Volatility definitely returned with a vengeance over the last week. Just looking at the summary graphic below you would think the week was tame with the Dow up +49 and the Nasdaq +14. Obviously, that was not the case.

Market Statistics

Friday Statistics

In order for the Dow to close up +49 for the week it had to come back +418 points from the 17,425 low on Thursday. That low was -476 points off of Wednesday's high at 17,901. We say all the time to ignore moves on low volume but the last three days have averaged 7.61 billion shares. Anything close to 8 billion is a heavy volume day.

The Dow rose +56 on Monday, +168 on Tuesday, dropped -159 on Wednesday and -252 on Thursday only to rebound +370 on Friday.

Multiple headlines got the blame for the Thursday decline with Mario Draghi the lead event. When the ECB announced their stimulus decision, it fell short of what analysts and the market expected. The market immediately accelerated to the downside and stops were hit as panic took hold.

It was not that the ECB did not take action. They cut the deposit rate another 10 basis points to -30 basis points. They extended their 60 billion euro per month QE for another six months until March 2017. They also expanded the types of securities available for the program to include state and local bonds.

The markets quickly decided those changes did not live up to the "whatever it takes" claims by Draghi and the rest as they say is history. The dollar crashed and the euro soared.

Fast forward to Friday and the situation reversed. Draghi spoke at the Economic Club and said again there was "no limit on using ECB tools...quickly and without delay" if needed. He said "the ECB had the power to act, the determination to act and the commitment to act." The market exploded higher on his comments.

A moderator at the Economic Club asked him in an interview if the comments in his speech today were meant to offset the negative impact of the comments on Thursday. Draghi replied, "not really, (slight pause) well of course." That produced a good laugh all around and the market moved even higher.

Helping to create a positive atmosphere in the market was the Nonfarm Payrolls. The headline number was a gain of +211,000 jobs. The September and October revisions added +35,000 to push the October payroll gain to +298,000 and the highest since last December.

The unemployment rate remained the same at 5.0%. The labor force rose +273,000 as more people decided to look for jobs. Goods producing companies added +34,000 and companies providing services added +177,000 jobs. Private companies accounted for 197,000 of the new jobs.

Leisure and hospitality added +39,000, healthcare +32,000, retail +31,000, professional and business +27,000 and temporary help declined by -12,000. That decline in temporary was strange given the number of temporary workers employed for the holidays.

Construction added +46,000 thanks to the warmest October on record and its extension into early and mid November. Mining/Energy lost another -11,000 as crude prices fell and commodity prices drop below the cost to produce them.

The negative points were a slower gain in hourly earnings at +0.2% compared to +0.4% in October. Also, the number of people forced to take a part time job because full time employment was unavailable rose from 5.78 million to 6.09 million. The broader U6 unemployment rate rose +0.1% to 9.9%.

Unemployment by category, for men 5%, women 4.7%, teenagers 15.7%, white 4.3%, black or African American 9.4%, Asian 3.9% and Hispanic 6.4%.

The three-month moving average rose to 218,000 and well into the range the Fed is looking for as confirmation of an improving labor market. Yellen said last week that a print of only 100,000 jobs would be enough to maintain the long-term average and allow them to hike rates in December.


The December rate hike is now locked in according to most analysts. The payroll report was sufficiently strong enough to offset declining economics elsewhere and the paltry 1.5% Q4 GDP growth as predicted by the Atlanta Fed. That was up slightly after the stronger than expected Factory Orders on Thursday but declined again on the weak international trade numbers on Friday.


If the Fed does hike rates in December, it will be the first time they hiked with manufacturing in a recession since 1981. The ISM Manufacturing on Tuesday dropped to a post recession low of 48.6 and into contraction. The ISM Services declined -3 points on Thursday to 55.9 and only 2 tenths of a point away from an 18-month low. I do not understand how the Fed can hike rates if they are truly data dependent but analysts are already talking about the next hike and whether it will be March or July 2016.

The calendar for next week is lackluster until the PPI and Retail Sales on Friday. Expectations for producer prices are for a decline of -0.2% after a -0.4% drop in October. There are no signs of any inflation on the horizon. The retail sales are expected to have risen +0.3% in November but after the complaints about the Black Friday weekend I would not be surprised to see that estimate missed.


There were no new split announcements last week.

For the full split calendar click here.


Despite the big market rebound there was very little stock news. The main headlines were Draghi, the Fed meeting and the California terror attack.

Ambarella (AMBA) had a volatile day after announcing decent earnings Thursday night. Unfortunately, the guidance was weak and that weighed on the stock. Shares declined to $53.75 at the open before rebounding to $61.16 at 10:AM. They fell back to $55.50 before rebounding back over $58 and then closing under $57. Traders appeared to be confused as to direction.

Deutsche Bank said Q4 guidance was even weaker than expected. Analysts were expecting weaker numbers because of slow sales at GoPro. The bank lowered its target from $70 to $60. Pacific Crest called the weak guidance a "toe stubbing for sure" but maintained a $77 price target and expectations for 15-20% growth in 2016. That is a far cry from the $125 we saw in July.


Shares of GoPro hit a new post IPO low at $18 after R.W. Baird cut its rating from outperform to neutral with an $18 price target. Piper Jaffray reiterated an underweight rating with a price target of $15.

Ambarella's guidance was in part due to rising inventories of unsold chips. This is directly related to sagging GoPro sales. They recently cut the price on their latest Session camera for the second time in five-months. GoPro has been talking a good game for Q4 but it remains to be seen if the sales will actually happen. Earnings estimates for Q4 and 2016 have been cut twice.


Chipotle Mexican Grill (CMG) warned on Friday that sales and earnings would be down sharply as a result of the E.Coli outbreak. The CDC reported early Friday that the same E.Coli strain had infected people in three additional states. The company said earnings for Q4 would be in the range of $2.45-$2.85 per share and well below the $4.09 expected by analysts. Chipotle expects sales to decline 8-11%. They said sales declined -16% in November after being down -22% in the middle of the month when the CDC reported the outbreak had spread.

The current theory is that the infection is coming from tainted celery since that has also impacted Costco, Target and several other firms. Chipotle announced another $300 million stock buyback in an effort to halt the decline in its shares. Chipotle shares closed the regular session at $560 but fell to $518 after the company warned.


Move over UPS, Amazon is coming. The online retailer announced on Friday it was going to put thousands of Amazon branded trucks on the road in a move to increase shipping capacity and shorten delivery times. Amazon currently uses UPS and FedEx to move their packages and they ship millions of packages a day. That means those shippers have to load, sort, ship, etc those millions of packages from Amazon fulfillment centers.

Amazon is not going to use these trucks to deliver to your door. They will be used to transport merchandise from and to their warehouses and to the various fulfillment centers and shipping companies. Instead of asking UPS to handle all the pickup and sorting you can expect to see Amazon trucks delivering presorted packages to various shippers like UPS and FedEx. This will further reduce their freight costs and lighten the load for the shippers that actually deliver to your door.

Amazon is currently leasing a prior DHL facility in Wilmington Ohio and is flying four Boeing 767 freighters a day to airports in California, Florida and Pennsylvania. The project is code-named Aerosmith and is done in partnership with Air Transport Services Group (ATSG).

Amazon has also patented what it calls "Anticipatory Shipping." Using this process Amazon can start shipping a package to you before you even order it. The program tracks what you and others around you normally buy, what is in your shopping cart and even how long you view certain product pages. By accumulating all those potential orders for one geographic location, Amazon can ship a truckload of those products to the closest shipping point to that location. When the order is actually placed, they slap a label on the box and hand it to a waiting UPS truck. Today those orders are shipped one at a time out of one of the main fulfillment centers. That means they are picked up by UPS and transferred from truck to truck as they cross the country in the UPS system until they get to your area. By prepositioning Amazon trucks with products at UPS hubs in every region they will eliminate that long travel time. This will greatly expand their next day delivery options.

Last year Amazon spent $8.7 billion on shipping. That equates to 9.8% of sales. Amazon ships about 5 million packages on an average day. On Cyber Monday alone they sold more than 40 million items giving you an idea on how many packages they ship in December. Slice Intelligence said Amazon captured 36.1% of all Cyber Monday sales with Best buy second at 5.5% and Walmart 3.8% to round out the top 3.


Ultra Salon (ULTA) jumped +13% after reporting earnings. Revenue rose +22% to $911 million and $31 million over estimates. Earnings of $1.11 beat estimates for $1.05. The company provided in line guidance for Q4 but raised guidance for the full year. Same store sales are expected to rise +10-11%, up from 8-10% in the prior estimate. E-commerce sales are expected to rise +40%. That compares to +56% in Q3. EPS growth is expected to rise in the low 20s percentage range.


Relypsa (RLYP) spiked +7% on rumors Merck (MRK) was planning on making an offer to acquire the company. The initial rumor was later redefined as Relypsa putting itself up for sale in an auction including GlaxoSmithKkine, Galencia, Merck and others. The company just received its first drug approval from the FDA and they need deeper pockets to continue development of other drugs.


Pep Boys and the old guy. Auto parts chain Pep Boys (PBY) now have a new partner. Carl Icahn revealed on Friday he had taken a 12.1% stake in the retailer. Icahn's filing said he was involved in active discussions with the company regarding their strategic alternatives. The company had previously tried to sell itself in the past with no bidders in 2006 and a LBO failed in 2012. Last June, Chairman Bob Hotz, bragged about his progress in growing same store sales, increasing gross margins, shrinking inventories and unlocking the value of their real estate. Icahn bought an auto parts supplier now called Auto Plus in June for $340 million. In a Bloomberg article, Icahn is reportedly trying to get Pep Boys to sell itself to Auto Plus.

The catch in Icahn's plan is that Pep Boys agreed to sell the retail chain to a unit of Bridgestone Corp for $835 million in October. The Bridgestone tender offer is set to expire on January 4th. The tender offer was for $15 in cash and a 23% premium over the stock price at the time. Shares closed at $15.69 on Friday with a 3% gain.


McDonalds (MCD) shares spiked to a new high after the company said there were $38.7 billion in bids for its offering of $6 billion in bonds. The five tranches of bonds from 3-years to 30-years went off at a few basis points over the equivalent treasury yields. For instance, the 10-year commanded a 155 bp premium at 3.7% while the 30-year garnered a 195 bp premium at 4.875%. The company is raising cash to give investors a $10 billion cash payment in 2016. This was announced on November 10th. McDonalds could have easily floated the entire $10 billion but it would have required a larger interest rate and they wanted to keep the price low.


OPEC held their regular production meeting on Friday. After much discussion, they did nothing as was expected. They left the production quota at 30.0 million barrels per day even though they are currently producing over 31.5 mbpd. By this time next year that could rise to 32.5 mbpd if Iran, Iraq and Libya increase production as expected. Some analysts thought they would raise the quota to match their production but they could not even agree on that. OPEC as a cartel is dead until they decide to manage production in order to manage prices. The next meeting is June 2nd. Most analysts believe Saudi Arabia will continue to flood the market with oil until at least the end of 2016.

Crude prices fell to close at $40 and traded briefly under $40 several times last week. Now that the threat of an OPEC production cut is over, we could see a continued decline.


OPEC members cannot afford to cut production. Because they have driven the price so low they need to produce every barrel possible to make up for some of the lost revenue. They are hoping the low prices will not only drive high cost producers out of business but also increase the pace of demand growth because of low gasoline prices. We have already seen that here in the U.S. with truck and SUV sales in November surging ahead of car sales because of low gas prices.

Crude inventories rose +1.2 million barrels to 489.4 million and only 1.5 million below an 80 year high. However, refinery utilization rose sharply to 94.5% from 92.0% the prior week. This is up from 86.0% the first week of October when the fall maintenance was underway. With refining demand so high it could slow the inventory buildup but there is still a flotilla of ships outside Houston waiting to unload.

Lipow Oil Associates said on Friday that 36 energy companies have filed bankruptcy so far in 2015. Sixteen were in Texas, 4 in Colorado, 4 in Delaware and 6 in Canada. They expect more in the months ahead because cash flows have been cut by more than half and drilling activity is still crashing.

The U.S. rig count declined -7 to 737 with oil rigs declining -10 to 545 and another decade low with gas rigs rising +3 from an 18-year low to 192. The surprising drop came in the offshore rigs with a decline of -5 to 25 and more than 60% off their highs.


Markets

The S&P dipped to a three-week low at 2,042 on Thursday causing numerous stop losses to be triggered. The rebound on Friday was frustrating to those who were stopped out because stocks in some cases rebounded back to the highs from earlier in the week.

Despite the +2% rebound on the S&P there is still the problem of another lower high on the 2nd. The S&P touched resistance at 2,104 and rolled over into that two day crash.

The rebound should have everyone guessing about what is going to happen when it returns to that 2100-2105 level. Will it fail again or will the seasonal trend take control and break through that level? The stronger resistance at 2,116 and 2,128 is still in front of us.

I am worried over the lack of market strength. Friday was mostly short covering after payrolls and Mario Draghi's comments. What will drive the market higher next week? If we do fail at resistance again I seriously doubt there will be a corresponding rebound from any major decline.


The Dow was on a roll on Friday with all the heavyweight stocks powering higher. Note in the graphic below that IBM was the only triple digit stock not in the list of leaders. In a price weighted index the higher the stock price the larger the impact on the index. The two stocks with the heaviest weightings were the top two gainers.

This was purely short covering. Goldman dropped -$10 to a five-week low over the prior two days and rebounded nearly $5. That was short covering on expectations for the Fed to hike rates. The rebound stalled at $190 at 1:PM and went sideways the rest of the day.

Like the S&P the Dow bounced off strong resistance on Wednesday and fell sharply. The rebound took it right back almost to that same resistance making Monday a critical test for the Dow.



The Nasdaq support and resistance was nearly picture perfect. Wednesday's opening high broke through resistance momentarily at 5,160 before falling to 5,011 and only 3 points from solid support. The +104 point rebound on Friday to 5,141 took it almost back to where the volatility started.

There were a lot of stocks with major gains as you can see in the winners list below. Apple is not in the list even though it did gain nearly $4 but not enough to make the top 25.

The key for this week will again be that 5,160 resistance. A breakthrough there should continue higher to a new historic high at least on an intraday basis.



The Nasdaq 100 ($NDX) did make a new intraday high by 2 points at 4739.75 at the open on Wednesday. After the -160 point drop from the high to 4,579 the rebound nearly returned to that new high level. The big cap techs quickly recovered their upward momentum after Thursday's crash. The 4,737 level is still the key for this week. A close over that level would be a new high close.


The Russell 2000 led the prior week, along with the Nasdaq big caps but it was crushed in the Thursday meltdown. The Russell recovered the least of the major indexes with only a +1% gain on Friday compared to 2% or more on the other indexes. Support at 1,165 held but now we have to fight the resistance battles at 1,194 and 1,200 all over again. In theory, the next two weeks are the strongest for the Russell. Let's hope the theory proves to be accurate.


I said last week "This will definitely be a week where we need to trade what the market gives us rather than what we want to see." The market provided some uncharacteristic volatility in a week that is normally bullish. However, other than being stopped out of half my positions, the market is poised to retest those resistance highs and the seasonal trend is for a bullish week ahead. It is the week after that is normally rocky.

I am sure everyone is aware that the seasonal trends are just about as accurate as the weather forecast. Over the very long term, they will prove accurate but any given year can produce a significant exception. I said earlier I was worried about the implied market strength. Until the Dow and S&P can break through that downtrend resistance, we are at risk. This will be another week where we need to trade what we see and not what we want to see.

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Random Thoughts


There is a contingent of analysts that believe Draghi's underwhelming list of new ECB stimulus moves on Thursday was purposeful. Draghi needed to under deliver and disappoint the markets to lift the euro, crash the dollar and give the Federal Reserve room to hike rates. If the ECB had come out with some major program, the euro would have crashed and the dollar exploded to new highs. If the Fed hikes rates on the 16th the dollar would have broken out to even higher highs and depressed the euro.

When Draghi under delivered he reset the dollar/euro ratio so a Fed rate hike will not be so devastating to the euro. The reset on the currencies was so strong that his speech on Friday barely had any impact.



On Wednesday Citi cut its weighting for equities in 2016 to neutral. They cited the sharp drop in corporate profits in recent months.

Credit Suisse has long held that equities peak 12-18 months after a peak in margins. It has now been 15 months since the peak in margins.

Citi also said the probability of a recession in 2016 has risen to 65%. "If this were a typical policy cycle after a typical economic cycle, the Fed would have already raised rates 2-3 years ago. Instead, the US recovery is set to enter its seventh year while the European recovery is still embryonic. So in addition to China sneezing, FI markets need to price the longevity of the cycle."

Following Citi by a day JP Morgan warned of a 76% probability of a recession. JPMorgan's Michael Feroli warns that in the past, a low unemployment rate, rising compensation, falling margins, and elevated durables investment have historically signaled an elevated risk that an expansion is nearing its end... and puts the probability of a US recession within 3 years at 76%.


Yellen was asked about Citi's 65% chance of a recession in her Wednesday testimony. She said she does not see the recession risk as "anything close" to 65% but she did not provide a number she thought was more appropriate. She reiterated that the Fed would not hike rates if the committee did not believe the U.S. would enjoy "at least some above-trend growth" that would result in an improved labor market.

Citi also said, "geopolitical risks likely pose the greatest potential to disrupt markets in terms of event risk." And, "There is also the potential for geopolitical risks to intersect with economic fragility in the event of a downturn, amplifying both."


On Wednesday, both Kansas City Southern (KSU) and CSX (CSX) warned that earnings were slowing. The KSU CFO warned Q4 revenue would decline in the "high single-digit" percentage range from year ago levels. The CSX CFO said rail traffic was slowing more than expected and EPS growth was now forecast to be 3%. As recently as October, the company had predicted "mid single digit" earnings growth.

With the Dow fighting overhead resistance and the Dow Transports moving lower, something has got to give. Whenever the two indexes diverge to this extent, the Dow normally loses the battle and follows the transports lower.



 

Enter passively and exit aggressively!

Jim Brown

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