The major indexes all posted gains for the week but those gains were muted after the post election bounce.

Weekly Statistics

Friday Statistics

The Dow only managed a 20-point gain for the week as the big cap stocks started to fade. The small cap Russell 2000 continued to surge with its 11th consecutive daily gain and another new high. The small caps are definitely leading the market but the large caps are beginning to weaken.

I believe this is the consolidation period from the monster post election gains. Traders were locking in profits ahead of the weekend event risk. It never hurts to take some gains off the table and reposition into different stocks.

With Thanksgiving week typically bullish it will be interesting to see if the historical trend holds or will the profit taking increase. I believe we will see continued but possibly muted gains.

The Russell is extremely overextended and due for a rest with resistance at 1,325. On Monday, more than 25% of the Russell components made new 52-week highs. That was a record.


On the economic front, the Kansas Fed Manufacturing Survey for November posted a decline from 6 to 1 and right on the verge of going negative again. That is only the 4th positive number over the last 12 months with a low of -12 in February. Nearly all the components weakened with prices paid the big gainer. Weak activity in nondurable goods, specifically food products and plastic items were blamed. Producers were still optimistic despite the weakness.



The state and regional employment reports showed employment increased in only 11 states in October, down from 14 in September. Employment fell in 5 states and was unchanged in 34 states. Washington added 10,600 jobs, Michigan 18,900 and California 31,200 for the biggest gainers. Connecticut lost 7,200, South Carolina -9,900 and Minnesota lost 12,500 to top the losers list. The report was ignored.

The economic calendar for Thanksgiving week is relatively bland with the existing home sales and Richmond Fed surveys on Tuesday the only material reports. The FOMC minutes are already assumed to point to a December rate hike so there is no mystery there.

The CME odds of a rate hike are now over 95% so there the hike is already priced into the market. The only surprise would be a hike of more than a quarter point but I doubt the market would care.



There was very little stock news on Friday as everyone is already going dark for the holidays. Foot Locker (FL) reported earnings of $1.13 compared to estimates for $1.11. Revenue of $1.89 billion matched estimates. Same store sales rose 4.7% and in line with estimates. The company opened 21 new stores in the quarter but closed 28 nonperforming stores. Shares were up fractionally on the news.

However, the earnings had a negative impact on Under Armour (UA). Foot Locker said the Steph Curry 2.0 and 2.5 shoes "performed well" during Q3 but the Curry 3.0 shoe which came out on October 27th, "started off a bit slower than the two previous models" but it was still early. Shares of UA fell -4% on the comment.



Hibbett Sports (HIBB) reported a 21% decline in earnings to 66 cents that badly missed estimates for 74 cents. Revenue of $237 million was only fractionally shy of the $237.8 million estimate. They guided for full year earnings of $2.82-$2.88 per share. They blamed the soft quarter on weak apparel sales because of the unseasonably warm weather. Shares fell 11% on the news.


Abercrombie & Fitch (ANF), a serial disappointer, reported earnings of 2 cents compared to estimates for 21 cents and earnings of 48 cents in the year ago quarter. Revenue of $821.7 million missed estimates for $830.6 million. A year ago, they posted $878.57 million in revenue. This was the 15th consecutive quarter of declining sales. Same store sales fell -6% compared to estimates for a -3.9% decline. The company said it expected "challenging" comps for Q4 but slightly better than Q3. Analysts are expecting earnings of $1.07 on revenue of $1.07 billion. Shares fell -14% on the news.


The Buckle (BKE) reported earnings of 48 cents that missed estimates for 51 cents. Revenue of $239.2 million matched estimates. Same store sales imploded with a -15.3% decline. Online sales fell -8.5%. Year to date sales are down -11.8%. It was a miserable report but shares rose 2% for no apparent reason. This looks like a short candidate along with ANF.


Wells Fargo (WFC) was cut to a sell at BMO Capital Markets. They believe the rally after the scandal has been too extreme and they issued a $47 price target with the stock at $53. After the bell, Wells Fargo declared cash dividends on their various preferred shares from $18.75 to as much as $414.06 per share depending on the preferred series. Also after the bell, bank regulators revoked WFC's right to be exempted from some executive compensation rules and said it might attempt to claw back some pay from executives. The bank also has to apply for permission before appointing any new officers. In the period after the scandal, new account openings declined 44% year over year and -27% from September to October. Account closures rose 3%. Based on all the bad news I agree with the BMO call. WFC looks over extended here.


Citigroup (C) was cut to neutral by Macquarie with a $57 price target. The stock closed at $55.45.

Gap Inc (GPS) was cut to sell by Citigroup with a $25 price target, about $6 under the Thursday close at $30.71. The reason was the weak outlook in Thursday's earnings. The stock immediately crashed to $25.50 on the combination of the headlines.


The earnings cycle is coming to a close and there are very few companies reporting next week. Jack in the Box (JACK) on Monday will be a highlight along with Hewlett Packard Enterprise (HPE) on Tuesday. Hewlett was raised to outperform at Raymond James ahead of the earnings. Deere & Co (DE) will report on Wednesday and this could be an interesting event. The stock is very extended given the weak global demand for tractors.


According to Factset, more than 95% of S&P-500 companies have reported earnings for Q3. More than 72% beat their earnings estimates and 55% beat their revenue estimates. The blended earnings growth for Q3 is +3.0% and the first quarter of growth since Q1-2015. At the beginning of the quarter, the consensus was for a -2.2% decline. Companies posted 2.7% revenue growth and that was the first quarter with growth since Q4-2014.

For Q4, 68 companies have issued negative guidance and 32 companies have issued positive guidance. The forward S&P-500 PE is 16.7. Another 13 S&P companies will report earnings this week.

Q4 earnings growth is now expected to be 3.4% with 4.9% revenue growth. For all of 2017 analysts are projecting 11.4% earnings growth and 5.9% revenue growth. This will change significantly from quarter to quarter. For instance, Q1 earnings growth is expected to be 13.4% alone but the strong dollar is likely to knock that back considerably.

The dollar has surged to a 14-year high at $101.21 on the dollar index, which values the dollar against a basket of currencies. This is going to be very damaging to companies that export and sell products overseas. The rising dollar is going to negatively impact commodities and that will eventually be a drag on equities.


The rising dollar along with the Brexit issues in Europe have pushed the Euro to within .02 of a ten-year low. The Euro could reach parity with the dollar in a short period of time if the current trends continue.


Gold prices have collapsed back to $1,200 on the surging dollar and the outlook for a stronger economy. The gotcha in this decline is that Trumps policies could fuel inflation and make gold a good investment in the future.


The yield on the ten-year treasury has spiked nearly 65 basis points over the last three weeks. That is a 35% increase in yield in a very short period of time. This is causing havoc in the mortgage market with 30-year rates now in the 4.25% range. Borrowers are now being rejected because they no longer qualify at the higher rates. Obviously, 4.25% is not high on a relative basis but it is high compared to the 3.25% advertised rate just a month ago.


The equity rally may be ending its run in the short term. As I reported above the analyst downgrades are starting to flow because so many stocks, especially financials, have risen significantly. While reducing a rating on one or two banks is not likely to subdue sentiment, having a dozen analysts reduce ratings on the leaders will have an impact.

Temporarily, the big banks are holding their gains but this is not likely to last. There will be profit taking. I would look at the December 14th Fed announcement as a sell the news event if we have not already seen some significant profit taking before that event.


OPEC has still not made up their collective minds about a potential production agreement and the meeting is the following Wednesday. Crude prices have traded between $43-$46 for the last two weeks with the exception of the one-day dip to $42. U.S. inventories are building again with the addition of 22.1 million barrels over just the last three weeks. I expect volatility to pick up slightly as we get closer to the meeting and the headlines begin to flow.


Last week was a good week for the drilling sector. Despite oil prices hitting $42 the week before, the active rig count rose by +20 to 588. Oil rigs added 19 and gas rigs added 1. The offshore count increased by 2 to 23. Producers have been mixed in their comments about the odds for an OPEC agreement but they are putting rigs to work as though they expect it to happen.


 


 

Markets

There have been multiple studies done covering trading patterns surrounding Thanksgiving week. Each reached a similar conclusion but different reasoning for the pattern. Without going into a lot of detail, it is sufficient to say that the market is typically bullish in Thanksgiving week. Black Friday is normally bullish and it is blamed on the positive consumer sentiment because of the holiday and the fact a lot of investors are not working on Friday so they tend to be on the computer rather than out wandering the malls.

The week after Thanksgiving is random and some blame the direction on the results of the Black Friday-weekend sales. If the retail reports are bullish then it is seen as a positive event for a strong holiday season. If the post weekend reports are negative then sentiment turns negative. There are analysts that are recommending selling retailers on Black Friday in a sell the news trade.

The Stock Trader's Almanac first noted the positive Thanksgiving trend in 1987. For the 35 years prior, the Wednesday before Thanksgiving and the Friday after were up 33 of 35 years. Unfortunately, that trend changed as soon as it was discovered. In the 29 years since 1987, there have been 13 declines and 16 advances. However, since 1987 the Dow has posted gains from the Black Friday close until year-end 22 of 28 times.

The big question is whether post election bounce has pulled all the buying forward and left us with another confused market until 2017.

The S&P had a strong chance of making a new high last week but missed it by a few cents. The record closing high from August is 2,190.15. The opening high on Friday was 2,189.89. That missed the old high by .26 points.

I speculated last week that a retest of that high could either produce a breakout where those shorts still in denial suddenly raced to cover OR it could turn into a double top followed by a decline.

So far, neither has happened but the selling was immediate when the S&P spiked to that Friday high. Fortunately, the decline was minimal and the S&P only lost 5 points.

The setup for next week is bullish. If the S&P could break through that 2,190 level in a normally bullish week, we might get some follow through. Nothing attracts new investors faster than new highs.

Support levels are now 2175, 2165 and 2150.


The Dow ran into resistance from November 2015 at the 18,900 level on Monday and never progressed any further for the rest of the week. With all the Dow earnings behind us, there is only post earnings depression ahead and profit taking from the post election bounce. I would like to think that the dead stop for a week at 18,900 was that consolidation and the trend higher will resume. However, what I wish and what really happens seldom comes to pass.

I am very encouraged that while the Dow failed to move over 18,900 it also failed to decline for the entire week with a progression of higher lows, even though the lows were only microscopically higher. The Dow traded in roughly a 100-point range from around 18,813 to 18,913. Given the +959 point gain the prior week, this tight range with no material profit taking was remarkable. That also gives us the support and resistance levels to watch for next week.



The Nasdaq closed only 6 points below a new high on Thursday at 5,333. Friday's intraday high at 5,346 was a new intraday high by 3 points but it could not hold the gains. Like the S&P, it flirted with the high but was not able to push through.

This tells us there are sellers waiting in both cases. However, like the Dow, the Nasdaq did not decline materially with only a 12 point loss on Friday ahead of weekend event risk. The indexes are poised to move higher but it will require a new sentiment spark to make it happen.



The Nasdaq 100 is still lagging but it did recover somewhat from the post election volatility. The biggest drag on Friday was GOOG and GOOGL with a combined 20-point decline. The sector rotation is still taking its toll but once the profit taking begins in the financials the techs should improve.


I have mixed emotions about next week. It is typically bullish and the indexes did not pull back significantly from resistance. That suggests underlying strength that is more than just a trading bounce. However, we are very overextended and due for a dip.

I mentioned last week that analysts tend to always be looking for the "end" of the trend rather than the extension of the trend. That happens in both bullish and bearish markets when a strong reversal appears. I can remember years ago expecting the end of a sudden bullish reversal every week for months and every week it failed to occur. Because of that memory, I hesitate to predict an end to this rally. The investing paradigm has changed. Bonds are being sold and money is pouring into equities, Since the election more than $35 billion has flowed into equity funds and $10 billion has flowed out of bond funds. Bank of America's Michael Hartnett, said it was the largest equity inflows in two years and the largest bond fund outflows in 3.5 years. He also said it was the largest weekly disparity ever. It is entirely possible we are seeing the long awaited Great Rotation out of bonds and into equities. If that is the case, equities have a long way to go.

On Friday, Tom Lee of Fundstrat was still predicting 2,325 for the year end S&P. He also believes the paradigm has changed. He said more than 21,000 new regulations have been created over the last 8 years that can be wiped out with the stroke of a pen. This will free businesses from hundreds of billions in regulatory costs. He said Washington's regulatory staff has increased by more than 25% at a cost of $108 billion a year to enforce these regulations.

With multiple big name analysts now predicting a continued boom it would be tough for portfolio managers to bet against the trend. Of course, the last 8 days does not make a trend. It would be a good start but we need the S&P and Nasdaq to follow the Dow and Russell to new highs before we can actually call it a trend.

 

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Random Thoughts


The surge in bullish sentiment continues and with good reason. Bullish sentiment has risen more than 23% over the last two weeks. Bearish sentiment declined -7.8% over two weeks and neutral sentiment has declined -15.3%. This survey ended on Wednesday before the Nasdaq made the new intraday high.

Last week results

Prior week results


 

Enter passively and exit aggressively!

Jim Brown

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