The Dow, S&P and Russell have erased the declines to close at new highs today.

Market Statistics

The Dow, S&P and Russell 2000 all posted decent gains to close at record highs. There were no signs of weakness and even the Senate Testimony by Jeff Sessions failed to dent the rally. The Nasdaq indexes gained a decent 44 points each but they have some catch up to do before they will be making new highs again.

The big cap tech stocks posted decent gains after a sluggish start to the morning. Investors are still regaining their confidence but it is coming back.


Over the weekend I warned to be cautious until the Nasdaq 100 ($NDX) moved back over 5,750 on decent volume. The index tried to cross that level twice today, once at the open and again at the close and was unsuccessful both times. However, I do expect that level to be broken to the upside in the days ahead.


There were two economic reports today. The NFIB Small Business Optimism Index for May was flat with April at 104.5. The internal components were nearly unchanged but those respondents planning to increase employment rose slightly from 16% to 18%. Most of the other components were either flat or changed by only 1 point. The sales expectations were an exception with those expecting higher sales rising from 20% to 22%. Those planning on raising prices rose from 18% to 21% so that is probably why the same percentage expected sales to rise.

The Producer Price Index (PPI) for May was flat after a +0.5% rise in April. The persistent low prices for petroleum fuels are helping to keep inflation in check. Prices for goods declined -0.5%, services +0.3% and core goods +0.1%. Over the trailing 12 months, the final demand prices are up 2.4%.

Both reports were ignored with all eyes on the markets instead. The calendar for the rest of the week is headlined by the Fed rate decision and Yellen press conference on Wednesday. The chances of a rate hike on Wednesday are 100% with 99.5% expecting a quarter point and 0.4% expecting half a point. There is zero real probability of a half a point hike. That would be a market killer. The chances for a September hike are only 24%. That should change depending on the Fed's statement on Wednesday. With the Atlanta Fed real time GDP Now holding at estimates for 3.0% growth for Q2, the Fed has no reason not to hike rates this week.



The Philly Fed Manufacturing Survey is the next most important on the list because it is a proxy for the national ISM in two weeks. The NAHB Housing Index and the New Construction will be important and analysts expect them to miss estimates.


The earnings calendar is devoid of any material reports for Wednesday. The highlights for the week will be Finisar, Kroger and American Outdoor Brands, formerly Smith & Wesson.


In stock news, Tesla (TSLA) was upgraded from hold to buy at Berenberg and they raised the target price from $193 to $464. With the stock at $375, they may be a little late on that price target upgrade.

On CNBC this morning, Ron Baron was targeting $500-$600 in 2018 and $1,000 by 2020. He said they would be making a million cars a year by 2020. Add in the massive battery output from the gigafactories and the solar shingle component and they will be posting explosive growth. Let's hope he was right. Shares have doubled since December. Elon Musk is already planning a second gigafactory because demand is expected to be so strong.


Western Digital (WDC) was in the news again. The company was initiated with a buy rating and a $130 price target at Aegis Capital and saying there was additional "long term appreciation" above that level. At the same time, Japanese media said WDC would raise its bid for the Toshiba memory business to $18.2 billion. The bids close on Thursday. Guggenheim reiterated a buy rating and a $125 target saying WDC would be fine regardless of whether or not it buys Toshiba.


Goldman Sachs (GS) initiated coverage of refiner Tesoro (TSO) with a "conviction buy" rating and $121 price target saying it was undervalued after its $6.4 billion acquisition of Western Refining (WNR) that was just completed. Goldman expects the combined companies to generate solid cash flow. Western benefitted from having refineries near the Permian Basin and access to cheap oil. The company is going to change its name to Andeavor and its symbol to ANDV on August 1st. The company now has 1.1 million bpd of refining capacity. They are not going to change the name on the 3,000+ Tesoro service stations. Tesoro now has 10 refineries in 8 states.


After the bell, H&R Block (HRB) posted earnings of $3.76 compared to estimates for $3.51 per share. Revenue of $3.04 billion beat estimates for $2.32 billion. They also announced a dividend increase to 24 cents per share. They have posted consecutive dividends since 1962. They repurchased 14 million shares in the quarter for a cost of $317 million. Shares gained 10% in afterhours trading.


Shares of Alexion Pharmaceuticals (ALXN) spiked $4 in afterhours when news broke that the Biogen CFO will leave after 16 years to join Alexion as CFO. The change will be effective on July 31st. ALXN shares rose $4 and Biogen (BIIB) shares declined $6.


Yahoo (YHOO) completed the sale of its operating business to Verizon for $4.5 billion. Shareholders overwhelmingly approved the sale last week. Yahoo was one of the Internet's iconic brands and had more than 1 billion users, 750 million of which had seen their personal information stolen in two cyber attacks. Verizon is going to combine the Yahoo assets with the AOL assets into a company called Oath and led by AOL CEO Tim Armstrong. Yahoo's CEO, Marissa Mayer collected her $23 million golden parachute and is out of a job. The remaining Yahoo assets consist of approximately a 36% stake in Yahoo Japan and 15% stake in Alibaba. Yahoo will change its name to Altaba (Alternate Alibaba). The company will file with the SEC to become a publicly traded, non-diversified, closed-end investment management company. The YHOO symbol will change to AABA on June 19th.


Facebook (FB) may soon be in the subscription content business. They are considering a pay wall where content companies like the Wall Street Journal, Barron's, etc, will be able to charge for their content posted on Facebook. If you subscribe to this content, it will appear in your news feed. Content providers have been begging for this for a long time in order to have access to Facebook's 2 billion members. That is a monster advertising pool. According to a recent survey 44% of Americans get their online news from Facebook and that is scary considering how much of it is fake news. YouTube supplies 10%, Twitter 9%, Instagram 4%, Linkedin 4%, Snapchat 2% and Tumblr 1%. The real winner from this Facebook feature will of course be Facebook because they will collect a commission whether you actually read the news or not.



 

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Markets

The market rally today was boosted by the pre Fed trend where Tuesdays before a Fed meeting typically post decent gains. The Tuesday before the May meeting did not follow the trend but historically it is about 80% accurate.

The actual Fed rate decision is not expected to move the market. It is already baked into the cake but the news that could be a surprise would revolve around their balance sheet. They are still buying new treasuries as existing holdings mature. They are doing this to maintain their $4.5 trillion balance sheet. They have discussed putting a cap on their future purchases where they would only repurchase a set dollar amount per month and the rest would simply fall off. Hypothetically, if they had $60 billion maturing next month and the cap was $25 billion, then $35 billion would mature and the balance sheet would decrease by that amount. There is a shortage of treasuries in the market and the Fed's constant repurchasing to keep QE alive, is holding down interest rates because of the competition in the market for the remaining supply. By purchasing fewer treasuries, it would allow interest rates to rise slightly without being dependent on the Fed Funds Rate.

In theory, the market should be ok with this process. When the Fed mentioned in the FOMC minutes the market did not crash so that trial balloon was successful. I would not be surprised to see it again soon, if not on Wednesday. I would expect the topic to be discussed in the Yellen press conference.

The Dow has seized the leadership reins for the market. The Dow surged to a 93-point gain on a broad based rally. Only 8 Dow stocks were negative and all lost less than $1. Even Apple turned positive for the first time in several days.

Support remains 21,130 but that is rapidly fading in the rear view mirror. There is no clear-cut resistance in the near future but round numbers like 21,500 could be a challenge.



The S&P closed at a new high but only by a point. The old high was 2,439.07 and today's close was 2,440.35. That means the 2,440 resistance level is still a factor. We need one more decent gain to power the index out of its recent consolidation pattern. Support remains 2,420.


The Nasdaq Composite posted a decent gain and moved back over the prior round number support at 6,200 but just barely. The index is still 100 points below its closing high of 6,321 but definitely in reach. It took several days to recover the lost ground in the prior two selloffs. As long as the big cap stocks just remain positive, the index should do fine. There is no need for them to charge off to new highs but we would not complain.




We saw something today that we have not seen in a long time. The big cap indexes and the Russell 2000 small caps both making new highs at the same time. That is bullish for the market and suggests the rally has further to go.


The market may stutter along for the next several days but assuming Yellen does not develop foot in mouth disease and cause a market drop, we should see the rally continue. All the factors are positive with economics improving slightly in some cases and holding their gains in others. Earnings are positive with double-digit gains expected over the next three quarters. Europe has fallen out of the spotlight with the UK elections failing to cause a crash. Washington politics seemed to have turned down the volume slightly since the Comey testimony. The market did not even blink about the Sessions testimony today. If certain people can stay out of the headlines the rest of the week it would be market positive.

Just remember, the events that cause the most market damage are the ones nobody expects. If we become too complacent, trouble usually follows. We do not want a market that simply shoots straight up. Slow and steady wins the race.

Enter passively, exit aggressively!

Jim Brown

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