The markets failed to crash after a week of monumental headlines. Dips continue to be bought.

Market Statistics

It was a rough week for headlines with the events in the Ukraine and Israel plus testimony by Janet Yellen that took direct aim at the market and some less than exciting earnings guidance. Despite the world shaking events the Dow closed near its recent high and the Nasdaq 100 closed at a new 14-year high. This has to be seen as bullish but we have to wonder how much longer this can last.

When markets ignore the headlines and dips are bought on really bad news it does not pay to be betting against the market. We are clearly in dip buying mode until proven wrong. The fly in this bullish ointment is the Russell 2000, which set a new two month low on Thursday. The Russell rebounded +1.6% on Friday with an 18 point gain but I believe that was short covering and option expiration pressures rather than a sudden surge of new buyers.

I believe the market took the downing of the Malaysian jet very well even when it turned out to be directed by a Russian advisor to the separatists in the Ukraine. A Russian colonel and Russian weapons but no serious blowback on Russia, yet. Many were initially worried that the downing of the jet could lead to U.S. military involvement much like the sinking of the RMS Lusitania in May 1915 caused a serious change in public opinion against Germany and caused the U.S. to enter World War I. The passenger liner Lusitania was torpedoed by a German U-boat and sank in 18 minutes killing 1,198 and leaving 761 survivors.

So far there does not appear to be direct link to Putin despite news the U.S. had intercepted a transmission between a Russian "advisor" and the missile crew telling them to fire on the plane. It is thought the missile crew believed the radar contact to be another Ukrainian An-26 transport like the one they shot down three days earlier. There were posts on Facebook and Twitter bragging they shot down another An-26 until early responders to the wreckage discovered it was a passenger plane. The posts were immediately taken down. The Ukrainian government claims it also had intercepted radio communications between separatists bragging about downing what they thought was an An-26. The Russian SA-11 Gadfly missile is radar guided. The operator on the ground could not determine visually what plane was flying at 33,000 feet. It is only a blip on a screen.

The point keeping this from being a major international incident is the fact the crew on the ground did not know it was a passenger airliner or at least that is what everyone believes today. If they had communication talking about attacking a passenger plane I think the reactions would be a lot more severe. All the nations involved appear to be holding back on their response until more evidence can be gathered. I believe we can expect some serious additional sanctions against Russia in the days ahead.

The impact to the market should be over unless there are further events out of the Ukraine that suggest future military intervention by other nations.

There has been a number of shoot downs of passenger aircraft in the past and none have caused a war. In Oct 2001 a Sibir Airlines passenger plane was downed by a Ukrainian missile during a training exercise. The crash killed all 78 passengers and crew.

In September 1998 a Lionair (Sri Lankan) plane was downed by separatists killing all 65 passengers. In September 1993 an Orbi Georgian Airways flight was shot down by Abkhazian rebels and crashed on the runway at Sukhumi-Babusheri Airport killing 108. In July 1988 an Iran Air flight was mistakenly shot down by missiles from the U.S. Navy in the Strait of Hormuz killing 290 passengers. In June 1987 a Bakhtar Afgan Airlines plane was shot down by rebels killing 53. In August 1986 a Sudan Airways plane was shot down by a missile fired by the Sudan People's Liberation Army in South Sudan killing 60. In 1983 a Korean Airlines 747 was shot down by Soviet fighter aircraft killing 269. In February 1979 an Air Rhodesia plane was hit by a missile fired by the Zimbabwe People's Revolutionary Army killing 59. In 1962 a Russian Aeroflot plane was shot down by a stray missile during an air defense exercise in Russia killing 84.

The Israel retaliation into Gaza is not a market mover. As of Friday night Hamas has fired 1,636 missiles into Israel in the last ten days. Hamas is funded and supplied by Iran. Very few people are complaining about Israel responding militarily against the missile attacks. Hamas and Israel have been fighting since Israel abandoned Gaza in 2005. Hamas had agreed in 2004 to stop the offensive against Israel if they would leave Gaza. Israel evacuated more than 7,000 citizens from their homes in Gaza but less than six months later Hamas was again launching attacks. This fighting has been going on for more than a decade with flare ups every couple of years. The market is immune to the Gaza headlines.

What the Ukraine and Gaza headlines did was distract traders from the earnings and economics. It was all overseas headlines all day on Friday. The economic reports were not market movers even if there had been no headlines.

The regional and state employment for June was positive with employment rising in 33 states while declining in 22. Florida led the country with 37,400 new jobs followed by California with 24,200 new jobs and New York with 22,500. Decliners included West Virginia -9,100, Alaska -5,900, New Mexico -4,700 and New Hampshire -3,900. This report was ignored.

Consumer Sentiment for July declined from 82.5 to 81.3 and the lowest level in four months. The present conditions component rose from 96.6 to 97.1 but the expectations component declined from 73.5 to 71.1. That is the lowest level since March for the expectations component.

The three month old conflict in the Ukraine plus the IS insurgency, formerly ISIS or ISIL, now just Islamic State, in Iraq that pushed gasoline prices to the highest level for this time of year probably weighed on expectations. Also, the news in late June of the -2.9% contraction in GDP in Q1 may have soured the outlook for consumers. Consumer spending in June missed estimates and suggests consumers were already starting to feel the pinch of higher gasoline prices and lowered economic expectations.

The economic calendar for next week is front end loaded with the Chicago Fed and Richmond Fed surveys on Monday and Tuesday. The Consumer price Index (CPI) on Tuesday will be a look at inflation at the consumer level for June. The CPI has shown a significant uptick in inflation starting in March with a rise of +0.2% followed by +0.3% and +0.4% in April and May. Janet Yellen said this three month uptick was just "noise" and she expects inflation to remain low. This report will be critical confirmation of her expectations. If it fades back towards the 0.1% average over the last year then the market will be pleased. If it continues to rise or even maintain the level of the last two months Yellen will be under a lot of pressure to substantiate her noise call.

The Durable Goods numbers on Friday will be important for Q2 GDP estimates. Orders fell in April and May, which was after the severe winter weather, so the June number is going to be critical for closing out Q2. If it remains negative like the -1.0% in May the economists are going to be running in circles trying to produce a new GDP forecast that shows growth. This number will be important for the Fed, which meets the following Tuesday to determine monetary policy.

St Louis fed President James Bullard was out on Thursday repeating his expectations for the normalization process to begin sooner rather than later. Normalization is code for returning interest rates to normal. Earlier in the week Yellen repeated her claim that rates will stay low for a considerable period after QE ends late this year. She indicated QE may be terminated in October. Bullard said the rapid drop in unemployment could push inflation "well above" the Fed's target. He is predicting 2.4% inflation in late 2015. Bullard wants the Fed to raise the interest rate by the end of Q1-2015. The market lost ground after Bullard's comments on Thursday but there were a lot of other headlines at the time.

Friday was a light day for earnings with GE the only major company reporting. GE reported earnings of 39 cents, a +13% increase on a +3% rise in revenue to $36.23 billon. Analysts expected 39 cents and $36.26 billion. Profits from industrial divisions rose +9%, oil and gas +25% and aviation profits rose +12%. However, transportation earnings declined -14%.

The company said it plans to sell 125 million shares at $23-$26 of its retail finance unit named Synchrony Financial (SYF) to raise $3.1 billion. GE will retain 85% ownership in SYF. Before the financial crisis GE received more than half of its revenue from financing operations.

GE shares declined fractionally on the news. With 10 billion shares outstanding it would take a major event to move the stock.

Skyworks Solutions (SWKS) reported earnings Thursday after the bell that rose +54% to 83 cents compared to estimates of 80 cents. Good but not great. However, they warned that results for the current quarter would be well ahead of estimates and said the company is "forecasting sustainable, above-market growth for the foreseeable future." Revenue for the current quarter is now expected to br $680 million with earnings of $1. Analysts were only expecting $607 million and 87 cents. Shares rocketed +14% higher to $53.

Schlumberger (SLB) reported earnings of $1.37 that was down from the $1.57 earned in the year ago quarter and barely exceeding the $1.36 analyst estimate. Revenue rose +7.8% to $12.1 billion and beat estimates for $11.9 billion. Shares declined -2% after the CEO expressed a "slightly more cautious outlook" from sluggish growth in the U.S. and "anemic" growth in Europe.

On Thursday Baker Hughes (BHI) said the North American fracking market is still 20% oversupplied and prices have been falling for two years due to a glut of equipment. Prices are expected to remain low for 2014. SLB said margins had declined from 19.7% to 18% due to the rising cost of frac sand.

AMD was the biggest loser with a -16% drop after reporting earnings of 2 cents compared to estimates of 3 cents on revenue of $1.44 billion. Revenue is expected to increase +2%, plus or minus 3%, sequentially, compared to consensus estimates of $1.57 Billion meaning they will probably miss Q3 estimates. The cautious outlook caused multiple downgrades and the stock drop. This was the biggest one-day decline in nine ears. Q2 sales in its computing solutions unit declined -20% while Intel's PC processor division rose +6.2%.

Next week is the busiest week of the earnings cycle with 133 S&P companies and 12 Dow stocks reporting. The major players are highlighted in yellow in the graphic below. Apple, Netflix, Facebook and Amazon are probably going to get the most attention.

Microsoft shares have already rallied on the Intel earnings beat and the massive job cuts. I can't imagine what they could announce to push the stock much higher.

Apple will either miss by a mile or beat by a mile and the shares will act accordingly. Last quarter there was a slowdown in sales of some iProducts but shares of Apple spiked from $75 to $85 in post split terms after they announced the 5:1 split and additional buyback plans. Without another split announcement of another $50 billion buyback I would be surprised if a simple earnings beat will power the stock much higher.

Apple will benefit from the new product announcements in the near future so buy any dip after earnings.

Dunkin Donuts (DNKN) reports earnings on Thursday. The company was downgraded by Janey Capital on Friday from buy to neutral and the price target cut from $56 to $45. Janey said same store sales trends for the rest of the year may be lower than expected. Another analyst said ignore Janey because Dunkin margins at 30-40% are twice that of Starbucks and they have plenty of room to expand. They are heavy in the northeast and south but only have three stores in California and very few stores in the west. Shares dipped initially on the downgraded but rebounded to gain 25 cents on the day.

Amazon (AMZN) reports earnings on Thursday and while nobody expects any blowout numbers the stock is still up +$30 over the last week. With Fox bidding for Time Warner we could see Amazon up the ante on the content wars by acquiring somebody like Lions Gate (LGF). Amazon has a $165 billion market cap and LGF only $5 billion. Amazon could pick up a progressive studio for pocket change and then ramp up content generation to compete with companies like HBO and Netflix. Lions Gate has been up on takeover rumors all week as a result of the Fox/TWC acquisition headlines. Content is king and LGF is producing a lot of very good material.

Amazon also announced a read all you want plan for the Kindle. For $9.95 per month you can download all the books you want without paying for them individually. This would let customers binge on reading without breaking the bank. Piper Jaffray said Kindle Unlimited could be generating $1 billion a year in revenue in the next several years. This is to compete with several other e-book sellers with similar plans.

In the "you can't make this stuff up" department the U.S. Justice Dept filed drug trafficking charges against FedEx (FDX) for accepting shipments from Internet pharmacies. The U.S. charged FedEx with 15 counts of conspiracy to distribute controlled substances and misbranded drugs that carry fines of twice the gains from the conduct. The government alleged that to be $820 million in shipping fees.

Attorney Larry Cole, formerly associate chief counsel for the DEA said this is "an unprecedented escalation of a federal crackdown on organizations and individuals to combat prescription drug abuse. Targeting a company that's two to three steps removed from the actual doctor-patient, pharmacy-patient relationship is unprecedented."

It may not be that unprecedented since UPS gave up $40 million in billings to online pharmacies last year under a non-prosecution agreement after the feds threatened to file similar charges. Walgreens (WAG) agreed to pay an $80 million civil fine last year to resolve claims their distribution center in Florida failed to report suspicious drug orders of oxycodone, or should have known, that prescriptions being filled were not for legitimate medical use. CVS Caremark (CVS) paid a $78 million fine in 2010 to settle claims that stores in California and Nevada allowed customers to buy cold medications that were used to make methamphetamine.

I can see how some of those events could be interpreted as lax management or looking the other way to make sales. However, FedEx is just a shipper. They pick up a load of prepaid, preaddressed boxes and deliver them to the address on the label. They don't know if the contents are medical supplies, candy, shampoo, mouth wash or prescription drugs. The shippers could just as easily packed them in priority mail boxes and dropped them off at the post office.

The Justice Dept said "FedEx delivered drugs to or for Internet pharmacies that supplied pills to customers who filled out online questionnaires, and were never examined by doctors, knowing these practices violated federal and state drug laws." FedEx said it can't be responsible for the contents of the 10 million packages it transports daily and that policing the content of customer's packages would violate their privacy.

FedEx said Friday it repeatedly asked the government for a list of illegal pharmacies so it would know which ones not to do business with. The U.S. never gave it such a list. The government said FedEx should have known the drugs were illegal with some packages sent to addresses that were vacant homes. I can see in some cases where that would have been obvious but if there is no signature required FedEx just leaves the package on the porch. If the criminals were doing their job right they would pick homes that did not look vacant.

After an initial dip FDX shares rebounded to close up +$1 for the day.

The rebound on option expiration Friday should have produced more volume than the rest of the week. The average volume for the prior three days was 6.3 billion shares. Friday's expiration volume was only 5.7 billion shares. The down volume on Thursday was 5.23 billion shares and the up volume on Friday was only 4.49 billion. If you allow for the normal expiration volume it suggests the rebound was on very low volume and should not be trusted.

I believe the downdraft on Thursday was the result of multiple headlines from Ukraine, Israel, Iraq and from Bullard's sooner rather than later prediction. The flurry of headlines prompted a lot of people to run for the exits and for the bears to pile in with new shorts. When there was no follow through to the downside on Friday morning after a -12 point drop on the S&P futures overnight there was a rush to cover before the weekend. There was a +32 point rebound in the S&P futures from Thursday night's low of 1,942 to Friday afternoon's high at 1,974. That is a huge move and can only be associated with short covering.

The Russell 2000 futures rebounded from 1,123 to 1,149, a +26 point sprint. The Russell cash had been heavily shorted for the last two weeks with the low at 1,131 at Thursday's close. That was an 82 point drop from the July 1st high at 1,213. To say the Russell was oversold would be an understatement. The Russell rebounded +18 points by noon on Friday. That was clearly short covering with the rest of the day flat.

I pointed out in the July 5th newsletter that the Russell 2000 was setting up for a potential double top when it failed to break through 1,208 for three days and so far that has come true. If it continues to decline the initial target would be 1,100.

Support at the 50-day average failed on Thursday with a close under the 200-day as well. The Friday rebound stopped exactly at the 50-day, which should now be resistance. However, as you can see in the chart below the Russell has not been very reactive to the various moving averages. The next material support is 1,096.

If the Russell continues its decline next week I would expect the big cap averages to follow. The small caps typically lead the broader market in both directions.

The S&P failed to return to strong support at 1,950 but it also failed to make a higher high of even reach the old high of 1,985. This is grasping at technical straws since the intraday high on Thursday was 1,984 but resistance appears to be strengthening with a pattern for the week that looks like a short term rounded top.

We can debate technicals all week long but the bottom line is a market that refuses to go down. There are many reasons analysts are giving for the resiliency from improving economics to strong earnings expectations but those reasons are based on hope rather than facts since earnings have been lackluster and economics remain mixed.

Whatever the reason for the underlying strength we need to continue to buy the dips until proven wrong. Sometimes market rallies are based more on people being afraid of not being in the market more than being afraid of the market.

Fund manager stock allocations are at 9 year highs, cash allocations at 9 year lows and outflows from high yield bond funds at 11 month highs. According to Merrill Lynch, global fund managers are overweight equities by 61% and the most exposed since February 2011. That is the second highest rate in the survey's history.

Apparently fund managers are all in until the Fed actually ends QE and begins to raise rates.

Support on the S&P is 1,950-1,955 and resistance 1,985-1,990.

133 S&P companies report next week. This is the busiest week of the earnings cycle and that means there will be plenty of post earnings moves to push the index around.

The Dow traded in a 200 point range for the week but the majority of that movement came on Monday and Thursday. Thursday's opening high of 17,151 was followed by a plunge to 16,966, a -185 point decline. Friday's close at 17,096 erased the majority of that decline and left the Dow poised to make a new high with very little effort. Uptrend support is now 16,900 with the 30-day average at 16,925.

The Dow is moving up slowly in the rising wedge of support-resistance and a breakout-breakdown, when it comes, could be significant.

With 12 Dow components reporting earnings next week we could see some significant movement if companies like Visa, reporting on Thursday, were to move sharply after their earnings.

The Nasdaq put in a series of lower highs despite strong earnings from companies like Intel. Support at 4,344 is still intact with the low for the week at 4,352. With Apple, Amazon, Intuitive Surgical and Baidu all reporting earnings next week there will be plenty of opportunity for further declines. Apple is expected to beat estimates but Amazon will likely disappoint simply because of increased spending on building the next big Amazon shopping feature.

The Nasdaq 100 ($NDX) looks a lot better than the Composite index. The NDX closed at a new 14 year high on Friday at 3,939. Instead of a down sloping trend on the composite the NDX trend is up sloping. This suggests the fund managers are still storing money in the big caps in case of trouble ahead.

Next week is going to be a challenge. Several commentaries I have read this weekend suggest the growing hostility against Russia could impact the market given some new headlines this weekend. Others believe the rebound on Friday has already taken into account the tragedy and by Monday it will be old news. The U.S. is not going to become involved militarily and Putin is going to be under a lot of pressure to smooth over the headlines by calming hostilities in the Ukraine. Time will tell.

The market is showing what I consider to be an unreasonable resiliency. However, that is just my view and when in doubt the trend is your friend. I believe we should continue buying the dips until proven wrong.

Random Thoughts

"If you have trouble imagining a 20% decline in the stock market, you should not be in stocks." John Bogle.

Since 1950 there have only been four bull market streaks without a 10% correction that are longer than this one. The current streak is now 32 months old. The four longer streaks were starting June 1984 at 38 months, June 1962 at 44 months, March 2003 at 54 months and October 1990 at 84 months. The corrections following those streaks were -33%, -16%, -56% and -11% respectively.

Josh Brown said the potential for major geopolitical events has not changed but the "awareness" that events may occur has definitely changed. In times of greater uncertainty momentum stocks are the first to decline since the fundamentals are rarely an issue. Investors buy them because they are going up, not for fundamental reasons. When investors are not invested for fundamental reasons they tend to rid themselves of those stocks very quickly when uncertainty rises.

The Bank of Italy slashed GDP growth estimates to +0.2% for 2014 and only 1.3% for 2015. The bank sees "downside risks for growth this year." This sent the euro to a seven-month low.

Portugal's Espirito Santo International Bank said it could no longer meet its financial obligations and applied for the equivalent of a chapter 11 bankruptcy trustee. The bank said a significant portion of its debt was maturing and it could not make the payments.

Greece is likely to apply for a third round of bailouts from the EU/ECB because of a 12.6 billion euro financing gap in 2015. Greek bonds rallied last year and the country was able to sell 4.5 billion euros in additional debt. However, the market for new debt is shrinking and with Portugal's ESI bankruptcy it looks like the public market for Greek debt may have evaporated.

This is an interesting look at how the different newspapers around the world reported on the Ukraine disaster. Newspapers of the World

One theory floated by a Russian newspaper was that the bodies found in the wreckage were long dead and speculated the plane was actually the vanished MH370 that had been hidden and then re-used to stage a "provocation" against Russia.

Beware of another Taper Tantrum 2.0. You may remember in June 2013 when Bernanke suggested the Fed was going to start tapering QE. The market declined sharply on worries QE would end. Janet Yellen said last week that QE could end at the October Fed meeting. That was pretty much ignored by the media but as we get closer to October it is likely to take center stage. The bond market is still ignoring the potential for higher rates but a few more statements from hawks like Bullard or a couple more months with higher inflation in the CPI and the realization could hit home in a flash. The first rate hike is often the worst for the market.

Comments from the On average, the year prior to a Fed Funds rate increase has been positive. However, one month after a major shift in policy to tightening, the market has never been up, and averaged a loss of 2.8%. Three months later has been even more negative with an average loss of 4.9%. From six months to one year later, the averages are still negative, but a few modest gains have occurred. Also notable are that the last two times that tightening occurred with DJIA at or near all-time highs (1973 and 1999) the impact was clearly negative.

Housing starts fell -9.3% in June from 1.001 million to an annualized rate of 893,000. This is the second monthly decline. This was supposed to be the summer the housing market was poised to accelerate. Housing permits fell -4.2%. Analysts had expected both numbers to rise sharply. Oops! The severe winter weather is long gone and mortgage rates fell back to their 2013 lows around 4.1%. In short, the housing recovery appears to be fading rather than accelerating.

A Bloomberg poll found that 47% of investors believe the equity market is at unsustainable levels while 14% believe it is already in a bubble. Having Janet Yellen claim biotechs and social media stocks are overvalued did not help.

The Bullish Percent Index on the S&P is currently 82.8%. That means 82% of S&P stocks have a buy signal. However, as you can see by the chart below that is normally the level where the market tends to fade.

According to Laurence Lewitinn the Investor Intelligence bull/bear ratio is 4:1 bulls over bears. That is the highest ratio for the year, close to the peak in 2013 and approaching levels not seen since 1987. Ari Wald, head of technical analysis at Oppenheimer explained that high of a ratio is bearish. You want to buy when there are more bears than bulls.

The streak is dead! The S&P streak of 62 consecutive days without a 1% move ended on Thursday. That was the longest since 1995 when the S&P was only 605 instead of the 1980 today.

I went on vacation last week to Langara Island 26 miles south of Alaska. It was a great trip. My son goes every year and he invited me along this year. In three days of fishing we caught over 50 salmon, kept 14 and released the rest. It is hard to get used to releasing 10-15 pound fish because they are too small. I highly recommend Langara Fishing Lodge to anyone who likes "catching" as opposed to just "fishing." The fish in the picture below were 16-18 pounds. The biggest fish from the group of 72 fisherman was a 46 pound Chinook salmon with several caught over 30 pounds. My son caught the biggest halibut also at 46 pounds.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"When you are dead you don't know it because you are dead. Only those people around you know it. The same goes for being stupid."

Alaskan fishing guide last week.