The major indexes continued to surge higher as shorts and portfolio managers begin to panic the rally could actually have legs.

Market Statistics

The Dow finally closed over the prior high close of 18,312 and it only closed about 25 points off its intraday high. Bullish sentiment appears to be rising sharply and worries over a potential decline are nonexistent. The S&P surged another 15 points to close over 2,152 and that level was the yearend target for several major brokers. Traders are so used to resistance holding they do not know how to act with no resistance in sight.

Positive market gains overseas helped to produce another gap open for the U.S. markets.


Economic reports were neutral but that is better prior reports that have been showing weakness. The NFIB Small Business Optimism Index for June rose slightly from 93.8 to 94.5. That is the highest level since December's 95.2 reading. The internal components were barely changed. The highlight would be the increase in capital expenditure plans from 23 to 26 and current job openings rising from 27 to 29. All the other components were relatively flat.

A net of 9% of respondents expect the economy to worsen. Employment plans fell from 12 to 11 and the percentage of firms planning on adding inventories fell from -1% to -3%.

The Job Openings and Labor Turnover Survey showed job openings rose at a 3.7% rate, down slightly from the prior report at +3.9%. Job openings declined from 5.845 million to 5.5 million and the lowest rate since December. Hiring declined from 5.085 million to 5.036 million. However, separations also fell from 5.015 million to 4.952 million. Layoffs fell from 1.71 million to 1.67 million. This report was for May and was ignored.

May wholesale inventories rose +0.1%, down from the +0.6% gain in April. Consensus expectations were for a gain of +0.2%. Seven out of 10 durable goods categories posted gains despite overall growth of only +0.1%. For nondurables, 6 of 9 categories saw inventories increase with a total gain of +0.2%. Sales rose +0.5% after two prior months of strong gains of 0.8% and 0.6%.

The Fed Beige Book out on Wednesday should not be a market mover unless it shows conditions have improved. The report has been neutral in prior versions suggesting growth was still moderate in some regions while a few were weak but not materially weak. If the report were to show growth was improving in all regions it would be market positive.

Friday is a big report day but they are not likely to move the market. The Friday obstacle is the beginning of the Republican Convention on Monday. Uncertainty over that event could cause investors to take profits from the big market gains.


After the bell, the API inventories for crude oil reported a 2.2 million barrel rise with gasoline adding 1.5 million barrels and distillates adding 2.6 million barrels. Analysts were expecting a 3.0 million barrel decline in crude inventories according to a Reuter's poll. Crude prices fell back to $46.45 in afterhours trading after a $2 gain in the regular session to $46.76. If the EIA inventories on Wednesday show a similar build, we could see prices back below $45 very quickly.

The gain in the regular session came after OPEC suggested supply and demand would return to balance later this year. A separate EIA report showed higher estimates for U.S. demand growth in 2017.


Amazon (AMZN) hit a new high intraday at $757 as Prime Day selling kicked off. There had been some traders last week recommending a short at the open today on a sell the news trade. That would have worked this year with the open at $757 and the low in the afternoon at $740. However, you would have to have been fast on the trigger because shares rebounded into the close.

Amazon has an estimates 63 million Prime members spending the $99 a year for free two-day shipping. Prime members tend to spend about $1,200 per year compared to $500 for regular shoppers. MKM Partners estimated Amazon sold $375-$400 million on the first Prime Day last year. For 2016, they expect that number to double. This compares to $10.21 billion spent in stores on Black Friday and $2.72 billion spent online. Piper Jaffray expects a 37% increase in unit volume this year. I browsed some of the Prime Day sales and there was some decent stuff compared to a lot of junk last year. If they shoppers actually showed up this year after being disappointed last year then the total dollar volume could be a lot higher.

To try and combat Prime Day, Walmart (WMT) is offering free shipping all week.


After the bell today, Juno (JUNO) announced they would resume the trial of a potential leukemia treatment that had been placed on clinical hold last week because of two patient deaths. The FDA removed the hold after Juno delivered some updated documents to the FDA. The drug JCAR015 is used for adult patients with B cell acute lymphoblastic leukemia. Shares spiked from the close at $28 to $34.50.


Starbucks (SBUX) shares rallied 2% after they said prices at company-operated stores in the U.S. would rise 10-20 cents per cup of coffee on selected drinks and 10-30 cents on espresso drinks and tea lattes effective immediately. The company also said it was raising wages 5% to 15% for U.S. workers effective in October.


Fastenal (FAST) reported earnings of 45 cents that missed estimates for 48 cents. Revenue of $1.01 billion also missed estimates for $1.02 billion. The company said, "While our customers value the capabilities we bring to the table, in the last eight quarters this group of customers has seen a contraction in its production and therefore its need for fasteners. The fastener product line saw growth of 10% in the last six months of 2014 to 6% in Q4-2015 and falling to about -2% in the first half of 2016." This is not a good sign for future quarters.


Seagate Technology (STX) raised guidance after the bell on Monday and shares spiked 22% on Tuesday. The company now expects revenue of $2.65 billion up from prior guidance of $2.3 billion and analyst estimates for $2.5 billion. That is still a 9.5% decline from the year ago quarter but significantly better than expected. They also announced they were cutting 6,500 employees or 14% of their workforce by the end of 2017.

Western Digital raised guidance last week and saw a surge in its stock price as well.


Teva (TEVA) raised guidance after the bell with revenue now expected to be $4.9-$5.0 billion, up from the prior forecast of $4.8-$4.9 billion. Earnings are expected at $1.19-$1.22 and up from $1.16-$1.20. The company is expected to give long-term guidance on a call on Wednesday morning that includes their acquisition of the Actavis generic business from Allergan (AGN). They are still waiting on FTC approval and have already sold off various assets to secure that approval. Shares rose only about 50 cents in afterhours.


United Airlines (UAL) shares rallied 9% despite a drop in passenger unit revenue of -6.5% in Q2. Analysts were expecting a 7% decline. I do not see the excitement in a 0.5% better number since both were declines. The company said it "beat" the estimates because of higher July 4th traffic and higher international fares.

American Airlines (AAL) said it sees a $1.55 billion boost in revenue from bank and credit card deals. In 2014 Delta generated about $2 billion in revenue annually or about 5% of their total from credit card deals. The cobranded cards provide an alternate source of revenue when holders buy other items on those cards. American has deals with Citigroup and Barclays.


If you are at the mall be careful you are not run over by Pokemon players. The new version of the augmented reality game has taken the world by storm in just the last several days. Shares of Nintendo (NTDOY) are up 50% and the game has only been out a week. The game uses the camera on your smart phone as a screen to your reality and players must walk into the picture to capture treasure and creatures superimposed on the camera picture. Go to the mall and just watch. Hundreds of kids and young adults are wandering aimlessly as the game directs their path in whatever location they are located.


Has the Great Rotation begun? Today's treasury auction was the worst in 7 years as the government tried to sell $20 billion in ten-year notes. The bid-to-cover ratio was 2.33 and the lowest demand since March 2009. The yield at 1.516% was the second lowest yield ever. Apparently, the market demand for 1.5% yields has evaporated with all the money going to the equity markets this week. The 3-year auction on Monday was equally as bad. Thirty-year long bonds will be auctioned tomorrow. The yield on the ten-year is up from the 1.336% low from last Wednesday.


The dollar has stopped moving higher with the dollar index holding at the $96.50 level for the last several days. The reason is that the pound has stopped falling. The pound hit a low of 125.81 and has rebounded to almost touch $130 today. The fast replacement of the UK prime minister is credited with halting the slide in the currency.



Gold prices collapsed on the new PM designate and the idea that maybe the UK disaster will not be a disaster after all. Gold is down from the $1,376 high on Monday to $1,330 tonight.


Markets

The breakout finally happened and it occurred on high volume. That is a double whammy for anyone that doubts the event. Volume was 7.6 billion shares and advancers were almost 3:1 over decliners. Yes, there were decliners. Quite a few charts had red candles late in the afternoon as traders were taking profits and moving on to something else.

With treasury yields so low at 1.5% there is no alternative (TINA) to stocks if you want to increase your gains. The lack of an alternative along with the breakout has energized investors to move back into stocks and portfolio managers with performance anxiety are rushing to chase prices higher.

In theory, this is the perfect storm for the bears. The bulls are buying everything, except for defensive stocks. Those defensive stocks that were in favor including Clorox (CLX), Verizon (VZ), Johnson & Johnson (JNJ) etc were all down today as investors dumped the safe plays for those stocks that were surging. This week oil prices had no impact on equities. Oil was down on Monday and equities rose. It was up today and equities rose. The breakout is the big news and after 17 weeks of equity fund outflows this week will probably break that string.

The S&P closed at 2,152 and over the 2,150 level several analysts had predicted would be the yearend target for the index. We are a long way from the end of December but you can bet those analysts are staring at charts this week.

The next unofficial resistance levels are 2,161 and 2,171 but when indexes breakout into blue sky territory the next target is always hard to predict. Support is so far back it is not even worth mentioning.

I would be very concerned as a trader if I was holding a lot of longs as we approach the weekend. Friday could see a lot of profit taking ahead of the weekend as we approach the Republican convention on Monday.


Despite the new highs on the Dow there were 7 Dow stocks in negative territory. Goldman Sachs was responsible for nearly 40 Dow points and Caterpillar another 15 points. Those two stocks were half of the Dow's gains.

The Dow stopped right at its prior intraday high of 18,350 but that does not mean it is done. It would be the perfect spot for some profit taking to appear so traders should be careful. Support is well back at 17,820 unless one of those prior resistance levels becomes support on the way back down.



The Nasdaq managed to close over 5,000 by 23 points and that would make the 5100-5160 range the next resistance level. The big cap tech stocks in the $NDX only gained 22 points to the Nasdaq Composite's 34 point gain. The big caps are under pressure as investors take profits and move into small and mid cap stocks.

Support is well back at 4,850 so any decline could be ugly if the buyers suddenly question the logic of owning tech stocks at 7-month highs ahead of a potential disaster in Apple earnings.



The small cap Russell 2000 closed right at strong resistance at 1,205 after a monster gain from the 1,085 post Brexit low or roughly 10% in two weeks. I like to see the small caps in rally mode because that means sentiment is improving and fund managers are not afraid to buy less liquid stocks. If the Russell can continue its gains, it could support the rest of the market. However, the historic high is 1,295 so it has a long way to go before a breakout.


The market could continue higher but it could also roll over at any time for some profit taking ahead of the weekend. The internals, volume and small cap charts suggest this rally could have legs. That makes us dip buyers rather than buying new highs at this point. After a 1,300 point rebound on the Dow and 161 point gain on the S&P in two weeks, the market is overbought even if it refuses to rest. If you are like me, once I capitulate and start buying the new high, that will be the signal a correction is coming. I would rather buy dips this week than roll the dice on continued new highs every day.

Enter passively, exit aggressively!

Jim Brown

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