The indexes had a good week with the Dow gaining 470 points.
That big Dow gain coupled with the S&P closing exactly on round number psychological resistance at 2,500 set the stage for a pivotal week. The Dow has pulled far enough into new high territory that investors are being forced to bite the bullet and buy something. However, with the S&P closing right on 2,500, that will be the deciding factor for a continued rally. If the index pushes through that level at the open on Monday, we could be off to the races. If it fails at that level, investors would be happy to see a minor dip so they can reload at a lower level. Either way, that 2,500 level is going to be the key to the markets for the next week.
The missile launch over Japan tanked the futures on Thursday evening but S&P declined only about 2 points at the open and the dip was immediately bought. North Korea is now old news and short of a military conflict, the problem will be ignored by the markets.
Friday had minimal stock news but a busy economic calendar. The retail sales for August shocked everyone with a -0.2% decline compared to a +0.6% rise in July and consensus estimates for a +0.1% rise. August is back to school shopping season and a drop in sales almost never occurs. Analysts blamed it on Amazon's Prime Day in July pulling purchases forward. They also blamed Hurricane Harvey for shutting down coastal Texas for the last week of August. The hurricanes will impact retail sales for September as well and then we should get a boost in Oct/Nov as people replace everything in their house and buy tons of building supplies.
For August, sales excluding autos rose 0.2% so that somewhat weakens the Amazon/Hurricane argument. Motor vehicles and parts declined -1.6% and the largest hit to the headline number. However, gasoline stations rose 2.5% for the biggest lift. Nonstore retailers, as in internet retailers, declined -1.1% and that is where the Amazon argument gains traction. Building materials were down -0.5% but that number will rise sharply over the rest of the year.
The NY Empire Manufacturing Survey for September declined slightly from 25.2 to 24.4. New orders rose from 20.6 to 24.9 and inventories recovered from -3.1 to +6.5. Backorders rose from -4.7 to +8.9 and employment rose from 6.2 to 10.6. Almost every component posted gains so I do not understand why the headline number dropped a point. The only material decline was six-month expectations for business conditions falling from 45.2 to 39.3.
Industrial Production fell from +0.4% in July to -0.9% in August. This was the first decline in seven months and analysts blamed it on Harvey. Analysts are not too excited because the majority of the decline came from the utility sector with a -5.5% drop thanks to the mild summer weather. Motor vehicles rose 2.2% and the first gain in four months, high-tech equipment rose +1.4%. Non-durable goods fell -0.9%, business equipment -0.4% and mining/energy -0.8%. Overall production is still up +1.3% over the trailing 12 months.
Business Inventories rose +0.24% for July after a +0.49% rise in June. Manufacturing rose 0.22%, wholesale +0.62% and retail inventories fell -0.11%.
Consumer Sentiment for September declined from 96.8 to 95.3 for the first half of the month. The present conditions component rose from 110.9 to 113.9 but the expectations component declined from 87.7 to 83.4. Despite the minor decline, sentiment remains near 10-year highs. The present conditions component at 113.9 is the highest level since 2000. More than 81% of respondents said their financial conditions were better than the same period in 2016.
The calendar for this week will be dominated by the Fed announcement on Wednesday and Yellen's press conference. They are not expected to hike rates but there is a decent chance they will begin tapering QE purchases. It will be interesting to see how the market reacts to that change in policy. Whenever they have changed QE policy in the past it did not go over well.
The Philly Fed survey is the next most important followed by the Home Sales and new construction.
The Atlanta Fed real time GDPNow forecast imploded after Friday's economic reports. The forecast fell from 3.0% to 2.2% growth for Q3. The outlook for real consumer spending growth fell from 2.7% to 2.0% and the outlook for fixed investment growth fell from 2.6% to 1.4%.
Once the impact of the hurricanes becomes evident, we could see a drop of another 1% according to analysts.
In stock news, Carnival Corp (CCL) was downgraded from outperform to neutral by Credit Suisse on worries about losses from cancelled cruises and reduced demand for cruises for the rest of the season. Credit Suisse cut its profit estimates by 10% and price target by 10% to $70. CS cited the natural disasters around the world and the reluctance to travel because of terror attacks. Because of the damage in the Caribbean from Irma, bookings are expected to decline 24%. Cruises in the Eastern Mediterranean have seen bookings decline 60% since 2011 because of terrorist concerns. Terror attacks in Barcelona just caused another wave of cancellations.
Oracle (ORCL) reported earnings after the close on Thursday and crashed on Friday. They reported Q2 earnings of 62 cents that beat by 2 cents. Revenue of $9.21 billion beat estimates for $9.03 billion.
The problem came in the guidance. They guided for earnings of 64-68 cents and analysts were expecting 68 cents. They guided for total cloud revenue to increase 39%-43% and that was lower than the 51.5% growth in Q2. It is only natural for growth to slow as the business gets bigger because the percentages are taken off the larger enterprise. However, investors were not pleased and the stock fell hard.
American Airlines (AAL) and United Continental (UAL) were downgraded to neutral by JP Morgan and they upgraded Southwest (LUV) to overweight. The downgrades were based on higher fuel costs, domestic pricing weakness and excess capacity. The airlines lost millions in the disruptions caused by Harvey and Irma even though they brought in extra planes to allow Floridians to escape the storm. The analyst said Southwest had 22% upside from its current price. He called the airline a "flight to safety" candidate in the airline sector. Current consensus estimates for the sector appear "increasingly unachievable" at current fuel prices. The analyst also warned that tourism to Florida and the Caribbean would be depressed because of the storm damage.
Evercore ISI went all in on Nvidia and boosted their price target from $180 to $250. The company hosted some of Nvidia's senior executives and were very impressed with their outlook for the future. The analyst said Nvidia is "building the industry standard for artificial intelligence or AI." The analyst said the company had built a $10 billion moat around its GPU CUDA Core architecture that would be "nearly impossible to replicate" and will remain in place for the long-term. He said Wall Street's estimates for multiple business segments are looking very conservative. The consensus is for 9% growth in data center revenue and 6% in gaming. The analyst said AI sector is merely in its early stages and Nvidia is "creating THE AI computing industry standard." Shares exploded 6% higher to a new record close.
I am glad to see analysts are finally beginning to understand how far ahead Nvidia is from AMD and Intel. They are not even in the same league. Readers know I have been pounding the table on Nvidia for the last year.
Nvidia's gains helped lift the Semiconductor Index ($SOX) to a new 17-year high close. The chip sector was already rebounding and the Nvidia spike pushed it over the top. Everything you buy today has a chip of some kind.
Gartner Inc said there will be 8.4 billion "connected" devices by the end of 2017. By the end of 2020 there will be 20.4 billion. This includes computers, tablets, phones and the new IoT category of cameras, TVs, refrigerators, home devices like Alexa, Google Home, Apple TV, thermostats, etc. Everything has chips and memory. This is the only sector guaranteed to see exponential growth over the next decade.
Adient Plc (ADNT) previously Johnson Controls Automotive, was spun off from JCI in Oct 2016. Shares spiked 5% on Friday afternoon when a story broke that activist fund Blue Harbor had acquired a 6.2% stake in the company. Blue Harbor said they had acquired the stake, their largest position ever, because they believe Adient can dramatically improve its margins, boost share buybacks and restructure its network of joint ventures in China. The fund is now the third biggest shareholder in Adient. They disclosed a 3.7% stake in August but have ramped up buying to 6.2%.
Hurricane Jose has finally decided to quit wandering in the Atlantic and has taken aim at NJ, NY, CT and MA. There is still a chance it will veer eastward and miss those states with anything except for its outermost winds. Jose has been wandering in circles just north of Puerto Rico for the last week or more.
Behind Jose are Maria and Lee. Maria is expected to run right over Puerto Rico and the Dominican Republic before targeting the east coast of Florida. Lee has a slight northerly track that is still expected to brush Puerto Rico and the Dominican Republic but maybe not hit them dead center.
There has been a lot written over the last week about why there is a sudden flurry of hurricanes. The majority of it blames the sudden flurry on global warming because Florida has not had a hurricane in 12 years. Any actual weather expert knows the storms are formed by the wind blowing off the African desert and fed by ocean currents. If these storms were caused by global warming then what caused the other 119 storms that have hit Florida since 1850? You cannot blame those on global warming. Hurricanes have been hitting Florida since before Columbus discovered America. There are multiple graveyards of fleets of ships that were sunk by hurricanes in the Caribbean and off Florida since the area was discovered in the late 1400s. Global warming did not cause those storms.
Florida has been fortunate over the last 12 years and after this season it could be another 12 years before it is blasted again but storms will continue to form because that is the way the climate works.
If Jose, Maria and Lee make landfall it will be another tragedy but there is nothing we can do about it. Home Depot (HD) and Lowes (LOW) will be the big winners along with the hundred thousand jobs that will be created in the rebuilding effort. Other companies that should benefit would be Lumber Liquidators (LL), Eagle Materials (EXP), Weyerhauser (WY), USG Corp (USG), Boise Cascade (BCC), Generac Holdings (GNRC) and Beacon Roofing (BECN).
Crude prices rebounded back to $50 for multiple reasons. Saudi Arabia said they were going to cut October exports by another 350,000 bpd. The IEA raised demand growth estimates by 100,000 bpd to 1.6 million bpd for 2017. They based this on very strong demand from the OECD countries plus the impact from the hurricanes and the rebuilding effort. They are now projecting demand of 97.7 million bpd for 2017 and 99.1 million bpd for 2018. For the first quarter of 2017, demand rose 1.2 million bpd over the same period in 2016.
The IEA projects a demand drop in the US as a result of the hurricanes of 600,000-800,000 bpd for September but a rebound in Q4. European demand rose 650,000 bpd YoY for June, the last month were records are complete. Chinese demand rose 575,000 bpd in Q2 following a 700,000 bpd rise in Q1. The IEA said global supply declined 720,000 bpd in July as a result of problems in Libya, Nigeria but mostly maintenance and unplanned outages in non-OPEC countries. Unfortunately, global supplies remained unchanged in July at 3.016 billion barrels. Even with all the increased demand and decreased production there was no material decline in inventories.
Yellow = 8-week lows, green = 8-week highs
Active rig counts declined by 8 rigs for the week ended on Friday. Oil rigs fell -7 and gas rigs declined -1. As you can see on the chart, the direction of active rigs has taken a sharp downward trajectory.
Amazon is about to be blamed for another retail disaster. Toys-R-Us is reportedly planning to file bankruptcy. They are in the process of securing a loan to allow them to operate their 1,600 stores after a filing. Retail is hard and getting harder. Toys-R-Us was taken private in 2005 in a $6.5 billion deal by KKR, Bain Capital and Vornado Realty Trust. This saddled the company with billions in debt as we headed into the period where Amazon's growth exploded. Amazon is now responsible for 25% of online retail sales and they are branching out into brick and mortar.
Amazon announced earlier in the week Amazon Web Services had been granted approval by the Dept of Defense to host its Level 5 data. This is the Pentagon's and US Military's most classified information. Amazon is only the third civilian company approved to host data for the DoD. The other two are IBM and Microsoft. Amazon also has a $600 million contract with the CIA to host its data.
Amazon is also in talks with a number of small TV stations about being acquired. Amazon is looking to acquire access to their content to stream on Amazon Prime and there are rumors of an Amazon channel coming to cable, satellite systems. This would feature current events, news, talk shows, etc as well as Amazon ads.
As of Thursday, it has been exactly ten months since the S&P has declined 3%. That is the second longest streak since 1928 and beaten only by an 11-month streak that started in 1994. This is also the fourth longest period in the history of the S&P without a 5% decline. While all streaks will eventually be broken, they tend to self perpetuate longer than most people expect. The constant shorting at what is seen to be a top and then the short covering when that top is broken, tends to keep the streaks alive until some event appears that overcomes the dip buying mentality.
The S&P closed exactly at 2,500 on Friday and this is a huge psychological tipping point. Whichever direction the S&P takes from here could be with us for a while. If it punches through, it could start an entirely new leg higher on short covering and price chasing. If it fails here, we could be headed for a break of one of those streaks I mentioned earlier.
The wild card is the Fed announcement on Wednesday. While no trouble is expected, you never know how the market will react to the wording of the announcement, especially if the Fed begins to taper QE purchases. Anything is possible when the algorithmic computers parse those words and then act on their programming.
Other than the Fed there are no negative catalysts on the calendar. The political crisis events have been pushed out to December. There is nothing that should push the market lower other than normal portfolio restructuring in September. All dips continue to be bought and everyone appears to be afraid of missing out on a Q4 rally.
The Dow posted a decent gain on Friday and pulled away from the prior resistance high. The move came despite weekend event risk. By pulling away from resistance and congestion, the Dow appears to be ready to move significantly higher. One problem could be the 470-point gain for the week. That could generate some profit taking but I would expect it to be light.
Boeing continues to be the strongest Dow stock with a 94-point gain for the year, which equates to 644 Dow points or 26% of the Dow's 2,506-point gain for the year.
Apple rebounded slightly on Friday after declining about 6 points from Tuesday's high. Shares are normally choppy with a negative trend for about three weeks after a product announcement. That suggests there could be further weakness ahead.
Initial support for the Dow is about 22,100 followed by 21,735. Resistance is going to be around 22,500 and another big round number.
The Nasdaq Composite did not close at a new high. Resistance at 6,460 from July remains intact and the mixed numbers on the big cap tech stocks kept the Nasdaq from gaining the required momentum. The index did reach a new intraday high at 6,464 at 10:54 but could only hold it for a very short time with the decline beginning at 10:56.
The mixed results on the big cap techs is a minor warning sign. If Apple weakens again, it will probably contaminate the rest of the big caps and that could lead to further market weakness.
However, it was an expiration Friday with weekend event risk. It would be very hard to apply too much importance to the resistance failure and the mixed results. Next week is going to be the key with S&P 2,500 the signal light for the rest of the market.
Initial support on the Nasdaq is 6,425 followed by 6,350.
The Russell 2000 posted a minor gain on Friday but the index did break through resistance at 1,427. That sets up a run to the old resistance high at 1,450. The Russell is following the big caps rather than leading. I would expect that to continue the rest of September and early October.
The September wall of worry has collapsed and the bears have run out of reasons to be short. Sometimes a lack of obstacles is a negative, despite how strange that would seem. Typically, the markets are flat the day after an expiration and post decent gains the day before a Fed announcement. Since there could be some QE taper announcements on Wednesday, the Tuesday rally could be muted unless there are some positive headlines in advance of the event.
In theory, investors should welcome the taper because it means conditions are slowly returning to normal. However, the dual hurricane impacts with three more on the way, could cause the Fed to do nothing. I am not sure how the market would react since that implies a weaker economy. I would think investors would see it as bullish and assume there will be no changes until December or later. The market likes a dormant Fed.
I would recommend keeping some cash in your account just in case a buying opportunity appears.
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Bullish sentiment exploded higher last week with a monster spike of 12%. The last time it was this high was January. This is only the second time in 35 weeks that bullish sentiment has been over its historical average of 38.5%. Bearish sentiment imploded with a -13.8% decline. These were major changes and suggest investors are ready to throw caution to the wind and chase prices higher.
Everyone is buzzing about the new iPhones but the Pixel 2 from Google is just a couple weeks away. According to the rumors, the normal sized Pixel 2 will be built by HTC, the same company that built the two existing models. The Pixel 2 XL or whatever they will call it, will have a larger 6.0 inch screen and be built by LG. The larger phone is rumored to have the OLED screen and be edge-to-edge like its competitors. The Pixel phones will be significantly faster than the iPhone because they will be using next generation Gigabit LTE networks. The iPhone is actually software limited to slower connect speeds because the phones use either a Qualcomm modem or a slower Intel modem. Apple is trying to move away from Qualcomm equipment. They limit the speeds on the Qualcomm modem to match the speed of the Intel modem so that people will not be trying to only buy the phones with Qualcomm inside. The Pixel 2 phone will be wide open and capable of 5-10 times current speeds as the carriers roll out the faster networks.
Most people are very happy that the phone will run the latest Android operating system, Oreo, which is the most powerful and cleanest of any prior OS. By cleanest, that means no bloatware, that carriers normally clutter the phone with when you buy it from a carrier. This phone will be pure Android and you add only the apps you want. You will not find a bunch of carrier supplied apps running in the background and sucking up memory and battery life.
The Pixel 2 launch is scheduled for Oct 4th. The XL is expected to retail for $849 with 32Gb and $949 with 128Gb.
The competition is the Samsung Galaxy S8 Plus 64Gb at $849 and Note 8 64Gb at $959.
Bitcoin had a rough week. JP Morgan CEO Jamie Dimon called it a fraud and said someone is going to get killed. Bitcoin lost -8.7% after his comments. Chinese authorities are rumored to be getting ready to shutdown several exchanges and ban projects that were planning on raising money in Bitcoin. Many so-called "initial coin offerings" or "ICOs" had been launched in recent months. Mohamed El-Erian warned that Bitcoin should be valued at half its current value. He said the current pricing assumes massive adoption that will not happen because governments will intervene to prevent money from leaving the country or to be used in illegal transactions. He said a reasonable price would be a third of its current value.
North Korean state sponsored hackers have an all out push to steal bitcoins as a way to evade the sanctions. North Korean hackers targeted at least three South Korean cryptocurrency exchanges according to FireEye.
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