This was the first time all three major indexes closed at a new high on the same day since December 1999.

Market Statistics

The markets roared back from Wednesday's minor decline thanks to some strong earnings from the consumer retail sector and the tech giants. Stocks are rotating out of defensive sectors and into momentum techs, biotechs, and even energy stocks. The Dow closed 18 points over its prior high and the Nasdaq stretched its high by 3 points and the S&P by 3 points. While the three major indexes all closed at new highs, it was not a major breakout. We will always take a new high whenever it is offered but it would be far more bullish if the gain were more than 3 points.

There was very little in the way of economic news today. Import prices rose unexpectedly by +0.1% in July despite a -2.5% decline in petroleum prices. This came after an upward revision for June from +0.2% to +0.6%. The consensus estimate for July was for a -0.5% decline. Nonfuel import prices were surprisingly strong at +0.3%. Export prices rose +0.2%. On a trailing 12 month basis import prices are down -3.7% and -1.2% excluding fuels. Export prices are down -3.0%. The report was ignored.

The calendar for Friday has the two most important reports for the week. Those are the Producer Price Index and Retail Sales. The inflation at the producer level is expected to have risen +0.2%. The Retail Sales for July is expected to rise only 0.3% compared to the 0.6% gain in June. After the various retail earnings this week that missed revenue estimates we could see sales even weaker.


In earnings news, Kohl's (KSS) reported earnings of $1.22 that rose +14% and easily beat estimates for $1.04. Revenue of $4.182 billion beat estimates for $4.158 billion but sales did decline -2%. Same store sales fell -1.8% compared to the prior quarter at -3.9%. The company remains cautious about U.S. consumer spending and will close 18 stores. At the end of the quarter, there were 1,150 Kohl's stores, 12 FILA Outlet stores and 3 Off/Aisle clearance stores. The total store count was down -14 from the same period in 2015. They cut their full year earnings guidance from $4.05-$4.25 to $3.80-$4.00. On August 9th, Kohl's declared a dividend of 50 cents payable on Sept 21st to holders on Sept 7th. Despite the guidance cut Kohl's shares spiked $6.40.


Alibaba (BABA) reported earnings of 74 cents that beat estimates for 62 cents. Revenue of $4.84 billion rose 59% and beat estimates for $4.52 billion. Cloud computing revenue rose +156% to $187 million. While that is still a small portion of the enterprise, Alibaba is trying to copy Amazon Web Services and cloud revenue is expected to soar significantly, as the company's offerings are better understood and accepted. Revenue from the digital media and entertainment business spiked +286% to $472 million. That is due to the recently acquired Youku Tudou video streaming company and addition of news feeds from UCWeb. Retail revenue rose 49% to $3.52 billion and mobile revenue rose +119% to $2.64 billion. Alibaba is firing on all cylinders but the company was quiet about the SEC probe into its accounting practices. Shares spiked over $5 on the news.


Burger chain Shake Shack (SHAK) reported earnings of 14 cents that beat estimates for 13 cents. Revenue of $66.47 million beat estimates for $63 million. Same store sales rose 4.5% compared to 12.9% in the year ago quarter. The company raised guidance for 2016 revenues from $245-$249 million to $253-$256 million. The conference call turned contentious with analysts arguing with management about the economic metrics. The skepticism about the model is increasing. Shake Shack stores are valued at roughly $14 million each while a comparable store from Panera is only $5 million. Shake Shack only has 23 stores and it is more of a regional fad. Shares fell more than 7% on the earnings.


Retailer Macy's (M) reported earnings of 54 cents that beat estimates for 48 cents. Revenue declined from $6.1 billion to $5.87 billion but still beat estimates for $5.77 billion. Same store sales fell -2% but that was better than estimates for a 4.7% decline. They also announced plans to close 100 stores out of its fleet of 728 stores. The retailer is conceding that shoppers are increasingly more likely to shop online rather than go to a mall store. Macy's is also negotiating to sell some of its flagship stores that occupy premium real estate locations in an effort to capitalize on those values. Shares rallied 18% on the news. That was the most since December 2008.


Dillard's (DDS) reported earnings of 35 cents that beat estimates of 31 cents. However, that was a decline of 50% from the year ago quarter. Revenue of $1.45 billion misses estimates for $1.48 billion. Total merchandise sales fell -4% and same store sales fell -5%. Shares fell -$3 in afterhours. The big spike at the open was on the Macy's news and was immediately sold.


Nordstrom (JWN) reported earnings of 67 cents compared to estimates for 56 cents. However, that was down from $1.11 in the year ago quarter. Revenue of $3.6 billion missed estimates of $3.7 billion. The CEO said the company had made major progress in actively addressing inventory levels, expenses and capital expenditures. Shares rallied strongly on the news.


Nvidia (NVDA) reported a 23.9% jump in revenue to $1.43 billion. Earnings rose from 5 cents to 53 cents. Analysts expected 37 cents and $1.35 billion. It was a strong report. The company guided to revenue of $1.68 billion and well above consensus of $1.45 billion. The CEO said earnings were powered by "strong demand for the Pascal generation GPUs and surging interest in AI and deep learning." Nvidia makes the most powerful GPUs for super servers and giant computing clusters. The speed and capability of these GPU enabled computers is truly off the scale of human comprehension. They also make the fastest video graphics for gamers and professional use. Their top of the line card was just announced a $1249 and sold out immediately. Revenue from the gaming graphics rose 18.3% in the quarter. Nvidia shares have been making new highs almost every day since June and today was no exception.


The only material earnings on Friday come from JC Penny's. After the flurry of retail earnings on Thursday, their report will be mostly ignored in the rush to leave work early and enjoy another summer weekend. The number of companies reporting next week will decline significantly.


Valeant Pharmaceuticals (VRX) rallied sharply on Wednesday for more than $5 after their earnings and guidance. The stock fell -10% or -$3 today on news a U.S. attorney in Manhattan was spearheading a probe into the relationship between Valeant and Philador that could lead to criminal charges for securities fraud, mail fraud and wire fraud. The probe could lead to criminal charges against the company and against its officers at the time. Valeant had previously disclosed the probe along with about a dozen others from various regulatory agencies.

The probe is focused on whether Valeant used its relationship with drug marketer Philidor to inflate sales by shipping large quantities of unsold drugs to Philador and Philador then "paper sold" them to another handful of shell companies it had opened for the purpose. When the scandal broke, Valeant was forced to take a charge for unsold inventory but it was only a few million dollars and was minor compared to the billions in Valeant revenue. You can bet an aggressive attorney is going to find something to charge Valeant with but it is not likely to be the end of the world for Valeant. They will have to cop a plea and pay an enormous fine. However, if they do that for the 10-12 individual probes it would be very expensive. There is a potential argument here for combining all the cases together in one universal settlement.


Oil prices exploded higher after comments from the Saudi Arabian oil minister that the country would do what it could to help balance supply and demand. Prices spiked because short interest is very high at more than 300,000 contracts on WTI and Brent. The Venezuelan president has been actively trying to stir up support for another production freeze meeting in order to stabilize oil prices. Most analysts believe prices are going to see another sharp decline in Sept/Oct as summer demand slows while production is ramping up again.

Venezuelan president Maduro is dying politically and economically because of the crisis in his country. His oil production is falling and he needs every dollar he can get on every barrel he produces. The only way for that to happen is for OPEC to slow production so that prices will rise. He almost pulled off a production freeze last time around but the Iran/Saudi Arabia conflict killed the process when Saudi and Iran both refused to halt new production. Prices rose sharply during the two months before the meeting and that helped everyone. The various oil ministers from OPEC countries realized they could spike prices by simply talking about a production freeze. The comments were repeated over and over in the press and prices rose.

Now Maduro is trying to repeat that scenario as he begins his Middle East tour to talk up prices. He wants OPEC to force prices back to $70 per barrel. OPEC helped his cause this week by announcing it would hold an informal meeting on the sidelines of the Algerian energy conference in late September.

Offsetting this production freeze talk was news Saudi Arabia produced a record 10.67 million barrels per day in July. Iran said it produced 3.85 mbpd and the EIA had not expected that until mid 2017. If prices did spike to $70 there would be 500 rigs put back to work in the U.S. almost immediately. Production that has declined 1.15 mbpd in the U.S. would begin to surge and 6-9 months from now that drop would be well on its way to being erased. Saudi Arabia does not want that production back on the market and that is a good reason for Saudi to drag its feet and try to discourage any future production freeze.

OPEC is like the Fed. They talk a lot but can rarely agree on a solution. In this case, the talk can raise prices but it would only be temporary. U.S. refiners will reduce production after Labor Day for a month of maintenance before they begin producing winter blend fuels. This will allow crude inventories to rise but also allow excess refined product inventories to recede.


Markets

The S&P rallied +10 points to put it +3 points into new high territory. The index came back from the dip to support at 2,175 on Wednesday. I wrote last night it was just minor profit taking and nothing to be worried about. The market breadth is expanding despite no material increase in volume. For the last four days, volume had been right at 6.0 billion shares.

The new high close came on strong gains in the consumer sector and new highs for Amazon (AMZN) and Google (GOOGL). I do not want to be too bullish here but the trend is our friend until it ends. What we need is a real breakout that wakes up those cautious investors waiting patiently on the sidelines. Money has been flowing routinely out of the market over the last 17 weeks and we need a real breakout to make those investors reverse course. They need to wake up in the morning and say "Dang, this is a real rally. I need to buy stocks before it runs away from me."

Currently we have fund managers buying defensively just to make sure no other fund surges ahead of them in performance. Once the markets actually start a new leg higher by more than 3 points a day, the race for performance could push it significantly higher.

For Friday, the support is clearly defined as 2,175 and resistance 2,188 and the high for the day.


The new high on the Dow is barely discernible on chart. A new high by only 18 points on an index of 18,600 points is a rounding error. It is far from a "breakout" and the dead stop at that prior resistance suggests there are still sellers waiting. There was a real mix of winners with 3M surging 2 points on no news after two weeks of flat trading at $178. The declared a $1.11 dividend on Wednesday, so why did the stock spike today? That move is not likely to continue on Friday.

I would love to see the Dow post a big gain on Friday but until it does, I will continue to be skeptical of the rally.




The Nasdaq increased its historic high from 5,225 to 5,228. Like the Dow, a 3-point move on that index is a rounding error. We need a 20-40 point move to new highs to really shake up cautious investors. The biotech sector was the driving force again with a 1% gain but there was a broad range of contributors. However, when the 30th highest gainer on the Nasdaq only rose $2 that has got to give you some cause for concern. You would like to see a lot more big gainers.

The Nasdaq has traded in a 30 point range since the end of the short squeeze last Friday morning. That is very narrow given the trend for tech stocks to be more volatile. Resistance is now 5,235 and support 5,195.



The Russell 2000 small cap index only gained 6 points and is well below the new high level of 1,295. While the Russell is at a 12-month high is has not been as bullish as the big cap indexes. This is the case of a few big caps leading the charge higher and the troops are lagging.


I would be very skeptical about buying the market on Friday. We need to reevaluate after Friday and make plans for next week. There is always another day to trade if you do not make stupid decisions and rush into the market.

Enter passively, exit aggressively!

Jim Brown

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