A report out of Europe claimed the ECB was planning on buying corporate bonds as part of their coming QE program and the markets rocketed higher.

Market Statistics

While the rumor was unconfirmed and flatly denied by other sources it did manage to lift the S&P futures out of a -15 point decline overnight and move them solidly positive before the open. China's GDP came in at 7.3% and the lowest level since the financial crisis and with the exception of the crisis the lowest level in decades. However, it was slightly above the 7.2% consensus so the Asian markets were mixed rather than in crash mode.

The Dow suffered from two more earnings misses from Dow components and IBM was down hard again but once the short covering began at the open those three components were unable to drag the index down.

On the economic front the Existing Home Sales for September came in stronger than expected at an annualized rate of 5.17 million compared to estimates for 5.10 million. Sales rose in 3 of the 4 regions. The Midwest declined -5.6% with the Northeast up +1.5%, South +5.0% and West +7.1%. Those are very strong numbers for this time of year. Normally people want to be moved in before Labor Day so the kids can start the year at their new school.

Inventories of single-family homes declined -1.3% to 2.3 million but still up +6% from the prior September. This equates to a 5.3 month supply. Home prices were up +5.6% over year ago levels with the average sales price of $209,700. The biggest negative in the data was the lack of first time homebuyers, which is at lows dating back to 2010. People can't pass the credit check and come up with enough down payment to overcome objections.


The Regional and State Employment for September was a non-event. Employment rates rose only marginally in 38 states and declined in 10 states. This report was ignored.

The calendar for tomorrow is equally uninspiring with only the Consumer Price Index as a headline. Consensus estimates are for a rise of +0.1% but I would not be surprised to see it flat or negative because of the drop in commodity prices.

The reports for the rest of the week are not normally market movers. All eyes are on the FOMC meeting next week and the potential end of QE.


Dow component McDonalds (MCD) reported earnings that declined -30% to $1.09 per share, down from $1.52 in the year ago quarter. Revenue declined -5% to $6.9 billion with U.S. same store sales falling -3.3%. The company blamed a lack of participation by millennials in the USA, store closures in Russia in retaliation for the sanctions and the meat supplier in China for the weak performance. Still, operating income in the U.S. fell -10% as new marketing initiatives failed. During the quarter it was found that Shanghai Husi Food Co, a supplier to McDonalds and others, was mixing fresh meat with expired meat and selling it as fresh. The discovery prompted yet another round of fast food avoidance in China. Shares declined -$1.85 at the open but recovered to end with a -0.58 loss.


Coca Cola (KO) shares declined -6% after reporting slower sales of soda. Overall global sales rose +1% thanks to noncarbonated beverages. In the U.S. sales of both soda and non-carbonated beverages declined. Recently Pepsi also reported a -1.5% decline in soda volume. Apparently taking the soda machines out of all the schools is actually having an impact. Adult Americans have been cutting back on soft drinks for the last decade.

Coke said it was focusing on smaller cans to boost profits. Unfortunately those profits fell -14% to 53 cents, which beat estimates by a penny but revenue of $11.98 billion missed forecasts of $12.15 billion.


Dow component IBM continued its decline with another -$6 drop to make it a loss of -$19 for the week. The -6 points is the equivalent of -48 Dow points but you could not tell it from the +215 gain on the Dow today. IBM was forced to cancel its forecast for $20 in profits in 2015 because of a rapidly changing technology environment from what they had been used to for the last decade. IBM is also being hampered by slowing hardware sales to Asia as a result of Snowden's NSA admissions. China is afraid IBM hardware has built in NSA entry points for future snooping.


Harley Davidson (HOG) shares rallied +7% after reporting earnings of 69 cents that beat estimates of 59 cents. Retail sales at dealers rose +3.4% in the USA. Globally they sold 73,217 motorcycles compared to 70,517 in the year ago quarter. Sales in Q3 rebounded somewhat after the cold weather in Q2 depressed spring sales.

Harley is introducing new models including an electric version that seems to be going over well enough for them to expand production. Management reaffirmed full year guidance and that helped boost the stock price.


Despite the increased orders for Hellfire missiles and other military equipment for use in Iraq and Syria, Lockheed Martin (LMT) guided for a decline in 2015 sales and reported lower than expected revenue for the second time this year. The company said 2015 revenues would decline by low single digits compared to 2014. In Q3 revenue declined -2% to $11.1 billion and below estimates for $11.31 billion. Earnings rose +5% to $2.76 compared to consensus estimates of $2.71. Despite the lowered 2015 guidance the company raised full year 2014 guidance to the higher end of the prior range. Revenue is expected to decline slightly from $45.4 billion to $45.0 billion but earnings are expected to rise from $9.58 to $11.15. Shares declined -$3 on the news but held above recent support.


After the bell VMware (VMW) reported adjusted earnings of 87 cents that beat estimates of 83 cents. Revenue rose +18% to $1.52 billion and also beating estimates of $1.50 billion. License revenue rose +13% with long term agreements including maintenance and support accounting for more than 40% of their revenue. EMC owns 80% of VMW and activist investor Elliott Management has been urging them to sell the unit. EMC is balking and claims it will continue to maintain its ownership. Shares were down $1 in afterhours. EMC reports earnings on Wednesday.


Yahoo (YHOO) reported earnings after the close of $6.70 per share or $6.77 billion. However, if you strip out the sale of their Alibaba shares the earnings declined to 52 cents or $543 million. Revenue from display ads declined -6% to $396 million. Overall ad sales rose +1% to $1.1 billion. The problem with these earnings is that they can no longer hide behind the Alibaba sale and future earnings will be based on their declining business model. CEO Marissa Mayer is going to have to do something dramatic with the $6 billion they got from the Alibaba sale or she is going to be looking for another job very soon.

The activist investors are starting to circle like hungry sharks and if Yahoo continues to flounder in its business model there will be plenty of investors lobbying to break up the company.

Yahoo shares rose $1 in afterhours.


On the earnings calendar for tomorrow two more Dow components will report. Those are Boeing and AT&T. The big events will be on Thursday with AMZN, CAT, GM, MSFT and MMM.


Earnings guidance is still slightly better than normal with negative guidance 3:2 over positive guidance. Normal is 2:1 negative over positive. However, inline guidance is growing rapidly. Apparently many companies are electing to stick with their prior estimates in hopes of closing out the year with a surge.


Amgen (AMGN) shares have risen +$16 since the lows at $128 last Thursday. The force behind the move is activist investor Dan Loeb and his fund Third Point. Loeb wants Amgen to break into two businesses. One would be the cash generating mature business and the other a fast-growing R&D focused business. Loeb sees Amgen shares worth $249 if the breakup were to occur. Shares of AMGN gained +5% today to close at $144.


Markets

There were multiple reasons the market rallied today. The Ebola fears are fading as expected now that the various U.S. groups in isolation are being released with no additional infections. This is calming consumer fears and removing another brick from the wall of worry.

Oil prices have stabilized at $83 and a level that should continue to hold. Energy stocks, a significant portion of the S&P, are all in rally mode. Last week they were in crash mode with the energy sector down -25% and firmly in a bear market. This week the dip buyers are viewing the sector as a buying opportunity.

The recent comments from various Fed heads has turned decidedly more dovish and there is even a chance for the FOMC to postpone ending QE at the October meeting. This would have been an unheard of topic just a month ago. There is even talk of a QE4 if Europe does fall into a deep recession. That is music to the market's ears.

China reported a Q3 GDP of 7.3% and slightly better than the 7.2% analysts expected. We don't know how much of that number was "managed" by Chinese bureaucrats but we have to take it on face value. Much has been made about the decline in China's economy. However, an astute reader pointed out that China's GDP output is actually rising, not falling. In constant 2005 dollars China's GDP output is actually expanding. To put this into perspective China's GDP is expected to rise to more than $10 trillion by 2020. I would hardly call this a material slowdown.

World Bank data. Annual amounts in trillions.

Year, Output, Growth, Rise in Output

2009 $3.476, +8.70%, +$258 billion
2010 $3.829, +10.4%, +$363 billion
2011 $4.196, +9.30%, +$357 billion
2012 $4.517, +7.65%, +$321 billion
2013 $4.864, +7.68%, +$347 billion
2014 $5.219, +7.30%, +$355 billion

Hat tip to JM for the info.

Lastly, the markets normally rebound from the October lows in the week after expiration. With only nine weeks left in 2014 fund managers are under the gun to do something quick to recover from lackluster performance year to date. More than 80% of funds are trailing their benchmarks and they have to chase performance or they are going to lose investors when the yearend statements are mailed.

I could go on with several other geopolitical events but you get the idea. We had a decent dip to correction territory and now the dip is being bought. Earnings are coming in slightly better than expected despite several high profile misses.

With the Fed turning dovish, earnings improving and geopolitical headlines fading it would appear to be a perfect recipe for a yearend rally. It is almost scary that I actually typed those words. I hope I did not jinx the markets.

The S&P soared +1.95% to 1,940 and blew right past the resistance of the 200-day average at 1,906. The move started with a monster burst of short covering that sent the S&P up +20 points at the open. From there it was a case of solid buying the rest of the day.

As usual the close left us with a bit of uncertainty with the S&P stalling right at downtrend resistance. With the S&P up +120 points from the low five days ago there are plenty of stocks that have gone from oversold to overbought in a very short period of time. A +120 point move normally takes several months in a normal market. However, the velocity of a sharp decline is quite often matched by the velocity in the rebound at least in the early days of the move.

If we continue higher the next challenge will be in the 1,960-1,966 range where the 50 and 100 day average converge along with some horizontal resistance. Support is so far in the rear view mirror that it is not worth mentioning.



The Dow rebounded +215 points but it is still below the downtrend resistance line around 16,800 from the September highs. It also has the convergence of the 50/100 day averages at 16,894. Once it gets to that roughly 16,900 level the resistance will increase substantially. From 16,900 to 17,150 there is a lot of congestion from the September and we will start running into the "I am finally back to where I should have sold" crowd that will be exiting with a sigh of relief.

I am not as bullish on the Dow as I am on the other indexes because of the earnings problems from the individual stocks. IBM is going to be a drag on the index for weeks to come and there are still 15 Dow stocks left to report.




The Nasdaq shifted into rocket mode when the expected post earnings depression did not hit Apple shares. Quite a few analysts thought Apple would report a good quarter but then experience a sell the news event. Fortunately the guidance was so good that eager buyers were waiting for any dip.

The Nasdaq rallied +2.39% or +103 points in just one day. This blew right by prior resistance levels of 4,344 and 4,371. It has gained +300 points in the last five days from the 4,116 low. The next material resistance is 4,485. Obviously a +300 point gain in five days is extreme and I would be cautious about trying to jump on this rocket ride. There is nothing to prevent it from continuing but remember how extreme the negative sentiment was just five days ago. That can come back in a heartbeat on a negative headline. While I am encouraged with the speed of the rebound I simply urge caution.



The Russell 2000 raced past prior resistance at 1,100 and gained +1.63%. That is a +72 point rebound from last Wednesday's low at 1,040. I am glad to see the small caps performing because that means fund managers are no longer afraid of another dip. They are chasing performance and small cap stocks are the way to get it.

The Russell has little in the way of resistance until the 1,150 level and then it repeats about every 10 points until 1,180.


The real index performer is the Dow Transports. After dropping to 7,700 last Wednesday they have sprinted to 8,485 today and a +3.14% gain today alone. This is absolutely amazing. They are right back at prior resistance of 8,500 and they could easily hit a new high before the week is out if the market remains positive. The lower fuel prices are going to be very positive for Q4 earnings.


It would appear that bullish sentiment has staged a remarkable comeback but too much of a good thing can always lead to trouble. The market is setting up for a very strong week and I just hope nothing appears to derail this rally train.

There are no economics of note that could upset the markets and the geopolitical events are all fading. The dip buyers are back and shorts are running for their lives. Let's hope this is all not just a huge bear trap but there are no signs of that today.

Enter passively, exit aggressively!

Jim Brown

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