The small cap indexes failed to rebound at the close and this could be trouble.

Market Statistics

The small caps typically lead the market both higher and lower but the big cap tech stocks filled that role over the last two weeks. The implosion in the small caps today could be bad for the overall market if this is an indication they are taking back control.

Over the last several weeks, the small cap indexes have been moving roughly sideways with a minor negative bias. As long as they were holding their major gains since August, investors were ok with the sideways trend. That changed on Tuesday and any further decline could poison the entire market.

Something spoiled sentiment this morning and it could have been the earnings from Priceline and TripAdvisor. Priceline (PCLN) shares fell -$257 to an 8-month low and the largest decline since they went public in 1999. The company reported earnings of $35.22 compared to estimates for $34.26. Revenue of $4.43 billion beat estimates for $4.34 billion. The company guided for Q4 earnings of $13.40-$14.00 and analysts were expecting $15.57. Priceline typically provides low guidance and normally they get away with it. They have guided lower for four consecutive quarters and 13 of the last 15 quarters. This time was different and 13 of 31 analysts downgraded the stock and cut their price targets. The average target fell from $2,116.50 to $2,021.07.

Here is the problem. Since they have a history of guiding lower, nothing they did this time was any different. What changed was the willingness by nervous investors to just shrug it off. This is a symptom of an overbought market. Investors are nervous and looking for any excuse to sell.

TripAdvisor (TRIP) is in the same sector and they reported earnings of 36 cents compared to estimates for 35 cents. Revenue of $439 million missed estimates for $451 million. They did not provide specific guidance but said competition was causing a reallocation of advertising capital and click-based and transaction revenue was expected to decline further in Q4. What declined immediately was their stock price with a 23% drop of $9.18. Investors are showing no patience in dealing with minor earnings misses as we near the end of the earnings cycle.

Red Robin (RRGB) was also hammered after disappointing results. The company reported earnings of 21 cents that missed estimates for 29 cents and were significantly below the 38 cents in the year ago quarter. Revenue of $304.2 million missed estimates for $309.3 million. Same store sales fell -0.1%. Rising labor costs and slowing customer traffic across the entire restaurant industry took its toll. They guided for the full year for earnings of $2.16-$2.31, down sharply from the $2.80-$3.10 in prior guidance. Shares fell -29% on the news.

Avis Budget Group (CAR) reported earnings of $3.10 that beat estimates for $3.04. Revenue of $2.75 billion missed estimates for $2.77 billion. The company guided for full year earnings of $2.45-$2.65 and revenue in the $8.8-$8.9 billion range. Avis said the hurricanes cost them money because of damaged cars and the expenses of moving cars from other parts of the country into the hurricane areas after the storms had passed. Investors had expected increased profits as a result of the storms. Shares were knocked for 15% decline.

Competitor Hertz Global (HTZ) reports earnings on Thursday but their shares were knocked for a 17% decline on the Avis Budget news.

Valeant Pharmaceuticals (VRX) reported earnings of $1.04 compared to estimates for 90 cents. Revenue of $2.22 billion beat estimates for $2.17 billion. They guided for the full year for revenue of $8.65-$8.8 billion. Valeant said it had given up on its $1 billion bet on "female Viagra." Valeant bought Sprout Pharmaceuticals in 2015 for $1 billion and their only drug was Addyl, supposedly the equivalent of Viagra for women. I would imagine those were some interesting drug trials. After two years of trials and sluggish sales, they sold the drug rights for a 6% future royalty and had to loan the buyer $25 million. The buyer was an investor in Sprout when Valeant acquired the company. Reportedly, the drug is expensive and cannot be used in conjunction with a lot of other drugs including alcohol. Shares of Valeant rose 17% on the earnings.

Mallinckrodt (MNK) reported earnings of $1.97 that beat estimates for $1.80. Revenue of $793.9 million fell -10.9% and missed estimates for $806.7 million. Sales of specialty generics fell -21.1% to $189.1 million. Sales of Acthar Gel fell -5.6% and the company said the decline would continue in the current quarter. The company said articles in Barron's about the questionable effectiveness of the drug and articles dealing with their also questionable marketing practices had weighed on sales. Shares fell 35% on the earnings.

TrueCar (TRUE) reported earnings of 2 cents that matched analyst estimates. Revenue of $82.4 million missed estimates for $86.7 million. Cars sold rose 15% but revenue per car fell from $319 to $306. Average revenue per dealer fell 5% to $5,319. They said marketing issues were causing a decline in sales and the situation with their major partner may not recover. Shares collapsed 35%.

After the bell, Zillow Group (ZG) reported earnings of 19 cents on revenue of $281.8 million. Analysts were expecting 17 cents and $277 million. They guided for the current quarter for revenue of $274-$279 million and full year revenue of $1.07 billion. Shares spiked to $44 in afterhours but fell back to close at $40.80 and only a 60-cent gain.

Snap Inc reported revenue of $208.9 million and missed estimates for $235.5 million. Daily average users at 178 million were below estimates for 180.5 million. This compares to more than 300 million for Facebook's copycat product. The company posted a loss of 14 cents that beat estimates for 15 cents. The company said their app was hard to use and advertisers were frustrated and the price per ad fell 60% because of a transition to an auction based bidding system. Shares fell sharply in afterhours.

Lending Club (LC) reported earnings of 3 cents that matched estimates. Revenue of $154 million missed estimates for $157 million. They guided for revenue of $158-$163 million in Q4 with a loss of $3-$7 million. Analysts were expecting $173 million. Shares fell sharply in afterhours.

Fossil (FOSL) reported an expected a full year loss of $7.75-$8.30 per share compared to estimates for $5.11. They expect revenue to decline -10.5% to $2.72-$2.78 billion. Analysts were expecting $2.78 billion. For Q3 they lost 11 cents compared to estimates for a loss of 24 cents. Revenue declined from $738 million to $688.7 million and analysts were expecting $649 million. Shares fell 15% in afterhours.

The next earnings highlight will be Nvidia on Thursday after the close. This had better be a blowout after the constant gains and another new high close at $212 today or there will be a lot of pain.

On the economic front, the Core Logic Home Price index rose 7.0% for September after a 6.9% showing in August. Yes, home prices are still going up. There is nothing to see here, move along.

Consumer credit for September rose from $13.1 billion to $20.8 billion and well over expectations for $16.5 billion. That is the highest level since November 2016. Credit card spending after the hurricanes was credited with part of the gains.

The Job Openings and Labor Turnover Survey (JOLTS) showed the openings rate was unchanged at 4.0% for September. There are 6.093 million current job openings. Hires of 5.273 million rose 3.6%. Separations of 5.240 million also rose 3.6%. Quits of 3.182 million rose 2.2%. Layoffs of 1.703 million rose 1.2%. These numbers show the job market remains strong. Workers are not afraid to quit and move to new jobs because of a better opportunity.

After the bell the API inventory numbers showed a decline of 1.562 million barrels of oil, compared to expectations for a drop of -2.7 million barrels. Gasoline inventories rose 520,000 barrels compared to expectations for a decline of -2.25 million. Distillate inventories fell -3.133 million barrels compared to estimates for -1.85 million. Crude prices fell back to $57 on the news.

Crude traded at a 2-year high of $57.69 intraday on the Game of Thrones being played out in Saudi Arabia by the Crown Prince Mohammed Bin Salman, otherwise known as MBS. The prince rounded up everyone that could be a competitor to his eventual control when the king abdicates late this year or early 2018. A dozen princes are being held captive in the Four Seasons hotel while dozens of ministers, officials and even ex ministers are being held in undisclosed locations. The prince said this was a corruption sweep but everyone knows he is clearing the playing field of anyone that could question his authority. The uncertainty in Saudi Arabia and the return of the Niger Delta Avengers in Nigeria is supporting oil prices after a major short squeeze.

SAVE $50 on your EOY Subscription - ONE WEEK ONLY!

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 20 years this Thanksgiving.

Several years ago, we offered a free silver dollar with an EOY subscription. It was our most successful promotion since the Financial Crisis. We are going to repeat that again in 2017 with a specific coin this time. Each EOY subscriber will receive a genuine Morgan Dollar, which is thought to be one of the best looking silver coins ever minted. These make great Christmas presents!

Morgan Dollar

If you already know you want to renew your subscription at the cheapest price of the year then click the link below. As in past years, we are offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. The Early Bird Discount Offer expires on November 15th and the price will revert to normal.



The big cap indexes recovered from their intraday losses and returned to neutral territory. The S&P managed to fight back from a 7-point decline to close only fractionally negative. The big cap dip buyers are alive and well and primarily in the big cap tech stocks.

The S&P continues to move farther above uptrend support and horizontal support at 2,565. The S&P has now gone 493 days without a 5% decline when we normally average at least two per year. As long as the index continues to post minor gains rather than a dozen points at a time, the rally can continue. That slow process is a meltup with opportunities for orderly exits and entries without a lot of drama.

Any portfolio manager that is still holding cash going into yearend is in a panic. They are being forced to hold their nose and buy something in order to maintain their position in the manager rankings and insure a yearend bonus. They are terrified the market could suddenly correct but even more afraid of being left behind.

We are setting up for a monster decline in January. If the market makes it through the end of December without any material decline, there will be significant end of year window dressing and beginning of year window undressing.

This means minor dips should continue to be bought but this week and next is the normal post earnings depression period so there could be some volatility ahead.

The Dow recovered from a 66-point intraday drop to gain a minimal 9 points after a 9-point gain on Monday and 22-point gain on Friday. The Dow is positively creeping higher as opposed to the surge we saw at the end of October. The Dow is already experiencing the post earnings depression phase because 25 components have already reported and there is nothing to provide lift. The Dow needs a catalyst to push it higher and I do not know what that would be. There are far more chances of a negative catalyst over the next couple of weeks.

The Nasdaq was handicapped by the 250 point decline in Priceline. Despite the big decline the stock only erased 11 points from the Nasdaq 100 and the index actually closed positive. Apple, Google and Qualcomm nearly erased the Priceline drop with their addition of 10 points of gains.

The Nasdaq has been the market leader over the last two weeks with nearly a 250 point gain. That could be changing. If you noticed the trend in the earnings reports today, the majority were massive declines. The earnings lift is rapidly fading.

The breakdown in the small cap stocks could be a problem. That would indicate portfolio managers have finally decided to take some profit off the table. If the declines continue, they could rapidly worsen because there is a major air pocket under recent support.

Personally, I would welcome a dip to buy but I would not rush into the first big drop. The dip buyers are still alive and well but the selling volume has been miniscule. If a real sales trend develops, the volume could quickly overwhelm the dippers.

Maintain some cash in your account in case a real opportunity appears.

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