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Rolling a Six? DJIA Eyes Sixth-Straight Record Day As Apple Earnings Drive Market Higher

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August 2, 2017

(Wednesday Market Open) The hits just keep on coming.

The Dow Jones Industrial Average ($DJI) posted new record highs each of the last five sessions, and looks like it might leap over the 22,000 hurdle today for the first time thanks in part to Apple’s (AAPL) muscular earnings results. AAPL earnings also helped drive the Nasdaq (COMP) much higher in pre-market action.

AAPL seems to be firing on nearly all cylinders, beating Wall Street analysts’ estimates not only for fiscal Q3 earnings and revenue, but also on most product line sales, including the iPhone. Guidance was also better than analysts had expected. So it wasn’t too surprising to see the stock jump more than 6% to new all-time highs in pre-market trading Wednesday. AAPL’s earnings of $1.67 a share came in 10 cents above the average estimate, while revenue of $45.4 billion beat analysts’ projected $44.9 billion.

Perhaps more importantly, the company’s strong guidance for fiscal Q4 led to wide belief among investors that the company is on target with a rumored September iPhone 8 launch. There had been lots of rumors about possible delays. Generally, iPhone sales looked good in Q3, and the Services business also posted firm growth, a positive sign for those who want AAPL to be more diversified outside of the iPhone. The one brown spot on the report might have been average phone prices falling for the second quarter in a row. We’ll see if that picks up with the launch of iPhone 8 and its rumored four-figure price tag.

AAPL’s bounce could give the tech sector a boost, as if it needed one. Info tech stocks have already climbed 21% this year, though the rally leveled off a little in mid- to late- July amid what looked like some profit taking and perhaps some investors rolling money into other sectors after the big tech run-up.

In other earnings news, Time Warner (TWX) beat Wall Street’s earnings per share and revenue estimates and climbed in pre-market trading, and Mondelez (MDLZ) beat on earnings but came up short on revenue. Tesla (TSLA), a widely-held stock among TD Ameritrade customers, reports after the close, potentially offering a good chance for investors to catch up on the company’s Model 3 launch. TSLA shares are up 50% this year. Focus on the call could include whether the company is on schedule for delivering new cars at a lower price point as it moves forward with a more affordable car for the masses.

While earnings continue to look pretty good, some other economic indicators aren’t so upbeat. Construction spending for June came up shy of Wall Street’s expectations Tuesday, while the July ISM manufacturing index fell from June. Chicago PMI failed to meet analysts’ projections on Monday, and auto sales for July took a step back (see below). On the plus side, pending home sales for June looked good, and personal spending rose slightly.

In the bond market, the yield curve shows signs of flattening again. Ten-year Treasury yields fell four basis points to 2.25% on Tuesday while the two-year yield fell just one basis point, to 1.35%, Briefing.com noted. That didn’t appear to hurt the financial sector much, as it rallied Tuesday. However, historically financial stocks have struggled when the yield curve flattens, so it’s a trend worth watching. The 10-year yield is nearing key support levels at around 2.22%.

Remember that even with earnings dominating the headlines today and tomorrow, Friday brings the July jobs report and that could turn attention back toward the economy. Payroll processor ADP said the U.S. added 178,000 jobs in July, which was below the 190,000 average Wall Street estimate.

RUT

FIGURE 1: STUCK IN A RUT?

The small-cap-heavy Russell 2000 has lagged the S&P 500 since last week, weighed down in part by a weaker dollar. Data source: S&P Dow Jones Indices, FTSE Russell Indexes. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Domestic disharmony? As the U.S. dollar continues to weaken against other developed currencies, one point of collateral damage may be the Russell 2000 Index (RUT - see figure 1 above). After setting a new high last week, RUT was hit particularly hard during the late-week equity selloff. But whereas the S&P 500 (SPX) climbed back this week, RUT has continued to weaken, and the culprit may be the dollar (DXY), which started 2017 at its high above 103, and has weakened steadily all year, falling below 93 intraday on Tuesday. Small-cap stocks tend to derive a greater share of revenue from domestic operations, and thus seem to be lagging versus larger multinationals, which make up a greater share of SPX.

Europe’s Strength is Dollar’s Loss: The U.S. dollar’s weakness partly reflects economic strength overseas, as the euro keeps rallying. Europe’s economy arguably isn’t 100% back in shape, but it’s certainly recovered from where it was a year ago. So we’re starting to see people feel a little more comfortable spreading their risk across countries, whereas for a while the idea was to pretty much invest in the U.S. because it was the best of the “weaklings.”

Are Auto Makers Losing Speed? Weak sales to rental car fleets spelled a tough July for both Ford (F) and Fiat Chrysler (FCAU). Fleet sales fell 26.4% for F and 6% for FCAU. All three of the big U.S. carmakers, including General Motors (GM), reported lower sales than analysts had expected, and once again, a culprit was falling demand for the traditional sedan. One bright spot, however, continues to be GM’s commercial sales, which are up 40% year over year. These sales include vans, small utilities, and pick-up trucks. Arguably, the U.S. consumer got a little tired of buying cars after two big years in a row, so weak sales now shouldn’t seem all that surprising, especially since people tend to keep their cars longer these days. The problem for car companies, though, is that they’ve come to rely on fleet sales.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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