The market week played out exactly as expected with a consolidation dip early, a final boost from window dressing on Wednesday and then weakness late in the week as that dressing faded and traders positioned themselves for next week.

Market Statistics

I wrote several times over the last week that I expected Thursday/Friday to be weak as window dressing faded and cautioned that next week could also be soft as some of that window dressing is removed. I am encouraged that the profit taking over the last two days was not any worse. Now we just have to get through next week without a big decline.

Typically, the first couple days of a month are positive from end of month retirement contributions being put to work. In November, those incoming contributions will be offset somewhat by managers taking some cash out of the market to rebuild their redemption reserves. As long as the selling is light, they may decide to leave some of their window dressing buys in place. November is supposed to be the starting point for the best three months and best six months of the year cycles.

On the flip side, the S&P was up +8.3% in October, Dow +8.5% and Nasdaq +9.4%. October was the best month in four years and with November the beginning of a new fiscal year for mutual funds they may want to take some profits.

Friday was a lackluster day in the market with the only news coming from Thursday earnings reports, a couple of weak economic reports and a continued crash in Valeant (VRX) shares.

Consumer sentiment for October came in at 90.0 in the final revision. That is up from 87.2 in September but well below the 92.1 in the first version. That is the second lowest reading since November of 2014 at 88.8. The present conditions component rose slightly from 101.2 to 102.3 but was the laggard. The expectations component rose from 78.2 to 82.1 thanks in part to the stock market gains.


Personal income for September rose only +0.1% and less than the +0.4% in each for the last four months. Analysts were expecting +0.2%. Wages and salaries declined from +0.5% to zero gain.

Personal spending for September rose only +0.2% after a +0.4% gain in August. Spending on goods was flat. Spending on durable goods rose +0.6% but non-durable goods declined -0.3% and spending on household furnishings declined -0.3%. Food and beverage spending declined -0.6% while spending on clothing rose +0.8%. Thank the back to school shopping cycle for that gain.

Of the most interest to the Fed was the -0.1% decline in the Personal Consumption Expenditure (PCE) Deflator. This is the Fed's preferred inflation indicator. The PCE Deflator has now been flat at zero for the last three months after a +0.1% gain in July. That is down from an average gain of +0.2% in the months preceding July. Falling energy prices are the culprit. Prices for gasoline and other energy goods declined -8.2% in September.

The PCE is now up only +0.2% for the trailing 12 months or almost zero inflation and declining. The Core PCE, excluding food and energy, is up +1.3% and dead flat for the last 8 months and is only expected to rise to 2% at the end of 2016. The headline PCE will give the Fed a headache over raising rates but the Core PCE will be their crutch.

Next week is payroll week with the ADP Employment on Wednesday and Nonfarm Payrolls on Friday. The ADP report is expected to show a decline in new jobs but the Nonfarm forecast is for a gain of +180,000 jobs. That is more than the +142,000 jobs in September. Because the weekly jobless claims are at multi-decade lows the majority of analysts are expecting a return to the 200,000+ level in the coming months. They view the declines in the last two months as an anomaly and problem with the data.

The ISM Manufacturing Index on Monday is expected to fall into contraction territory at 49.6 after peaking at 58.1 in August 2014. This should also be a headwind for the Fed but they are in "hear no evil, see no evil" mode and will probably ignore it.


Lastly, Janet Yellen will testify in the House on Wednesday. That is normally good for producing market volatility.


The first reading on Q3 GDP came in at +1.5% growth, down from +3.92% in Q2 and up from +0.64% in Q1. Inventories lifted GDP in Q2 and crushed it in Q3. The big positive swing in Q2 was blamed on the West Coast port strike and the sudden influx of goods when that strike was over. That made the Q2 number artificially high and Q3 is now artificially low as those inventories decline.

However, the Atlanta Fed GDPNow for Q3 went out at +1.1% growth so the outlook is for a decline in the official Q3 numbers when they are revised over the next two months. The current average for the first three quarters is 2% and the current outlook for Q4 is +2.5% so it has not been a banner year for growth. It is amazing to think the Fed is ready to raise rates in December with manufacturing in contraction and economic growth hovering at +2%.


Q3 GDPNow Forecast

Abbvie (ABBV) reported earnings on Friday of $1.13 that beat estimates by a nickel. Revenue of $5.95 billion also beat estimates. The company guided to full year earnings of $4.26-$4.28 and above analyst estimates of $4.24. Even better, Abbvie guided to a better than 10% annual growth rate to revenue of $37 billion by 2020. Analysts were only projecting $30 billion in 2020. The guidance projected full year earnings of $8.80 in 2020 or more than twice the forecast for 2015. Shares of Abbvie rallied +10% on the report.


The CBOE (CBOE) reported earnings of 76 cents compared to estimates for 73 cents. Transaction fees spiked +39% and trading volumes jumped +6% to 5.25 million contracts per day. However, the CBOE warned that costs were rising and analysts pointed out that trading volumes were declining as Q4 progressed. The average revenue per contract rose from 32.9 cents to 43.1 cents because of a price hike in Q3. Operating expenses rose +16% in the quarter. Shares declined -3% on the news.


CVS Health (CVS) reported earnings of $1.28 that missed estimates by a penny. That is the first time CVS has missed estimates in 7 quarters. Revenue of $38.6 billion beat estimates for $37.9 billion. The company guided for 2016 earnings to $5.68-$5.88 per share and analysts were expecting $6.02. Same store sales rose +1.7% with pharmacy same store sales up +4.6%. The chain said earnings were hurt by the introduction of numerous generic drugs with lower profit margins. Shares declined -$5 on the news.


Chevron (CVX) beat drastically reduced estimates of 79 cents with earnings of $1.09 on $34.32 billion in revenue. Chevron does not report onetime adjustments so there is no way to really compare apples and apples. The reported earnings represented a net income of $2.0 billion, a -64% decline from the year ago quarter. Chevron said it was cutting 7,000 jobs (11%) and cutting costs by another 25%. Additional cuts would be made in 2017 and 2018 if crude prices did not recover. Refinery earnings rose +54% in the U.S. to $1.2 billion. International refinery operations saw a +66% jump in profits to $962 million. Shares rallied $1 on the news.


Exxon (XOM) reported earnings of $1.01 compared to estimates for 89 cents. That represents net income of $4.24 billion. Refining profits nearly doubled to $2 billion. Production increased +2.3% to 3.9 million barrels of oil equivalent per day and they still expect to finish 2015 at 4.1 mboe. Exxon is planning on spending $34 billion on exploration and production in 2015 and less than that in 2016 and 2017. Shares were up fractionally on the news.


Companies that reported earnings on Thursday evening and seeing their shares move on Friday included Linkedin (LNKD). Shares rose +11% on a strong earnings beat.


SolarCity (SCTY) shares fell -22% after they reported terrible earnings and warned that they were going to focus on cutting costs and improving cash flow rather than generating higher growth. Multiple brokers slashed price targets and this decline will likely be the start of a further drop in price.


Shares of Baidu (BIDU) rallied +11% after reporting earnings of $1.43 compared to estimates for $1.28. Revenue rose +36%. The company announced a $2 billion share buyback, the second in 3 months.


Expedia (EXPE) reported earnings of $2.07 compared to estimates for $2.02. The value of bookings rose +21% to $15.4 billion. The company said it would see a meaningful increase in revenue from its acquisition of Orbitz. Expedia raised full year guidance.


Cybersecurity firm Imperva Inc (IMPV) reported earnings of 19 cents compared to estimates for a loss of 5 cents. Revenue of $63.3 million also beat estimates for $56.5 million. They raised full year revenue guidance from $215-$217 million to $228-$229 million. They raised earnings estimates to breakeven or 7 cents loss from a loss of 44-46 cents.


More than 340 S&P companies have reported earnings for Q3. Of those 76% have beaten on earnings and 47% have beat revenue estimates. The blended earnings growth for Q3 as of Friday was -2.2%. On September 30th, the blended estimate was for a -5.2% decline according to Factset. Just last Friday the estimate was for a -3.9% decline so the outlook is improving.

The average earnings beat is 5.9% above estimates. The average revenue miss is -2.9%. The earnings for Q4 are currently expected to decline -2.4%. The energy sector has provided the biggest earnings beats with an average of +22%. Even with the energy beats, they are still a drag on earnings. If you exclude energy, earnings for Q3 would be up roughly +6.3%. That is still the fourth consecutive quarterly decline but much better than a -2.2% drop.

If earnings do decline for Q3, it will be the first decline since Q3-2009. However, it will be the third consecutive quarterly decline for revenue.

Next week 105 S&P companies and 2 Dow components (V, DIS) will report.

The highlights for the week will be Tesla on Tuesday, Facebook on Wednesday and Disney on Thursday. The volume of earnings will begin to decline the following week.


After hitting a historic high of $105 on Thursday, Facebook was downgraded on Friday and shares gave back -$3 on the news. Jyske Bank cut Facebook from buy to sell ahead of its earnings report on Wednesday. Jyske is a private bank and they should not have that much impact on Facebook shares but coming 3 days in front of an earnings report probably triggered some additional cautious selling. JMP Securities and Wedbush both reiterated a buy rating after the Jyske Bank call. There are 46 buy ratings, 3 holds and 2 sells. The other sell is Societe Generale.

Facebook shares average about a $3 move after earnings. Options are currently pricing in a 5.4% move.

Analysts expect Facebook to report earnings of 52 cents on revenue of $4.37 billion. Monthly active users should be around 1.38 billion with daily users at 1.1 billion.


Bill Ackman of Pershing Square Capital Management is in a lot of trouble. His second largest position in Valeant Pharmaceuticals (VRX) has fallen from $264 per share to $94 with much of that decline over the last few weeks. Ackman owns 21.4 million shares of Valeant and the position is down about $1.8 billion and severely crimping the $16 billion Pershing portfolio.

He spent four hours on a conference call on Friday trying to explain why Valeant would recover and rally to $448 per share over the next several years. Short seller Citron dumped their typical report on Valeant a couple weeks ago claiming they were Enron part II and saying their accounting was fraudulent. They do this to a different company about once a year.

In this case, they may have gotten it right. Valeant had an illicit relationship with mail order pharmacy Philidor Rx Services. There are some questions on how drugs shipped to Philidor were paid for and whether it was a circular scheme to inflate Valeant profits. I do not know enough about it to pass judgment but CVS and Express Scripts have both dropped Philidor from their network after researching the Citron claims. There is a good chance Philidor will go out of business.

Ackman claims Valeant made some bad decisions and shares will probably lose more ground before a recovery appears. He expects them to pay a fine for their misdealing and then continue business as usual. What would you expect Ackman to say with another $1 billion at risk and already losing -$1.8 billion? He has to talk the stock back up or he is going to take a monster hit that could end his firm after investors flee to avoid the next mistake. Ackman bet $1 billion that Herbalife would go out of business and shares are back above his entry price. That did not turn out well either.


Microsemi (MSCC) raised its offer for PMC-Sierra (PMCS) to $11.88 per share. That is $9.04 in cash and 0.0771 shares of MSCC. That compares to an all cash bid of $11.60 by Skyworks Solutions (SWKS). Initially Skyworks agreed to buy PMCS for $9.50 per share but MSCC swooped in with a higher offer. Now there is a bidding war in progress with analysts saying a likely offer of $12-$13 is expected. MSCC could use its stock to offer up to $15 per share but analysts do not expect the bidding to go that high. Skyworks will probably end up the victor because they have no debt and could fund the entire acquisition in cash. PMCS shares closed at $11.92 and above the MSCC offer so investors are expecting a higher bid. Shares were $6.35 when the bidding started.


Hewlett Packard (HPQ) splits into two companies this weekend. They will become HP Inc (HPQ) and HP Enterprise (HPE). The new HP Enterprise will sell servers, software, storage, networking, cloud and associated services. HP Inc will sell printers and PCs. Each company will be a Fortune 50 company with about $57 billion in revenue each.


Crude inventories rose +3.4 million barrels for the week but crude prices rallied sharply. Traders were heavily short and a flurry of news headlines caught them off guard. A Reuter's survey found that Iraq and Saudi Arabia pumped less oil in October than expected. Active oil rigs declined -16 suggesting production is eventually going to decline. China said they were boosting their oil import plans for 2016 in order to fill their strategic storage. Lastly, the U.S. said it was sending Special Forces troops to Syria to assist forces on the ground fighting ISIS.

The potential for a U.S.-Russian conflict or possible accidental bombing of U.S. forces caused crude prices to rise. There are pipelines from Saudi Arabia and Iraq crisscrossing Syria and the more the conflict heats up the better chance some of those pipelines are bombed accidentally.

After falling to $42.58 on Tuesday, crude spiked +6% on Wednesday on the various headlines and ended the week at $46.60. In theory, crude inventories will continue to build and prices should fall but the Syrian conflict is the wild card. Anything is possible. There are currently four active wars in the region and ISIS/Al-Qaeda could attack oil facilities at any time.

In September Saudi Arabia thwarted a terrorist attack at Abqaiq, the world's largest oil processing facility that can process up to 7.0 million barrels per day. There are 46 pipelines connected to Abqaiq including a major pipeline to Ras-Tanura, the largest export terminal in the Persian Gulf. With Saudi Arabia bombing Yemen and also part of the coalition fighting ISIS in Syria we could see ISIS strike back against these facilities at any time. Therefore, oil prices may not follow the normal pattern of declines in Q4 as inventories build.


Active rigs declined by 12 to 775 for the week ended on Friday but that was the ninth consecutive week of declines for oil rigs. Oil rigs declined -16 to 578 and a decade low but gas rigs rose +4 to 194. Offshore rigs declined -2 to 33.


Markets

The major indexes completed four weeks of gains with the exception of the NYSE Composite and the Dow Transports. After gaining more than 8% in October, it should be time for some profit taking. Fund managers should be ecstatic that October pulled them back to zero to close the year unless they were heavy in tech stocks. The S&P is now up a whopping 0.99% for the year, the Nasdaq Composite +6.7% and the Nasdaq 100 big caps +9.7%. The Dow is still negative by about -0.9%.

This has been a tough year for most funds and especially tough for hedge funds. Almost every day we get a report about some hedge fund down double-digit percentages for the year. Investors are fleeing those funds and going back to self-management of their accounts. Index funds and index ETFs are seeing huge inflows of cash.

Now that November begins on Monday and the best six months of the year we should see continued inflows because a lot of investors believe in that strategy. That may not protect us next week because the profit piper must be paid. The gains from October's window dressing will need to be harvested. This could take a couple days or longer depending on how much month end retirement cash is going to be put to work or alternately used by fund managers to replenish the cash coffers.

We have a new wild card in play. The Fed came very close to saying "we are going to hike rates in December" with the change in their post meeting statement. After an initial dip, the market rallied on Wednesday but that was the last day for window dressing so we do not really know if it was Fed or funds pushing stocks higher. In theory, the market is ready for a rate hike and the Fed statement was seen as a warning for December. However, the payroll reports will have to cooperate. The reports for both October and November will need to be over 200,000 for the Fed to have a green light. Inflation will have to flat line or improve. If the PCE numbers continue to decline it could keep the Fed on hold even though they want to hike.

The October rebound should have energized investors ahead of the November kickoff for the best six months cycle. The next three months are the best three-months in the year so investors should be excited. That means any profit taking that produces a dip will probably be bought. Earnings are coming in better than expected and overseas markets are exploding higher. Multiple companies have said they see improvement in the European economy. That is good news for the U.S. outlook.

The S&P is so overextended that it generated a technical short-term sell signal on Wednesday. There are three components to this signal. The extension and the width of the gap on the MACD, the nearness of the 70 level on the RSI and the 72-point spread between the Wednesday close at 2,090 and the 20-day average at 2,018. Note that the 20-day typically runs in the middle of the price range and not 72 points below. The MACD is at the point where it would typically roll over and the RSI is at the high for the year. Previous tops have been at 60.

All these indicators really mean is that the S&P has come too far too fast and we need some profit taking to reduce the pressure.


However, the S&P Bullish Percent Index has spiked to the highest level since May at 69.4%. That means 69% of the S&P-500 stocks are showing a buy signal on a Point & Figure chart. This is very bullish and indicates that the breadth of the rally is expanding.


The percentage of stocks trading over their 50-day average is over 78% and that is a high for 2015. While that sounds really bullish this is the result of the averages being pushed lower in September and the rebound has lifted stocks back over those lowered averages. This is bullish because it shows breadth but needs to be taken in context.


The Advance/Decline Line Index on the S&P is at the highest level since May but notice the MACD at the bottom. The indicator is rolling over and suggests some weakness ahead which I believe will be short-term.


The S&P opened at resistance at 2,090 on Friday and failed to extend its gains. The late day decline knocked off -10 points to close just under 2,080. The index has support at 2,075, 2,065 and 2,020 but I doubt we will dip that far. There is always the possibility we will not dip at all but I view that as less likely.


The Dow managed to cling to a 16-point gain for the week but it was very close. The Dow hit 17,799 at 1:45 and it was all downhill from there culminating in a -78 point drop in the last 10 minutes. There was no headline and it was purely based on market on close orders. A decline like this on the last day of the quarter is normally positioning for some early month selling.


Only a handful of the Dow components lost more than $1 but the declines were three times the advancers. Goldman Sachs and UnitedHealth were the biggest losers with each giving back -$2 in the last hour. It appeared the selling was concentrated in those two issues with the other charts showing limited end of day declines.


The Dow has decent support at 17,550 and 17,350 followed by 17,150. Resistance is 17,775-17,800. The 200-day average is 17,577 but the Dow is not very reactive to moving averages. Two Dow components report this week. Those are Visa on Monday and Disney on Thursday.


The Nasdaq Composite held its gains really well and is stubbornly refusing to retest psychological support at the 5,000 level. Most of the big cap tech stocks have already reported so the potential for a big earnings disappointment is fading. Facebook is the only material big cap tech reporting next week and I would be surprised to see a big decline.

Support is about 5,010 and resistance is rock solid at 5,085.



The Nasdaq 100 closed within ONE point of a new high on Wednesday. The prior high of 4,679.68 was nearly reached with the 4,678.58 close at the high of the day. This is a clear example that the big cap tech stocks have been leading the market higher. That prior high has turned into serious resistance with the index coming to a dead stop just below that level for the last two days.


The Russell 2000 small caps just cannot hold a gain over resistance at 1,165. Wednesday's spike to close at 1,178 looked like a breakout but it was immediately sold the next day to close back at 1,161 on Friday.

In theory, November is when the small caps begin to shine as the January Effect begins to be felt. Historically fund managers would buy small caps in January but as that trend became known traders would buy the small caps earlier and earlier in order to front run the funds. Now the effect tends to appear in the middle to end of November and run through Christmas. Let's hope the buying interest is about to begin.


I think I was clear in stating my bias above. I expect some short-term profit taking soon and then the market should rally into Thanksgiving week. The major earnings are over but there are still about 700 companies reporting this week and there will be some hits and misses. With 105 S&P companies reporting there will still be some sector hiccups if there are some earnings disasters. However, overall the earnings are coming in better than expected. The bar was really low but a beat is still a beat. I would be a dip buyer next week.

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Random Thoughts


How good was October?

The three major indexes had their best month since October 2011.

Since 1992, there have only been four months with bigger point gains for the Dow.

Since 1987 the S&P gained more than 8% in a month only 12 times.

The German Dax gained +12.3%.

The Japanese Nikkei gained +9.75%.

The Chinese Shanghai Composite gained +10.8%. That was the first monthly gain in five months.


First time jobless claims were 260,000 last week. That is the third consecutive week at 260K or lower. The last time that happened was in November 1973. Jobless claims are low not because there is suddenly a surge in employment but because more people are dropping out of the labor force. This is a bad trend hiding under a seemingly positive data point. Jobless Claims Low

Chart from Bespoke


Stupidity is rampant in Washington. The new budget deal passed last week authorizes the sale of 58 million barrels of oil from the Strategic petroleum Reserve (SPR) in order to raise $5 billion in revenue to go into the general fund. Really? Oil is at post crisis lows at $45 and when the last barrels went into the SPR from 2000-2005 the price of oil was rising to the $75 range. Buying high and selling low never makes sense in the stock market so why does it make sense in the SPR? Fortunately, the sales do not start until 2018 so there is time for calmer heads to prevail. The sale was rationalized as a test to see if oil from the SPR could be sold on the open market in a time of stress. We never had trouble extracting oil from the SPR in the past so why should we have trouble in the future? The SPR contains 694 million barrels.


Sam Stoval at S&P Capital IQ authored a piece on "Stealing from Santa." In this article he pointed out that the S&P gained more than 8x normal in October. Since 1945 a gain of more than 7% in October resulted in a drop in the November/December gains to an average of +1.9% versus an average gain of +3% for all 70 years. After a strong October, the frequency of additional gains fell to 60% rather than the normal 77%. He also found that the sectors that led in October lagged the rest of the year. Stealing from Santa


The Titan supercomputer in Knoxville Tennessee can process 20,000 trillion instructions per second. This is the equivalent of 10 million times faster than your PC. Titan Supercomputer


Russia is planning on restarting civilian defense training on how to protect themselves in case of nuclear war. The deputy prime minister in charge of defense said after a meeting with Putin that the U.S. was upsetting the nuclear balance by developing new weapons systems. Russia has no choice but to react to the aggressive capabilities of the United States. Russia Increasing Nuclear War Defenses

Russian Bombers Buzz Navy Ships


 

Enter passively and exit aggressively!

Jim Brown

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"Amateurs built the Ark, professionals built the Titanic. "

Richard J Needham, 1979

 

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