The market reminds me of an old Abbott and Costello routine, Which Way Did They Go.

Market Statistics

The Nasdaq continues to make new highs, thanks to the biotech sector today, but the Dow and S&P remain weak. The Dow opened lower, rallied intraday to 19,957 then gave it all back to close lower at 19,855. The S&P was similar with a surge to 2,279 intraday but it gave back -11 points to close flat for the day and barely avoided another decline.

The markets are confused. Traders are confused and anyone leaving their computer for a couple hours is likely to see a complete reversal when they return. The November rally that stalled in December has lost momentum and the clock is ticking on January's event calendar.

With the market closed next Monday, we should see a decline in volume over the next several days and there should be a tendency to take profits ahead of the 3-day weekend when the rest of the world is open for trading.

The economic news was positive this morning with the NFIB Small Business Survey Optimism Index soaring from 98.4 to 105.8 for December. This is the highest level since 2004. More than 50% of respondents said they expected the economy to improve. That is the strongest reading since 2002 and is up from 12% in November and a net of -7% in October.

Those planning on raising capital investments rose from 24% to 29%. Those expecting sales to improve rose from 11% to 31%. This was a very strong report and when coupled with multi year highs in the Consumer Sentiment Index and Consumer Confidence Index it suggests everyone is very excited about 2017. Not to get political here but we did not see similar post election bounces in 2008 and 2012.

Moody's Chart

The Job Openings and Labor Turnover Survey (JOLTS) for November showed openings rose by 3.7% from 5.451 million to 5.522 million. That was a 6.2% increase over November 2015. Hires rose from 5.160 million to 5.219 million, a 3.6% increase. On the negative side, layoffs rose from 1.569 million to 1.637 million. Overall separations for any reason rose from 4.966 million to 5.028 million. Overall, the report was positive and showed available jobs rising. Quitters rose slightly from 3.023 million to 3.064 million and that suggests workers are becoming more confident about finding a better job so they are making changes. Because the report covered November, it was ignored. We have already seen two payroll reports since November.

The wholesale inventory numbers for November surged by 1.0% compared to a 0.05% average for the prior 6 months. Durable and nondurable goods were both up +1.0%. However, sales declined from 1.1% to only 0.4%. Durable goods sales fell from 0.8% to 0.4% and nondurable goods sales declined from 1.3% to 0.4%. If the build in inventories continues in December, it will provide a strong boost to Q4 GDP. The lagging report was ignored.

The calendar for the rest of the week is not exciting with the Producer Price Index on Friday the most important report. Coming on the day before a 3-day weekend it will be ignored.


Valeant Pharmaceuticals (VRX) was back in the news today. The company said it sold three skin care brands to L'Oreal for $1.3 billion. The company also said it was selling its Dendreon cancer business to Sanpower for $820 million. CEO Joseph Papa said the company would use the proceeds to pay down debt and they were targeting a $5 billion reduction over the next 18 months. This would be accomplished through normal cash generation and potentially some additional asset sales. Shares rallied about 10% at the open but faded as the day progressed.


Yahoo (YHOO) said it was changing its name to Altaba once the deal with Verizon is complete. The remaining company will only have a ton of Alibaba shares and its interest in Yahoo Japan as its remaining non-operating assets. The Altaba is a play on "alternate Alibaba" for investors that want to invest in that company and get the Japanese assets as well. Essentially it will become an Alibaba tracking stock.


Barracuda Networks (CUDA) reported earnings of 22 cents compared to estimates for 8 cents. Revenue rose 11% to$88.8 million. Recurring subscription revenues rose 17% to $68.3 million and 77% of its total revenue. Gross billings rose 13% to $100.4 million. Total active subscribers rose 15% to 309,000 with a renewal rate of 90%. RW Baird said CUDA was well on its way to transitioning to a cloud subscription model and growth would be faster in the future compared to the legacy appliance model. Shares rallied sharply at the open but faded as the day progressed.


Dow component Goldman Sachs (GS) was downgraded by Citigroup from neutral to sell. The Citi analyst, Keith Horowitz said Goldman would need an additional $4 billion in revenue above current year forecasts in order to bridge the gap between current and expected return on tangible equity. Citi expects the bank to see "improved trading revenues the rest of 2017 but the path is uncertain and the bar is relatively high." Analysts expect Goldman to have revenues of $32.32 billion. Goldman will report Q4 earnings on Jan 18th and analysts expect $4.80 a share on $7.67 in revenue. Goldman shares were down sharply at the open to $239 but rebounded to close with only a fractional loss. The opening drop was a big drag on the Dow.


Alphabet (GOOGL) is in talks to sell its satellite business to San Francisco based Planet. Alphabet bought the business in 2014 for $500 million when it was known as Skybox Imaging. The division is now known as Terra Bella and Alphabet is reportedly willing to take an equity stake in Planet to get the deal done. Skybox raised $93 million in venture capital to produce small satellites that would take thousands of high-resolution images every day. The images would then be merged together to track changes over time. They launched their first satellite in 2013. Alphabet thought the acquisition would help improve Google Maps. Planet had 63 satellites in orbit at the end of 2016. Planet takes pictures of 50 million square kilometers of earth every day. Google has been scaling back on many of its "moonshot" projects that have been a black hole for cash and failed to generate significant revenue.


WD-40 Co. (WDFC) lost traction after reporting earnings of 82 cents that missed estimates for 87 cents. Revenue was $89.2 million and missing estimates by $7.1 million. They blamed the miss on the strong dollar. Shares slipped on the earnings and fell -$12 on the news.


Fast growing Parsley Energy (PE) said it would acquire 23,000 acres in the Permian for $607 million and fund it with a secondary stock offering. The acreage has existing production of 2,300 boepd. The company said it would offer 20 million shares of common stock with the offering underwritten by Morgan Stanley and BMO Capital. Shares closed at $36.67 but declined to $35 in afterhours because of the announcement. PE has been an active acquirer and has used secondary offerings in the past. The volatility on the top right side of the chart has been prior acquisitions.

The company also said its capex budget for 2017 would be in the range of $750-$900 million with 60% of that going to the Midland Basin. That is up from the $460-$510 million target for 2016. They projected production growth of 60% in 2017 to 57,000-63,000 boepd.


Crude prices collapsed this week with a $2.20 decline on Monday and $1.18 decline today. The problem is exactly what I expected. Field reports suggest some OPEC producers are actually cutting production but the amount of cuts is in doubt. Iraq said it was raising exports from the port of Basra to an all time high in February while exports over the first nine days of January have been near record highs.

Even reports that Saudi Arabia, Russia and Kazakhstan had reduced production failed to support prices. The market ran up on all the OPEC headlines and expectations and now prices are falling on the realization that the overall cuts may not be as large as expected and overshadowed by increases in Libya and Nigeria. Meanwhile rig counts in Canada rose 20% in December to 209 and U.S. rigs counts are expected to move sharply higher in the weeks ahead.

Inventories are very high and the combination of all the global factors do not point to a decline in the near future.


There is no shortage of analysts now calling for a market reversal. One of those was DoubleLine Capital CEO Jeffrey Gundlach. He said today that the post election gains will be reversed and investors should "peel off" their exposure to equities.

Sven Henrich from Northman Trader warned that the S&P was due to pull back to its 25-day moving average and that would represent a 4% or better decline.

Carolyn Boroden said there are eight different Fibonacci time cycles on the Dow and seven of them come due next week with the other coming due this week. She said this kind of setup normally leads to a market reversal 65-75% of the time. She also warned that a convergence of time cycles could also lead to a breakout and a new leg higher. I guess she can claim she was right regardless of what happens.

There is also the earnings cycle causing analysts to worry. Nearly every warning to date has mentioned the strong dollar. I reported above an earnings miss by WD-40 and they blamed it on the strong dollar. This is going to be a recurring theme throughout the cycle and could provide some disappointments for investors.

Markets

The S&P did something rare today. The index closed unchanged for the first time since Jan 3rd, 2008. Prior to that, it was 11 years before the last occurrence. Since 1980, the S&P has closed unchanged only 11 times. While that is interesting, it does not tell us where the market is going tomorrow.

However, the S&P closed -11 points off its intraday high and that is not bullish. The Dow closed exactly 100 points off its intraday high at 19,957. For both of those indexes to give back those intraday gains suggests the sellers are getting anxious.

We saw last week that resistance had moved up steadily from 19,950 to 19,990 but this week it appears to be moving lower. Sellers that were content to dole out their stock in measured increments as the Dow approached 20,000 are no longer sure that is going to happen so they are setting their sell stops lower and lower.

With three Dow components cut to a sell this week, GS, PG and KO, that is going to be an added drag to the Dow. As the index exhibits weakness it could induce other analysts to jump on the bandwagon and begin cutting ratings on other Dow stocks.

Nobody can predict the market direction from day to day but with a three-day weekend ahead and the terror risk from the inauguration the following Friday, there is little to incentivize investors to take new positions at a market top.



The S&P traded well over resistance intraday but then declined to close flat. The index is still within easy distance of a new high but the intraday decline after a drop on Monday as well suggests that resistance level is moving lower. It would not take a very big headline to cause investors still long from November to reconsider their positions.


The Nasdaq Composite closed at a new high thanks to the semiconductors and biotech stocks. The big cap tech stocks were nowhere to be found. The FANG stocks all posted declines and Apple only gained 12 cents. The JP Morgan healthcare conference will be over on Thursday and the biotech surge will fade, if not before then. The conference draws 450 public and private companies and more than 9,000 investors. It was started in 1983 and has consistently provided a sector boost but those daily headlines will disappear on Thursday.

The Nasdaq has posted five days of gains and the biotech sector has been up for 6 days. The Nasdaq rally may be nearing an end. The Nasdaq is over extended and the index is up +181 points from the Dec-30th low. That is a 3.5% gain in six days.



The Russell 2000 closed right on support on Monday and appeared ready to break that 1,355 level and trigger a market decline. Today those same chips and biotechs powered a 1% rebound and relieved that pressure. The Russell should be our market indicator but it remains to be seen which index is going to crack first.


The S&P futures are down -4 as I type this. Volume is going to slow for the rest of the week and the path of least resistance is down but there are no guarantee that is the path. There are a lot of events over the next 8 trading days that could move the market. There is no reason to be overly long at this point in the rally.

The advertising for the End of Year subscription special is over. However, I will leave the link open until midnight Sunday in case anyone else wants to take advantage of the savings.



Enter passively, exit aggressively!

Jim Brown

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