The first two weeks of October are typically negative and the first one is over with one more to go.

Weekly Statistics

Friday Statistics

The nonfarm payroll numbers did not produce the market movement most expected. The early Dow decline saw buyers appear when the -119 low held for over an hour and traders gave up on a bearish move. The index rebounded to positive territory in the afternoon but the 18,250 price magnet was too strong and it closed just below that level.

The Dow has not been reactive to moving averages in a long time but the 100-day has returned to act as support.


The economy added 156,000 nonfarm payrolls in September. That was less than the expectations for 170,000 and less than the revised gain in August of 167,000. The August number was revised up from 151,000. The July job gains were revised lower from 275,000 to 252,000.

After the ADP report on Wednesday declined from 177,000 to 154,000 and also missed consensus estimates of 170,000 the first look at the nonfarm headline number suggested the economy was slowing. However, the average hourly earnings rose +0.2% to +2.6% over the same period in 2015 and the average workweek rose slightly to 34.4 from 34.3 hours. Those are minor gains but spread across 149 million workers it makes a difference.

The unemployment rate rose one tenth to 5.0% as more people entered the workforce. More than 444,000 people entered the workforce in September. The labor force participation rate also edged up slightly from 62.8 to 62.9% after a low of 62.6% in May.

Construction payrolls rose by 23,000 to put the goods producing segment back into positive territory at 10,000 after losing -25,000 jobs in August. The firming of energy prices have started to reverse the job losses in the exploration and production sector.

The separate Household Survey showed a gain of 354,000 jobs. The number of workers employed part-time involuntarily declined by 159,000. The median term of unemployment fell to 10.3 weeks. However, the larger U6 unemployment rate was unchanged at 9.7%.

The average monthly job gains in 2016 is +178,000 and slightly less than the 200,000 per month average for 2014 and 2015. We are in the seventh year of an expansion cycle so a slowing of job growth is to be expected. The number of discouraged workers has declined as a tight job market has produced more job advertisements and higher wages.

As an example of the problems people are having finding qualified workers, Axon, a Seattle based producer of body cameras and associated software is offering a Tesla Model 3 car to new hires including engineers and web developers. The company had 31 open positions as of Wednesday.

Amazon has been known to pay significant sums to developers to induce them to sell their homes and move to Seattle. Tableau Software (DATA) is paying employees a $10,000 finder's fee for referring new prospects that are hired. Microsoft posted openings for 500 new jobs just a week ago.

Despite the third consecutive decline in new jobs, this was still a decent report and Fed heads immediately talked about the need to start raising rates.


The odds of a rate hike for the November meeting have declined to only 8.3% but the odds for December have risen to 65.1%. Unless the economic reports show an implosion in the economy over the next two months there will be a rate hike in December. Several Fed heads are trying to talk up a November hike but the futures are ignoring those efforts. The equity market is not ignoring those comments and that is one of the reasons for the volatility over the last week.



Unfortunately for the Fed the economic forecast is not proceeding according to plan. Back at the beginning of August the Atlanta Fed real time GDPNow forecast for Q3 GDP was predicting 3.8% growth. Over the last two months that has declined to 2.1% growth and could easily slip under 2% in the next revision. This compares to the final Q2 reading of 1.41%. That is hardly the kind of growth the Fed wants to see when they are raising rates.

While the Fed claims it is data dependent, it is not. However, the equity market is the most efficient discounting mechanism of future events and the current volatility on Fed headlines suggests investors are afraid the Fed is going to hike regardless of the country's economic strength.



The other economic report on Friday was the Wholesale Inventories for August, which declined -0.2% after a -0.1% decline in July. The report was ignored.

Next week is a light calendar for economic events but there are still plenty of Fed speeches and the start of the Q3 earnings cycle. Monday is Columbus Day and the banks and the bond market will be closed.

Tuesday is the official kickoff for earnings with Alcoa, Fastenal and Barracuda Networks. Friday is the biggest earnings day with Citigroup, Wells Fargo, PNC Financial and JP Morgan Chase reporting.

The FOMC minutes on Wednesday will be the most important event with analysts trying to decipher the minutes to see if there really is a chance for a rate hike in November. Rounding out the week Janet Yellen has a speech on Friday and whenever she speaks there is always the danger of a lightning strike.


One of the problems hitting the market on Friday was the flash crash in the British pound. The pound crashed from 1.26 to the dollar to 1.14 overnight before a rebound appeared. Banks blamed it on very thin liquidity and a sudden abundance of sell orders. Bloomberg reported that eight market makers went offline for more than 30 seconds because of an absence of bids. Traders said a large number of sell stops were hit and there was nobody to buy. That sent the computer programs into a panic and they cancelled orders until normal trading resumed.

Citigroup blamed the crash on "blunt aggression" in a thin market coupled with retail stop losses being hit.

We are never more than one unfortunate series of seemingly unrelated events away from a flash crash in anything. With more than $5 trillion in currencies traded daily, that is normally assumed to be a very liquid market but there has been at least four flash crashes in the currency market this year.

This chart from the CME does not show the low at 1.14 because of program constraints but the magnitude of the drop is apparent. Normal bid/ask is 1-2 pips. That rose to more than 50 pips and at one point was 600 pips. In currencies, that is a nightmare scenario.


Honeywell (HON) rocked the market with an earnings warning ahead of the Q3 report. The company cut guidance from $1.67-$1.72 to $1.60 and the street was expecting $1.67. They blamed the warning on foreign defense order weakness along with a decline in business jet engine orders. They said weakness in the energy sector reduced demand for private jets and maintenance for those jets. They also guided for Q4 for earnings of $1.74-$1.78 and full year for $6.60-$6.64. That was down slightly from $6.60-$6.70. Shares fell -7.5% on the news.


PPG Industries (PPG) warned it expected to post a loss for Q3 of 74 to 77 cents. That will be the first loss in 30 consecutive quarters. The adjusted earnings will be $1.54-$1.57 compared to analyst estimates for $1.71. They posted a $1.52 profit in the comparison quarter. They blamed the loss on a charge related to their pension settlement. Revenue is expected to be $3.8 billion and also below estimates for $3.84 billion. Shares fell -$8.50 on the news.


Tyson Foods (TSN) shares fell -9% after Pivotal Research cut the stock from buy to sell as a result of a price fixing class action suit filed in September. The analyst said the suit has merit and he cut the price target from $100 to $40. Tyson, Pilgrim's Pride (PPC) and Sanderson Farms (SAFM) reportedly colluded starting in 2008 to reduce production in order to keep prices high. The analyst said this suit could cause stronger industry regulation and reduce profits.


Yahoo (YHOO) is said to be resisting efforts by Verizon to reduce the purchase price from $4.8 billion to $3.8 billion as a result of the hacking scandal. Data from more than 500 million accounts was stolen in 2014 and Yahoo management did not disclose the extent of the breach in the negotiations with Verizon. It would appear to me to be a material adverse change or a MAC event that could allow Verizon to walk if it so desired. Yahoo said there had been some breaches in the past but did not disclose that 500 million accounts were stolen.


The Twitter (TWTR) sale is dead. The rumor making the rounds late Friday said the Twitter sale process had failed and all the bidders had walked away. Google, Disney and SalesForce.com had all withdrawn according to an article on Bloomberg. Twitter had hired Goldman Sachs to find a buyer against the wishes of CEO Tom Dorsey. According to the Bloomberg article, the sale process was all but dead because all the interested parties had passed after a quick look at the offering materials. Apparently, the prospective buyers were also getting a lot of pushback from their boards and investors about acquiring a declining business. The SalesForce CEO was especially bombarded at a company conference with a steady stream of people making their feelings known.

Twitter was supposed to have a board meeting late Friday to discuss potential offers with Goldman but the meeting was cancelled. With the news breaking late on Friday we could see Twitter shares decline again on Monday.


Deutsche Bank (DB) was rumored to be working on an investment from Qatar for $5 billion. There is no confirmation on that but DB slipped into the bond market late Friday and sold $3 billion in dollar denominated five-year bonds at 4.25%. Apparently, there are a lot of investors that do not believe DB is going to fail. The stock has rebounded more than 25% from the $11 low on the 29th.


The "Profit's" Marcus Lemonis, went public with his Camping World (CWH) business on Friday and it was far from exciting. The shares priced at $22 and right in the middle of the expected $21-$23 range. After a full day of trading, they closed at $22.43. While the IPO may have been perfectly priced from the Camping World perspective, it had to be a letdown for Lemonis not to see a big post IPO gain.


Shares of The Gap (GPS) rose +15% despite posting lower than expected same store sales. Comparable store sales fell -3% compared to a -1% decline in the year ago quarter. Comps at Gap Global fell -10% and Banana Republic Global fell -9%. Old Navy was positive with a +4% rise.

Shares were rising because management blamed the decline on the fire that destroyed the massive Fishkill warehouse. The company said Gap Global sales were reduced by 5% because of the fire, with another 3% impact to Banana Republic. According to my math, that does not overcome the declines in comps but apparently, investors were satisfied.


Silicon Motion (SIMO) raised revenue guidance from $140.7-$147.7 million to $156.2-$159.0 million. Analyst consensus estimates were $144.2 million. Shares rose 3.5%.


Crude prices continued their headline honeymoon with nearly two months to go before the OPEC countries actually have to agree to something. They played the game perfectly this time and there has been a lack of loose lips to sink the effort.

Normally somebody cannot stand the suspense and says something stupid the next time a microphone appears. So far, that has not happened. With prices at $50, we are at the level where rig activations could accelerate over the next several weeks, if the price holds.

There has been five consecutive weeks of inventory declines in a period where inventories should be rising rapidly. Imports are down about 500,000 bpd and I attribute that to the hurricane blocking the entrance to the Gulf. U.S. production has been flat at 8.47 million bpd and demand has actually slowed from 16.9 mbpd to 16.0 mbpd. If you are good at math that means we have been using about 900,000 bpd less oil for the last several weeks and yet we still have a decline in inventories. Something is not making sense unless we get a deluge of oil over the next three weeks from the tankers parked in the Atlantic waiting for the storm to blow itself out.


Active rigs rose +2 last week to 524 and I was expecting more activity. With oil at $50, it is profitable to drill in several of the shale areas, especially the Permian. Pioneer Resources said the Permian Basin could use another 100 active rigs.

If I could bet on the rig count, I would bet on 575 by year-end if oil prices remain at $50.


 


 

Markets

The major indexes have fallen into a sideways pattern and we cannot seem to find a catalyst to break us out of the current rut. We do need to remember the first two weeks of October are normally negative. We have one week to go. What happens next week could be the result of Sunday's debate more than any economic event on the calendar. The markets do not do well where there is not a clear leader.

Trump's comments from 11 years ago have ignited a firestorm that may not be survivable. Clinton has an opportunity to end the race on Sunday if she can get passed the recent document dumps from Wikileaks and Guccifer 2.0. Both candidates are flawed but in this case, the rational speaking candidate has the best chance. The news on both came out after the market closed on Friday. If Clinton wins the debate by remaining rational in the face of a Trump meltdown, the markets should rally on Monday. The status quo will be continued and investors will know what to expect.

The S&P spent the first week of October stuck in a range between 2144-2164 and closed the week right in the middle at 2,154. The 100-day and 75-day averages have suddenly come back into play on the S&P. The index has not been reactive to averages in a long time until just recently.

Horizontal support has formed at 2,145 but there is still a pattern of lower highs that was broken only briefly on Friday morning. The S&P is not giving any indication of direction but the lack of a material decline in this normally volatile period is positive.


The Dow is using the same averages differently with the 75-day average as resistance and the 100-day as support. The 18,250 price magnet is still active as is the pattern of lower highs. However, there is a miniscule upward bias in the Dow chart with the 100-day average rising and the index respecting that support.

The hurdle for the Dow next week will be on Friday when the major banks report earnings. The banks were up +3% last week on expectations for a rate hike. With that possibility not until December, the banks are probably going to weaken before they move higher. The FOMC minutes on Wednesday could either depress the financials or lift them depending on what the Fed discussed.

Once the Dow components begin reporting earnings on Friday, there is a steady stream of additional companies reporting over the next two weeks. That is our best chance to see an end of October rally. We need the guidance to be positive and the earnings to be decent.



The Nasdaq has been struggling to move higher and repeat the new high from September 22nd but has run into solid resistance at 5,320. Support is 5,250 giving it a range of 70 that has been tested repeatedly. However, the intraday dips are always bought.

There is no conviction on either side but there is a very slight bias to the upside. If we can hold that until some of the tech stocks begin reporting earnings then we have a decent chance of making a new high. That will happen in option expiration week.



The Russell 2000 pattern is troubling. This is the clearest example of lower highs and Friday's intraday dip below support could be suggesting a bearish move ahead. If that support at 1,235 fails, the Russell could sink the entire market with a drop to 1,205. The Russell 2000 is the market sentiment index and it is looking very weak.


On Friday, Bank of America analyst Steven Suttmeier warned of a potential 5% decline in equities over the next two weeks. He believes there is complacency in the market with the VIX holding in the 12-13 range. He said the complacency in the VIX and VXV/VIX ratio, along with a lack of fear in the put/call ratios, limits upside and suggests there is a further decline ahead. A VXV/VIX ratio under 1.0 normally signals a market bottom. The closing ratio on Friday was 1.306 suggesting further selling. He suggested buying a S&P dip back to the 2050-2100 range with expectations the index would eventually rise to 2,300. He said we are nearing the "buy October" point on the calendar in expectations of a 5% rally before April.

This is just one more opinion by a technical analyst based purely on the charts. He may be right or wrong with the daily headlines driving market direction. While I am not convinced we will see a 5% decline, I do believe we will see a decent rally if one candidate pulls well ahead of the other in the polls. Equity fund managers need to put money to work before the end of October and they are holding their breath going into Sunday's debate.


We are approaching the point where the market "should" rally into November. Pick a few stocks on your shopping list and decide where you would like to buy them on a dip. If one appears, it may be brief.

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Random Thoughts


I am shocked by the sudden change in sentiment. Bearish sentiment took a -9 point plunge and bullish sentiment jumped nearly 5%. The survey ends on Wednesday and the markets were positive on Wednesday. I believe this is calendar oriented with experienced investors shifting their mindset towards the normal end of October rebound.



Did you know that hurricanes, typhoons and cyclones spin in different directions depending on where they form. Above the equator, those storms will spin counterclockwise. Below the equator, they will spin clockwise. The reason for the different direction of the spin is called the Coriolis effect, named after the French mathematician Gaspard-Gustave de Coriolis, who discovered the cause and published his findings in the 19th century. The earth is spinning faster at the equator than at the poles. The faster spin imparts a greater force on the side of the storm closest to the equator and pulls the storm on one side to create the spin.


A state run TV channel in Russia warned that a nuclear war with the U.S. could be imminent. Zvezda, a nationwide TV service run by the Ministry of Defence, said "Schizophrenics from America are sharpening nuclear weapons for Moscow." At the same time, the Russian government initiated a civil defense drill and is evacuating 40 million people. "The three day, four stage drill, involves more than 40 million people, more than 200,000 specialists of rescue units, organizations and enterprises as well as some 50,000 units of equipment."

Whenever there is unrest at home, the Russian government gives citizens another enemy to worry about.


The U.S. formerly blamed Russia for the recent political hacking attacks saying they were "intended to interfere with the U.S. election process." U.S. officials said they were "confident" the Russian government directed those attacks on American political organizations. Last month Putin called the hacking of the DNC a "public service" but denied any involvement. "The important thing is the content given to the public."

Kremlin spokesman Dmitry Peskov said the U.S. accusations behind these cyberattacks are "nonsense." The spokesman said "tens of thousands of hackers" attack Russian President Vladimir Putin's site "every day." "Many attacks are traced to U.S. territory but we are not blaming the White House every time."

Personally, I seriously doubt an attempt at public shaming of the Russian government by the U.S. government, will ever accomplish anything. To the Russians it is probably a badge of honor.


 

Enter passively and exit aggressively!

Jim Brown

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"Sometimes people don't want to hear the truth because they don't want their illusions destroyed."

Freidrich Nietzsche