With very little news on Friday, investors passed time while they waited for Yellen to speak. The post Yellen decline was lackluster and shorts covered at the close.

Market Statistics

Friday Statistics

When Yellen spoke in the early afternoon she was asked about a rate hike and she said, "It's appropriate, and I have said this in the past, I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate." That was the end of the conversation about rates and the market was underwhelmed.

Sellers tried to take the market lower after her comments but the S&P stopped falling at 2,092 and after 30 minutes of no decline the shorts began to cover and the market melted up into the close with the S&P ending the day at 2,099.

This was a holiday Friday and volume was very light at 5.5 billion shares and the second slowest day of the year. The Dow traded in a very narrow 49-point range. That was the narrowest for a full day of trading in the last 18 months.

Traders were absent and the meltup was more a lack of sellers than an abundance of buyers. Advancers were 2:1 over decliners and advancing volume was 3:2 over declining volume.

The economics for the day were positive but not stimulating.

The Q1 GDP revision saw the initial 0.5% number revised up to +0.8%. That is hardly a roaring economy despite what the Fed would have you believe. This was the slowest growth in a year. That compares to 1.4% in 2015-Q4, 2.0% in Q3 and 3.92% in Q2. The trend is going in the wrong direction.

Housing was the biggest contribution with consumer spending rising 1.29%, down from 1.66% in Q4 and 2.04% in Q3. Government added -.2% while inventories removed -0.2% and exports -0.21%. Nonresidential investment was the biggest loser at -0.81%. One bright point was a +1.94% increase in after tax profits compared to -8.08% in Q4 and -3.3% in Q3.


Consumer sentiment for May was revised lower from 95.8 to 94.7 but that was still well above the 89.0 in April. The present conditions component rose from 106.7 to 109.9 and the expectations component rose from 77.6 to 84.9.

This was the highest level for the headline number since last June. Gasoline prices have risen but are still well below the average for this time of year. Consumers are glad winter is over and summer has arrived.


The calendar for next week is very busy. The ISM Manufacturing, Fed Beige Book, ADP Employment and Nonfarm Payrolls head the list as the most important items but there is plenty of filler in the form of other reports.

The OPEC production meeting starts on Thursday and the ASCO cancer conference opens a 4-day run on Friday. That should continue to support biotech stocks next week.


Stock news was also muted with only a handful of companies making headlines. Big Lots (BIG) reported earnings of 82 cents that beat estimates for 71 cents. Revenue of $1.31 billion beat estimates of $1.30 billion. They guided for the current quarter to earnings of 42-47 cents and for the full year to earnings of $3.35-$3.50. Analysts were expecting $3.30. Same store sales were +3%. The CEO said their core customer continued to respond positively to improved merchandise selection and better in-store execution. Shares exploded higher by 14% to $51.


Ulta Salon (ULTA) reported earnings of $1.45 compared to estimates for $1.29. Revenue of $1.07 billion beat estimates for $1.03 billion. They guided for the current quarter to revenue of $1.04-$1.06 billion and analysts were expecting $1.03 billion. Earnings are expected to grow in the low 20% range and slightly higher than the prior 18-20% forecast. Same store sales rose a whopping 15.2% and beating estimates for 10.7%. The CEO said their consumers were healthy and demand was strong thanks to their unique format and offerings. Shares rose 9% on the news.


Palo Alto Networks (PANW) really stunk up the sector after they reported a loss of 86 cents that was significantly more than the 28-cent estimate. Revenue surged 47.7% to $345.8 million, which easily beat estimates for $339 million. However, expenses rose 50%. All of the revenue metrics were very positive for their various products but they are not making any money. They did guide for Q2 for revenue to rise 36% to $388 million and for earnings of 48-50 cents. Analysts were expecting a loss of 23 cents. Analysts did see the revenue growth as a guide down from the 47.7% in the last quarter. Shares fell -12% on the news.


GameStop (GME) reported earnings of 66 cents compared to estimates for 62 cents. Revenue fell -4.3% to $1.97 billion but matched estimates. However, shares declined on the guidance. Sales of game consoles and accessories declined -28.8% in Q1. They guided for earnings of 23-30 cents in Q2 and analysts were expecting 33 cents. The company said the gaming business would continue to decline in 2016 so it is expanding its technology brands business, which sells cellphones, tablets, computers and other computer electronics. While game sales declined -28.8% revenue from the technology brands business rose +62.2%. Shares fell -4%.


Deckers (DECK) reported earnings of 11 cents that beat estimates for 6 cents. Revenue of $378.6 million beat estimated for $363.4 million. They guided for full year earnings in the range of $4.05 to $4.40 per share. That missed analyst estimates for $4.60. The CEO said the warmer than normal weather impacted sales of their Uggs brand. They projected sales to be down -3% over the next fiscal year. They are looking for a loss of $2.10 to $2.20 for the current quarter with sales falling 20%-25%. This is traditionally a weak quarter because boot sales are very slow. The company was downgraded from buy to neutral by Citigroup. Strangely, shares rallied 8%.


More than 98% of the S&P-500 have reported earnings. The blended earnings through Friday were down -6.7%. Eighty companies have issued negative guidance and 31 companies issued positive guidance. Revenue declined -1.5%. This the fourth consecutive quarter of earnings declines and Q2 is also projected to be negative. This was the fifth consecutive quarter of revenue declines. This is the worst string of earnings since the financial crisis.

The earnings for next week are very light with Broadcom (AVGO) the highlight for the week followed by Kors, Ctrip.com and WorkDay.


Valeant Pharmaceuticals (VRX) shares rose 9% intraday before falling back to +5% after news broke that TPG and Takeda had made a takeover offer for the company. The offer was made several weeks ago before Joe Papa became CEO. There was talk on how an acquisition would work but a firm price was never discussed. The parties are no longer holding discussions. Valeant has about $30 billion in debt but they also have a lot of assets. Any acquisition would probably try to sell off non-core asset quickly to pay down the Debt. Papa has said Valeant expects to pay down $1.5 billion in 2016 and increase the amounts in future years.


Thermo Fisher (TMO) is buying FEI (FEIC) for $107.50 a share of roughly $4.2 billion. FEI is a microscope technology specialist company. Thermo Fisher CEO Marc Casper said the growing adoption of electron microscopy to study the structure of proteins is an important field in life sciences. FRI will complement our mass spectrometry leadership. The acquisition will add 30 cents to TMO earnings in the first year. Shares spiked to more than $108. I wonder if traders expect a competing offer?


Freeport McMoran (FCX) will pay Rowan Companies (RDC) $215 million to cancel another drilling rig contract. The lease on the Rowan Relentless drillship was scheduled to terminate in June 2017. Freeport could be liable for another $10-$20 million in contingent payments depending on the price of oil over the next 12 months. The ship had already moved to out of service mode because Freeport was not involved in any drilling.

Freeport has significant assets in the Gulf of Mexico and it said it was negotiating with several firms over "North American" assets. They bought some deepwater assets from Apache for $1.4 billion in 2014 just before the oil crash began. They own non-operated interests in the Lucius and Heidelberg developments along with 11 primary exploration blocks. The deepwater assets have an estimated 55 million barrels of oil reserves and several hundred million BOE of gas and liquids.

Freeport bought the assets after it sold Encana $3.1 billion in Eagle Ford Shale assets. Freeport also owns the gulf assets of McMoran Exploration that they took over in 2014 along with the $6.9 billion in assets from Plains Exploration & Production they bought at the same time.

Freeport's problem is their big shopping spree just before the oil crash. Now they have all these assets acquired when oil was $110 and they are worth less than half what they paid for them. Reportedly, they are in talks with China's Citic Metals to sell a stake in the North American and South American mining operations. The stake under discussion could be up to 20% and the reported price is $2 billion. They are also in talks with another "investor group" but no decisions have been made. Freeport is trying to reduce its debt by 50%.


Western Digital (WDC) revised its guidance to reflect the completion of the SanDisk acquisition. They now expect current quarter revenue in the range of $3.35-$3.45 billion compared to the prior forecast of $2.6-$2.7 billion. Earnings are expected to be between $.65-$.70 cents compared to the prior forecast for $1.05. The new guidance now includes interest costs of about $220 million. They incurred $30 million in debt issuance costs and $50 million in interest prior to closing on the acquisition. I believe WDC is going to rally off the recent lows and through resistance at $51. The combined companies are much stronger with a wider range of products than Seagate and sales late this year and in 2017 are going to be much stronger.


The National Oceanic and Atmospheric Administration (NOAA) released its predictions for this summer. They are predicting a hotter than normal summer primarily in the west and the Northeast. They also predicted a stronger hurricane season than in recent years. They expect a 70% likelihood of 10-16 named storms, 4-8 hurricanes and 1-8 major hurricanes. Over the last three years, we have averaged only four hurricanes per year. The second storm of the season could form this weekend. Tropical depression TWO is moving off the coast of Florida but is expected to move northwest and strengthen as it hits the warmer water off the coasts. The storm will be named Bonnie. This should produce some significant waves for the holiday beach goers in that area.


Holiday travelers are expected to spend $12 billion on gasoline this weekend. It would be worse but with the average gas price at $2.32 that is 40 cents less than in 2015. The ten-year average is $3.15. The average road trip this weekend is around 400 miles. With oil prices rising, we should expect to see gasoline prices rise as well. For every $1 gain in oil prices, we will see about a 2.3 cent rise in gasoline prices.

 

Do you remember how cheap gasoline was in January? The futures price set an 8-year low at 98 cents a gallon. We have rebounded a long way since then but compared to the last ten years we should be very grateful.


Crude prices touched the magic $50 level on Thursday and as expected, there was some instant selling. That was the target price for many traders. The new target is $55 but there is far less conviction that it will be hit.

The OPEC production meeting is Thursday and nothing is expected to change. There will be the obligatory headlines as every oil minister tries to grab his 5 minutes of fame by making some comment to the press. However, the outlook calls for more production and the end to a lot of current production outages. The oil sands in Canada are starting to come back online and Libya has worked out a deal with the various factions to start shipping oil again. Nigeria is still down about 800,000 bpd to a 20-year low and there is no immediate fix in sight. Venezuela is circling the drain with production down about 7% YTD and still falling as the economy implodes. Columbia is down about 200,000 bpd on pipeline problems. Iraq is down from 4.7 mbpd to 4.5 mbpd because of infrastructure problems. These problems will be fixed eventually and some OPEC countries are increasing production to take advantage of the $50 oil.


The decline in oil rigs has slowed. Active oil rigs declined only -2 last week after being flat the prior week. With oil at $50 there may not be any further declines. Most U.S. drillers can come close to breakeven at $50 and several including Pioneer (PXD) can even be profitable at that level. Pioneer said they would add 5-10 oil rigs if it appeared the price has stabilized at the $50 level. Saudi Arabia does not want to see this. We have not had enough companies go out of business to prevent production from accelerating if prices remain over $50. This is why I expect no production freeze at the OPEC meeting and more than likely promises of production increases. More than 60 U.S. oil companies have filed bankruptcy. That number rises to more than 100 if you count service companies. More than 185,000 workers have lost their jobs.


Markets

The Dow added 372 points last week and the Nasdaq +163. The S&P gained 47 points and the Russell 2000 added 38. It was a good week all around with the semiconductors adding 4.6%, biotechs 4.2% and a sector you do not see often, the brokers adding 4.5%.

The S&P halted its climb on Friday at 2,099 and right on the edge of critical resistance. The S&P is poised to blow through that resistance if we have positive news from the Asian and European markets over the weekend. The 2,111 intraday high from April 20th and the 2,116 high from November are the critical numbers to watch if we do get further gains.

We are well above support at 2,040 but we are not out of the woods yet. The next 15 points should be difficult once everyone is back at work next week.


The Dow is lagging the S&P in relative performance. The major resistance at 17,925 has not yet been retested and Friday's intraday high was lower than the prior two days. While the Dow added 372 points that may have been the last gasp for the index. Tuesday's market action will be the key. If the Dow rolls over after touching 17,925 then we could be targeting the support at 17,500 again.

With no further Dow earnings there is little in the way of headlines to push the stocks higher ahead of the summer doldrums. It can happen and traders are normally surprised when a summer rally breaks out.



The Nasdaq broke through resistance at 4,900 thanks to the biotechs and semiconductor sectors. The biotechs can continue their upward movement for the next week because the ASCO cancer conference does not start until Friday. The expectations of stock movement from presentations there could keep a bid under the sector. The semiconductor sector has broken out to an 11-month high and nearly a 10% gain over the last two weeks. Jeff Bailey used to call semis the "head of the snake." The direction of the semis was a leading indicator for the Nasdaq. Whether the semis can keep up this torrid pace is the $64 question.

The Nasdaq has resistance at 4,968 from the April highs then again at 5,000 from Q4. Those levels could be the end of the road for the Nasdaq rally.



The Russell 2000 is nearing the 1,150-1,156 resistance high from April. The index never tested real resistance at 1,165 so that range from 1150-1165 is going to be a real question for traders. Should it get though that level there is very strong resistance at 1,200.

The Russell is being powered by the same sectors as the Nasdaq with the addition of the energy sector as powerful support. However, with oil likely to peak around $50 that sector could begin to take profits and produce a drag on the Russell.


I am neutral for next week. Volume should be very light on Tuesday unless there is some event over the weekend that powers the markets. The meltup could continue due to the lack of volume assuming no major headlines. Once traders begin to return to work on Wednesday, they will be setting up for the barrage of late week economic reports and Yellen's economics speech on the 6th.

However, as one reader emailed me on Friday, "I don't get it. Earnings suck; guidance sucks; economic reports suck; commodities are in the tank; the dollar is rising; oil will probably be declining again. For six years, the Market has been terrified of another rate increase. In fact, all they wanted was more "stimulus". Now that there is a possibility of another rate hike in June/July they are cheering. Go figure. Bizarro World."

Rallies are strange market events. Sometimes when things seem the most bleak, the markets suddenly rebound. The bad news becomes good news and shorts get crushed over and over again because they cannot adjust to the new reality.

I do not know which reality we will get next week. We just need to follow the trend, whichever direction it decides to go. The trend is your friend, until it ends.


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Random Thoughts


The bullish sentiment in the AAII Investor Sentiment Survey for last week fell to 17.8% and the lowest level since April 14, 2005 when it was 16.5%. This was the 29th consecutive week and the 62nd out of 64 weeks, that bullish sentiment has been below the average of 39.0%. Neutral sentiment rose to 52.9% and the highest level in 16 years. The last time neutral sentiment was higher was in April 1990 at 56%. Neutral sentiment has now been above 40% for 12 consecutive weeks and above its average of 31% for 17 weeks. However, bearish sentiment at 29.4% is right at the historical average of 30%.

In the 28 times neutral sentiment has been above 50% only TWICE did the S&P decline over the next 26 weeks and it was only down once in the following 52 weeks. In fact, the 52-week return on the S&P averaged about 20.5% and the 26-week return was 8.4%. However, the AAII survey began in June 1987 and since 1989 neutral sentiment over 50% has only occurred 6 times in 27 years. The other 22 times were clustered in 1988-1989.

This is only the sixth time in 29 years that bullish sentiment has been under 20% and neutral sentiment over 50% in the same week. Five of those weeks were in 1988 and 1989. That means in 27 years this has only happened once before. In the 26 weeks that followed, the S&P averaged an 11.2% gain and over 52 weeks a 25.76% gain. There were no losses.

AAII Source



The CME FedWatch Tool is showing a 28% chance of a rate hike at the June meeting. This is up from a 4% chance just a couple weeks ago. The July meeting has risen from about 10% to a whopping 48% chance for a rate hike. The September chart shows a 68% chance of rates rising to .75% and a 21% chance of rates rising to 1%. November rises to a 71% chance for higher rates, December 81% and February an 83% chance.





Immigrants from Latin America are flooding across the Mexican border in a desperate race to get into the USA before Trump becomes president and tightens down on border crossings. Reportedly in 2015 there were 332,430 people detained trying to cross the border. Authorities on both sides of the border claim the numbers are much higher than in 2015 and U.S. border patrol agents have run out of space to house them. The Sacred Heart Catholic Church shelter in McAllen has been taking in more than 200 per day and that quantity has never happened before.

One 26 yr old mother of 3, Viude de Cruz, paid $2,800 in fees to smugglers and bribes to Mexican officials to reach the U.S. and avoid her 9-yr old son being drafted into a Salvadorian gang. As she was getting on a bus for Maryland, where she was to be housed until her court date nearly two years from now, she said, "There is not another country where you can provide something better for your children, where you will not get harmed. The only one is the United States."

Ruben Villarreal, a Republican candidate for Congress, former mayor of Rio Grande City and Trump supporter, called the wall idea a "12th-century technical solution to a 21st-century problem. There is no such thing as a fence that is impenetrable. And all the talk of it is causing a draw of people." The migrant attitude is "hurry, hurry, hurry, get there." The campaign trail talk "is going to encourage people from here to November."


Everybody knows when a major publication makes a market call the opposite normally happens. The cover of Barron's is almost unbeatable for jinxing the market direction. That means this weekend cover is the straw that could break the market's back. The jinx is in. Sell everything.

The article points out that only one market crash in the last 35 years was not caused by a recession. Therefore, no recession today equals no crash.

Contrary to the Barron's article, Goldman claims the median stock has never been more overvalued. More Americans between the ages of 18-34 live with their parents than any time since the Great Depression. Despite the strong sales of homes and the rapidly rising price, the majority of Americans cannot afford a home. China injected more than $1 trillion in new loans into the economy in Q1 to prevent an economic crash. Lastly, nearly every recession since the Depression has been caused by Fed rate hikes, which the Fed is suddenly in a hurry to execute.



 

Enter passively and exit aggressively!

Jim Brown

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