Dogs of all types have fun chasing cars but disaster can strike when they catch one.

Weekly Statistics

Friday Statistics

After six-weeks of chasing Dow 20,000, traders finally captured the prize. Just like the dog that catches a car, now they do not know what to do. I had several dogs when I was a child and two of them eventually caught cars and it was fatal each time. Let's hope the late week dormancy after investors caught 20,000 does not prove fatal as well. Volume very light on Friday with only 5.7 billion shares. The Dow traded in a very narrow roughly 31 point range after 10:AM and the S&P was locked in a four point range. What we have is a standoff. The buyers and sellers are both waiting for the other to make the first move.


The economic news was disappointing but not enough to tank the market. The GDP for Q4 came in at 1.87% growth compared to 3.5% in Q3 and forecasts for 2.4%. That 1.87% rate was just under the 1.91% average growth rate for the entire year when you add in Q1 at 0.83%, Q2 1.41% and Q3 3.5%.

Consumption contributed 1.7%, fixed investments 0.67%, inventories 1.0%, government 0.21%. Net exports subtracted -1.7%. The full year GDP was down from the 2.6% in 2015 and was the slowest growth since 2011.

The difference between Q3 and Q4 came from sales, which rose 3.0% in Q3 but only 0.9% in Q4. That emphasizes how weak the holiday shopping season really was.

It should be noted that 2017 is the 8th year in the current economic expansion and that is the second longest in the nation's history. The internet bubble of the 1990s was the longest at 10-years. The current expansion should continue for at least another year since inflation is low, global growth is rising, interest rates are low, S&P earnings are increasing and odds are good there will be some form of tax cuts that will act as additional stimulus.


Consumer sentiment rose slightly from 98.1 to 98.5 but that was the highest level since January 2004, eclipsing the 11-year high of 98.1 in January 2015. The present conditions component declined slightly from 111.9 to 111.3. The expectations component rose slightly from 89.5 to 90.3. Business expectations rose from 50% favorable to 63%. That was up from only 33% favorable in October. More than 80% of consumers said this was a good time to make major purchases.


The durable goods orders for December registered a -0.4% decline but that was far better than the -4.6% drop in November. Unfortunately, analysts were expecting a 2.6% increase. A sharp drop in defense orders was the reason for the weakness. Excluding transportation orders the headline would have been +0.5% growth and the six consecutive month without a decline. Excluding defense orders that rises to 3.8% and what would have been a good month. By themselves defense orders declined -33.4% and that skewed the entire number series. Offsetting that was a 42.2% rise in aircraft orders. Overall order growth has been very volatile over the last year.

Moody's Chart

The economic calendar for next week is headlined by the FOMC rate decision and the payroll reports. Getting lost in the noise is the ISM Manufacturing and ISM Services, which are also important.

The Fed is not expected to change rates but they will probably point to March as a potential hike. They have indicated the potential for three hikes in 2017 and as long as the market is stable they would probably rather get started sooner rather than later.

The job market is expected to have improved slightly to add 167,500 jobs compared to the 154,500 average between the ADP and Nonfarm reports in December. I am always cautious about the January report. There are a lot of temporary workers laid off in January. The seasonal adjustments are supposed to take that into account but sometimes reality rears its ugly head.

This is also the report where they do the benchmark adjustments for the prior year. That means the numbers we have been reporting can change significantly now that they actually have some data rather than just guesswork.

The ISM Manufacturing Index is expected to decline slightly. It appears analysts are unsure of the direction of activity because of the recent volatility in the regional reports.

On Monday night, the Bank of Japan meets to determine monetary policy. At the November meeting, the BOJ said it would buy an unlimited amount of Japanese government bonds (JGBs) at a fixed price with terms between 1-5 years. This was an effort to slow the rise in interest rates. Japanese rates were rising sharply on expectations for President Trump's administration to lift both growth and inflation. Now analysts are waiting to see if the bank will back off that "unlimited" authorization.


There were not many earnings on Friday but there were some market movers. General Dynamics (GD) reported a 9% increase in earnings to $2.62 compared to estimates for $2.54 per share. Revenue of $8.233 billion missed estimates for $8.258 billion. As of year-end, the company had a backlog of $59.8 billion. Shares spiked $8 on the news. Later in the day, Trump took aim at GD and Huntington Ingalls (HII) saying he was going to cut the costs of the F35 and the new submarines proposed by the Navy.


American Airlines (AAL) reported adjusted earnings of 92 cents that matched analyst estimates. Revenue of $9.79 billion narrowly beat estimates for $9.75 billion. Shares fell -5% after the company guided for higher costs in Q1 with sharp increases in fuel prices and labor costs. They predicted nonfuel costs to rise 10% to 12% compared to analyst estimates for 9%. Despite the rising costs, American authorized another $2 billion stock buyback program.


Colgate (CL) reported earnings of 75 cents that matched estimates. Revenue of $3.721 billion declined -4.5% and missed estimates for $3.844 billion. The company had increased prices 2.5% but the strong dollar removed 1.5% of sales and unit volume overseas declined by 5.5%. Shares fell 5.2% on the news.


Honeywell (HON) reported adjusted earnings of $1.74 and revenue of $9.99 billion. The company saw a -13.4% decline in Q4 because of weakness in its aerospace business. Analysts were expecting $1.74 and $10.15 billion. For the current quarter, they guided for a 1% to 2% decline in revenue because of divestitures and acquisitions. They forecast earnings growth of 1% to 3%. They did not give dollar amounts. Analysts are expecting $1.62 and $9.44 billion. Shares were volatile after the report but ended the day with a minor gain.


GoDaddy (GDDY) preannounced expected Q4 revenue of $486 million. Their prior guidance was $483-$487 million. The analyst estimate was $485 million. Shares were fractionally positive.

Gentex (GNTX) warned that 2017 revenue would be in the range of $1.78-$1.85 billion. Analysts were expecting $1.83 billion. Shares dropped about 10% at the open but recovered to close down only 2%.


AbbVie (ABBV) guided for full year earnings of $5.44 to $5.54 per share. Analysts were expecting $5.48. Shares declined -2%.

Air Products (APD) warned that earnings would be in the range of $1.30 to $1.40 and analysts were expecting $1.55. Full year guidance was $6.00 to $6.25 and consensus was $6.38. Shares fell -5% on the news.


Chevron (CVX) reported earnings of 22 cents compared to estimates for 64 cents. Earnings were not as bad as the headline suggests. There was a charge of $872 million in the quarter and removing that puts the adjusted number closer to 68 cents. Revenue of $31.497 billion missed estimates for $32.605 billion. Daily production remained almost unchanged at 2.669 million Boepd. Chevron has a lot of new production coming online over the next two years where they already spent the development money and now they are just getting everything connected and in operation. This will provide a significant boost to future earnings. The company reaffirmed its $1.08 dividend per quarter. Shares fell $2.76 on the news.


There was a flurry of tech earnings on Thursday after the bell and shares reacted on Friday. Some moved in a direction you might not have expected.

Intel warned Q1 earnings would be in the range of 51-61 cents on revenue of $14.3 to $15.3 billion. Analysts were expecting 62 cents on revenue of $14.52 billion. For the full year, Intel expects $2.66-$2.94 and $59.4 billion. Forecasts were $2.83 and $61.13 billion. You would have expected Intel shares to decline but they gained 1% for the day. Intel is facing resistance at $38.25.


Alphabet (GOOGL) reported earnings of $9.36 compared to estimates for $9.64. Revenue of $26.06 billion beat estimates for $25.26 billion. Shares fell $12 on the news.


Juniper (JNPR) reported earnings of 66 cents compared to estimates for 63 cents. Revenue of $1.39 billion beat estimates for $1.36 billion. Unfortunately, they warned Q1 earnings would be in the range of 38-44 cents and analysts were expecting 46 cents. Shares fell -4% but that was after a $2 bounce from the lows.


Microsoft (MSFT) was a big post earnings gainer. Everything appears to be going well for the company since CEO Satya Nadella took control. Their Azure cloud product is said to be in second place behind Amazon and gaining speed. Microsoft posted earnings of 84 cents that beat estimates for 79 cents. Revenue of $26.1 billion also beat estimates. The company raised guidance. Shares hit a new high and were instrumental in keeping the Dow and Nasdaq from a bigger decline. On a side note, Citigroup upgraded the company from sell to neutral. Sell? Really?


Other post earnings results include:

BDX +$4.19
VMW +$2.94
PYPL -$1.23
SBUX -$2.34
LRCX +$3.91
WYNN +$7.50

Caterpillar (CAT) warned earnings would be around $2.90 on revenue of $36-$39 billion. Analysts were expecting $3.03 on revenue of $37.87 billion. Shares gained almost 2%.


The earnings calendar for next week has a few high profile companies. Apple on Monday, MasterCard and UPS on Tuesday, Facebook on Wednesday and Amazon, Amgen, Chipotle on Thursday. There are four Dow components reporting including AAPL, XOM, MRK and Visa. After this week there will only be six Dow components left to report. Those are DIS, KO, HD, CSCO, WMT and NKE.


More than 34% of the S&P 500 companies have reported earnings. More than 65% have beaten earnings estimates but only 52% have beaten on revenue. The blended earnings growth rate for Q4 is up to 4.2% compared to the forecast of 3.1% as of December 31st. Revenue growth is now 4.7% which is slightly less than the 4.9% expectation at the end of the quarter. According to FactSet, 17 companies have issued negative guidance and 16 have issued positive guidance. Next week 103 S&P companies will report earnings. Earnings are expected to continue to increase for the rest of the year. For Q1 earnings growth is expected to be 12.8%, Q2 10.3% and for all of 2017 11.6% growth.

The party is nearly over for Sears (SHLD). Shares were down -22% for the week and the outlook is not good. They confirmed late Friday they had laid off a significant number of full time workers across all 800 of their stores. They are not laying off temporary help. They are cutting full time workers that have been there for a long time. These are the high dollar salaried positions with benefits. They laid off assistant managers, department managers, backroom managers and pricing managers. Message boards for Sears workers claim the stores only have a skeleton crew left and too few workers to actually operate the stores.

Merchandise is not even being unpacked. They have removed the shelves in many stores and they are just setting pallets of merchandise in the isles. These are pictures of a Kmart store taken by an employee and given to Business Insider.



Sears reported a -12% decline in same store sales over the holiday shopping season. Moody's and Fitch Ratings both downgraded Sears to a lower level of junk last week saying the $1.8 billion cash burn for 2017 is likely to force a default event. Most analysts believe bankruptcy is inevitable.


Crude prices continue to hover in the $52-$54 range thanks to a constant stream of headlines from OPEC about how successful the production cuts have been. Now that January is nearly over, we will begin to get the actual production data and be able to judge those headlines for ourselves. Most analysts believe oil prices will move lower before they move higher.


The active rig count is exploding. After adding 35 rigs the prior week, the U.S. added another 18 last week. Production of 8.96 million bpd is nearing the 9 million mark but still down from the 9.61 mbpd on June 5th of 2015. With this accelerated rig activation and oil prices holding over $50 we could see a new production high by the end of 2017. Producers are ramping up completions of previously drilled but uncompleted wells. The IEA said as of September there were 4,117 unfracked wells. This is the low hanging fruit for producers as they attempt to ramp up production. When prices were low, producers would drill the wells to secure the acreage but then remove the rig and not spend the additional money to complete them and turn on the production. Since the hard part is already done, they can put them on production fairly quickly. The frackers are going to be very busy over the coming months.


 


 

Markets

Happy New Year! Saturday kicks off the 15-day Spring Festival in China that follows the Lunar New Year. From the low volume on Friday, you would have thought it was New Years Eve in the USA.

I really think we are suffering from that dog/car analogy I mentioned earlier. Investors have been focused on the Dow 20,000 level for the last six weeks and now that it has been broken, nobody knows what to do. There is no higher target. People are talking about 23,000 but that is too far away to energize traders today. If we did get a corporate tax cut to 15%, we could get there in a hurry on earnings growth alone, but nobody really expects that to happen in the near future or to actually be 15%. We are probably a couple months away from the appearance of an actual tax-restructuring package and a couple more months at least before all the smoke clears from the political war that will develop. In reality, nothing is likely to actually happen to the rates until 2018. The prospect of a tax cut is the main driver of the market today and investors may be coming to the realization that it is a long way off.

The sellers have no conviction. Buyers are not chasing prices but they are buying the dips. The fact we have not seen any "material" dip is bullish but just like thunderstorms in the summer, we know there will be one eventually.

The very low intraday ranges on the Dow and S&P have pushed the Volatility Index to 30-month lows. Actually, it is less than a point from 24-year lows. We know from experience that volatility will not stay at this level and once it reverses, it can move very rapidly. When the VIX is high, it is time to buy. When the VIX is low, it is time to go. The weekly chart is to show the prior low and it does not show the rebounds as clearly since they are all squeezed together. Over the last ten years, there have been a lot of volatility events. The daily chart shows the events about every 2-3 months. It has been three-months since we had one.



If there is a target after Dow 20K, it is S&P 2,300. When the index neared that level on Wednesday there was a dead stop. The high for the day was 2,299.55. Thursday's high was 2,300.99 and Friday's high was 2,299.02. There is strong resistance at that level and that may be the next threshold to watch. The S&P has short-term risk back to 2,260 and longer-term risk to 2,230.


On the Dow, the winners offset the sinners and the index closed only fractionally lower on Friday. Gains from CAT, JNJ and MSFT offset the losses in GS and CVX. With only four Dow components reporting earnings this week, we are not likely to see the single stock volatility except for Apple on Wednesday. They report after the close on Tuesday so the reaction will be on Wednesday. The other three stocks, XOM, V, MRK are not normally market movers.

The Dow has short-term risk back to 19,750 which is just a little more than a 300-point decline. Unless market sentiment changes significantly, I do not see that level breaking but anything is always possible.



The Nasdaq big caps have caught fire and the Nasdaq 100 is in rocket mode. The next measurable resistance is well above at 5,500 but I seriously doubt we will get there without a couple pauses to consolidate and take profits. The index is up nearly 10% since the election. Most years do not gain 10%. You can see from the recent spike it is totally unsupported but that does not mean it cannot go higher.


The Nasdaq Composite is not as overheated as the Nasdaq 100. The index broke over uptrend resistance on Wednesday and is using that as support. The biotech index actually posted a decent gain on Friday and that helped push the composite index higher.

With the majority of the Nasdaq big caps already reported, we are facing a couple weeks of post earnings depression in those stocks. Apple, Facebook and Amazon are the last three majors to report this week and then we could see a period of restructuring where traders leave the stocks that have reported and look for something else that is making a move.

Support on the composite index is still 5,530.



The Russell 2000 is the straggler. It has failed to break through or even test the prior resistance highs at 1,390 and fell back on Friday below prior short-term resistance at 1,375. The Russell benefitted from the two-day short squeeze but there was no follow through. If the Russell drifts back below 1,350 we could see it lead the big cap indexes lower.


It is hard to pick a direction for next week. The complete lack of sellers and the quick buying on the dips is keeping them shallow. This would suggest we are still in a bullish mode. Technically, we are still overextended but nobody seems to care. We need to remain in trend following mode. We follow the trend until it ends. We will know that it ended when the dips begin to make lower lows. I would definitely maintain your stops as the earnings cycle plays out. Once the cycle starts to fade, the market typically fades with it as the post earnings depression takes hold.



Random Thoughts


I am shocked that the bullish sentiment declined after the Dow broke through 20K on Wednesday and the top four indexes all set new highs. That should have caused a flood of bullish sentiment. However, as I mentioned earlier, once a target is hit, there is nothing left to aim at and traders lose interest. Note that they did not shift to bearish but to neutral.

Last week results


News broke this weekend that North Korea had restarted a nuclear reactor that produces plutonium that can be used for weapons. The reactor had been dormant since 2015 as the spent fuel rods were removed for reprocessing to produce that plutonium. Washington's 38 North Korea monitoring project said the country had enough uranium and plutonium to produce about 20 bombs at the end of 2016. They are expected to test a new ICBM any day now that NK claims could reach the USA. This will be a new problem for President Trump. He has said these NK events will not happen on his watch. It will be interesting to see what he does about it. Secretary of Defense Mattis is scheduled to visit Japan and South Korea next week so shared concerns about NK will be the topic of conversation.


The Dow broke 20,000. Check. However, it took 28 days for the index to move from 19,900 to 20,000. That is the longest amount of time for the last 100 points in any of the prior 1,000 point moves since 10,000. It only took the Dow 64 days to move from 19,000 to 20,000. That is the second fastest 1,000 point gain in Dow history.

There was significant resistance to that big round number at 20K and it may not be gone. The short squeeze on Tue/Wed simply overcame the existing sellers but it may not have erased the overall resistance to this new level. Next week will be interesting.



 

Enter passively and exit aggressively!

Jim Brown

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"A correction takes place to determine which investments are the tennis balls and which are the eggs. You want to own the things that bounce, as in tennis balls, and not the eggs."

William Berger