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Daily Newsletter, Tuesday, 5/1/2018

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Afternoon Delight

by Jim Brown

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The sudden market reversal at 1:30 turned a dreary day into a reason for hope.

Market Statistics

There was no obvious reason for the sudden reversal at 1:30 but nobody in the bullish camp is complaining. Short sellers were forced to cover and the Dow rebounded nearly 300 points from the -354 low and the S&P rebounded 30 to close with a gain. Unfortunately, the S&P is still well below the recent resistance at 2,675 but it is far better off than it was a 1:PM.

Adding to the gloom after the open was a sharp decline in the ISM Manufacturing Index. The Index for April declined from 59.3 to 57.3 and the second consecutive decline. The drop put the index at the lowest level since July. However, anything above 50 still represents economic expansion. The respondents mentioned supply problems and tariff concerns as the reasons for the weaker responses.

New orders declined only slightly from 61.9 to 61.2. Order backlogs rose from 59.8 to 62.0 because of the supply constraints. Prices paid rose from 78.1 to 79.3 and the highest level in seven years. Employment declined slightly from 57.3 to 54.2, more than likely related to the supply constraints and worries over the potential business impact from tariffs. Production fell from 61.0 to 57.2 as a result of supply constraints. Supplier deliveries posted their 19th consecutive month of slowing deliveries.

Customer inventories rose from 42.0 to 44.3 but this was still the 19th consecutive month of low inventories. Twelve industries reported customer inventories as too low.

Construction spending for March declined -1.7% to $1.28 trillion and missed estimates for a +0.5% rise. Private spending declined -2.1% led by a -3.5% drop in residential spending and -0.4% in nonresidential spending. Public spending was flat at $297.2 billion. Construction spending is still up 3.6% year over year.

Vehicle sales for April came in at 17.15 million, down slightly from 17.5 million in March but ahead of estimates for 17.0 million. Passenger car sales fell from 6.48 million in April 2017 to 5.42 million. Light truck/SUV sales rose from 10.56 million to 11.72 million. The average vehicle price was $32,544 with average incentives of $3,700.

After the close, the weekly API inventory report showed a build of 3.427 million barrels compared to estimates for a 739,000 rise. Gasoline inventories rose 1.6 million and three times the estimate. Distillate inventories declined -4.08 million barrels and three times the expected 1.36 million barrel drop. Crude prices fell a few cents on the news but they were already down nearly $2 from Monday's $69.34 high.

The two big reports for Wednesday are the ADP Employment with expectations for a gain of 200,000 jobs and the FOMC monetary policy update. No changes are expected in Fed policy until June but analysts will always be alert for subtle changes in the statement that could indicate bigger changes in the future.

Tesla and MasterCard highlight the earnings calendar for Wednesday. The last Dow component to report this week is Dow DuPont on Thursday and Alibaba is the highlight on Friday. After this week, nearly 400 S&P companies will have reported.

The big dog on the tech calendar was Apple and they announced earnings after the close. The company reported earnings of $2.73 that beat estimates for $2.67. Revenue of $61.1 billion rose 16% and narrowly beat estimates for $60.9 billion. They sold 52.2 million iPhones and just below revised estimates for 53.0 million. This compares to the 51.0 million in the year ago quarter and down from the 77.3 million in the December quarter. Revenue from phone sales was $38.0 billion and missed estimates for $39.1 billion. Services revenue rose 31% to $9.1 billion and beat estimates for $8.4 billion.

After analysts worried about the weakness in iPhone X sales, Apple said "customers chose iPhone X more than any other iPhone model every week in the quarter. Of course, that is somewhat misleading. Apple has multiple models of each generation still for sale and has more models currently for sale than at any point in iPhone's history. This lowers the bar for "most popular iPhone model." Apple did grow revenue by 20% in China and that was a big plus.

Apple sold 9.1 million iPads, less than the 9.17 million expected. They also shipped 4.1 million Macs compares to 4.14 million expected. They announced plans to buy back $100 billion in stock and increase dividends 16% to 73 cents per share. Since 2012, Apple has returned $275 billion to shareholders in dividends and buybacks. They did not put a date on the buyback program saying it was "very large" and they want to do it efficiently. They will complete their original $300 billion capital return program this quarter, three quarters earlier than originally announced. They will provide an update to their full capital return program within 12 months.

Apple currently has $267.2 billion in cash overseas. For tax reasons that cash is reportedly held on the island of Jersey in the English Channel. The island charges no taxes on corporate profits and has a population of around 100,000. That sounds like the basis of a new script for the Oceans 11 crew.

Shares gained $3.84 in the regular session to close at $169 and gained another $6 in afterhours to close at $175.75. That put shares back at initial resistance with secondary resistance at $180.

Snap Inc (SNAP) reported a loss of 17 cents that matched estimates. Revenue of $230.7 million missed estimates for $244.5 million. The company also warned that year-over-year revenue growth rates would "decelerate substantially." The blamed the revenue decline on lower ad prices. SnapChat ad prices had already declined 65% due to lack of interest by advertisers and competition. They also blamed the decline on the implementation of their auction system for ad purchases. Daily active users of 191.0 million also missed estimates for $194.2 million. Average revenue per user of $1.21 missed estimates for $1.27. Shares fell -$2.25 in afterhours.

Gilead Sciences (GILD) shares declined -$4 in afterhours. The company reported earnings of $1.48 that missed estimated for $1.67. Revenue fell $1.42 billion to $5.09 billion and missed estimates for $5.4 billion. The company reiterated their full year outlook at $20-$21 billion and analysts were expecting $21.27 billion. Sales of Hep-C drugs Sovaldi and Epclusa declined 59% to $1.05 billion and beat estimates for $1.02 billion. On the positive side, sales of Yescarta hit $40 million and beat estimates for $17 million. They acquired that drug from Kite Pharma in 2017.

Shares of Shutterfly (SFLY) rallied $8 or 10% in afterhours. The company reported a loss of 83 cents that beat estimates for a loss of 95 cents. Revenue rose 4% to $199.7 million and beat estimates for $192 million. The company updated guidance for the full year to revenue of $2.01-$2.06 billion and earnings of $2.83-$3.28.

Yum China (YUMC) reported earnings of 72 cents that beat estimates for 53 cents. Revenue of $2.2 billion rose 15% but missed estimates for $2.4 billion. Same store sales rose 3.3% led by a 5.0% rise at KFC. Their new loyalty program at KFC now has more than 120 million members while the Pizza Hut program has 40 million. Shares fell $3 in afterhours on the revenue miss.

Before the bell Dow component Merck (MRK) reported earnings of $1.05 that beat estimates for $1.00. Revenue of $10.04 billion missed estimates for $10.09 billion. Hep-C medication Zepatier saw weak sales because of the same increased competition that was also impacting Gilead. The company narrowed revenue guidance for the full year to $41.8-$43.0 billion. The company narrowed and raised full year earnings guidance to $4.16-$4.28. Shares fell slightly on the news.

Pfizer (PFE) reported earnings of 77 cents that beat estimates for 74 cents. Revenue of $12.91 billion rose slightly but missed estimates for $13.15 billion. Declining sales of Viagra due to the patent expiration and introduction of a rival drug to Enbrel, caused the revenue weakness.

Under Armour (UA) posted adjusted earnings of zero compared to estimates for a loss of 5 cents. Revenue of $1.19 billion beat estimates for $1.12 billion. The company reiterated guidance for full year revenue growth at a low single digit rate, suggesting a 5% decline in North America and 25% growth internationally. Shares posted a minor gain on guidance that were less bad than expected.

Facebook (FB) held its F8 developers conference today with Mark Zuckerberg giving the keynote speech. One announcement that set the market on fire was the launch of a dating service. The new service will match people with others they are not already friends with and users can build a dating profile which friends will not be able to see. Mark said the service would be to build long-term relationships, not just hook-ups. (Good luck with that.) The service will allow links to events advertised on FB and allow users to connect with prospects that share the same interests. Users will be able to communicate via private text messages, separate from Messenger or WhatsApp. Zuckerberg said there were more than 200 million users on Facebook that list themselves as single. Clearly, the majority of users have opted to not share a classification. Facebook shares gained $1.80 but the real movement was in Match.com.

Match Group (MTCH) shares fell -22% on the potential for Facebook to disrupt the dating site sector. With Facebook's 2.1 billion users, they already touch nearly every single person with a smartphone. It will take a while for FB to develop any scale but it could ramp fast once the application launches.

The dollar index has exploded higher with a close near 92.50 and a four-month high. The rise in the dollar is pressuring commodities with gold falling to a four-month low just above $1,300.


The sudden surge in the market at 1:30 is being attributed to the normal Fed Drift but I am not a believer. The drift is normally a positive market the day before a Fed decision. In theory, it would have applied to the entire day.

I think there is a better chance the rebound came on short covering in the chip sector ahead of Apple earnings. Chips had been down -6% in recent days and were up all morning even though the Dow was down as much as -355. The already positive sector surged at 1:40 as soon as the S&P started to rise. It is hard to apply cause and effect on a series of potentially unrelated events but I guarantee you that once the rebound began it was the chips that powered the Nasdaq.

As an example, Skyworks Solutions (SWKS), a major Apple supplier, surged nearly 5% today after a major decline over the last month on the Apple production rumors. There were no news headlines on Skyworks to power the rebound.

The S&P rebounded about 30 points from the lows but that only gave it a 6-point gain. The index remains well below the strong resistance at 2,675. Unfortunately, despite the Apple earnings and afterhours rally, the S&P futures are down more than 5 points as I write this.

The Dow retested for the third time in six days new support at 23,850. The nearly 300-point rebound was encouraging but the chart is still bearish. We sometimes get caught up in the day-to-day and intraday movements and do not focus on the longer-term picture. The long-term trend is bearish but we are nearing the lows from the last dip. If there is going to be a material rebound it should appear from above the 200-day average, currently at 23,727. The last ditch support would be 23,500 but there are no such things as triple bottoms or tops. Normally the third time a major level is tested, it fails and a breakout/down appears.

The Dow needs to move back over 24,700 or even 25,000 before we can start breathing easier about a rally.

The Nasdaq fell to 7,036 intraday before the rebound began. The index moved back above 7,100 but it is not out of the woods yet. The index needs to move well over 7,200 before any price chasing will begin.

The Russell 2000 sank to a three-week intraday low before rebounding back into positive territory. The index closed right at long-term resistance at 1,550. The Russell is lagging the tech sector but at least it is not declining like the Dow.

I continue to recommend caution about adding long positions. Today's afternoon rebound was more than likely short covering ahead of the Apple earnings and that is not lasting support. That was a time dependent event which has now passed.

There is the potential for the Apple gains to lift the tech sector but the Dow and S&P futures are negative and the Nasdaq futures are up only about 12 points. With Apple closing the evening session up 6 points, that equates to roughly 42 Dow points. That is hardly a giant lift to that index.

Be patient a trend will eventually appear.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Direction Change?

by Jim Brown

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Editors Note:

The nearly 300-point rebound in the Dow and the 95-point reversal in the Nasdaq is important. The Dow tested new support at 23,850 for the third time in five days and rebounded strongly from that level. The negative close and the intraday low are still lower highs/lower lows but this could be a turning point thanks to Apple's earnings beat and nearly 10 point initial spike in the afterhours session. If this holds into Wednesday it could trigger a lasting short squeeze in techs.


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In Play Updates and Reviews

Never Short a Dull Market

by Jim Brown

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