"I don't believe in flagship retail, because the definition of flagship retail is that it's a marketing expense, and it's going to lose money.
--Kevin Plank
 
Rise of the Undead
 
Equity markets traded sideways yesterday. There was some weakness seen across the healthcare space, as well as the financials. One, thanks to the immediate uncertainty regarding policy, the other still due to soft guidance seen on Friday when the big three banks reported earnings that forced some profit taking. The bond proxies showed some strength, as yields were pressured. There was one industry withing the Discretionary space that showed some leadership to the upside yesterday, and ironically, this is an area that most have by this time given up for dead.
 
Make that the Undead. Rise. Almost all of retail found some support in yesterday's quiet trade, but what we refer to as the multi-line retailers really roared. The catalyst? Cowen (using data provided through National Traffic Devices) released some research that showed retail traffic across the United States almost 10% lower year over year for the week ended this past Saturday. Of course, almost anyone who has shopped for anything recently has noticed the solitude of the task. The positive? No crowds. The negative? No help in the aisle, nor at the register.
 
The difference maker, at least for one day, was apparel. Dead right? Hmmm, not so fast, tough guy. While traffic at stores that sell clothing was still indeed lower on a yearly basis, that very same data showed that apparel sellers saw traffic declines of only little more than 5%. In comparison, traffic at the very low end -- electronics sellers -- was exceedingly light (-26%). Permanent trend? How can one say. I will say this. My wife dragged me around on Saturday, as she shopped for some new clothes. She also often helps me with my own unofficial research in this area. She is the one that got me out of Lululemon ( LULU) ahead of that earnings debacle back in March.
 
It did seem to me that the stores outside the mall -- at a free standing Kohl's ( KSS) , and a free standing Old Navy ( GPS) , specifically -- were benefiting mildly from discounting. Both had full parking lots, and both had lines at the register requiring significant wait times. BTW, I am long KSS.
 
Macy's ( M) led the way on Monday, but Guess ( GES) , KSS, Abercrombie & Fitch ( ANF) , Michael Kors ( KORS) , JC Penney ( JCP) , and Ralph Lauren ( RL) all enjoyed gains in their stock prices that approached 1.5% or more for the session. On top of this warm and fuzzy group hug, there has also been significant levels of insider buying at Macy's, led by CEO Jeffrey Gennette. These purchases were made at, or close to, the $23 level. That's not usually a bad sign.
 
Yes, It is Still All About Subscriber Growth
 
Netflix ( NFLX)  reported after the close, with operating profit margin printing at 4.6% globally, down from 9.7% in the first quarter. The firm has made public it's wishes to be measured on profit margins, as well as revenue growth. The "Take 'em" crowd doesn't quite see it that way. Netflix added an astounding 4.14 million international subscribers. That crushed the firm's own guidance of 2.6 million. Domestically, 1.07 million subs were added versus guidance of 600,000. Huzzah!!. The firm did miss by a penny versus EPS (earnings per share) expectations. However, revenue did grow 32.9% year over year, which was a solid beat.
 
On forward-looking guidance, the firm raised third-quarter expectations for revenue and net income, while mentioning that it expects to see a first-ever profit from the international side of the business. It's not all gummy bears and roses, though. Free cash flow is expected to post somewhere in range of -$2 billion to -$2.5 billion for full year 2017.
 
The company reiterates that it expects free cash flow to remain negative for many years to come, as it feels compelled to finance content spending through debt. Competition is only growing in this space. What's important here? At least for the overnight trading session, the crowd seems to have spoken. I did come in to these earnings long NFLX call options.
 

 
Kevin Plank at Under Armour doesn't believe in flagship retail.
Kevin Plank at Under Armour doesn't believe in flagship retail.
 
Oh, That Rotation?
 
The crowd was rotating out of technology. Remember that? Oh, to be sure, there are days where it still feels that such a move is in motion, but those days have ended up being buying opportunities for those of us out here trying to turn a buck. Month to date (July so far). the S&P 500 has returned 1.5%. And the Technology Select Sector SPDR ETF ( XLK) ? Oh, just 4%, much of that over the Nasdaq Composite's now seven-day winning streak. The Nasdaq may have gained just a smidge yesterday (+0.03%), but a win is a win. It's the kind of thing that you notice on days that the Dow Jones Transports give up nearly half a percent versus the Industrials, which largely ran sideways.
 
Am I a firm Dow Theorist? Not really. It is an arrow in my quiver. Does confirmation of broad market strength by the Transports (like the kind that we have indeed had for most of the year) make me feel better? Yes. Like technical analysis, fundamental analysis and investor sentiment, this theory is part of the mosaic that results in price discovery.
 
So, when even for one day, the transports diverge lower, it does not go unnoticed. When certain things do not fit, you keep an eye on them. The Russell 2000 continues to perform well, even outperforming the S&P 500 so far this month. Does that make perfect sense? With a weakening U.S. dollar? A U.S. economy running softer than are some other economies? With tax reform and any kind of infrastructure build seemingly off in some distant fantasy world? Maybe not.
 
Make sure you've got you're flanks out. Point, and tail covered. Heads on a swivel, gang. The vegetation here is rather thick. Are you diversified?
 
Macro
 
08:30 - Import Prices (June): Expecting -0.3%, May -0.3% m/m.
08:30 - Export Prices (June): Expecting 0.0%, May -0.7% m/m. May was an awful month for both Import and Export prices. On the Import side, prices were indeed dragged lower by energy prices, which fell 3.9% month-over-month all by themselves. That is also why we expect further contraction in that space for June. As for Exports, agriculture did have a hand in the ugliness, but the weakness was broad-based. A spate of dollar weakness for the month should have helped support export prices.
 
08:55 - Redbook (Weekly): Last Week 2.4% y/y. Chain store sales by this measure have been steadily improving on a year-over-year basis for several months now. Last week was the sixth consecutive week to print at minimum growth of 2.1%, but we still need to see a week of 3% expansion to get back to 2015 levels. Remember, as recently as 2014, year-over-year growth of 4%, and even 5%, were commonplace for the Redbook.
 
10:00 - NAHB Housing Market Index (July): Expecting 67, June 67. A 67 tag is considered very strong for this item, which is also known as the homebuilders' optimism index. The thing is that 67 was a contraction from May, and the weakness was in traffic. Just how bad will the drop in traffic play out? We'll start finding out tomorrow, when Housing Starts and Building Permits for that month hit the tape.
 
16:00 - TIC (May): Expecting $17.7B, April $1.8B. Cross-border investment disappointed badly in April, as the barely positive result for net long-term TIC flows missed a consensus expectation that was up in the high-$30-billions. The culprits were U.S. Treasuries. Foreign accounts sold a net $-22.6 billion of Treasuries in April, and it was not Chinese accounts that did the most damage, as it is believed that the Chinese actually increased their holdings during the month.
 
Sarge's Trading Levels
 
These are my levels to watch today for where I think that the S&P 500 and the Russell 2000 might either pause or turn.
 
SPX: 2482, 2470, 2463, 2457, 2449, 2442
RUT: 1448, 1441, 1433, 1424, 1417, 1406
 
Today's Earnings Highlights (Consensus EPS Expectations)
 
Before the Open: BAC (0.44), SCHW (0.39), CMA (1.09), GS (3.39), HOG (1.39), JNJ (1.79), LMT (3.07), PGR (0.60), SNV (0.59), AMTD (0.42), UNH (2.38)
After the Close: CSX (0.59), IBM (2.75), UAL (2.62)

 
 
What's Hot On TheStreet

Netflix is so impressive: By trouncing quarterly subscriber estimates and issuing solid guidance, Netflix Inc. (NFLX) did much to put to rest fears that its stock had gotten ahead of itself following a 31% rise so far in 2017, TheStreet's Eric Jhonsa says. The streaming giant also showed that it has reached a point where its sheer scale provides a competitive edge that makes it hard for even deep-pocketed tech and media rivals to slow it down, Jhonsa adds.

Overall, Netflix is an unstoppable beast because millennials like watching movies on the couch.

Tesla is bizarre: Tesla Inc. (TSLA) is adding two new executives from major media corporations to its board of directors after investors urged the electric carmaker to add members without close ties to CEO Elon Musk, TheStreet reports.

James Rupert Murdoch, the CEO of Twenty-First Century Fox Inc. (FOXA) , and Linda Johnson Rice, the chairman of Johnson Publishing Co., will join Tesla's board, according to a company blog post.

Though the new board members are indeed independent, according to BoardEx, a relationship mapping service of TheStreet Inc., they lack experience in the car industry and have loose ties to the technology industry at best. Seeing as Tesla is burning through cash at a startling pace and is undergoing a Model 3 production ramp, adding experienced car or tech people to the board would have seemed like a better idea.

Meanwhile, Musk now apparently doesn't think his stock is overvalued after TheStreet called him out on his comments over the weekend.

Vicious downgrade on one hot tech stock: Barclays downgraded Advanced Micro Devices (AMD) to a price target of $9 on Tuesday TheStreet reports, giving it a rating of underweight from equal weight, saying that the valuation was pricing in a high degree of success but there is little evidence of share gains.

Barclays analyst Blayne Curtis predicted the stock would crash 35% from current levels. Since the beginning of June, shares of AMD have gained 23.5%, while Nvidia (NVDA) has risen almost 14%, on the back of a surge in demand for GPUs used to mine an alternative cryptocurrency called Ethereum (the units are known as Ether), TheStreet's Annie Palmer reports. A wave of bullish reports has come out since then saying that the boost in cryptocurrency mining demand could help Nvidia and AMD rise above a seasonally weaker fiscal second quarter, among other benefits.

But thanks to a steep drop in the prices of cryptocurrencies, the benefits may already be priced into the current quarter, with little left to gain thereafter, according to analysts.

(Get Morning Recon delivered directly to your inbox each market day. Click here to sign up for e-mail delivery of Stephen "Sarge" Guilfoyle's Morning Recon, Jim Cramer's Daily Booyah! or other great free newsletters from TheStreet.)
 

At the time of publication, Guilfoyle was long Kohl's equity and long Netflix call options, although positions may change at any time.

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