All but one of the broad market indexes closed at a new high on Friday after two days of breakout gains.

Weekly Statistics

Friday Statistics

It is official. We now have a breakout in progress. The Dow, S&P-100, S&P-400, S&P-500, Nasdaq Composite, Nasdaq 100, NYSE Composite, Vanguard TSMI (VTI), Russell 1000, 2000 and 3000 all closed at new highs. Yes, even the Russell 2000 by less than 1 point. The only broad market index not joining the party was the S&P-600 Small Cap Index.

Friday's continued breakout was confirmation of the new high breakout from Thursday. The major indexes actually closed near their highs and it was not a short squeeze. There was a minor gap higher at the open but the buying was steady all day.

The resistance level at 2,300 on the S&P has now been broken with a close on Friday at 2,316. Both Nasdaq indexes closed well over their respective round number resistance levels at 5,700 and 5,200. It will be hard for the bears to recover from this mauling.


The motive power supposedly came from a comment by President Trump on Thursday that a "phenomenal tax cut" would be unveiled very shortly. Former Goldman Sachs president Gary Cohn is leading the tax reform effort and confirmed it would be released within weeks. The leaked details claim a cut in the corporate rate to 20% on U.S. income and imports with no tax on exports or income earned overseas. Reportedly, U.S. companies have accumulated $2.6 trillion in banks overseas while they waited for the next repatriation holiday. None of these details are carved in stone and may or may not make it through into the final plan or through Congress. However, there is a tax cut coming and that is what juiced the market.

On the economic front, the Consumer Sentiment for February declined slightly from 98.5 to 95.7. The present conditions component declined minutely from 111.3 to 111.2 and the expectations component fell from 90.3 to 85.7 for the majority of the headline decline.

This was the first decline in the headline number in four months. We should not read too much into the decline. Consumers have gotten their credit card bills from the holidays and the higher minimum payments always weigh on sentiment in February. Sixty-four percent of respondents said their financial conditions were better than five years ago, up from 61% last month.


Import prices for January rose 0.4% after a 0.5% rise in December. However, excluding oil, prices declined -0.2%. Excluding autos prices declined -0.3%. The rise in the dollar makes imports cheaper. By comparison oil import prices rose 7.9% in December thanks to the OPEC production cut headlines.

The prices for agricultural foods, feeds and beverages fell -1.9% in January. That was the same as the drop in December. Nonagricultural prices rose 1.0%. This report was ignored.

If a border adjustment tax is imposed or a tariff arrangement with Mexico, our import prices are going to shoot up rather quickly. For instance, we import about $300 billion in goods from Mexico annually. If there were just a 5% tax on those imports, it would mean the cost of those goods would rise by $15 billion a year. There have been numbers tossed around as high as 20%.

The calendar last week was devoid of any material economic reports. That is not the case this week. There is a flurry of economics with a surge of Fedspeak interspersed. Janet Yellen will give her semi-annual testimony on the economy to the Senate on Tuesday and House on Wednesday. Those are always flash points for the market because you never know what direction the questions will take and what answer will be given. In her early days as Fed Chairwoman, she did suffer from foot in mouth disease on more than one occasion. In recent appearances, she has been more cautious.

The Philly Fed Manufacturing Survey on Thursday is the most important regional report for the month. On Wednesday, the Retail Sales for January is probably the next most important for the week.

The Fed speakers are all clustered together on Tue/Wed so the headlines will flow but it will be over quickly.


Stock news on Friday was very sparse. With the earnings cycle winding down there were very few reporters that most people would recognize.

Engineering company Fluor (FLR) reported earnings of 82 cents. That is four cents above estimates. They will take a charge of $45 million or 32 cents a share on an IRS rule that limits the deductibility of foreign currency translation losses on some foreign subsidiaries. They expect to report actual earnings on Feb-17th. Shares were up fractionally.


Interpublic Group (IPG) reported earnings of 75 cents that beat estimates by 8 cents. Revenue rose +3% to $2.26 billion and matched analyst estimates. Interpublic is an advertising agency and they said ad sales rose 3.3% in the U.S. and 7.8% in international markets. The company announced a $300 million share repurchase program and raised their dividend by 20% to 18 cents. The dividend will be paid on March 15th to holders on March 1st. Shares spiked over $25 at the open but faded quickly.


Insurer Aon Plc (AON) reported earnings of $2.56 compared to estimates for $2.49. Revenue of $3.32 billion missed estimates for $3.4 billion. Free cash flow rose 22% for the year to $2.1 billion. Shares spiked at the open but faded quickly.


CBRE Group (CBG) reported earnings of 93 cents that beat estimates for 79 cents. Revenue of $3.82 billion rose 6% but missed estimates for $3.89 billion. The company guided for full year earnings of $2.35 to $2.45. Shares rallied 8% on the news.


Stock movement was mixed for companies reporting on Thursday evening. Expedia (EXPE) reported earnings of $1.17 that missed estimates by 20 cents. Revenue of $2.1 billion rose 23% but barely beat estimates for $2.068 billion. Gross bookings rose 8% or $1.2 billion to $16.1 billion. Analysts thought guidance was conservative and shares were volatile but closed only fractionally lower.


Nvidia (NVDA) reported earnings of 99 cents compared to estimates for 83 cents. Revenue of $2.17 billion also beat estimates for $2.11 billion. It was a record quarter for Nvidia. The company guided for Q1 revenue of $1.9 billion compared to estimates for $1.88 billion. Nvidia also said margins would decline in Q1. The company returned $1 billion to shareholders in 2016. They authorized a dividend of 14 cents to be paid March 17th to holders on Feb 24th.

The CEO bragged on Nvidia's inroads to AI, machine learning, cloud computing, gaming, autonomous vehicles, early cancer detection and weather prediction. "The era of AI is upon us." I am ok with that as long as they do not change their name to SkyNet.

Shares declined on the soft guidance but the stock has seen giant gains over the last year. It is due for a rest. They are kicking Intel's butt in new technology and while $120 is the current resistance, I have no doubt they will be higher in the coming months. I would be thrilled to have another chance to buy this stock at $100. Nvidia is the new technology revolution.


Activision (ATVI) reported earnings of 92 cents compared to estimates for 73 cents. Revenue rose 49% to $2.45 billion and beat estimates for $2.36 billion. The company raised its dividend by 15% to 30 cents and will buy back $1 billion in stock over the next 12 months. They also committed to repay $500 million in debt of which $139 million has already been paid in 2017.

Guidance was soft. The company guided for Q1 revenue of $1.05 billion and earnings of 18 cents. Analysts were expecting $1.196 billion and 31 cents. For the full year, they guided for $6.3 billion and $1.85 and analysts were expecting $6.68 billion and $2.03.

The CEO said the company had record revenue and earnings for both the quarter and the year. They have 447 million monthly active users. Customers spent 43 billion hours playing and watching Activision Blizzard content. Shares exploded higher with a 19% gain.

Think about that for a minute. Over 43 billion hours in one quarter playing games. I wonder how many of those hours were played by unemployed persons. That would be an interesting statistic.


NCR Corp (NCR) reported earnings of $1.07 compared to estimates for $1.03. Revenue of $1.8 billion beat estimates for $1.74 billion. For the current quarter, they expect earnings of 43 to 48 cents and revenue of $1.45 to $1.47 billion. This was their 14th consecutive quarterly earnings beat. For the full year, they guided for $6.6 to $6.72 billion and $3.25-$3.35 for earnings. Analysts were expecting $6.55 billion and $3.27 for earnings. Shares spiked 6% on the news but faded into the close.


Twitter (TWTR) reported a loss of 3 cents that beat estimates for a loss of 11 cents. Revenue of $717.2 million missed estimates for $737.7 million. The company only reported 4% user growth to 319 million monthly active users. Daily active users rose 11% probably due to Trump's 20 million followers.

The stock is in freefall and the odds are good the prior support at $14 is not going to hold this time around.


The earnings calendar for next week has only one Dow component and that is Cisco Systems on Wednesday. There are 54 S&P companies reporting. As you can see, the names in yellow are a lot less important than in prior weeks. The next two weeks are the small cap reporting period. The big caps are mostly over and the small caps will be generating the headlines starting next week.


According to FactSet 71% of S&P companies have reported with 67% beating EPS estimates and 52% beating revenue estimates. The blended earnings growth rate rose from 4.6% last week to 5.0% as of Friday. On December 31st, the estimate was for 3.1% earnings growth. For Q1, 57 companies have issued negative guidance and 25 have issued positive guidance.

For Q1 analysts are expecting 9.9% earnings growth and 7.5% revenue growth. For Q2 the numbers are 9.1% earnings growth and 5.5% revenue growth. For all of 2017 the forecast is 10.3% earnings growth and 5.6% revenue growth.

According to FactSet the most mentioned item on the 317 conference calls was tax policy on 85 calls, deregulation on 63 calls, trade policy 58, health care 25, infrastructure/stimulus 23, defense 11, energy 10 and immigration 6. Given the recent uproar over the travel ban, I would have expected immigration to be higher.

Intel (INTC) held an analyst day on Thursday and the company is probably wishing they had cancelled it. Intel said its three main areas of investment are memory chips, autonomous vehicles and wireless 5G chips. The company also said the secular decline in personal computer usage was a headwind to growth. Credit Suisse said Intel has a "spotty" track record when investing in new areas.

Intel sees a server contraction for the foreseeable future with a 5% decline per year through 2021. The reason was the decline in company operated server farms in favor of moving to the cloud. The spokesperson said the server decline will lead to smaller operating margins.

Analysts read through the chatter on why Intel was sticking with 14 nanometer (NM) products in 2017 instead of going with their new 10 nm process. Apparently, the yield and the margins on the 10 nm process are holding back full-scale production. Estimates were for full production in Q4 and too late for the back to school and holiday shopping seasons. The slowdown in technology implementation by Intel looks like an opportunity for AMD to steal back some market share with lower priced high performance PC/Server chips.

Intel shares broke support at $36.25 and declined sharply on the analyst downgrades, post meeting.


Sears Holdings (SHLD) spiked 39% at the open after the company pulled a rabbit out of their press release hat. The stock closed at a 14-year low on Thursday at $5.53 and gapped up to $7.70 on short covering at the open. The Sears press release was large and they promised multiple things, most of which were simply restatements of prior announcements.

They announced a restructuring in order to save $1 billion annually. They are going to combine the Kmart and Sears administrative offices. They are closing 150 stores. They have initiated a plan to sell $1 billion in real estate based on recommendations by Eastdil. They are going with computer analytics to plan inventory purchases by store and reduce unwanted inventory. They also took down the rest of their unused $500 million bank credit line while their total $1.971 billion revolving credit line was cut back to $1.5 billion.

Same store sales declined more than 10.3% in the holiday shopping period but they guided for revenue of $6.1 billion compared to analyst estimates for $5.68 billion. Despite the expected revenue beat, they will still post a loss between $535 million and $635 million.

Most of the analysts were astounded by the 39% spike in the shares since much of the press release was a repeat and the rest was vague, wishful thinking ideas.


The financial sector was up on Friday after the Fed's toughest watchdog on the sector resigned. Federal Reserve Governor Daniel Tarullo, announced he will retire on April 5th. He started his term the week President Obama took office. His term was not due to expire until 2022. He was a principal driver of the new rules and regulations to govern the sector since the financial crisis. Analysts believe that his replacement will more than likely favor deregulation as proposed by President Trump. Neil Dutta head of U.S. economics at Renaissance Macro Research said, "Buy banks. The dogs are running without a leash."

The Financial select SPDR (XLF) was up sharply on the news but faded late in the day.


Crude oil had a volatile week with a decline from $54 to $51.50 on news the U.S. added more than 13 million barrels to inventories last week. Crude immediately rebounded on the expectations for tax cuts and a stronger economy that lifted the broader market. Crude closed right back at $54 where it started the week and that was despite a rising dollar that closed at a two week high.


Active rigs rose +12 to 741 with 8 new oil rigs and 4 new gas rigs. That is the highest number of active rigs since November 4th 2015. The pace of additions is beginning to slow but that is still an addition of 82 rigs over the last four weeks. Producers are clearly expecting oil prices to remain over $50.


 


 

Markets

I scanned the Dow 30 charts because I was curious how many of the companies were at new highs. I was actually surprised that 16 of the Dow components were either at or relatively close to new 52-week highs. Those at the highs were CAT, BA, IBM, GS, HD, UTX, DD, V, UNH, AXP, CSCO, MSFT, JPM, DIS, MRK and AAPL. That suggests the rally is actually more broad based that it appeared on the surface.

The S&P finally broke over the 2,300 level convincingly and held its gains. There was only a two-point fade at the close to end at 2,316. If the S&P can hold those gains and even expand on them next week, we could be off to the races. The problem is the uptrend resistance at almost exactly 2,316. This is where the tax cut and deregulation enthusiasm runs head first into the reality of resistance. The most likely path is a fall back to 2,300 as support and then a new surge to a new high. On a positive note both Nasdaq indexes have already surpassed that same uptrend resistance.


The Dow managed to close 169 points over prior resistance of 20,100. Doing this on a Friday afternoon without any material selling at the close is very positive. The Dow actually closed just slightly above uptrend resistance from April while the S&P closed just below that level. ANY further gains by either/both indexes should trigger significant short covering and price chasing by portfolio managers.



Both Nasdaq indexes have broken over uptrend resistance and well over their respective round number resistance levels at 5,700 and 5,200. The winners list below is a good balance of all types of tech instead of just the big caps or the FAANG stocks. This is a broad market rally in the Nasdaq.




The Russell 2000 is still the laggard. The index did close at a new high by less than 1 point but in reality, it was a dead stop at the 1,388 resistance level. If the small caps were to catch fire and begin making new highs like the Nasdaq, it would be a race to buy stocks. Fence sitters would be coming off the sidelines in droves to keep from being left behind. A move over 1,400 would be very bullish for the broader market.


I am very encouraged to see an actual trend that is not sideways. With the earnings cycle nearly over for the big cap indexes, there will be less to motivate buyers. If the potential for a tax cut and deregulation is powering stocks as analysts believe then the slowing earnings may not be a problem.

It is very critical that the markets hold their gains and we do not slip back as we did the prior week. That decline to 19,800 on the Dow has been erased but it caused a two-week pause in the rally. In late January, there was also a two-week pause. I want to be done with these consolidation pauses. Let the markets rise for a full week so the bulls can develop some conviction and the sellers become converts.



Random Thoughts


The markets were choppy early in the week and this survey closes on Wednesday. The bears lost a lot of voters last week but only a few have made the full conversion to bullish. The other half decided to pause on the sidelines before diving in the rally river.

Last week results


Edward Snowden may be returning to the U.S. in the near future. Multiple sources claim Russia is done milking him for everything he knows and is considering sending him to the U.S. as a gift to the Trump administration. Putin is clearly trying to befriend the new president and Trump has called Snowden a traitor and a spy. The plan is reportedly to "curry favor" with President Trump. Russia is denying this rumor but it has sprung up from several sources. By keeping Snowden that is just one more point of contention between the U.S. and Russia and one that is easily rectified at no cost or effort to Russia.

If Snowden is returned to the U.S. it will be the end of his cushy lifestyle and he will spend the rest of his life in a maximum security prison. There have been calls to have him executed for treason. Also over one million people signed a petition to President Obama to grant him a pardon. Obama released Private Bradley (Chelsea) Manning instead. Manning was convicted of turning over hundreds of thousands of classified documents to WikiLeaks.

Snowden


Venezuela's food crisis has gotten so bad people are killing pink flamingos, anteaters, monkeys and other protected animals to stave off hunger. Zulia University reported finding more than 20 flamingo remains with their breast and torso removed. Citizens are transitioning from eating the pigeons, lizards, cats, dogs, horses, donkeys and anything else they could catch or steal. The new wild animal diet is now called the "Maduro Diet" after the current dictator Nicolas Maduro, who assumed power after Hugo Chavez died.

Inflation rose 700% in 2016 and is expected to be worse in 2017. The lack of money and price controls prevents anyone from importing food. Corporations are not going to import a chicken for $3 if they have to sell it at the government mandated price of $2. Currently 2 pounds of flour costs $2 on the black market. That is very expensive in Venezuela. When the average minimum wage in Venezuela is currently $11 a month, there is no money to buy groceries even if those groceries actually existed.

The protests against the government are becoming bloodier by the week. Troops are loyal to Maduro because he can feed them. If he were overthrown, chaos would accelerate even worse than what we see today.

The country is already a failed nation and is approaching a nationwide disaster as people slowly starve to death, literally. Any outside aid is seized by the government or by angry mobs as soon as it arrives. I seriously doubt Maduro will last the year.


 

Enter passively and exit aggressively!

Jim Brown

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"To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit."

John Templeton


 

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