Now that the Korean summit is behind us, investors are focused on the Wednesday Fed announcement.

Market Statistics

It was another low volatility summer session as the Korean summit ended and investors turned their eyes toward the three central banks. The Fed is set to hike rates on Wednesday but the guidance will be the key to market reaction.

Typically, the day before a Fed meeting is positive but the Dow was struggling as banks and energy stocks were the biggest laggards. The Nasdaq and Russell set new highs but the Dow and S&P remain stuck below critical resistance.


The NFIB Small Business Optimism Index for May surged from 104.8 to 107.8 and a new high for the index since its inception in January 1986. The number of respondents expecting the economy to improve rose from 30% to 37%. Those respondents thinking now was a good time to expand rose from 27% to 34%. Plans to increase employment rose from 16% to 18% but respondents with current job openings declined from 35% to 33%. Those planning on raising prices rose from 22% to 26%. This was a good report and suggests the tax cuts and regulation reforms are really starting to take effect on business owner sentiment.


The Consumer Price Index for May rose 0.2% and the same pace as April and in line with consensus estimates. Food prices were flat and energy prices rose +0.9%. Goods prices declined -0.1% and services rose 0.3%. Headline inflation is up 2.7% year over year. Food prices are up 1.2% and energy prices 11.0% and those are the drivers of the headline number. The core CPI, excluding food and energy, is only up 2.2% for the trailing 12 months.

This report guarantees the Fed will hike rates on Wednesday but there was never any real doubt. This could influence the Fed's inflation forecast and ratchet up chances for a fourth high this year.

The CPI was a material cloud over the market today for that very reason.

Moody's CPI Chart

After the bell, the weekly API crude inventory report showed a minor decline of 730,000 barrels. Analysts were expecting a 2.7 million barrel decline. Gasoline inventories rose 2.33 million barrels and much more than the 443,000 expected. Distillate inventories rose 2.1 million barrels and much more than the 200,000 expected.

Crude prices were flat after the somewhat bearish report. Nigerian exports are struggling and the country recent declared force majeure on the Bonny Light grade of oil. Russia and Saudi Arabia both increased production in May to 10.0 and 11.09 million bpd respectively. This suggests OPEC may agree to raise output when they meet next week.


Wednesday is headlined by the Producer Price Index before the open and the FOMC rate announcement. Expect some volatility after the announcement but normally the market turns directional the following day. Wednesday's afternoons are not good predictors of market direction.

The ECB and BOJ meetings this week will also impact equities. Both are expected to make changes in policy and that could impact market sentiment.

The retail sales report for May on Thursday is the most important late week report.


The earnings calendar leaves a lot to be desired with Adobe Systems the biggest announcement this week. Canada Goose (GOOS) on Friday could be interesting. They are a current position in the Leaps Trader Newsletter and they closed at a new high today.


The biggest stock news of the day came after the bell when AT&T (T) won court approval to buy Time Warner (TWX) for $85 billion over objections from the Trump administration. This would be the fourth largest deal in the telecom, media, entertainment space and the 12th largest deal regardless of sector. The judge said "I conclude that the government has failed to meet its burden of proof" and one of the government's arguments was "gossamer thin." In his opinion, the judge warned the government not to try and stay his ruling, saying it would be "manifestly unjust" and not likely to succeed. Shares of AT&T declined after the close, Time Warner rose about 5% and Comcast was down about 3%.

AT&T argued that companies like Google, YouTube, Netflix and Amazon were disrupting the entertainment market and the traditional media companies needed scale to compete. This is likely to begin a wave of mergers in the sector.

Comcast (CMCSA) is expected to launch a bid for the Fox entertainment assets as early as Wednesday. Disney (DIS) already has a $52.4 billion all stock offer in progress for the majority of Twenty-First Century Fox but Comcast is said to be preparing an all cash offer that is superior to Disney's. CBS, Viacom, LionsGate, Verizon and Amazon could all announce deals in the weeks ahead.

In order to win approval AT&T said it would submit pricing disagreements to third-party arbitration and they agreed not to black out programming during arbitration for a period of 7 years.


RH Inc (RH), parent of Restoration Hardware, reported earnings of $1.33 that easily beat estimates for $1.01. Revenue of $557 million missed estimates for $563 million. They guided for Q2 revenues of $655-$662 million and earnings of $1.70-$1.77. They guided for the full year for revenue of $2.53-$2.57 billion and earnings of $6.34-$6.83. All guidance was above estimates. Shares spiked 30% on the news. This chart is a textbook picture of a painful short squeeze.


H&R Block (HRB) reported earnings after the bell of $5.45 that beat estimates for $5.23. Revenue of $2.39 billion also beat estimates for $2.34 billion. They announced a 4% increase in the dividend to 25 cents payable on July 2nd. Somebody did not like what they saw and the stock crashed more than 18% in afterhours on no news.


Oxford Industries (OXM) parent of Tommy Bahama and Lilly Pulitzer reported earnings of $1.28 that beat estimates for $1.22. Revenue of $272.6 million missed estimates for $274 million. They guided for the current quarter for revenue of $300-$310 million and estimates of $1.75-$1.85. For the full year, they expect earnings of $4.45-$4.65 and revenue of $1.125-$1.145 billion. They closed the regular session with a 2.7% gain but fell more than 6% in afterhours.


Shares of Pivotal Software (PVTL) rose $1 in afterhours on their earnings news. Subscription revenue rose 69% to $90.1 million. Total revenue rose 28% to $155.7 million. They posted a loss of 10 cents compared to a 20 cent loss in the year ago quarter. They added 20 new subscribers in the quarter to bring their total to 339. They announced two new software offerings in the quarter. They guided for Q2 for subscription revenue of $92-$93 million, total revenue of $157-$159 million and a net loss of 9-10 cents.


Twitter (TWTR) shares rallied 5% after JP Morgan said they were seeing strengthening advertising revenue. The company reiterated a buy and said it was a "top pick" on their focus list. The analyst raised the price target from $39 to $50. He said conversations with ad industry participants showed that the value of Twitter ads was rising in their opinion. They were seeing higher click through rates and better ad engagement. With the World Cup starting this week, expectations were high for Twitter to have a great quarter.


Weight Watchers (WTW) also benefitted from a bullish call by JP Morgan. The analyst started coverage with a buy rating and price target of $105. He said it was time to stop watching from the sidelines. He said "management has stabilized the growth trajectory and repositioned the company for outsized growth and improved the mobile platform. They benefitted from recruiting pivotal social media influencers. Specifically mentioned was Oprah Winfrey with 42.5 million Twitter followers and a 10% stake in the company she bought at $3.75 in July 2015. The stock closed at $91 today. Analysts are forecasting $2 billion in revenue by 2020 compared to $1.31 billion in 2017.


Sage Therapeutics (SAGE) shares rose 20% after the FDA gave them a "breakthrough" designation for drug SAGE-217 designed to treat various forms of depression. The company plans an expedited phase III study for major depressive disorder and they will eventually promote it for post partum depression as well.


Lands' End (LE) shares rallied 27% after reporting earnings. The company posted a loss of 8 cents that beat estimates for a 17-cent loss and was up from a 24 cent loss in the year ago quarter. Revenue rose 12% to $299.8 million and beat estimates for $285 million. Same store sales fell -18.9% but apparently, investors did not care.


Tesla (TSLA) said it was laying off 9% of its workforce and Elon Musk said it was a difficult but necessary restructuring. The layoffs will be among salaried employees and no production workers will be let go. He said the terminated workers would be given accelerated vesting of their stock options and significant termination payments. Musk said the layoffs were necessary to become GAAP profitable and cash-flow positive in Q3.

The company also said it was terminating its deal with Home Depot to market the solar products on a retail basis.



Markets

Tuesday was a slow day in the markets. Without the surge in the tech sector, it would have been a totally different finish. The tech gains lifted AAPL, INTC, IBM and CSCO on the Dow to help the index return to flat at the close. Visa rose counter to the rest of the financials thanks to gains in the credit card payment sector. Paypal, MasterCard and Square were all positive.


The Dow is struggling with resistance at the 25,400 level and while it touched that resistance on Monday, it failed to recover that high today. The index has been relatively flat for the last four trading days with the exception of a spike at the open last Thursday. This is strong resistance and as long as the tariff headlines continue to flow it could be difficult to cross.


The S&P has a similar hurdle to cross at 2,792 but it has help because of the large number of tech stocks. The S&P should break through this resistance on the next positive day in the market. This could produce additional short covering and that would put the S&P, Russell and Nasdaq leading the Dow higher.


The Nasdaq had a good day with a 44 point gain thanks to positive moves on almost all the big cap stocks. The rally ended three days of consolidation ahead of the summit. It also equalized the overbought pressures and should have set the index up for an even higher high this week. That assumes the Fed does not go overly hawkish in their announcement on Wednesday.



The Russell also rose to a new high thanks to the rally in the tech sector. The Russell has consolidated three times in its ramp up from the early May lows but it may still be overbought. I would love to see it continue higher but once the Dow/S&P catch fire, we could see some profit taking in the Russell as rotation occurs.


The Fed will drive the market action for the rest of the week. The statement will be dissected every way possible and any hawkish tone will be used as a club for bullish sentiment. I believe we should be cautiously long until proven wrong.

The S&P futures are up +6 in the overnight session and as long as that holds, the S&P cash should push through resistance.


Enter passively, exit aggressively!

Jim Brown

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