The potential for a peaceful conclusion in Syria has produced a powerful short covering rally this week.
After two weeks of choppy trading and testing of support over concerns about the aftermath of a Syrian attack the sudden reversal of those fears has powered the market higher. While a "deal" is far from done and my never get done the potential for an eventual attack has declined significantly. Negotiations may drag on for weeks and then implementation for months but the U.S. has apparently escaped the red line box that was pushing us towards the attack.
The president is scheduled to speak to the nation tonight at 9:PM ET but his tone and content will be significantly different than it would have been just 48 hours ago. The market is factoring in the escape with only a "threat of force" to drive the negotiations rather than an actual "use of force."
The other headlines we were dreading for September included the debt ceiling debate and the budget battle. Somebody must be spreading laughing gas in the House and Senate chambers because there are tentative proposals already circulating to raise the debt ceiling and pass a temporary budget resolution to push the deadline into December.
Obviously proposals are a long way from approval votes but potential resolutions so soon after Congress returned from the August break is nothing short of amazing.
The FOMC meeting for next week has also morphed into a back page headline with analysts unanimous that the Fed will only announced a token taper and put the next decision point well into the future at the December meeting. With all the potentially good news breaking out in Washington the Fed has been back paged and forgotten. That may change by next Wednesday but for today they are old news.
Lastly, Chinese economics appear to be getting better every day. Factory output rose to a 17 month high this week and retail sales grew at the fastest rate of the year in August. Factory output ros e+10.4% in August, up from 9.7% in July. That is the biggest increase since March 2012. Retail sales rose an annualized +13.4% in August and the fastest rate for the year. The annual pace of fixed investment rose slightly to 20.3% for the first eight months of 2013. Bank loans rose to 711.3 billion yuan and higher than a forecast for 700 billion. That is a sign of growing confidence. The central bank said an aggregate of all social financing nearly doubled from 808.8 billion in July to 1.57 trillion yuan in August.
With Europe moving out of the two-year recession and China suddenly shaking off the worries from Q2 we are seeing investors turn bullish on emerging markets and markets in general. Could it be that the long awaited global recovery is actually here?
EEM - Emerging Markets ETF
Economics in the U.S. were mixed but the reports were lightweights so there was no hindrance to the market moving higher. The NFIB Small Business Survey declined -0.1 point to 94.0 for August. While the decline was minimal the anecdotal data from the survey showed that small companies were seeing sales and earnings decline in Q3. A larger number of respondents said they expected the economy to deteriorate through the end of 2013. The earnings trend component declined from -22 to -35 for August after being in the -22 to -26 range for the last 7 months.
The Job Openings and Labor Turnover Survey (JOLTS) for July showed the number of job openings declined -200,000 to 3.689 million. Hires rose slightly from 4.318 million to 4.419 million. Separations fell more than 100,000 from 4.228M to 4.109M. Quits rose from 2.205M to 2.268M. Layoffs declined -1.4% to 1.513M.
The JOLTS report was slightly negative and continued to reinforce the weak labor market outlook. This was a lagging report for the July period and was ignored by the market.
The calendar for Wednesday is uneventful except for the 9/11 event risk. Al Qaeda likes to remember anniversaries of successful attacks. Last year we had the Benghazi embassy attack and with all the Syrian implications this year there could be a series of anniversary attacks. The U.S. has already evacuated the embassies in several Middle East countries and there is always the risk of an attack in the USA. I am always relieved when we get to 9/12 without some major event in the USA.
Apple is set to announce their opening of sales through China Mobile (CHL) on Wednesday morning. They announced the iPhone 5S and 5C today as expected. However, the 5C at $549 was not as cheap as many expected. There were analysts expecting prices as low as $395. The higher price has a double result for Apple. They will make more money per phone but they will sell fewer phones. Apple shares fell -11 today in a typical sell the news decline. More than 71% of the time Apple shares decline after new product announcements.
The Dow Jones people are shaking up the big cap index by removing the three lowest priced stocks in the Dow. Those are Hewlett Packard (HPQ), Bank of America (BAC) and Alcoa (AA). Those are being replaced with Goldman Sachs (GS), Visa (V) and Nike (NKE). The inclusion of three much higher priced stocks will change the ratio of the price weighted index. Currently any change in a Dow stock by $1 impacts the Dow Index by roughly 8.22 points. After the change a $1 move in a single stock will impact the Dow by roughly 6.5 points.
The combination of AA, BAC and HPQ totaled only a 2.3% weighting in the Dow because of their low prices. By comparison IBM at $186 has an 8% weighting in the Dow. After the new stocks are added beginning at the open on Monday September 23rd the three heaviest weighted stocks in the Dow will be IBM, GS and Visa. Yes, two of the new stocks will be the number 2 and 3 largest weighted.
What this does is potentially create some additional volatility since GS and Visa tend to move in big jumps and that will create larger moves in the Dow. For instance GS gained +3.50 today and Visa +3.38 and that would equate to roughly a 23 point Dow gain for each of those stocks.
In the graphic below I highlighted the stocks being removed in yellow and added in green. Some analysts were wondering if this dumping of low priced stocks meant that Intel, GE and Cisco were also in danger. Of the three I would think GE was safe because it is the largest industrial. I would think DuPont would be at risk more than GE. Cisco is a relatively new addition so I would think it was safe for the time being.
It was a low news day for individual stocks. We are still a couple weeks away from the height of the earnings warning season for Q3 and headlines about Syria and Apple blanketed the news.
After the bell Texas Instruments (TXN) disappointed investors with a warning of sorts although it was mixed. TXN guided analysts to earnings of 55 cents for Q3 compared to prior guidance of 49 to 57 cents. Obviously the new guidance was at the top end of the range and analysts were only expecting 53 cents. However, they guided for revenue in the $3.15-$3.29 billion range compared to prior guidance of $3.09-$3.35 billion. Analysts were expecting $3.23 billion and just barely over the midrange of the new guidance. Shares fell slightly in afterhours after closing at a new 52-week high.
International Paper (IP) said after the close they were hiking their dividend by +17% to 35 cents and announcing a $1.5 billion stock repurchase program. Shares of IP rallied about 60 cents in afterhours.
Restoration Hardware (RH) posted adjusted earnings of 49 cents and beating estimates for 43 cents. They posted a 30% increase in revenue, +26% same store sales and issued guidance that topped prior forecasts. Unfortunately, GAAP earnings were actually a loss of 46 cents or $17.8 million. Shares of RH fell -$4 to $72 in afterhours. Last time they beat earnings and raised guidance they spiked +$7. Can you say, "Buy the dip?"
NetFlix rallied +$19 after announcing a deal with Virgin Media, a U.K. cable company, to offer NetFlix streaming TV and movie service over the company's Tivo DVR. Virgin said it was giving NetFlix access to 1.7 million customers that currently have the Tivo set-top box. No financial terms were released. Customers would still need to have a NetFlix account to access the service but analysts believe there will be a rush to sign up to get access to the NetFlix portfolio of shows.
Shares of NFLX are now trading with a lofty PE of 372. I am sure Amazon is regretting the decision not to buy NetFlix when it was $53 last fall. The gains today pushed it to a new historic high.
Headlines are a killer to market forecasts. Even those that are highly anticipated rarely turn out as expected. For the prior three weeks the market was setting up for a deluge of bad news and closed at two month lows the Friday before Labor Day. What a difference a week makes.
The Dow has rebounded +450 points since the 14,760 low on August 30th. The S&P has gained +56. However, the real winner in percentage terms has been the Nasdaq with a +150 point gain or +4.1% in just over a week. Not only did it post a +4% gain but broke out to a new 13 year high both days this week. The Russell 2000 gained +46 points, a gain of +4.5% but is still stuck under strong resistance at 1060.
I had expected the markets to succumb to the debt ceiling fight and the budget battle. With both of those events fading into the future, Syria off the table for weeks if not months and China suddenly surging again we have to wonder if this rally will continue for the foreseeable future.
Sometimes the best laid plans of mice and men do go astray. They say in the military the battle plan is always perfect only until the first shot is fired. We have had several shots this week and the noise has stampeded the bulls.
The S&P has rallied back to strong resistance at 1685 and barring any resurgence of negative headlines I could see it continuing to move higher. However, when looking at hundreds of individual charts there is a lot that look way over extended. We all know the old market axiom, "The market can remain irrational longer than you can remain liquid." Anyone betting against the bull this week has been pounded into the dirt by the stampeding hooves. That can continue just as easily as this entire rally could reverse in an instant with the right headline.
Resistance is 1685 followed by the prior high at 1709.67, call it 1710. Numerous analysts were recommending selling the rally at the close today. It will be interesting to see how those predictions fare by this weekend. Who knows, the FOMC may suddenly become a worry again if analysts begin ratcheting up their taper estimates based on China's economics.
The Dow sprinted back above 15,000 to 15,191 but is still well below the August 2nd high of 15,658. The Dow looks rather unsupported after its gains for the week but don't fight a bull market. The resistance at 15,325 could be a speed bump or a stop sign since it would take another +135 point gain to get there. That would mean the Dow had rebounded nearly +600 points since August 30th and that is pretty short term over extended in anybody's book.
Support remains 14,800 and the Dow is still trading at the bottom of the range for the last five weeks. Somebody is buying Dow stocks and until they run out of incentive that could continue. Short squeezes like this tend to take on a life of their own.
The Nasdaq new high is actually a bearish candle and it will be interesting to see if the short squeeze will continue on Wednesday. Apple will more than likely be a drag on the index and the +4.5% gain is short term overextended. This could be a climax top but I am not calling it that. Just be careful about going long Nasdaq stocks until the direction is confirmed.
Support should be back at 3650 and that could be a launch point for a continued rebound.
The biggest risk I see for Wednesday is the potential 9/11 risk and the possible backlash if the president's speech tonight goes in an unexpected direction. Those buying stocks this week are putting their faith in Russia and Syria. I don't think either of those countries are our friends and obviously neither are trustworthy. This entire scenario could self destruct at any moment.
Personally I would stay away from crowded public locations on Wednesday. We never know when Al Qaeda will begin a new offensive in America.
Enter passively, exit aggressively!
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