The Dow finally joined the new high list that includes the S&P-500, Russell 2000 and Dow Transports. The Nasdaq is still lagging.

Market Statistics

The Nasdaq has not joined the current new high list because of a weak performance by AAPL, GOOG, MNST and AMGN. Apple declined to close exactly at $500. Google was down -$35 for the week and Amgen -$5. Intel was also a major drag on Friday with a -6.3% decline plus its impact to the rest of the chip sector. It was not a good week for the Nasdaq with a gain of only +9 points.

The Dow closed at a new five-year high at 13,649 but that is still slightly below the intraday highs from September. It was a good move and nobody is complaining but traders will feel a lot better with another 50 points on the board.

Dow Chart - Daily

It was another session of dip buying after Dow component Intel tanked at the open and the Consumer Sentiment for January suffered its own decline.

Consumer sentiment declined from 72.9 to 71.3 and that is the lowest level since December 2011. The decline was nowhere near the -9.8 point decline in December but analysts were expecting a rebound from what was thought to be an abnormal number in December.

The declines were blamed on the fiscal cliff in December and on the return of the payroll tax in January. The current conditions component fell -2.2 points to 84.8 and the lowest level since July. The expectations component declined -1.1 to 62.7 and the lowest level since November 2011. The headline number should decline again with the second reading for January once the rest of the country gets their paychecks with the smaller net amount.

Consumer Sentiment Chart

Sentiment was the only U.S. economic report of note on Friday. However, China's National Bureau of Statistics said GDP for Q4 rose +7.9% compared to estimates for +7.8% growth and a 7.4% reading for Q3. This powered the overseas indexes and was underlying support for our markets during the day.

Next week the calendar is highlighted by three more regional manufacturing reports and followed by New Home Sales on Friday. The real news for next week will be earnings not economics.

Economic Calendar

Tuesday's earnings will be led by IBM and Google. IBM has been languishing just over $190 for the last two months and can't seem to find a direction. Earnings are expected to be $5.25 per share and they have been very quiet. I would love to see a strong beat here to push the Dow higher.

Google is floundering. After hitting $745 seven days ago they have been in a steady decline after they blamed partner LG for manufacturing problems that have held the Nexus 4 phone to about 370,000 units internationally. LG blamed Google saying the company underestimated the demand by a factor of 10. LG said there was a serious backlog that would not be corrected soon. The lack of these phones will not hurt Google's profits but they are killing the share price.

On Wednesday Apple is expected to report earnings of $13.44 per share. If they report as expected it will be the first time in nine quarters that they reported lower earnings than the comparison quarter. In this case the year ago quarter was $13.87 per share. Apple is expected to guide lower for Q1 because of the slowing sales of the iProducts. Sharp reported on Friday they had almost completely halted production of screens for the large iPad do to an order cancellation by Apple. About the only thing you can be sure of for Apple's earnings is that they will produce a monster move in the stock. Historically Apple has averaged a 3.9% move on the day after the earnings report. That is calculated over the last eight quarters. The options are predicting a 7% move for next week. If you only knew which direction you could make a lot of money. Options are so expensive you can't play a straddle/strangle with any reasonable hope of making a profit.

While on the topic of Apple I saw where Al "Jazeera" Gore exercised some options to buy Apple shares. Using his options he paid $7.47 for 59,000 shares of Apple. The cost was $441,000 to get $29.5 million shares of Apple. Gore joined the board of Apple in 2003 at the request of Steve Jobs after his gig as VP ended in 2001. Apple shares were trading for $7.47 at the time of the option grant. I guess Jobs was hoping Gore would use his experience in "creating the internet" to help them refine new ground breaking products for Apple. Gore told Wolf Blitzer in a CNN interview in March 1999 when asked about his accomplishments, "I took the initiative in creating the Internet." His words were taken out of context but that claim has followed him for more than a decade now.

Dow components MCD and UTX report on Wednesday. UTX is expected to report a drop in earnings from $1.42 to $1.03. McDonalds is expected to report $1.33 per share and the same as Q4-2011. Both companies will be scrutinized for their outlook for Asia.

Thursday has earnings from MMM, MSFT, SBUX and JNPR. 3M is expected to report $1.41 compared to $1.35. Starbucks is expected to report 57 cents compared to 50 cents. Starbucks will be quizzed on same store sales in Europe. That is where it lost ground last quarter. Juniper is a preview of Cisco and they are also expected to report an earnings decline from 28 cents to 22 cents.

Microsoft is expected to report an earnings decline from 78 cents to 75 cents. The adoption of Windows 8 has not been strong and sales of the Surface tablet have been lackluster. MSFT shares have been dead money for years and they will have to release a breakout product to change the trend. Windows has become a commodity and there is no urgent desire by users to upgrade to the current version.

Friday has earnings from Halliburton, Honeywell, Kimberly Clark and Proctor & Gamble. Halliburton should duplicate Schlumberger's guidance but because HAL is more land based they could be a disappointment. Honeywell will be late to the earnings party and their earnings mostly ignored even though they are expecting to post $1.09 and a nickel better than the comparison quarter. KMB and PG are just filler for Friday. Nobody really cares what they earn. They only want to know if sales are rising or falling as a view into current consumer sentiment. As always guidance will be the key.

Earnings Calendar

Next week is considered tech earnings week because of Apple, IBM, Google, Microsoft, etc. However, Intel reported on Thursday and it was not pretty. That could have colored expectations for techs for next week and set the bar even lower.

Intel said sales declined -3% in the last quarter and that came after a -5% decline in the prior quarter. With PC sales dying and individuals moving to tablets by the millions it is costing Intel a lot of money. Researchers believe PC sales declined -4.9% in Q4 and that is normally a strong quarter. Tablet sales rose +72% in the same period.

Intel reported earnings of 48 cents that beat the street by 3 cents but the guidance was the key. They are planning on spending $13 billion on new plants and equipment in 2013 in an effort to compensate for the lower demand by upgrading their product line and reducing future costs. Intel has 80% of the PC processor market. Server sales rose +4% to $2.8 billion. Q1 sales are expected to decline to $12.7 billion, compared to $12.9 billion in the year ago quarter. With full year revenue expected to be just over $50 billion that $13 billion capex investment is steep. Analysts were expecting something in the high $9 billion range and the announcement of rising capex and falling sales had analysts wondering how Intel was going to pay for it. $2 billion is earmarked for a research facility to engineer a process for creating 450-millimeter (18 inch) silicon wafers. That will increase the number of chips they can make during each production run.

Wafers - The largest here is 12 inch.

Intel declined -6.3% to close at $21.25. That is the biggest decline since January 2009 and it came after a -15% decline in 2012. AMD declined -10.2% because any problem impacting Intel is magnified on AMD. The number two chipmaker reports earnings on Tuesday.

Intel Chart

GE reported earnings on Friday that seemed to please investors. The company reported earnings of 44 cents that beat the street by a penny. Revenue rose +4% to an eye popping $39.3 billion. Profits were $4.0 billion. Profits for the full year were $13.6 billion or $1.39 per share. CEO Jeff Immelt said the outlook for developed markets remained uncertain. However, China and other emerging markets, along with those regions exploiting natural resources, were expanding.

GE reported increased profits in all seven of its industrial divisions. Energy management, oil and gas, aviation and transportation all grew more than 10%. GE bought back $2.1 billion in stock for the quarter raising the total to $5.2 billion for the year. This is how GE beat the street by buying back a significant number of shares. That raises the earnings per share because of the fewer outstanding shares.

GE Chart

Morgan Stanley (MS) was the hero for the day. Morgan reported earnings of 45 cents compared to a loss of -20 cents in the year ago quarter. Revenue jumped +37% to $7.5 billion. Morgan is moving more into the individual investor area and scaling back part of its investment banking efforts. The bank is scaling back on expansions in Russia and the Middle East and cutting 1,700 positions in that effort. Overall they cut 4,500 people in 2012.

The bank made news last week by announcing a deferred bonus program. Roughly the top 20% or the highest paid workers will have their bonuses deferred rather than paid in a lump sum. They will be paid in installments over three years. That breeds a longer term commitment to the company and encourages workers not to take chances that would endanger their future bonus payments. In theory it takes some risk out of the business model plus it averages out the payments Morgan has to make. A good year can be offset by a bad year.

Morgan Stanley Chart

Oilfield service provider Schlumberger (SLB) reported earnings of $1.08 that beat estimates by a penny. Revenue rose +8.5% to $11.2 billion. That was well over analyst estimates for revenue growth. A slowdown in land drilling was expected to weigh on SLB but the company made up for it because of the boom in offshore drilling. The company expects customers to boost spending on exploration and production by +10% in 2013. SLB said earnings per share could increase by double digits in 2013 as global oil demand continues to increase.

SLB gets two-thirds of its revenue from outside the USA. The company said the number of active rigs around the world declined to 3,426 in Q4. That is a decline of -6.5% from Q4-2011 thanks to a drop in shale gas drilling.

Halliburton may not have such a rosy report next week because they are predominantly land based.

SLB Chart

Another big loser on Friday was Capital One (COF). The bank reported earnings of $1.42 per share compared to estimates for $1.58. This was a huge miss but it got worse. COF told analysts revenue would be "about the same" as Q4 at $5.62 billion compared to the prior forecast of $5.76 billion. Net interest margin (NIM), the gap between the interest it pays depositors and the interest it charges borrowers fell to 6.52%. That is -0.45% less than Q3. It does not sound like much but they have $212.5 billion in deposits. Half a percent on $212 billion is a lot of money. On the positive side the $1.42 in earnings compares to only 88 cents in the year ago quarter.

They also raised loan loss reserves to $1.15 billion, an increase of $290 million. Loans over 30 days past due rose to 3.66% and the highest of the top six credit card issuers. COF has made more than $28 billion in acquisitions since 2005 and that boosted deposits by more than $100 billion.

I looked a little deeper at COF to see if it was worth recommending a buy at this level and decided it was not worth the risk. I would rather buy AXP than COF. The metrics are much better. COF is definitely improving but there may be more tough times ahead. Raising the loan loss reserve is the key signal. COF deals with subprime borrowers and the increase in the payroll tax could push a few more people into the delinquent column.

COF Chart

OSI Systems (OSIS) was crushed back in November after the government said tests on new software "may have been falsified" to produce acceptable images. Rapiscan, a subsidiary of OSI, produced the x-ray backscatter scanners the TSA was using to scan airline passengers. The scan produces a nude image of the person being scanned and the TSA has taken a lot of heat in the issue. OSI strongly objected to the claims of software rigging saying, "This was a government controlled test at all times and the company could not have manipulated any data." The company was told it had to come up with a less intrusive image by June or the scanners would be replaced.

Fast forward to Friday and Rapiscan told TSA it would not be able to meet the deadline and TSA cancelled its contract with Rapiscan. The TSA will remove all 174 scanners at 30 airports. There are also 76 in storage. The TSA has been quietly replacing them in high profile airports and shifted them to very small airports. OSI shares rebounded on Friday after the company said the 250 scanners would be moved to other government agencies like prisons and military bases where privacy is not a problem. Shares jumped because that meant OSI would not have to take them back and incur millions in losses. OSI will take a one-time $2.7 million charge to cover efforts to create the software to blur the image.

Sample Rapiscan Image

The replacement scanners are made by L-3 Communications (LLL) and use a millimeter wave to produce an image and the software does not show the naked form. TSA has 669 of these scanners already and options for 60 more.

OSIS Chart

Level-3 Chart

The push to new market highs last week was amazing for multiple reasons. First, the S&P pushed to new five-year highs without any help from Google and Apple. Those companies were actually a significant drag on the S&P.

Secondly, the huge fund flows from the prior week were reversed. In the prior week there was $18.32 billion in total fund flows with $8 billion into the U.S. equity markets. That was the most since 2008. Six billion of that $18.32B went into non-U.S. equities. Last week there was -$4.181 billion in outflows from domestic equity funds.

I think everyone realizes the fund inflows for the first full week of January was from a NORMAL surge in end of year retirement funds. It was supplemented by inflows from money market funds after the fiscal cliff deal was completed on Jan 3rd and investors realized capital gains taxes were not going to the 43% as some had predicted.

Regardless of the reason for the prior week's inflows the market still rose last week despite the outflows. That has got to be bullish. Maybe too bullish. The AAII Investor Sentiment Survey showed individual investor bullish sentiment declined -2.5 points to 43.9% bullish. However, the bullish sentiment for institutional managers rose to 55%. That means the Rodney Dangerfield rally is getting more respect from the major money managers.

The USA Today said this weekend that the S&P has now gained more than 119% since the March 2009 lows. That puts it in the top nine bull markets of all time that gained more than 100%. Since the 2009 bear market was the worst since the Great Depression it makes sense that it should be followed by a big gain. The current bull has taken 1,407 days and that ranks it eighth in the 1,000 day club. Wilshire Associates claims the market has generated $10.5 trillion in paper wealth since that March 2009 low.

Ironically the current bull market has been almost completely ignored by individual investors. In 2012 they pulled $557 billion out of stock mutual funds and put more than $1 trillion into bond funds according to the Investment Company Institute. Investors don't trust the market after the parade of dips including things like the Flash Crash and Euro Debt Crisis. The 44 million baby boomers are too close to retirement to risk another 50% decline in their 401K and IRAs. There have been two 50% declines since 2000.

That reluctance to put money back into equities could just be the driver of the next leg higher. When markets breakout to new highs they become a price magnet. Everyone is afraid they will miss the next bull market and they suddenly want to throw money at it. Making less than 2% in the bond market is also a driver. You can't live on 2%. If bonds continue to decline we are going to see more investors cutting their losses in the bond market and moving back to equities.

Others are waiting for that next big drop to put their money to work. The higher the market rambles the more incentive to give up on waiting for the drop and put some money back to work.

The Rodney Dangerfield market may be getting more respect as the indexes breakout to new highs but the volume is still very low. The irrational exuberance of past bull markets has not yet appeared in the current bull. When (if) it does the stampede away from bonds will begin.

The S&P is currently trading at a PE of 13. That is well below the historical average of 15 and bull market levels of 17. Earnings for Q4 have averaged about 2.5% but only about 10% of companies have reported. Next week will begin the flood of reports and we could see that number increase slightly. Most analysts believe Q3 was the low point for earnings and they will rise from here and grow roughly 10.6% for the full year according to Thomson Reuters or 13% according to Abby Joseph Cohen. That will mean the market will be even further undervalued if it does not keep pace.

The political cloud is still the biggest worry for investors. The Feb-15th debt ceiling, March 1st sequester and March 27th continuing resolution makeup the wall of worry the bulls must scale.

We may have seen some breakthrough this weekend when news broke that the Republicans are going to offer a bill next week to raise the debt ceiling for another 90 days to push that fight until after the other two battles. The only requirement will be a demand for the senate to pass a budget by April 15th. The sequester and the continuing resolution are fights over spending and spending cuts while the debt ceiling is more of a political football. I think this is wise to put the focus back on the budget rather than a lose-lose proposition on the debt ceiling.

Of course the democrats claim they will not vote on any debt ceiling that has any conditions attached so this is not going to be a rubber stamp deal. The current political environment in Washington is negative for the markets with the biweekly manufactured crisis confrontations. Until this calendar clears we are only a sound bite away from a sell off.

The market seems to be discounting the debt ceiling risk and assuming it will be resolved just like the fiscal cliff issue did, with another can kicking session. President Obama is proving why he is the orator in chief. He is excellent at making speeches and casting blame on the republicans for everything even though the democrats have not passed a budget in four years.

He claims he wants an unlimited ceiling without having to come to congress for approval. Apparently he forgot that as a senator he voted against a debt ceiling increase when the deficit was only $248 billion. He condemned Bush for adding to the national debt and called it "irresponsible" and "unpatriotic." Fast forward to today he said not approving a $5 trillion increase in the debt ceiling is "irresponsible" and "unconscionable" a "catastrophe" and a "self inflicted wound."

Whatever the politicians want to call it the debt battle is likely to be pushed off until April 15th. That will remove one more obstacle to investor sentiment in the short term. All three political problems still remain but another crisis will have been averted by kicking the can farther down the road.

The market should breathe a sigh of collective relief as the cloud over the current earnings cycle will be pushed back until April. Short term the market can continue to move higher but ultimately we are going to have some challenges in March and April. That would correspond nicely with the normal weakness we see in those months and setup a bigger risk of decline than normal. Don't worry, be happy! That is three months away. Traders have plenty of time to profit from the new highs and then hunker down for the political battles.

The S&P finally broke out to a new five-year high with a close at 1,486 and above the December 27th, 2007 close of 1,476. The next hurdle is the 1,497 close that came from the prior week. That is also round number resistance at 1,500 so it may take some really good news to push us over that level. Future resistance highs are 1,515, 1,549 and the big daddy of them all the all time closing high of 1,565 from Oct-2007. Current support is 1,465 so dip buyers have a clear entry point. Markets making new highs tend to continue making new highs so the outlook remains bullish.

S&P Chart - Daily

The Dow managed to squeeze by the closing highs from September but remains slightly under the intraday highs of 13,661. Barring any significantly negative headlines next week this should be accomplished and put the Dow on course for the 13,727 closing high from December 2007. Lastly the all time high close of 14,164 from Oct-2007 will be the eventual target. Moving from Friday's close at 13,649 to 14,164 is only 515 points and a successful can kick on the debt ceiling could open the door for that gain. Support is 13,500.

Boeing is the biggest drag on the Dow with the 787 fleet not likely to return to service in the near future. Within a few days the knee jerk damage to Boeing shares should be complete and it will cease being an anchor for the Dow.

Dow Chart

The Nasdaq remains hostage to Apple and Google and their earnings next week are not likely to be market positive unless the declines from last week were traders pricing in a disappointment. We just need to get past these events and suffer the post earnings dip so new investors will feel comfortable about taking positions in those two stocks.

The Nasdaq will be influenced by a lot of tech earnings other than the two giants so next week will be a critical wall of worry for tech investors. Support remains 3100 and resistance well above at 3185.

Nasdaq Chart

The most bullish signals for the market are the new high breakouts on the Russell 2000, S&P Midcap 400 and the Dow Transports. These market segments suggest fund manager sentiment is very bullish and worries over a future political dip are unfounded. These breakouts show belief in a global economic rebound and better U.S. economics later in 2013. Let's hope these hopes are not unfounded.

Russell 2000 Chart

Dow Transports Chart

S&P Midcap 400 Chart

I believe we remain in a buy the dip market. The headlines next week will be over the proposed debt ceiling extension and of course Q4 earnings. More than 80 S&P companies report and by the end of the week we should know how the earnings cycle is going to end. Without the debt ceiling cloud we could see the markets continue to creep higher for the rest of January.

Monday is a market holiday making next week a short week. This should intensify the volume and make any breakout more relative or breakdown more troubling.

I remain in buy the dip mode until proven wrong.

Enter passively and exit aggressively!

Jim Brown

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"When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us."
Alexander Graham Bell