After weeks of big cap stocks leading the charge higher and small caps declining, that reversed last week.

Weekly Statistics

Friday Statistics

The small cap indexes were sharply higher on Friday after three days of gains and they posted the best performance of the week. If this continues, it will be bullish for the overall market. The S&P-600 gained 5 points and closed over short-term resistance after testing support three times over the last two weeks. The small cap index gained 2.3% for the week. This is very bullish if it continues but there is solid resistance at 860 so it will not be an easy task. The Russell 2000 also gained 5 points on Friday and 1.9% for the week.


For a quadruple witching option expiration, Friday was positively boring. Over 9.6 billion shares traded and the major indexes closed basically flat. Typically, the fireworks are seen earlier in the week but the Fed decision probably kept trading in check. Monday after an expiration is normally lackluster as well because of option settlements.

The economic reports did not generate any market excitement with traders focused on the option expiration. The Consumer Sentiment for March rebounded from 96.3 to 97.6. The February number had declined from the 98.5 high in January.

The present conditions component rose from 111.5 to 114.5 and the highest level since the year 2000. The expectations component rose only slightly from 86.5 to 86.7. The rising jobs numbers and decade lows on the weekly jobless claims are helping to support sentiment.


Industrial Production for February was flat at zero after a -0.1% decline in January and +0.6% gain in December. Durable goods rose +0.6% thanks to a +0.8% surge in motor vehicles and parts. Production of high tech equipment rose only +0.2%. Nondurable goods rose +0.4%. Mining/energy rose 2.7% as the oil fields go back to work. The report was ignored.

Now that the Fed is behind us until early May, the talk is turning to the GDP. The real time estimates from the Atlanta Fed have declined to +0.9% growth for Q1, down from the 3.4% forecast at the beginning of February. This is not a good sign but it should keep the Fed on a "gradual" path of rate hikes for the rest of 2017.


The Fed is expected to hike rates twice more in 2017 and the next hike will not be at the May meeting unless something changes quickly. The Fed futures are only predicting a 6% chance of a rate hike at that meeting. The June meeting is the next target for a hike and already has a 54% chance according to the futures.

You may remember that three weeks ago, the outlook for a hike in March was only about 20%. Through Fedspeak by the various Fed officials and even Yellen herself, that expectation rapidly advanced to 94% just before the meeting. They managed the expectations in the direction they wanted. That means we can never completely discount a meeting as "not a live meeting." The outlook can change very quickly.



We have a very light economic calendar for next week. The most important event will be Yellen's speech on Thursday. Now that the March hike is behind them, she will need to begin posturing for the next hike, but the clues will be miniscule. With 10 other Fed speeches next week there will be plenty of Fedspeak to decipher.

The home sales on Wed/Thr will be a highlight since the warmer than normal weather probably got consumers off the couch and out into the market. With interest rates rising there will be some incentive to make a move soon before the next Fed hike.

The event I am looking forward to the most is the Vernal Equinox otherwise known as the arrival of spring at 4:30 PM EDT on Monday. I am ready for the cold weather, what little we had, to change into springtime temperatures.


In stock news, Tiffany (TIF) reported earnings of $1.45 that beat estimates for $1.37. Revenue of $1.23 billion just barely beat estimates for $1.22 billion. The company guided for revenue to increase by low single digit percentage for 2017. They opened 11 stores in fiscal 2016 to bring their total to 313 stores. Sales were boosted in Japan by brand exposure on a popular TV show and a strong yen. Sales also rose in China. Sales of items under $500 were stronger than normal and the company is going to increase offerings in that range. They said disruptions around Trump tower in Q4 caused sales at that store to decline 7%. Shares rallied 3% to a 20-month high on the news.


Valeant Pharmaceuticals (VRX) found a friend in activist hedge fund ValueAct Capital. How much of a friend remains to be seen. The company boosted its stake in VRX from 4.4% to 5.2%, an addition of 3 million shares making it the second largest shareholder. Paulson & Co owns 5.68% and is the largest shareholder now that Bill Ackman's Pershing Square fund has dumped their holdings. Shares rallied at the open but closed fractionally lower. I wonder how many investors are waiting until they see a rebound appear, thinking there is a double here easy if the company makes the right moves? The problem for me is the ton of legal issues, probes by regulators, class action suits and $30 billion in debt when the company's market cap is only $4 billion.


Bernstein initiated coverage on Netflix (NFLX) with a buy rating and $178 price target. The analyst, Todd Juenger, said "Netflix is a polarizing stock. You either believe in the ten-year story or you don't. We believe." Juenger said subscription video on demand or SVOD will become the dominant business model for delivering premium content and Netflix is the "anchor" service. Because of the extremely large global market, he expects Netflix subscribers to triple from the 99 million they have today. He said the current enterprise value of $62 billion is "absurdly low compared to future value." They are using the Amazon model of foregoing profits now to build a massive subscriber base. He said rival services like Amazon Prime Video are growing the SVOD market rather than taking market share.

Netflix just added a new button that will allow you to skip the opening credits. Also, after the widely ridiculed Amy Schumer profanity driven "Leather Special" comedy show, Netflix is changing its ratings method. After the show received so many one star ratings, the company is changing the system to either a "thumbs up or thumbs down" system. They claim they have been considering this for some time but the Schumer special must have triggered the change. Netflix said the old system was flawed. Say you watched a show like Sharknado you may have given it a two star rating for its lack of redeemable content but you still enjoyed watching the show for some light entertainment. A bunch of two star ratings would tell everyone else the show was worthless whereas a thumbs up or down would tell them if it was worth watching. If 65% gave it a thumbs up then you might consider watching it. If 65% gave it a two star rating you probably would not watch. Netflix said in a study, users gave 200% more ratings when presented the up/down option rather than a 5 star system.


Citibank (C) warned of a phishing email with the sender address of alert@citibank.com and a hyperlink appearing to go to Citibank but actually a phishing website overseas. Citi warned that the emails were fraudulent and would steal your personal information if you clicked the link and acted on the confirmation page. With more than 200 million customers, you can bet several thousand clicked on the link and gave their information to a bogus webpage.

These emails happen daily. Because of all the "open" email addresses we had on the website in the past, I get more than 10,000 spam emails a week. Fortunately, we have a couple of good spam/virus filters but a few always seem to sneak through. You have to be very vigilant about what you click regardless of how valid it appears. Always go to the actual website by typing in the webpage address rather than clicking on a link.

In a recent study of 19,000 individuals by Intel Security, they showed each person 10 different emails and asked them to identify the real ones and the fake ones. Only 3% identified all ten correctly. That means 18,430 would have clicked on a phishing email. Clearly, everyone needs a security program to protect us from ourselves.

The financial sector was down sharply on Friday despite the Fed rate hike. The sector lost -1.3% and has been weak for the last 11 days. The rate hike was already priced in two weeks ago.



Goldman Sachs (GS) was the biggest loser in the financials. CEO Lloyd Blankfein saw his compensation cut by 27% in 2016 to "only" $22 million. He received $16 million in stock and a $4 million cash bonus in addition to his $2 million in salary. I just do not understand how he can live on only $22 million.

JP Morgan's CEO, Jamie Dimon, received $28 million, Morgan Stanley's CEO James Gorman $22.5 million, Bank of America's Brian Moynihan $20 million, Citigroup's Mike Corbat $15.5 million and Wells Fargo's Tim Sloan $12.8 million. Sloan is the new kid on the block having only become CEO in October.

Goldman was the biggest drag on the Dow on Friday with a $4 decline that knocked 29 points off the Dow.


Boeing (BA) was the second biggest gainer on the Dow after the company said it signed a $3.4 billion contract with the Army and an unidentified international customer. The Army will get 244 remanufactured Apache helicopters and the customer will get 24 new helicopters of the latest Apache AH-64E variant. The 64E first began deliveries in October 2011 and seven countries in addition to the U.S. currently operate this version. Fifteen other countries operate older variants of the Apache.

Boeing also said it won a $371 million contract for support of the F-15 fighter. The F-15 is undefeated in aerial combat in more than 100 air-to-air clashes. A couple months ago Boeing was also awarded a $4 billion contract to upgrade the radar in the F-15 with the Eagle Passive Active Warning Survivability System. That suggests those planes will be flying for a long time. There are more than 1,600 in service in six countries. They are still being produced with 15 delivered in 2016.


Thursday after the close, Adobe (ADBE) reported earnings of 94 cents that beat estimates of 87 cents. Revenue increased 21.6% to $1.68 billion and beat estimates for $1.65 billion. They guided for the current quarter to revenue of $1.73 billion and earnings of 94 cents. Analysts were expecting $1.72 billion and 91 cents. The company said the shift to a subscription model with the Creative Cloud package was the main driver. Annualized recurring revenue was $4.25 billion, an increase of $265 million for the quarter. Adobe Marketing Cloud revenue was a record at $477 million. Shares spiked 4% on the news.


Jabil Circuit (JBL) reported earnings of 48 cents compared to estimates for 45 cents. Revenue of $4.45 billion beat estimates for $4.36 billion. They guided for 19-39 cents for the current quarter. Analyst said the strong earnings in Jabil and other Apple suppliers meant the weakness in Apple should be over. Multiple analysts have recommended buying the suppliers in the Apple food chain ahead of the iPhone 8.


Apple (AAPL) shares stalled over the last two weeks on concerns over the 3D motion sensor manufactured by ST Microelectronics (STM). I wrote about it in the past. There was a fire at a STM facility and there were concerns the sensor would be delayed. Multiple analysts are now claiming there is no material problem and there will be a delay of a week or two at the most. Shares of STM have recovered and are at new highs. Shares of Apple opened at a new high intraday on Friday at $141. One trader sold 9.24 million shares at $141 in a single trade at the open. That is $1.3 billion. Since it was quadruple witching day, analysts believe this was an adjustment of some kind rather than somebody dumping the stock. That dented the opening surge but shares rallied back almost to $141 at 2:00 before sellers appeared and shares plunged in the afternoon as another 4.5 million shares sold in the last few minutes of trading.



Amgen (AMGN) released the results of a landmark study of 27,564 patients taking Repatha to manage LDL cholesterol levels. The study proved that reducing LDL levels below what is currently achievable with statins, leads to a further reduction in major cardiovascular events including heart attacks and strokes. The study found that adding Rapatha to existing statin therapies reduced the number of adverse cardiac events by 20% with no significant increase in side effects. The longer the patient was on the treatment the better the results. In the first year, events declined 16%, second year 20% and third year 25%. This would seem to be an outstanding new drug for at risk patients.

However, it was not as good as analysts had hoped. The drug is expensive at $14,000 a year. Amgen said it would offer a 30% discount to pharmacy benefit managers and they offered a novel money back guarantee, with some qualifications, if you have a cardiac event while you are taking the drug. Based on the mortality profile insurers would have to pay for the drug for 25 patients to prevent one cardiac event. That is according to research at the American College of Cardiology. This suggests insurers are not going to be willing to pay $250,000 a year for 25 patients just to save one hospital visit that would cost them significantly less. Shares of Amgen crashed 6.4% and took other companies with cholesterol drugs down with them. REGN lost $12 (-3%), ESPR -$6 (-20%) and MDCO -$4 (-8%).


While the number of earnings reports declines significantly for next week there are three companies worth watching. These are FedEx, Nike and Finish Line. FedEx will be important for guidance for the post holiday quarter. Nike and Finish Line are important to the retail outlook. They sell high dollar products and their guidance could help or sink the retail sector. Under Armour is not reporting but it will get either a boost or a hit on those earnings.


Crude prices were actually relatively flat for the week after bottoming at $47.09 on Tuesday. With futures expiring on Monday there was little activity on Friday. Volume was very low.


Traders are confused after Saudi Arabia increased production in February. The "we are storing it" excuse did not fly with most traders. While they may be storing it for the summer electrical generation demand, they could also be storing it just until a tanker can load it. We have learned in the past to listen to what they say but watch what they do.


Active rigs exploded higher with a gain of 21 last week. Oil rigs rose by 14 and gas rigs gained 6. One more strong weekly gain and active rigs will have risen 100% over the lows last May. However, if oil declines any further it could slow those reactivations. Any rigs restarted last week had been in the moving and setup category for several weeks before they actually went to work.



Markets

There was a whirlwind of headline activity last week and traders had a lot to worry about. The markets climbed the wall of worry into Janet Yellen's news conference Wednesday afternoon. After the conference everyone exhaled with a big sigh of relief. The excitement was gone and the pending option expiration became the focus as traders waited for their option positions to expire.

The big caps saw some cash drain as the small caps suddenly found favor. Whether that will last into next week is the big question. If the small cap stocks are going to assume their leadership role after three months of consolidation, I would be thrilled. They have been holding the broader market back.

Hurting the Nasdaq on Friday was the decline in healthcare stocks. The sector lost 1% after the huge run since the end of January. The Health Care ETF (XLV) made a new high at $76.75 on Wednesday. That was an $8 gain since the $69 low on January 31st. The drop was powered by the decline in the cholesterol stocks and weighed on the Nasdaq.


The prior closing high on the Nasdaq Composite was 5,904 on March 1st. The index has now closed at 5,899 for three consecutive days. Clearly, this is solid resistance. I just hope it is not a double top.

The Nasdaq big caps have been leading the market higher with FB, AMZN, NFLX, GOOGL, ORCL and ADBE all at new highs. Amazon and Netflix are struggling with new high resistance while the rest are setting new highs.

The semiconductor sector is also setting new highs and the biotech sector set a new 52-week high on Wednesday.

A lot of these supporters need to rest. The biotechs declined the last two days to cause a drag on the Nasdaq. The crash in the drug stocks on Friday also pulled it lower. If the Nasdaq Composite can shake off this weakness and set a new high while the small caps are still positive it would be a big lift to bullish sentiment.




The Dow has been the weakest big cap index. It is barely holding over support at 20,850 and the end of week trading was lackluster. Now that the Fed decision is behind us, we should not expect any help from Goldman or JP Morgan. Caterpillar is in trouble with the government raiding their offices and we should not expect any big gains there. Crude prices should remain volatile for a couple more weeks and that means Chevron and Exxon should be flat. Intel is being attacked from all sides on the technology front and is setting lower lows.

The middle of the Dow, stocks like Verizon, McDonalds, Coke, Procter & Gamble, etc are likely to remain choppy without a discernible trend.

This means the Dow is not likely to be the market leader but could follow the S&P and Nasdaq in whatever direction they choose.



The Russell 2000 was bullish on Friday with its third day of gains and a close over the 1385-1388 resistance. If the gains continue this could rekindle market sentiment. A break down here making a lower high and lower low below 1,350 would be the kiss of death to any future market rally.


We have a light economic calendar with almost no earnings and plenty of Fedspeak to confuse the outlook. The Monday after a quadruple witching expiration is not normally a strongly directional market. Option settlements are being handled and traders are trying to decide what to do next.

We are still in a bullish uptrend. Dips are shallow and still being bought. Follow the trend.



Random Thoughts


The weekly sentiment survey becomes more confusing every week. The high bearish sentiment from last week declined by 7.8% but those traders moved to neutral rather than bullish. We are still looking at nearly 70% of respondents not in the bullish category. That is a large majority not expecting further gains. That should suggest there is plenty of money on the sidelines ready to go to work if sentiment improves.

Last week results


The S&P has now gone 108 days without a 1% single day decline. That is the 9th longest streak since 1950. If it can go another 7 days, it will be the sixth longest streak at 115 days. This will eventually end but there are no clues that it will be this week.



Volatility has not been this low for this long since the period from Oct-1st 2006 through Feb 26th 2007 when it traded below 10 numerous times and rarely reached 12 on temporary spikes. The historic low of 8.60 was made in this period. We know how that period of low volatility ended and there were no real clues in the equity market that the crash was coming.



The Shakespeare of Rock and Roll passed away this weekend. Chuck Berry was 90 and is survived by Toddy, his wife of 68 years. Chuck made rock and roll famous as he combined rhythm & blues with country and western. His big hits included Maybellene, Johnny B Goode, Roll Over Beethoven and Brown Eyed Handsome Man. He was called the "father of rock and roll." Leonard Cohen said, "All of us are footnotes to the words of Chuck Berry." He spent three terms in prison for armed robbery, tax evasion and violation of the Mann Act for driving an underage girl across state lines from Texas to his home in Missouri. Before becoming famous, he worked on an assembly line and studied cosmetology. Chuck had already announced the release of his first album in 38 years, scheduled for release this year and dedicated it to his wife. He will not be forgotten until long after all of us in his generation cease to exist.



 

Enter passively and exit aggressively!

Jim Brown

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"In general, the art of government consists of taking as much money as possible from one party of the citizens to give to the other."

Voltaire (1764)


 

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