After the short squeezes on Monday/Tuesday, the markets traded sideways on moderate volume but very calmly.

Weekly Statistics

Friday Statistics

Despite the calm, there were a lot of shares traded. Volume averaged more than 7 billion shares a day for the entire week. Despite the small declines in the big cap indexes, there were 4,360 decliners to 2,625 advancers.

While the market appeared calm on the surface, I have a perfect analogy. Picture a flock of ducks moving slowly up stream. They may look calm on the surface but they are probably paddling like crazy underneath. That is what happened to the markets the last three days. The indexes barely moved but the volume was heavier than normal, about 1 billion shares a day over the average for the last five weeks. That is a lot of volume for markets not making material changes.

Granted, it is earnings season and that does create more volume. Earnings have been strong this quarter but the last two days down volume has been significantly stronger than up volume.

The most significant event on Friday was the -1.2% decline in the Russell 2000 and the S&P-600 small cap indexes. They have been bullish for the last 7-8 days and suddenly reversed significantly while the big cap indexes barely declined. That could be a sign of a sentiment shift in the market or just some profit taking ahead of weekend event risk. We will not know until Tue/Wed next week. The Russell had gained 5.6% in only 8 trading days so it was due for some profit taking.


On the economic front, the GDP report for Q1 was depressing. The GDP declined from 3.52% in Q3 to 2.08% in Q4 to 0.69% in Q1. Analysts were working themselves into a sweat trying to come up with a reason to blame. It was the weather, excessive inventory adjustments, late tax refunds or maybe it was Russia hacking the Bureau of Economic Analysis servers. Everybody had a different excuse.

Without going off on a political rant here, let's just agree that the slow growth has been a product of the economic environment over the last several years. Moody's said, "The economy is expanding at the same pace as it has throughout the last eight years." There is also the problem with Q1 numbers in general. For the last 30 years, the Q1 GDP has consistently underperformed the surrounding quarters. The BEA has written about it over the last several years and they are trying to find a way to tweak the numbers for Q1 so they "better represent" the actual conditions. I have written about this in the past. When bean counters do not like the answers their models produce, they always want to change the models until they get a number they like.

The better way is to have an accurate model for the entire year and average the results on a trailing four-quarter basis. That way the peak quarters as we had in Q3, average out the trough quarters as we had in Q1. That takes the critical focus off the quarter-to-quarter changes. It is a big economy. The models are never going to be exactly right so live with it.

Over the last six years, the Q1 average has been 0.87% growth. That compares to the average of all quarters over the last six years of 2.0% growth or 2.36% growth if you leave the Q1 numbers out of the calculation. Yes, there is a problem with Q1 but it may be just the way it is. Consumers are shopped out after Q4, businesses are planning for the rest of the year and the winter weather does retard activity. Note in the chart below that the two negative bars over the last six years have been for Q1.

A major factor in the drop was a drop in consumer spending from 2.4% to 0.23% in Q1. That is the lowest level in years. We knew it was coming because of the wasteland that is the retail sector. Over the prior four quarters, spending averaged a 2.1% contribution to GDP with Q1-2016 the lowest contributor at 1.11%.

Inventories subtracted -0.93%. Exports only added +0.07% and government subtracted -0.3%.


The forecast for Q2 GDP is roughly 3%. I do not think there has been a dramatic change in the actual economy over the last three months. The optimism is there and hiring has picked up slightly but did the economy surge 2.3% over Q1?

We have known for many weeks that the Q1 number was going to be bad. The Atlanta Fed real time GDPNow number declined to a forecast of only 0.2% growth as of Thursday after the Census Bureau lowered the estimate for inventory growth.


The final Consumer Sentiment for April declined 1 point from the initial reading to 97 and just slightly over the March number at 96.9. The present conditions component declined from 113.2 to 112.7 and the expectations component rose from 86.5 to 87.0. Sentiment and confidence have begun to fade from the post election highs but only slightly. The percentage of consumers expecting a strong economy over the next four years declined 4% to 49%.


This is going to be an active week for economic reports. This is a payroll week as well as ISM reports and factory orders. Right in the middle of the week is the Fed meeting and rate hike decision.

The House punted on the government funding battle and postponed it until next Friday so we have another whole week of wondering if there will be a government shutdown.

If that is not enough to worry about, we have the French runoff election next Sunday. Marine Le Pen is rapidly closing the gap between her and Emmanuel Macron. She gained 2% in the last two days and 6% over the last week. She is still well behind at 41% compared to Macron's 59% but the race is tightening. After the election last Sunday, she was only given a 35% chance. If she pulls within 2-3 points by the weekend, Europe will be freaking out again with the possibility of a Trump style come from behind win.


It has been a good earnings cycle so far. According to Thompson Reuters of the 288 S&P companies that have reported 76.7% have beaten analyst estimates for earnings and 64.8% have beaten on revenue. The averages over the last four quarters are 71% and 53% respectively. Q1 earnings are now expected to grow by 13.6% and well over the estimates on March 31st for 9%. Excluding energy, the earnings growth shrinks to 9.3% but still great. This will be the first quarter of double digit earnings growth since Q3-2011. Revenue growth for the quarter is expected to rise 7.1%.

The earnings forecast for Q2 is 9.3% growth, Q3 9.3% and Q4 13.5%. Q1 of 2018 is expected to grow by 11.6%. If all these forecasts were to play out as expected this could be a very strong growth period for the market. If a tax reform package is passed that lowers corporate taxes and allows for repatriation at a reasonable rate, those earnings numbers could rocket higher.

The earnings estimates have surged over the last three weeks as seen in the FactSet chart below. The estimates were still hovering at 9% in mid April and then spiked over the last two weeks. This is due to the large number of companies beating estimates. This should be bullish for the market because 13% earnings were not priced into equities.


For Q2, 38 companies have issued negative guidance and 24 have issued positive guidance.

Next week there are 127 S&P companies reporting and two Dow components, AAPL and MRK. The most watched companies for the week will be Apple for obvious reasons, Facebook, Tesla and Activision. There are a lot of companies reporting but the number of high profile companies have declined.


Chevron (CVX) reported better than expected earnings on Friday of $1.41 per share. Analysts were expecting 86 cents. However, the Chevron number included $600 million gain from an asset sale. Revenue of $33.4 billion missed estimates for $34.9 billion. Operating costs declined -14% and capex for 2017 is down about 30%. Net production increased 3% and they guided for a 4-9% growth for the full year. Shares gained $1.23 to add 8.4 points to the Dow.


ExxonMobil (XOM) reported earnings of 95 cents that beat estimates for 88 cents. Revenue of $63.3 billion missed estimates for $66.4 billion. The better earnings came from the upstream division with a profit of $2.3 billion. The refining division generated $1.1 billion in profits and the chemical business created $1.2 billion. Production was 4.2 million boepd, a decline of 4% due to more downtime for maintenance and smaller entitlements because of higher prices. Some leases and production contracts have production sharing. Exxon gets the majority of the production when prices are low as an incentive to drill and produce but when prices rise the other parties get an increased share. This reduces the production credited to Exxon even though the actual rate of production did not change. Shares rose a minimal 39 cents to add 2.67 points to the Dow.


GM reported earnings of $1.70 that rose 34.9% and easily beat estimates for $1.45. Revenue of $41.2 billion rose 10.6% and beat estimates for $40.25 billion. The company guided for full year earnings of $6.00 to $6.50 compared to the $6.12 it earned in 2016. Free cash flow is expected to be $6 billion and GM will return $7 billion to shareholders in buybacks and dividends. Shares managed to remain fractionally positive.


Cruise line Royal Caribbean (RCL) reported earnings of 99 cents compared to estimates for 92 cents. Revenue of $2.01 billion narrowly missed estimates for $2.02 billion. The company guided for the current quarter to earnings of $1.60-$1.65 and analysts were expecting $1.40. For the full year, RCL is guiding for $7.00 to $7.20. Shares spiked $6 on the news.


Uranium miner Cameco (CCJ) is having a rough decade. Shares were trading at $43 in 2011 when Japan's Fukushima disaster occurred. A 15-meter high tsunami disabled the power supply and cooling at the three Fukushima Daiichi reactors causing a meltdown. As a precaution, nearly all of Japan's 50+ reactors were shut down until they could be inspected and then recertified to withstand higher earthquake intensity. Currently 42 reactors are operable and able to restart with 24 in the actual process of getting restart approvals.

The loss of 10% of the world's 449 reactors for the last six years caused a major problem for Cameco. Uranium that had been contracted to refuel the Japanese reactors over that six-year period created a glut in the market and uranium prices crashed sending Cameco on a roller coaster of declines with the low at $7.50 in October 2016. Uranium prices hit a 13-year low in October.

I am telling this story because the outlook for Cameco is still outstanding, long-term and a reader recently asked me my opinion about the stock. When those 42 reactors eventually restart, they will join the 60+ currently under construction worldwide and uranium demand is going to rocket higher again. The long-term problem is that there is not enough uranium to fuel the growing fleet once those reactors are all operational. Multiple analysts have been predicting a production shortfall for several years but the long-term business of restarting or building a new reactor is measured in years, not months. Back in 2011 more than 15% of the uranium used in reactors came from Russian bombs. In a program started in 1993 called megatons to megawatts, Russia shipped excess uranium from deactivated weapons to the U.S. to be converted into fuel for nuclear reactors. The 20-year program terminated in 2013. The U.S. bought the highly enriched uranium from Russia in order to take it out of circulation and the byproduct of the deal was to provide fuel for reactors. Without that program supplying 15% of the fuel needed, the uranium shortfall will be even greater. Cameco is a stock I have recommended many times over the years but the restart timeframe always caused problems. The restart is always coming soon but it has never arrived. If you have a long-term investment horizon, I would not hesitate to put some Cameco shares in your portfolio.

Cameco reported a loss of 5 cents (Canadian) for Q1, compared to earnings of 20 cents in the year ago quarter. Revenue fell -4% to $393 million. Another challenge Cameco has is that uranium is ordered years in advance and Cameco stores it until time for delivery. They cannot claim the revenue until the delivery takes place. That makes their quarter-to-quarter revenue very volatile depending on how many reactors took delivery that quarter. Hurting them in Q1 was the final cancellation of the contract by Tokyo Electric Power, the operator of the Fukushima plants that will not be restarting.


Colgate Palmolive (CL) reported earnings of 67 cents that beat estimates by a penny. Revenue of $3.76 billion missed estimates for $3.8 billion. A 2.5% price increase was offset by a 2% loss in global volume and a 0.5% hit from global currency issues. North American sales accounted for 20% of total sales, Latin America 25%, Europe 15%, Asia Pacific 19%, Africa/Asia 6% and Hill's Pet Nutrition 15%. Shares fell $1 on the news.


The real news was not the earnings on Friday but the tech titans that reported after the bell on Thursday. Microsoft posted a fractional gain to a new high after reporting earnings of 73 cents compared to estimates for 70 cents. Revenue of $22.1 billion missed estimates for $23.6 billion. Shares rose because of positive comments the company made about their growing cloud business.


Intel reported earnings of 66 cents that beat estimates by a penny. Revenue of $14.80 billion rose 7% and missed estimates for $14.81 billion but it was a minor miss. They guided for Q2 revenue of $14.4 billion and full year revenue of $60 billion, with Q2 earnings of 68 cents and full year of $2.85. These were just slightly over analyst estimates. Shares declined on the slowing of Intel's high margin datacenter business. With AMD, Nvidia and now Qualcomm seeing increasing sales in that area, Intel is fighting to maintain its market share.


Alphabet (GOOGL) reported earnings of $7.73 that beat estimates for $7.38. Revenue of $24.75 billion beat estimates for $24.22 billion. That is an awful lot of ad clicks to produce that kind of revenue. Paid clicks rose 44% during the quarter with clicks on Google sites rising 53%. Revenues in the "other" segment, which includes cloud, rose 49% to $3.1 billion. This was Google's 29th quarter of 20+% revenue growth.

Analysts were quick to raise their price targets.

Monness Crespi Hardt from $900 to $1,050
Oppenheimer from $1,000 to $1,050
Pivotal Research from $950 to $990
Stifel Nicolas from $1,050 to $1,075
Nomura from $925 to $985
Credit Suisse from $1,100 to $1,150
Cantor Fitzgerald from $1,040 to $1,070
BMO Capital from $900 to $970
Cowen from $1,050 to $1,075
Barclay's $1,065
Deutsche Bank $1,250


Amazon (AMZN) reported earnings of $1.48 and revenue of $35.7 billion. Analysts were expecting $1.08 and $35.3 billion. Operating cash flow rose 53% to $17.6 billion and free cash flow rose to $10.2 billion and this was just for the quarter. Amazon Web Services had revenue of $3.6 billion which rose 43% and generated $890 million in earnings. For Q2 the company guided for revenue of $35.35 to $37.75 billion and that includes a massive $720 million hit from currency issues. Operating income guidance was $425 million to $1.1 billion. Amazon is still spending on new projects and building out its supply chain infrastructure. Jeff Bezos believes in the mantra, "If you build it they will come." They emphasized an opportunity in India and that country has four times as many consumers than the USA. If they are successful there it will catapult them into an even higher revenue bracket.


Starbucks (SBUX) broke my heart again after they reported earnings of 45 cents on revenue of $5.29 billion. Analysts were looking for 45 cents and $5.42 billion. Every time I buy Starbucks on a promising chart, there is some unexpected hiccup that costs me money. Despite jam packed stores, same store sales rose only 3% compared to expectations for 3.6%. They are suffering from multiple problems. Their mobile ordering application proved so successful that stores were swamped during peak periods and customers became frustrated and did not visit as often. Starbucks is increasing staff and procedures and they are confident they can handle the problem. Having too much business is a good thing once you learn how to handle it. Secondly, chains like Dunkin Donuts and McDonalds are eating into their market share. McDonalds is offering $1 coffee and $2 specialty drinks and no waiting. I still have confidence in Starbucks for the long-term but these post earnings disappointments are getting to be a habit.


Western Digital (WDC) reported earnings of $2.39 that beat estimates for $2.16. Revenue of $4.65 billion beat estimates for $4.59 billion. The drive maker guided for revenue of $4.8 billion in Q2 and earnings in the $2.55-$2.66 range. Analysts were expecting $4.6 billion and $2.14. They generated $1 billion in free cash flow and ended the quarter with $5.8 billion in cash. They are kicking Seagate's butt in the drive market and since they bought SanDisk last year they now have another business line and they are announcing new products every couple of weeks.

Just last week they announced a new 12 TB Ultrastar enterprise hard drive, filled with helium, which is the largest enterprise drive on the market for random activity. Helium is 1/7th the density of air, which allows the read/write heads to "fly" closer to the recording surface, allows for thinner disks and the addition of two extra platters. They have shipped more than 15 million of these in the smaller sizes. This is a must own stock for long-term investors but look for a dip.


Oil prices continued to fall to nearly $48 on worries U.S. shale production was rebounding too quickly. Crude inventories did decline -3.6 million barrels but those draw downs have been slow to appear. U.S. production rose to 9.27 million bpd, up +200,000 bpd over the last eight weeks. The peak in June 2015 was 9.61 mbpd. The low point in July 2016 was 8.428 mbpd. Over the last ten months, production has risen 840,000 bpd and that was using a much smaller number of rigs. We have more than doubled the number of active rigs since the historic low of 404 last May. If the current pace of production increases holds, an average increase of 18,000 bpd per week, we could add another 720,000 bpd by the end of 2017. Since we now have double the active rigs that pace could actually increase.

This is a challenge for OPEC and their decision to extend the production cuts for another six months. If they do that, and prices rise, U.S. producers will put even more rigs to work.

The U.S. imported 8.91 mbpd last week, 1.1 mbpd more than the prior week and the most in months. Traders are worried about U.S. production but they should also be worried about the pace of imports. Refiners import oil because it is cheap and it is a heavier oil needed to make products other than gasoline, including diesel, heating oil, etc.

Green is a high, yellow a low.


Producers activated 9 additional oil rigs and 4 gas rigs last week. However, offshore rigs declined by 3 to 17 and a three-month low.


Markets

The markets exploded higher on Mon/Tue and then went dormant. The S&P has been fighting a battle with resistance at 2,388 since Tuesday afternoon with moves above and below but returning to that level at the close. On Friday that changed and the index dipped slightly on the afternoon event risk selling.

The 2,388 level has become our directional indicator. If the market moves lower from here that becomes the level all future moves are measured against. If it moves back over 2,388 the shorts will have to cover and we could see an extended move. For traders the play would be to remain short under 2,388 and go long over 2,400. That 2,400 level is also going to be tough to cross. I would remain neutral between those levels.


The Dow has an equally difficult hurdle at the 21,000 level. The index spiked to that level by 10:AM on Tuesday and then failed to extend the gains despite some intraday penetration on Wednesday. That is rock solid resistance and it will probably take a decent catalyst to power the Dow higher from here. There are only two Dow components reporting next week and Apple after the bell on Tuesday could be a market mover. Let's hope the direction is up. Until Apple reports, there may be some hesitancy for investors to get long the market.



The Nasdaq indexes are on a mission. They are making new highs every day even though the other indexes have stalled. The Nasdaq Composite is up +237 points (4.1%) since the close on April 13th. This move is very over extended and now that most of the big cap techs have reported, we could see a lack of enthusiasm. Apple, Facebook and Tesla are the market movers reporting this week. The Composite Index is closing in on uptrend resistance at roughly 6,100 and that would be another 60 points higher. If we were to reach that level, I would definitely be a seller on a short-term trade.



The Nasdaq 100 managed to post a gain on Friday thanks to GOOGL, AMZN, PCLN and TSLA. With Apple and Facebook reporting this week there is a strong possibility we could see another upside move but after that, the majority of the big cap tech earnings will be over. The index is extended and could be setting up for the sell in May cycle. Long-term uptrend resistance from November 2014 is about 5,635.


The biotech sector surged on Friday to cap a strong week after Regeneron (REGN) reported the FDA accepted their new license application for the drug Kevzara targeting rheumatoid arthritis. Shares spiked $22 on Friday to lift the sector. The spike in biotechs should have supported the Nasdaq and the Russell but both were negative. Obviously, those losses would have been worse without the biotech support.


I mentioned earlier about the weakness in the Russell and the small caps. The S&P-600 fell back below strong resistance at 860 after a nice two-week gain. This could be a critical event for Monday. If the small cap indexes continue to decline, we could be in for a broader dip.


This is a Fed meeting week. Typically, there is a market bump on Tuesday ahead of the Fed decision. Whether that trend will be enough to lift the indexes back over resistance is unknown, especially with Apple reporting after the bell on Tuesday. The first day of May is typically bullish so that is also working in our favor.

The weekend event risk probably will not become a factor until Thursday and that depends on the headlines out of Washington on the budget crisis and French election headlines. Since the Fed decision is Wednesday, the Nonfarm Payroll report on Friday will be of lesser importance. Analysts will still bloviate about the jobs gain, regardless of what it is, but the market is not likely to react to the number.

We are approaching the "sell in May and go away cycle." Using the MACD indicator to time the exit from stocks it would appear we are still days or even weeks ahead of that signal. More on this in the Random Thoughts.

We are at the point in the market where we need to be cautious about being over extended. Once the earnings excitement fades, we could see some decent profit taking.



Random Thoughts


Wow! Bullish sentiment spiked a whopping 12.3% from 25.7% to 38.0%. That is a monster jump and a two-month high. The new market highs on Tuesday must have converted a lot of the fence sitters because bearish and neutral categories also fell sharply. This is actually worrisome since the herd is normally wrong. When the herd is most bullish, we should be getting ready for a decline.

Last week results


"When the VIX is high it is time to buy. When the VIX is low it is time to go."

The VIX made a new 10-year intraday low at 10.22 on Tuesday. While it can go lower, it very rarely accomplishes that feat. Even though it closed at 10.82 on Friday, the index is holding at three-year lows. When the market is at new highs and the VIX at new lows, we should be worried. The index can stay in the 11-12 range for some time but the longer it is low the more likely a sell off will appear.



Stock Trader's Almanac Six Month Switching Strategy

Back in 1986 the Stock Trader's Almanac discovered the position switching strategy that corresponds with the "Sell in May and go away" strategy that has been around for decades. They found that investing only in the best six months of the year and sitting out the worst six months of the year produced astonishing returns.

Since 1950, if you had invested $10,000 in the Dow over the worst six months of the year you would have a cumulative loss of $6,710 over the 66-year period. If you invested $10,000 in the Dow in 1950 and never touched it you would have a gain of $860,000 today. However, if you used the best six months switching strategy with a MACD entry point, you would have generated $2,496,586 in profits. Obviously, that is a significant difference and the strategy is really easy.

Basically, the best six month period is November-April and the worst six months are May-October. Since millions of events impact the market the Almanac publishers figured out that using a MACD buy/sell signal could significantly improve results rather than just using a strict calendar formula.

Currently the MACD is in a bullish position thanks to the market spike last week. When the MACD rolls over in May it would be a sell signal for long positions. They recommend moving to cash or bonds or some neutral position. The advantage is that you are out of the market over the summer months and free to vacation without worrying about the market gyrations. When we get close to November, you begin looking for a positive signal on the MACD to time the entry back into the market for the next six months.

A lot of investors follow this strategy so it is sort of a self-fulfilling strategy.

Read the full details HERE



 

Enter passively and exit aggressively!

Jim Brown

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"Experience is the hardest kind of teacher, it gives you the test first and the lesson afterward." And "Experience is the name everyone gives to their mistakes."

OSCAR WILDE


 

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