A rally broke out while everyone was looking for a new low and the Dow gained +612 points for the week. However, the real news is the +1,144 point gain in eight days from the September 29th low at 15,942.

Market Statistics

Friday was really quiet with the markets opening slightly higher and then fighting off some midday weakness to end the day with minor gains. I see that as bullish since nobody was taking profits from the big rebound ahead of the weekend. With the bond market closed on Monday there was the potential for a stock hiccup next week.

Friday was also light on economics with nothing to really move the market. Import prices for September declined -0.1% after a -1.6% decline in August. Export prices declined -0.7% after a -1.4% decline the prior month. The numbers would have been worse but petroleum prices rose +1.1% after a -11.8% drop in August.

Wholesale inventories rose +0.1% for August after a -0.3% in July. The internal components were unremarkable and the report was ignored.

The calendar heats up next week with the bond market closed on Monday for Columbus Day. The equity markets will be open but trading volume will be light.

Wednesday has the Fed Beige Book with the update on economic conditions in each of the 12 Fed regions. Normally this is just informational and neutral for the market. However, with payrolls declining and regional manufacturing reports weakening, we could see the conditions in the Fed regions also worsening.

Thursday has the Philly Fed Manufacturing Survey. This is a proxy for the next ISM Manufacturing report and the most important regional report of the month. Expectations are for a slight improvement to zero after falling into contraction in September.

The Producer Price Index (PPI) and Consumer Price Index (CPI) will be inspected for evidence of inflation. The Fed did not hike rates in September because many of the Fed heads were concerned about the falling inflation. These reports will tell us if inflation is still declining. Since oil prices have rebounded in the last two weeks the next pair of reports in November should show an increase in inflation but for this week the reports for September are probably still going to show a decline.

The U.S. debt ceiling was hit several weeks ago. The Treasury is implementing "special operations" to continue paying the bills until the ceiling is raised. Treasury Secretary Jack Lew said the government will run out of money on or about November 5th. On November 18th, more than $14.2 billion in social security payments are due. Congress will need to resolve its problems and raise the debt ceiling by mid November to avoid a crisis. Some analysts believe this can be extended until early December but the date to worry about is November 18th.


Global Payments (GPN) announced a 2:1 split along with earnings and the stock rocketed higher. GPN has gained +$18 since the Tuesday evening announcement. The spike was on earnings and not the split but that news helped juice the earnings short covering. Full Stock Split Calendar


Tesla (TSLA) shares shorted out on Friday with another $6 decline after Barclays cut them to sell. The analyst lowered his price target from $190 to $180 but it was the sell rating that powered the decline. Shares closed at $220. Several brokers have lowered estimates on the company since the Model X debut last week. The general consensus is that the Model X is too expensive and deliveries will be too slow to reach production targets. They claim the car is too well made and the extra attention to detail is causing production delays. Earlier in the week Robert Baird downgraded Tesla from outperform to neutral on the Model X price.

Elon Musk took some shots at Apple last week. The company had been hiring away Tesla engineers to work on the new Apple car project. Musk called Apple the "Tesla graveyard." "They hire the engineers we fire. If they can't make it at Tesla they go to work for Apple." He warned that making cars was a lot more difficult than making phones. A couple weeks ago, he poked fun at Toyota and their fuel cell technology calling it "fool cell technology." Bloomberg reported earlier this year that Tesla had hired more engineers from Apple than anywhere else.

Tesla shares could be headed back to $180 ahead of earnings on Nov 4th. With delivery estimates in doubt the company could lower the forecast again with earnings.


Gap (GPS) shares fell -5% after the company reported ugly same store sales comps. Overall, global sales were flat after a 3% decline in the year ago quarter. However, Banana Republic sales fell -10% compared to a 2% rise a year ago. Old Navy sales rose +4% after a 1% gain in the comparison quarter. This compares to comps from competitor Limited Brands (LB) which rose +9%.


If you have been trying to trade Netflix, I hope you were quick on the trigger. On Monday shares rose +$5, down -$4 on Tuesday, up +6 on Thursday and down again on Friday. Earnings are next Wednesday and the last several cycles have not been kind to investors.

Over the last four years, the reactions to the Q3 earnings report have been disastrous.

Q3-2014 -19%
Q3-2013 -9%
Q3-2012 -11%
Q3-2011 -34%

However, every earnings report in 2015 has been followed by a huge spike.

Q4- Jan +18%
Q1- Apr +21%
Q2- Jul +18%

This year Netflix has already seen a -28% drop from the $129 high in August to the $93 low in September. That could mean the downside risk has been eliminated but I would not count on it. If you are holding a profitable position on Netflix, it may be wise to close it on Tuesday. The options market is expecting a 15% move in Netflix shares after earnings. Based on Friday's close that means a potential drop to $100 or a spike to $130. Choose the right direction and you have a big winner. Choose wrong and you have zero.


Twitter (TWTR) was still on an upward trajectory at the close but that may not last. Twitter announced a new video advertisement feature. Publishers are no longer restricted to uploads from mobile devices using the mobile app. Advertising videos can now be uploaded fro desktops and that suggests the quality of the advertising videos will quickly improve. Twitter will also put pre-roll ads in front of the videos and collect 30% of ad sales.

Twitter's new Moments product is being met with rave reviews and that helped push shares higher after Jack Dorsey was officially named the permanent CEO.

After the close Re/Code said Twitter was planning company-wide layoffs next week. The company employs 4,100 people in 35 offices around the world. There was no news of how many people would be impacted. Shares declined about $1 in afterhours trading.


Apple (AAPL) announced it is increasing the reach of Apple Pay and Starbucks (SBUX), KFC and Chili's Grill will accept the payment service. Apple Pay only accounts for 1% of all retail transactions in the U.S. because of the slow rollout of the payment service. Starbucks own mobile payment app accounts for 20% of all transactions in the coffee shop. The company said it still plans on making all popular payment methods available to customers. Their U.K. stores have been accepting Apple Pay for several months.

Chili's is owned by Brinkers (EAT) and the company said it plans to offer Apple Pay at 930 of the stores nationwide by Spring. Yum! Brands (YUM), owner of KFC, plans to offer Apple Pay at all its stores by spring.

Apple pulled ad-blocking apps from its webstore saying the apps could resell user data with browsing history. Conspiracy theorists claim Apple is doing this because advertising is a big source of revenue that they do not want to see diminished.

Starbucks shares rallied to a new high on the news. Apple shares gained +2.62 on the news but stalled right at prior resistance at $112.



International Paper (IP) said it had agreed to sell its 55% ownership in a joint venture partnership for coated board in China. The sale will remove $400 million in debt from IP's balance sheet and they will receive $23 million from their partner. IP said rather than create a new business to sell in China they were going to sell their globally competitive products made in U.S. and Russia. Shares rallied +5% on the news.


Helen of Troy (HELE) shares spiked +7% after the company reported earnings of $1.12 compared to estimates for $1.03. Revenue of $369.1 million easily beat estimates for $338.6 million. HELE manufactures housewares and beauty products.


Supermicro Computer (SMCI) shares fell -15% after the company warned that revenues would be in the range of $529-$530 million compared to prior guidance of $520-$580 million. Earnings are now expected to be 44-45 cents compared to prior guidance of 49-59 cents. The blamed stronger seasonal effects along with weakness from Europe and Asia. I am sad to see them experiencing weaker sales. They make the best servers in the market in my opinion. We have used them at Option Investor for the last 15 years. Every computer we have is a Supermicro. When the best company is seeing product weakness we can bet Hewlett Packard and others are going to be weak as well.

In related news, research firm Gartner Inc, said PC shipments fell -7.7% in Q3 to 73.7 million units. Research firm International Data Corp, said shipments fell -10.8% to 71 million units. Gartner said the launch of Windows 10 had minimal impact on PC sales as most users opted to upgrade existing PCs.


There were some random analyst moves on other stocks on Friday. Mizuho initiated coverage on Valeant Pharma (VRX) with a neutral rating. Allergan (AGN) and Jazz Pharma (JAZZ) were initiated with a buy rating.

Needham cut the price target on Yahoo (YHOO) from $550 to $40 but kept its buy rating.

Morgan Stanley (MS) initiated coverage on Ciena (CIEN) with an equal-weight rating and price target of $25. Shares closed at $22.75.

After the bell additional news broke about a potential acquisition of EMC by Dell. The new deal could value EMC at close to $55 billion. Dell is planning on paying cash for most of the acquisition but would then issue a tracking stock for the 20% of VMWare that EMC does not own. Reportedly, Dell is offering EMC up to $33 per share but some news reports are as low as $27.50. Dell is only a $23 billion company. This will require a lot of debt to complete and Dell already has $12 billion in debt on its books. Shares rallied to $29 in afterhours trading. VMWare (VMW) shares were unchanged.


Earnings kick off in volume next week with 30 S&P companies reporting. The highlights will be Intel, Netflix and the flurry of major banks. Netflix will be the most watched because of the potential for a major post earnings move.

S&P Capital IQ is now expecting a -5.1% decline in earnings for Q3 and the first decline since Q3-2009. Excluding energy, earnings growth would be +2.8%. That is down from the +3.4% estimate a week ago. The revenue outlook has improved to a -1.1% decline, up from a -2.3% decline last week. This would be the third consecutive quarter with a revenue decline.


The energy sector provided a large part of the market lift last week. The Oil Service Index ($OSX) rallied +12.4% and the Oil Index ($XOI) gained +9%. Crude oil rallied +8.5%.


WTI crude rallied to trade over $50 intraday on Friday after Russia launched 26 cruise missiles from the Caspian Sea to hit rebel targets in Syria. Four of them reportedly malfunctioned and crashed in Iran. Tensions between Russia and Turkey, the USA and NATO continue to rise. It is only a matter of time before there is an incident regarding Russia.

Crude prices rose despite an inventory build of 3.1 million barrels on Wednesday. Refinery utilization declined more than 2% to 87.5% and suggests inventories will continue to build in the weeks ahead. Production rose +76,000 bpd but it was ignored.

On Friday the Baker Hughes rig count declined another -14 rigs to 795 and a decade low. Oil rigs declined -9 to 605, down -1,004 from the peak. Gas rigs declined -6 to 189 and a new 18-year low.



Markets

Market sentiment changed dramatically last week. The S&P powered through the resistance band from 1990-2005. However, it came to a dead stop at the September high at 2,020 on Friday. The actual high on Friday was 2,020.13 so the rejection was immediate.

If the S&P can manage to punch through that 2,020 level next week the next material resistance is 2,100. That would be a significant move of +3% after the index already gained +3.3% last week.


There is considerable congestion from 2040-2125 so it is hard to single out one particular area as material resistance other than 2,100. The risk is that the S&P rallies to near the prior highs and then weak earnings and economics causes funds to begin taking profits.

The fiscal year end for most mutual funds is October 31st. They need to complete their restructuring before then in order to plan for the distributions and tax statements before the calendar year end. Since the August flash crash probably caused a lot of unplanned selling there is not likely to be a lot of tax loss selling heading into month end. It is more likely that funds will be putting money back to work in window dressing their portfolios for the fiscal year end.

With the S&P posting the best weekly gain of 2015 there is the potential for some profit taking early in the week. Energy stocks are over extended and due for a rest. The bank earnings are not expected to be good and that could also be a cloud on the markets.


The Dow sprinted past resistance at 16,750 and 16,933 to close at a seven-week high. That is a 1,144-point gain from the low on September 29th. If the Dow can move over 17,130, there is a solid range of congestion beginning at 17,500 through 18,165. It would take a lot of cooperation and positive earnings from the 30 Dow stocks to keep that move going. Since most of the Dow stocks are international companies they will all face significant currency headwinds and most will probably miss on the revenue component.

Multiple Dow components report earnings next week with Intel, JP Morgan, GE, Wells Fargo, Johnson & Johnson and Goldman Sachs on the calendar. Each will have an opportunity to move the index and the direction may not be up.



The Nasdaq stopped right on resistance at 4,835 on Friday after a +2.6% gain for the week. The Nasdaq Composite and the Nasdaq 100 ($NDX -2.4%) posted the smallest gains of the major indexes. The biotech sector continues to drag the Nasdaq lower and semiconductor stocks added to the weakness on Friday.

Earnings from Intel and Netflix could weigh on the Nasdaq early in the week. The big flurry of Nasdaq reporters occurs the following week.

Support has formed in the 4715-4740 range and immediate resistance is 4,835 and then 4,900.



The Russell 2000 small cap index posted the second largest gain for the week at +4.6% to come to a stop right on resistance at 1,165. If that level can be broken, the resistance at 1194-1200 could be a challenge. That is a psychological level and the beginning of significant congestive resistance all the way to 1,275. I would love to see the small caps take the lead because it would mean the fear was leaving the market.


The index with the biggest gain for the week was the most unlikely. The Dow Transports gained +4.82% despite the sharp +8.5% rise in oil prices. The airlines were responsible for the gains with UAL up +6.6% on Friday, DAL +2.7%, JBLU +3.3% and American +6.7%. They all reported positive guidance for September revenue miles. Load factors were up, margins were up and revenue passenger miles rose +7.2% at American. The airline bought back 6% of its stock in Q3.

The Transports came very close to breaking over short-term resistance at 8,260 and did break the downtrend from March.


I am encouraged that the normal October trend with market lows in the first ten days of the month did not appear. This may be the beginning of a normal Q4 rally but quite a few professional traders are recommending we short the rally.

This is normal. When a rebound occurs from extremely bearish conditions it takes a few days for the traders to change their mindset. They are still focused on the decline and where they thought the market was headed rather than the rebound. As we move over the various resistance levels those traders will become converts.

There is always the possibility they are right but at this point I continue to believe we should trade what we see rather than what we expected to see. Continuing to hold a bias contrary to market direction can be financially destructive.

We are well over that solid resistance at 1,950 and again at 2,000 and those were critical levels. Buy the dips until proven wrong.


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Random Thoughts


There was a huge change in sentiment for the week ended on Wednesday. Bearish sentiment declined -11.7 and bullish sentiment rose +9.4. This is what we should have expected from the rebound in the markets.



Lawrence Summers, Treasury Secretary from 1999-2001 and economic adviser to President Obama in 2009-2010, is warning of a global recession. Inflation is well under the target of 2% in all the developed countries and interest rates are near zero in those same countries with no chance of a material increase in the foreseeable future. The global economy is barely getting by despite the low interest and most areas are declining. The Fed funds futures are only projecting a 1% rate as of the end of 2017 and that could be optimistic. If a global recession does take hold, the central banks have no tools to combat the problem. They cannot lower rates any farther with short-term rates in many countries now negative. QE has not been effective as proven in Japan. Full Story

The bond market has lost confidence in global central banks. Despite hundreds of interest rate cuts, rates at zero or below and trillions of dollars in QE, the bond market outlook for inflation is approaching the lows seen during the financial crisis. Central bank efforts in the major economies are failing. The bond market is losing faith in central banks and that means a "risk off" mentality in the equity markets. Despite all their efforts, inflation is continuing to decline. That shows they have lost control. Central Banks Lose Credibility

Bank of America warned that QE has gone too far and the removal of QE, if it ever happens, is going to be a very rough ride. Buckle Up


China's economy has turned significantly negative over just the last two months. Alcoa warned that automotive production, commercial building construction in China and sales of heavy trucks and trailers would fall much more than previously expected. In July, Alcoa did not even breakout the outlook for China because there was no reason.

Yum Brands reported dismal earnings that disappointed significantly because of "unexpected headwinds" in China. As recently as August 18th, the CEO said "same-store sales in China had turned significantly positive."

NuSkin slashed its Q3 revenue forecast because of a sudden decline in sales in China in Aug/Sep. In July, the company said it was "particularly" pleased with progress in China, where it generated "healthy sequential growth in both sales leaders and revenue." Something changed dramatically.

The IMF downgraded its China forecast to 6.2% growth in 2016 and several brokers are suggesting it could be less than 6%. China a Red Flag for Global Economy


The IMF cut its global growth estimates for 2015 once again and warned that downside risks to the economy appear "more pronounced." Global growth is now expected to be +3.1% and decline of -0.2% from the July forecast. They cited lower growth prospects for emerging economies, including China, and a decline in commodity prices as the reason for the revision. With lower commodity prices reducing capital flows to emerging markets and devaluations of their currencies the risks to the outlook are rising. IMF Cuts Global Growth Outlook Again


Liz Ann Sonders, chief investment strategist at Charles Schwab, turned neutral on stocks. Schwab manages $2.46 trillion for clients. She is worried that we are in an earnings recession and could be approaching an outright economic recession. Q3 earnings are expected to show a -5.1% decline. Q4 earnings, which at one point were expected to show +12% growth, are now expected to decline by -1%. Full year earnings growth is now expected to be negative. Sonders Neutral on Stocks, Fears Recession


The OPEC price war is heating up. Saudi Arabia cut the price on light-crude deliveries to Asia by -$1.70 per barrel. Previously they had been charging a premium of 10 cents a barrel on the rival Dubai benchmark crude and that cut takes them to a $1.60 discount to Dubai. Saudi also cut its price for heavy oil to the Far East by -$2 a barrel and -30 cents to the USA. The move came after Iran, Iraq and other Middle East countries cut prices to be lower than Saudi Arabia in an effort to gain market share. As these countries battle to be the lowest cost seller in the market it will continue to pressure WTI prices in the USA. The rebound last week was strictly short covering on Russia's entry into Syria and the decline in active rigs.


Deutsche Bank warned again that mortgage standards were tightening from what were already considered tight levels. "We believe this has been and will remain a drag on economic growth in the US and contribute to lower for longer interest rates." Average FICO scores required to get a conventional loan have risen from 720 to 750 in the first half of 2015. DB describes those as "very high, at the end of prime and nearing super prime." The FHA said the average FICO score in Q2 was 689 and FHA loans are at the lower end of the mortgage scale. Mortgage Requirements Rising


Jeff Hirsch of the Trader's Almanac, pointed out that the period from Halloween to Christmas has posted gains in 25 of the last 33 years. The average gain since 1982 has been 4.2%. The Almanac Trader said their best six months seasonal buy signal was triggered on October 5th. There have only been two losses in the last 12 years. Buy Signal Triggered

Over the last 21 years, the Dow has averaged a gain of +12.3% over the same period. If the trend holds true the Dow could be trading over 18,000 in the near future according to Hirsch. Dow Averaged 12.3% since 1994


Bespoke broke down the S&P-500 into ten groups of 50 stocks. They grouped them by the amount they lost from the May 21st high to the September 29 low. The stocks with the biggest losses rebounded an average of 15.4% over the last week. The stocks that lost the least in the market decline rebounded only +3.7%. EVERY group performed exactly as expected with each group of 50 that declined more than the prior 50, rebounding more than the stocks in the prior group. The worst performing stocks in the decline were the best performing stocks in the rebound.

Short covering was a big part of that rebound. Fund managers also bought the losers thinking the worst was over and the risk was negligible. They called it an "epic buy the losers rally."

Bespoke Investment Group Chart Source


 

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Jim Brown

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"The third-rate mind is only happy when it is thinking with the majority. The second-rate mind is only happy when it is thinking with the minority. The first-rate mind is only happy when it is thinking. "

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