We saw another decent intraday rebound after the Dow lost -168 points by 10:00.

Market Statistics

Tuesday was the fourth consecutive day where the Dow gapped lower at the open and then rebounded off the lows. Support at the 23,300 level is being tested every day and this morning's dip hit 23,271. A close at that level would have been a three week low and very negative for market sentiment. The Russell 2000 also clawed its way back from a morning drop to 1,465 and 10 points under prior support at 1,475. However, the small caps posted another lower high and lower close.

The strong intraday rebounds give the appearance that the market is doing ok when the closing numbers show only a single digit gain or loss. Everyone's nerves are calmed and the overall trend is not damaged. However, every one of these big dips chips away at market sentiment. As we move farther into the post earnings depression period there is less conviction to power the next rebound.


The damage would have been a lot worse except for the support of HD, UTX, CAT and MMM. Those four stocks added about 50 Dow points while GS, AAPL, DIS and DWDP subtracted about 65 points. The A/D line on the Dow was dead even at 15/15. For quick reference in the future, the small hash market on the right side of the graphic represents the middle of the Dow list.


The damage would also have been a lot worse without the news headline at 10:35 that Mohamed El-Erian was being considered as Fed Vice Chairman. El-Erian is very well respected on Wall Street and would be a good balance for Jay Powell as Fed Chairman. The Dow rebounded about 130 points on the news but traded in a very narrow 50-point range the rest of the day.


On the economic front the Producer Price Index for October rose +0.4% compared to estimates for a +0.1% gain and a +0.4% gain in September. Goods prices rose +0.3%, services +0.5% and core goods, excluding food and energy, +0.3%. These numbers lifted the 12 months trailing inflation at the producer level to 2.7% and a cycle high. Energy prices were still blamed for the rise in the headline number with oil prices up and fuel prices still high from the hurricane impact.

Despite the rise in producer prices, there are a growing number of analysts that believe the December rate hike is no longer guaranteed. However, the Fed Funds Futures are still rating the chance of a hike at 100%.


The NFIB Small Business Optimism Index for October rose from 103.0 to 103.8 and continues to project solid optimism for the sector. The percentage of businesses that expect higher sales over the next six months rose from 15% to 21%. The percentage with current job openings rose from 30% to 35%. Those thinking now was a good time to expand rose from 17% to 23%. Some 35% said they had at least one job opening they could not fill because of a lack of qualified candidates.

This was a solid report. The NFIB was initially against the tax reform package but have switched to supporting it with the current modifications.

The calendar for the rest of the week is busy but none of these reports are expected to move the market.


The earnings calendar continues to shrink with a decline in quantity and quality of earnings reports. Dow component Cisco Systems reports after the bell on Wednesday and Wal-Mart reports before the bell on Thursday. That means we could see some Dow volatility because of earnings on Thursday but expectations are light.


Home Depot (HD) was the big earnings report this morning. The company reported earnings of $1.84 that beat the street by 3 cents. That was up from the $1.60 it earned in the year ago quarter. Revenue rose from $23.15 billion to $25.03 billion and beat estimates for $24.52 billion. Same store sales rose 7.9% system wide and 7.7% in the USA. Big ticket transactions over $900 rose 12.1%. That represents 22% of the company's sales. Home Depot said about $282 million in revenue was a direct result of the hurricanes but they also lost $51 million from store damage and costs of additional merchandise movement to different locations. They guided for the full year for earnings of $7.36 and that was 3 cents above analyst estimates. Revenue is expected to rise 6.3% with same store sales up 6.5%. It was a very good quarter.


Advanced Auto Parts (AAP) rallied 16% after reporting earnings of $1.43 compared to estimates for $1.20. Revenue of $2.18 billion missed estimates for $2.21 billion but apparently, investors did not care. Shares were down 51% year to date so expectations were minimal. They announced a dividend of 6 cents payable Jan 5th to holders on Dec 22nd.


Dick's Sporting Goods (DKS) reported earnings of 30 cents that beat estimates for 26 cents. Revenue rose 7.4% to $1.94 billion and beating estimates slightly. They guided for the current quarter for earnings of $1.12-$1.24 compared to analyst estimates for $1.10. They guided for the full year for earnings of $2.92-$3.04, up from prior guidance of $2.85-$3.05. However, they warned that earnings could fall as much as 20% in 2018 as they boost online spending in an effort to improve their E-commerce sales. Shares declined slightly on the news.


TJX Cos (TJX) reported earnings of $1 that matched estimates. Revenue of $8.76 billion missed estimates for $8.86 billion. Same store sales were flat and missed estimates for 2.4% growth. The company said the hurricanes and warm weather had impacted results. The hurricanes reduced earnings by 3 cents according to the CEO. They guided for Q4 for earnings of $1.25-$1.27 and analysts were expecting $1.27. Same store sales are expected to be 1-2% and estimates were for 2.7% growth. Shares fell -4% on the news.


Beazer Homes (BZH) reported earnings of $1.03 on revenue of $665.5 million. Estimates were 53 cents and $647.85 million. I am not sure if the $1.03 and 53-cents are apples to apples comparisons. That seems like an enormous beat but it was not reported that way. Adjusted EDITDA rose 14.4% to $178.8 million. Homebuilding revenue of $665.5 million rose 6.2%. Home deliveries of 1,904 homes rose 2.6%. The average selling price rose 4.6% to $349,500. Homebuilding gross margins rose 17.0%. New orders declined -2.3% to 1,315 (hurricanes). Cash at the end of the quarter was $292.1 million. Total backlog of 1,855 homes rose 2.0% to $665.8 million. Shares rallied to a new 3-year closing high.


After the bell, IBM shares dipped to $146.37 after news broke that Warren Buffett had cut his stake in the company by 32% from 54.1 million shares to 37 million. This was at the end of the September quarter and disclosed in the recent SEC filing. That reduced his stake from 81 million shares at the end of 2016. Shares rebounded from the headline drop to close at $147.91. This is new news but the trades happened in Q3.

Buffett added to his stake in Apple with the purchase of 3.9 million shares to bring his total to 134 million. He also bought 679 million shares in Bank of America.


Apple shares declined slightly in afterhours on a new rumor about production delays with the 3D sensors. This has been a persistent rumor since production began many months ago. Adding to this was news that Foxconn, the company that assembles the phones for Apple, posted a 39% decline in profits due to later than expected shipments because of a component shortage. Rumors are already flowing about features on the September 2018 iPhone updates. Reportedly, there will be a 6.46 inch display option for the iPhone X compared to the current 5.8 inch screen. There are reportedly going to be two "high end" iPhones that will be a successor to the model X. All new phones will have the TruDepth camera systems.


Buffalo Wild Wings (BWLD) shares soared after PE firm Roark Capital made an unsolicited acquisition offer of $150 per share or $2.3 billion. Chicken demand has been hot recently and chicken prices have been rising steadily. This has been squeezing margins for places like BWLD and Wingstop (WING). Roark already has multiple restaurant chains in their portfolio including Arby's Auntie Anne's, Cinnabon, Carl's Jr, Hardee's, Corner Bakery, Jimmy John's and many others.


Wal-Mart (WMT) said it was teaming up with Lord & Taylor and will create a Lord & Taylor store on Walmart.com. The company said many of their customers were looking for higher end merchandise and they were going to create a "higher end destination" for L&T. How this will work is still unknown but I would bet that other retailers also approach Wal-Mart about this same "store within a store" online concept. They will not be selling L&T merchandise in their retail locations.


The API inventory report showed a build of 6.513 million barrels and analysts were expecting a decline of -1.4 million. Gasoline inventories rose 2.399 million barrels compared to estimates for a -1.1 million barrel decline. Distillate inventories fell -2.527 million barrels and analysts expected a decline of 500,000 barrels. This coupled with the IEA cutting global demand forecasts for 2018 caused a huge -3% decline in crude prices. This also weighed on the market as energy equities declines sharply.



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Markets

Some analysts believe the "corruption sweep" in Saudi Arabia could be partially responsible for the weakness in the market. There have been short periods of significant selling in multiple world markets including the USA as we saw this morning. On Friday, there were four million ounces of gold sold in about a 10-minute period. They theorize the asset freeze in Saudi Arabia has caused cash flow problems and some Saudi investors are scrambling to raise cash. There was some talk that other Middle East sovereign wealth funds may be raising cash on worries that a war could breakout between Saudi Arabia, Iran and others. With the blockade of Qatar, the Iran proxy war in Yemen, saber rattling over Lebanon, the bombing of the pipeline to Bahrain and heated words flying all around the region, there could be some reasons to reduce global investments and raise cash. We will never know if this is true but sometimes rumors are just as good a reason to sell as headlines.

Asian markets are declining overnight and the S&P futures have been down as much as 10 points in recent trading. They have stabilized around -7.50 but there is a lot of darkness before morning. There are multiple reasons why the markets could be down but I do not have time today to cover them all.

The Saudi Arabia factor could be one that is depressing the Asian markets. Also, Chinese economic data was weak this morning and that could be another reason. Since most of the overseas markets have had huge gains over the last several months, this could be simple profit taking.

In the US, the tax debate is running 24/7 and it seems like every day we get some new interpretation of the current rough draft of the proposals. The senate is currently marking up their bill and we learned today there are 355 amendments that have been presented. This is going to be a hotly contested mishmash of everyone's idea of trade offs and methods of payment. The eventual concoction will be a witch's brew of hundreds of ideas both positive and negative.

The head of the house finance committee said today they were committed to getting the house and senate bills passed, moved through the conference committee and to the floor for an actual vote before the holidays. Unfortunately, there are only about 14 days when Congress will be in session between now and the holidays. Getting a major tax reform package passed by December 15th is going to be next to impossible. There is also the budget battle and debt ceiling deadline on December 8th. Ryan said they would probably punt that into 2018 with a continuing resolution to keep from cluttering up the potential for the tax vote.


The challenge for the market is the daily talking points out of both houses of congress. Every reporter is jumping at every chance to take a 5-sentence sound bite directly to the airwaves with their own interpretation of what it means.

This is going to be the Washing version of the game telephone where everyone tells the next person in line something and then they pass it to the next person and by the time it gets to the end it is nothing like the original content.

The market is going to have to live with extreme political uncertainty for the next four weeks. That in addition to the post earnings depression cycle, suggests the markets could remain volatile.

In the last two weeks of November in 2016, the S&P lost 69 points on post earnings depression and tax loss selling. I am hoping we do not get a repeat.

It has been 500 days since the S&P has seen a 5% decline. Today that would be 129 points. We typically average two 5% declines a year.

Investors have been pricing in a drop in the corporate tax rate to 20%. That is believed to add $15 to S&P earnings and 270 S&P points if it occurs. Most analysts believe some of those gains have been pulled into 2017 and would be immediately erased if the tax bill fails. Wells Fargo said on Monday they expect a 120-150 point decline at any time now and should the headlines on taxes turn negative it could be immediate. The senate version of the bill postpones those tax cuts until 2019 and that news is what crashed the market last Thursday.

The S&P retested support at 2,565 and rebounded to only lose 6 points for the day. The index is only 16 points away from its high and so far, this is just a normal consolidation pattern.


The Dow is consolidating in a sideways pattern until support at 23,300 fails. The index is only slightly below its high close of 23,563. That is just over a 1% decline and definitely nothing to be worried about. However, if that support fails, there is a huge air pocket down to 22,275. The dip buyers are alive and well and as long as the intraday rebounds continue, the market will be fine. If we break support and start closing on the lows of the day, that is when we should be worried.


The big cap tech stocks were evenly mixed today but the Nasdaq declined 19 points. The index is respecting uptrend support and we could lose another 150 points and maintain the current positive trend. It would be painful but it would only reinforce the trend over the last year of the triple digit dips every 4 weeks.



The biggest problem remains the small caps. The Russell 2000 made a lower close and I would not buy this chart. This chart is suggesting a continued decline and there is a lot of air below the current level and real support.

The Russell typically leads the market both higher and lower and this weakness is definitely a negative indicator for market sentiment.


With the global markets experiencing volatility, our small caps leading to the downside and the tax battle underway in Washington, there is likely to be a catalyst in our future. Unfortunately, that catalyst may be negative. I would not be a buyer of this dip at this time. Maybe in a day or so we will see a reversal and the internals will improve. There is always another trading day if you have capital in your account. Be patient, good things come to those who wait.

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

I sincerely apologize for the lateness of the newsletter tonight. We had some technical issues with a server this evening. Never a dull moment!

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 


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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!

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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 after November 14th and the price will revert to normal.

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