August rarely turns in a level performance. Markets are either up strong or down hard in August.

Weekly Statistics

Friday Statistics

The Nasdaq was the market focus on Friday as the short squeeze pushed the index to a new high close at 5,221.12. The last new high on the Nasdaq was July 20th, 2015 at 5,218.86. It took a year and a lot of volatility before the Nasdaq was able to recover that level. I should also point out that the Nasdaq has rallied 14.1% since the 4,574 low on June 27th. That is only 28 trading days. Can you say, overextended?


The Friday short squeeze was caused by another blowout jobs report. Friday's buying was not because a hundred thousand investors suddenly decided a good payroll report was the reason to buy stocks on a summer Friday. Investors were heavily short in anticipation of a mediocre report at best and a market decline into late August. The big back to back job gains caused a kneejerk reaction and a monster short squeeze was born.

The Russell 2000 chart is a good example. There was a 14 point gap higher open to 1,227 and then the index went sideways to down the rest of the day to end with a gain of +17, only 3 points higher than the first hour of trading.


The Nonfarm Payrolls showed a job gain of +255,000 compared to the June total of +287,000. That 287K number was revised higher to 292,000 and the previously revised 11,000 for May was revised up to 24,000. The unemployment rate remained flat at 4.9% (7.8 million) as the labor force participation rate rose slightly to 62.8%. Another 407,000 people joined the workforce after the addition of 414,000 in June.

Analysts expected a gain of +175,000 jobs after the ADP report on Wednesday showed a gain of +179,000. Average hourly wages rose +0.3% to +2.6% year over year. The number of workers employed part time because they could not find a full time job was flat at 5.9 million. The broader U6 unemployment rose to 10.1% unadjusted at 16.1 million.

Professional and business services added 70,000 jobs. Health care added 43,000, financial sector 18,000, leisure and hospitality +45,000, food services 21,000 and government 38,000.


The conspiracy theorists were out in force on Friday. The headline number of +255,000 is seasonally adjusted. The unadjusted gain was only +85,000. There was a similar adjustment in the June numbers. SouthBay Research posted the following chart of the seasonal adjustment totals since 2006. The majority of the positive adjustments came over the last two months. Why do you think the adjustments suddenly exploded higher in an election year? It makes it a lot easier for the party in power to get reelected if the numbers suddenly look materially better and support the economic recovery claims. The jobs report is one report that consumers actually understand when they hear the two-sentence sound bite in the news. Of course, they have no clue that the numbers are heavily adjusted.


The jobs boom will put the Fed back on the calendar sooner rather than later. The percentage chance for a rate hike in September rose from 12% to 18% but the December meeting jumped to 47% and any additional positive data will put it over the 50% threshold.


There was another shocking data point released last week. The Atlanta Fed real time GDPNow forecast for Q3 rose to +3.8% and vastly over the +2.3% Blue Chip consensus average. This compares to the recently released Q2 GDP at only +1.2%. There are a lot of investors who would like to know what changed between Q2 and Q3 to triple the GDP growth. The majority of the monthly economic reports are just trudging along with only minor gains and losses each week so what happened? How did the Fed "adjust" this forecast and why?


The conspiracy theorists believe it is all election related. In the 8 years since the Financial Crisis, we have seen the slowest economic recovery since the Great Depression. Suddenly 5 months before the election the major economic numbers rocket higher for no particular reason. I have to agree that is a little unlikely just to be a random coincidence.

The calendar for next week is very light with no market moving reports. There are not even any Fed heads giving speeches. Welcome to the dog days of August. With school starting in two weeks the market volume is going to fall off drastically so it is a good thing there are no critical reports.


After the Q2 earnings cycle peaked last Thursday, the news flow this week has been slowing. Friday was almost devoid of any interesting reports.

Cognizant Technology (CTSH) reported earnings of 79 cents that beat estimates for 73 cents. Revenue of $3.37 billion nearly matched estimates for $3.371 billion. Financial services revenue rose 8.1%, healthcare 6.9% and retail/manufacturing/logistics rose 14.2%. Other revenues rose 11.2%. It looked like a good quarter and the company added $1 billion to its buyback authorization to raise the total authorized to $3 billion. They noted a onetime payment from India of $2.8 billion. That is a heck of receivable.


Priceline (PCLN) reported earnings of $13.93 that beat estimates of $12.67. Revenue of $2.56 billion missed estimates for $2.6 billion. They guided for Q3 earnings of $28.30 to $29.80 per share. Analysts were expecting $28.99. They guided for revenue to rise between 12-17%. Hotel bookings rose 24.4% in Q2 while car rental bookings rose 7.6%. Shares rallied $54 on the news.


After the bell, Berkshire Hathaway (BRK.B) reported earnings that rose +25% to $5 billion or $3,042 per class A share. That compares to $2,442 in the year ago quarter. However, adjusted operating earnings of $2,803 per share missed estimated for $2,911 per share. Revenue rose 6% to $54.46 billion but also missed estimates for $56.47 billion. The class B shares declined about $1 after the bell after being up $2.50 in the regular session. Berkshire shares rarely trade in afterhours.


Linkedin (LNKD) reported earnings of $1.13 compared to estimates for 78 cents. Revenue of $933 million rose 31% and easily beat estimates for $898 million. Premium subscriptions revenue rose 21% to $155 million. Shares did not move since the company is being acquired by Microsoft for $26.2 billion or $196 per share in cash.


Virgin America (VA) reported earnings of 93 cents that missed estimates for $1.17 by a mile. Revenue was $425.7 million. Shares did not react because VA is being acquired by Alaska Airlines (AKLS) for $57 in cash on Sept 30th.


Dentsply International (XRAY) reported earnings of 76 cents that beat estimates for 70 cents. Revenue of $1.02 billion matched estimates. They guided for the full year to earnings of $2.70-$2.80 per share. Shares declined on a sell the news trade.


Earnings for next week include one Dow component on Tuesday and that is Disney. Valeant Pharmaceutical (VRX) will also report on Tuesday and will be the headline leader in the biotech space. On Thursday, Alibaba and Nvidia will report. The Nvidia earnings are going to be highly watched because shares continue to hit new highs almost every day. New products are being announced almost weekly and they are the bleeding edge of computing/graphics technology.


With 86% of the companies in the S&P already reported, 69% have beaten on earnings and 54% have beaten on revenue. The blended earnings decline is now -3.5% and revenue is flat with the year ago quarter. Fifty-three companies have issued negative guidance and 26 have issued positive guidance. The earnings forecast for Q3 is -1.7% and +5.7% earnings growth for Q4.

Tesla reported earnings earlier in the week and Elon Musk spent most of the conference call assuring analysts they really were going to produce 50,000 cars in the second half of 2016 and 500,000 in 2018.

Musk said he went through "production hell" in June as they were trying to upgrade the production line to accommodate the faster rate of production. He said he spent many nights sleeping by the production line so he could be there anytime something went wrong.

Musk reaffirmed they still had 373,000 Model 3 reservations and he threatened suppliers that might be short on component deliveries that he would cut them off and they would get no more business from Tesla. He also said despite the huge waiting list for the Model 3, they were still seeing orders increase for the Model S and the Model X. He also said the next vehicle would be the Model Y, which will be a smaller SUV built on the Model 3 platform. He also said Tesla would unveil the Tesla semi and minibus within 6-9 months and put them into production following the Model Y.

Analysts were unhappy about the $1.06 per share loss compared to the 59 cents analysts had forecast. However, in order to make more cars faster, Tesla had to spend more to beef up the manufacturing process and that is investing for the future and investors were ok with that.


A potential blockbuster cancer treatment from Bristol-Myers Squibb (BMY) failed in a key study as the company tried to further extend its use to lung cancer patients. Bristol's drug Opdivo is already approved to treat melanoma and lung cancer but only after chemotherapy. The study involved 541 patients that had received no prior treatment. The study failed to produce any material results. Shares of BMY fell -16% and the biggest one-day drop in 15 years. Competitor Merck (MRK) markets the drug Keytruda and shares of MRK soared $6 as the biggest gainer on the Dow.


The strong jobs numbers caused a corresponding spike in the dollar from a six week low. The low dollar had helped offset the drop in oil prices and then the strong jobs suggested we were consuming more oil and prices rebounded again on Friday to close at the high for the week. The low for the week came on Wednesday at $39.19 after crude inventories rose for the second consecutive week in a month where we normally see declines.

However, we did see a spike in refinery utilization to 93.3% as refiners ramp up production ahead of the Labor Day weekend and the last surge of driving until Thanksgiving. They will probably produce more gasoline for the next four weeks and then drop back into maintenance mode for a month as they prepare to switch over to the winter blend fuels. Production will begin to increase in mid October as they ramp up winter fuels ahead of that Thanksgiving weekend.

This means oil prices are likely to go lower in the weeks ahead. I seriously doubt they will fall much under $40 but we could see some days in the high $30s until that maintenance period is over.



Active rigs rose only +1 to 464 but that total is misleading. Oil rigs rose +7 and gas rigs fell -5. Offshore rigs fell -2 to 17 and a new low for this energy cycle. We saw a decline in gas inventories with a draw of -4 Bcf from storage. That is well below the average injection of 58 Bcf for this period. The lack of new wells being drilled and the hot summer weather combined to a shortage of new supply. Gas prices did not rise on the news but they should have.




Markets

The short squeeze on Friday produced a lot of new highs but the Dow, NYSE Composite and the Russell 2000 did not complete the task. The S&P-100, S&P-400 Midcap, S&P-500, S&P-600 Smallcap, Vanguard Total stock Market Index (VTI), Russell 1000 and Russell 3000 all made new historic highs. Every one of those indexes had one giant short squeeze candle that dwarfed the mediocre moves of the last three weeks.


There were a lot of traders caught leaning the wrong way. This was not a case of a hundred thousand investors suddenly deciding to buy stocks on a summer Friday because the jobs report was better than expected. It was purely a short squeeze.

On the positive side, a lot of market rallies begin with a major short squeeze. Traders get caught leaning the wrong way and they cover, short, cover, short and cover again as fund managers race to chase prices so the market does not run away from them. Whether this will be one of those instances is of course unknown. It is such a clearly recognizable short squeeze that everybody may stand aside and let the market settle and wait for a new direction to form.

The fly in the rally soup is still the volume. Friday's volume of 6.8 billion shares was slightly higher than a normal summer Friday BUT compared to the 6.4 billion shares on Thursday it was nowhere close to the kind of volume you would need as confirmation a real rally had suddenly broken out. The volume increase from 6.4 to 6.8 billion shares was negligible, expecially given the +191 gain on the Dow and the new highs across most of the indexes.

It will take more volume confirmation next week to keep the rally going. Without that volume the odds are good the rally will either be lackluster or fail entirely.

The S&P surged to close at the exact high of the day at 2,182.87. Despite the three weeks of low volume consolidation the index is still very over extended and is not likely to continue much higher without some decent profit taking. The intraday decline to support at 2,150 last Tuesday should not have been enough profit taking to let traders on the sidelines feel comfortable about opening new positions. If anything, it encouraged the shorts to increase their positions and that is what caused the Friday squeeze.


The Dow was helped significantly on Friday by the $6 bounce in Merck shares and the $4 gain in Goldman Sachs. Those two stocks accounted for nearly 80 Dow points. The odds are very good they will not repeat their gains next week. Disney is the only Dow component reporting and it is not likely to have a significant impact on the Dow. With 23 Dow stocks gaining less than $1 or not gaining at all we can see the limited breadth in the rally. Only 7 Dow stocks gained more than $1.


The Dow chart has an interesting pattern repeating from late 2014. The one big rebound was the Ebola bounce when it appeared the contagion had been stopped. It was followed by a couple months of volatility and after a drop back to support at 17,050 it suddenly surged to a new high at 18,213 before moving sideways for several months and finally collapsing. Fast forward to January 2016 and we saw an equivalent bounce from 15,500 to 18,167 and then two months of consolidation. The sudden dip back to support at 17,050 was followed by a similar rebound back to new highs. Markets do have a memory but it is not reliable.

If the pattern were to continue, we should trade sideways from here for a couple months and then have a new support test in October. I am not saying this is going to happen but we can see one consistent pattern in the two-year chart. Every time there was a prolonged sprint higher, it was always followed by consolidation and then a decline. Given the extent of the recent gains, I would be very surprised if we did not see one more decline before we see a ramp into Q4 earnings, which are expected to be the strongest in the last two years.


The Nasdaq sprinted to a new high at 5,221 and just 3 points over the prior high from July 2015 at 5,218. That is hardly a breakout and more of a resistance test. There is nothing stopping the Nasdaq from moving higher as long as the chip stocks and biotech stocks continue to participate. The biotech sector is at a 6-month high. The Semiconductor Index is only 2 points from a new high. The Nasdaq also benefitted from a 55 point earnings gain in Priceline.

If the Nasdaq can continue pushing higher it would be a strong motivating force that could push fund managers to chase prices higher. One other factor is resurgence of the FANG stocks. Facebook, Amazon, Netflix and Google all posted strong gains last week. There are momentum players active in the market and those big cap stocks have a big influence on the Nasdaq.



The Russell 2000 broke out to a 52-week high at 1,231 but it has a ways to go to make a new high over 1,295. The Russell gained +1.44% and was the second biggest gainer behind the Dow Transports at +1.89%. Both of those indexes were heavily shorted and that is the reason they were the biggest gainers.

The target on the Russell 2000 is probably 1,275 and the last major resistance before the 1,295 high. The 1200-1205 level was perfect support on the midweek decline and the Russell could continue to be a strong performer because of the sector constitution of the index. However, should oil weaken it could be an anchor on the index.


While I am not convinced the new highs will last given the weak volume, I am not going to bet against them, again. The trend is your friend until it ends. This trend refuses to die.

The next three weeks will see the lowest volume of the summer. The earnings cycle is in decline and there are very few high profile earnings events to power the market. Continue to raise your stop losses. Remain long until you are stopped out and try not to buy the first dip.

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Random Thoughts


Bullish sentiment continues to decline despite the new highs last week. This survey ends on Wednesday and the market was going lower at that time. Bullish sentiment fell another -1.5% but so did bearish sentiment. Neutral sentiment continues to increase at 43.4%. Neutral sentiment has been above the historical average of 31% for 27 consecutive weeks. Bearish sentiment declined to 26.8% and the fifth consecutive week under the historical average of 30.5%. Bullish sentiment at 29.8% has been below the historical average of 38.5% for 39 consecutive weeks and for 72 of the last 74 weeks but the market is setting new highs.



Goldman Sachs penned a piece last week titled, "Does the Treasury Market Still Care about Economic Data?" They talked about the decline in treasury yields as the sensitivity of yields to data has faded. Goldman said the markets are only paying attention to central bank communication and policies. In other words, "Don't fight the Fed" remains the age-old adage in the stock market.

One analyst last week commented on the Fed's constant warning about impending rate hikes and the lack of follow through on those warnings. Given the current global environment, the Fed is actually tightening by non-action. When the majority of the other central banks are cutting rates and doling out stimulus like crack cocaine, the Fed has kept rates flat, which is actually an implied tightening. While other countries are seeing rates go deeper into negative territory, the U.S. treasuries have become the safe harbor for the world's liquidity. One analyst suggested the demand for U.S. treasuries was so strong the Fed should use this opportunity to start liquidating some of those on its balance sheet. That would allow real rates to drift slightly higher without the Fed actually having to hike. Plus it would free up the Fed's balance sheet for future action when a recession eventually appears.


Bank of America pointed out that global central banks have now cut rates 666 times since the Lehman crash.

They also warned again that fund flows were negative. Equity funds saw outflows last week of $4.6 billion while bond funds saw monster inflows of $10.2 billion. That is the largest inflow into bonds since February 2015. This came as the BoJ, BoE and RBA all cut rates. More than $1 trillion has flowed into bond funds since Lehman. The Swiss National Bank and he GPIF upped their allocation of equities and continue to buy using their government printing presses.

Should we worry that money is still flowing out of equity funds even when the market is making new highs? I would think that would be relative to intelligent investors.


Citigroup called the S&P rally "unstoppable" saying this "U.S. bull market just won't die" and urging clients "don't underweight the S&P." Citi said on a fundamental basis since 2011 the U.S. market has risen from a trailing PE of 17x to 23x and remains very overextended.

"The S&P Composite is now 38% above its prior 2007 high. The FTSE 100 has been flat for 16 years. The Nikkei 225 is down 59% below its 1989 peak. Emerging market equities are down 35% from prior highs. The Eurostoxx is 29% lower. Since 2010, U.S. equities have returned 123% compared to 23% for the rest of the world."


IDI is a one-year-old company that has built a database on every adult in the USA. They have compiled a database of public information along with every other piece of private information they can collect. If you use a loyalty card at the grocery store, they know what you buy. If you have a rewards card with your bank they know what you buy and how much you spend. They know what car you drive, who insures it and in some cases where you drive it.

The company said the personal profiles contain "all known addresses, phone numbers, and e-mail addresses; every piece of property ever bought or sold, plus related mortgages; past and present vehicles owned; criminal citations, from speeding tickets on up; voter registration; hunting permits; and names and phone numbers of neighbors. The reports also include photos of cars taken by private companies using automated license plate readers—billions of snapshots tagged with GPS coordinates and time stamps." They operate multiple coupon websites where they collect personal information to "supply you with better offers" but that information includes things like your birth date, home address, email address and even your health history so they can offer you discounts on over the counter medicine. However, the real reason for the personal questions is to fill in the blanks on your record in their database.

IDI sells this data to private investigators, law firms, debt collectors and government agencies. They are also targeting consumer marketers. The company continues to spend millions to acquire existing databases from other companies to combine with its own. They spent $100 million in December to acquire market profiler Fluent and the 120 million profiles it had accumulated. In June, they spent $21 million to buy Q Interactive and their database. Big brother is watching. Source


I have to admit I am a data junkie. I read literally hundreds of articles on dozens of websites almost every day. The common thread on a lot of investing websites is the failure of the market to make a meaningful correction. It seems there are a lot of frustrated bears trolling the message boards and comments fields under articles on this topic. I sometimes read the comments looking for a referenced source to some new article. I got a good laugh out of the reader comment below. This was on ZeroHedge.com, which has a permanently bearish outlook on the market. Enjoy!

BillHilly Aug 5, 2016 4:05 PM

That's it ! I am capitulating, I am done, I am finished with holding on to a picture of reality that will seemingly never be allowed to happen. I have been bearish for 6+ years now (coincidentally coinciding with my embrace of ZH) and I have been beaten into submission by TPTB. (The Powers That Be) I can no longer stand the losses, financial and emotional, that come along with a view which will not conform to the reality which exists, agree with it or not.

I am not bashing ZH here. I am a long time fan and reader. I agree in heart/mind with much of what is posted by the Tyler's, yet their views do not/have not borne sweet fruit, in fact it has been a sour, gut-retching meal that has left me emaciated and weak. Following their take on the economic conditions "as they are/should be" has led nowhere but to the depths of confusion and exhaustion. I wish to be neither confused nor exhausted any longer.

So fare-thee-well all you "red-pill" poppers, I am ready to explore the promised land of bliss and prosperity that is offered so generously by our magnificent political/financial benefactors. I am ready to bow to the highly educated and intelligent members of our leadership. I will listen attentively to their bullish message on all their colorful and glossy media channels. I will praise the 1%-ers and stand aside as they pass by, genuflecting in their presence. I will build a golden idol of the mighty "printing press" and worship it daily with reverence.

I will no longer doubt. I will no longer distrust. I throw away my tin foil hat. My leaders have proven themselves worthy in mine eyes. They would not deceive nor mislead me - they love me, as they do all of us.

Ahh, what a glorious future I now have to look forward to. Unlimited "growth", vibrant economic recovery(s), abundant job creation, government largess where "debt does not matter", and the power and farsightedness of an honest, caring, and all-embracing political/military/corporate complex.

What took me so long to find this glorious path? Why did I fight the system? Why did I not pay heed to all the wisdom offered by "Million Dollar Bonus"? I will finally listen to my handlers and know the True reality which can exist with the proper mindset. I will now be set free !!!

Hand me the Blue Pill please !


 

Enter passively and exit aggressively!

Jim Brown

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