The market rolled over not for any material reason but mostly low volume heading into the holiday weekend.
As I have said many times, volume is a weapon of the bulls. When volume is weak, sellers tend to gain an advantage. It takes far less conviction to be a seller than it does to be a buyer. Volume today was 6.1 billion shares and while light, it was still more than the 5.8 billion on Monday in the big short squeeze. There was no follow through on Monday and today was just an extension of that lack of interest. There was $1.2 billion in sell on close orders and without any buyers to suck up the sell volume, the market closed near its lows.
There were excuses being made that a Trump comment about the Korean summit now only a 50:50 chance of happening as a reason for selling. I completely disagree with that. The market does not care what happens with North Korea today. That may change depending on the outcome of any summit but today those headlines are just noise.
There were analysts blaming the decline on another Trump comment on China. Reportedly, he said he was not happy with the recent trade talks and wanted a more specific agreement to target the $200 billion he wants to remove from the trade deficit. He also downplayed a potential deal to rescue ZTE as part of the trade agreement. He said any rescue package could contain a fine of $1.3 billion or more, new management, new board, stringent trade rules and oversight and a requirement to buy billions in components from U.S. companies. Of course any deal to rescue ZTE is going to find opponents in Congress.
I believe some of the market weakness was due to the comments on the weak China trade deal but mostly it was just a weak market.
The major indexes struggled last week. The big short squeeze on Monday came on low volume and the Nasdaq did not really participate. If you look under the market hood, the engine is sputtering.
There were no material economic reports to stir the market today. The Richmond Fed Manufacturing Survey for May came in very hot, rising from -1 to +16 but nobody got excited. The new orders component rose from -9 to +16 and the backorders rose from -4 to +7. While those numbers seem really strong, the April numbers had taken an unexpected dip that was severe. For instance, the gap between new orders and inventories fell from +12 to -24 in April and rebounded to +8 in May. It was the April dip that was unexpected, not the May rebound.
The employment component rose from 12 to 18. The internal components suggest there will be further improvement in the June report.
After the bell the API crude inventory report showed a decline of -1.3 million barrels compared to estimates for -1.567. Gasoline inventories rose 980,000 and analysts were expecting a -1.388 million barrel decline. Distillates declined -1.3 million barrels and in line with estimates.
Crude prices declined only slightly in the regular session after some OPEC comments that they would be willing to produce more to offset any supply shortage as a result of the decline in Venezuela and the impending sanctions on Iran. Normally that would have caused a bigger decline but investors are sticking with their abnormally high long positions.
Tomorrow we have the FOMC minutes and new home sales. With builders getting crushed after earnings it will be even more important for positive home sales numbers.
The FOMC minutes are always important especially since the Fed is in a rate hike cycle. Those minutes take on more importance in this environment.
There are very few earnings on tap for Wednesday. L Brands, Lowe's, Target and Net App are the highlights.
Toll Brothers (TOL) reported a 17% rise in revenue to $1.59 billion. GAAP earnings were 72 cents and a penny below the year ago number. Adjusted earnings were 79 cents and beat estimates for 76 cents. Analysts were expecting $1.57 billion in revenue. Guidance was weaker than expected and shares were crushed. Orders rose 6.2% to 2,666 homes. Gross margins fell from 24.3% to 22.5% and costs rose 20.5% to $1.29 billion. The average price of a home rose from $832,400 to $847,900. The number of homes sold rose from 1,638 to 1,886.
Kohl's (KSS) reported earnings of 64 cents that beat estimates by 15 cents. Revenue rose 3.4% to $4.208 billion and beat consensus for $3.951 billion. Same store sales rose 3.6% and beat estimates for 2.7%. The company guided for full year earnings of $5.05-$5.50, up from $4.95-$5.45. Analysts were expecting $5.29. Shares fell -7% after the conference call after the company warned that a friends and family promotion in Q1 pulled sales forward from Q2 and therefore comps could be weak in Q2.
TJX Companies (TJX) reported earnings of 96 cents that missed estimates for $1.02 but there was a 17-cent tax benefit exclusion. Revenue of $8.7 billion rose 12% and beat estimates for $8.5 billion. Same store sales rose 3% to beat estimates for 2.5%. They raised guidance from $4.00-$4.08 to $4.04-$4.10. Including tax benefits, earnings are expected to rise 18% to 20% to $4.75-$4.83. For Q2 they expect $1.02-$1.04 and comps of 1% to 2%.
Hewlett Packard Enterprise (HPE) reported earnings of 34 cents that beat estimates for 31 cents. Revenue rose to $7.47 billion and beat estimates for $7.39 billion. They guided for Q2 for earnings of 35-39 cents and $1.40-$1.50 for the full year. Analysts were expecting 36 cents and $1.41. Shares were unchanged in afterhours.
Red Robin Gourmet Burgers (RRGB) reported earnings of 69 cents that missed estimates of 76 cents. Revenue of $421.5 million also missed estimates for $427 million. They guided for Q2 for earnings of 55-75 cents and analysts were expecting 75 cents. Shares fell $9 in afterhours.
Autozone (AZO) reported earnings of $13.42 compares to estimates for $12.90. Revenue of $2.66 billion missed estimates for $2.71 billion. The earnings included tax benefits from the new laws, which inflated them suggesting an actual miss. The company blamed it on a very "cold and wet spring through March." Performance improved significantly in April. Investors were not optimistic and shares fell -$63.
Micron (MU) was the big winner after raising guidance and announcing a $10 billion stock buyback that would see the company buying back 16% of its shares. They also announced a new quad level (QLC) NAND chip that is 33% faster than the current TLC NAND. Micron QLC based SSD drives positions Micron as the leader in high capacity, low cost, performance sensitive drives. They announced this in cooperation with Intel. The two companies announced earlier this year they would be dissolving a partnership once the QLC NAND was released. Intel said it had a deal with a Chinese backed government owned company to manufacturer the chips using state of the art Intel technology in China. This is not going to go over well with President Trump. Micron shares rallied $3.55 on the news.
It was actually a very quiet day in the markets. Earnings news was limited given the light calendar and company news has been in a lull the last couple of weeks. If you were interested in the Zuckerberg grilling in Europe that could have take some of your day but traders are over that chapter in Facebook history.
The challenge for the market was simply low volume and lack of bullish conviction. The weakness over the last 6 days has not changed and neither has the outlook. The rebound from the early May lows appears to have run its course and with firm resistance on the big cap indexes, it may take a new series of headlines to bring investors back to the markets.
The S&P gave back most of Monday's gains and closed in the middle of its recent range. The close on the S&P was below Monday's intraday low giving us an outside day. Support is still the 100-day at 2,709 and resistance at 2,750. Nothing has changed in the last nine days. A breakout in either direction could produce a new trend.
The Dow fell back below resistance at 25,000 and 24,850. This was not a good day for the index. Several of the stocks that rallied strongly on Monday as a result of the Chinese trade deal, including BA, CAT, MMM, etc, gave back all their gains today on the Trump comments about not being happy with the outcome of the trade meeting.
If the Dow drops below the 24,650 support from last week, it could turn ugly.
The Nasdaq tried to breakout over 7,421 once again but failed again. The index only gave back 15 points and that is somewhat bullish given the Dow's 200-point intraday slide. The Nasdaq is struggling to remain near that resistance level and has tested it multiple times. If we can get a breakout there, the S&P and Dow should follow the Nasdaq higher.
The Russell finally paused to take a breath. The index has been on fire since early May since the small caps are relatively immune to the tariff issues making headlines. I was worried yesterday that the cancellation of tariffs and the rotation back into big caps would hurt the Russell but it posted a 15-point gain on Monday. Today's 12-point loss is just a retracement of that gain. The Russell is in new high territory so any recovery would be market positive
I am cautious about adding any new long positions. We are only going to see volume decline over the next four days and that favors the sellers. However, the days before a holiday weekend many times show positive gains. With the market near its recent highs, I believe investors are going to cautious about adding to long positions. I would recommend patience until a trend appears.
Enter passively, exit aggressively!
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