Sellers left early for the holidays but a few fund managers apparently stuck around to catch up on their window dressing for year-end. Volume was light but nobody is complaining about the gains.

Market Statistics

The markets moved higher at the open and never really looked back. There were some pauses but the gains were constant and measured. It was not a big short covering rally although there were more than likely some shorts that were covering given the bearish sentiment from last week.

There is a saying, "Never short a dull market." There is another saying far less well known, "Never hold shorts over a holiday." When U.S. markets are closed, many of the global markets are open. That is a recipe for a major surprise when the U.S. markets reopen. Given the current terror threat environment I would be surprised if we did not see some selling before Thursday's early close to protect against some event over the Christmas holidays.

The Dow peaked at 17,451 at 3:PM and a gain of just over 200 points. However, at about 3:PM a news story broke about a potential terrorist event in NYC. The Dow dropped about 75 points very quickly but the story was quickly put down. The NY police department sent an email to everyone on the force warning that this was a high stress threat period over the next few days. The email warned everyone to be on high alert. It did not mention any specific threat. One news source picked that up and misreported it according to the latest account. The NYPD also said there were no known threats or events. That shows you how nervous the market is today.

The economic reports were mixed but not enough to cause any market weakness. Existing home sales declined to 4.76 million from 5.36 million annually. That was a -10.5% decline from October. With record setting warm temperatures all across the country you would have expected home sales to be strong. Realtors blamed new regulations that are lengthening closing times and causing it to be harder to buy a home. Sales were down in all four regions.

Single-family home sales declined -12.1% from October while condo and co-op sales increased +1.7% from 600,000 to 610,000. Current inventory totaled 1.81 million homes for sale. That was also down -3.2% from October as some people take their homes off the market in the winter months. The seasonally adjusted home price rose +0.3% to $224,700.

The last revision of the Q3 GDP declined slightly from 2.1% to 1.98%. With Q1 at 0.64%, Q2 at 3.92% and Q3 at 1.98% that makes the year to date GDP 2.18%. We are not exactly setting the world on fire but Q3 was slightly higher than some estimates for the revision. We will not get the first Q4 estimate until January 29th.

Consumption was the biggest plus for the GDP adding +2.04 points but down from +2.4% in Q2. Fixed investment added +0.6% while inventories were a -0.71% drag along with exports at -0.26%. Government activities added +0.32%. Corporate profits declined -1.6% after a +3.5% gain in Q2.

The Q4 GDPNow real time update from the Atlanta Fed will not be updated again until tomorrow. It is currently showing +1.9% for Q4.



The Richmond fed Manufacturing Survey for December rebounded back into positive territory after three months in negative territory. New orders rebounded from -6 to +8 and the biggest gain in five months. Backorders jumped from -16 to zero and also the highest level in five months.

It is hard to get excited about the Richmond manufacturing survey since the chart looks more like an EKG than any kind of positive trend.

The Richmond services survey rose from -1 to zero. That compares to an 18 on the headline number in October. With warm weather and the holiday season in full swing, I would have expected significant improvement. This is not a good sign for January.



The calendar for the rest of the week is lumped into Wednesday but nothing on the list should move the market. There will be nobody at their trading desks to hear the news.


This was a very light day for stock news so this is going to be a short commentary tonight. Google (GOOGL) and Ford (F) are in talks to form a partnership to develop autonomous car technology. This would use the technology from Google and the manufacturing capabilities of Ford. Reportedly, the two sides have been talking for months. If Google is successful in recruiting Ford as a partner the path to an actual production vehicle could be shortened considerably.

Google prototypes have logged more than 1.3 million miles of autonomous driving. An official announcement could be made at the Consumer Electronics Show in early January. Ford's former CEO, Alan Mulally, is a director at Google. In September, Google named John Krafcik as CEO of the self-driving car project. He worked for Ford for 14 years in a number of management positions.

Ford shares spiked +3% on the news and GOOGL shares rose less than 1%.


Steelcase (SCS) rusted out today after reporting earnings that disappointed. Shares fell -23% on earnings of 30 cents compared to estimates for 33 cents. Revenue of $787.6 million also missed estimates for $812.9 million. The company guided for current quarter earnings of 20-24 cents compared to expectations for 26 cents. Revenue forecast of $720-$745 million also missed consensus estimates for $771.9 million.


Caterpillar (CAT) rallied +5% despite news the company was ordered to pay $73.6 million for stealing trade secrets from Miller UK. The two-month trial concluded that Caterpillar copied a coupler that enabled excavator operators to change scoops or other attachments without leaving their vehicles. Miller was supplying these to Caterpillar after designing them in 1998. CAT "developed" their own version in 2008 and ended the arrangement with Miller forcing the company to lay off 75% of its workforce and close an office in Georgia and another in Japan. Miller is asking for attorney's fees and other costs that could raise the total to $100 million.

CAT appeared to find a bottom at $65 over the last two weeks and today's rebound closed at $68.50. I still would not buy it because the low commodity prices and slowing Chinese economy means machine sales are going to be slow in the coming months. On Sunday, Caterpillar said global machine sales were down -11% in November, with world resource industry sales down -28% and construction industry sales down -7%. This does not sound like a buy to me.


Baxalta Inc (BXLT) shares rallied +4.5% on news that it may accept an updated bid of $30 billion from Shire PLC (SHPG). Shire is now offering 40% of the purchase price in cash to go along with the $45 offer. BXLT was trading at $37.50 before the news broke.


Church & Dwight (CHD), makers of Arm and Hammer products, will join the S&P-500 after the close next Monday. The company will replace Altera (ALTR), which is being acquired by Intel (INTC). Shares spiked about 3% to $87.50 in afterhours.


After the bell Nike (NKE) posted earnings of 90 cents that rose +22% and beat estimates for 86 cents. Revenue of $7.7 billion rose +4% but missed estimates for $7.8 billion because of currency issues. Revenue in China rose +24% while North America sales rose +9%. Futures orders, a measure of future sales, rose +20% on a constant currency basis. North American futures were up +14%, China +31% and Western Europe +17%. Futures orders will be delivered between the end of December and April 30th. In the year ago quarter futures orders were up +11%.

For the current quarter, Nike expects revenue growth in the high single-digit to low double-digit rate. On a constant currency basis, growth would be in the mid-teens percentages. Analysts were expecting 8.2%. With the 2016 Summer Olympics to fuel sales in 2016 Jefferies raised the price target to $150. Nike will probably beat that target. I would be a buyer of Nike on any weakness in January. Shares rallied to $134.50 in afterhours.

Under Armour (UA), Finish Line (FINL) and Foot Locker (FL) shares rose in afterhours after the Nike earnings.


Micron (MU) reported earnings of 24 cents compared to estimates for 23 cents. Revenue of $3.35 billion declined -26.7% and missed estimates for $3.46 billion. A 13% decline in DRAM selling prices held back the revenue numbers. The average selling price for Micron products declined -7%. Gross margins of 25% were 2% lower than in the comparison quarter. The company guided for the current quarter for earnings in the range of 5-12 cents and analysts were expecting 23 cents. Revenue forecast for $2.9-$3.2 billion also missed the consensus estimate for $3.47 billion. Continued weakness in PC sales remain a challenge for the sector. Shares fell to $13.75 in afterhours.


Crude prices traded up slightly at $36.41 as the February contract became the front month contract. The removal of the oil export ban last week has already benefitted U.S. oil companies. The price of WTI closed a penny higher than Brent and the first close at parity since the recession. American WTI will be in demand but we will not see any actual exports for several months. There are a lot of details that have to be handled before a tanker takes on a load and heads for Europe. The spread between WTI and Brent has been as high as $5 in recent years.

After the bell API said oil inventories fell -3.6 million barrels in the week ended on Friday. However, inventories at Cushing Oklahoma, the delivery point for WTI futures rose +1.5 million to a new high. The API release caused a 25-cent jump in WTI from the $36.14 close. The real inventory report is the EIA report due out in the morning. Crude normally trades higher on Tuesdays as shorts cover before the EIA report.


Markets

Volume was very light at 6.3 billion shares but we will be lucky to finish over 5 billion on Wednesday. The trading week is over for all practical purposes. There will be some more window dressing and some speculation positions hoping for a January rally but the volume may not be enough to push the markets higher.

Today was mostly shorts covering before they leave for the weekend and fund managers trying to add some winners to their portfolios in hopes of distracting from the worst returns since 1998.

Advancers were 5:2 over decliners and up volume was 3:1 over declining. It was a nice gain because the sellers apparently ran out of stock or they already left for the holidays. With the 12.4 billion shares traded on Friday and 8 billion or more every day last week there were plenty of traders running for the exits with their hair on fire. It is possible that anyone who wanted out before year-end has already made their exit.

The S&P smacked into resistance at 2,040 once again and that is where it closed. That suggests the Wednesday open could be a challenge. S&P futures are down -5 as I type this. If by chance the S&P does get through the resistance at 2,040, 2,075 and 2,095 there is still very strong downtrend resistance at 2100-2105. I think we should be happy just to retest 2,075 and not actually expect a breakthrough. Support is going to be Monday's lows at 2,005.


The stocks pushing the Dow lower last week are the ones lifting it this week with the exception of Exxon and Chevron, which were neutral. Goldman Sachs was the poster child for the biggest loser last week and was third from the top today. Caterpillar was the surprise with two different negative news items and still posting a gain. IBM is also confounding expectations after eight months of declines. It appears the Dogs of the Dow buyers are out in force. That is the strategy that buys the ten worst Dow stocks of this year in hopes they rebound in the coming year. In theory, Dow stocks do not cut their dividends after a bad year and that is the cushion for the next year. Between 1992 and 2011 the Dogs of the Dow strategy returned an average of 10.8% annually and outperformed the S&P with a 9.6% gain. The strategy has been back tested as far back as 1920.

The dog buyers will need to find some friends if they expect to lift the Dow back over 17,800 and downtrend resistance at 17,850. The Dow chart is showing a negative pattern regardless of the seasonal bullishness for this week and next.



The Nasdaq Composite posted a decent gain of +32 points but barely finished over 5,000, which is now psychological resistance with 5,008 just ahead. The high last Wednesday was 5,088 and that becomes a critical level in the days ahead. Another failure at a lower high would be very negative at this point. Support from Monday at 4,935 is the level to watch on the downside.

Apple had another negative day but it was fractional. The biotech sector was also fractionally negative and both those factors held the Nasdaq back.



The Russell 2000 small caps posted a +10 point gain but the index is still just a few points above Friday's lows at 1,120. The small caps are definitely not living up to their seasonal outperformance record. This is going to be a challenge for the big caps if the Russell continues to lag. Real resistance is 60 points above the close so it will be practically impossible for the Russell to breakout to the upside.


I am thrilled to see the markets post back-to-back gains but if you remember, they did that last week too before imploding. The seasonal trend is a bullish bias until December 28th then fade into the last two trading days of the year. I would be cautious about adding a lot of positions. Volume is going to be weak and the markets have definitely been volatile. Moving into and out of year-end could be rocky. January has been down the last two years but it was up strongly the three prior years. Which will it be this time?

An Added EOY Bonus This Year!

As an added bonus this year I am including a copy of Jason Zweig's "The Devil's Financial Dictionary." I recently bought this book and loved it. I immediately decided to reward every EOY subscriber with their own copy. This is 256 pages of irreverent definitions to all the terms you hear in the market every day.

"Open this wonderful book to any page. Try not to laugh. I dare you." - James Grant, Grant's Interest Rate Observer

"Laugh, cry, and learn as you enjoy the sparkling Devil's Financial Dictionary." - John C. Bogle, founder of The Vanguard Group

"This is the most amusing presentation of the principles of finance that I have ever seen." -Robert J. Shiller, author of Irrational Exuberance

"The Devil's Financial Dictionary is witty, irreverent, skeptical and humorous - making it an entertaining read for those within and outside the financial industry." - Manhattan Book Review

 

Time is Running Out for the
Annual End of Year Subscription Special

It is that time of year again when we offer the best prices of the year on a package of our top newsletters. If you have been a subscriber for several years you know this is the best price and best deal of the year.

Please follow the link below to see for yourself the EOY subscription special for 2016. You will not be disappointed!

Enter passively, exit aggressively!

Jim Brown

Send Jim an email