The payroll report on Friday surprised quite a few people with a number that was Goldilocks perfect. Not too hot and not too cold. The futures exploded higher and a major short squeeze was born. Unfortunately there was no follow through.

Market Statistics

All the market gains came in the first 10 minutes of trading and there was no follow through with additional buying as the day progressed. Volume died about 10:AM and all the indexes came to a dead stop at resistance.

The economy added +223,000 jobs in April according to the Nonfarm Payroll report. The consensus estimate was for a gain of +220,000 but I don't know where they got those estimates. The consensus for traders was a lot lower in the 165,000-185,000 range. The ADP Employment on Wednesday only showed a gain of +169,000 and that is what the market was expecting for the Nonfarm report. The ADP consensus was for a gain of +200,000 jobs.

The revisions were critical as well. The already low estimate for the March payrolls at +126,000 was cut again to a gain of only +85,000. The February number was revised only slightly lower by -2,000 to +266,000. That brings the three month average to +191,000. That is a decent trend but still too low for the Fed to hike rates. More than one Fed head has said they would like to see jobs over 200,000 for "several months" before they raise rates.

The combination of the decent April report plus the decline in the 3 month average put the numbers right in the middle of the Goldilocks zone. With the majority of investors expecting a much lower number after the ADP miss on Wednesday a monster short squeeze was born. Over the last ten years covering more than 120 ADP reports they have only missed the estimates that bad a total of six times.

The total unemployment rate fell to a post recession low of 10.8% and the government managed unemployment rate declined to -5.443%. The labor force grew by +166,000 and the labor force participation rate rose +0.1% to 62.8%. Household employment, separate from the Nonfarm survey, rose +192,000, up from +34,000 in March.

Those unemployed for less than five-weeks rose +241,000 to 2.7 million. Those employed part time because they can't find a full time job was 6.6 million and flat with March.

Professional and business services added +62,000 jobs, services added +16,000, computer systems design and related services +9,000, business support services +7,000 and management consulting +6,000 jobs. Health employment rose +45,000 and construction +45,000 but nonresidential construction employment fell -8,000. Transportation and warehousing added +15,000. Mining and energy employment declined another -15,000 bringing the total year to date to -49,000 jobs. Manufacturing only added +1,000 jobs, which suggests the strong dollar is still impacting that sector.

Average hourly earnings rose only +0.1% and March was revised down from +0.28% to +0.2%.

The labor market rebounded somewhat but the layoffs in the energy sector and the decline in manufacturing employment continued to be a drag. If May employment is well above 200,000 like the February number at 266,000 then there will be a risk of a rate hike in June. Rumors are circulating that the Fed may hike an eighth of a point just to get the process started. That amount would have no impact on the economy and could be easily digested by the market depending on what language accompanied it.

The best comment I heard on Friday came from Larry McDonald, managing director at Societe Generale. He wanted a number well over 300,000 jobs. He said we should not be excited by an economy that is averaging +191,000 jobs after zero interest rates for six years, $4 trillion in QE and $20 trillion and rising in global stimulus. He said when the financial crisis began in 2008 we had 23 million full time jobs in America. Today there are only 21 million. Over that same period the population has grown more than 20 million. In April full time jobs declined by -252,000, the most in nearly a year, while part time jobs rose by +437,000, the most since last June. There is something seriously wrong with that scenario and we should not be celebrating a Goldilocks number.

On the positive side the weekly Jobless Claims have declined to post crisis lows at 265,000 for the last two weeks. Numbers under 270,000 have not been seen in more than 15 years. This suggests the payroll numbers for May could be strong if this trend continues.

The other economic report on Friday was the Wholesale Trade inventories for March. Inventories rose only +0.1% compared to +0.3% in February with nondurable goods inventories declining -0.4%. Sales fell -0.2% compared to -0.6 in February. Nondurable sales declined -1.5%. Petroleum inventories declined -5.1% due mostly to the drop in oil prices, and farm products declined -7%.

Prior month numbers were also revised lower. This is happening in multiple reports suggesting the economy is not as healthy as previously believed. The decline in the Wholesale Trade report knocked the real time GDP estimates for Q1 down to a contraction of -0.5% compared to the -0.3% earlier in the week. The estimate for Q2 GPD growth was +0.8% but that was before the Wholesale Trade report. The GDPNow page won't be updated until next week. It would not take much in the way of weak economics in the days ahead to push Q2 into the contraction column as well. That would really upset the Fed's rate hike plans.

The economic calendar for next week is fairly uneventful. The retail sales for April is probably the highlight followed by the Producer Price Index. The retail sales will tell us if the consumer has begun to part with their gasoline savings. Now that gasoline prices are back up to $2.65 and rising the consumer is going to be even more constrained on their spending over the summer months.

The split calendar is starting to expand. Insys Therapeutics and IDEXX Labs both announced a 2:1 split. EMC Insurance, not EMC Corp, announced a 3:2 split. I expect even more companies will be announcing in the weeks ahead. It is a financial engineering move that can give companies with a high stock price some headlines in the market and make their stocks more attractive to the individual investor. There are so many stocks today with huge triple digit prices that it could provide a surge in splits. When Netflix announces their split ratio in June, which is probably going to be huge like 5:1 or even 10:1, it could trigger several other companies to announce splits.

The continued weak economics are keeping the projections for future interest rates very low. The market forecast for Fed funds rates is only 1.0% at the end of 2016 and 1.5% at the end of 2017. Anyone with any experience in the Fed rate hike cycle understands that this is ridiculously low and the market is going to react negatively as those forecasts are corrected. About the only way the Fed can force the market to correct its forecast is to actually hike rates. The Fed has been so dovish for the last six years that nobody believes they are actually going to hike anytime soon. Eventually there will be the equivalent of a taper tantrum when the harsh light of reality begins to dawn.

You've got mail! AOL, remember them? The company reported earnings of 34 cents compared to estimates for 32 cents. Revenue rose +7% to $625 million and well over estimates of $594 million. Global advertising revenue rose +12%. An 11% decline in subscribers was offset by a 7% increase in pricing. AOL Platform revenue rose +21% as a result of the sale of premium formats and increased video usage across the various platforms. Shares spiked +10% on the news.

WhiteWave Foods (WWAV) reported earnings of 24 cents that beat estimates of 22 cents. Revenue of $911.1 million was slightly under estimates of $913 million but investors did not seem to mind. The company raised its forecast excluding China to 23-25 cents compared to analyst expectations for 25 cents. They raised full year estimates from $1.08-$1.12 to $1.10-$1.14. Analysts were expecting $1.11. WhiteWave has a portfolio of organic brands including Silk nondairy products, Land-O-Lakes, Earthbound Farms salads, International Delight and Horizon dairy products.

Ebix Inc (EBIX) reported earnings of 51 cents that rose +28%. Revenue rose +24% to $63.8 million. Gross margins were 32%. I could not find any analyst estimates but investors liked the results and powered the shares to a +13% gain. Ebix provides software and e-commerce solutions to the insurance industry.

Tableau Software (DATA) reported earnings of 8 cents that easily beat estimates for a loss of -2 cents. Revenue of $130.1 million also topped estimates for $115.1 million. Tableau provides data analytics software that helps employees analyze data without the need for costly IT projects to create customized reports. The company's closest rival is Qlik Technologies (QLIK) with Microsoft and well behind them in this field.

Bluebird Bio (BLUE) reported earnings on Wednesday that missed estimates by 14 cents. However, enrollment in multiple drug trials and progressions on the drug front powered the company to a $24 gain on Thr/Fri. Other companies are wishing they could miss on earnings and soar to new highs. This one is due for some profit taking.

Outerwall (OUTR), known for their Redbox video kiosks, blew away estimates of $1.67 with earnings of $2.87 thanks to a price hike on DVD rentals. Revenue of $608.8 million surpassed estimates for $594 million. The company raised full year estimates to a range of $7.49 to $8.49 and revenue from $2.29-$2.42 billion. The company closed 1,720 underperforming Redbox kiosks in Q1 and plans to close 1,000 to 1,900 more in the near future. Currently they have 41,960 kiosks with average revenue per rental of $3, up +42 cents from the year ago period.

Universal Display (OLED) reported earnings of 3 cents on revenue of $31.2 million and reaffirmed their guidance for the current quarter. That was good enough for a 10% spike to a new high. The company makes LED lights. (STMP) reported earnings of 72 cents that beat estimates by 12 cents. Revenue of $44.1 million rose +32%. Paid subscribers reached a record high. They raised full year guidance by 5 cents to a range of $2.55-$2.95 and revenue estimates by $5 million to $165-$185 million.

Other major gainers on Friday were:

CF - CF Industries +11%
SYT - Syngenta +11%
MMI - Marcus & Millichap +16%
NLS - Nautilus +5.5%
AZO - Autozone +9%
IMPV - Imperva +9%
PUMA - Puma Bio +9%
AGIO - Agios Pharma +10%

Broadridge Financial (BR) guided for full year earnings with a midpoint of $2.47. Analysts were expecting $2.51. Shares declined -6%.

Trex Company (TREX) reported earnigns of 55 cents that beat estimates for 52 cents. Revenue also beat. Trex guided for Q2 revenues of $136 million and analysts were expecting $139.1 million. Shares still rallied +4% on the news.

Horizon Pharma (HZNP) reported earnings of 21 cents that beat estimates by 2 cents. Revenue of $113.1 million also beat estimates for $105.2 million. They raised full year revenue guidance to a range of $590-$610 million, up from $450-$475 million. Analysts were expecting $545 million. You would think those metrics would produce a spike in the shares but they also reported an 86% hike in operating expenses. Shares fell 6% on the news.

The earnings calendar for next week is pretty bare with only six headliners as the earnings season comes to a close. GoDaddy on Tuesday, Cisco and Jack in the Box on Wednesday will be the crowd favorites.

This is also retail week with Kohl's, Nordstrom, Dillards and JC Penny on Thursday.

Crude oil surged to the high for the year at $62.50 on Wednesday and then pulled back to use prior resistance at $58 as support. The sharp drop on Thursday caused heavy losses in the energy equities. You would have thought oil had crashed back to $50.

After 16 consecutive weeks of inventory gains the string was broken with a -3.9 million barrel decline in Wednesday's inventory report. This powered the surge higher but profit takers were ready to strike. Refinery utilization rose from 91.3% to 93.0% and the highest level of the year as we near the start of driving season.

Late Friday Baker Hughes reported a decline in active rigs of -11 and the smallest number since the week of December 5th. As you can see in the highlighted Rig Change line the pace of the declines is slowing. Last week's total active rigs of 894 is -961 rigs off the high and a -58.6% decline. We are only 28 rigs above the financial crisis lows at 866.


If the market does not pick a direction pretty soon I am going to start looking for a high bridge to jump from. These alternating 2-3 day periods of triple digit gains and losses since early December are making it very difficult to determine market direction and pick stocks. After two days of strong declines to a new five-week low the Dow and S&P recovered all those losses and returned to the highs in only about 10 minutes of trading on Friday morning. Investors can't profit from that kind of movement and it has been constant for more weeks than I care to remember.

The Dow, S&P and Nasdaq all returned to stop at or near major resistance. Since there was no follow through after the first 15 minutes of trading on Friday the obvious deduction would be that the market should decline on Monday. It was clearly a short squeeze because of negative expectations for the payroll report. However, the market exists to make the most fools possible out of any particular situation.

You can look at the S&P as a pending breakout or a pending breakdown depending on your market bias. The S&P closed at 2016 and less than 2 points from a new historic high. How can you be bearish with that fact? To start with it has traded in that range six days out of the last ten. The S&P could be slowly wearing away at that overhead resistance and a breakout could be imminent. However, the only really positive data point we have seen in the last month has been the payroll report. The market does not run on jobs alone.

Also a positive is the better than expected earnings. More than 68% of the S&P have now beaten on earnings but only 52% beat on revenue. Earnings for the quarter are now expected to grow by +2% compared to estimates for -3% at the beginning of the cycle. Bulls will point to that as a reason why the market should move higher.

The S&P is at its record high despite outflows from U.S. equity funds of -$35.8 billion and the biggest monthly move since October 2008 according to Merrill Lynch said investors have withdrawn $99 billion year to date. Last week was the largest weekly withdrawal at -$17.2 billion. The market will have a tough time moving higher if the outflows continue.

Volume on up days continues to be anemic. Monday's gain came on the lowest volume of the week at 5.7 billion shares and Friday's monster short squeeze came on the second lowest volume of the week at 6.5 billion shares. The three declining days in the middle of the week came on a daily average of 7.1 billion shares.

They say a bull market climbs a wall of worry. This one is doing that on declining volume, negative fund flows and weak economics while Janet Yellen is warning the market is overvalued. This is a clear case of "don't fight the Feds." Yes, Feds is plural. With the ECB just getting started with its QE program, Japan throwing mountains of cash at the equity market and China ready to add to its $1.1 trillion in stimulus, the market is awash in liquidity. That is the only answer to why the market continues to ignore the headlines and power ahead. The volatility is increasing because investors are nervous. They don't want to miss out on the gains but they can see the signs pointing to an eventual correction. That means this is scared money ready to jump out at the first sign of trouble.

On the positive side new highs attract money from the sidelines faster than flies to a picnic. Every time the market flirts with a new high the buyers come running only to see the rally fizzle as institutions sell into the spikes. When is this going to end?

Eventually the S&P is either going to breakout or breakdown and every day that passes means we are one day closer to that event. The number of analysts calling for a correction increases every day but as I have pointed out before that tends to be a contrarian indicator. If everyone is expecting a crash the opposite normally happens.

So what do we do this week? The S&P has the perfect setup for trading. If it breaks through the 2120 level on decent volume I would jump on for the ride. If it opens down on Monday I would wait patiently to see if support at 2070-2080 fails or another buy the dip rebound begins. The 100-day average currently at 2071 has been decent support since February. If that average breaks it would be a sell signal that could see the S&P decline to the 2000 level.

This is May. Be patient and wait for the market to pick a direction.

The Dow punched through resistance at 18,100 but came to a dead stop at 18,200. The historic high close at 18,288 is still about 100 points away. In theory the Dow "should" fail at this 18,200 level since there was no follow through after the open on Friday. As Einstein is quoted as saying, "In theory, theory and practice are the same. In practice, they are not."

All 30 Dow stocks were positive on Friday. That rarely happens because there is always a headline or two to drag a couple of stocks lower. Gains can be deceiving. Quite a few of the Dow stocks had small candles with big wicks indicating the opening spike and then a quick decline back to the opening level. Note the Friday candle on the Walmart chart. Would you rush out and buy Walmart because of this chart? Probably not. Based on this chart would you expect a continued rally on Monday?

Boeing was the leader on the Dow and it was clearly short covering after several weeks of declines. Boeing also said on Thursday that Kuwait is about to place a $3 billion order for 28 additional F/A-18 fighter jets that will keep the assembly line open for at least 2 more years past the expected 2017 closure. The spike was obvious short covering after two weeks of declines. Would you buy Boeing from this chart?

The Dow has been at the 18,200 level five other times over the last two months and each time the resistance held. Is this time different? If so, why? What has changed? Nobody today knows if resistance will hold on the sixth attempt. Friday's close was +460 points above Wednesday's lows. That alone suggests the index is stretched and profits could be taken on Monday that puts the Dow back into the congestion from the last month. The 100-day average has been the key level to watch over the last five weeks. So far the Dow has not closed below it.

We don't talk about the Dow Jones Composite Index ($DJA) much but the chart is worth mentioning this weekend. The DJA retested support for all of 2015 at just above 6250 on Wednesday. This support level has been tested many times and has held each time. However, there is a strong pattern of lower highs that suggest the long term view is negative. That could change at any time but we need to pay attention when a broader index of about 3,250 stocks is giving a signal.

Likewise the NYSE Composite ($NYA) is informational when trying to determine market direction. In this case the NYSE rebounded to resistance at 11,200 and came to the same dead stop as the other indexes. However, the NYSE is in an uptrend with the historic high close of 11,203 only 6 points above Friday's close. The NYSE is telling us the exact opposite of the Dow Jones Composite.

The Nasdaq rebounded to stop dead on resistance at 5002 and there was no follow through after the opening candle that halted at 5005. This is the textbook definition of a short squeeze. The index could power higher as long as the biotechs cooperate but most of them were simply rebounding from short squeezes of their own. The sector had been devastated over the last two weeks and there were a few brave souls holding short positions. Looking at the gainers list below do you expect most of those stocks to continue higher? STMP, BLUE and OUTR were all earnings events that won't be replicated on Monday.

I would continue to be cautious on the Nasdaq until it can move convincingly over 5000 with some decent volume. Support is now 4900 and 4850.

The Russell 2000 has the most convincing short squeeze candle of the bunch. It is almost invisible with the open at 1234.82 and the close at 1234.78. Yes, 4 cents difference and clearly no follow through from the opening spike. The Russell chart could go either way but the candlestick on Friday suggests possible weakness in the coming days.

As Johnny Carson used to say, "We have come to a fork in the road." The earnings cycle is ending, rates are rising, economics are weak, the dollar is strong, $99 billion has left U.S. equity funds in 2015 and volume is low suggesting a lack of conviction. Investors hear every day how we are due for a correction and the market is overvalued. However, money leaving the treasury market has to go somewhere. We are into the sell in May period and last week's volatility may have had something to do with that trend. Historically the first two weeks are volatile so that suggests next week may be volatile as well.

Investors at the fork in the road will have to decide if they want to take the path that buys equities and hopes for a summer rally despite the weak fundamentals or will the take the path towards a more conservative summer and wait until some more green shoots form.

The problem with waiting is that once it is apparent the earnings and economy are recovering it will be too late. The market is an extremely efficient discounting mechanism and is normally optimistic even in the face of economic weakness. With the S&P, NYSE Composite and possibly the Dow threatening to breakout that may mean that investors have overdosed on the Fed's "moderate growth" Kool-Aid and they are investing for the future.

I suggest we take the path of caution. There is no need to rush into the market like our money is going to self destruct if we don't buy something. With the summer doldrums ahead anything is possibly. We will lose nothing by waiting a few days to make our next trading decision and let the market pick a direction first.

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Random Thoughts

Japanese debt rose to a new record at 1,053,357,200,000,000 yen. The interest on this debt if 2.275%. The vast majority of it is owned by Japanese citizens. The odds of Japan paying it back are near zero. The only way they will be able to pay it back is if they inflate it away with rampant inflation that makes the yen even cheaper and pushes the citizen investors into financial ruin. Japan remains a bug in search of a windshield.

Investor sentiment took an interesting turn last week. The percentage of traders neutral on the market remained over 45% for the fourth consecutive week and a new 26 year record. However, the bullish sentiment took a dive, down -3.8%, and bearish sentiment rose sharply by +4.9% suggesting sentiment is turning against the market.

If Yellen hikes rates this year she will break a trend that has been in place since 1948. Since that year the Fed has raised rates 118 times and the nominal GDP averaged 8.6% when those hikes started. Only in Q3-1958 and Q3-1982 did the Fed hike rates when GDP growth was under 4.5%.

Since Harry Truman was in the White House, nominal GDP was 4.5% or greater and over 5.5% 112 times when rates were hiked.

Since 2010 nominal GDP growth has averaged 3.9% and is now falling. Analysts believe if the Fed hikes rates soon they may come to regret it. Even Minneapolis Fed President Narayana Kocherlakota is calling a rate hike in 2015 "inappropriate."

Morgan Stanley is warning of a "triple taper tantrum" in 2016. Morgan Stanley said the Fed, ECB and Bank of Japan might all taper their super-loose monetary policies next year if growth and inflation across all three regions picks up. The broker warned that all three entities were at different stages of post-crisis management BUT conditions have changed considerably since the first of the year. In early January deflation was the big worry with oil prices and commodity prices plunging. Those have all reversed and signs of inflation are starting to appear. If all three entities began removing monetary stimulus the global markets could not react well. Triple Taper Tantrum

The bond market is giving investors a bad case of nerves. In the past 15 years a rise in yields of this size and speed has only happened twice before. That was in 1999 and late 2011. HSBC said the spike in yields was a classic pain trade. "Negative rates in the eurozone forced money up the local rate curves and down the credit spectrum while encouraging a flow into higher yielding regions like the USA." History of Bond Market Corrections.

The Social Security Administration (SSA) projects that its trust funds will be depleted by 2033. However, new studies from Harvard and Dartmouth researchers found that the SSA has been overstating the financial health of the trust funds since 2000. Trust funds are expected to grow until 2019 and costs will exceed income beginning in 2020. Social Security Shortfall

Nuclear weapons in a week? Saudi Arabia said "We prefer a region without nuclear weapons. But if Iran does it, nothing can prevent us from doing it too, not even the international community," according to Abdullah al Askar, a member and former chairman of the foreign affairs committee of Saudi's advisory legislature. "Our leaders will never allow Iran to have a nuclear weapon while we don't. If Iran declares a nuclear weapon, we can't afford to wait for 30 years or more for our own - we should be able to declare ours within a week." Saudi Arabia Considering Nuclear Weapons

The U.S. military has ordered security at bases around the USA to the highest level in 4 years. The threat level was raised to threat level Bravo and 2 levels below maximum. The security at recruiting stations, National Guard posts and military bases and camps in the continental US, Alaska, and U.S. territories will be heightened. A U.S. official speaking on condition of anonymity said the government had some specific information that people might be inspired by the attack in Garland. The last time security was raised at bases all across the U.S. was Sept 11, 2011.

An ISIS account on the web claims they have 71 trained fighters in the U.S. across 15 states and that 23 of them are preparing attacks. A FBI official said on Saturday that they were tracking thousands of people sympathetic to ISIS but the vast majority would never take violent action. It is that minority group that could cause a lot of trouble. Pentagon Raises Base Security

North Korea announced it had carried out a successful test of a submarine launched ballistic missile. Kim Jong Un praised the test as a "miraculous achievement." "This missile is a time bomb which will go off on the backs of our hostile enemies at any time." The launch of the missile is a clear violation of multiple UN Security Council resolutions. Military officials warned that nuclear armed submarine launched ballistic missiles would be difficult to defend against. North Korea has been working on nuclear weapons and missile launch systems for more than two decades despite being the most sanctioned country on the planet. North Korean Missile Test

Last week Chinese experts said North Korea may already have 20 nuclear warheads and enough fissile material to double that number by next year and have up to 100 by 2020. North Korean Nuclear Weapons


Enter passively and exit aggressively!

Jim Brown

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