Volume declined to 6.53 billion shares and the least in the last five days ahead of the holiday weekend.
Volume will continue to slow as the week progresses and traders pack up their desks and head home for the holidays. With the indexes at record highs and well above established norms, there is no buying opportunity at these levels. Traders are probably hoping for a continued decline so they can establish positions for the Q1 earnings cycle.
The Dow is 4,835 points or 20% above its 100-week average. It has not been that distance away since the dot.com bubble in 2000. I get hate mail whenever I say the market is overbought but I doubt anyone can look at the Dow chart below and come to any other conclusion. The Dow has gained 6,904 points (38.6%) in the 14 months since the election. That is hardly a normal market.
On the economic front, the housing sector continues to surprise. New residential construction for November rose to 1.297 million units on an annualized basis, up from 1.256 million in October. The unseasonably warm weather was credited with the increased activity. Single-family starts rose from 883,000 to 930,000. Multifamily starts declined from 373,000 to 367,000. Single-family permits rose from 850,000 to 862,000 and multifamily declined from 466,000 to 436,000. Starts in the Western region led with a 19% increase. The South rose 11.1% with the Midwest falling -12.9% and the Northeast losing -39.6%.
The current account deficit declined from -$124.4 billion to -$100.6 billion and a 12-quarter low. The goods deficit improved from -$141.7 billion to -$134.4 billion. The investment income balance improved from $40.5 billion to $57.0 billion. The dollar has depreciated making our exports more attractive. That makes goods from American manufacturers more competitive with those from other economies. With the global economy improving, consumers in other nations are buying more from the USA.
After the bell, the API inventories showed a crude oil decline of 5.222 million barrels, to extend the large losing streak to three weeks. Analysts were expecting a decline of -3.5 million barrels. Gasoline inventories rose 2.0 million barrels and roughly in line with estimates. Distillate inventories declined -2.85 million barrels compared to estimates for a -1.33 million barrel decline. Prices rose 20 cents after the report.
The decline in crude inventories should continue for the next two weeks as refiners try to reduce inventories ahead of the property tax deadline on December 31st. Inventories will rise again in January once we are past the tax date.
Wednesday we have existing home sales but they will probably be ignored. The bigger reports are the Philly Fed Survey on Thursday and the final revision of the Q3 GDP. The reports on Friday will definitely be ignored because there will be nobody around to see them.
The earnings for tomorrow include BlackBerry and Best Buy. Thursday has Dow component Nike, Carmax, Finish Line and Accenture.
Toys-R-Us is considering closing a minimum of 100 stores because of weak holiday sales. They could close as many as 200. They operated 879 stores earlier this year. The company is in bankruptcy and closing those stores will be another hit to Mattel (MAT) and Hasbro (HAS). I reported last month that the toy manufacturers are struggling because children are not playing with normal toys as much as before. They are playing video games at earlier ages and phones and tablets can keep them occupied for hours. The toymakers have warned of falling sales and the impact of the bankruptcy. UBS said today that closing the Toys-R-Us stores was likely to benefit Target but would not even move the needle for Walmart.
Darden Restaurants (DRI) reported earnings of 73 cents that beat estimates for 70 cents. Revenue of $1.88 billion rose 14.6% and beat estimates for $1.85 billion. They guided for the full year for earnings of $4.45-$4.53, up from $4.38-$4.50. Analysts were expecting $4.44. Same store sales rose 3.1% and beat estimates for 1.56%. Olive Garden sales rose 3.8% and beat estimates for 2.3%. During the quarter, Darden added 153 Cheddar's Scratch Kitchen restaurants and 28 other net new stores. Darden bought Cheddar's for $780 million. Cheddar's stores each average $4.4 million in revenue and only slightly less than the $4.5 million from Olive Garden. Darden believes they can expand the southern chain nationwide to provide a major boost to overall revenue. They expect Cheddar's to become the number 2 brand in their portfolio. Cheddar's is known for their ribs, onion ring stacks, Spasagna, a lasagna-like brick of spaghetti and their chocolate cake. Shares exploded higher with a $6 gain.
Navistar (NAV) reported earnings of $1.43 that blew away estimates for 65 cents. Revenue of $2.6 billion easily beat estimates for $2.32 billion. They guided for the full year for revenue of $9.0-$9.5 billion compared to $8.7 billion in FY-2017. The company has reduced its inventory of used trucks by half to $200 million. They have worked down the liability from a technology mistake in 2013 to $600 million and half of the original amount. In 2013, Navistar spent a fortune on a new technology to reduce emissions and the technology failed, leaving the company with liabilities and no revenue from that technology. Shares spiked 7% on the earnings.
FactSet Research Systems (FDS) a provider of corporate financial data, reported earnings of $2.04 that beat estimates for $1.98. However, revenue of $329.1 million missed estimates for $331.2 million. They guided for full year 2018 earnings in the range of $8.25-$8.45 with revenue of $1.34-$1.36 billion. Analysts were expecting $1.36 billion and $8.16. FactSet added 65 clients to bring their total to 4,809. Client retention averaged 95%. However, the actual user count declined -250 to 88,600. Shares fell -$17.27 on the news.
After the bell, FedEx (FDX) reported earnings of $3.18 compared to estimates for $2.73. Revenue of $16.3 billion beat estimates for $15.7 billion. The company raised guidance for the full year to $12.70-$13.30 compared to analyst estimates for $12.47. FDX prior guidance was "no more than $12.80" so it appears conditions improved. The company said the tax reform could add $4.40 to $5.50 in earnings in 2018 due primarily from a revaluation of net deferred tax liabilities. They only expect a gain of $.85-$1.00 from a lower tax rate. They plan to use the money to fund pensions, increase their dividend and buyback stock. Shares gained $3 in afterhours.
Micron Technology (MU) reported earnings of $2.45 that beat estimates for $2.20. Revenue of $6.8 billion rose 71.4% and beat estimates for $6.38 billion. Gross margins rose from 50.7% to 55.1%. The company said demand for DRAM and NAND remained strong and they enjoyed a favorable product mix. They guided for Q4 for earnings of $2.51-$2.65 and analysts were expecting $2.04. Revenue guidance was $7.0 billion compared to estimates for $6.08 billion. This was an outstanding quarter and outstanding guidance but shares gained only slightly more than $2 in afterhours. I would expect them to rally further on Wednesday.
Stich Fix (SFIX) reported its first post IPO earnings and the result was not pretty. They reported earnings of 4 cents compared to estimates for 3 cents. Revenue of $295.6 million barely beat estimates for $295 million. They guided for the current quarter for revenue of $287-$294 million, which beat estimates for $287 million. The company said they expect profits to decline as they move into new categories. They said margins were already suffering from higher orders in men's and plus size clothes, due to rising shipping costs and a shortage of available inventory.
The company has 2.4 million customers that pay $20 to receive a box with 5 items. They can ship back anything they do not like and they are charged for what they keep, minus the $20 deposit. They had a 750,000 order waiting list for boxes for plus size women when they IPOed in November. Shares fell about 12% in afterhours.
Red hat (RHT) reported earnings of 73 cents that beat estimates for 70 cents. Revenue of $748 million beat estimates for $734.4 million. The company guided for earnings of 81 cents for Q4 with revenue of $758-$763 million. Analysts expected $754.7 million. They also guided for full year earnings of $2.88 and revenue of $2.91 billion. Revenue from application development related and emerging technology subscription revenue rose 44%. Overall subscription revenue rose more than 20%. The CEO said the number of deals over $1 million rose by 30% thanks to strong cross selling. Shares fell $5 in afterhours to $123.51.
Apple (AAPL) was downgraded by Nomura from buy to neutral saying the iPhone X as well as other positives are already baked into the stock price. The analyst said the iPhone x was already into late innings with the rise in average selling price already discounted by analysts. He also felt the boost from services would not be enough to offset the Q1 drag from slowing X sales. Even the expected repatriation is already priced in. The last time Apple received a down was twice in June.
Last week a Cowen analyst said more customers could be opting for cheaper versions of the iPhone rather than putting down more than $1,000 for an X. Cowen said that could be a hit to the average selling price. Several analysts were quick to rebut the Nomura downgrade saying Apple's guidance was strong and the holiday shopping season would be good for sales.
Apple is expected to announce three new phones in September including its biggest screen ever along with an X phone with a regular LCD screen instead of the OLED.
Moffet Nathanson Research warned that the bear case on Facebook was becoming clearer. They said the lack of monetization on the Messenger platform was evidence the ad load was shrinking. They do not believe Facebook can continue to grow by 50% a year. Other analysts said the lack of monetization was a plus because that was a growth opportunity. Facebook has no debt and $38 billion in cash. That gives them a lot of options and they have a lot of new features and projects on the drawing boards. Facebook guided low for the current quarter because of extra expenses they were incurring in fixing some of the existing problems and adding additional levels of security.
Citigroup upgraded Dicks Sporting Goods from neutral to buy saying they were a retail survivor. The analyst raised the price target from $28 to $35. Citi said Dick's had survived drought and desolation in the sector, which has produced multiple bankruptcies and hundreds of store closings. As a survivor, they should benefit from the lack of sporting goods retailers and attract more customers. The analyst called Dick's the Best Buy of the sector. Dick's cancelled guidance in Q3 saying earnings could decline -20%. Citi expects that guidance to be beaten. Also, the recent cold weather across the Midwest and Northeast would be a benefit because winter clothing and winter sports products have higher margins. Shares posted a minor decline after opening higher on the upgrade.
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The S&P gave back 9 points after spiking through uptrend resistance on Monday. There is no reason to believe this is the start of a bigger decline. There is no incentive to selling stocks in 2017 when taxes will be cheaper in 2018. This "should" convince investors to hold what they have currently and plan to restructure their portfolios in January.
This is where the risk comes in. Most investors will want to be invested in companies with high tax rates that will benefit from the tax reform. That is industrials, financials, consumer stocks, etc. Technology stocks have an average tax rate of 24% so their windfall should be significantly less than say a Home Depot at 34%.
If they wait until January to close existing positions they may even be able to buy their new stocks at a discount to today's prices. One investor's trash could be another investor's treasure. If we were to get a downdraft in January, I would expect it to be minor even with the huge gains we have seen in 2017. There is still too much money on the sidelines and too many people waiting on that buying opportunity that never comes.
The S&P is currently 18% above its 100-week average and the widest spread since 1997. It would take a major pullback to put is back within the normal range. That would be around the 2,450 level. On the positive side, the average is moving higher and just holding the existing gains in January could narrow the range somewhat. However, that is a weekly average and it moves very slowly. Eventually, the piper will have to be paid and another cross will appear. That could be a long time in the future.
The Dow posted only a minor decline and remains at the top of its regression channel. This could curb future gains but all we need is for 2-3 Dow stocks to catch fire and we could see another 100-point gain. The winners were lackluster today with HD the biggest gainer with a moderate $1.25 win. The Dow has only had 2 losses in 9 days so today is not likely the start of a new decline. The bulls are running into year-end and Dow 25,000 is still the December target.
The Nasdaq was the weakest link on Tuesday with only one big cap tech stock posting a gain. The uptrend resistance at 7,000 remains strong and could be a challenge to cross. It is that big round number resistance syndrome. Tech stocks have a lot of uncaptured gains for the year and there may be a lot of investors selling their winners to offset their losers for 2017 tax management.
The Russell 2000 is still fighting resistance at 1,550 and today was no different. The small caps should be positive in December but they have been struggling. If that 1,550 level can be broken, it could lift the entire market.
I believe the markets should remain mostly positive for the rest of December. The holidays are normally bullish and there is nothing fundamental on the horizon that should disrupt the pattern.
However, the government funding deadline on Friday is still a potential pothole. Senate leader Mitch McConnell said this afternoon there is "no way" there will be a government shutdown. While I would like to believe him, there are quite a few other lawmakers on both sides that are talking hard-core about forcing a shutdown. Hopefully cooler heads will prevail. I do not care if they kick the can into late January and then have their big fight. The end of year, beginning of January volatility will be over and the market will be in a better position to deal with their temper tantrums.
The trend is still up until it changes. I would continue to hold existing longs but I would not add to them at these market highs ahead of what could be a volatile few weeks.
Enter passively, exit aggressively!
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