The major indexes tried to rebound but only the Nasdaq was successful.

Weekly Statistics

Friday Statistics

Fear of the weekend event risk was the likely cause for the mediocre rebound in the Dow, S&P and Russell. The war of words with North Korea continued to intensify and President Trump said the U.S. was "locked and loaded" to respond if Kim Jong-un did anything stupid. China took the unusual step of saying they would not take sides if NK started a military conflict but they would respond if the U.S. started the fight. Since China has always had North Korea's back, for them to say they would not respond if NK started the fight, probably had a cooling effect on Kim. Without his protector, North Korea would be a lonely place in a battle with the USA.

NK did respond to the locked and loaded statement saying they would pound the U.S. into jelly. I am sure that struck fear into the U.S. military.

If North Korea was not enough geopolitical tensions, the president said he was not ruling out a military option in Venezuela. President Maduro replied with a call to meet with President Trump at the UN General Assembly next month. Maduro said he wanted to have a "personal conversation" with the president. In the same speech to the new ruling body in Venezuela he also said, he would not cede authority to any foreign power. Maduro and Chavez before him, routinely called the U.S. an evil power causing all the hardship in the country. It is a typical ploy of dictators to take the focus off of themselves and transfer it to some other entity, then they can take credit for trying to solve the problems this entity caused.

The markets traded in a narrow range with most of the gains in the early hours with the exception of the Nasdaq. The big cap techs rebounded from big losses to allow the Nasdaq to regain 40 of the 135 points it lost on Thursday.

Volume was light at 6.1 billion shares and the A/D line was almost dead even. There was a total lack of conviction on both sides.


The main economic report on Friday was the Consumer Price Index (CPI). The CPI rose 0.1% for July after a flat reading in June and -0.1% in May. There is no inflation. Analysts were expecting +0.2%. This puts a damper on the Fed's intentions to hike rates in December. They will need a sudden surge in inflation if they are still data dependent. I suspect, regardless the numbers they will try to find some reason to allow them to hike again. They have already begun to quote other factors in their justifications.

Food inflation rose +0.2% and energy declined -0.1%. The core CPI without those two components rose +0.1% with goods falling -0.1% and services up +0.2%. On a trailing 12-month basis the CPI is up +1.7% and well below the recent peak in February at 2.8%. The 12-month core CPI is also 1.7%.

Over the prior six months the headline CPI was down -0.1% in total and the first decline since 2015. The drop in oil prices has reduced prices for everything and the Fed continues to stress this is "transitory" but that transit could be with us for a long while.

The odds of a rate hike in September are zero with a minimal 4.1% chance of a rate cut. The current rate is 1.00%-1.25% and has a 95.9% chance of staying there.


The December futures are suggesting there is only a 35.9% chance of a rate hike. That combines the 1.25-1.50% with the very slim chance of a bump to 1.50%-1.75%. A bump that high has zero chance of happening and analysts believe the odds of no hike at all will increase over the coming months.

The most likely event at the September meeting is the start of QE taper where the Fed stops replacing all the securities that mature each month. They have put forth a plan to let a portion mature without replacement while the rest of the maturing securities would be replaced with new purchases. The market has not gotten too excited whenever this is mentioned but the last time they tried to taper there was a "taper tantrum" and the market crashed. While nobody expects a market tantrum this time because of the open communication for the last year that it was coming, it is best to never say never.


The lack of inflation in the CPI and the market crash on Thursday saw treasuries rally again in a flight to quality move. The yield fell to 2.189% and some analysts are saying we could see a 2.15% or lower if the market declines further.


The weak CPI also weighed on the dollar and it headed back towards its 12-month lows. This is beneficial for the 50% of the S&P sales that are overseas.


The calendar for next week is highlighted by retail sales, Philly Fed Manufacturing and the FOMC minutes. Traders will be watching the minutes for signs of the QE taper details. That is the most important event for the week.

The retail sales are expected to show a big rebound from June's -0.2% decline and a miss there could be disappointing for the market because it suggests a weak economy.

The Philly Fed Manufacturing Survey is the proxy for the national ISM two weeks later. This will be insight into the national economy.

The Fed's Jackson Hole meeting is still two weeks away and Yellen is expected to set the stage for the QE taper in her speech.

I added the budget and debt ceiling deadlines to the calendar because it is looking more likely there is going to be a major battle and the potential for a government shutdown. Quite a few senators claim they will not vote for the budget or debt ceiling as proposed and the other side is saying they are not going to allow changes. With the extreme partisan politics in Washington today, both sides are fortifying their bunkers for a long drawn out fight.


The earnings calendar shrank for next week now that most of the big name companies have reported. However, the last three Dow components will report with HD before the open on Tuesday, Cisco Systems after the close on Wednesday and Wal-Mart before the open on Thursday.

Alibaba is the last big Nasdaq tech stock to report before the bell on Thursday. The week is heavily stacked with retail stocks and lately it has been feast or famine with either big beats or big misses.

The earnings should not move the market this week but they could be a contributing factor.


More than 455 S&P companies have reported and earnings are expected to have grown by 12.0% when the cycle ends. Of those 455 companies, 73.6% have beaten on earnings and 68.3% have beaten on revenue. The long-term averages are 64% and 59% respectively so we are well above the averages.

There have been 55 guidance warnings and 34 positive preannouncements. The forward PE remains 17.6.

There are 20 S&P companies reporting this week.

On Friday, JC Penny (JCP) reported an adjusted loss of 9 cents that was larger than the 5-cent loss analysts expected. Revenue of $2.96 billion beat estimates for $2.84 billion. Same store sales declined -1.3% and slightly worse than the -1.2% analysts expected. The company guided for the rest of 2017 for sales to be down 1% to up 1%. They expect earnings to be in the range of 40 to 65 cents and analysts were expecting 49 cents. Shares fell 16% on the news.


Bottomline Technologies (EPAY) reported adjusted earnings of 28 cents. Analysts were expecting 25 cents. Revenue of $93.5 million beat estimates for $90.9 million. EPAY operates as a Software as a Service (SaaS) company handling digital payments, documentation and digital banking. They offer Paymode-X, a cloud based payment network with invoices, payments, ledgers and vendor support.


While there were only a couple reports on Friday, there were some notable reactions to stocks reporting earnings on Thursday evening. Fan favorite Nvidia (NVDA) reported earnings of $1.01 compared to estimates for 69 cents. Revenue of $2.23 billion also beat estimates for $1.96 billion. They guided for the current quarter for revenue of $2.35 billion and analysts were expecting $2.13 billion. Despite the blowout earnings and guidance, shares fell $9.

Think about this. Revenue rose 56%, net income rose 123%, revenue in the data center segment rose 175%. Revenue from gaming rose 52%. The company has posted total revenue growth of more than 50% in each of the last three quarters and triple digit earnings growth for five consecutive quarters. So why did Nvidia shares crash? Because the stock is up 700% over the last three years and $35 in the last six weeks. Is Nvidia still a great stock? Absolutely, because it is growing faster than any other tech stock in the market and many times faster than any industrial stock. These gains will continue because they keep announcing new chips, new equipment and most importantly new performance standards. They just announced a new chip that is 12 times faster than their current top of the line chip and the current speed leader. Yes, they are replacing the fastest chip available with one that is 12 times faster. What has Intel and AMD done lately that even remotely compares?

When Nvidia fell back to $140 after their last earnings, I was pounding the table on the buying opportunity. While I do not know where this current post earnings drop will end, it is still a new buying opportunity even at the current level. If it declines any further it will just be a better opportunity.

Short seller Andrew Left was out talking his book on Nvidia again on Thursday saying he shorted Nvidia ahead of earnings because they were grossly overbought. You may remember him touting his short position in June and predicting the stock would decline to $90. He only missed it by $50 and if he is still holding that initial short he is in a world of trouble with the stock hitting a new high at almost $175 on Thursday. Left could continue to make waves with his short thesis and push the stock lower in the short term. If he does, we should thank him for the buying opportunity. Needham just upped their price target to $200.


Snap Inc (SNAP) continued to disappoint both with earnings and the tone of the conference call. Snap reported a loss of 16 cents compared to estimates for 14 cents. Revenue of $181.7 million missed already lowered estimates for $186.9 million. Snap officials blamed unnamed competitors (Facebook, Twitter and others) for "growth hacking" and using phone notifications to lure back prior users. An analyst spoke up and said "why is that different? Snap is doing exactly the same thing." The Snap answer was convoluted and the analyst laughed out loud and said, "I did not even understand his response" suggesting the CEO was being specifically vague. That would not have been a problem except the microphone was still on and everybody on the call heard the laughter and comments. This was typical for Snap. They tend to talk down to analysts on the call and then analysts talk down the stock. Snap will not give guidance so analysts are flying blind when they produce their estimates and they are going to be wide. Much of their problems are self-inflicted. Shares fell to $11.83 on their way to single digits.


Etsy (ETSY) shares spiked 2% after news that CEO Josh Silverman had purchased 64,000 shares in the open market for $15.67 each. That is roughly a $1 million acquisition. Silverman became CEO in May. Etsy blew away earnings the prior Friday.


Crude prices tried to rally after the big decline in inventories and the OPEC & non-OPEC meeting early in the week. WTI actually pushed through $50 briefly but fell back on the weak economics and general market weakness. Sometimes when the market crashes, you have to sell other things to cover margin calls and raise cash. That was probably a driver for crude prices.

The IEA pointed out that the decline in global inventories was not enough to allow OPEC to end its production cuts for a long time. The IEA said those cuts "could be here to stay" if something does not change in the demand cycle. Global inventories are declining about 500,000 bpd but even if the cuts lasted until the end of Q1-2018, they would still be 60 million over the five-year average and the target for OPEC. The compliance for the 1.8 million bpd production cut fell to 75% in July or about 470,000 bpd less than they agreed to cut.

On the positive side, the IEA raised their demand growth estimates for 2017 to 1.5 million bpd after Q2 demand soared to 1.8 million bpd. That is not expected to continue but they are seeing solid demand from Germany and the US. The EIA said US demand rose 820,000 bpd in May and the highest since 2007. China's demand rose 290,000 bpd in the first half of 2016 but European demand fell -125,000 bpd.

Global supply of oil rose 520,000 bpd in July to 98.16 million bpd. OPEC output rose 230,000 bpd to a new high of 32.84 million bpd, and this is with 75% compliance on the 1.8 million bpd of cuts.

I warned recently that Saudi Arabia was only promising to cut exports by 1.0 million bpd because they needed the extra oil to burn to produce electricity in August. They actually admitted it last week when Saudi Energy Minister Khalid al-Falih said exports would be limited to 6.6 million bpd to satisfy peak power demand in August. So much for the benevolent Saudi kingdom trying to do their part in boosting oil prices. We knew the truth would eventually appear.


U.S. shale drillers can see the future and it is bearish. More than anyone, they understand that demand is going to fall off a cliff in early September and prices will fall as well. To combat the expected fall in prices they are cutting back on active rigs. Five rigs were deactivated last week and 4 rigs the week before. Over the last five weeks, they have only added a net of 3 rigs. Multiple companies lowered capex guidance when they reported earnings. Projected well completions have been reduced with some completions pushed out until 2018.

U.S. companies are not joining OPEC in the voluntary cuts. They are just planning their expenses for the next down cycle in crude prices. The result is the same. Depletion will do the rest. In the Permian, they are losing 154,000 bpd per month to depletion in older wells. If they slow drilling that depletion will offset new production and total production will not rise.




Markets

The major indexes tried to rebound in a low volume market but the weekend event risk was likely to blame for their failure to make material gains. The early morning gains were sold at the close when traders realized stocks were not going higher.

I actually think the fact they did not fall back into negative territory was a positive. That could mean once traders see there were no military attacks over the weekend they will be more conducive to buying again. Of course, all the new weekend headlines will have to be factored in as well.

The S&P fell 36 points on Thursday and rebounded only 3 points on Friday. That is hardly a bullish event but there was the event risk. The S&P is flirting with very light support at 2,440 with the 2,420-2,410 the real target level.

While a 36 point drop is a lot for one day, the S&P is only down -1.6% from its closing high from Monday at 2,480.91. So far, Thursday's decline was just a hiccup rather than a sell off.

Until the S&P moves under 2,420, I am not going to be worried. We know the next 8-weeks are normally bearish so we should expect further declines and be happy if our expectations are wrong.

A drop to 2,381 would be a 3% decline and 2,332 would be a 5% decline. In normal markets a 3%-5% decline occurs a couple times a year.


The Dow declined -204 points on Thursday and rebounded only 14 points on Friday. Despite this decline, the Dow is only -1.2% below its closing high of 22,118 from Monday. The winners list from Friday was led by those normally at the top with the exception of Microsoft, which hardly ever gains $1 because of the 7.7 billion outstanding shares. It takes a lot to move that stock. Microsoft hit a 6-week low on Thursday and Disney a 9-month low so they were due for a decent rebound. It was probably not a change in their trend.

Apple has been an outperformer since their earnings. The iPhone 8/Pro is now expected to be announced on time but with slow deliveries. That is fine with analysts and they are just adjusting their Q4/Q1 sales expectations. Several key features are now rumored to be off the table and that has freed up production schedules.

The Dow could be a leader again if the market turns positive next week. The falling dollar and rising overseas economies favor the blue chips in the index.

Initial support on the Dow remains 21,500 and Friday's close was 350 points away. It would not hurt for the Dow to rest for a few additional days to let emotions settle before making another attempt to move higher.



The Nasdaq was the rebound leader on Friday with a 40 point gain on the Composite Index and a 43 point gain on the Nasdaq 100. The Nasdaq Composite is only down -2.6% from its 6,422 closing high from July 25th. The index did not make a new closing high on the 7th along with the other big cap indexes.

The Composite Index has support at 6,100 and closed at 6,256. From the intraday high of 6,460 on the 27th to the low on Thursday, the Composite has lost 246 points.




The Nasdaq 100 found initial support in the 5,800 range and closed at 5,831. That is roughly 257 points above real support around 5,575. Except for Thursday, the big cap index has been holding its recent gains even though it was not moving higher.


The Russell 2000 is the problem index. The Russell has fallen -78 points or -5.4% from its July 25th high of 1,452. The Russell began to decline before the other indexes and has fallen significantly farther. Current support is 1345-1355 so I am using 1,350 as a round number. If it reached that level, it would be a 6.5% drop. A move below 1,345 would be a significant negative event for the broader market.


Monday is going to be a critical day. The headlines from the weekend will be filtered and decisions made on whether they are important. Traders will determine if it is safe to go back into the market and sellers will be waiting for the next bounce. Volume is likely to be light and intraday volatility could be strong. Eventually one side will win the battle. Monday's outcome could influence the market for the rest of the week.

However, remember we are entering into a normally weak period and rallies could be sold. There is no rush to buy dips because there may be a better buying opportunity in the weeks ahead.

After the House comes back from the August recess there are only 12 work days before the budget and debt ceiling must be approved. The odds of this happening are very low. There will be volatility around these events in September.

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Random Thoughts


This survey ended on Wednesday, before the big market drop. A few more bulls eased back over to neutral but I would expect next week's survey could be significantly different unless we get an early week rebound. 66% still believe the market is not going higher.



With all the headlines about North Korea attacking Guam and President Trump promising instant retaliation, I found it interesting that there are only 6 B1 bombers in Guam. Since that is the vehicle to deliver the long distance retaliation, it would seem to be a small fleet unless they are going to use nuclear weapons. The best description of a plan to retaliate suggests they will use the B1s and some cruise missiles to take out their 30+ missile launch and storage locations. However, there are no carrier strike forces near the Korean peninsula and it would take several weeks to move them back into position. Apparently, the U.S. is not taking the threat seriously despite the constant headlines.

Also of interest is that only 30 of the 62 B1 bombers in inventory can fly because of a lack of spare parts. This condition came from continuous budget cuts over the last 8 years. Nearly half of our existing fighters are grounded for parts and more than half of our tanks are mothballed because they have been scavenged for parts. Stockpiles of bombs and rockets are around 40% of recommended levels. We are not prepared to fight an actual war. We have the greatest military in the world but budget cuts have caused more damage than any enemy has.


Somebody in Illinois won the $393 million Mega Millions jackpot. Their odds were 1 in 258,890,850. You have better odds of being struck by lightning 3 times. Assuming they took the lump sum option of an estimated $247.3 million, the taxes are going to be painful. The Federal government will keep 25% up front and eventually get 39.6% or $97.9 million. Illinois will get $12.4 million up front. While a tax bill of $110.3 million is a lot of money, the $137 million that is left over would definitely pay my bills. I do not think any of us would complain about the taxes. Just give me the check please!


The world's oldest man died just short of his 114th birthday. He was born in 1903. He survived both wars and years in Auschwitz where his wife and two kids were killed. He was constantly asked what his secret was to a long life. He always replied, "I do not know. There have been smarter, stronger and better-looking men than me who are no longer alive." Francisco Olivera, a resident of Spain, now has the title of oldest man at 112 years and 242 days. The oldest verified male ever was 116 years and 54 days old when he died in Japan.

The oldest living woman is Jamaican resident Violet-Mosse Brown at 117 years, 155 days. She was born March 10th, 1900. When asked her secret she said, "Really and truly, when people ask what me eat and drink to live so long, I say to them that I eat everything, except pork and chicken, and I don't drink rum and them things," There you have it, the secret to living longer.

World's Oldest Women

World's Oldest Men


The CBOE said options on VIX hit a record 2.56 million contracts on Thursday. VIX futures volume hit a record of 939,000 contracts. Analysts said the sudden spike in volume to record levels suggested Thursday's decline was more serious than it appeared on the surface. With the near constant addition of volatility products including ETN/ETFs there could be an issue with leverage since all these products link back to the VIX. With the various inverse ETFs and the 2x, 3x ETFs there is the potential for very wide intraday swings in volatility that is accentuated by the heavy volume in the underlying that is much higher than would be dictated by the swing in the S&P. In a major market move, traders and funds are forced to buy back short positions at the worst possible time and that rapidly inflates prices just like a monster short squeeze in a thinly traded equity position. What this means is that individual traders should not be short volatility ETN/ETFs or you could eventually have a very bad day.



 

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Jim Brown

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