1% and probably related to the hurricanes.

The August Case Shiller Home Price Index rose slightly to 5.9%, up 0.1% from July. This is a lagging number and was ignored.

The Employment Cost Index for Q3 rose +0.7% after a +0.5% rise in Q2. Benefit costs rose +0.8%. This report was also ignored.

After the bell, the weekly API crude inventory report showed a huge decline of 5.087 million barrels compared to expectations for a 1.4 million barrel decline. Gasoline inventories fell 7.697 million barrels compared to expectations for a drop of 1.7 million barrels. Distillate inventories declined -3.106 million barrels. The decline in refined products is due to the seasonal switchover from summer blend fuels to winter blends and not a function of surging demand. Refiners are not replacing the summer blends in the storage facilities until the inventory levels decline to make room for the winter products. Refiners are also in a maintenance cycle to prepare for that production change.

WTI prices rose another 25 cents after the API data. That put prices just slightly over resistance from early 2017. The real move will come if the EIA report on Wednesday morning shows similar declines.

The calendar for Wednesday begins with the ADP employment numbers for October. The estimates have declined 25,000 to a gain of 200,000 over just the last two days. The Nonfarm payrolls on Friday have seen estimates rise 5,000 to 315,000 over the same period. As long as we get numbers in those ranges, the Fed is not likely to accelerate their rate hikes. Anything hotter than that and the Fed could become uneasy.

The ISM Manufacturing Index is expected to decline slightly from 60.8 to 60.5. That number could be completely ignored but any significant deviation could raise some concerns. There could be some hurricane impact that depresses the October activity levels.

The FOMC announcement is not expected to raise any eyebrows as long as they do not surprise us with a rate hike. That would truly be a lightning strike and nobody expects any movement.

The real challenge is going to be the release of the details on the tax reform package. The rumors are flying and there could be something in the package for both the bulls and the bears. Negative details could cause a major hiccup in the market. Analysts fear the need to get something passed will have necessitated the inclusion of features in hopes of appeasing both fiscal conservatives and a few democrats as well. This will be a witch's brew of good, bad and ugly components. Since all the good expectations are already priced into the market, the odds of a sell the news event are very high.

Late news tonight: The GOP is going to postpone the release of the proposal until Thursday.

Also on Thursday, President Trump is expected to nominate Jerome (Jay) Powell to take over as Fed Chairman when Janet Yellen's term ends in January. Anyone else but Powell is likely to tank the market. The other names in contention are seen to be more hawkish and favor less policy accommodation.

The rest of the week will be tame by comparison to Wed/Thr with Thursday night earnings the big focus after the dual Fed headlines.

The headline earnings for Wednesday will be Facebook, Qualcomm and Tesla. All will come after the bell. On Thursday, Dow components Apple and DowDuPont will report along with Alibaba and Starbucks.

The early morning earnings disaster was Under Armour (UA). Actual earnings of 22 cents beat the street by 3 cents but fell -24% from the year ago quarter. However, revenue fell -5% to $1.41 billion and missed estimates for $1.49 billion. This was the first quarterly revenue has decline ever. The company guided for full year earnings of 18-20 cents. Think about that a minute. They posted 22 cents in Q3 but they are guiding for 18-20 cents for the year. That was the second time they have lowered guidance in three months and about half the 37-40 cents they were expecting in August. They cut full year revenue growth forecasts from 9-11% to "low single-digits." North American revenue fell -12% and Under Armour gets 90% of its earnings from North America. UA shares fell 22% on the news.

While UA and Nike are struggling, Adidas saw North American revenue rise 24% in 2016 and 32% in the first six months of 2017.

Pfizer (PFE) reported earnings of 67 cents that beat estimates by 2 cents. Revenue rose 1% to $13.17 billion and matched estimates. The company is trying to decide if it wants to sell off its consumer product business consisting of brands like Chapstick, Centrum vitamins, Advil and dozens of other brands. A decade ago, they sold off profitable brands including Listerine, Visine, Sudafed and Neosporin to J&J for $16.6 billion in order to invest in their new drug pipeline.

Pfizer's drugs still under patent saw an 11% rise in sales to $8.12 billion. Older drugs with generic competition declined 12% to $5.05 billion. Consumer health sales rose 4% to $829 million. The company guided for the full year for earnings of $2.58-$2.62 and slightly better than the $2.54-$2.60 forecast in August. They guided for revenue of $52.4-$53.1 billion, down from the $52-$54 billion in the prior guidance.

Aetna (AET) reported earnings of $2.45 compared to estimates for $2.06. That was up from $1.70 in the year ago quarter. Revenue of $14.95 billion missed estimates for $15.11 billion. The company guided for full year earnings of $9.75, up from prior guidance of $9.45-$9.55. Analysts were expecting $9.55. Aetna has fully exited the Obamacare market where it previously had over 900,000 people insured. The sign up window opens this week but Aetna is not participating in 2018.

Allison Transmission (ALSN) reported blowout earnings of 75 cents that beat estimates for 48 cents. Revenue of $595 million beat estimates for $526 million. The beat was powered by higher demand from North American off-highway products and higher parts sales. Shares spiked $3 at the open but gave it all back.

MasterCard (MA) reported earnings of $1.34, up 11%, that beat estimates for $1.23. Revenue of $3.4 billion rose 21% and beat estimates for $3.29 billion. MasterCard's gross transaction volume rose 11% to $1.35 trillion.

Shopify (SHOP) reported earnings of 5 cents that beat estimates for 2 cents. Revenue rose from $99.6 million to $171.5 million and beat estimates for $166.0 million. They guided for Q4 revenue of $205-$208 million with full year revenue of $656-$658 million. Analysts were expecting $204.3 million and $650.4 million. Shares fell $10 after a post by short seller Citron Research about their marketing tactics.

Alibaba (BABA) shares are up $17 in four days as traders position themselves for the November 11th singles day. However, this year Alibaba is calling it the 11.11 Global Shopping Festival and instead of 24 hours, they have lengthened it to 24 days. This is going to produce monster revenue with new sale items and promotions being presented on each of the 24 days by more than 100,000 vendors. Alibaba earnings are before the open on Thursday.

Mylan's (MYL) president was named in a major suit brought by 46 state attorneys general against 18 drug makers. The prosecutors are calling it a "mind-blowing" scheme to fix generic drug prices. Reportedly, manufacturers met at trade shows, conferences and other events as well as through email, phone and text messages. Together the 18 companies worked together to falsely inflate generic drug prices. The prosecutor said the "collusion was so pervasive that is virtually eliminated competition in the market for 15 drugs" to treat glaucoma, arthritis, high blood pressure, diabetes, anxiety, asthma and several other conditions. The suit also includes TEVA, RDY, NVS, LCI, Actavis Pharma, Emcure Pharma and Heritage Pharma among others. Since the generic drug market is a $75 billion a year market, one prosecutor said they could see a fine of $5 billion a year and the records go back 10 years or more.

Apple shares are screaming higher after the orders for the iPhone X opened on Friday. Shares have rallied $12 in three days. Apple provided sample phones to the various writers that review tech gadgets and every one of them had glowing reviews. They said the X is not perfect but it was the greatest iPhone ever made. "It was as revolutionary as the original iPhone." The rumors of slow production continue to be dispelled to some extent but we will get more information when Apple reports earnings after the close on Thursday. We say this all the time but "the guidance will be critical." Beware a sell the earnings news event!

Apple is only $127 billion away from having a trillion dollar market cap.

Qualcomm (QCOM) shares fell sharply after a report that Apple could replace the QCOM chips in their phones and iPads as early as the Q3 product update in 2018. The companies are in a multibillion-dollar battle over patent licensing and both companies have suits in progress all around the world. Intel would be the beneficiary. Intel already supplies more than half of the modem chips in the iPhones as Apple tries to move away from Qualcomm. A couple years ago, Samsung dropped Qualcomm chips and did not tell the company until it was almost time to ship the phones. Shares fell 7% on the news.

Netflix (NFLX) shares declined on news they have halted production on season 6 of House of Cards (HoC) because of the sexual allegations against Kevin Spacey. The company had already said it was going to drop the show after season 6 but the new season was eagerly awaited and production had already begun. Actor Anthony Rapp said Spacey picked him up, placed him on a bed and climbed on top of him while making sexual advances, while he was a minor in 1986. Spacey was 26 at the time and Rapp was 14. The claim by Rapp caused a confession by Spacey that he did not remember it because he was drunk at the time and if it happened, he apologized for the event. That did not appease the public and there is a huge outcry against him. He also took the apology opportunity to admit that he was gay. Netflix said production will be suspended until further notice. Since HoC is one of their top original programs, they will be pressured to complete it but also pressured to drop Spacey. Shares were down $3 intraday.

Your rally today was brought to you by the letters S-O-X. The semiconductor sector was on fire led by a $2.66 gain in Micron after Samsung reported strong demand and short supply of DRAM and NAND memory would continue through 2018. Nvidia gained $3 and closed at a new high at $206.75. Intel also surged to a new high at $45.49 with a $1.12 gain. The semiconductor sector leads the Nasdaq. Where chips go, the Nasdaq will follow. Past Option Investor writer Jeff Bailey called the $SOX the "head of the snake" because the Nasdaq had to follow wherever it went.


Also dragging the markets lower on Tuesday was another decline in the Dow Transports. This is seen as a sentiment indicator for the Dow Industrials and it closed at a four week low. The airlines have been declining and now the railroads are declining as well. If the economy is so strong, why are these subsectors in decline? Enquiring minds want to know.

Robert Shiller has been making the rounds on TV recently because the CAPE Ratio (Cyclically Adjusted PE Ratio) has risen to 31.42 and the same level it was when Alan Greenspan gave his famous irrational exuberance speech in December 1996. Today is the second highest market valuation ever. However, that big spike on the right of the chart came after the Greenspan speech. Overbought can always become more overbought and that is eventually followed by the sharp declines into oversold as seen on the chart. The key is being aware that markets do not go up forever and be prepared to exit when the slide begins.

The S&P is moving up on the strength in the tech stocks. The A/D ratio on the S&P was 233:223 with advancers only ahead of decliners by 10 stocks. However, that was much worse than the broader market at 4,586 advancers to 2,595 decliners. There was some buying under the surface that kept the markets positive.

The S&P has resistance at 2,580 and support remains 2,555-2,565.

The Dow barely closed positive once again with the index declining sharply a few minutes before the close. In the last 20 min of trading, the Dow dropped 46 points but recovered 15 points in the last four minutes to end with a gain of 28. Apple was the leader again and it has contributed nearly 85 Dow points in just the last three days. Without Apple's rebound, we would be looking at a lower level on the Dow today.

Note that the A/D on the Dow was evenly mixed at 15 winners and losers. The majority of the components only posted fractional gains. This is either due to worries over the Fed meeting and the tax plan on Wednesday (now on Thursday) or the post earnings depression phase has already started.

Resistance is 23,470 and initial support is 23,250.

The Nasdaq managed to move over resistance at 6,700 and close at a new high thanks to the chip sector and Apple. Given the 144-point spike on Friday and the gains today, the Nasdaq is already moving into overbought territory but at least it had a week off to rest the prior week. This could give the tech sector some more running room as long as the Dow does not implode. Having AAPL, MSFT and INTC in the Dow is providing tech support.

Support is now well back at 6,550.

The Russell rebounded thanks to the chip stocks and closed back over the prior support at 1,500 but it now has a confirmed pattern of lower highs. The Russell needs to break out over 1,512 on volume to convert the sellers back into buyers and begin a new leg higher. This week and next are small cap earnings weeks.

With the rescheduling of the tax plan release for Thursday, I would have expected the market to fade or continue to trade sideways until the event. However, once the date change was confirmed the S&P futures began to rise and are now up +3.75.

Keep some cash in your account in case we do get a buying opportunity because it will eventually appear. I am not talking about a crash or correction but just a 3-5 day bout of profit taking. Follow the Boy Scout motto and "be prepared."

Enter passively, exit aggressively!

Jim Brown

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.

subscribe now