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Morning Commentary

Painful Internals

By Charles Payne, CEO & Principal Analyst
8/10/2017 9:27 AM
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Once again, the market exhibited resolve on Wednesday, climbing off the lows of the session against the backdrop of saber-rattling and North Korean uncertainty. Normally, that would be a positive sign that makes us move closer to buying the dip. However, market internals continue to be worrisome and give pause for the moment.

Decliners outpaced advancers on the NYSE and NASDAQ by a ratio of 2.3%, and volume is more ominous. The NYSE down volume was 100% greater than the up volume for the NASDAQ (for each share in the green, there were 3.5 in the red).  This is very disconcerting, underscoring a move into gold and Treasuries. Ironically, the defensive posture of investors didn’t apply to stocks as utilities were among the biggest losers.

Many would be shocked to know only 41 names on the NASDAQ closed at new 52-week highs, while 122 closed at one-year lows.  There is carnage happening beneath the surface.  For those that are discouraged, understand the cyclical nature of this rally. Today’s “loser” could be tomorrow’s grand slam (if the fundamental story and value proposition are intact).   

Market Breadth

NYSE

NASDAQ

Advancers

886

803

Decliners

2043

2025

Up Volume

204.2 million

701.1 billion

Down Volume

406.8 million

1,262.4 billion

New 52 Week Highs

71

95

New 52- Week Lows

41

122

 

I understand the market rotation from one equity sector to another that began seven weeks ago. We are now seeing mounting new lows and money trickling into other asset classes, and I’m paying attention.

Please don’t hit the panic button, and understand that the last seven years have seen periods like this only to come out with broad vigor and resolve. 

Can Energy Provide Boost?

West Texas Intermediate (WTI) crude oil edged higher to $49.59 after inventories fell once again.  The Street was looking for a 2.5-million-barrel decline for the week ending on August 4th, but the actual result was a drop of 6.5 million. Note: The American Petroleum Institute (API) data showed a decline of 7.8 million, so there might have been whispers for a larger number from the Energy Information Administration (EIA) as crude inventory is now down 3.6% from a year ago.

In addition to rapidly declining oil and fewer imports (-491,000 last week to 7.8 million b/d), oil companies, large and small, are cutting their capital spending plans, which means fewer rigs and less drilling. Yesterday, Continental Resources announced a potential reduction of $200 million in their spending budget.

Announced Changes to Capital Spending During 2Q Earnings Season (million USD)

APC

-$300

WLL

-$150

SN

-$100

MRO

-$300

DVN

-$100

PXD

-$100

COP

-200

HES

-$100

 

Furthermore, with less drilling and greater draws in inventories, there are signs of improved domestic demand.  At the start of 2017, Marathon Oil presented its budget, assuming crude would be $55.00 a barrel on average; I’m sure they aren’t the only company in the industry that had such a rosy outlook. 

As American suppliers wrest greater control of global crude prices from the Organization of the Petroleum Exporting Countries (OPEC), they will have to do a better job of not killing the golden goose. This is something OPEC learned the hard way after the Arab Oil Embargo of the early 1970s.  Crude north of $50 and closer to $55 will have a net positive impact on the stock market and will underscore domestic economic growth.

Today’s Session

Its official, the market bias has shifted to the downside as the North Korea situation not only continues to linger, but it became more intriguing with specifics on a potential NK missile test later this month.  According to NK state media, four missiles will land within 30 miles of Guam to underscore the ability to accurately hit a target. 

In addition, earnings season is winding down with today’s focus on retailers.  Kohl’s beat on earnings and comparable sales, initially sending the shares much higher.   Macy’s has also posted results that beat on top and bottom lines giving its shares a lift.  Then, Dillard’s posted a big earnings miss, and all brick and mortar stocks tumbled, including KSS and M.

No matter what these names do today, it’s unlikely to dull the argument of more damage to come for brick and mortar, including continued waves of bankruptcy.

The broad market needs leadership, but it might also need to test the conviction of this rally.  That means allowing pressure to attract more buyers to test the resolve of potentially weak hands.  

This could be a tough period for many that have watched the market, seemingly on autopilot, now turn lower after they jumped in. 


 

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