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Stocks Slip as China Concerns Impact Earnings

Jim Giaquinto

We started this week with losses of approximately 1% for the major indices as a couple soft earnings reports reinforced the market’s fears of a slowing Chinese economy.

This is a busy week of earnings, but on Monday investors were most interested in Caterpillar on the industrial side and NVIDIA on the tech front. Both companies disappointed Wall Street and blamed their woes on slowing growth in China. As a result, stocks started the session solidly in the red.

While the indices never made an attempt to reach the green, they did come off their lows by the close. The NASDAQ, though, was still down by 1.11% to 7085.68.

We’re getting ready for a lot of big tech reports starting with Apple after the close tomorrow, along with Microsoft, Amazon and Facebook in the following days. So the market wasn’t too thrilled that such a week began with graphics chip leader NVIDIA cutting its fourth-quarter revenue guidance. Remember, this comes less than a month after Apple lowered its Q1 guidance amid weak iPhone sales in China. 

On the other end of the market, Caterpillar’s weaker than expected earnings wreaked havoc with the Dow and sent it lower by well over 300 points at its worst. However, it recouped a bit and was off by only 0.84% (or about 209 points) to 24,528.22. The Dow and the NASDAQ are on five-week winning streaks, but now they’ll need to dig out of a hole to keep that rally going.

The S&P slipped 0.78% to 2643.85.

Overall, though, earnings season has been solid so far. However, its biggest test comes this week with three of the four remaining FAANGs heading to the plate. There will also be other industrial names reporting, such as 3M tomorrow.

As we near the end of January, we should take a step back and really appreciate what the market has accomplished in the past 5 weeks. Remember how sour the sentiment was in December? Since then, stocks have gotten back most of what they lost in the correction. But the exuberance has mellowed a bit of late and we’ve been seeing a lot of choppy sessions. We’re going to need good earnings reports and, eventually, a trade deal to spark the next leg higher.

Today's Portfolio Highlights:

Surprise Trader: Whether on the ground or in the air, Dave has you covered this earnings season. On Monday, the editor added a pair of transportation names with 12.5% allocations each. ArcBest (ARCB) is a Zacks Rank #2 (Buy) trucking company with a positive Earnings ESP of 4.78% for the quarter coming after the bell this Wednesday. The other buy is Zacks Rank #1 (Strong Buy) airline Skywest (SKYW), which hasn’t missed earnings since August 2014. Given its positive Earnings ESP of 2.7%, Dave thinks this impressive streak will continue when SKYW reports again after the bell on January 31. Read the full write-up for more on these new buys.

Options Trader: The portfolio is going to the movies by adding a few calls in Cinemark (CNK), a Zacks Rank #2 (Buy) motion picture exhibition leader that operates 4,600 screens in 408 theaters. The stock may finally be ready to break out to the upside after building a bullish basing pattern over the past four years. The company has a positive Earnings ESP of 10.12% for the report coming on February 22, but Kevin thinks this stock will be moving higher in the runup to the announcement. Ultimately, the editor’s longer-term price target for the stock is $62.50. On Monday, he bought to open three September 40.00 Calls in CNK. Read more in the full write-up.

Black Box Trader: The portfolio had five winners out of the six stocks that were deleted in this week’s adjustment. Those positions that left today were:

• Michaels Companies (MIK, +12.4%)
• Sealed Air Corp. (SEE, +7.4%)
• Rent-A-Center (RCII, +6.5%)
• United Continental (UAL, +3%)
• AES Corp. (AES, +1.5%)
• Hertz Global Holdings (HTZ)

The new buys that replaced these names are:

• Dana Inc. (DAN)
• Taylor Morrison Home Corp. (TMHC)
• NRG Energy (NRG)
• JetBlue (JBLU)
• Spirit Airlines (SAVE)
• Omnicom Group (OMC)

Read the Black Box Trader's Guide to learn more about this computer-driven service designed to take the emotion out of investing.

All the Best,
Jim Giaquinto

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