It is not summer yet but the very low news flow was the equivalent of a lethargic summer day.

Market Statistics

The lack of any material news kept the market from selling off but there was no particular urge for buyers to chase prices higher. The yield on the 10-year treasury rose again to 3.095% but the market did not react negatively. After the big spike on Tuesday, we may be inoculated against a few days of very minor gains.


There was some good news and bad news in the economic reports. The new residential construction for April declined from 1.336 million to 1.287 million. While that is still a strong number, it will relieve pressure on the Fed to raise rates. This is not a material input to their calculations but it does count. The -3.7% decline was similar to the drop from January to February that was erased by the sharp jump in March.

Single-family starts rose very slightly from 893,000 to 894,000. Multifamily starts fell from 443,000 to 393,000 (-11.3%). Housing permits, a sign of future starts, declined from 1.377 million to 1.352 million. Single family permits rose 8,000 and multifamily permits declined by 33,000.


Industrial production for April rose +0.7% and flat with March. Analysts were expecting +0.6%. Manufacturing rose +0.5%, high tech +0.7%, nondurable goods +0.5%, manufacturing orders, ex autos +0.6%, mining and oil +1.1% and utilities +1.9%. The only loser was motor vehicles and parts, which declined -1.3%. Overall production is 3.5% above year ago levels and at a new high for this economic cycle.

Oil inventories declined -1.4 million barrels and contrary to the build of 4.854 million barrels in the API report on Tuesday. Distillates declined -0.1 million and gasoline declined -3.8 million barrels.

U.S. production hit another record at 10.723 million bpd. Refinery utilization is still relatively low at 91.1% and should be back over 95% in the coming weeks. The Memorial Day weekend kicks off the summer driving season. Natural gas inventories for last week are not released until Thursday.

Crude prices are right on the edge of a real breakout over $71.50. The tensions in Israel and the expectations for problems related to Iran and their sanctions are keeping prices high. Israel does not produce any oil but they are the flash point for numerous Middle East problems so conflict in or around Israel supports oil prices.



The calendar for Thursday only has one material report. The Philly Fed report is the most important of the regional surveys. If manufacturing is running hot in that region, it will put pressure on the Fed.


The biggest earnings report this morning was Macy's (M). The company reported earnings of 48 cents that beat estimates for 35 cents. Revenue rose to $5.54 billion and beat estimates for $5.39 billion. Same store sales rose 4.2% and well above estimates for 1.4%. The CEO said Macy's exceeded expectations across all three brands and all geographic regions in Q1.

The company guided for the full year for earnings of $3.75-$3.95, a 20-cent increase over prior guidance and well above analyst estimates for $3.61. They guided for up to a 1% decline in revenue and in line with estimates for $24.73 billion. Shares spiked 11% on the report.


After the bell, Jack in the Box (JACK) reported earnings of 85 cents on revenue of $209.7 million. Those numbers missed on both metrics with analysts expecting 86 cents and $121.1 million. Same store sales declined -0.1%. Company stores in the QSR sandwich and burger segment rose +0.9%. Average checks grew by 2.6% but the number of transactions declined by -1.7%. They repurchased $100 million in shares in Q1 and the board just authorized another $200 million buyback along with a quarterly dividend of 40 cents payable June 11th to holders on May 29th. They guided for comp sales for Q2 and full year 2018 to be flat to +1.0%. Shares declined about $3 in afterhours. The company completed the sale of the Qdoba restaurants on March 21st.


Dow component Cisco Systems (CSCO) reported earnings of 66 cents that beat estimates for 65 cents. Revenue of $12.46 billion also beat estimates for $12.43 billion. The company guided for the current quarter for earnings of 68-70 cents on revenue of $12.62-$12.86 billion, a 5% rise. Analysts were expecting 69 cents and $12.72 billion. Shares fell about $3 in afterhours.

Cisco has 4.82 billion shares outstanding and it is tough for them to move the needle on earnings per share. Competition in their sector is fierce. There are at least a dozen competitors selling equipment cheaper. Cisco is quality, everyone else is price. The CEO noted on the call that Cisco is trying to compete with its own high prices by offering more networking services and software in addition to the routers and switches.


On the calendar for Thursday is Walmart, Applied Materials, JC Penny's and Nordstrom. The list is less than inspiring.


Micron Technology (MU) shares spiked 4.6% after RBC Capital initiated coverage with an outperform rating. The analyst said Micron could rise another 50% to $80. The stock gained $2.49 to close at $56.50. The analyst said the volatility should be over and this was the best way to get exposure to DRAM and NAND markets at an attractive valuation. He said consolidation has resulted in a more rational pricing environment for memory. At the same time, the DRAM market has become more diversified than it was ten years ago with hundreds of different applications calling for different types of DRAM chips.


Jefferies downgraded 3M (MMM) due to rising interest rates and recession fears. The analyst said we were approaching the latter part of the economic cycle and profits and valuations would only decline from here. He lowered the rating from buy to hold and lowered the target price from $250 to $220. He believes the company will face "lumpiness" in its electronic display materials, drug delivery, consumer health care, energy and auto business in 2018 and 2019.


Loxo Oncology (LOXO) shares soared after the bell on news their new cancer drug led to tumor shrinkage in 69% of patients. The drug LOXO-292 was well tolerated by patients with advanced cancers. The drug targets RET abnormalities that cause cancers to grow at a rapid pace. In the trial 69% of patients with lung or thyroid cancers saw significant shrinkage of their tumors with an 83% response rate for thyroid tumors. Shares spiked $27 in afterhours.



Markets

Despite the lack of news flow, the markets tried to post a decent rebound from Tuesday's losses. The Dow rose 94 points intraday and ended with a 62-point gain. While that is not exciting in a market that has become accustomed to triple digit gains, we would gladly take a day like today 3-4 times a week.

I am tired of the monster moves and high volatility. A little boring with an upward bias would be great. The S&P posted a decent rebound gain of 11 points and never touched the 100-day average at 2,708 which should now be support. The index has to move over 2,750 before we will consider it in rally mode. If we continue to chop around below that level for several days, that would suggest the next move could be lower rather than higher. We are at a pivotal point in the market where the looming summer doldrums will weaken investor interest and that normally means a slow decline or sideways chop. Volume is the weapon of the bulls and without volume they are unarmed.


The Dow gained 94 points at its intraday high and closed with a lackluster but respectable gain of 62 points. The Dow components mirrored the index components with only three posting a change of more than $2 for the day. The Dow has strong resistance at 25,000 and decent support at 24,700. That gives us a 300-point range with the 100-day average at 24,851 exactly in the middle.



The Nasdaq has major resistance at 7,421 an that is 8 points above the intraday high. We did not reach it today. The majority of big cap tech stocks were positive but the gains were small for most. The chip and biotech sectors were positive but not bullish. They provided only limited support. We need the FAANG+BAT stocks to catch fire and power the index over that strong resistance.



The Russell was the breakout winner with a new record high close and record intraday high. The small caps are immune from the tariff woes and they will benefit from the tax cuts. The rebound from 1,600 into the record close follows the 0.0035 loss from yesterday where the index was almost perfectly flat in an ugly market. The Russell could lead the broader markets higher if it continues to post gains.


May is now half over and the last two weeks tend to be choppy as vacations, kids out of school and holidays begin to take investor attention away from the market.

I am cautiously positive today thanks to the Russell. I would be cautious about adding a lot of longs until the Dow is over 25,000 and Nasdaq over 7,421. The key level on the S&P is 2,750 but it is not as clearly defined.

Be patient and a trend will eventually appear.

Enter passively, exit aggressively!

Jim Brown

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