The Dow did not manage to make a new high on Friday but nearly every other broad market index did and others made new relative highs.

Weekly Statistics

Friday Statistics

The market is confounding bears at every turn and Friday's gains helped to push multiple indexes to new highs. The S&P-500 closed at 2,175 and 2 points over the prior high. The S&P-400 Mid-Cap index closed at 1,552 and 3 points over the prior high close of 1,549.


The S&P-600 closed at 741.86 and just under the prior historic high close of 742.13. That is close enough for me.


The Vanguard Total Stock Market Index (VTI) closed at 111.72 and just over the prior high close of 110.72.


The Russell 3000, the top 3,000 stocks by market cap, extended its new high to 1,283.


Whether the bears like it or not there is a summer rally in progress and it is climbing a decent wall of worry to make that happen.

The Nasdaq and the Russell 2000 are still lagging but the Russell closed at an 11-month high and the Nasdaq at a 7-month high.

The internals are positive and growing more bullish by the day. The only fly in our rally soup is the light volume. Volume on Friday was only 5.6 billion shares. The average volume for the week was only 5.9 billion shares. The day with the heaviest volume was Thursday (6.5 billion) when the market declined.

Fund managers are clearly chasing prices with every minor dip in a momentum stock being bought on any sign of a rebound. Netflix is about the only major stock that has not rebounded after their earnings dip.

There were no economics of note on Friday. However, most of the reports earlier in the week showed minor improvement. Unfortunately, the biggest report of the week, the Philly Fed Manufacturing Survey, saw a negative headline number. The good news hiding behind that negative number was an improvement in almost every internal component. New orders went up to 11.8 and the second highest reading over the last year. Backorders turned positive for the first time in a year. The price components were the only two that did not improve but they did remain in positive territory.

There are green shoots in the U.S. economy but they are not readily seen in the headline numbers of the various reports.



We get the first look at the Q2-GDP next Friday. The consensus estimate is for 2.7% growth and the Atlanta Fed's real time GDPNow forecast is currently 2.4% growth. Either of these forecasts would be significantly better than the final 1.07% reading for Q1.


Other reports due out next week include home sales, which are expected to show another increase. Zillow reported that time on the market for a home listing had declined by more than 1 week in the latest analysis. Low mortgage rates are spurring people to buy and prices are rising because of the reduced inventories. The housing reports this week are likely to show gains.

The negative event this week is the Fed announcement on Wednesday. There is still almost zero chance of a rate hike at this meeting with the Fed Funds Futures showing only a 2.4% chance. However, the September meeting has risen to a 20% chance, November 22% and December 48%. Any further improvement in the economic picture will likely raise the chances for a rate hike sooner than December.


The following week we will get the employment reports with the ADP on Wednesday and Nonfarm Payrolls on Friday. Any continued strength in the Nonfarm numbers will produce rate hike anguish in the market.

The Bank of Japan meeting on Thr/Fri could cause some volatility because analysts expect additional stimulus. The stress test results for 50 EU banks are due out on Friday and that could also produce some market volatility.


The market movement this week came from some positive earnings. On Friday, GE reported earnings of 51 cents that easily beat estimates for 46 cents and it is not normal for GE to beat by a wide margin. Normally they report inline or only a penny or two over the estimate. Revenue rose 15% to $33.49 billion. Revenue was boosted by a 31% rise in revenue from their power generation business. If you recall in Q1 they had some issues with deliveries and the surge in revenue in Q2 was the result of those deliveries being completed. During the quarter, GE escaped the SIFI designation by getting rid of the majority of their financial operations. GE said this freed up $18 billion in capital and they are returning it to shareholders through buybacks with $13.7 billion spent in Q2. GE had cash and equivalents of $91.8 billion at the end of the quarter. In a sell the news event shares traded down nearly 2% after earnings.

The CEO said they were seeing a "volatile and slow growth economy."


After the close on Thursday Schlumberger (SLB) reported earnings of 23 cents and a 20% decline in revenues to $7.16 billion. Analysts were expecting 21 cents and $7.13 billion.

The company also announced an additional 16,000 layoffs. The company did say the oil business in the U.S. had turned but would remain weak for the rest of 2016. The CEO said, "In the second quarter market conditions worsened further in most parts of our global operations, but in spite of the continuing headwinds we now appear to have reached the bottom of the cycle." That followed similar comments from Halliburton on Wednesday.


Honeywell (HON) reported earnings of $1.66 compared to estimates at $1.64. Revenue rose 2% to $9.991 billion but missed estimates for $10.134 billion. They raised earnings guidance for the full year from $6.55-$6.70 to $6.60-$6.70. Revenue is now expected to be $40.3-$40.9 billion up from $40.0-$40.6 billion. Shares fell sharply on the revenue miss and anemic guidance upgrade.


Whirlpool (WHR) reported earnings of $3.50 that beat estimates for $3.36. That compared to $2.70 in the year ago quarter. Revenue was flat at $5.2 billion. The company raised its full year earnings guidance from $14.00-$14.70 to $14.25-$14.70. The company said cost reduction efforts offset the unfavorable exchange rates. Shares rose $5 and are nearing the prior high from April.


Stanley Black & Decker (SWK) reported earnings of $1.84 compared to estimates for $1.72. Revenue of $2.93 billion also beat estimates for $2.91 billion. The company guided to full year earnings of $6.30-$6.50 per share, up from $6.20-$6.40 thanks to volume growth and expanding profit margins. Shares rallied 5% on the news.


American Airlines (AAL) reported earnings of $2.81 compared to estimates for $1.68. However, revenue declined -4% to $10.36 billion but still beat estimates for $10.32 billion. They said Q2 revenue was hurt by growth in capacity from competitors, macroeconomic weakness and foreign currency weakness. Revenue per available seat mile declined -6.3% to 12.71 cents. Shares rose 4% on the news.


Starbucks (SBUX) reported earnings after the bell on Thursday of 49 cents and revenue of $5.24 billion. Earnings matched estimates but revenue fell short of estimates for $5.35 billion. Same store sales rose +4% ending a streak of 25 quarters of 5% growth or better in the USA. They raised guidance for new stores from 1,800 to 1,900 in 2016. However, revenue growth is expected to top out at 10% compared to prior estimates for the low teens. Same store sales comps are now expected to be mid-single digits compared to prior guidance for "somewhat above mid-single digits." Current quarter earnings are now projected to be 54-55 cents and analyst estimates were 55 cents.

CEO Howard Schultz said the drop in same store sales growth came from the change in the loyalty card program. Previously the awards were given based on the number of store visits and now they are based on the total amount spent. He said some customers were gaming the old system by asking cashiers to ring up a coffee and bagel separately to simulate two visits. The change angered some customers and caused a drop in total visits. Customers were so angered they failed to show up for the Frappuccino Happy Hour promotion that caused a 20% increase in revenue in the same period in 2015. Despite the hostility by some customers, the number of loyalty club members rose 18% over the same period in 2015 to 12.3 million.

Schultz warned the U.S. is facing a very challenging environment. He said, "I think we have a situation where you have a very uncertain election, you have domestic civil unrest with regard to race, and I think the issues around terror have created a level of anxiety, so we are no longer looking at just an economic downturn, there are a number of things that we are facing as citizens and I think the direction of the country."


Next week is the busiest week of the cycle for earnings and Thursday is the busiest day of the cycle. There are a lot of high profile companies reporting. There are 12 Dow components and more than 175 S&P companies.


FactSet said 25% of the S&P has reported for Q2 and 68% have beaten on earnings and 57% beat on revenue. Only 17% of companies have missed earnings estimates. Earnings growth has improved from the prior week forecast of -5.5% to -3.7%. Revenue is now expected to decline -0.3% which is slightly better than the prior estimate for -0.8%. For Q3 14 companies have warned and 5 companies have issued positive guidance. The earnings outlook for Q3 has deteriorated from +0.3% growth to a -0.1% decline in earnings. On March 31st, the outlook was for 3.3% growth in Q3.


After the close on Friday, news broke that Verizon was the successful bidder for Yahoo in the range of $5 billion. The news was not confirmed but flowing from multiple sources. The bid includes Yahoo's real estate but not their intellectual property. Verizon bought AOL for roughly $4 billion and they believe adding the Yahoo assets into AOL will make both websites more valuable. Verizon wants the roughly 300 million Yahoo users to enhance their existing advertising programs. This will give Verizon more eyeballs and it will give AOL significantly more content. Despite the downtrend in Yahoo's business, they still have a lot of content. Verizon will probably sell the recent Yahoo acquisitions that make no sense. Those would include Polyvore, BrightRoll, Flurry and Tumblr.


While Halliburton and Schlumberger both claim the bottom is behind us in the oil patch the price of crude continues to fall as inventories of refined products continue to rise. We are rapidly approaching the end of the driving season with the Labor Day weekend. Time sure flies when you are having fun. Gasoline inventories are at their highest level for this time of year since 1984 despite record demand for fuel in June. Gasoline demand in June rose 2.7% to 9.64 mbpd. Crude supplies have declined for nine weeks but they are still more than 100 million barrels over the five-year average. Bullish sentiment that drove prices over $50 and had analysts predicting $60-$65 by year-end has evaporated.

Analysts are already talking about oil in the $30s once the summer driving season ends.


Active land rigs rose +15 to 462 with oil rigs up +14 to 371 and gas rigs -1 to 88. Miscellaneous rigs rose 1 and offshore rigs declined -3 to 19. That was the biggest gain in oil rigs since early 2015. The stagnant gas rig count and low injections into storage have pushed nat gas prices up to $2.80 and near an 8-month high.


The dollar hit a 4-month high at 97.35 on the Dollar Index. This helped push crude prices lower along with the rest of the commodity sector. This will continue to pressure earnings for multinational companies.




Markets

I know as soon as I turn bullish in my comments here that will be the kiss of death for the rally. However, a longtime reader named John, claims I am already drinking the Kool-Aid despite my constant warnings about being "overly long."

There is always a hesitance to commit to a direction when that direction goes against the obvious fundamentals. However, when multiple indexes are breaking out to new highs and the S&P is 45 points over its last resistance, it is hard not to be bullish.

Typically, there are events along the way that signal a trend change. The current market had been range bound around S&P 2,100 since December 2014. Portfolio managers were lulled into a false sense of complacency that the markets would remain range bound or in decline ahead of Brexit, elections, weak earnings and the weakest two months of the year in Aug/Sep. They have been sitting on the most cash since 2001 and got caught off guard.

Now they have to buy the market as long as it keeps going up. They cannot afford to sit in cash while their competition is buying stocks and the markets are making new highs.

The key question now is how high can the market go while it remains this overbought? I noticed in Keene's commentary on Thursday he is projecting potential reversals at 2,177 and 2,293. Blue sky forecasting is very difficult because all the easily seen resistance levels have already been broken. Traders have no obvious target. The vast majority of traders are not technicians so they are flying blind.

We have to watch other indexes more closely to see if they are going to breakout as well. The broader the index the more representative of the broader market. That is why I listed the VTI and $RUA at the beginning of this commentary. They are both 3,000 stocks and both are breaking out. The Dow and S&P get all the attention but they are the stocks with the biggest market cap. The other 4,500 stocks with a smaller market cap are still important to market direction. We talk all the time during most market rallies that the generals are leading the charge and the troops are following reluctantly. That is true today as well with the Dow and S&P the farthest into their new highs but the troops are also beginning to charge.

Another way we can monitor the market is with the charting tools. Keene uses a shorter duration MACD at (8,13,5) compared to the standard MACD at (12,26,9). I am using Keene's tool settings today because he is a CMT and that stands for Chartered Market Technician not Certified Massage Therapist. According to the shorter MACD the S&P is on the verge of rolling over. However, the index closed at a new high on Friday ahead of the weekend event risk. That suggests the index could continue higher temporarily despite the weakness in the indicator. The only indicator that is foolproof is hindsight.

When the markets are in blue-sky territory, the prior forecasts from market analysts become more important. As each target price is hit, traders will watch to see if the market is going to stop before they put new money to work. According to S&P, the consensus analyst estimates is for the S&P to end 2016 at 2,175 and exactly where it closed on Friday. The average for the 15 analysts below is 2,161. Remember, this is where they expect the S&P to finish the year, not where they expect it to top out. Most do expect a late summer decline ahead of the election.

I apologize if any of these have changed and I missed it. With the recent market volatility, I know estimates have been revised almost daily by somebody. These estimates were collected over the last 90 days.

Bank of America, Savita Subramanian, 2,000.
JP Morgan, Dubravko Lakos-Bujas, 2,000.
Wells Fargo, Chris Haverland 2000-2100.
Goldman, David Kostin, 2,100.
BMO Capital, Brian Belski, 2,100.
Credit Suisse, Andrew Garthwaite, 2,150.
Citigroup, Tobias Levkovich 2,150.
Morgan Stanley, Adam Parker, 2,175.
UBS, Julian Emanuel, 2,175.
Wells Fargo, Scott Wren 2190-2290.
Barclays, Jonathan Glionna, 2,200.
Deutsche Bank, David Bianco 2,200.
S&P Capital IQ, Sam Stoval, 2,250.
Oppenheimer, John Stoltzfus 2,300.
Fundstrat, Tom Lee 2,325.


On a simple trend line projection the S&P could continue to 2225-2240 but over a very long timeframe like the 8-years below it is hard to expect enough portfolio managers to be watching the progression and decide to exit at that resistance level. To put it simply, the market will stop where it stops and a couple weeks later there will be a dozen analysts saying "I told you it would stop there."


One factor that could impact the market significantly is the Q2 earnings cycle. This coming week is the busiest week with Thursday the busiest day of the cycle. Over 175 S&P companies report earnings next week. Once these core earnings are behind us there will be less excitement about the lower quality companies that will follow. Next Friday is the point where the summer doldrums, low volume and diminished earnings interest can produce an inflection point for the market. With Aug/Sep historically the two weakest months of the year, a strong case can be made for the rally to end.

The Dow had an incredible rally of more than 1,500 points but it appears to have stalled at just over 18,500. The index has gone sideways as some companies beat on earnings and others disappointed. There are 12 Dow components reporting earnings next week. As earnings excitement fades, even positive reports will produce a smaller post earnings bounce while negative reports will still cause declines.

In the chart below, notice the congestion at the highs for last week. The index appears to be losing traction. With the Fed meeting this week, we could see some profit taking just to avoid a hawkish statement about the potential for future hikes.



The Nasdaq finally reached the bottom of the resistance band from 5,100 to 5,160. Now the real test can begin for the Nasdaq. The index is up 526 points (+11.5%) since the 4,574 post Brexit low. We can go an entire year and not see a gain of 11% in normal years. With the Nasdaq very overbought and tech stocks at extended valuations it could be tough to get through that 5100-5160 resistance to a new high. With Apple, Amazon, Amgen, Expedia, Baidu and Google reporting next week there is a lot of opportunity to push the index around with post earnings moves.



I am encouraged by the break over strong resistance by the Russell 2000. After 9 days of sideways movement, the pattern appears to be resolving to the upside with an 11-month closing high. That suggests market sentiment is improving and any further gain should trigger additional short covering. This is the chart to watch. A break higher here could support the broader market while a decline under 1,200 would be a sell signal.


The market is tired. Volume is slowing but as long as the upward move continues, the fund managers will have to keep buying. They have plenty of cash so the move could continue next week. We are running on borrowed time and the peak in Q2 earnings on Thursday could also trigger a peak in the market. August begins the seasonal weakness the following Monday. That is no guarantee the markets will weaken but portfolio managers do have a memory. I suspect they would like to keep some cash handy for the normal September/October buying opportunity.

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Random Thoughts


The AAII sentiment survey had an interesting change in direction. Despite the market setting new highs almost every day the bullish sentiment declined -1.4% to 35.4%. Bearish sentiment rose +2.3% to 26.7%. This survey ends on Wednesday and the market was positive the first three days of the week. Investors must be looking at those overextended charts and coming to the same conclusion we are that profit taking cannot be far off.



June was the warmest on record according to the National Oceanic and Atmospheric Administration (NOAA). June temperatures averaged 1.62 degrees over the 20th century average. The six months ending in June were the hottest on record at 2.4 degrees warmer than the end of the 19th century. The El Nino trend boosted global temperatures starting in October but the underlying trend so far this century has been routinely setting records. Arctic Sea ice during the summer melt season covered 40% less area than normal. Source


Elon Musk released his Master Plan Part 2 last week. He said Tesla is going to expand their product line including heavy duty trusks and large passenger transport vehicles like busses. He reiterated they are working towards a fully autonomous vehicle that would be significantly safer than driving yourself. The plans for trucks and busses would be unveiled next year. The bus vehicle is already in development.

He envisions fully autonomous cars that you can summon from anywhere and after it picks you up you could read, sleep or do anything else on the route to your destination.

He said Tesla planned to marry the SolarCity rooftop panels with battery storage and allow individuals to become mini utility companies with a large amount of electricity returned to the grid for a profit.

Tesla changed its web address from TeslaMotors.com to just Tesla.com as it prepares to combine all its products into one gateway website.

Full text of the Master Plan Part 2


Who is this alien on the right in the new Star Trek Beyond movie that debuted this weekend? He is very famous and the third richest person in the world. He is also a Trekie. I guess if you are rich enough you can do anything your heart desires, even appear in a Star Trek movie.


Answer: Jeff Bezos


 

Enter passively and exit aggressively!

Jim Brown

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Charles L. Allen