There are only three weeks left in September and several critical events have passed.
The biggest problems on our wall of worry for September evaporated after the House and Senate both passed the compromise proposal to fund the government for three more months and temporarily suspend the debt ceiling for the same period and allocated $15.3 billion to Hurricane Harvey relief. The government shutdown can was officially kicked down the road to December 15th. President Trump signed the bill Friday afternoon. The market should have rallied on that news but there were plenty of undercurrents that produced a drag on stocks.
The Dow opened negative and eventually gained 61 points by mid morning but barely avoided closing negative after Apple shares fell -$2.63 to subtract 18 Dow points. The Nasdaq added to the decline with a -51 point drop on the Nasdaq 100 as the big cap tech stocks fell hard.
Friday's economic reports failed to interest the market. Wholesale Trade for July rose 0.6% after a 0.7% rise in June. Because it was a lagging report for two months ago, it was ignored.
Consumer Credit for July rose by $18.5 billion after an $11.8 billion rise in June. However, June's total was the smallest gain since December. The trailing 6-mo average is $15.65 billion. I suspect July was a rebound from an accounting challenge in June. Because this was a July number, it was ignored.
The calendar for next week is devoid of any market moving reports. The price indexes will be the most important because of the Fed's desire to see some rising inflation. They will get their wish in next month's reports because of the hurricane-induced spike in fuel prices.
The yield on the ten-year treasury fell to 2.037% intraday before rebounding slightly at the close. Everyone wants to short treasuries but everyone that does loses money. The current flight to safety should continue as long as North Korea is launching missiles.
The Dollar Index fell to 91.35 and the lowest close since January 2015. The declining dollar is going to be beneficial to corporate earnings since roughly 50% of S&P-500 sales are overseas. The sharp rise in the euro is helping this earnings trend.
You cannot turn on radio or TV without seeing news on Hurricane Irma. The storm is expected to make landfall in Florida late Saturday night at Cat 4 intensity. Islands in its wake have been devastated with 80%-90% of structures demolished. This will be a major storm. Because Florida is hit more often than Texas, the response is significantly different. People have fled and emergency crews are staffed and waiting.
The market was ignoring its approach other than pounding insurers early in the week and rewarding Home Depot (HD) and Lowes (LOW). Both companies have delivered at least 1,000 truckloads each of relief supplies to local stores and have prepositioned hundreds more to rush into the areas that are hit the worst. These companies have turned hurricane response into a science.
Currently, Jose is a cat 4 storm but it is expected to turn north and back out to sea. Hurricane Katia made landfall in Mexico on Friday.
Earnings are definitely over. There are only two companies with any investor interest for next week. Those are Cracker Barrel and Oracle. This is why portfolio managers use September to restructure their positions. They analyze the recent earnings and guidance and then add/subtract positions to profit from Q3/Q4 earnings and the start of the best six months of the year on November 1st.
Kroger (KR) reported earnings on Friday of 47 cents and that beat analyst estimates for 39 cents. Revenue rose 3.9% to $27.6 billion, which barely beat estimates for $27.49 billion. Same store sales rose 0.7% compared to estimates for 0.4%. The company guided for same store sales of 0.5% to 1.0% for the rest of 2017. They guided for earnings of $2.00-$2.05 and analysts were expecting $1.98. Analysts said the revenue growth guidance was weak and shares were hammered for a 7% drop.
Part of Kroger's problem came from a blog post by Target (TGT). The retailer said it was discounting thousands of products in an effort to move away from excessive promotions. They are moving towards the Wal-Mart model of "everyday lowest price" but insisted they would still offer specials on the "right products at the right time." Target shares fell -2%, Costco -1.2% and Wal-Mart -1.5%.
Obviously, these major chains are getting ready for the price war with Amazon and Whole Foods. They should not be worried because even with the recent price cuts at Whole Foods they are still significantly more expensive. The price cuts ranged from 1% to 9% and only on some items. Once Amazon begins offering larger discounts to prime customers, it may become more competitive.
Equifax (EFX) shares fell $19 after announcing they had been hacked and information on 143 million customers had been stolen. There were some unusual trades to go along with the news. Only a couple days after the hack was discovered, several officers sold $1.8 million in shares. They sold at roughly $145 per share. This immediately caused concerns but Equifax said, "three executives sold a "small percentage of their shares" but they "had no knowledge of the cyberattack."
Also, Equifax put options trade an average of only 13 contracts per day. For the entire month of July there were only 260 put contracts traded. However, several days after the cyberattack was discovered, 2,600 of the September $135 puts were purchased for about 65 cents each. That was an investment of roughly $156,000. After Friday's stock drop, those were worth about $12 each. That is about $3.2 million. Obviously, that trader will be getting a visit from the SEC.
Equifax created a website where you can see if your data was part of the data stolen. However, you have to click through a link that says you agree not to sue them or participate in a class action suit. Otherwise, there is no way to know if your data was stolen. They are taking a lot of heat on that attempt to skirt legal responsibility.
American Outdoor Brands (AOBC), formerly Smith & Wesson, reported earnings after the close on Thursday and paid the price on Friday. They reported adjusted earnings of 2 cents that missed estimates for 11 cents. A year ago, they earned 62 cents. Revenue of $129 million missed estimates for $148 million. For the current quarter, they guided for earnings of 7-12 cents and revenue of $140-$150 million. The company said sales of firearms had continued to decline under a Trump presidency. There is no urgency to buy a gun since there are no prohibitions on the horizon. Shares fell 18%.
Finisar (FNSR) reported earnings of 40 cents that matched analyst estimates. Revenue was $341.8 million and beat estimates for $341 million. They guided for revenue of $322-$342 million and earnings of 27-33 cents. Analysts were expecting 50 cents and $370 million.
The problem gives us some insight on Apple's production problems. Finisar is widely believed to be providing the 3D sensing unit for augmented reality and facial recognition in the iPhone X, 9, Edition or Pro, whatever it ends up being called. Finisar said a "large cell phone customer in the US" required some adjustments to the VCSEL array that is part of the 3D sensing. The CEO was questioned on the call if they had missed the order from Apple with the adjustments to the array. The CEO said, no, sales were just pushed forward a quarter and we are ramping up production now. The shortage of these parts could be part of Apple's production problem.
Apple (AAPL) is scheduled to announce their new products on Tuesday. The Wall Street Journal was out with a warning on Friday that shipments of the new phone were going to be delayed even further. Besides the 3D sensor, the WSJ said there were production issues with the OLED screens, which are made by Samsung. I cannot believe Apple would put its future in the hands of its biggest competitor. Reportedly, the fingerprint scanner has been dropped in favor of an infrared facial recognition feature. The warning from the WSJ caused Apple shares to fall -$2.63. We have been hearing these warnings for the last six months but coming this close to the announcement it caused a lot of concern.
There are analysts worried the Apple product launch could be a disappointment for the market. Boris Schlossberg, from BK Asset Management, warned a disappointing announcement could drag the entire market lower because Apple is the largest stock in the S&P, Dow and Nasdaq indexes. A sharp decline could impact the entire market. Apple shares do have a habit of selling off in the 3-4 weeks after a product launch. However, Apple is expected to announce 3 iPhones, 4K Apple TV and a new stand alone Apple Watch. Hopefully something will produce some excitement.
Somebody is really bullish on silver. Somebody bought 19,500 contracts of the January 2019 $25 LEAP calls on the SLV ETF. The trade went off at 47 cents or roughly $916,500. With the ETF at $17 today, that would take a 50% rally to end in the money in 2019. The ETF did trade as high as $48 in 2011 and it will eventually trade there again. Whether it will do it before January 2019 is the $916,000 question. Unless this investor has some inside information about an impending shortage of silver, this is probably a hedge against some other position. Gold and silver spike on geopolitical events and North Korea will be a festering sore for the foreseeable future. Once this trade began showing up in the news, open interest quickly spiked to 33,000 so the followers were definitely active.
North Korea was widely expected to launch a new ICBM on Saturday but it has not happened. Analysts believe the delay could be due to a strong period of solar storms last week that are hitting the earth's protective atmosphere this weekend. Because the missile travels outside the atmosphere, the guidance and electronics can be impacted and cause a malfunction. If North Korea wants a valid test, they need to wait a couple days until the solar activity has faded.
This Korean missile threat scenario is ridiculous. They have been preparing for the last two weeks to launch this missile. If we suspected them of bad intentions, it would be extremely easy to just launch a single cruise missile to eradicate it whenever a Korean missile reached the launch pad. They are never going to be a real threat as long as it takes them two weeks to get a missile ready to launch. Once they can launch an accurate ICBM from a mobile launcher they will be a threat. That assumes Kim Jong-Un is ready to commit country suicide. If they ever did attack somebody with a nuclear weapon, North Korea's military targets would be decimated in return and that would include Kim.
Crude prices rallied to $49 midweek for multiple reasons. Saudi Arabia said it would cut export allocations by 350,000 bpd beginning in October. They are trying to counteract the weak demand season with less oil hitting the market. Secondly, Hurricanes Irma and Jose are killing the shipping lanes from the Middle East. Tankers headed for the U.S. are faced with these two major storms right in their path and they have been there for more than a week. Tankers will have to loiter in place in the eastern Atlantic until the storms run their course. I am sure there are quite a few trailing Jose just far enough behind the storm to stay out of danger. This is going to cause a major traffic jam when they approach the Gulf ports all at once. Imports as reported by the EIA on Wednesday are going to take a sharp drop over the next couple weeks and then see a sharp rebound when all those tankers appear.
U.S. production fell -8% from 9.53 mmbpd to 8.781 mmbpd last week. Imports fell from the 8.15 mmbpd average to 7.08 mmbpd. Gasoline demand fell -700,000 bpd to 9.163 mmbpd. The drop in production is of course temporary and more than likely has already been recovered or at least will be by the end of next week.
Analysts were also concerned that Irma would not make the turn north into Florida and continue on a straight line to the oil patch offshore from Louisiana. There was no guarantee it would turn as expected. When that turn became more likely on Friday, crude prices collapsed.
Baker Hughes rig counts showed a decline of 3 oil rigs but a gain of 4 gas rigs. Offshore rigs remained unchanged at 16 and a multiyear low.
The four-day rally from last week ended on Monday with the S&P hitting the resistance high at 2,480. The index ended with a 15-point loss for the week at 2,461. Despite the decline, the S&P is just one good day away from a new high. With the political deadlines pushed out into December, the biggest challenge will be normal portfolio manager restructuring in September.
The second challenge will be the weakness in the big cap tech stocks. It may only be temporary because we have seen the dips bought many times. However, they do have a lot of accumulated profits that managers may want to capture before year-end. Doing it now and shifting into other positions before November, would be a wise strategy. While they could go higher, there is little reason to risk the existing gains. There is always the threat of an Apple disappointment on Tuesday. Even without a disappointment, shares typically decline over the next 3-4 weeks after an announcement.
The S&P chart is neither bullish nor bearish. The minor 15-point decline for the week after a 52-point gain the prior 4 days is just a normal blip. The S&P would have to decline below 2,440 again to turn the chart bearish and even then, that is only about a 2.5% decline from the highs.
The Dow remains the weakest index with strong resistance at 21,900 and again at 22,000. Support is 21,600, 21,500 and 21,300. The Dow is suffering from the 30 stock curse. Individual stocks were lifting it back in July/August and now individual stocks/sectors are weighing on the index. Note that the breadth was negative with 20 out of 30 stocks negative and overpowering the five big gainers at the top.
The uptrend support is critical. If that were to break, it could trigger some additional selling from investors unsure if they want to hold over September volatility.
The Nasdaq Composite closed at a new high on Monday but ended with a 75-point loss for the week. The 38-point decline on Friday was directly related to the sharp losses in the big cap techs. Nvidia closed at a two-week low as did Tesla. Apple was the big drag with a $2.63 drop on Friday and a $6 drop for the week.
As I wrote earlier, if managers decide it is time to rotate out of big cap techs, the market is going to have a bad month. Despite the recent weakness, I do not expect that to happen. Those stocks have the highest growth rates and with the exception of Amazon, the strongest earnings. There may be some selling but others are probably looking for a dip to establish positions.
Support is around 6,200 followed by 6,100. We just need to keep our fingers crossed that this pattern does not turn into a double top. Note that this is the third time in 2017 where big declines turned into several weeks of choppy trading and consolidation before a new rally appeared.
The Russell rallied for 7 consecutive gains and has been consolidating those gains and holding above the 1,400 support level for the last four days. The 1,399.43 close on Friday was close enough to 1,400 for me.
September is normally the most volatile month of the year. That is because normally there are budget battles in Washington that only get solved at the last minute. The new fiscal year starts on October 1st. September is also portfolio-restructuring month. Second half lows typically occur in late September and the first two weeks of October. Now that the political cloud has been lifted, I would like to think the rest of September will only be choppy rather than directionally bearish. There is no guarantee historical trends will be followed or that some new headline will not appear to disrupt the market.
I would recommend keeping some cash in your account just in case a buying opportunity appears.
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Every week when I click on this survey, I am always surprised by the results. The indexes were down for the week but bullish sentiment rose 4%. This survey does end on Wednesday so only two negative days had been seen when it closed. The bullish number is still almost 10% below normal. 71% still believe the market is not going higher.
Oppenheimer's chief investment strategist John Stoltzfus said on Friday, the North Korea problem and political issues will not derail the rally. He expects another 7% gain into year-end. "We do not believe we are headed into a period which will see the markets turn chaotic from here to the end of the year." "We also do not expect the market to take off in a straight line higher."
Stoltzfus is predicting the S&P will end the year at 2,650. Out of 16 top strategists, he is the second-biggest bull. He believes the passage of a tax cut and some infrastructure spending could see his target reached earlier or even surpassed.
His views are not shared by everyone. CNBC did an online survey asking if visitors expected the market to rally 7% by the end of December. Only 32% said yes.
Fundstrat Global Advisors co-founder, Tom Lee, is predicting the market will decline 5% over the next 30 days. He blamed risk aversion in the credit markets and a bond bubble. He said investors are also worried the Trump tax reform program will suffer the same defeat as the Obamacare repeal. Since investors are already factoring in some additional earnings from tax reform, that would be negative for the market. He warned that investors were betting on President Trumps 15% corporate tax rate and anything other than 15% would be market negative. Paul Ryan has already said there is no hope for 15% with 20% to 25% more likely. Once that is factored into the outcome, earnings estimates will be revised lower. He also warned of deterioration in market internals with fewer stocks supporting the indexes.
Since the election, the markets have rallied strongly. With average gains of about 7% per year, they are well over average. This is why we could see some negative portfolio adjustments in September. There is a significant amount of uncaptured gains.
Gains since the election:
FlightRadar24 posted this picture of flights leaving Florida on Friday. Everyone with a plane was headed elsewhere on Friday to avoid the storm. These are ONLY flights leaving Florida from airports between Miami and Orlando. There were 332 departures. Flights Out
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