We moved from extreme election uncertainty and 4-month lows to new highs only 6 days later.

Market Statistics

We saw extreme volatility with the Dow futures falling -976 points from their intraday high late Tuesday night followed by a 1,453 point rebound into today's close at 18,870. The S&P and Nasdaq futures hit their circuit breakers with 5% declines in the overnight session and then rebounded with the cash indexes near new highs. The Volatility Index ($VIX) hit 20 and now it is back to 13.

Today was a nearly perfect day in the market. The Dow, which has been leading the big cap indexes higher, pulled back at the open after two prior days of small gains and then rallied again into the close at another new high.

We have seen three days of muted gains but they were still gains as the Dow has now completed 7 consecutive days of gains. This consolidation after three days of monster gains allowed the markets to pause and traders to rotate into new positions.

The Dow and Russell 2000 closed at new highs and the Nasdaq shook off some significant declines to post solid gains. It was a good day for the market.


The economic reports were market neutral. The NY Empire State Manufacturing Survey struggled back into positive territory at 1.5 for November. The reading for October was -6.8 and the Moody's forecast was -8.8 for November so this was a surprise. This was the first positive reading since July. Despite the positive headline number there was still a lot of red in the internal components. This report was ignored.



Retail Sales for October surprised with a +0.8% gain compared to estimates for +0.6% and a revised +1.0% gain in October. Excluding autos and fuel there was a +0.6% gain. Vehicles and parts, building materials, gas stations, sporting goods and nonstore retailers were the biggest gainers.


Business Inventories for September rose +0.1% and the sixth gain out of the last seven months. Manufacturing inventories declined -0.03% while retail inventories rose +0.22%. Autos and parts rose +0.7% for the largest gain. Business sales rose +0.7% and helped to keep the rise in inventories to a minimum. This report was ignored.

The calendar for the rest of the week is heavily weighted with Fed speeches. With the chance for a rate hike now at more than 81% every speech will be setting the stage and preparing investors for the event. At that high of a percentage, it is already priced into the market.

The most important economic report is the Philly Fed Manufacturing Survey on Thursday. However, everyone is focused on the market and not on economics so unless it is a disaster it will also be ignored.


Dow component Home Depot (HD) reported earnings of $1.60 that beat estimates for $1.58. Revenue rose 6.1% to $23.2 billion and beat estimates for $23.0 billion. Same store sales rose 5.9%. The company guided for full year revenue rising +6.3% and earnings to rise +15.9% to $6.33 per share. Same store sales are expected to rise 4.9%. Analysts were expecting a 6.4% rise in revenue and earnings of $6.33 so the affirmed guidance was slightly disappointing. Shares declined on the news and they were the biggest loser on the Dow.

I had expected HD earnings to be slightly better along with Q4 guidance because of all the repair work that is required after Hurricane Matthew. The company said they estimated sales rose $100 million as a result of the hurricane. While it was not a bad earnings report it did fail to impress. Home Depot does have a record of trying to keep expectations low and that may be why their guidance did not grow.

They did say the number of transactions rose 2.4% and transactions over $900 were up 11.3% in Q3.


Advance Auto Parts (AAP) reported earnings of $1.73 that beat estimates for $1.72. Revenue declined -2% to $2.25 billion but still beat estimates for $2.20 billion. Same store sales declined -1%. On the surface that would seem to be an uninspiring report but the shares spiked 15% on the news. Management said the increasing number of miles being driven and the aging vehicle fleet will be positive in future quarters. They are trying to improve operating margin by 500 basis points starting in 2017. The commentary did not excite me but there was enough meat that investors raced to cover their shorts.


3D printer maker Stratasys (SSYS) reported adjusted earnings of less than one cent compared to estimates for 4 cents. Revenue of $157.2 million missed estimates for $174.2 million by a wide margin. They guided for full year earnings of 13-21 cents on revenue of $662-$673 million. Traders were not impressed and shares fell -12%.


Dicks Sporting Goods (DKS) reported earnings of 48 cents that beat estimates for 42 cents. Revenue of $1.81 billion beat estimates for $1.77 billion. Dicks acquired numerous Sports Authority stores out of their bankruptcy and they just completed the acquisition of Golfsmith Holdings and they are going to retain 30 of the Golfsmith stores and rebrand them to their own Golf Galaxy name.

Dicks guided for Q4 earnings in the range of $1.19 to $1.31 and analysts were expecting $1.32. The expenses related to the acquisitions are taking their toll. Shares fell -7% on the news.


Teva Pharmaceuticals (TEVA) reported earnings of $1.31 on a 15% rise in revenue to $5.6 billion. Analysts were expecting $1.28 and $5.7 billion. They guided for Q4 to earnings of $1.34-$1.44 on revenue of $6.2-$6.5 billion. For the full year, they projected $5.10-$5.20 and revenue of $21.75 billion. Analysts were expecting $5.17 and $22.31 billion. Shares fell 8% on the news.


Zebra Technologies (ZBRA) reported adjusted earnings of $1.43 compared to estimates for $1.41. Revenue of $904 million missed estimates for $906.4 million. The company guided for the current quarter for earnings of $1.65-$1.85. Shares surged 13% after they announced Olivier Leonetti, formerly WDC CFO, as the new CFO for Zebra. He is known to the investing public as very shareholder friendly due to his efforts to return capital to shareholders. The CEO said Leonetti will be instrumental in developing a capital return program for Zebra.


Dow component Cisco Systems (CSCO) reports earnings after the bell on Wednesday followed by Walmart (WMT) before the open on Thursday. The combination of these two could cause some volatility on Thursday morning. Those are the last two Dow components to report for Q3.


Be careful what you short. Shares of Dryships (DRYS) were trading at $5 last Wednesday. They reported a larger than expected loss of $7.70 per share on revenue of $12.1 million. Nobody paid any attention. When the market continued to rise after the election the small cap sector was seeing a lot of buyers. Shares started to tick up and suddenly a short squeeze was born.

The company has been in trouble with the decline in shipping rates over the last two years. They did a 1 for 4 reverse split when the stock was trading at $1 in August. Shortly thereafter they engineered another 1 for 15 reverse split at the start of November. A reverse split removes shares from the market and doing two so close together removed about 90% of the float to leave only about one million shares available to trade. At the end of October there were 1.7 million shares sold short, up from 300,000 six months ago.

On Tuesday, more than 10 million shares changed hands compared to the daily volume before the reverse split of 500,000 shares. A monster short squeeze was born because traders did not take into account the dramatic reduction in the share count. That $5 stock last Wednesday hit $102 today. Clearly, there will be a massive decline eventually but this was the biggest short squeeze I can remember. A lot of money was lost over the last three days.


After the bell, the API oil inventory report showed a gain of 3.6 million barrels for the week ended on Friday. Crude prices had risen more than $2 during the regular session on positive comments out of OPEC about the potential for a production cut at the November 30th meeting. Those guys know how to play the media even better than Trump. Nothing changed. They just talked about a potential agreement again. The Saudi Arabian energy minister was quoted as saying "it is imperative that OPEC reach an agreement on curbing production" at the November 30th meeting. There were even "rumors" that Iraq and Iran were considering "restraining production." Just a week ago, they were adamant they would not participate. This is just a big con game. The IEA said on Tuesday that OPEC produced 33.8 million bpd last week. That was even higher than the prior estimate at 33.64 million. Actual production is rising rapidly at the same time they claim they want to cut it back to 32.5 mbpd.

Crude rallied to $45.76 intraday and declined slightly in afterhours on the API news. Since the API and EIA reports rarely agree, most traders are keyed into the EIA report on Wednesday morning.


Markets

It has been a great rally but not all stocks are in rally mode. Arthur Cashin reported that 300 stocks on the NYSE hit new highs on Monday at the same time that 300 stocks hit new lows. There is tremendous divergence between sectors and even individual stocks in those sectors.

Quite a few small cap stocks are up more than 15% or even 20% as the Russell 2000 hits new highs. The Russell has 19% of its weighting in financial services. That is the largest Russell sector followed by information technology 17%, industrials 15% and healthcare 13%. With the banks, industrials and biotech stocks in solid rally mode they are pushing the Russell to new highs.

However, it is either feast or famine in the small cap sector. For every stock with a 15% or more gain, there is another one testing its 52-week lows. The key is that the strong stock gains are outweighing the minor losses on the weak stocks.

Despite all the good news and the new highs, we are due for a decent bout of profit taking. I am happy to see the Dow waffle for three days but still continue its gains at a slower pace. That is the perfect way to keep the rally going.

I do not know if that is going to work on the small caps. The Russell is totally unsupported at the current level and the recent spike is totally out of character for the index.


The S&P had a great day with a 16-point gain that allowed the index to push through resistance at 2,175 and close at 2,178. The next hurdle is 2,188 and the historic high at 2,190. If the S&P can break out to a new high, it would cause an entirely new round of short covering and price chasing.

Today was a good day for the S&P because the Dow was negative for most of the day. For the S&P to shake off the Dow weakness and post a solid gain suggests there are more gains ahead. I would love to see that S&P streak continue to surge to new highs like the Russell and the Dow.


The Dow is closing in on 19,000 for the first time and the trader talk around the web is already focused on 20,000. That could be the mother of all sell signals when/if the Dow reaches that level.

The banks have been leading the Dow higher with Goldman Sachs up 20% since the day before the election. In what universe can Goldman rally 20% in seven days and not get hit by a huge decline on profit taking? We are way over due for a decent decline but I do think it will be a buying opportunity.

The Goldman chart looks like an Internet stock from the Nasdaq bubble in 2000.




The Nasdaq Composite never sold off as hard as the Nasdaq 100 and it closed at a three week high today at 5,275. The index is closing in on its prior high at 5,339 but it may not be accomplished in a straight line. That does represent significant resistance.

The 5,200 level has returned as support.

The Nasdaq 100 found support at 4,700 and it appears the big cap tech stocks have finally found some buyers. There are quite a few investors that wait for big events like we saw last week as buying opportunities and they came back in volume today.

The NDX has a long way to go before making at new high over 4,909 and we need the big caps to maintain a positive bias for a couple weeks if that is going to happen.




The Dollar Index broke over 100 intraday and that is a definite warning sign. The dollar will depress commodities but it also provides buying power overseas. This is a good news, bad news event but the bad news will eventually be the driver.


I believe the rally will continue but it should moderate in velocity. In reality, it should take several days off to rest. I would be very careful about buying any stocks with big gains because the eventual profit taking dip could be painful. Trees do not grow to the sky and rallies always see profit taking. Be prepared to buy the dips rather than chase prices higher.

Enter passively, exit aggressively!

Jim Brown

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