The Nasdaq finally powered through round number resistance at 4,000 to a new 13 year high. Now we are in rally mode.
Of course you could not tell we are in rally mode from the Dow, which closed only fractionally positive after trading up +45 points intraday at 16,120. There was a market imbalance at the close that was probably some last minute shuffling by funds before closing for November.
The S&P also gave back decent gains to 1,808 to close only fractionally positive at 1,802. The Nasdaq and the Russell 2000 were the winners for the day. The Nasdaq closed at 4,017 and -10 points off the intraday high but still well over the round number resistance.
The Russell 2000 surged +10 points to 1,134 and closed only -2 points from the intraday high. This along with the Nasdaq close well over 4,000 was a bullish signal for next week's market.
The economics today were mixed but mostly positive. The weekly chain store sales spiked +2.6% as early holiday shopping started to move the needle. Sales only rose +0.1% in the prior week. This report is considered noise since it is a weekly update and can be impacted by everything from weather to paycheck cycles.
The Richmond Fed Manufacturing Survey snapped back after two months in the cellar. The headline number rose from 1.0 in October and zero in September to 13.0 for November. Activity in the Richmond area slowed dramatically in the Sept/Oct period and it was probably related to the government shutdown that impacted sentiment in that area. Every internal component showed an improvement.
New orders rose from zero to 15. Backorders rose from -15 to -1 but still slightly in contraction territory. The average workweek rose from -1 to +12. Employment was the least improved gaining from 4 to 6 but still an improvement. Let's hope the return to a budget deadlock in December does not put the Richmond manufacturing sector back to sleep.
The Richmond service sector was less exciting with the headline number falling one point from 9 to 8. If you exclude retail it declined from 10 to 1. However, the services employment index rose from 9 to 18, excluding retail. I am excluding retail because of the seasonal swelling of the ranks.
The Texas Service Sector Survey rose from 6.4 in October to 10.3 in November. However the employment component declined from 5.5 to 3.9 and hours worked was still contracting at -1.6. Wages and benefits spiked again from 8.7 to 13.5. Rapidly rising employment costs will weigh on continued improvements in hiring. Input prices have been rising all year and remained high at 27.4, down slightly from 28.6.
Consumer Confidence declined for the third consecutive month with a drop from 72.4 to 70.4 for November. Analysts had expected a rebound after the government shutdown ended. This was the lowest reading for confidence since April. The biggest drag was worry over the job market.
The present conditions component declined only slightly from 72.6 from 72.0. The expectations component fell from 72.2 to 69.3 and was responsible for the decline in the headline number. Those respondents believing jobs were easy to get rose slightly to 11.8% and those thinking jobs were hard to get declined slightly to 34.0%. Those respondents expecting a raise fell from 15.7% to 14.9%. Those expecting a cut in pay rose from 15.5% to 15.9%.
Buying plans declined across all categories. Those planning on buying a car declined from 11.9% to 11.5%. Those planning on buying a home fell from 5.5% to 5.0%. Appliance buyers fell from 50.5% to 45.4%.
Those that felt business conditions were bad rose +2.2 points to 25.2%. That was the highest level since May. Those who felt business conditions are good rose only +0.4% to 19.9%.
With the budget deadlock returning in mid December and debt ceiling fight in late January we can expect weakness in consumer confidence to continue through February.
New home building permits rose to 1.034 million in October from 974,000 in September. That is 13.9% above year ago levels and +6.2% month to month and the highest pace since 2008. This was a very strong performance for the sector and helped boost builders and home improvement companies.
October single family permits at 620,000 was +0.8% faster than September but down -1% from August. Multi-family permits surged from 359,000 to 414,000. The normal data on housing starts and completions was not provided because of the government shutdown causing data problems.
Case Shiller home prices for September rose 13.3% over September 2012. That compares to a 12.8% gain for the 12 months ending in August. On a month to month basis prices rose +0.7%. This is lagging data for September and was ignored.
The FHFA Purchase Only Home Price Index was basically flat in September at 8.5% for the trailing 12 months and the same level as August. The was a miniscule improvement of +0.3%.
The economic calendar for Wednesday will be headlined by the ISM Chicago at 9:45 and the Chicago Fed National Activity Index at 8:30. After the ISM the market volume should die as traders head home for the Thanksgiving weekend.
The market reopens for a half day on Friday and volume will be very thin. The Black Friday market day is normally seen as the start of the December rally period. The month of November will be over with trades settled in December. Holiday sentiment normally imparts a bullish spin to the market and our meltup could actually gain some speed.
In stock news Take Two Interactive (TTWO) shares fell -5% after saying they were buying back the 12 million shares (13%) owned by Carl Icahn for $203.5 million. The three Icahn sponsored directors will resign. Icahn first began his assault on TTWO in 2010 and ended up with an annualized 15% per year gain. Shares in TTWO dropped because the Icahn exit means the company will not be sold and there will not be any new activist increases in the dividend or share price. Volume in the shares of 6.75 million was twice normal.
Nuance Communications (NUAN) reported earnings of 30 cents and revenue of $472.2 million. Analysts were looking for 29 cents and $488 million. However, the company lowered guidance for 2014 to a range of $1.05-$1.15 and analysts were expecting $1.41. Shares declined -18% to $13.10 on the news.
Tiffany (TIF) reported a 50% increase in earnings to 73 cents on revenue of $911.5 million. Analysts were only expecting 58 cents per share and revenue of $888.4 million. Tiffany also raised its full-year adjusted earnings forecast above analyst estimates. Tiffany guided for full year earnings between $3.65-$3.75 up from prior guidance of $3.50-$3.60. Analysts were expecting $3.62. Net sales are expected to grow in the high single digits.
Palo Alto Networks (PANW) shares spiked after the company easily beat expectations and raised guidance. Revenue rose +49% to $128.2 million and earnings were 8 cents and beat by a penny. Buyers were also encouraged by the coming product refresh that could further boost results. On the conference call CEO Mark Mclaughlin told analysts he was not concerned about Cisco's purchase of competitor Sourcefire. He said they beat Cisco when they go head to head in an account and they have beaten Sourcefire products as well. Palo Alto added more than 1,000 new customers in the quarter. Pacific Crest Securities reiterated an outperform rating with a $65 price target. Gabelli reiterated a buy rating and $70 target. Stifel Nicolaus reiterated a buy rating and $60 target.
Men's Warehouse (MW) had been pursued by Joseph A Bank (JOSB) as an acquisition target. When MW turned down the last JOSB bid the CEO of JOSB said "If somebody offered JOSB the same premium we are offering MW we would be obligated to consider it." He was obviously shooting from the hip and not expecting anyone to actually make an offer for JOSB.
Fast forward to this week and Men's Warehouse turned the tables on their potential acquirer and made a hostile bid for JOSB of $55 per share. Shares were trading at $50 when the offer was made. Men's Warehouse decided that merging would be a good deal and offer economies of scale but they wanted to be the acquirer not the acquired. Based on its management experience, scale, long-term growth and performance and history of successfully acquiring companies, Men's Warehouse decided they wanted to be in the driver's seat. The $1.2 billion bid carries an 8.7% premium and a 45% premium to the Oct 8th closing price the day before JOSB made an offer to acquire MW. If the two chains end up going to the altar together it would create a chain of 1,700 stores with $3.5 billion in sales.
Google (GOOG) surged to a new high at $1058 after Motorola said it was shipping the Moto G a month ahead of schedule and to good reviews. The $179 phone is not meant to be all things for all people but just a great Android phone at a cheap price. According to the reviews it should be a big seller.
The Wall Street Journal also had an article saying businesses are suddenly snapping up the Chromebook laptops instead of a regular Windows laptop. This is a win for Google and a challenge for Microsoft since they make the most of their money off selling hardware and software to businesses. The Chromebooks cost about $250 and one-third the cost of a Windows laptop. The Chromebooks use Google Apps instead of Microsoft Office.
Apple (AAPL) also helped push the Nasdaq to a new 13-year high with a +$10 gain to $533 and very near a breakout over that resistance that has held for a month. Apple continues to get positive press and without a doubt it will be an Apple Christmas for retailers. iPads, iPhones and iPods are on nearly every Christmas list and analysts are starting to up their estimates on Apple's Q4 volume.
Time Warner Cable (TWC) is getting a lot of love lately. Shares of the cable company rose another 4% after Cox Communications was rumored to be interested in making a bid. Cox has six million subscribers and is privately held. Time Warner has 12 million cable customers. Charter Communications is reportedly nearing a deal with Bank of America, Barclays and Deutsche Bank for funding to make an offer for Time Warner. It must be nice to have so many companies willing to buy your company. TWC has already expressed an interest in a Comcast bid and previously turned down a Cox bid.
After the bell today Hewlett Packard (HPQ) reported earnings of $1.01 and revenue of $29.31 billion. That beat estimates of $1.00 and revenue of $27.91 billion. HPQ shipped 13.7 million PCs in Q3 compared to 13.5 million in the year ago quarter. Gartner said worldwide PC sales declined -8.6% in Q3 and back to school PC sales were the slowest since 2008. Hewlett Packard appears to be bucking the trend and the turnaround on track. Hewlett is handicapped by not having a tablet and no smartphones. It is an old school PC, printer and services company and that is a tough business today. CEO Meg Whitman said HP would be releasing new tablet models next year and "the innovation engine is alive and well." Shares of HPQ rallied $1.50 in afterhours to close at $26.73.
The winter storm heading towards the northeast is a readymade excuse for retailers when they post soft sales numbers for November. The storm ate our sales is going to be a popular excuse regardless of whether it impacted shopping or not. Retailers have been expecting a lousy holiday season with six shorter days and surveys showing consumers were planning on spending -3% to -10% less this year. Now retailers can breathe easier with an excuse already in hand. Conversely abnormally cold weather will help stimulate sales of winter apparel.
You probably heard of the deal between the six UN nations and Iran over the nuclear program and sanctions. It has only been three days and already Iran is balking. Iran says the U.S. is misleading the public over the details of the interim deal and Iran has rejected the U.S. version of the deal as "invalid." Iran said the White House released a one sided interpretation of the agreed text and some of the explanations and words in the release contradict the actual text of the "Joint Plan of Action." Iran released its own version of the deal saying it did not give up the right to its nuclear program.
The text from Iran says, "This comprehensive solution would enable Iran to fully enjoy its right to nuclear energy for peaceful purposes under the relevant articles of the NPT in conformity with its obligations therein." And, "This comprehensive solution would constitute an integrated whole where nothing is agreed until everything is agreed."
The strong objections by Iran to what has been released in the press calls into question whether they will actually follow through with the final stage talks when the deal is implemented in the next several weeks. The Joint Plan of Action must be finalized before the terms of the plan can begin. Translation, it is not over until it is over and there is a lot of negotiation still to be done.
On another front China surprised the world on Saturday when it declared an Air Defense Identification Zone (ADIZ) that covered a significant portion of the South China Sea and areas claimed by Japan. The black order on the left side is the previously claimed border by Japan. The area in gray is the new ADIZ claimed by China. Countries claim ADIZ boundaries all the time but they don't attach the stipulations China is demanding. They are requiring flight plans, transponder identification codes, constant radio communication by the pilots and over flight permission from China. They are threatening to backup their demands with military action against any plane failing to properly identify and follow their demands. Japan has protested strongly since the area covers islands that belong to Japan. The U.S. also protested to China without any material response. On Tuesday the U.S. flew two B52s through the area without flight plans, communication or transponders. The exercise was a direct challenge to the new ADIZ rules. The bombers were not armed and they were not challenged.
Since a Chinese general recently said that China and the U.S. would be at war by 2020 and the same idea was put forth by a high ranking U.S. officer it would appear these "events" are going to increase. According to USA Today, the Pentagon disclosed it was building up its bases in the Pacific in an effort to limit damage in the case of a Chinese missile attack. The Pentagon said that 90% of its bases were within 1,100 miles of China and vulnerable to missile attack. China is rapidly developing an ICBM specifically to target aircraft carriers within 6,000 miles of China. The missile is launched into near space and then dives at 5-7 times the speed of sound directly into the deck of the carrier. It would be guided and very hard to defend against and the kinetic impact alone would destroy the carrier. Welcome to 2020.
The markets continue to chip away at overhead resistance because in Art Cashin's terminology "there is no alternative." This is a TINA market. Bonds are on the verge of a huge selloff when the Fed begins tapering QE. Nobody wants to see their principal rapidly eroded when that starts so bonds are not the investment of choice today. Goldman Sachs released two market calls for 2014 this week. The first was to buy the S&P-500 and the second was to short bonds.
It is a TINA market because the Fed is inflating the cost of risk assets and reducing the value of fixed assets like bonds. Until the circumstances change there is no alternative to stocks.
The markets faded at the close today because this was the last day of the month for institutional traders. They are headed home for the holidays and even the hardcore traders will close up shop after the Chicago ISM on Wednesday. The real start of the Santa Clause rally is traditionally on Black Friday. Housewives go shopping and investors, home for the holidays, tend to end up on the PC trying to decide where to invest their bonus. The next four weeks should produce a positive trend.
The S&P traded up to 1,808 intraday before falling back to close at 1,802. No harm, no foul and just another temporary dip to buy. Initial support is now 1,780 followed by 1,770. Initial resistance is 1,810-1,812 and then into uncharted territory.
I would rather have this slow meltup than a big spike on news that is susceptible to a multiday bout of profit taking. It is much easier to justify buying the market tops when there is a daily pause point at the close. It is a two steps forward, one step back market and we should be thankful.
On the Dow the 16,100 level has been resistance for the last two days and that should break on Friday. I am not expecting a big market day on Wednesday. Initial support remains 15,900. The Dow remains very over extended and could be subject to a bout of profit taking at any time. With the small caps back in the lead we could see some selling in the big caps to generate cash for investment in the fast movers.
The Nasdaq spiked over 4,000 thanks to strong gains in Apple, Google, Priceline, Netflix, Amazon, Baidu and JOSB but the gains were broad based across the entire tech sector. Breaking through the 4,000 barrier was a strong signal of more gains to come. The Nasdaq consolidated for a month at the 3,900 level and the breakout should take us significantly higher. Support remains 3,895 but I would be surprised to see it tested next week.
I am really happy about the strong gain in the Russell 2000 today. That is the strongest signal we can get that fund managers are buying stocks and no longer afraid of a correction. For several weeks we saw weakness in the small caps and strength in the big caps as fund managers rotated into the safer equities. Now they are rotating back. The relative weakness in the big caps compared to the Russell clearly shows they are setting up for the Santa Claus rally. Small caps routinely perform the best in the period between Thanksgiving and Christmas. The Russell could easily see uptrend resistance around 1,150 in the coming weeks. Uptrend support is now the 50-day average at 1096 and the uptrend channel around 1,080. Both are rising so any profit taking would encounter those trends at higher levels than we are seeing them today.
At the risk of appearing too bullish I believe we are setting up for a decent rally in the weeks ahead. However, when everyone begins capitulating for a move in either direction there is always the potential for a counter trend event. While I am bullish I think we need to keep looking over our shoulder for those unexpected events. It could come from Europe where the news has suddenly gone quiet. It could come from China and their PMI on Friday. There could be an event in the South China sea or something unexpected from Iran. There is always the potential for a slipup in Japan with the removal of the uranium rods from the damaged reactor. A serious mistake there could render thousands of square miles uninhabitable and not only in Japan. Or it could come from our own Fed speakers trying to get their names in the headlines. When the market is as complacent as it is today anything unexpected could destabilize it. Be long but be prepared.
We have had a very nice year in the markets. Most of the indexes are at new highs and the outlook for the future is rapidly improving. If we can just keep the Fed from rocking the boat we could have a good 2014 as well. Analyst estimates are ranging from 2050 to 2200 for the S&P by year end 2014. Don't go through 2014 alone. Take advantage of the 15th annual End of Year Renewal Special today. Don't wait until the last minute.
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