Investors were shocked when the ISM Manufacturing number was the lowest since 2009 and the markets recoiled at the number. However, buyers intent on profiting from a normally bullish December bought the dip.
The markets started off with a bang with the Dow up +172 but reality returned very quickly and he index dropped back to +50 on disappointing economic news. Dip buyers appeared and the indexes began to creep back towards the highs to end where the morning started with a +168 point gain.
The Fed is facing an uphill battle in their quest for a rate hike two weeks from now. The ISM Manufacturing for November fell into contraction territory at 48.6 and the lowest level since 2009. That was down from 50.1 in October and the recent high of 53.5 in June. The last time the Fed hiked rates with the ISM in contraction was 1981 when Reagan was president. The last three rate hike cycles occurred with the ISM over 55 and expanding. If they are truly data dependent, they should be running from a rate hike rather than towards the first hike in nine years.
All of the major components declined with new orders also falling into contraction for the first time. Most of the other components have been in contraction under 50 for several months. The sharp decline in inventories is bad news for Q4 GDP, which will take a sharp hit from an inventory drop.
Analysts were quick to blame the strong dollar, again. The second reason given was weak global demand and the Fed cannot do anything about that. If they do raise rates, the dollar will go higher and that will further slow demand for anything made in America.
The real time GDPNow forecast from the Atlanta Fed is plunging on the recent string of negative economic reports. The GDPNow is the most accurate forecast of the GDP in the market today. After the ISM report this morning, the forecast declined from +1.8% growth to +1.4%. If the Fed is truly data dependent the GDPNow is not the kind of data they want to see ahead of their December meeting.
On the positive side vehicle sales soared to an annualized rate of 18.19 million in November. That compares to 17.2 million in November 2014. This is being called "peak autos" because analysts do not believe sales can increase above this level in the current economy. GM sales rose +1.5%, Ford +0.4%, Fiat Chrysler +3% and Toyota +12.4%. Volkswagen sales fell -24.4% because of the scandal over emissions and the "stop sale" order from regulators. Volkswagen cannot sell any of the cars covered by the EPA probe. Light trucks and SUVs rose from 10.2 million to 10.4 million with autos declining from 8.0 million to 7.8 million. Thank the low gas prices for the increase in truck and SUV sales.
Construction spending for October rose +1.0% after a +0.6% increase in September. Public spending rose +1.4% with private spending up +0.8%. Residential spending rose +1.6% with nonresidential spending at +0.6%. Total spending for October was $1.107 trillion on an annualized rate. Private construction was $802 billion with residential construction at $399 billion. Public construction rose +1.4% to $305 billion. This report was ignored.
The calendar for tomorrow is headlined by the ADP Employment, which will give us a clue for what to expect from the Nonfarm Payrolls on Friday. A strongly positive ADP with a number over 175,000 would suggest a Goldilocks report on Friday around 200,000. The Nonfarm Payrolls will be the last major data point watched by the Fed before they meet on the 15th.
The Fed Beige Book on Wednesday is also important but since the report is produced by the Fed, they already know what it contains. This is an update for investors.
Janet Yellen will speak at the Economics Club on her economic outlook. That should be a directive on her plans for rates. After the ISM she may want to loosen expectations somewhat.
Facebook CEO, Mark Zuckerberg and wife Priscilla announced the birth of their daughter Max. They also announced they planned to give 99% of their Facebook shares to the Chan Zuckerberg Initiative. Chan was Priscilla's last name prior to marriage. The organization will initially focus on personalized education and curing disease. Zuckerberg plans on keeping his majority voting position in Facebook for the "foreseeable future." According to an SEC filing he will donate no more than $1 billion a year over the next three years.
He currently has about $45 billion in Facebook shares. He owns 4 million Class A shares and 419 million Class B shares. The Class B shares are not traded and are worth about $45 billion. The Class A shares were worth $428 million at Tuesday's close. The Class B shares have 10 votes per share compared to 1 vote for Class A shares. Mark controls 57% of the voting rights so he controls the company direction.
Gilead sciences (GILD) saw its shares decline slightly after a Senate committee released the results of an 18-month investigation into drug pricing. The committee said Gilead knew it would put the life saving treatment out of the reach of many people by pricing it at $1,000 a pill. The 144-page report referenced the Hep-C drugs Sovaldi and Harvoni. They reviewed more than 20,000 pages of documentation. An internal Gilead report showed that 24% of insurers would restrict patient access at $75,000 per patient and that would rise to 47% if priced at $90,000. The same presentation said patient-advocacy groups and doctors would be critical of a price over $80,000.
Gilead released a prepared statement saying it disagreed with the committee's conclusions and the company "responsibly and thoughtfully priced" the two drugs. It should be noted that the drugs CURE Hep-C in 98% of the patients that take it. Without the drug, patients are looking at liver transplants and/or death. Gilead said the high price was necessary to provide funds for research and development of new life saving drugs.
Barclays raised the target price on Amazon (AMZN) to $850 after Amazon said the sales of its electronic gadgets more than tripled over the same weekend in 2014. The Fire tablet at $49 was the top-selling product. Sales of the tablet tripled and sales of the Fire TV set-top box rose +600%. Amazon said it has sold millions of Fire tablets and is building millions more to keep up with demand. Amazon claimed the Fire TV device is the number one streaming media player across all retailers. The Amazon Echo was the top selling product costing more than $100. Amazon said "hundreds of thousands" of Kindle E-Readers were sold over the weekend.
Amazon was clearly the retail winner over the weekend with analysts mostly negative on Black Friday sales in the brick and mortar sector.
TerraForm Power (TERP) rallied +33% from a 52-week low after Oppenheimer upgraded the stock to outperform and raised the price target to $10. However, the bigger reason for the move came from David Tepper's Appaloosa Management hedge fund. Tepper complained the move by TerraForm into higher-risk projects was not serving the interests of shareholders. TERP has agreed to buy 523 MW of projects ($922 million) thrown off from the SunEdison (SUNE) acquisition of Vivint Solar (VSLR). The Vivint projects are higher risk than the utility scale assets TERP normally buys. The company also cancelled a deal to buy $3.45 billion in renewable energy assets in Brazil that is was going to acquire from SunEdison. Investors believe the opposition from Tepper could be the push needed to get TERP to cancel the rest of the SunEdison projects. Shares of TERP have been crushed since the deals were announced several months ago.
Powell Industries (POWL) warned after the close it expected full year 2016 earnings to be in the range of $0.65-$1.05 on revenue of $530-$560 million. Analysts were expecting $1.75 and $578 million. Shares fell about 15% in afterhours to $30.
Guidewire Software (GWRE) guided for current quarter earnings of 13-16 cents per share and $94.5-$98.5 million. Analysts were expecting 14 cents and $95.6 million. They also raised guidance for 2016 from 54-63 cents to 57-66 cents on revenue of $410 million. Analysts were expecting 61 cents and $411 million. Shares rose +5% in afterhours to $63.20.
Johnson Controls (JCI) guided for 2016 earnings to $3.70-$3.90 on revenue of $38.6 million. Analysts were expecting $3.82 and $37.39 million. Shares popped at the open but immediately faded to close down 50 cents.
PNM Resources (PNM) shares broke over resistance after the company guided to full year earnings of $1.56-$1.61. Consensus estimates were $1.59 so I really do not see what pushed the stock higher unless investors were worried about an earnings miss.
Cepheid (CPHD) guided for a Q4 loss of 17-19 cents and analysts were expecting a loss of 18 cents. Revenue of $146-$150 million was in line with estimates for $147.4 million. They guided for 2016 revenue in the range of $618-$635 million and estimates were for $619 million so that was an upgrade. Shares lost $2 on the news but recovered more than half before the close.
TD Ameritrade (AMTD) said it was transferring its listing from the NYSE to the Nasdaq effective on Dec 14th. The symbol will remain the same.
The dollar lost some luster after the ISM report and declined from its highs. This allowed silver and gold to trade slightly higher. The Chinese Yuan was accepted by the IMF on Monday to be added to the "Special Drawing Rights" or SDR basket. The addition will take effect next October. The yuan will have an approximately 10.92% weighting. The dollar has a 41.73% weighting, euro 30.93%, yen 8.33% and pound sterling 8.09%. All of those weightings were reduced to accommodate the addition of the yuan and the new weightings will become effective in October.
The SDRs act like a currency reserve asset. There are currently $204.1 billion of SDRs. Countries can buy or sell SDRs and use them as reserve collateral for transacting business. The addition of the yuan will weaken the dollar somewhat when the new weighting takes effect in October.
Treasury yields also collapsed on the ISM numbers. The yield on the ten-year declined -2.84% to 2.15% and a four-week low. The treasury market is showing reduced chances for a rate hike.
Crude prices were mostly unchanged thanks to the drop in the dollar and the OPEC meeting this Friday. Traders are probably waiting for the Wednesday inventories and will then change their holdings ahead of the OPEC decision. In a survey of dealers and traders in the energy sector 100% expected no cut in OPEC production.
The S&P surge late in the afternoon pushed the index above critical resistance from 2,095 to 2,100. The close at 2,102 was just enough to clear that barrier but stronger resistance remains at 2,116. The markets are normally down on the last day of November for mark to market gyrations but are then positive for the next five days. I hope today's bullish start to December continues to follow those seasonal norms.
The 2,116 resistance was rock solid in early November and late July. December is normally bullish and I do expect that level to be tested. If we do succeed in breaking through I would expect a new high on the S&P before December is over. It may only be a brief trade over 2,128 but I think it will happen. Depending on when/if it happens it could be a trigger for shorts to pile in ahead of an expected January decline.
The Dow surge to 17,895 at the open followed by a drop back to 17,719 only to surge again at the close to 17,885 was remarkable. The shorts got a perfect entry point at downtrend resistance at the open and attempted to capitalize on it. Unfortunately, for them it did not work and that forced a minor short squeeze at the close.
However, if you look at the chart, the Dow stopped exactly at downtrend resistance and just below the resistance highs from early November at 17,964 and 17,977. The next 100 points on the Dow could be difficult but the normal seasonal bullishness could prevail. There is very little stock news and nothing to depress the Dow 30 stocks unless it is a stock specific event that has yet to appear.
Caterpillar was weak after the Chinese PMI came in at a multiyear low suggesting there will not be a surge of orders from China in the near future. Apple just continues to be weak on worries the Q4 sales cycle will disappoint. Apple is expected to sell 76 million iPhones in Q4. News that the watch counters in Apple stores were deserted over the Black Friday weekend were a drag on the stock.
If the Dow makes it over 18,000 the next resistance is 18,100 and then 18,165. If the Dow makes it over 18,000 I would expect it to make a new high because once it gets this close it normally becomes a self fulfilling event. That does not mean it will breakout and sprint for another 1,000 points. It just means we could see a higher print before the end of December.
The Nasdaq Composite closed at 5,156 and right at resistance at 5,160. As I mentioned for the other indexes a move over that high resistance produces a sure bet that we will see a new high over the historic 5,218 close. Once the indexes get this close they normally seal the deal.
Support is now 5,100 and prior resistance.
The Nasdaq 100 ($NDX) closed only ONE point below the historic high close at 4,717 on November 4th. The historic intraday high is 4,737. I believe both will be broken in the days ahead for the same reasons I mentioned earlier. However, the Nasdaq 100 has the potential to move several points higher because of the FANG stocks and the Biotechs. The large cap tech stocks will be favored by the window dressers going into the end of December.
The Russell 2000 stalled at resistance at 1,200 but has closed twice over that level in the last three days. The small caps should continue to be favored for most of December. A higher close on Wednesday could produce some short covering and price chasing as funds struggle to produce gains before the end of December.
I want to remind everyone that the first 5-7 days in December are normally bullish. The next 5-7 days are normally weak as investors restructure their portfolios by taking profits and making their tax loss sales. About the 15th of the month the market normally turns bullish again with the Russell the usual outperformer followed by the big cap techs.
So far this week has gone according to the seasonal norms but two days does not make a trend. We need to plan for the seasonal rally but be prepared for the mid month weakness. I would consider that a short-term buying opportunity.
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