Bulls raced into the market as indexes broke to new highs on a summer Friday.

Market Statistics

While historians are remembering the June 6th invasion in Normandy, traders are going to be remembering Thursday and Friday as the summer stampede. All the major indexes broke solidly above prior resistance with the Dow, $S&P, $OEX, $RUI, $RUA, $NYA, $TRAN and $SOX all surging to new highs. The Nasdaq 100 ($NDX) made a new 14 year high. The Nasdaq Composite ($COMPQ) and the Russell 2000 ($RUT) were up strongly for the week but they started from a lower level and did not make new highs.

It would appear on the surface the market has gone from stealth rally to stampede mode in the last three days. The Volatility Index fell to 10.73 and closed under 11 for the first time since February 2007. Anyone looking to sell option premiums to make money is going to be hard pressed to find any premiums worth the risk. However, those looking to buy calls will be rewarded with low prices.


The big news for the morning was of course the Nonfarm Payrolls for May. The headline number came in at a gain of +217,000 jobs and April was revised lower by a small -6,000 drop to 282,000 jobs. The estimate range for May was from 110,000 to 240,000 so it came in towards the high end of forecasts. Overall it was another Goldilocks report, not too hot and not too cold. Over the last 12 months the average gain was +198,000 jobs so there is no real acceleration in hiring.

The unemployment rate remained unchanged at 6.3% as the labor force participation rate remained weak at 62.8%. The separate Household Survey showed a rise of +192,000 in the labor force after a -806,000 drop in April. The Household Survey showed a gain of +145,000 jobs and a nice improvement over the -73,000 loss in April.

The economy needs to create TWICE as many jobs in order to accomodate the increase in the working-age population. That is not likely to happen and the long term unemployment is going to decline slowly as more workers enter the job market.

Approximately 3.6 million college students will graduate in 2014 and roughly 3.5 million will graduate from high school. Approximately 1.2 million legal immigrants will be allowed in and roughly 500,000 illegal immigrants will arrive according to to Homeland Security. Assuming 3.0 million college grads, 1.0 million high school grads, 600,000 legal immigrants and 400,000 illegal immigrants will enter the workforce that is roughly 5.0 million new workers. We only created 2.379 million jobs over the last 12 months or about half what is needed to keep unemployment rates from rising.

Private payrolls rose by +216,000 with business and professional services gaining +55,000 jobs, down from +71,000 in April, and healthcare also rose by +55,000. Retailers only added +13,000, down from +43,000 in April.

Analysts are still playing the weather card saying the job gains were boosted by the snapback from the bad weather in Q1. Outside projects delayed by the weather are just now ramping up to full speed now that summer weather is here to stay.

Employment has to improve significantly or the Federal budget is going even higher as a result of growing expenses for social programs to keep the rising number of unemployed persons from starving.


Next week is another light week for economic reports. The retail sales report is probably the most important for the week because it will tell us how consumers spent money in May. The Producer Price Index is expected to rise slightly due to the rising cost of commodities and fuel. If consumer spending remains soft the producers will not be able to pass that on to the retail purchaser.

The wholesale trade number is a lagging indicator for April so it will be ignored.


The biggest event is the Apple stock split. Apple's 7:1 split at the close on Friday is the fourth split in the company's history and the largest. The stock has gained +135 points since the April low at $511. The gains came primarily from the stock buyback and dividend announcements and of course the stock split.

We all know that the split has no impact on the fundamentals of the stock. It is simply a liquidity event that makes the stock more affordable for the smaller investor. They will surely pile into the stock at the open on Monday when the shares open at $92.20 based on the closing price on Friday.

Most investors that traded stock splits during the go-go days of the Y2K rally understand there are multiple phases of a stock split. The first is the announcement spike where all the shorts are forced to cover. Depending on the time between the announcement and the split there may be a post announcement depression period while traders are dormant waiting for the split to draw nearer. The next phase is the pre-split runnup. Normally about three weeks before the split date the trader community piles into the stock for the pre-split rally.

When the split actually occurs there is a very short term blip as new investors snap up the cheaper shares. However, this is normally a short term event of 1-2 days. The bigger pressure on the stock will be dividend selling.

When a company announces the stock split as a dividend, which is 99.9% of all splits, the holders of the stock after the split can sell their new shares and be taxed at dividend rates rather than regular tax rates.

This means can sell their "new" shares at a lower tax rate. That does not mean they will sell them all but they can sell a portion of their new shares and take some cash off the table. Given the +$135 rally in the last month there will be a lot of people taking profits.

Also, some pension funds are restricted as to the number of shares they can own. If they held 5 million shares on Friday they will have 35 million on Monday. If their limit was 20 million per position then 15 million have to be sold.

There were 861.38 million shares outstanding on Friday. On Monday there will be 6.029 billion shares outstanding. The volatility is going to be significantly reduced. Microsoft (MSFT) has 8.26 billion shares, Oracle (ORCL) 4.46 billion and Exxon (XOM) 4.29 billion. You rarely see those stocks moving more than $1 a day.

The vast number of shares available to trade next week is going to limit the movement in the stock unless a majority of existing shareholders decide to sell a chunk of their new shares and that overpowers the number of new investors buying the newly affordable shares. You have to think that shareholders of 6.029 billion shares could easily overpower the buying power of small account holders wanting to buy a 100 lot at the new price.

It is not unusual for the post split depression to push prices back to the price at the announcement. That would be $525 or $75 post split. With a lack of catalysts in Apple's immediate future I would hold off on buying new shares until we see what levels they reach in the post split depression phase.


Google (GOOGL) spiked to $588 on the day of the split but then declined to $511 within three weeks on post split depression.

MasterCard (MA) is a good example of a split run. They announced a 10:1 split in December at $760 and split on January 21st at $823 ($82.30). In the ten days after the split the stock declined to $71.75 or more than $10. Despite the suddenly affordable stock price dropping from $823 to $72 the stock moved sideways for two months. Will that happen to Apple? MasterCard had only 1.12 billion shares after the split and Apple will have 6.029 billion. I would say the odds of post split depression over the next several weeks are pretty good. However, MasterCard does not have the same retail investor sex appeal as Apple shares so anything is possible.


In stock news Caesars Entertainment (CZR) fell -3% after bond holders served the company with a notice of default. Investors owning more than 30% of Caesars Entertainment Operating Company's second lien, 10% bonds due in 2018, gave the company the notice of default. The group said the company defaulted on its obilgations by transferring assets, including the Bally's Las Vegas hotel to an affiliate and by removing the parent company's guarantee on the debt of the operating unit. There are $3.7 billion in notes outstanding.

Apollo Global Management (APO) and TPG Capital bought the parent company in 2008 in a leveraged buyout. The company has $23.4 billion in outstanding debt. If the company does not resolve the creditor concerns the creditors can file for receivership, file an involuntary bankruptcy or foreclose. The second lien debt is trading at 42.5 cents on the dollar. The $1.5 billion in first lien bonds are selling for 84 cents on the dollar.

Caesars is eventually going to default. The $23.4 billion in debt is simply too much for the company to carry and some of it carries a 10% interest rate. Analysts believe bond investors are positioning themselves for the eventual restructuring by pushing for concessions in advance.


Keurig Green Mountain was trading flat for the day at $112.58 at 1:30 in a very quiet session. By 3:45 the stock had spiked to $123.38 on absolutely no news. Option volume exxploded with 30 cent options rising to $5 in only a few minutes. More than 12,000 June $120 weekly calls traded against an open interest of only 54. The calls expire next Friday. To buy calls $8 out of the money with only a week until expiration ahead of a monster unexplained spike in the stock is sure to bring regulatory inspection.

Total option volume in GMCR topped 74,000 contracts, more than 14 times the daily average. Calls outnumbered puts 3 to 1.

After the close the rumor of an acquisition by Coke (KO) resurfaced but there was no news. Coke bought 10% of the company in February and then said they were raising their stake to 16% about a month ago. Some analysts speculated Coke might acquire the entire company if the new cold beverage dispenser sold well. Coke is looking for a way to expand its offerings.


Tesla (TSLA) got a reprieve in New Jersey with the legislature voting unaminously to allow Tesla to sell its cars direct to the consumer in the Garden State. They were forced to stop selling them on April 1st after the Motor Vehicle Commission passed a rule banning direct sales. The new bill allows Tesla to have up to four retail stores, two more than it had before, and at least one service center.

The reversal of fortunes should make other states reconsider their laws against Tesla. Currently Texas and Arizona ban direct sales in their states while Maryland, Virginia and Colorado have some restrictions in place. Since Texas and Arizona are vying for the gigafactory you can bet the winner will immediately allow direct sales as a condition on getting the factory. California has already offered to relax some of its regulatory and environmental standards to entice Tesla to build the factory there.

Panasonic has announced it had signed a letter of intent (LOI) to partner with Tesla on the $5 billion gigafactory. It is not yet a firm commitment but the two sides are working closely to reach an agreement. Tesla will put up $2 billion and Panasonic $3 billion based on the current planning.

Tesla shares are still struggling under the resistance at $220 because of uncertainity over the "controversial" plans Elon Musk suggested were coming last week. He said at the shareholder meeting in reference to his desire to see more manufacturers build electric cars. "I'm kind of planning on doing something fairly significant on that front, which will be kind of controversial, with respect to Tesla's patents. But I probably want to write something so I can articulate it properly and explain the reasoning for the decision." He also said he would share supercharging stations with other manufacturers if they would contribute capital to the project. None have volunteered.


NetFlix (NFLX) is going to war with the cable companies. Netflix has started putting messages on the screen when you are trying to watch a movie. When the delivery speed slows down and interferes with reception the customer is getting the message "The Verizon network is crowded right now." They are also claiming similar slowdowns with Comcast (CMCSA).

Verizon sent a letter to Netflix threatening legal action if the company does not stop the onscreen messages. The Verizon letter demanded that Netflix provide evidence and documentation that substantiates its claim the streaming issues were "solely attributable to the Verizon network." Verizon also demanded the customer information for all customers that received the onscreen message. "Failure to provide this information may lead us to pursue legal remedies." Netflix has previously agreed to pay Verizon and Comcast for faster Internet speeds and priority for downloads. Verizon claims Netflix offloads its content to low cost broadband providers that suffer congestion issues unrelated to Verizon instead of connecting directly to Verizon.

Netflix shares are up +$130 since April.


Family Dollar (FDO) shares surged 10% after the close when Carl Icahn announced he had acquired a stake of 10.7 million shares or roughly 9.4%. Icahn said he was urging the discount retailer to explore ways to boost its value. Based on the closing price of $60.53 the stake would be worth about $647 million.

The discount dollar stores have been struggling because the low dollar consumer remains under pressure. Walmart (WMT) has posted declining sales for the last five quarters and they have a lot more marketing power than the dollar stores. Same store sales at Family Dollar declined -3.8% in the first quarter.

Shares of Dollar General (DG) rallied +3.50 in afterhours on expectations Icahn may try to force Family Dollar to merge with Dollar General. They are the country's largest dollar store with 11,100 locations.


Amazon (AMZN) is engaged in a war of its own over the price of e-books. The retailer is already fighting with Hachette Book Group and Bonnier Media. In the near future contracts with Simon & Schuster and HarperCollins will also be up for renewal. The fight with Hachette will determine the success of the future contract renewals with everyone else. Digital books are surging in demand and physical books are seeing rapidly declining demand. Physical book sales are expected to be $19.5 billion this year, down from $26 billion in 2010. E-book sales are expected to top $8.7 billion, an 800% increase. Amazon is fighting for a larger discount off the sales price so the company can continue its everyday low price model and increase margins. Amazon is already blocking some preorders for Hachette titles like Silkworm, written by JK Rowling of Harry Potter fame. She wrote the book using a pseudonym.

Amazon feels it has a dominant market position and as such it can sell more of the digital books than anyone else. That benefits the publisher and Amazon wants a bigger quantity discount. Amazon has 60% of the e-book market. Amazon offered to fund 50% of an author pool to reduce the impact of lower prices on authors. Typically writers receive 25% of the publisher's sales. A bigger discount to Amazon would reduce author revenue. Four major publishers including Hachette settled a Justice Dept investigation in 2012-2013 claiming they, along with Apple, fixed e-book prices. As part of the settlement they had to cancel their contract with Amazon and enter a new deal in 2012 that allows Amazon to discount book prices. It is that contract that is coming to an end.

Some authors are on Amazon's side. Since Amazon created the e-book market they have been able to sell many more books than they would have without Amazon. Publishers tried to kick back against Amazon by setting a firm retail price and paying a commission for the sale. Discounting was not allowed. Apple had several deals under that model where they received a 30% commission on sales. That went against the Amazon model of discounting everything and the fight began. As part of the government settlement publishers had to allow retailers to discount. That reduces the price to the publishers and to the authors but sells more books.

How do you fight a retailer that has a 60% market share? Is it worth receiving a buck or two more for your books but selling 40% fewer books? Obviously some readers will find a way to buy them elsewhere. That is a big revenue haircut for authors and publishers alike. Amazon is the 800 pound gorilla and sometimes you have to just get along.

Amazon has announced a new product event on June 18th in Seattle. It is rumored they are going to announce the long awaited Amazon smartphone. Also rumored it is to have 3D capabilities. The leaked specifications are for a 4.7 inch screen, 720P display, 13 megapixel camera and a Qualcomm Snapdragon processor. While Amazon is not expected to really impact the smartphone market with a leap in market share the market cap of the stock did jump $8 billion on the announcement. That is twice the market cap of Blackberry (BBRY). If Amazon is lucky they might sell as many phones as Blackberry and sell them at a loss like Blackberry does. The wild card here is the sales model. If Amazon elects to sell them really cheap in hopes of users buying more Amazon products through their phones they could depress prices and profitability for the other manufacturers. For Amazon it is all about gaining that next 1% of market share in any way possible.


Sprint (S) and T-Mobile (TMUS) are about to enter into the worst deal of the decade. Sprint is rumored to be considering an offer worth $40 per share for T-Mobile with 50% in stock and 50% in cash. That values T-Mobile at $31 billion. If they could actually conclude a deal it would create a larger number three telecom company in the U.S. and provide some real competition for AT&T and Verizon.

However, analysts give it only about a 30-40% chance of being approved by regulators. What makes this the worst deal in a decade is the breakup fee. If they enter into a contract and can't conclude a deal Deutsche Telecom, the 67% majority owner of T-Mobile wants a $3 billion breakup fee. Softbank, 80% owner of Sprint only wants to pay $1 billion. They will probably meet in the middle. I can't imagine any board giving approval to incur such a monumental breakup fee when there is less than a 40% chance of getting a deal done. Have people lost their mind? Shares of both companies declined on the breakup possibility even though a combination would be beneficial.



The Apple 7:1 stock split has broken the barrier for high dollar stocks and there is likely to be a flood of new stock split announcements. If the Apple split is successful and the stock rises after the initial volatility you can bet there will be other companies announcing their own splits. It was ok to have a high dollar stock as a status symbol as long as Apple and Google were sporting high prices. The Google split did not really count since the two class share issue clouded the waters. However, the Apple split and the lame attempt to get included in the Dow could trigger a new wave of announcements.

There were only 30 stocks out of 4,000 commonly traded companies with a price over $100 at the height of the financial crisis in 2008. Today there are hundreds and the list is growing.

Some companies that could announce are listed below. Some will never split because they don't want to deal with the shareholder paperwork that comes with billions of shares. They know having a high share price means the majority of your investors will be institutions with low turnover rates. If you split your stock down from $200 to $20 your shareholder count could go up by 1000% over the next couple of years. That means more annual reports, more notices, more mail, more shareholder questions, etc. Plus the movement in your shares slows to a crawl. The larger number of shares makes it harder to increase your earnings per share. Instead of having your earnings go up by 50 cents a share they may only rise by 5 cents and that is far less impressive. Dell was a prime example. They split their shares so often it took a monster quarter just to move the needle by a few cents.

The companies I believe will split over the next year are TSLA, AMZN, NFLX, ISRG, AZO and CMG. I included the Berkshire A shares in the list at $192,903 but Buffett said in the past he would never split his A shares. Maybe when they reach $200,000 each he will reconsider.


For the last two weeks the S&P has been in a solid uptrend. Multiple resistance levels have been broken. As each was tested the analysts would say "if this resistance breaks it would be a bullish breakout." It would break and then the analysts would point to the next level and "well we still have to get over xyz level" for confirmation. "Now we need some critical economic numbers from the ISM and Payroll reports."

I am guilty of making those statements. My levels were 1,900 and 1,925. The S&P closed at 1,949 on Friday after a +26 point gain for the week. That is a clear sign of shorts covering and fund managers chasing prices.

The rally was operating in stealth mode from the 27th to the 3rd but broke out into stampede mode on the 4th. Back on May 15th when the S&P was testing 1,860 the predominant sentiment was for a potential correction. Because each rebound had only been about 20 points and then a failure at resistance everyone was asleep when we retested the 1,900 level on the 23rd. The move over that level began to attract attention but the bears kept warning it was a blow off top because the Nasdaq and Russell were not participating. The continuing climb by the S&P was slow and lackluster and that kept the bears on board for another week.

When the Nasdaq and Russell suddenly began to rebound as well the bears were trapped. Suddenly every day was short covering day. Fund managers who were under invested in the market ahead of summer suddenly had to chase prices higher and put that idle cash back to work.

The combination of decent economic reports, ECB stimulus, better than expected economic numbers out of China and peace talks between Ukraine and Russia increased bullish sentiment and stocks moved higher over a crumbling wall of worry.

The S&P has now managed to move from oversold to overextended in about three weeks. The close at 1,950 could be seen as resistance but the 1,965 level is the real deal. However, 1,957 is the median target price for the S&P for 2014. We are at the yearend target in June and there are 7 months left. What happens now?


While the median S&P target is 1,957 the real target everyone talks about is 2,000. With the short covering and price chasing I believe there is the potential for that 2,000 level to be tested. At the risk of jinxing the current rally there is no bad news to crater the market. Russia and Ukraine are holding peace talks. China is improving. The U.S. continues to slowly recover and there are no storm clouds on the immediate horizon. There is nothing in sight to keep the markets from continuing to rise.

However, as I have said many times, the markets don't need an excuse to correct. They can do it at any time and the market reporters will assign a convenient excuse.

If anything the bears are still in denial and there are more shorts left to cover. I am sure there are still some fund managers holding cash that has suddenly become a liability. Can we move higher, absolutely! Can we suddenly move lower, absolutely but I think we have finally established a directional trend to the upside and it may continue.

New highs tend to attract new money faster than flies at a picnic and the majority of indexes have all broken out into blue sky territory and that is a flashing buy signal for retail traders.

The fly in the ointment is the volume. Friday's bullish gains that pushed the VIX down to 10.73 and 7 year lows came on volume of barely 5.2 billion shares. It was a summer Friday so that may actually work out in our favor. When everyone returns to work next week the volume could pickup and it is likely to be to the buy side.


The Dow breakout over 16,800 and then 16,900 puts it truly in blue sky territory. The clear round number target here is 17,000 but 17,200 is the next level of uptrend resistance. I went through the Dow 30 stocks and only 9 of them are not in an uptrend and several are exploding to the upside. The laggards are MCD, PFE, WMT, T, PG, VZ, HD, V and IBM. The financial stocks have been laggards all year and they caught fire last week with Goldman and American Express moving up strongly. AXP set a new high on Friday. With the financials suddenly catching fire this rally could have some staying power.



The Nasdaq 100 ($NDX) broke out of resistance on the strength of Apple and it may die next week because of Apple. The post split depression story is the wild card for tech stocks. Apple is a sentiment indicator for techs and a big post split decline could poison sentiment. The NDX broke out to a 14 year high and there is no serious resistance until 3,950-4,000 with Friday's close at 3,794.


The Nasdaq Composite is a different story. The Composite has not broken out to a new high and has strong resistance at 4,344 and 4,371. That 27 point range could be really tough to break if Apple is struggling with the post split depression. Fortunately the Composite built some decent support early last week at 4,220 so the potential for a major decline has dwindled.



The Russell 2000 slammed into strong resistance at 1,165 at the open on Friday and remained stuck to that level the rest of the day. The Russell rebounded +4% from the week's lows at 1,119 and +2.7% in just the last two days. That was a very strong performance but I doubt it was new money rushing in. It was more likely shorts covering after the support at 1,120 was tested for three consecutive days and failed to break. Shorts are not stupid and three rebounds from support when the big cap market is moving to new highs was a strong incentive to abandon those short positions. As the rebound began I am sure there was some new money chasing prices higher.

However, just getting past resistance at 1,165 is only the first hurdle. There are four additional levels starting at 1,180 that need to be crossed as well. The Russell does not need to be charging ahead for the big cap market to continue its gains. The Russell just needs to be mildly positive so it does not act like an anchor holding the market back.


The Dow Theory followers should be jumping for joy. The Dow and the Dow Transports are both in breakout mode and the economic indicators are improving. In theory that should mean both will continue higher. However, as sure as night follows day the transports will eventually return to the 100-day average as support. I doubt it will be soon but it will happen.


Eurozone stocks are also breaking out after the ECB cut interest rates and discussed the potential for QE. The ECB actions were widely expected and stocks had pushed higher but the actual news worked to push them to a new post recession high. The ECB has served notice it is going to battle deflation and use every means possible so eurozone stocks should do well.


I look for the markets to consolidate their gains next week and for the Nasdaq 100 to be the weak link "IF" the post split depression in Apple shares occurs as expected. Otherwise I think we are in buy the dip mode until proven wrong. The economic calendar is light and there is nothing on the geopolitical scene that should roil the markets. Of course those geopolitical events are never telegraphed in advance. They just show up unexpectedly and investors pay the price.

Random Thoughts

QE is not over. The Fed is still buying $45 billion a month in treasuries and mortgage backed securities. The Fed is still supporting the market.

The ECB cut its deposit rate to -0.10% to become the first major central bank to charge for funds on deposit at the bank. This means correspondent banks in Europe will now have to move the money out of safe keeping at the ECB and put it to work. They are no longer able to collect even a miniscule amount of interest by parking the money. They are going to have to find some other way to invest it.

The ECB cut the benchmark interest rate by 10 basis points to 0.15% and the marginal rate was reduced by 35 points to 0.4%. The ECB also opened a 400 billion euro ($542 billion) "liquidity channel" tied to bank lending. This is another effort to get banks to lend money. Banks will be able to borrow from the ECB up to 7% of their outstanding loan balance to non-financial corporations and households. The name for this is Targeted Long Term Refinance Operation or TLTRO. That means they can borrow money for practically no interest as long as they loan it to businesses. The ECB also said from March 2015 to June 2016 banks will be able to borrow as much as three times the amount of their net lending to euro-area companies. Lastly they are working on an "asset purchase" plan or QE to be announced in the future.

The final numbers are in. The Russians withdrew 61% of their money from U.S. banks in the month before the sanctions took effect. Deposits held by Russians in U.S. banks fell from $21.6 billion to $8.4 billion in March.

Remember the sky high GDP forecasts from two weeks ago? Q2 GDP was expected to snap back to 4% or even 5% and the full year GDP was going to be 3% to 4% depending on who was making the prediction. Surprise, the estimates are dropping like a rock. Bloomberg published this chart last week after a survey of economists. The full year estimate now averages 2.5% growth and is still falling.

Chart from Bloomberg Briefs

David Rosenberg from Gluskin Sheff said there is ZERO chance of recession because none of the ten checkpoints leading into a recession have come true. List courtesy of Pragmatic Capitalism

1. Inverted yield curve – despite the decline in bond yields, the spread between the 10 year US T-note and the three month T-bill is 244 points.

2. Morgan Stanley Cyclical Stock Index down more than 10% – the index closed at a record high on Monday and is up 4.9% year to date.

3. Bond yield rally of at least 135 basis points – the 10 year T-note yield has fallen 56 bps from the recent peak of 3.04% hit at the end of December.

4. Commodity prices down 5-10% – the CRB spot commodity price index is just off a two year high hit in May and is up 9.3% year to date.

5. High yield corporate bond spreads widen out 350 bps or more – spreads have continued to narrow and currently sit at almost seven year lows.

6. ISM below 50 for at least on month – the ISM manufacturing index just ticked up to its highest level so far in 2014 at 55.4 in May.

7. Initial jobless claims (four week moving average) up 75K – the four week moving average of initial claims fell to 311,500 in the week of May 24th, the lowest level since August 2007.

8. Relative strength of the S&P Financials down at least 20% – the ratio of S&P financials to the S&P 500 is down 2% year to date and down 6% from the recent peak from last July.

9. ECRI smoothed index of -5 or worse – the index was +5.3 for the week of May 23rd.

10. 20 point decline in University of Michigan consumer sentiment – the gauge of consumer confidence fell 2.2 points in May from April’s nine month high and is 3.2 points below the post-recession high hit last July.

David Tepper tapered his concern over market conditions. Two weeks ago he said he was concerned over the stability of the market and stocks swooned. On Thursday he said he was not as concerned and the market rebounded. Since he has a history of moving the market I wonder if he bought puts before the first comment and then bought calls before his last comment.

Ralph Acampora was right back in the flip flop chair last week. Three weeks ago he was saying the market could correct by as much as -25%. On Thursday he was bullish again. When questioned about his flip-flop he said that is the beauty of technical analysis. "When the technicals change direction you change your outlook." So is Acampora a day trader now?

China's PMI came in better than expected and at a 4 month high last week. Does that mean China is back to abundant growth? Not hardly as anyone will tell you one number does not make a trend. In fact the IMF lowered their forecast for GDP growth from 7.5% to 7.0% for 2015. China is on track for 7.3% growth in 2014 and will miss the current 7.5% target.

Let's be realistic. Everyone in the world would love to have 7% GDP growth. It just means China's economy has grown so big it is difficult to keep growing at a monster rate.

I saw a great comment on the VIX closing at 10.77 on Friday. "It has never stayed lower than that. And never is a long time." Is it time to buy long term VIX calls?

The most important number in the jobs report was 23.5 million. According to the BLS 23.5 million people either want a job or are working part time because they can't find full time employment. This is down from the 30.4 million four years ago but up from the 16 million just prior to the recession. That makes the real unemployment rate about 14.5%. The percentage of American civilians aged 16 and over and are not actively seeking one remained at 37.2% or 92,018,000 people and a 36 year high in May. The number of working Americans was 65.7% of the population when President Obama took office. It has declined to 62.8% and a 36-year low over the last five years.

Sell in May and go away. While that is historically the normal trend there are exceptions and 2013 and 2014 were two good years. The Stock Trader's Almanac did a study and on years when May is positive and the month of June is positive more often than not. However, the good news is that since 1968 when May is positive the rest of the year was positive 18 times and negative only 8 times. The positive years averaged a gain of +22% and the down years a loss of -4%. If history repeats itself this year we have a roughly 70% chance of a good year. Whether this overcomes the horrible history of the second and third quarters of a midterm election being negative is yet to be seen. While we can't trade on the historical seasonality it does make it interesting to see if they come true.

Jeffery Hirsch, editor of the Almanac, was questioned on CNBC why the sell in May cycle did not appear this year. The answer is "QE." The Fed is still buying $45 billion in treasuries every month and that is supporting the market along with the slowly recovering economy and the positive news from Europe.

Markets run on earnings. The PE may get ahead of earnings but they always come back to meet at some point in the future. Either earnings grow to meet the price or prices decline to meet the earnings. This is like gravity. We can avoid it temporarily but we always come back to earth. Today's S&P-500 PE is 16.5 and not high but not low either. It is right at the Goldilocks level where stocks are fairly priced.

The S&P has risen in 20 of the last 24 months with a 46% gain. That makes this the second most positive period in S&P history going back to 1952. The only time that there were more positive months in a 24 month period was 1994-1996 when the S&P rose in 21 of 24 months and rose +67%.

Quote of the week from Scott Krisloff from Avondale Asset Management.

Last month a Norwegian journalist who has been reading my analysis contacted me asking for a bearish quote. He mentioned to me that I have been waiting for "quite a long time" for a decline. My response to him was that it really depends on how you define a long time. Within the context of economic cycles, the six months that we've been bearishly positioned is not exceptionally long.

We experience time in hours and days, but economic cycles are measured in months and years. The average economic expansion has lasted 58 months since World War II, and we are in the 60th month of this expansion. On that time scale an extra three or six months is not meaningful. But when you are in the thick of things, that time can feel like an eternity.

It is probably this very disconnect that ends up creating economic cycles. The cycles last just long enough for emotional memory to fade so that we can make the same mistakes a second time. Market cycles trend towards extremes because we project the short term onto eternity and convince ourselves that the present environment will continue indefinitely.

Prices do not trend linearly in one direction though. Economic cycles rise and fall, and even though it may feel like things will stay this way forever, I can promise that they will not, and it’s highly likely that the top will be the precise moment that we're most convinced that they will. The longer that prices rise without a commensurate increase in earnings, the more likely that the correction will be severe when it eventually arrives.

The CIA went social last week with its first ever tweet. Apparently someone there has a great sense of humor. The tweet was "We can neither confirm nor deny that this is our first tweet."

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Enter passively and exit aggressively!

Jim Brown

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"Never argue with stupid people. They will drag you down to their level and then beat you with their experience."


Mark Twain