The markets tripped after opening at news highs and performed an embarrassing face plant.

Market Statistics

The Dow gapped open this morning to 26,086 (+282 points) and almost 100 points over the 26,000 level. That excitement lasted until about 10:00 when sellers appeared. The index fell -383 points from its intraday high to the intraday low but finally found some traction to close almost flat. That was a whopping -1.5% decline intraday. The Nasdaq fell -107 from its high. The Dow Transports fell -253 points before rebounding slightly to close with a -146 loss. The Biotech Index fell -151 points before rebounding to close down -98. It was not a good day in the market but it could have been worse. The Dow almost rebounded to positive territory and damage to the big cap indexes at the close was minimal.

Boeing was the biggest gainer at the open with an $11.52 spike that added 76 Dow points. When Boeing rolled over to drop -$16.40 from its highs it erased -108 Dow points. I have remarked several times that once Boeing's rocket ride ends, the Dow is going to pay the price.

Helping to lift the Dow at the open was earnings from UnitedHealth (UNH) and Citigroup (C). UNH reported earnings of $2.59 ($3.62 billion) compared to estimates for $2.50. Revenue of $52.06 billion beat estimates for $51.52 billion. For the full year of 2018, UNH guided for earnings of $12.30-$12.60. That is up from prior guidance of $10.55-$10.85. Analysts were expecting $11.47 for 2018. In addition to the regular earnings above, they posted a $1.22 gain related to an adjustment of their net tax-deferred liability as a result of tax reform. The company projected cash flow from operations of $15.0-$15.5 billion.

Total enrollment rose from 48.59 million to 49.05 million. Commercial policy enrollment rose from 29.87 million to 30.58 million. Medicaid and Medicare enrollment rose from 13.79 million to 15.58 million. The company's effective tax rate over the past five quarters was 40% according to Morgan Stanley. MS is projecting an earnings increase in 2018 of $1.80 per share as the result of taxes. UNH has beaten earnings for nine consecutive quarters.

Citigroup (C) reported adjusted earnings of $1.28 that beat estimates for $1.19. Revenue rose 1% to $17.3 billion. GAAP results were a loss of $7.15 because of a $19 billion charge for deferred taxes under the new tax reform plan. Citi had previously estimated it at $20 billion. They also took a $3 billion charge for foreign earnings it will repatriate to the US. Even after the charges, Citi will have $21 billion in tax credits remaining on its balance sheet. They expect their effective tax rate in 2018 to be 25% and then decline in 2019.

If you exclude all of those non-cash numbers Citi earned $3.7 billion in Q4. Because of the lower tax rate, they are still on plan to return $60 billion to shareholders over the next three years.

Shares were up slightly after the report. Citi is not an investor favorite but the stock has been rising steadily.

Comerica (CMA) reported earnings of $1.28 that rose 28% and beat estimates for $1.21. Their net interest income rose 19.8% to $545 million. They took a non-cash charge of $107 million to adjust their deferred taxes under the new law. Revenue of $830 million beat estimates for $819.6 million.

After the bell, Boeing and Adient (ADNT) announced a joint venture to build airplane seats. Boeing said passenger seats have been a persistent challenge for customers through the years and they were partnering with Adient to resolve these problems and help address constraints in the market. The seats will be available for new planes as well as retrofit into older planes. Adient is primarily a seat maker for automobiles. The joint venture plant will be located in Frankfort Germany. Adient will have 50.1% stake and Boeing 49.9%. Adient shares were highly volatile and closed down $2 in afterhours.

CSX Corp (CSX) reported adjusted earnings of 64 cents that beat estimates for 56 cents. Revenue of $2.86 billion missed estimates for $2.88 billion. The company reported a $3.6 billion tax reform benefit and a $10 million restructuring charge. Shares closed down about 65 cents in afterhours. The company is struggling in its current restructuring program. The prior CEO that began the program died unexpectedly only 8 months into it. Investors are unsure how the new CEO, Jim Foote, will complete the plan. They have admitted they lost some customers because of the change to a tighter regular schedule rather than operating around the schedule of their major shippers. Rail yard closures have triggered persistent service disruptions. Foote has a big task by taking over in the middle of an unpopular program.

Juno Therapeutics (JUNO), which was a position in OIN until today, broke support intraday and stopped us out. After the bell, a story broke that Celgene (CELG) was in talks to acquire them. Shares rebounded $20 in afterhours. Both companies have partnered on cancer treatments in the past and it would be natural for them to merge. They are both working on CAR-T drugs that teach the immune system how to fight cancer cells. Recently Gilead Sciences (GILD) paid $12 billion for Kite Pharma to get their CAR_T technology. I need a drug for depression after bring stopped out.

Interactive Brokers (IBKR) reported earnings of 43 cents that rose almost 500% with revenue doubling to $515 million. Estimates were for 39 cents and $399 million. Customer accounts rose 25% to 483,000 and customer equity rose 46% to $124.8 billion. Great earnings but shares fell $2 in afterhours.

There were no economic reports of note on Tuesday.

The NY Empire Manufacturing Survey for January came in at 17.7, down just slightly from 18.0 but it was the lowest reading since July. New orders declined from 19.0 to 11.9 but backorders rose from -8.7 to +4.3. Employment took a significant hit from 22.9 down to 3.8. This report is showing seasonal issues and it was ignored.

Tomorrow has a full slate of events with the Fed Beige book the most watched. For the rest of the week there is nothing that is expected to move the market.

The potential government shutdown on Friday is the biggest hurdle. With both sides digging in behind their verbal fortifications and appearing to be moving farther apart than closer together, the odds of a shutdown are growing. The other option is another continuing resolution to kick the can down the road into February and buy them another month of time to try and whittle away at the demands from the other side.

Earnings on deck for Wednesday include Bank of America, US Bank, Goldman Sachs, Schwab and Alcoa. Goldman could provide the most volatility as a Dow component.

Bitcoin fell off a cliff today with the price dropping from $14,000 to almost $10,000 intraday. Those with dollar signs in their eyes back at $19,000 are probably having a rough day if they have not yet sold.

There is always hope. Kay Van-Peterson, an analyst at Saxo Bank, initially projected bitcoin to reach $2,000 in 2017. At the time, it was $900. She turned out to be spectacularly right. Today she said bitcoin could rise to between $50,000 and $100,000 in 2018. Hey, she won the lotto once and now she is going for the Powerball jackpot. She said 50% pullbacks are healthy because it creates additional buying from people that are not traders and will hold for a longer-term investment. At the end of her piece, she did qualify her targets saying it could take ten years for it to reach $100,000. She is not alone. Julian Hosp, co-founder of TenX is projecting $60,000 in 2018 but said it would have to crash first. Dave Chapman, managing director of Octagon Strategy, a coin-trading firm, said bitcoin actually could hit $100,000 in 2018. There are definitely a lot of opinions from zero to $100,000 and I am projecting a price somewhere in between. I think I am safe in my bet.


It was not just the major indexes selling off today. There was confirmation of growing market weakness in a couple of other sub indexes. The Dow Transports ($TRAN) touched a new high intraday but then crashed to lose -147 for the day. The Dow Transports are seen as a leading indicator for the Dow Industrials. For the transports to decline so sharply is a warning sign. However, they were significantly over extended and they were due for a rest. The question is where that rest will end.

The Biotech Index ($BTK) closed at a new high on Friday and lost -98 points or -2.2% on Tuesday. The JP Morgan Healthcare Conference is over and that could have taken some of the buyers out of the market. However, the biotechs are a major component of the Nasdaq and the Russell and a continued correction in that sector is going to weigh heavily on those indexes. This is another canary in the coalmine to watch for the rest of the week.

The S&P hit 2,807 at the open before falling 39 points to the low of the day. The rebound only recovered 8 of those points. This was far from bullish. The low from Friday was 2,769 and the index hit that level at the lows today. That is the red line indicator for a reversal. If the S&P closes below Friday's low, there could be stronger selling ahead. Support should be in the 2,750 range followed by 2,700.

The Dow fell -383 points intraday from the high to the low before recovering slightly to end just barely negative. If the Dow declines further it should find support at the prior uptrend resistance, which is about 25,500 for the next couple days. The index remains very overbought and is at risk. That does not mean it cannot go higher. We are living on borrowed time and it is eventually going to experience some profit taking.

I wrote over the weekend that I expected the real selling to appear in expiration week in February. I also wrote that we could see some stagnation of the current gains because the index is so overbought. We may not go significantly lower until after the majority of the S&P report earnings but we may not go significantly higher either.

The Nasdaq is also overbought and that should come as no surprise to anyone. However, the Nasdaq has a history of regular declines for profit taking every 2-3 weeks for the last six months. It is due since it has been up for two weeks as of today. I wrote over the weekend I would not be surprised if the decline did not come for two more weeks until after the major big cap tech stocks reported earnings. Investors are always eager to hold those stocks in the graphic below in hopes of a big post earnings blowout. Time will tell if that is the right strategy this quarter.

The Russell 2000 posted the largest percentage decline at -1.2% and that is probably related to the drop in the biotech sector. The index has failed twice at the uptrend resistance and I doubt we are going to just surge through that level this week. Support is 1,550 and prior resistance.

The futures have been down sharply and up sharply in afterhours and now they are just slightly positive. I see no reason to rush into the market. The decline in individual stocks was not enough to create any bargains and the option premiums have inflated because of the volatility. I would recommend buying a real dip if one appears. Until then it is a game to be watched from the sidelines. I never recommend buying new high breakouts on the market. That is a fool's errand in most cases. Today's spectacular reversal is a red flag until proven otherwise.

The pending government shutdown could give us a new entry point if it occurs. A can kick down the road could relieve the cloud over the market until after earnings and that would be positive in the short term.

Enter passively, exit aggressively!

Jim Brown

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