Last week was a story of major moves in high profile stocks by both winners and losers. The big gains pushed the indexes to a two-month high and the first four-week gain for the Dow since 2014.

Market Statistics

On September 29th, Carl Icahn warned in an online video we were facing a disaster in the market. The Dow hit a low of 15,942 on that day and rallied to close at 17,646 on Friday. That is a +1,704 point gain or roughly +10%! The S&P has rallied from 1,872 to close today at 2,075 or a gain of +203 points or 10.8%.

Friday's gains were driven by news China was cutting interest rates for the sixth time since November. The gains were also driven by monster moves in stocks that posted huge earnings. For example Amazon +35, Google +40, AthenaHealth +35 and Microsoft +10% to name a few.

China said they were cutting deposit rates by -0.25%, lending rates by -0.25% and reserve ratio rates by -0.50%. While this was positive for the market, you have to wonder why they are adding so much stimulus to juice an economy growing at a reported 6.9% rate. More than one analyst said the October numbers must be dropping fast.

Only a day earlier Mario Draghi said the ECB was ready to increase stimulus again. He hinted he was ready to add hundreds of billions in QE and produce an even deeper negative deposit rate.

There is also a strong rumor that Japan will also add to QE and stimulus before the end of October.

Obviously, with the world's major central banks applying stimulus with a fire hose to avoid deflation it would be next to impossible for the Fed to raise rates in the near future. The chances for a rate hike have suddenly slipped all the way out to March or even later.

The market celebrated stimulus and earnings and the big cap indexes closed at a two-month high.

There were no economic reports of note on Friday. The ECRI Weekly Leading Index (WLI) I wrote about last Friday rebounded from nearly a three-year low at 128.7 to 130.0. That does not mean we are out of trouble but simply the data is volatile.


The big event next week is the October Fed meeting. Nobody expects them to make any moves and the meeting is a formality. It will be interesting to see if they still see it "appropriate to hike rates in 2015." I suspect that sentence will disappear.

The first reading on the Q3 GDP is due out on Thursday and the official consensus is for +1.6% growth but Moody's is expecting 1.1% and the Atlanta Fed GDPNow real time forecast is expecting +0.9%. These numbers are down from the previously reported +3.92% growth in Q2, up from 0.64% growth in Q1. So which is it? Are we ticking along at a less than 1% growth in Q1/Q3 while the nearly 4% growth in Q2 is looking more like an accounting error every day? This is going to be an interesting report.


The Richmond Fed Manufacturing Survey on Tuesday could take us farther into correction from the -5.0 reading in September. That was the first negative reading since April after hitting a 12.6 high in July. How quickly the bloom faded.


Shenandoah Telecom (SHEN) was the only split announced last week with a 2:1 scheduled for New Years Eve. With volume of 50,000 shares a day, they need to do something to increase the float and the activity.

Full Stock Split Calendar


Amazon (AMZN) reported actual earnings of 17 cents compared to estimates for a 10-cent loss. Shares of Amazon rallied +10% or +$56 at the open before fading to close +$35 and +6%. Analysts are so used to Amazon losing money that a surprise profit has them speechless. Prime subscriptions rose about 50%, which is a huge driver of Amazon future sales.

Amazon Web services only accounted for about 8% of overall revenue but 52% of the profit. AWS revenue was up +14.3% sequentially from Q2 and +78% over the year ago quarter. AWS is on track to hit $7 billion in revenue for the year. Amazon total revenue ex-FX was up about 30% at $25.36 billion. Active customer accounts rose 9 million to 294 million.

Management said sales were four times year ago levels in India and active customer accounts rose +230%. The number of sellers rose +250% with 90% using Amazon logistics and warehouse services and were adding 40,000 products per day.

Amazon operating expenses rose 8.4% sequentially to $8.2 billion. They added 25,000 full time workers year to date and will be adding 100,000 temporary workers for the holidays.

Amazon ended the quarter with $14.43 billion in cash and equivalents, up +$427 million for the quarter. Inventories rose +20.2% ahead of the holiday quarter. They provided guidance for the current quarter with revenue up +19.9% to just over $35 billion. As long as Amazon can continue to increase revenues about 20% per quarter, they can continue to spend money like crazy and get away from it. Shares closed up +$35 at a new high on the news.


Alphabet (GOOGL) reported strong earnings and received no less than 19 price target raises from analysts. Google saw strength in its paid clicks on search ads and by strength in YouTube. Google is increasingly able to power search ads on smaller mobile screens and pricing is stabilizing as a result of their new technology. Paid clicks rose +23% while cost per clicks declined -1%. The cost-per-click rate that Google charges advertisers declined -11%. The number of ad impressions served rose +350% from the comparison quarter. That is a lot of ads.

Google earnings of $5.73 actually missed estimates for $5.88. The problem was a $1.87 per share hit from the strong dollar. Without that hit they would have crushed estimates at $7.35 per share. The company also announced a $5,099,019,513.59 stock buyback, the first of its kind. They announced a YouTube subscription service for $9.99 that is ad free. Gross revenue rose +5.3% sequentially to $18.63 billion. That is a 13% increase from the comparison quarter.

Google actually announced a stock buyback of $5,099,019,513.59. Yes, that is an odd number. Google changed its name to Alphabet. The alphabet has 26 letters. That number is the square root of 26 multiplied by $1 billion. Google has a habit of planting "Easter eggs" in its products and communications. The name Google is a play on googol, which is the number 1 followed by 100 zeroes. When Google filed for its IPO, it said it planned on raising $2,718,281,828. That is the product of "e" and $1 billion with "e" a mathematical term used in calculus. When Google bid for Nortel Networks in 2011 it bid "Pi."


Microsoft (MSFT) posted earnings of 67 cents that beat estimates for 58 cents. Revenue of $21.7 billion beat estimates for $20.9 billion. Microsoft said Window 10 was now installed on 110 million computers. Annualized Cloud revenue was exceeding $8.2 billion as Azure cloud services rose +8% to $5.9 billion. The Office software suite added $6 billion. Windows operating systems declined -17% in volume but added $9.4 billion in revenue.

Microsoft's share price soared to $54 intraday and the highest level since March 31st, 2000 during the dot.com boom. During the quarter, Microsoft increased its dividend +16% to 36-cents and repurchased $6.9 billion in shares. Microsoft's market cap rose +$38.7 billion on Friday alone.


AthenaHealth (ATHN) reported earnings of 36 cents that easily beat estimates for 26 cents. Revenue of $236.1 million beat estimates for $232.9 million. The company guided to full year earnings of $1.10-$1.20 and revenue of $905-$925 million. Analysts were expecting $1.22 and $920.7 million.

While the earnings were up the guidance was mediocre and I am surprised the shares rallied +27%. Clearly, there were a lot of shorts betting against the results.


Stericycle (SRCL) crashed hard after reporting earnings of $1.08 compared to estimates for $1.18. Revenue rose +7.6% to $718.6 million but missed estimates for $735 million. Non-GAAP earnings were flat and GAAP earnings fell -51.6% to just 47 cents. The strong dollar removed $33 million from revenue. The company said volumes of hazardous wastes had fallen unexpectedly when normally they are very stable. Guidance was also about $150 million light on revenue because of the unexpected decline in waste.


Appliance maker Whirlpool (WHR) is what you would consider a stable business. Unfortunately, there is a price war in progress and the strong dollar is killing revenues. Foreign competition and the dollar have been forcing prices lower and the company is losing market share.

I am sure readers glaze over when I say the strong dollar impacted revenue. This one will choke you. Whirlpool said the strong dollar was going to reduce revenue by a whopping -$2.5 billion for all of 2015. That is not pocket change and it really reinforces the damage that is being done to all the international companies.

Q3 sales did rise +9% to $5.3 billion but missed estimates for $5.41 billion. Whirlpool lowered full year earnings estimates from $12-$13 to $12-$12.50. Analysts were looking for $11.96. Overall, the earnings and guidance was not bad but the $2.5 billion FX hit crashed the stock.


Next week has a very heavy calendar of earnings with more than 150 S&P companies reporting and more than 500 smaller companies. This should be the heaviest week of the cycle. Apple, Twitter, UPS and Alibaba on Tuesday will lead off the week. GoPro and Facebook will be the highlight on Wednesday and Conoco, Linkedin, Starbucks and MasterCard on Thursday. Bringing up the rear on Friday will be Chevron, Exxon and CVS Health.

So far, 172 S&P 500 companies have reported. Blended earnings are down -3.1% and revenue -4.0%. About 70% have beaten on earnings and only 50% on revenue. About 23% have missed on earnings.


Facebook (FB) does not report earnings until Wednesday but shares soared +2.52 to $102.19 and a new high. This was the first close in triple digits. The move came after the company said it had indexed more than 2 trillion posts in a move to take away some of Google's search territory. Users can search topics and see posts dating back to Facebook's beginning.

Facebook already has more than 1.5 billion searches a day. With the addition of their news feeds, you can now search on almost anything to get the news and see what your friends are saying about it. If Facebook is able to keep users at home on Facebook rather than see them move to a browser for information it keeps those ad clicks in the network rather than give them to Google. The new Moments feature allows users to see today's stories in pictures, videos and tweets. Facebook also allows you to make your posts private so they do not show up in a search.

Facebook is also pushing ahead into online video, which will eventually steal some market share from YouTube. Last week Facebook announced a dedicated video feed that users can browse to find new items of interest. Facebook earnings are Wednesday.


Apple shares finally showed some life after Nomura, Piper Jaffray and Maxim Group all upgraded the stock to a buy ahead of Tuesday's earnings. Maxim raised the price target from $144 to $167. Maxim said the recent partnership with Cisco will sell more iPads and iPhones to businesses and enable them to run on teleconferencing products.

The key to their earnings will be their phone sales and guidance. Q3 sales were thought to be in the 48 million range. Q4 estimates are in the 70-76 million range but there are a lot of disagreements over those targets. In Q4 2014, they sold 74.6 million. However, that was the first time they offered the dual format plus size options. The changes to the 6s this year are much less exciting and some analysts believe they could sell as few as 60 million in Q4. That is the same number they are expected to sell in Q1.

The analysts rebutting that call claim Apple is open in more countries this year and international sales will offset any weakness in the USA.

About the only safe bet on Apple is to be in cash on the sidelines. Shares are typically extremely volatile after earnings and could easily decline 10-15% or explode higher if the naysayers are wrong.


Twitter CEO Jack Dorsey surprised everyone on Friday when he gifted one-third of his company stock to an employee pool. Dorsey had 3.2% of the company shares and was the fifth largest shareholder. He is giving the shares, worth $206 million, to the company for free in order to "reinvest directly in our people." The move was the right thing to do in a company that seems to be floundering and competitors are trying to hire away your best people.

It was also a way to build up confidence in his ability to turn around the company and put it on the right track. How much more confidence in management are you going to have in a new CEO that just gave you and your friends $206 million in stock? The 6.8 million shares have to be approved by shareholders in 2016 by approving an equity incentive plan for the shares to be granted "over time" to Twitter employees. The board has already approved the deal.

Twitter shares rallied +4% on the news. They have earnings on Tuesday after the bell.


Sanity is finally returning to the oil market. Crude has declined from it's nearly $51 high the prior week and is now threatening to dip under support at $44. The Russian incursion into Syria did not cause the Middle East to melt down and there has not been a USA/Russian confrontation. Saudi Arabia is attacking Russian oil buyers in Europe by offering them even lower prices than before. Cutting Russia's income is far more effective than attacking them in Syria. When they run out of money, they will run out of a way to fund military interventionism.

In the U.S., crude inventories rose another 8.0 million barrels last week, now up +23 million in the last four weeks. That puts total inventories at 476.6 million and only 14.3 million below an 80 year high of 490.9 million set last April. There is almost no scenario that does not see a new record high in the coming weeks.

One noted analyst said last week, "one third of oil companies will go out of business or be acquired. One third will file bankruptcy and one third will struggle through with dramatically weakened balance sheets." That is definitely not a reason to rush out and buy energy equities.

Energy earnings begin next week with the big caps and while they will be ugly, they will still be in business. It is the two weeks after that where companies are going to be confessing and those confessions of dividend cuts, secondary offerings, earnings losses, reserve write-downs and credit line cuts will be painful for their stocks.

Energy company Noble Corp (NE) slashed its dividend on Friday from 37-cents to 15-cents in order to save $220 million and maintain liquidity. "Returning cash to shareholders through a dividend has been an important element of the company's long-term value creation goals and cash allocation strategy." However, (paraphrased) "preserving liquidity in an uncertain market" makes more sense today. The company did say they expect to beat the street when they report earnings next week. Noble has 32 offshore drilling rigs.


Active rigs were flat at 787 last week but active oil rigs declined -1 to 594 while gas rigs rose +1 to 193. Producers are continuing to slash drilling expenses and try to preserve cash.


Markets

So far the plan is working. The end of October, mutual fund fiscal year end window dressing is in full swing and working wonders on the market. The big cap indexes closed at a two-month high and even the Fed meeting next week should not have any impact. There is no way they are going to raise rates so the meeting is just a formality.

Earnings have been mostly better than expected except that Q3 is now the third consecutive quarter of revenue declines. Eventually that will become important but today it is being ignored. The strong dollar excuse is now so common that the impacts are ignored. Unfortunately, the dollar will get stronger once the Fed really does start raising rates and the impact will be worse.

The Trader's Almanac best six months of the year strategy kicked off early a couple weeks ago when the MACD turned positive. They are off to a good start. This is equivalent to the "sell in May and go away" strategy where the market is bought again around November 1st for a six-month holding period.

The Halloween Indicator, which is similar to the best six months strategy, is to buy on Halloween and sell on May Day. The history of that indicator since the inception of the Dow shows the returns are about 50% higher when the September/October period produces gains rather than a loss ahead of November. If the market loses ground in Sept/Oct then the market averages a 4.0% gain from Halloween to May Day. If those months produce a gain instead, then the Nov/May gain averages 6.8%. Just bear in mind that averaging anything since 1882 tends to produce some relatively flat averages. There are both large gains and large losses imbedded in those results. We cannot actually bet on the same results in 2015. However, since the late 1990s the gains have been even stronger than the long-term average according to Mark Hulbert.

I am not really worried about the long-term averages for the next two months. I am more worried about what happens when the calendar turns to November and the October window dressing ends. The global economy is weakening and about to get another dose of stimulus in hopes of waking it from its slumber. The U.S. economy is about to turn in another sub 1% growth quarter if the analysts are to be believed. Jobs weakened over the last two months and some analysts believe we are headed for a recession. How is that going to play out in the market fundamentals once we are in November?

The addition of global stimulus again may bounce the markets but eventually the same medicine over and over tends to have a weaker result.

As you would have expected bearish sentiment declined as the market was moving higher last week. However, bullish sentiment was flat and neutral sentiment is back over 41%. It seems investors are unsure about what the future holds despite the two-month highs.


I am going to refrain from making a prediction and simply suggest we trade what the market gives us. From that viewpoint the S&P has rallied +10.8% in four weeks. Is it just me or does anyone else feel like that is excessive? Granted we wandered around in correction territory for over a month and saw a nice double bottom retest. That was a picture perfect setup for a rally. However, now that we have pocketed an 11% gain will we be able to tack on another +2.6% gain to make a new high? After 11% what is another 2.6% in the greater scheme of things? Unfortunately, it is a lot.

The S&P came to a dead stop at Friday's close at 2,075 with major congestive resistance between there and the high close at 2,130.82. We spent six months wandering sideways in the 2050-2130 range and could not break through. Why should we expect to just charge higher this time after an 11% sprint. Normally the market would be very winded at this point and need to pause to refresh and then chip away a few points at a time at the overhead resistance until finally breaking through weeks later.

What I love about the market is that nobody can ever accurately predict the future. Thousands of analysts try and on any given day, dozens will be preaching on where the market is going. While I expect the markets to pause to refresh and weaken as we move into November there is no guarantee. That is just a calculated guess from 25 years of analyzing the market every day. That and $3 will buy you a cheap cup of Starbucks coffee.

I have said for a couple weeks that we are in a buy the dip market and that has not changed. Instead of trying to predict market direction, we should continue to buy the dip early this week and then become more cautious once we arrive in November. I do not care how many indicators and strategies claim we should buy the market in November I think we should look before we leap. Blindly buying stocks just because November is typically the beginning of a strong period, could be a recipe for disaster. Let us see what November brings before we bet the farm.


The Dow got a lot of help on Friday from the Microsoft post earnings bounce and the sudden resurgence in Apple ahead of earnings. Procter & Gamble also generated a post earnings gain. Eighteen Dow components have now reported with Apple, Pfizer and Merck the next on the calendar for Tuesday. Closing the week will be Exxon and Chevron on Friday.

Apple is the most likely candidate for a big whiplash in the Dow after it reports on Tuesday night. It is not unusual for Apple shares to move $10 the day after earnings. That would be great if it was a gain but it could be a significant headwind if Apple implodes. Pfizer and Merck are rarely Dow movers but anything is possible. Earnings from Exxon and Chevron are expected to be ugly but the damage may already be priced into the stocks.

The Dow sprinted into the congestion range last week and the next major resistance is 17,775 and then 18,165. Normally I would say the Dow was at risk for some decent profit taking this week but the small caps have been seriously deficient. The Russell 2000 did not pull back into the green for the week until late Friday. This suggests the majority of the short covering is occurring in the large caps with high liquidity. That means window dressing could keep the Dow stocks up for the coming week but the undressing at the first sign of market weakness in November could be brutal .

Support is about 17,400 followed by 17,150. However, other than some light profit taking I do not see anything on the horizon that could cause a significant retracement. Of course, it is the things you do not see that hurt the worst.



The Nasdaq added +121 points on Friday and a quick glance at the graphic below shows the winners definitely overcame the sinners in size of the moves. The top four winners totaled more than 150 points on their own. I did not research their Nasdaq weightings but you can bet they were substantial.

Other than Apple and Amgen the earnings calendar for next week is lacking any major market movers. Companies like GoPro and Twitter will be of interest to the tech crowd but even if they have a major swing it will not move the market.


Despite a decent +2% move on the Biotech Index on Friday the sector is still mired in the mud and cannot manage a rebound. That will continue to be a drag on the Nasdaq until the biotechs begin to recover.


The Nasdaq move on Friday was a strictly a gap higher on short covering. You can tell by the shortness of the candle that the intraday range was short compared to the total gain. There was a monster short squeeze on Amazon, Google and AthenaHealth and that represented the majority of the gain. They did stimulate short covering in the other issues but the gain was mainly in response to those three stocks.

The gap shot the index over 5,000 and resistance from March at 5,008. How long the Nasdaq remains over 5,000 is the $64 question. I would expect some of those monster gains to fade on Monday. How much they fade depends on how many investors are still short. I doubt many traders are going to be buying those highs in Amazon and Google and thinking they got a bargain.

On the bright side, that prior resistance from 4900-4925 should now be support but it is a long way down.


The fly in the ointment is the Russell 2000 small caps. They declined mid-week and barely returned to resistance at 1,165 by Friday. There is minimal buying interest in the small caps and that gives more credence to the big cap window dressing concept. Fund managers may be worried the market is not on stable ground long term and they are using the big caps as an ATM rather than an investment. Until some buying interest appears in the small caps, the market should be viewed cautiously as we approach November.

However, there is a historical pattern to the lagging small caps. Jeff Hirsch says this is normal until late November when the "January Effect" begins to appear and small caps finally find a bid. While he may be right, there is a reason behind the lagging performance and I suspect it is the window dressing in the big caps as I explained above.


At the risk of repeating myself, I would buy any dip on Monday but look to tighten your stops by Thursday as we near month end. The window dressing should taper as the week progresses. If managers are going to undress, they will do it on the first sign of weakness in November. Once past the October fiscal year end, they are free to raise cash again and restructure their portfolios at will until the end of the quarter. The end of December is another statement date where portfolio games can be played depending on what the market has done over the next six weeks.

The early bird discount for the End of Year Renewal Special will be out next weekend. Watch for it and save an additional $50 off your subscription.


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts


Prepare for the ECB to become Japan. Mario Draghi telegraphed more easing from the ECB in December. The how or what question is keeping analysts busy. The ECB has a shortage of bonds it can buy. Rates are already negative and buying more for longer will only push rates further into negative territory.

There are worries that Draghi could copy Kuroda from the Bank of Japan and put stocks on the QE purchase list. RBS analyst Alberto Gallo included that possibility in an option list the ECB is likely considering.

Japan has already bought $100 billion in equities and the Swiss National Bank (SNB) also has $100 billion in equities. Draghi even mentioned the SNB during a Q&A session after the ECB press release. When Draghi said the ECB was "open to a whole menu of monetary policy instruments" he quite literally meant it. What will the ECB buy next?

Before we rush off the deep end here and think because the ECB may buy stocks that good times are here to stay we should consider the future. Rick Santelli repeated his statistics last week about the future of the global economy and it is a scary thought. Since the Great Recession, central banks have been pouring stimulus into the global economy through multiple fire hoses and it appears to be nonstop. The Fed has increased their balance sheet to $4.5 trillion, the ECB, BOJ, PBOC, etc, have added even more.

Since the recession, more than $60 trillion in debt has been added to the global economy in an effort to return to normal growth. What have we gotten out of it? After a brief rebound, the economy has begun to slow again and with commodity prices shrinking, we could be headed for a depression or at least another recession.

Ponder this. If the economy is shrinking after $60 trillion in stimulus, will anything save it? What will happen when central banks begin to remove that stimulus from the market? Can you even imagine that occurring over the next several years or even over the next decade?

More than $1.57 trillion in global government bonds are now priced with a negative interest rate. That is about 25% of the market. Will more QE really help?

If the global economy will not grow on $60 trillion in growth hormone injections then what comes next? $80 trillion, $100 trillion?

Eventually that money has to be withdrawn from the market and it is a scary scenario. While this is not going to impact us in the next 6-12 months, it will need to be removed just as sure as a cancer from your body. Hopefully a remedy can be found before this economic cancer becomes terminal.


What can the Fed do if the U.S. economy continues to weaken?

1. More forward guidance. (That has not worked well in the past)

2. More QE. (In a non-financial recession that would not help.)

3. Negative interest rates. (This could have serious negative effects.)

Full article on these options.


Who are the 92 million Americans not in the labor force?


The U.S. Dollar is slowly moving towards a critical juncture. The event will be the recognition of the Chinese yuan as a reserve currency by the IMF. The bank has given China strong signals that the yuan will be included in the Special Drawing Rights category when the board reaches a decision soon. China is already preparing celebrations of the event. It will mean they will no longer be required to transact international business in dollars, euros, yen and pounds and their dependence on the dollar will diminish. With that fading dependence the dollar's status as "the" favored global reserve currency will shrink. China's yuan could become a 14% share as the fifth currency to reach SDR status. That is calculated on China's export volumes. In addition, it has long been rumored that China and Russia are preparing to launch a gold backed currency that would be a major challenge to the dollar and other fiat currencies. Russia was the largest buyer of gold last month.

 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Work like you don't need money, love like you've never been hurt, and dance like no one's watching."

Unknown author

 

subscribe now