After nearly three months of relative dormancy, traders have awakened to see the train leaving the station.

Weekly Statistics

Friday Statistics

Sometimes when a stock or index breaks out to a new high by a couple points we say, yes a new high but there was no conviction, I would be cautious. This time there is conviction and there is no doubt we have a real breakout in progress. While there is no way to know if it will last a few days, weeks or months, what we do know is that investors are paying attention and they are chasing prices. Shorts are being covered and investors are biting the proverbial bullet to buy something even if they do not believe it will last. The market has failed to decline on a multitude of events and now all of that base building is paying off.


Some of the credit for Friday's gains should be given to Tom Lee of Fundstrat, who made a bullish call on the FANG stocks. He said hang onto those stocks and we could see another 20% to 40% gains in the second half of 2017. Not only are those companies blessed with soaring earnings, they historically rise in the second half of the year since 2009. In 2015, the FANG stocks rose 29% through May and then surged another 43% by year-end. Since 2009, they have averaged 17.7% gains from May 31st through year-end.

Lee's call is even more surprising because he is the biggest bear on Wall Street. His year-end S&P target is 2,275 and 7% below Friday's close. Year to date, Facebook is up 33%, Amazon 34%, Netflix 32% and Alphabet/Google +26%.

The four original FANG stocks have deviated from the same path over the prior four months but the last two weeks they have been in lock step. They have been responsible for lifting the Nasdaq and the S&P to new highs and we thank them for it.


The morning market started strong despite a big miss on the Nonfarm Payrolls. The headline gain for May slipped to 138,000 from 211,000 and missed estimates for 185,000. The 211,000 from April was revised lower to 174,000 and the 79,000 from March was revised lower again to only 50,000. The rise in May was still the 80th consecutive month of gains and the longest string since the 1930s.

Goods producing firms added 16,000 jobs and service industries added 122,000. Retailers suffered the biggest decline with a loss of -6,100 jobs. Personal and business services added 38,000, finance 11,000, transportation 3,600 and mining/energy 6,000.

The U3 unemployment rate fell from 4.4% to 4.3% and the broader U6 rate fell from 8.6% to 8.4%.

There were still 94.983 million people shown as not in the labor force. The labor force declined by 429,000 and the labor force participation rate declined from 62.9% to 62.7%.

Despite the decline in unemployment the number of workers being laid off declined sharply and there were fewer workers taking part time jobs because they could not find full time work. This suggests the labor market is doing just fine and the minor 0.2% gain in the average hourly wage is not showing any upward pressure from a lack of workers. That said, there are nearly six million unfilled positions in the US. Employers claim they cannot find qualified workers or they cannot find people willing to do the work.


The decline in the growth rate of employment suggests future weakness in consumer spending and that knocked the Atlanta Fed real time GDPNow forecast down from 4% to only 3.4% growth.


The "adequate" jobs numbers and comments from Fed officials helped to raise the expectations for a rate hike at the June meeting next week. There is now a 94.6% chance of a quarter-point rate hike, which is as close to a guaranteed hike as you can get. The July meeting probability is only 4.7% and September has risen slightly to 29.3%. December probabilities have risen to 49% and should increase based on the Fed statement next week.


Also on Friday was the ISM for NY. The current conditions index declined from 55.8 to 46.7 and back into contraction territory for the first time in eight months. The employment component fell from 45.1 to 40.3 and the six-month outlook from 73.2 to 70.6.

Moody's Chart

The economic calendar for next week is very short. The biggest events come on Monday with the ISM Services and Factory Orders. The rest of the week is tame with the Wholesale Trade on Friday normally ignored.


The big event that traders are probably ignoring is the snap election in the UK. Prime Minister Theresa May called the snap election ahead of the Brexit negotiations thinking she could expand her majority in Parliament. When she called the election, she thought it would be an easy victory and add to the conservative majority. Today, according to polling by YouGov, her lead in the polls has fallen from 15% to 5% with Jeremy Corbyn, leader of the Labor Party, surging in the polls. YouGov believes May is now 13 seats short of the 326 seats needed for a majority in Parliament.

The Brexit decision is still a hotly contested topic and the election could go either way. If May loses or wins by only a small amount it will put her in a much weaker position to negotiate the terms of Brexit with the EU Commission. The pound would be hit hard. Bank of America sent a note to clients on Friday warning that currency markets appeared "overly complacent" given recent polling data. Brown Brothers Harriman said the activity in the options market showed some investors were buying downside protection against a currency event.

This will probably play out like all the other critical events over the last three months and nothing will happen to the markets. Of course, once we begin to expect that to happen we are setting ourselves up for a disappointment.


Meanwhile the dollar is at 8-month lows as the U.S. economy slowed in Q4 and 24 economic data points in May came in lower than expected. Add in the firestorms surrounding the current administration in Washington and the dollar is losing its clout.


The yield on the ten-year treasury fell to 2.159% and the lowest level since the election. The rising geopolitical concerns, troubles in Washington and weakening economics are turning treasuries back into a safety trade. That is fine if you are comfortable with a 2% return but with equities in breakout mode it will be interesting to see if bonds continue higher and yields lower. Some analysts believe this is strictly the result of a lack of securities in the market. Companies with little to no credit are able to sell billions in debt because the demand is so high the risk is ignored. With the Fed holding $4.5 trillion in treasuries, that keeps a lot of paper out of the market.


There were no material earnings reports on Friday. Companies celebrating from their earnings on Thursday included Broadcom (AVGO). The company reported earnings of $3.69 compared to estimates for $3.36. Revenue of $4.19 billion beat estimates for $4.11 billion. They guided for the current quarter for revenue of $4.37 to $4.52 billion and analysts were expecting $4.23 billion.

RBC Capital said the "stable to better demand" and "impressive execution" led to the earnings beat. Broadcom said "anticipating that end markets will remain healthy, we expect current quarter revenue growth of 6% sequentially" because of a later than normal production ramp for iPhone 8 and then into double digits in the October quarter. The CEO also said a pending smartphone ramp by a "large North American customer" an implied reference to Apple, would feature a 40% increase in the dollar content of the RF and Wi-Fi/Bluetooth combo chips Broadcom is supplying compared to the last iPhone cycle. As phones become more complicated and required to communicate at faster speeds over more frequencies, the chips become more complicated in order to support those capabilities.

Also helping the stock was news that Broadcom was not bidding on the Toshiba memory assets. Analysts were afraid they were going to pay too much. They are already in the midst of acquiring Brocade (BRCD) for $4.5 billion.

Shares exploded higher with a $20 gain.


Lululemon (LULU) rocketed 11% higher after reporting earnings of 32 cents compared to estimates for 28 cents. Revenue of $513 million missed estimates for $520.3 million. The company guided for the full year for earnings of $2.28-$2.32, a 2-cent higher range, but reduced revenue expectations to $2.53-$2.58 billion. The big earnings disappointment the prior quarter appeared to be a one-time event BUT the beat this quarter was against lowered expectations.


Restoration Hardware (RH) reported earnings of 5 cents on revenue of $562 million. Expectations were for 4 cents on sales of $556 million. The company raised full year revenue guidance from $2.3-$2.4 billion to $2.4-$2.45 billion. However, they cut earnings guidance from $1.78-$2.19 to $1.67-$1.94. RH is shifting to a Costco model where members will be charged $100 a year and that gives them access to special prices when they shop and advance notice of sales. Shares fell 25% on the news.


Workday (WDAY) reported adjusted earnings of 29 cents that beat estimates for 16 cents. Revenue of $479.9 million beat estimates for $466.8 million. Subscription revenue rose 42.7% to $399.7 million. Services revenue rose 18.7% to $67.5 million. They generated $149.4 million in free cash flow and ended the quarter with $2.1 billion in cash. They raised revenue guidance for the quarter and full year. Shares rose $3 on the news to a new high.


VMWare (VMW) reported earnings of 99 cents that beat estimates for 95 cents. Revenue of $1.74 billion beat estimates for $1.71 billion. The company guided for the current quarter for revenue of $1.84-$1.89 billion and analysts were expecting $1.81 billion. Earnings guidance of $1.11-$1.14 was above analyst estimates for $1.09. Shares declined $2 despite the good news.


Medical device maker Cooper Companies (COO) reported earnings of $2.50 that beat estimates by 25 cents and rose 25% from the year ago quarter. Revenue of $522.4 million beat estimates of $522 million. They raised full year earnings guidance from $9.10-$9.30 to $9.50-$9.65. Shares spiked $18 on the news.


Earnings for Q1 have increased 15.4% with 496 S&P-500 companies reported. Over 75% have beaten expectations and above the four quarter average of 71%. More than 62% beat on revenue and above the 53% average for the last four quarters. There have been 78 earnings warnings for Q2 and 40 companies issued positive guidance.

For next week, there are still a few stragglers. Dell (DVMT) will report on Thursday and be the highlight for the week. Softbank (SFTBY) is the biggest company reporting but they are not widely followed in the US.


Western Digital (WDC) is still trying to buy the Toshiba memory unit. The CEO of WDC is traveling to Tokyo next week to meet with Toshiba president Satoshi Tsunakawa about a new offer for the memory unit. The companies have been dueling in the press over the WDC offers and claims. WDC has filed an arbitration complaint against Toshiba and since that will take up to a year to be processed, Toshiba must work out a deal with WDC or forgo receiving any money from a sale for that period. Toshiba is desperate for cash and that puts WDC back in the picture. According to their prior joint venture agreements, WDC has sole right of refusal on any sale or transfer of assets out of the joint venture. In theory, that means WDC can block any sale. In practice, it just means any attempted sale without WDC approval is going to be messy and when you are talking about a $20 billion deal, it may be hard for alternate buyers to turn loose of the money unless they know they are getting clear title.

I believe WDC has a good chance of ending up with the business. I just hope they do not pay too much. WDC claims the fair value is $16-$18 billion but Chinese company Foxconn has reportedly bid well over $20 billion. The Japanese government does not want Toshiba to sell to a Chinese company so that bid is simply noise.


BlackBerry (BBRY) is at new 52-week highs after Citron Research said the stock could double ($20) because of their shift away from a hardware company to security software and automotive software. Citron said the change in company focus could be a game changer. Citron said Blackberry could be the next Nvidia. While I applaud their reach in comparisons, there is little to no chance of that coming to pass. Citron said Blackberry has become a real takeover target. Macquarie Research wrote an investor note in late May saying BBRY shares could hit $45, by 2020. That time horizon is out of my ballpark.


Crude prices fell again despite a larger than expected decline in U.S. inventory levels. Goldman warned that they were reducing their outlook for crude prices for the rest of the year to average $52.92. Some analysts had been targeting $55-$60 later this year but that view is fading fast.

With crude production rising almost to the point of negating the 1.8 million barrel OPEC cut by the end of 2017, traders are worried about OPEC's next move. They certainly cannot just end the cuts in March as projected. That would flood the market with a surplus of oil and ruin any 2017 effort to normalize inventories. The only thing we can always count on is that traders will never be happy regardless of what OPEC says or does.


Producers activated 11 oil rigs last week despite the drop in crude prices. However, since it takes weeks to months to unstack, move and crew an out of service rig, these have more than likely been in motion for some time and just now began drilling.

U.S. production is up more than 500,000 bpd in 2017 and is expected to rise another 500,000 bpd by the end of the year. Consumers should be thrilled because summer gas prices should remain low.



Markets

It is hard not to be optimistic or at least hopeful for the markets next week. The magnitude of the breakout on the S&P leaves no doubt about whether it is a breakout or just a minor push through resistance. In theory, this rally should continue because of the sudden strength. We have been talking for weeks about "if resistance breaks" or "it was only a minor break on low volume and there was no conviction." On Friday, volume was moderate at 6.4 billion shares but there was plenty of conviction.

Advancers beat decliners 4,710 to 2,418. New 52-week highs were 1,180 and the highest in 2017. It may have been led by the FAANG stocks and Tom Lee's bullish call but once the train started to leave the station everybody raced to climb on board.

This was a Friday when weekend event risk normally keeps markets in check. There was no sign of that caution anywhere except the Russell 2000 where the index peaked at 1,415 at 11:30 and then fell -10 points in the afternoon to close at 1,405. All the rest of the major indexes closed at or near their highs.

The S&P blew through resistance at 2,420 on Thursday and continued to climb on Friday to close 19 points above that prior resistance. Last Sunday I said the next material resistance was between 2,435 and 2,445. The S&P stopped right in the middle at 2,439. Any further gains could produce a runaway market. The last time we had a sprint like this was in February when the S&P spiked 130 points in 18 trading days to end with new highs on March 1st. it took us three months of consolidation to equalize those overbought pressures. I would gladly trade another three months of sideways summer movement for a second 130-point gain. The S&P has already rebounded 88 points from the May 18th low. For a market with no prior direction, this has been a monster rally.

I read some other commentaries and most analysts are now targeting 2,450 to 2,465 with some as high as 2,475. Most are just confused and are grabbing at major numbers as resistance points. When markets breakout well into blue-sky territory there is no really accurate way to predict a top.

I do not want to try and predict a top. I would rather just keep a running commentary of support points and look to buy the dips as they appear.

There is so much money on the sidelines because of the normal summer weakness and the various bearish market calls by big name investors, that this rally could continue farther than any expect.

Obviously, I am going to be very disappointed next week if 2,440 proves to be a climax top but I will still be appreciative for the gains we made last week. Investors are always trying to get positioned for the next move higher and those who were long last week were richly rewarded.

Current support should be 2,420 and then 2,400. This is the point where short covering and price chasing become major market movers. Shorts are in disbelief and anyone in cash is racing to chase stocks they believe are going to run away from them.


Fortunately, the Dow did not spike a couple hundred points. The 62-point gain on Friday was not enough to suggest there will be a multitude of sellers on Monday morning and several days of good solid gains are exactly what the market needs. Those big spike and die gains like those that we saw on March 1st are not conducive to a long-term rally. We need several days like Friday with solid 60-point gains and no drama.

I am not holding my breath since we have been conditioned over the last three months for sideways movement and no volatility.

There was a broad cross section of gainers on Friday with banks and energy the weakest. Defense, tech, consumer discretionary and even a couple of drug companies combined to lift the Dow.

I do not think the Dow is far enough over that prior resistance for it to be effective as support on a decline. That means support is still in the 21,000 range and that is 200 points below Friday's close.



The Nasdaq Composite surged 59 points on Friday to extend its breakout over the long-term uptrend resistance. The 6,200 level was support from the last rebound and provided a launching pad for the Thr/Fri sprint higher. The biggest news on Friday was the lack of decliners. Note in the winners and sinners list below how few Nasdaq stocks there were with losses over $1. Only 21 stocks lost $1 or more.

I have to put in the obligatory "Nasdaq is overbought" message after the 300-point gain in the last two+ weeks but there may be room to run. The Nasdaq is powered by earnings and those earnings have been strong.

Support remains 6,200 and I have no resistance on my chart until around the 6,500 level. While I seriously doubt we will just sprint up to that level that is the next line on the chart.




The Russell 2000 blew through resistance at 1,388 and 1,400 but hit a brick wall at 1,415 and closed 10 points off the intraday high on Friday. Next Friday is when the first rebalance list is released showing the dozens of stocks being removed from the Russell indexes. This typically causes a headwind the following week as retail investors try to jump in front of the actual rebalance selling later in the month.


The market had a good week after a slow start. It was driven by the big cap tech stocks but the enthusiasm was contagious. If we could just get the banks to recover next week, they could provide some additional lift. With interest rates rising, the banks should be recovering but the falling treasury yields, weaker economics, weaker dollar and low trading volumes are taking their toll. Most of the big banks closed near their 2017 lows last week.

The trend is our friend until it ends and the rally in the big cap techs could keep the current trend alive. There will eventually be a day of reckoning but without a major negative headline, I do not see a market decline for next week. Unfortunately, it is the ones we do not see coming that hurt the worst.

The terrorist attack in London on Saturday is depressing but it should not have any material impact on the U.S. markets on Monday.



Random Thoughts


The bulls cannot make up their mind. The +9% gain from last week was followed with a -5.9% decline this week. Most went back to the undecided column. The week-to-week results of this survey continue to show the lack of conviction by quite a few traders. Currently 73% are not bullish and the market is at new highs. That should/could provide more fuel for the rally if they become converts.

Last week results


Marissa Mayer, now 42, left Google to be CEO of Yahoo (YHOO) in 2012. Since then she has made nearly a quarter of a billion dollars running a company that continues to decline. Facebook and Google stole their advertisers. Their Yahoo web pages lost market share after makeovers by an army of programmers that obviously did not have any real world experience actually using the pages. Everything became an ad and content became sparse. Yahoo was hit with two of the biggest cybersecurity breaches in history and they did not even report it for two years. More than 500 million accounts were hacked in 2014 and one billion in 2013. More than 50% of the staff left and Yahoo continued to see earnings decline.

For her efforts in running a failing business, Mayer received about $900,000 a week in compensation including stock and options. She will get $187 million in severance if shareholders approve the Verizon acquisition.

Yahoo shareholders will vote this week to approve the $4.5 billion acquisition by Verizon. The phone company will take over the actual operating company and Yahoo will become Altaba, a combination of the words alternative and Alibaba. The company will hold shares representing 15% of Alibaba worth about $35 billion. Altaba will also hold 35.5% of Yahoo Japan worth roughly $10 billion. Verizon is paying the reduced price of $4.5 billion for the operating assets and the combination of those three items equals the $50 billion in market cap for Yahoo stock today.




 

Enter passively and exit aggressively!

Jim Brown

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"Sometimes people don't want to hear the truth because they don't want their illusions destroyed."

FRIEDRICH NIETZSCHE


 

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