Once again we wonder whether overall earnings have peaked and will decline or even go negative in the next quarter or two. » Read More
Stock buybacks can boost earnings, but without underlying fundamentals, it's not worth chasing them. » Read More
Tax talk is setting the stage for markets to keep melting up, but the rally could be poised to lose steam soon. » Read More
Bob Pisani notes the strange outperformance in micro-cap stocks » Read More
Are the markets in trouble?
Not yet, but there's some cracks. We've seen something in the last two weeks we haven't seen in some time: a succession of selloffs.
Last week, we saw a familiar phenomenon: a brief 1 percent dip in the market that turned around within a couple days. But on Thursday we had another bout of selling that is starting to do some technical damage. The small-cap Russell 2000 and the Dow Jones transportation index have both broken through their 200-day moving averages, a major technical indicator.
Almost half of all NYSE stocks are below their 200-day moving average.
Several events have come together to cause this:
The next few days will be an important test. All this year, people have been set to buy the dips —and there haven't been many of them. That hasn't happened today. People are getting burned after buying last week's dip, so they are not getting the same reward they used to get. It's interesting that the S&P took a dip to a new low at the end of the day when it dropped below the low from last week (2,437).
Makes sense: once you get burned a few times, it's tougher psychologically to buy the dip.
Look, we've had a huge run in the market. Now is the right time to get a pullback. With buyers on strike due to seasonal low volume, issues with Presidential leadership, and sheer exhaustion of market leaders after a strong year, it makes sense for stocks to pull back some. For the moment, the risks outweigh the benefits.
What's a pullback? In today's context, 5 percent would be notable. We haven't had that in a long time — you have to go back to Brexit in June, 2016.
A 5 percent drop from the recent closing high of 2,480 would bring us to 2,356, which would bring us back to the levels last seen in May.
Seems like a long time ago, doesn't it?
After a stellar earnings report, with a surprising 1.3 percent gain in same store sales, Target shares are up only 3 percent today, after dropping 23 percent for the year.
Huh? Target not only beat expectations, it raised full-year numbers by nearly 10 percent. But the stock is up a measly 3 percent. That tells you that the investing public is not that impressed.
But there's no significant rally in retail. Target trades at $56; it started the year around $73.
Yesterday there were dozens of retailer stocks trading at 52-week lows, including JC Penney, Buckle, Bed Bath & Beyond, Mattel, L Brands, Under Armour, Penske Automotive, Hibbert Sports, Cato, Express, Francesca's Holdings, DSW, and even retail REITS like Tanger Factory Outlets.
Absent some sudden mass rush to the stores, it's unlikely we will see a notable rally in retail until the fall, if at all. The reason: retailers are facing "revenue cliffs" and margin compression this year and it's not clear to investors where the bottom is.
You can see this with Target, which after reporting $73.7 billion in revenue in 2016 is expected to report revenue of $69.4 billion this year, a decline of nearly 6 percent.
It's the same story with most other retailers, but particularly department stores, all of which are looking at mid-single digit declines in revenue.
It's been another ugly day for "Big Energy," with 52-week lows again for everything across the board, including big oil like Exxon Mobil; oil service names like Schlumberger and Halliburton; exploration and production names like Hess, Apache, Anadarko and Noble Energy; and drillers like Ensco, Transocean, Rowan and Nabors.
What's going on? Another epic miss on oil prices is causing traders to push down their earnings expectations for big oil, and they're not done yet. And it's the price of oil that determines the price and the valuation of oil companies.
Go back to January, when analysts were confidently predicting oil would be close to $60 by the third quarter. Instead, it has been mired in the $45 to $50 trading range, and dipped as low as $42 in the middle of June. And it's happening again, with oil now at a 3-week low.
Oil and oil stock prices are very closely correlated. Oil company earnings were supposed to rebound big-time this year and be the major contributor to earnings for the S&P 500, but with oil well below expectations, analysts have been aggressively taking down third quarter earnings estimates.
At the beginning of April, earnings for the oil group were expected to be up a whopping 222 percent for the period ending Sept. 30th, but now they're expected to be up only a little more than half that, at 132 percent.
So now you have two big problems with energy stocks. First, despite the price drops there's still not a compelling valuation for oil companies because no one knows if oil is going to go up or down from here.
The second problem is just as serious: how do you get anyone interested in the energy story, even with stocks at new lows?
Energy stocks are now only about 6 percent of the weighting in the S&P 500. But the S&P is at all-time highs. If I am a big investor, if I'm a big hedge fund, or a large actively-traded mutual fund at Fidelity or Vanguard, why do I care about energy when I have tech (22 percent of the S&P) and financials (15 percent) moving?
Why do I care, even with prices depressed, when a lot of people are now saying shale will permanently depress oil prices, as it has with natural gas?
This is the question that the oil bulls have to answer.
Home Depot is down more than 3 percent despite a stellar earnings report that posted its highest quarterly sales in the company's history. What's going on?
Simply put, continuing fears of the "Amazonification" of retail is hitting the sector hard today, and Home Depot—long considered immune from the Amazon effect—is getting swept up in the worries.
"The Amazon spectre is everywhere in retail," Rob Plaza, retail analyst at Key Private Bank said on CNBC this morning.
Stacey Widlitz with SW Retail Advisors, also appeared on CNBC noting that Amazon "is becoming the new specialty retailer."
But wait a minute—isn't Home Depot supposed to be relatively "safe" from Amazon? Alan Rifkin from BTIG said a few weeks ago that he thought the agreement to sell Kenmore (Sears) appliances through Amazon were "overblown" and that Home Depot had a significantly more robust product lineup than Amazon.
He told me Tuesday he still thinks the concerns are overblown, noting that Kenmore's share has eroded from 30 percent to 10 percent in recent years as Sears share has eroded to 23 percent today.
And back in July CFRA analyst Efraim Levy said, "[B]y the nature of its business, we consider HD to be Amazon-resistant, notably via customer assistance and rising focus on professional customers." Levy reiterated his buy opinion on Home Depot Tuesday, noting that "many of HD's products and its services are not offered by Amazon."
And that's been the tune of most analysts: Home Depot has clear advantages with the Do-It-Yourself (DIY) and professional contracting crowd that is the core of its buyers.
Still, that confidence is eroding somewhat. Widlitz noted that auto parts were also considered "safe" from Amazon not so long ago, and are no longer considered so: "We have to ask the question with Home Depot, particularly as Kenmore is now selling appliances online that are now smart appliances, is this sector safe as well?"
Is Amazon the only issue for Home Depot today? No. Widlitz noted that despite the stellar earnings report, 'HD' does have a high multiple, and gross margins may have plateaued.
Joe Feldman, assistant director of research at retail analyst firm Telsey Advisory Group, told me that he remains bullish on Home Depot but acknowledged that investors are incrementally more concerned about the threat of share loss to Amazon, especially in consumable areas (batteries, light bulbs) as well as disruption in appliances following Amazon's deal with Sears to sell Kenmore and leverage Sears' appliance shipping infrastructure.
He added an additional issue: the longevity of the housing and remodel market. "That question came up on the earnings call today," he told me. "We believe the housing market is not done given the aged housing stock and younger buyers finally coming into the market. However, it's likely that the growth may slow in the next couple of years. As such, some investors have begun to reduce their exposure to Home Depot."
Still, it's Amazon that is the big mover of the retail sector. Indeed, Amazon is a pervasive presence in the conference call for many retailers this quarter. Dick's Sporting Goods CEO Ed Stack, when asked this morning about what was prompting recent "price promotions" (i.e. price cuts) acknowledged that they would have to "wait and see" about the impact of Nike's proposed deal to distribute through Amazon (Nike is a big customer of Dick's). He then went on to say: "I think the pricing is from additional significantly increased distribution and everybody fighting for their share of what now is the same size market but with more competitors in there."
That sums it up perfectly: "Everybody fighting for their share of what now is the same size market but with more competitors in there." And no competitor is bigger than Amazon.
Also not helping the narrative is the poor showing from Advance Auto Parts, which after reporting flat same-store sales for its second quarter said full year comparable sales would drop between 1% and 3% (well below expectations for 0.5% decline).
The poor showing from those two retailers is helping to drop the entire retail sector, with most names in the sector down at least three percent.
Bottom line: after rallying briefly in July (the main Retail ETF, the XRT, rallied nearly 10 percent off its 52-week low in early July) vast swaths of retailers are again at 52-week lows today, including JC Penney, Buckle, Bed Bath & Beyond, Mattel, L Brands, Under Armour, Penske Automotive, Hibbert Sports, Cato, Express, Francesca's Holdings, DSW, and even retail REITS like Tanger Factory Outlets.
So is Amazon destined to take over the world? Not so fast. Efraim Levy from CFRA has heard this before. "At some point a long time ago, Wal-Mart was projected to have a growth rate that would have it take over the entire U.S. economy."
That didn't happen because there was a saturation point, which he believes will be reached with Amazon as well.
It's the summer of hell for IPOs as the mood turns sour despite record high markets.
IPOs started the year with great promise, but have fizzled on high profile disappointments from Snap and Blue Apron and the refusal of tech unicorns to go public and face lower valuations from a stingy investment community.
The latest debacle: a disastrous conference call from Blue Apron, which missed estimates on its first earnings report as a public company (a loss of $0.47 versus a loss of $0.30 expected), had fewer orders than expected, and had 9% fewer customers quarter-over-quarter, which the company said was due to lower marketing expenses but may also be due to operational issues moving to a new facility. Regardless, revenues in the second half will be lower than expected, and that was enough for the bears (this is already a heavily-shorted stock) to pile on.
The company, which had already priced its IPO at $10 at the end of June, well below earlier price talk of $15-$17, is now at $5.28.
Also this morning: coal producer Contura Energy was supposed to begin trading at the NYSE, but its IPO was postponed due to the dreaded "market conditions." You can't blame it on the stock market, there was likely far less demand than anticipated. They are producers of both metallurgic (steel) and steam (utilities) coal, and while demand for steel is still good demand for utility coal has been facing stiff competition from natural gas for many years.
Then we have the morning re-filing of millennial darling Yogaworks, which pulled its IPO in June and this morning announced they would try to go public in the next few days at a valuation 30% below what they were seeking a few weeks ago. There have been 7 or 8 other companies that have pulled their IPOs this year.
Where did it all go wrong? I called Kathleen Smith, whose firm, Renaissance Capital, provides research on companies going public and runs an ETF for IPO investors.
Smith's first issue with this crop of IPOs: "Some of these companies should never have gone public."
She listened to the Blue Apron conference call and was dumbfounded. "The real issue is that the company is having operational problems. We knew about the competition issues with Amazon and others, but this was a real surprise. This is a textbook example of what not to do as an IPO. You don't miss expectations right out of the box. That is a big no-no."
But there's a bigger problem. Private equity has thrown so much money at these companies that many are living in a private-equity bubble and are shocked to find out the investing public is not so generous.
"They were living in unicorn land, in La-La Land," she said. "It used to be there were non-discerning investors who would buy anything at any price. They're not there anymore, they went and bought ETFs."
The new IPO buyers, she insists, are much more discerning. "You should not think you are worth what some private valuation says you are worth. That is a small group of investors. The public market is not going to care what your last private round was. They are going to look at it much differently."
How have investors in the IPO market done this year? The aftermarket —what happens after the IPO goes public--has generally been good, despite high profile disasters like Snap and Blue Apron. The Renaissance Capital IPO ETF (IPO), a basket of roughly the last 60 larger IPOs, is still up 22% for the year.
But that includes IPOs that go back roughly two years. More recent returns have not been as great. Smith notes that of the 89 IPOs that have gone public this year, the average first-day pop has been a very-respectable 9.3%. However, the average return is now just 8.9%. That means that returns after the first day are now negative, on average.
Where do we go from here? Smith notes there are more than 100 unicorns with private valuations over $1 billion waiting to go public. Indications are that the expectations are still way too high, even as private equity continues to pour money into the companies.
"The public has always been considered the dumb money, but wouldn't it be funny if it turns out the private investors are the dumb money," she told me.
That would be a switch!
I got a call from an old friend, a veteran trader who had worked on hedge funds and as a high-level stock strategist for many years before being laid off earlier this year.
He called to tell me that he had finally obtained a job, working as a strategist at a very respectable firm. I realized he was one of about a dozen friends who had been fired from senior positions in the last year, and he was the only one who had gotten another job.
Call it The Great Paradox, or Wall Street's Miserable Summer: Even as the markets hit new highs and investor sentiment remains strong, Wall Street continues to lay off its own.
Among the 10 leading global investment banks, head count for traders in fixed income, equities and investment banking are down more than 20 percent from 2011 to 2016 and are declining again this year, according to Coalition, a business intelligence provider.
What's behind this? Another year of record low volatility, low volume, oceans of money leaving active management for passive investing, and the growing use of artificial intelligence to pick stocks for even active managers means that sell-side traders and many hedge funds are suffering through another year of slow business.
In the old days, volume would pick up as stocks hit record highs time and again, but no more.
You can see the miserable state of the trading business in the results from companies like Virtu, one of the world's largest market makers in stocks, bonds, commodities and currencies. They reported earnings this week. CEO Doug Cifu summarized the state of the business: "With volatility measures globally at historic lows, challenging conditions for market makers persisted in the second quarter."
That's putting it mildly: Total revenues were down 16.8 percent year over year. Trading income was down 18.2 percent.
How slow has it been? Here's some excerpts from the report:
1) Why the markets seem so boring. The major indices crawl to new highs, but they aren't moving much on an intraday basis. Realized intraday volatility for the S&P 500 was just 55 basis points in the second quarter. That means on any given day the S&P moved about a half-percent from its high to its low. That's about 12 points. That's 41 percent lower than it was last year.
2) Why traders are getting worried about their jobs. Low volatility means less trading. Average daily consolidated U.S. equity share volume declined 6 percent year over year.
3) The slowdown is happening everywhere, not just the U.S. In Europe, realized intraday volatility dropped 50 percent in the Euro Stoxx 50 index; volume declined 13 percent. In Japan, realized intraday volatility of the Nikkei 225 index dropped 62 percent year over year; volume declined 9 percent.
4) It's not just stocks, it's happening in commodity and bond trading as well. the JPMorgan commodity volatility index dropped 18 percent year over year, as did other measures of commodity volatility. The Deutsche Bank FX Volatility Index (CVIX), a measure of investors' expectations of future currency volatility, declined 29 percent.
Traders are not just getting fired — they're getting paid less. Pay is down 5 percent to 15 percent for equity sales traders just from 2015 to 2016, according to Johnson Associates.
Is it all over for a Wall Street career? Not necessarily — but forget about the traditional analyst and trading job. UBS says they are hiring psychologists, as well as experts from fields like pricing and shipping, to complement the firm's research process. Others are hiring behavioral psychologists, social media consultants and computer geeks who can write code to execute complicated algorithms.
"We're hiring physicists, we're not hiring Ivy League athletes," Cifu told me.
—CNBC's Kirsten Chang contributed to this report
The financial markets are acting really wacky right now. There are some very strange divergences going on.
Here are just two that really stick out:
1) The Dow has been a monster in the past couple of weeks, but everything else is flat to down. You can blame this on the way the Dow is constructed, the improvement in the global economy and the weaker dollar.
The Dow is up 2.8 percent, but the small-cap Russell 2000 is down 1.7 percent? That's a bit odd.
There are three likely reasons for this:
First, the Dow is a price-weighted index, so the highest-priced stocks move the index more than the lower-priced stocks (the S&P 500 and most other indices are market-cap weighted indexes).
Recently, higher priced stocks have been bigger movers and are pushing the Dow around. For example, the Dow has moved a little over 600 points since July 24. The highest-priced stocks — including Boeing, Goldman Sachs, UnitedHealth, Apple and Home Depot — have moved significantly in that time.
Dow biggest contributors
(since July 24)
Boeing: 32 percent
Goldman Sachs: 17 percent
Home Depot: 10 percent
Apple: 8 percent
United Health: 5 percent
Remainder: 29 percent
Only 3M — another of the highest priced stocks — hasn't been a big mover recently.
Second, the global economy has been doing very well this year, and many of the Dow members get a significant amount of their revenue outside the United States. Here are just a few examples:
Global exposure game
(percentage of revenue from outside the US)
McDonald's: 66 percent
Apple: 65 percent
American Express: 61 percent
Boeing: 60 percent
3M: 60 percent
Third, the dollar has dropped more than 5 percent since the start of the second quarter, which is a major tailwind for company earnings overseas.
The S&P of course, also has these stocks, and that index benefits as well, but with 500 stocks the S&P has many more companies that are in the mid-cap and even small-cap universe that don't benefit as much from overseas growth.
2) Crude has been rallying, but oil stocks are not participating. Oil stocks are tightly tied to the price of oil, but that has been decoupling recently:
There's an obvious reason this is happening: oil has been a huge disappointment this year. Analysts had confidently predicted oil would be close to $60 by the third quarter; instead, it has been mired in a $45 to $50 trading range, and dipped as low as $42 in the middle of June.
As a result, analysts have been aggressively taking down third quarter earnings estimates for oil stocks. At the beginning of April, earnings were expected to be up a whopping 222 percent for the period ending Sept. 30, but now they're expected to be up only half that:
Q3 Earnings: Energy Earnings
April 1: up 222%
July 1: up 186%
August 8: up 132%
Source: Thomson Reuters
Yes, earnings estimates typically come down a bit going into the quarter because analysts are overly optimistic, but not by 50 percent. That is huge.
Once again, oil stocks are presenting a huge buying opportunity for investors. But having been badly burned already this year, they appear to be attracting far fewer buyers. The last time oil stocks rallied off their lows — it was early June — a notable inflow of money went into oil ETFs as investors bet that oil had finally bottomed around $45.
Wrong! Oil dropped to $42, and investors who bought in early June were selling by the end of the month.
Now oil is rallying again, this time toward $50. But oil stocks aren't following. Given what has happened this year, who can blame investors for staying on the sidelines?
August is typically a down month: The S&P 500 has on average dropped 2.1 percent this month since 2010, according to the analytics tool Kensho. Right on schedule, the August slowdown has emerged.
The issue is whether this will morph into something bigger. Consider the following:
"FAANG" this week
Amazon: down 3.2 percent
Netflix: down 2.6 percent
Facebook: down 2.2 percent
Google: down 1.9 percent
Apple: up 4.1 percent
Energy stocks, which were expected to supply a very large part of the earnings gains for Q2 and Q3, have been disappointing. Shares of Apache, Oasis, Concho and Noble Energy are all down notably on earnings.
Energy earnings disappoint
Pioneer Natural Resources: down 17 percent
Apache: down 12 percent
Noble Energy: down 12 percent
Concho Resources: down 10 percent
Does the loss of momentum names necessarily mean the rally is over? No. Other sectors may rotate into leadership positions. There is some indication this is happening already. We have seen financials make a modest move recently — the S&P Financial Sector hit a nine-year high today. And industrial names — particularly defense and those with global exposure — remain strong.
Industrials at new highs: Rockwell Collins, Deere, Lockheed Martin, Honeywell, Raytheon, Northrup Grumman.
However, so much money is in the big momentum names (FANG, Semis), that you need to be very vigilant. When you are dealing with momentum stocks, a shift in momentum will easily initiate a shift in positioning — in other words, one day, you just get a hell of a lot of people dumping out. This usually occurs at inflection points for stocks that tell short-term investors that a longer-term uptrend is in trouble.
Are we there yet? It's not clear, but it is clear that price momentum is waning.
A different, slightly more troubling, issue is the market response to what can only be described as excellent earnings. Bulls were looking for a further breakout on earnings, but the overall reaction of the market has been, "Meh."
Bulls are arguing that the S&P saw its runup going into earnings season and it is typical to consolidate (move sideways) after such a move. That is the crux of the debate.
Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.
President Donald Trump inserted himself into the stock market rally this morning when he tweeted, "Business is looking better than ever with business enthusiasm at record levels. Stock Market at an all-time high. That doesn't just happen!"
Can the President claim credit for the rally? Partly. The S&P 500 did rally about 6 percent in the month after the election, clearly on hopes that Trump would bring in tax cuts, regulatory reform, and more infrastructure spending. But it has rallied an additional 10 percent this year.
Some sectors saw notable gains. Bank stocks rallied almost 30 percent in the month following the election, clearly on hopes of regulatory relief. The main bank ETF is today exactly at the level it hit in mid-December last year after that 30 percent rally — in other words, banks as a group have gone nowhere this year. You can't blame them: hopes for a rise in short-term rates have been mostly dashed, and loan growth has been modest at best. Regulatory relief is obviously a powerful inducement for owners of bank stocks.
Infrastructure spending and regulatory relief also clearly played a role lifting industrial stocks post-election, but many stocks that posted big gains — engineering companies like Flir Systems, AECOMM, and Fluor — have all faded as the Trump agenda has faded. The Industrial sector of the S&P 500 rose roughly 9 percent in the month after the election, but is up another 9 percent since then because the global economy has improved.
Technology had almost no reaction after the rally, up about 3 percent, but has been on fire this year, up 28 percent. Why? because a relatively small group of tech stocks are putting up very large earnings and revenue numbers.
And that really is the story for 2017: the S&P is up 10 percent, but the Trump agenda — aside from some modest changes in regulations — still hasn't been enacted and still seems far away.
For the most part, stocks trade off of future earnings prospects, and the rally this year is due to the improvement in the global economy and the corresponding rise in corporate earnings.
Earnings for the 500 companies in the S&P 500 are expected to be up 11 percent for the second quarter after rising 15 percent in the first quarter.
Much of this is on global growth. On Wednesday, the Dow crossed 22,000 for the first time. The 1,000 point move that occurred this year when the Dow moved from 21,000 (March) to 22,000 was due to gains from five stocks:
Dow 21,000 to 22,000: who led?
25 others 35
As UBS' Art Cashin has pointed out, four of those five stocks get more than 50 percent of their revenue outside the U.S. (UnitedHealth is the exception).
Here's the main issue: how much of a risk premium is embedded in the market for the Trump agenda of fewer regulations, tax cuts, and infrastructure.? If Trump tweeted tomorrow, "Tax cuts, infrastructure spending, and a big cut in regulations are dead. Not happening!," how much would the stock market drop?
It's not clear, but no one I speak with doubts there would be a drop. Perhaps 5 percent. Perhaps more. Clearly more in banks!
Could an August surprise be in the cards? August is typically lousy for stocks — it's the worst month for the S&P 500 since 1987, according to the Stock Trader's Almanac.
The bulls are hoping they can confound all expectations and pull out another monthly advance. The hope is that the market will continue to do what it has done all year: Technology will continue to be the leader, and even if a modest profit taking occurs after Apple's strong numbers, the market pattern will hold and weaker sectors will rotate to the forefront.
The two key rotation candidates are energy and financials.
Can this plan work? There are some signs this is already happening...
1) The key for energy to start moving is to get oil consistently over $50. After being stuck in the $42-$45-a-barrel range for several months, oil is now trading in a regular $45-$50 channel, but only rose over $50 on Monday. Regardless, stocks like Chevron, EOG Resources and Schlumberger have all moved up since oil begun moving toward $50 in early July.
(since July 7)
Transocean: up 9.6 percent
Chevron: up 7.2 percent
Schlumberger up 6.4 percent
EOG: up 4.8 percent
2) The key to getting financials going is to get a modest breakout in short-term rates (banks hit their recent highs in early July when 2-year yields briefly broke over 1.4 percent) and get the Trump administration talking about deregulation expansion. Expectations for a modest rise in rates have already begun to move large regional banks since earnings season ended in mid-July.
(since July 17)
3) Finally, there are several losing sub-sectors that are starting to show signs of life and may also provide new leadership in August, including telecom and some retail that got beaten up badly on Amazon.
So, what are the chances of an August surprise? For Art Cashin of UBS, it could work, but "the surprise would have to come from Washington," he told me.
A notable rally in oil stocks? A lot of money has been lost chasing an energy stocks rally this year. The chances are at least as great that oil will end the year at $45 or lower than it will at $55 or so. Call that a tossup.
Same with financials. We're not getting much in terms of regulatory changes, the Fed may not even raise rates in December and loan growth is still pretty modest.
"I don't know how much more rotation there can be in financials ... everyone seems fully invested," Jack Micenko, bank analyst at Susquehanna, told me.
He noted that the biggest gains in Financials came immediately after the election. "I don't see financials as a source for new money," he said, "at least for the moment."
Any moves on the major issues — loan growth, interest rates and regulatory changes — would cause him to alter his opinion, but the logjam in Washington — and the runup in banks around regulatory reform — very much worry him.
"At some point, something is going to rattle the markets around the lack of progress in Washington," he said.
My take? The momentum remains on the side of the bulls, who have been right all year. The global economic expansion and the great earnings picture are what's moving stocks, and I'm not abandoning that as the central thesis.