After a lackluster week the major indexes finally broke out to new highs to set the stage for next week.

Market Statistics

The Dow and S&P spiked to a new high over their round number resistance on Monday and then pulled back as is often the case as traders took profits after the target was hit. After languishing throughout the week the indexes began strengthening on Thursday and accelerated into Friday's close. The Dow closed at 16,064 and well over that round number resistance at 16,000. The S&P finally moved to close at 1,804 and also over the resistance that knocked it into a hole when the week began.

The most important index high was the Russell 2000, which closed at 1,124.70 and a new historic high. The Russell had pulled back sharply to trade at 1,096 on Wednesday only to rally +2.5% in the last two days. The small cap rebound from the sharp sell off to a new historic high is very bullish for the market next week.

Even the Nasdaq squeezed out a new 13 year high at 3,991 but remained slightly below the round number resistance at 4,000.

Despite closing at new highs it was actually a lackluster day in the markets. Volume was the lowest of the week at 5.5 billion shares. It would have been much more bullish if volume was rising but we will not complain about the result.

The economics were also lackluster without any material reports on Friday. The E-Commerce sales rose from $64.8 Billion to $67.0 billion in Q3. Nobody seemed to care.

The Job Openings Labor Turnover Survey (JOLTS) was flat at 2.8% in September after rising +2.8% in August. Employers posted 3.9 million job openings up from 3.8 million in August. Hiring also rose slightly from 4.56 million to 4.59 million. This was a lagging report for the September period and it was ignored.

The Kansas Fed Manufacturing Survey improved only marginally from 6.0 in October to 7.0 in November. However, the internal components were more upbeat. New orders rose from 3.0 to 15.0 and backorders increased from -2.0 to +14.0. Employment rose from -2.0 to +6.0. The Kansas area tends to be tied to auto production and that was seen as the driver in November. The report was mostly ignored.

The market was in rally mode on Friday as a result of the Philly Fed Manufacturing report on Thursday. The Philly Fed headline number declined from 19.8 to 6.5 and the lowest level since May. New orders declined from 27.5 to 11.8 and backorders fell from 9.1 to -4.2. Employment declined from 15.4 to 1.1.

The Philly Fed Mfg Survey is seen as a proxy for the entire U.S. and the poor performance suggests the Fed will continue QE well past December. James Bullard tried to talk up the possibility of a December cut to QE but with economics like this it is not likely to happen.

The volatility in the various economic reports means there is no sustainable recovery in progress and the Fed will look at the reports along with the fiscal follies about to start in Washington and QE will continue well into 2014. The consensus estimate as of Friday is for a March taper announcement.


The economic calendar for next week will likely be ignored as well. The Richmond Fed and Chicago Fed surveys will be the highlights along with the Chicago ISM (PMI) the end of the week for traders. Once that report is released many traders will hit the door for the long weekend.

The market is closed on Thursday and closes early at 1:PM on Friday. Volume will be seasonally low all week.

Thanksgiving week is typically bullish but the week after Thanksgiving is even stronger.

The week starting with Black Friday has been up 7 of the last 7 years and 9 of the last 11. The period from Thanksgiving to Christmas is seasonally strong. The challenge will be the budget deadline on Dec 13th and the headline war that it will produce.


Stock news was pretty sporadic with hits and misses coming from several unrelated sectors. Intel (INTC) shares fell -5% the day after the company held its analyst meeting. In that meeting the CFO Stacy Smith said Intel will see 2014 revenue flat with this year as 9% growth in server chips will be offset by a "mid-teens" percentage decline in sales of chips for client computing devices.

Analysts said Intel was more candid than normal in their disclosures. However, the lukewarm outlook suggests the company is having trouble combating the slowdown in its PC business. Intel said it was going to make a bigger push into mobile and expand its manufacturing chips for a fee for other chip makers. Some analysts felt the slowdown in PC chips was forcing Intel to branch out into so many areas they might lose focus.

Some analysts pointed out the strong demand for the iPad Air and other iPad products as downward pressure on PC chips. The explosion of tablets is forcing Intel to compete in another product area where it is not the leader. However, Intel is going to debut two new Atom chips in 2014 that could bring tablet prices down to the sub $100 level and that will be bullish for chip and tablet demand. However, by pushing the price of chips so low it will also squeeze their margins. There is also the potential for the ARM chips to begin eating away margin from the core PC business.

Goldman Sachs left the meeting disappointed and reiterated a "sell" rating with a price target of $16. They saw Intel guiding for another year of no revenue or earnings growth but record capex investments. Goldman expects computer and chip prices to continue to decline and they are worried about further guidance warnings throughout the year.


Herbalife (HLF) shares shook off another strong attack by Bill Ackman and gained +5% for the day. So far Ackman's $1 billion short has cost his Pershing Square Capital hedge fund $500 million but he refuses to give up saying he will pursue his Herbalife battle to the ends of the earth. He said he was speaking with regulators on at least a weekly basis.

Herbalife continues to deny it is a pyramid scheme and pointed to a lack of progress by Ackman despite spending millions to press his case. A Herbalife spokesman said "Mr. Ackman presented nothing new today after a year of baseless claims and hundreds of millions of dollars of losses for his investors. The only thing he has proven with his ego-driven, obsessive investing decisions is his lack of understanding of consumer product companies." The spokesman pointed to Ackman's investment losses in Target, JC Penny, Borders, etc as evidence of his investing mistakes.

Ackman said "Every day that goes by without an audit, I can't believe people own this stock." Herbalife lost its auditor a year ago and hired a new firm. The results of the new audit should be released soon. The new firm is taking its time because they know the audit will be under a microscope as soon as it is released.

George Soros, Carl Icahn and William Stiritz have all taken major long positions against Ackman. In his presentation on Friday Ackman said it was curious that 80-year old billionaires had taken long positions in the company. Ackman said he had taken some of the risk out of the trade by converting 40-43% of his short position into long dated puts and covering the corresponding short in the shares. He is obviously feeling the pain.


Time Warner Cable (TWC) and Comcast (CMCSA) both soared on Friday after Comcast said it was seeking advice on possible regulatory hurdles it might face if it made a bid for Time Warner. This came right after the Wall Street Journal said Charter (CHTR) was trying to line up financing to make a bid for Time Warner. There was a report that Time Warner had reached out to Comcast as the company they would rather see make a bid. Time Warner saw income fall in Q3 after a dispute with CBS took the channel off the air for 3 million homes for about a month. Net income fell -34%. Time Warner has a market cap of roughly $37 billion but an acquisition could be in the range of $55-$58 billion.

Previously federal rules prohibited any one company from having more than 30% of cable subscribers. The rule was eliminated in 2009 but there would probably be some antitrust concerns with a TWC/CMCSA merger that would end up with about 37 million customers or 33% of the market. Comcast owns 20% share today. Analysts believe a combined company would control the way content was presented in America and what channels it would allow. That could be too much control for regulators to allow.



Lumber Liquidators (LL) was knocked for a -12% loss after Whitney Tilson, manager of the Kase Capital Management hedge fund gave a presentation at the Robin Hood Investors Conference. He said the fund was short LL because the gross margins were too good to be true. He suggested it might be related to alleged imports of illegal timber from eastern Russia. The federal government is probing those purported shipments and raided LL headquarters in late September. Tilson quoted from a report from London-based nonprofit Environmental Investigative Agency on the company's practices. The agency alleged LL had turned a blind eye towards the source of timber and it had fueled rampant illegal logging in Eastern Russia.

Shares of LL had been spiking after they reported earnings with the best sales growth in several years thanks to the wave of remodeling currently underway. Even after Friday's drop the stock is up +93% for the year.


The Fresh Market (TFM) crashed -19% after missing on earnings and revenue and warning on Q4. Earnings were 23 cents compared to estimates for 26 cents. Revenue rose +14% to $364.5 million but missed estimates of $373.4 million. The company lowered the full year forecast from $1.50-$1.55 to $1.42-$1.47. Analysts were expecting $1.53. Fresh Market said it "experienced increasingly challenging economic conditions as the quarter progressed." I suspect it is because Whole Foods is eating their lunch and rapidly gaining market share. Whole Foods is not having the same problems as Fresh Market.


3D Systems (DDD) and Motorola Mobility, a Google company, entered into a multiyear development agreement to create a continuous high-speed 3D printing production platform for the phones to be produced in support of Motorola's Project Ara. "These highly-custom, modular smartphones will allow users to make functional and aesthetic choices about their device" according to the press release.

Several analysts said this development agreement would move 3D printing into the mainstream and showcase the revolutionary change in the manufacturing business model. 3D printing is rapidly going from a novelty to a mass produced reality and we could see this company and process surge in the coming months.

Motorola invented the cell phone and 3D Systems invented the 3D printer. How appropriate they joined forces to create the first mass produced 3D manufacturing system. This will bring even more credibility for 3D Systems. It is not just a fad anymore.


Novartis (NVS) held an investor day on Friday and Christmas came early for Novartis investors. The company said it was launching a $5 billion stock buyback to start immediately and run over the next two years. That is part of an $11 billion plan launched in 2008 with more than 75% still unpurchased. The company also set aside additional funds for a dividend and for acquisitions. They recently announced the sale of the majority of their diagnostic business to Spain's Grifols for $1.68 billion in cash. The company said it was starting to develop new business segments in dermatology, Heart Failure and respiratory illnesses. The company also said it had a new breast cancer drug going into Phase III clinical trials. The LEE011 drug is a CDK 4/6 inhibitor similar to one in development by Pfizer (PFE), which is thought to be a $5 billion a year drug by the end of the decade. Novartis is taking it a step farther and has early stage studies with LEE011 looking at melanoma, lymphoma and pediatric cancers. I thought the investor day news was very bullish for Novartis and I would be a buyer on any pullback.


After the bell on Friday the S&P announced JCP was being dropped from the S&P-500 and replaced by security provider Allegion (ALLE), a spinoff from Ingersoll Rand (IR) effective Nov 29th. ALLE shares will begin trading on December 1st. Earlier Friday JCP reported an adjusted loss of -$1.81 on a -5.1% drop in revenue to $2.76 billion. Analysts were expecting a loss of -$1.74. Same store sales for the quarter declined -4.8% but sales for September posted the first monthly gain since December 2011. Shares reached a two-month high on Wednesday at $9.63. Shares fell -10 cents in afterhours on Friday.


The swirling comments over tapering QE sent the yield on the ten-year treasury to 2.84% on Thursday morning but the two-month high spike was short lived. The yield came back down to 2.75% by Friday's close. However, Bank of America believes there are higher yields ahead and the market could come "unhinged" when it happens. The 3.0% level seems to be the next target and BAC believes we could see 3.17% to 3.3%. While the market may see some volatility from that move BofA said any move over 3.3% is going to produce dramatic volatility in the equity markets. "Safe" yields over 3.3% will be very attractive to large institutions looking to preserve capital rather than risk it. Insurance companies, pension funds, etc will start shifting capital out of equities and back into treasuries over 3.3%. It is only a matter of time until this happens but the Fed should be able to keep rates low for the next six-months or so with QE. Once they start tapering the rates will soar.


Oppenheimer updated their yearend forecast for 2014 to 2,014. No that is not a typo. They are expecting the S&P to rise to 2,014 by the end of 2014. They said "The 2,014 target reflects our expectation that the stock market will have opportunity to move higher over the course of next year, and turn in yet another double-digit increase...albeit around half the size of this year's rally to date. Our price target is set using the mid-point between our dividend discount model and a price/earnings model." They expect these valuation projections to be supported by improving fundamentals now that US economic growth has been "primed" by the Fed's QE program.

The P/E model puts the price target at 2,060 while the dividend-discount model prices the index at 1,967. The actual average is 2,013.50 so they rounded up to 2,014. Oppenheimer's chief market strategist John Stoltzfus raised the 2013 price target from 1,730 in October to 1,812, less than 1% above Friday's closing level.

The S&P closed at 1,804 on Friday and a new record high. This just happens to be the long term uptrend resistance from March 2012. I expect it will be broken for multiple reasons. The first is the normal seasonal strength of Thanksgiving week and the Santa Claus rally starting the week after Thanksgiving. We also have the support from continued QE and rising fundamentals for stocks. Q4 earnings estimates are still rising despite the round of ugly earnings and lowered guidance from the retail sector.

On a side note JP Morgan pointed out last week that more than 60% of earnings growth over the last two years has come from stock buybacks rather than rising sales growth. Buying back stock reduces the number of shares outstanding and increases the earnings per share. In case you have not noticed the stock buyback announcements have been booming over the last several weeks.

If we add improving fundamentals and improving economics to the buyback trend we should get even higher earnings in the next several quarters. Q4 is the first quarter in over a year where the earnings estimates are rising instead of falling as the quarter progresses.

Lastly, I think the S&P will move higher because funds are behind the S&P on performance. The S&P is up +26% for the year and the average fund is up only in the mid teens in percentage terms. That comparison does not look good on year end statements. Funds are going to be chasing performance. The momentum stocks that have outperformed over the last quarter should continue that performance over the next five weeks.

This is no longer a technically driven market. This is a bull market and without some major unexpected event the market should rally into year end. The S&P just managed the longest winning streak (7 weeks) since May 2007. One event that could trip it up is the budget deadline on December 13th. If Washington goes back into trench warfare mode it could damage sentiment and slow any year end gains. If Washington somehow came up with a grand bargain everyone agreed on the market would explode higher. I am not holding my breath.

The S&P is over extended but it can remain that way for weeks to come. Small dips of 2-3% like we had last week should continue to be bought. Initial support is now 1,780 followed by 1,765-1,750. Eventually we will revisit the 100-day average but I expect that in early 2014 rather than the next five weeks.


The big caps are still leading the charge but the small caps are now in chase mode. The Dow rocketed through 16,000 after four days of consolidation and chipping away at that round number resistance. The Wednesday dip back to 15,900 after the FOMC minutes was a buying opportunity and it was not missed.

The Dow has no material near term resistance now that it is over 16,000. The week of consolidation gave it a decent base to launch from and we could see continued gains in the days ahead.

The Dow is very overextended but bull markets can remain overextended for a long time. Support is 15,900 and I doubt we will see that again next week without some external event reversing market sentiment.



The Dow Transports closed at 7,211 on November 15th and then powered up to 7,240 last Monday before selling off sharply to close under 7,100 on Wednesday. The Transports are supposed to confirm new Dow highs by making new highs. Friday's 26 point gain closed at 7,199 and not quite that new high. Considering crude prices are at four month lows, rail loadings at 13 week highs and airlines at new highs you would have thought the transports would be breaking out every day. FedEx is a drag on the index. Shares of FDX have been very choppy of late on warnings of lower overnight volumes and more ground shipments. UPS is making new highs because the majority of their business is ground oriented. I believe the Transports will breakout this week and confirm the Dow Industrials.


The Nasdaq Composite closed at 3,991 and a new 13-year high by +5 points. Very few of the Nasdaq big caps closed positive on Friday with most of the heavy lifting done by the biotechs. Biogen Idec (BIIB) gained +33 points on positive news and Regeneron (REGN) added +19. Missing from the point gainers list are GOOG, AAPL, PCLN, etc, making it hard for the Nasdaq to accelerate.

The Nasdaq has not broken over round number resistance at 4,000 but it should this week. There is strong support at 3,920 and the rising 50-day average at 3,860. I doubt either level will be tested this week.



The Russell 2000 came roaring back after three weeks of profit taking and fund rotation into big caps. Apparently when they saw the small caps were not going to decline any further the fund managers began pouring cash back into small cap leaders. The Russell closed at a historic high on Friday and should continue to make new highs during the seasonally bullish weeks ahead. Small caps are usually favored in December.

Support is 1,096 and resistance around 1,135-1,145.


Bull market corrections show up unannounced and they are usually fast and deep and are over quickly. Since they are unannounced it is tough to plan for them so we should always be prepared. They rarely appear in December but January could be a very good possibility.

December is the top month for S&P gains with an average of +1.7% since 1950. It is also the best month for the Russell 1000 and Russell 2000 and second best for the Nasdaq since 1971.

The current market is fueled by QE. The following chart is the best example I have seen. Without QE the market would be focused on fundamentals and global fundamentals are terrible but global stock prices continue to rise. What is wrong with this picture? Remove QE and the market will collapse.

Source Bloomberg via Zerohedge

Forecasts

Goldman Sachs (GS) is projecting a good year for stocks in 2014 but David Kostin reiterated a yearend target of 1,900, a gain of only 6% from here. Morgan Stanley is now projecting 1,840. Goldman said the S&P could fall -6% in the next three months and 11% at some point over the next 12 months. (1,600) Kostin sees a 67% chance of a 10% drop at some point in 2014 before rebounding to close at 1,900. He also sees S&P 2,100 by year end 2015 and 2,200 by yearend 2016. They base that on $108 earnings in 2013, $116 in 2014, $125 in 2015, $132 in 2016, $138 in 2017. Goldman expects $150 billion to flow into stocks in 2014 from individuals, investors and companies. Another $225 billion will flow into equities from mutual, pension funds and life insurers.

Morningstar said $172 billion flowed into stock funds in the first 10 months of 2013. That is the largest amount since the $272 billion in all of 2000. Most of the cash this year went to international funds but domestic equity inflows are still the highest since 2004.

Blackrock CEO Laurence Fink said stocks may decline as much as 15% in 2014 because of political risks in China, Japan, France and the USA. China and Japan are on the verge of war over disputed islands in the South China Sea.

A factor I believe is being ignored is the implementation of Obamacare. With insurance rates for most people rising 25% to 75% with some over 100% this is going to be a huge drain on consumer spending in 2014. The GDP could plummet as consumer spending crashes. When oil prices soar and gasoline prices near $4 the economy slows dramatically. In reality that is only about a $20-$25 a week hit to the average commuter.

The sharp increase in insurance premiums is going to be significantly more than the cost of gasoline and the economic impact could be huge. When the mandate for employer supplied insurance rolls around at year end 2014 there is an estimated 75-80 million policies that will be cancelled. That means those plans will be replaced with higher cost programs and the impact will be about 600% greater than the current displacement of individual plans. Estimates are between 8-12 million individual policies have been cancelled and participants are being pushed into the higher cost exchanges. Multiply that by the much larger number of group plan holders at the end of 2014 and it will be a significant economic hit. The market in 2014 and 2015 could suffer significantly under the burden of dramatically lower consumer spending.

Lastly, we should not forget QE. The Fed will begin tapering somewhere in 2014 and that could produce a -15% decline in the market according to several analysts. Once that support is removed the market will focus more on the fundamentals and interest rates and money could quickly shift back into treasuries. You can't forecast 2014 targets without taking into account the end of QE.

If I was going to worry about anything over the next few weeks it would be the lack of worry in the market. Volatility is too low and bullishness too high BUT market action is too reserved given those factors. The risk of a headline war ahead of the December 13th budget deadline and the potential for another debt ceiling battle in late January may be holding back cautious investors but that is not showing up in the volatility. Everybody seems to be bullish but the market is in slow meltup mode instead of rally mode. The market is too calm. Remain long but keep those stops in place.

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Enter passively and exit aggressively!

Jim Brown

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