It was a lackluster week for the Dow and S&P but the Nasdaq scratched out a small gain while the Russell 2000 surged +2.3% for the week. The small cap rally arrived on schedule.

Market Statistics

The S&P struggled to gain less than 1 point for the entire week. Resistance at 2,095 was rock solid and the entire week was a pattern of lower highs. The Dow was worse with a loss of 25 points for the week. Most of that came from Disney on Friday.


All the air was sucked out of the big cap indexes on Friday after Disney (DIS) filed a 10K with the SEC showing ESPN subscribers had declined from 95 million to 92 million. Disney had warned of weakness in the ESPN division back in August. They claimed there was a lack of high profile sporting events like the Olympics that keep subscribers paying the monthly bill. CEO Bob Eiger has promised multiple times this was temporary and subscriber numbers would return with the summer Olympics in Brazil in 2016. Disney shares lost -$3.50 on Friday to knock about 25 points off the Dow.

This is another buying opportunity on old news. Volume was very low on Friday and that allowed the unexpected loss. The 10K was simply a repeat of the August news. Star Wars is coming and estimates are growing to more than $3 billion in revenue from this picture. The Force is with Disney!


There were no economic reports on Friday. However, next week is fully loaded. The ISM Manufacturing Index on Tuesday is expected to post a minor gain to bring it back from the brink of contraction. The headline number last month was 50.1 and only 0.2 from contraction territory.

The ADP Employment on Wednesday will be the first look at the November employment picture. Consensus estimates expect a small gain over the +182,000 jobs in October.

The Fed Beige Book will recap the economic activity in the 12 Fed regions. This is perfect timing since the Fed's rate hike decision is only two weeks away.

Friday's Nonfarm Payroll number is the last major data point ahead of that December 15th FOMC meeting. Unless the bottom fell out of the job market in November the Fed should be on track to hike rates. The weekly jobless claims had been slowing but the prior three weeks showed an increase of about 15,000 claims a week to 275,000. However, the claims last week returned to their pre November pace of 260,000 and near the post recession lows.

Lastly, the ECB will decide on its QE path on Thursday. Mario Draghi has been super dovish recently and constantly repeating his "whatever it takes" phrase. Quite a few analysts believe the ECB will raise their QE purchases from the current 60 billion euros per month in an effort to jumpstart inflation. This puzzles me because more than 30% of the sovereign bonds in Europe are now trading at a negative yield. How does pushing the yields even further into negative territory stimulate consumer spending in Europe?

The OPEC production meeting next Friday is not expected to produce any changes in their quotas but I would not be surprised to see oil prices creep up ahead of the event as speculators cover shorts and increase longs just in case the unexpected does happen.

Janet Yellen will get two chances to prepare investors for the December FOMC meeting. She gives a speech to the Economic Club on Wednesday at 12:25 and testifies before a Senate committee on Thursday morning at 10:AM. The topic for both is her economic outlook. Since the Fed is heading for its first rate hike in nine years just over two weeks from now the odds are good she will be trying to focus investors on that possibility. The data dependent phrase will be used repeatedly but she is going to try to set the market's expectations so there is no post announcement disaster.


Hormel Foods (HRL) announced a 2:1 split for February 9th subject to shareholder approval on January 26th. Shares are in rocket mode and I would not be a buyer here.


For the full split calendar click here.


The dollar continued its surge higher and closed at a 12 year high on the dollar index. This is crushing commodity prices and gold closed at $1,055.90 and a six-year low. Copper and silver have flat lined over the last two weeks with silver at $14 and copper at $2. This appears to be strong support but should the ECB announce more QE and the Fed hikes rates the dollar will surge even more and the precious metals could move to new lows.

I had several readers email me over the last couple of weeks asking if it was time to buy gold. My answer was the same as above. I believe there are new lows ahead. If you are thinking about buying gold for the really long term then you could scale into a position starting now just to avoid having some event spike it back over $1,100 or higher. A showdown with Russia could do that. However, if you just added a little every week you will not have the lowest possible price but very few traders ever do. Picking the exact bottom is a function of luck rather than skill so constantly averaging down assures you of a constantly lower average price.

Personally, I would wait until just before the FOMC meeting. If they fail to hike, the dollar could fall and gold rally. That would be the only "known" event on the calendar that could push gold prices higher.

Ebay said they were selling up to $2 million in gold bullion from their top sellers every day thanks to the low price. On Thursday, they were selling $1,000 bars at the rate of one per minute. Bullion sales were up +27% from October. Ebay has been selling silver coins in their "daily deals" section with 2,500 rolls of 20 one-ounce Silver Eagles sold in just one day last week. They were selling 50 ounces of silver every 60 seconds. This week, they sold lots of 100 1-oz Silver Eagles (5-rolls, 100 ounces) for $1,665 and 1,523 lots were sold. I have bought a significant amount of silver coins from Ebay sellers. Just make sure the seller has a large number of positive feedbacks.



The biotech sector had a good week with the $BTK up +2.7%. After spending all of October at ten-month lows the sector finally found caught a bid and while not straight up it has been getting progressively better. A lot of the second and third tier stocks have been accelerating while big caps like Biogen (BIIB) have been lethargic. The new up and comers are powering the sector.

The Nasdaq and the Russell are benefitting from the biotech rally. The Nasdaq has a lot of the larger names and the Russell is benefitting from the smaller names.


The Shanghai Composite Index fell -5.35% and the worst day since the market crash in August. Two headlines sparked the declines. Chinese industrial profits fell -4.6% in October. This compares to a decline of -2.0% for the first ten months of the year. Economic conditions are worsening.

The second headline came from the Chinese Securities Regulatory Commission (CSRC). The commission launched probes against several brokerages for allegedly breaking regulations. Citic Securities, Founder Securities, Guosen Securities and China Merchants each declined 10% or more. China continues to cut rates but the there are festering problems throughout China and hundreds of probes in progress to crack down on those problems. Unfortunately, each crackdown has slowed business in that specific area as companies and investors withdraw into their shells to avoid attracting attention of overzealous regulators.


Black Friday is over and retailers were not generally excited. There was a definite division over those that felt it was a good day and those that were disappointed. The CEO of Tanger Outlet Malls said shopper traffic was up more than 40% at most locations and Friday was setting records for his 42 outlet malls.

Retail watchers said Kohl's (KSS) and Limited Brands (LB) were doing a brisk business but other stores like Neiman Marcus and Nordstrom (JWN) were not as busy. Toys R Us CEO Dave Brandon said there were lines down the street when the doors were opened at 5:00. That is an annual favorite since families will cut back on clothes but toys will still be bought.

Target said store traffic was "solid" but bragged that online sales on Thanksgiving was the biggest sales ever for any day. The company said it was selling an iPad a second on Thr/Fri. They are giving $80-$100 gift cards with each tablet purchased so consumers were lining up.

Walmart said "tens of millions of customers" shopped online and in the stores. More than 25 million people accessed store maps and digital ads online in preparation for the event. Walmart launched all the door busters at 6:PM Thursday rather than staggering them throughout the day as in prior years. In a press release, Walmart said the shopping season was off to an "exciting" start. In the same release last year they called it an "awesome" start.

Walmart offered its Black Friday specials online starting at 12:01 AM on Friday but the website was down for much of the morning. Consumers said the delays in the response time were so long their sessions timed out. Others said the system cancelled their orders even after they had checked out because the delays meant the inventory numbers were incorrect.

The website for Neiman Marcus was down almost solid for most of Friday with only a few brief glimpses of the home page. That is a killer for online sales because consumers give up and shop elsewhere. Newegg.com, HP.com, Footlocker.com and Jet.com also experienced website outages resulting from heavy traffic.

Macy's (M) said more than 15,000 people were in line outside the flagship Herald Square store at 6:PM on Thursday when the store opened. A Moody's analyst said crowds were heavy at the Best Buy and Target stores he was assigned to visit.

Unfortunately, for retailers 57% of consumers have not even started their holiday shopping according to NPD Group and CivicScience surveys. NPD said only 6% more people shopped this week than the prior week.

In 2014 holiday shoppers spent more than $650 billion in Q4 and $110 billion of that was online. There are signs that the online retailers were seeing larger crowds than the brick and mortar retailers. With many consumers cautious about mingling with the crowds after the Paris attacks, the online retailers were getting more attention.

General Growth Properties and Taubman Centers both said they had increased security significantly, both visible and invisible. The International Council of Shopping Centers spent more than $2 million to develop a training course on how to respond to an act of terrorism. More than 30,000 mall employees have completed the course.

I was in a Costco on Wednesday and it was wall-to-wall people with lines of cars in the parking lot waiting for parking places to open up. I visited the largest Walmart in the Denver area two hours later and it was a ghost town by comparison. There was plenty of parking, plenty of baskets and isles with no customers.

Various analysts are predicting sales growth for the holidays from 2.3% on the low side to +4.4% on the high side depending on the analyst. The trend of opening on Thanksgiving and remaining open 24 hours for the entire weekend seems to be slowing. Fewer stores are finding that advantageous. Most are now seeing the stretching out of the shopping hours as expensive and unprofitable. They are only doing it out of self-defense because competitors are open and they see it as a loss leader.

Analysts pointed out the increasingly promotional atmosphere with discounts from 40% to 70% not out of the ordinary. Simon-Kucher surveyed 1,000 consumers and found that more than 50% cited huge discounts and promotions were a major influence on where they shopped. With Pre-Black Friday deals starting way before Thanksgiving many of the sales had been pulled forward from this weekend and that will reduce the total sales volume for the weekend. It is easier for retailers like Target to advertise heavily for pre-sales 2-3 weeks in advance and not have to compete with the thousands of ads for Black Friday.

Since quite a few retailers have already warned on sales for the holiday season due to slower mall traffic and the requirement for excessive promotions to move merchandise this may turn out to be a good shopping season for consumers but a loser for retailers.

Late Saturday I heard a headline on the radio that Black Friday sales disappointed and overall traffic was down more than 10% as shoppers stayed away from the malls. The real numbers will not be available until early next week but the lack of customer traffic may have translated into more online shopping instead.

The St Louis Fed produced this chart of the state of retail department stores. Sales have been declining since 2000, which just happened to be the start of the online shopping movement. Clearly, the shopping patterns have changed and there is little hope that the percentage of online sales will decline in the future. If anything, they may accelerate if terrorist activity increases.


Retailers have come up with new names for nearly every day of the holiday shopping season. Many retailers started their Black Friday sales well ahead of the actual date. If you are shopping this weekend, you will probably appreciate this cartoon.


Oil prices rebounded to resistance at $43 mid week but lost traction thanks to the rising dollar and rising inventories. Gasoline demand was very strong in November thanks to the low prices. The national average on Friday was $2.05 a gallon. When Putin failed to nuke Turkey over the downing of the plane the risk premium in crude began to fade. While the crisis is not over it has slipped from the headlines.

Crude inventories rose +1.0 million barrels and are now only 2.7 million from a new 80-year high at 490.9 million. U.S. production declined -17,000 bpd to 9.165 mbpd and only 20,000 bpd below the 10 week high set two weeks ago.


The active rig count declined -13 rigs to 744. Oil rigs declined -9 to 555 and now down -1,054 from the peak. Active gas rigs declined -4 to 189 and a 17-year low.


Natural gas in storage rose to 4,009 Bcf and a new historic high. Typically, injections of gas into storage end on November 1st as colder weather prompts higher demand of natural gas for heating and electricity. October was the warmest October on record and November was heading in that direction until the last two weeks.

Propane supplies are also at record levels after a +1.73 million barrel increase to 106.2 million barrels last week. The lack of any cold weather and the high production of propane rich ultra light shale oil is pushing inventories higher. Wholesale prices are still in the 50 cent per gallon range and retail prices in my area are $1.09. Some regions on the East Coast are in the $2.50 range but that is still well below the $3.25 from the same period last year.

Record Levels of Natural Gas in Storage


Record Inventories of Propane in Storage


Markets

The markets for last week were easy to analyze. Nothing happened. Other than the opening dip on Tuesday on the downing of the Russian plane the Dow and S&P were almost perfectly flat. The S&P hit its high for the week at 2,095 at the open on Monday and we closed the week at 2,090. The resistance at 2,095 from the prior Friday was rock solid. However, that is not saying much since volume was VERY light. Wednesday totaled 5.1 billion shares and Friday barely squeezed out 2.8 billion. Tuesday was the high day at 6.8 billion and that was due to the sudden drop and rebound on the Russian incident.

We knew in advance the volume would be low but in prior Thanksgiving weeks, there was normally a melt up into the holiday. I believe the worry over a potential terrorist attack on U.S. soil kept investors on the sidelines. With a very heavy economic calendar next week, there will be plenty of headlines to stimulate the market. Whether that stimulation will be positive or negative remains to be seen.

This is going to be a make or break week for the markets. With the pattern of lower highs on the S&P and still 15 points below major resistance, there is the potential for trouble. If the S&P cannot break through that 2,116 level and declining resistance from July it could turn into a disappointing December.

We spent most of the year around 2,100 with minor peaks and valleys every 2-3 weeks. That produced some significant resistance that should not be easy to break. If we rally up to that resistance and then fail again it could produce some investor fatigue where they begin to close positions and go to cash for the end of the year.

We need to find some traction early in the week and rekindle the upward momentum or December may not follow the seasonal trend higher.


The Dow was the leader in lackluster performance with a loss of 25 points for the week. Disney was the culprit on Friday or the Dow would have been flat for the week. Downtrend resistance at 17,900-17,950 is going to be the next challenge. The Dow has had four consecutive days of lower highs. However, we cannot really apply too much importance to it because of the very low volume.

With the earnings cycle over there is little to move the individual Dow stocks other than negative headlines like the one we got from Disney on Friday. A Fed rate hike could lift the banks but that is two weeks away. Some event in the Middle East that puts a risk premium into oil prices could lift Chevron and Exxon but that is a wild card. I am not looking for the Dow to be a leader in any rally. That position will remain with the Nasdaq and Russell. The Dow will be a follower.



The Nasdaq finally broke through the resistance at 5,100 on Wednesday and put two decent days of gains to stretch that breakout to 5,127. The next challenge will be 5,160 and then the high close at 5,218. I expect 5,160 to be tested and a breakthrough there should be good for a new high. These events tend to be self-fulfilling once they get close to the goal.

Apple is still the laggard but hopefully headlines about their product sales over the weekend will lift it out of the doldrums. It is very hard for the Nasdaq to advance when Apple is declining.

Apple could be offset by Amazon and reports of a banner weekend. Amazon is just a few points below a new high and any positive news could produce a breakout.



The Nasdaq 100 big cap index ($NDX) is only about 50 points from a new high. The resistance at 4,688 was tested on Monday and the index held its gains to close at 4,680 on Friday. A new high on the big cap techs would help to drag the Dow higher as well.


The Russell 2000 small cap index is on the verge of a breakout if the buying activity from last week continues. The index closed at 1,202 and 2 points above strong resistance that held it back in early November. A breakout here could run to 1,244 where it is likely to pause for a profit break. The small caps were positive for 7 of the last 8 days since rebounding from support at 1,144. It is due for a rest.


This is a make or break week. If the prior week's rally does not continue, it would signal investor fatigue ahead of year-end and possibly some uncertainty about the Fed's rate hike plans for December 16th. In theory, the market should celebrate a rate hike because the Fed is confident the economy is growing. In both prior Fed statements/minutes the strong language suggesting a December rate hike resulted in market rallies. If investors were positive after those events then they should also be positive about a December hike.

However, as Spock said in Amok Time - 1967, "having something is not so pleasing a thing after all as wanting. It is not logical but often true." We have all experienced this. We think we want something and once we have it the excitement fades quickly and we realize it was just a passing fancy. Once we have a rate hike the market may decide that instead of a one and done it may actually be the start of a series of rate hikes. Instead of one vaccination and done we find out the Fed has an entire series of vaccinations planed for us in the months ahead. While that is not likely it is still a possibility.

I am thrilled at the lack of terrorist events in the U.S. over the weekend and there is a good possibility we could begin the week with a relief rally.

This will definitely be a week where we need to trade what the market gives us rather than what we want to see. There are numerous headlines this week that could stimulate the market in either direction and hopefully that direction is up.

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Random Thoughts


Goldman Sachs compiled a list of 19 companies that hedge funds are betting will go down. The Hedge Fund Trend Monitor listed these stocks and their short interest. Dollar values in billions.

Symbol, Value of short positions, Percentage of float, reason for short.

T - $3.8B - 2% - Rising costs from DTV acquisition, subsidy challenges
VZ - $2.1B - 1% - Changing subsidies, demand for more bandwidth
BA - $2.9B - 3% - Cargo traffic a problem, orders moderating
ACE - $2.2B - 6% - Underwriting growing more competitive
CVX - $2.1B - 1% - Continued decline in oil prices, refined products
IBM - $3.2B - 3% - Asian sales declines driven by Chinese boycott
SLB - $3.3B - 3% - Declining prices in service sector
JNJ - $2.9B - 1% - Increased competition, generics
CAT - $3.0B - 7% - China decline, coal decline, mining decline
SYY - $2.0B - 9% - Food deflation
HAL - $2.1B - 6% - Activity levels dropping globally
WMT - $2.1B - 2% - Rising expenses, slowing sales growth
DIS - $6.7B - 4% - Subscriber losses from cable channels
TGT - $2.5B - 5% - Sales rising in limited categories, overall slowing
MON - $2.8B - 6% - Strong dollar slowing overseas sales
XOM - $4.1B - 1% - Weak oil prices, refined product sales
AVGO - $2.8B - 9% - Semiconductor competition
INTC - $3.7B - 2% - Ongoing macroeconomic headwinds, PC sales
ESRX - $3.8B - 7% - Rising drug costs, insurance reimbursements


How long is an average rate hike cycle? Since 1980, the average cycle has lasted 22 months. Based on current Fed projections a new cycle begun in December could last for three years or more before rates return to "normal." However, there is a greater possibility of a recession cutting short any new rate hike scenario since the average time between recessions is about five years. We are now in the sixth year of this recovery.



Can the Fed really hike rates in the current economic environment? The release of the Personal Income and Spending data last week crashed the Atlanta Fed's real time GDPNow forecast to only +1.8% growth in Q4. The GDPNow forecasts have been very close to reality in recent quarters. With the GDP forecast plummeting the Fed might decide that caution is warranted. However, if they do not hike in December after almost guaranteeing it in recent releases, their credibility will be ruined. That assumes they have credibility that is not already worthless.



The Stock Trader's Almanac posted a composite chart of the typical market movement in December. Link All indexes typically surge in the first five trading days before succumbing to weakness mid month as traders take profits and tax losses and position themselves for the coming year. Starting around the 12th trading day the indexes begin to rebound into the Christmas holiday.



OPEC meets late this week to discuss production. Analysts claim there is actually a better chance of the cartel raising the production quota from 30 mbpd to 31 mbpd rather than cutting production. Saudi Arabia is the governing vote and analysts expect them to continue flooding the market with crude throughout 2016. OPEC has been producing over 31 mbpd for a year so changing the quota to 31 will have no impact.

Saudi Arabia has backed off its recent record production but continues to produce over 10 mbpd. Indonesia is returning as an OPEC member, Iraq is increasing production and Iran is expected to up its production by 500,000 bpd in early 2016 and raise that to 1.0 mbpd by July. Keeping the quota at 30 mbpd would just be a face saving measure. In reality, they could be producing 32 mbpd by the middle of 2016. That assumes they have a place to store it.

There are a record number of oil tankers stacked up outside Houston and ClipperData claims some of them do not have a home for their oil. Producers had to put the oil somewhere so they put it on a tanker and sent it to the U.S. in hopes of finding a buyer while the tanker was en route. The U.S. has a near record amount of oil in storage and with more than 40 tankers in a holding pattern outside Houston, there may be a challenge finding someone with onshore storage capacity that is willing to take the oil. The longer the prospective buyers leave those tankers in a holding pattern the cheaper the oil will get. The owners will eventually discount the oil even further to avoid paying the $35,000-$40,000 per day in tanker rent.

The IEA said the prior week that global inventories are at a record 3.0 billion barrels and rising at the rate of 1.6 mbpd. Eventually we will run out of storage. The sharply rising dollar is also weighing on oil prices.


 

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Jim Brown

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"The difference between genius and stupidity is that genius has its limits."

Grassroots Editor 1961