It was a good week for the markets but it would have been a lot better without the hole in the middle. The Dow declined -499 points from Monday's high to Wednesday's low then rebounded +471 points into Friday's close. Without that hole, we could have been a lot higher today.

Market Statistics

Friday Statistics

The Dow hit 16,664 on Monday and then crashed to 16,165 at the low on Wednesday. The rebound that started at that low added 471 points to close at 16,636 or 28 points below the Monday high.

They midweek market flush cleared out all the stop losses and gave portfolio managers an entry point for new positions. Those managers were hesitant to buy the market at resistance but they jumped right in when the market dipped. The Dow is now up +1,133 points from the February 11th low at 15,503.

You can thank oil prices for the Friday fade. After spiking to $34.69 at 9:AM and a five week high, crude fell back to $32.84 at the close. The Dow opened at 16,795 on the strong oil gains and then fell back -159 points to close near the lows for the day.

The economics were actually positive for a change and you would have expected that to be a plus for the market. However, the worry that stronger economics could put the Fed back in play when they meet in two weeks was one factor in the decline.

The Q4 GDP revision came in much better than expected at +1.0% growth. That is up from +0.7% in the first release and significantly better than the +0.4% revision analysts expected. Consumer spending and residential investment provided an upward lift. Inventories, exports and nonresidential investment were a downward drag.

Spending added +1.38% while exports subtracted -0.25%, inventories -0.14%, nonresidential investment -0.24% and government -0.1%. The strong dollar continues to impact exports and tourist spending. Lower oil prices are good for consumer spending but they are a drag on spending by energy companies and the 150,000 workers that have been laid off by the crash.

Despite the recent positive economics, the Atlanta Fed GDPNow forecast for Q1 has taken a sudden negative turn to 2.1% growth. With two more months of data to impact the Q1 numbers, it may go a lot lower.

The final reading of Consumer Sentiment for February came in at 91.7 and up +1 point from the original reading of 90.7. The January reading was 92.0 so only a minimal decline.

The present conditions component rose from 106.4 to 106.8 and the expectations component declined from 82.7 to 81.9. Cheap gasoline prices probably had the biggest impact on the present conditions and the election politics the biggest impact to the expectations decline.

The Personal Income and Spending data for January were all positive. Personal income rose +0.5% after a +0.3% increase in December. Personal spending rose +0.4% after a +0.1% rise in December. The PCE Deflator, the Fed's preferred measure of inflation, rose +0.1% after a -0.1% decline in December. The core rate, excluding food and energy, rose +0.3%, up from only +0.1% in each of the prior three months. On a 12 month basis the headline number is up +1.3% and the core rate +1.7%. The Fed wants to see inflation in the 2.0% range. Energy was the biggest drag at -2.9% after a -3.0% drop in December.

The Fed is going to be challenged to hike rates with the GDP at only 1% and core inflation at 1.7%. While inflation is moving towards their goal, the GDP is actually growing at a subpar rate. Prior to December, the Fed has never hiked rates with a 1% GDP. The Fed will be forced to restate their policy at the March meeting and it will be interesting to see how they phrase it. Yellen has said, "If inflation comes back quicker, rates could go up faster."

The economic calendar for next week is very busy and this is payroll week. The ISM Manufacturing for February is expected to remain in contraction for the fifth consecutive month. The Beige Book on Wednesday is expected to show deterioration in economic activity in several regions because of the recession in the manufacturing sector. The ISM nonmanufacturing on Thursday needs to stay in expansion territory over 50 or the economic conversation will take a sharp turn for the worst.

The ADP Employment on Wednesday is expected to show another slowdown in job gains to 190,000 for February, down from 205,000 in January. The Nonfarm Payrolls on Friday are expected to show a rise in job gains from 151,000 in January to 193,000 in February. Some analysts believe the low number in January was a fluke onetime event while others believe it was finally stating correctly after the large Q4 adjustments for seasonal workers. Another low number for February will be very negative for the Fed's decision and their messaging. The next Fed meeting is in two weeks.

There are worries over the Super Tuesday election event next week. Twelve states hold their primary contests on Tuesday and historically it can be unsettling for the equity markets. Investors hate uncertainty and having a large field of candidates supplies that uncertainty. When the Super Tuesday contests deliver a clear winner with a strong chance of being the nominee the market tends to rejoice regardless of who that nominee may be. They view it as a point of certainty and they can plan their investments based on how that candidate will impact the market. When Super Tuesday produces a mixed field with no clear winner, the market tends to be volatile because of the potential for multiple diverging economic programs.

This year the potential for Clinton and Trump to surge ahead and produce an election that nobody wants could frustrate the market. Those two candidates may be leading in the delegate totals and the polls but they both have the highest level of dislike by the rest of the voters. A recent Gallup poll found that 51% of voters dislike Clinton while only 29% like her as a candidate. For Trump, it is worse with 60% of voters viewing him negatively and only 33% having a favorable opinion. The dislike for the front-runners has made party loyalty a negative for the voters. Only 29% of people polled will admit to being a democrat and only 26% will admit to being a republican.

Once we get past Tuesday, March has the third best record for the market on average since WWII according to Sam Stovall from S&P.

Friday was a relatively slow news day for stock news. (STMP) shares spiked +21% to $116 after reporting earnings of $1.57 compared to estimates for 95 cents. Revenue of $69.9 million blew away estimates for $58.4 million. They guided for the full year for earnings of $5.00 to $5.50 and analysts were expecting $4.33. That is a heck of a guide higher.

China's equivalent to Google, Baidu (BIDU), reported a 19.7% rise in earnings to $545.7 million on a 33% rise in revenue to $2.86 billion. Monthly active search users rose +21% to 657 million. Mobile search users rose +43% to 302 million. Gross merchandise volume rose +397% to $2.3 billion. Baidu Wallet activations rose +189% to 53 million.

If Bill Ackman is still short Herbalife (HLF), he had a very bad day on Friday. The company posted earnings of $1.19 compared to estimates for 92 cents. Revenue of $1.1 billion also beat estimates for $1.05 billion. They guided to earnings of $.97-$1.07 for Q1 and below estimates for $1.09. However, shares exploded higher after the company said it was approaching a resolution of the FTC investigation. They are in discussions with the FTC over a settlement. Herbalife said the potential outcomes of the discussions were a potential contested lawsuit, a settlement that includes a monetary payment or the closure of the regulatory probe without any action. Shares spiked 20% to $55 on the news.

Zoes Kitchens (ZOES) reported a loss of 3 cents compared to estimates for a loss of 6 cents. Revenue of $52.7 million beat estimates for 50.5 million. Same store sales rose +7.7%. The company has been on an extreme growth spurt. At the beginning of 2015, they owned 5 company-operated restaurants. As of December 31st, they owned 163 company-operated stores. That means they were opening an average of three per week. Obviously, there was a reason for them to post a loss for the quarter with all of the expansion costs.

A week ago Carl Icahn's, Icahn Enterprises (IEP), was on the verge of having its debt downgraded to junk. On Friday, shares rallied +11% after the company acquired the Trump Taj Mahal casino in Atlantic City. Trump Entertainment Resorts was in chapter 11 bankruptcy and was acquired by IEP. Trump forfeited his 10% ownership in the business with the acquisition by Icahn. The billionaire also acquired the Tropicana Casino in Atlantic City out of bankruptcy.

Biopharmaceutical company Tesaro (TSRO) reported a loss of $1.89 compared to estimates for a loss of $1.84. Revenue of $230,000 fell well short of estimates for $2.9 million. However, full year earnings were $6.38 or $251.4 million. Shares were up +14% after the company announced the sale of 4.4 million shares at $35.19 in a private placement to raise $155 million.

G-III Apparel Group (GIII) rallied 8% on Friday after announcing it had taken a 19% stake in the parent company of the Karl Lagerfield brand. G-III also holds a 49% stake in a North American joint venture that holds the rights to the Karl Lagerfield trademarks for consumer products. Lagerfield is the head designer for Chanel and Fendi as well as his own brand. G-III said the Lagerfield venture could generate $300-$400 million a year within five years. Earlier this month G-III signed a licensing deal with Tommy Hilfiger Licensing, which is owned by PVH Corp.

Berkshire Hathaway (BRK.A) reported earnings on Saturday. The company earned $4.67 billion in Q4 and $17.36 billion for the year. Earnings rose +32% to $3,333 per Class A share. Analysts were expecting earnings of $3,129 per share. That is up from $2,529 in the year ago quarter. Revenue rose 7% to $51.8 billion. Berkshire completed the Precision Cast Parts (PCP) acquisition in January for $32 billion for Berkshire's largest deal ever. Next week Berkshire will acquire Duracell for $3.8 billion in PG stock and $1.7 billion in cash.

In his annual letter to shareholders, Warren Buffett warned a major nuclear, chemical, biological or cyber attack was a "clear, present and enduring danger" and "there was no way for American corporation or their investors to shed this risk." This warning from Buffett come on the heels of the nuclear deal with Iran and the "satellite" launch from North Korea. See further comments in the Random Thoughts section below.

Foot Locker (FL) reported earnings of $1.16 that beat estimates for $1.12. Revenue of $2.1 billion matched estimates. Same store sales were up +7.9%. The company guided for mid single digit comp sales in 2016 and double-digit earnings growth. Despite the good earnings shares declined -4.3% on the news. This is just another example why we do not like to hold positions over an earnings report unless we are holding for the long term.

Under Armour (UA) is beating Nike on sales gains but Nike is still the overall winner in global sales. UA reported a 97.6% jump in sales for the week ended February 20th while Nike sales rose +8.2%, Adidas +28.3% and Skechers rose +18.5%. Reebok sales fell -51.9%. While UA reported the biggest percentage sales gain it was from a very small base. This is the equivalent of having sales rise from $1 million to $2 million for UA when Nike sales rose from $100 million to $110 million. The percentages can be misleading.

The earnings cycle is about over but the warnings are still flowing. On Friday, only one company issued positive guidance, 6 companies issued in line guidance and 11 companies warned about future earnings/revenue.

A study done last week suggested the quality of earnings was declining. We always report the "adjusted" earnings rather than GAAP earnings because the analysts forecast based on the adjusted numbers that do not include things like charges for restructuring, acquisitions and other onetime events. The theory is that adjusted earnings represent the true picture of the ongoing business without the major swings of the special items.

However, the survey showed that GAAP earnings for Q4 were 25% lower than adjusted earnings. That is the widest spread since 2009. Companies are stretching to classify everything possible in the GAAP side so the adjusted earnings are better. Analysts warn that we may not be looking at the true picture of corporate health because the adjustments are getting out of line.

FactSet said on Friday that 96% of the S&P-500 companies have reported Q4 earnings. Of those 69% beat on the earnings side while only 48% have reported revenue above estimates. The earnings decline for Q4 is now -3.3% and the first time we have seen three consecutive quarters of earnings decline since Q1-Q3 2009. Average revenue has declined -3.9% and that is the fourth consecutive quarter of declines.

For Q1 2016, 88 S&P companies have issued negative earnings guidance or 80% of those giving guidance and only 22 have issued positive guidance. Analysts do not expect the S&P to return to earnings growth until Q3. The current forecast for Q1 earnings is a decline of -7.4% and -1.6% for Q2, +4.7% for Q3 and +9.4% for Q4. The increase in Q3/Q4 is the result of very low comparisons to Q3/Q4 2015.

If the earnings forecasts continue as expected we will have an earnings recession that lasts five quarters and a six-quarter revenue recession. However, forward estimates more than one quarter in advance are notoriously inaccurate and normally overstated. That -1.6% decline for Q2 could be 4% off in either direction by the time the earnings are actually reported.

Crude oil rallied to $34.69 at the open on Friday on more headlines from the Middle East on the potential for a production freeze. The Nigerian oil minister said Russia and Saudi Arabia were on board and the other producing nations were coming into the agreement. He tried to continue hyping the potential for future action by saying a production freeze would establish a base line of cooperation that could be expanded on for a production cut at the June 5th OPEC meeting. The vast majority of analysts, company executives and OPEC oil ministers believe there is zero chance of a production cut in June but the headlines continue to flow and oil prices are rising. The Saudi Arabian oil minister specifically said there will be no cut during a speech in Houston last week. Whatever they say is the official position.

The Nigerian oil minister said oil prices would return to $50 by the end of the year. He said there was no technical or historical reason but prices would rebound to that level. Sounds like wishful thinking to me and he is trying to talk the price up with his comments.

The active rig count declined -12 to 502 rigs and -1,429 off the 2014 peak of 1,931. Oil rigs declined -13 to 400 and gas rigs rose +1 to 102. The Canadian rig count imploded with a -31 rig drop (-18%) to 175 rigs. Oil rigs declined -26 (-24%) to only 83 active rigs.

The Dow Transports have risen more than 16% from their January lows and supported the broader market rally. Some analysts believe this is the top in that rebound. The railroads have rallied on no change in fundamentals. Shipping in the energy sector continues to decline. The airline sector has been moving higher on the drop in oil prices and reduction in capacity. However, load factors are shrinking despite the changes. SkyWest (SKYW) reported revenue seat miles declined to only 77% meaning they had a lot of empty seats in January. They run multiple brands and function as a feeder airline into the larger carriers. Charts on the individual airlines show they have rallied into major resistance.

The Transport ETF (IYT) has rebounded to its 38% Fibonacci retracement level and analysts believe the $135 price point will be the end of this rally.

If the transport sector rolls over the broader market may follow. However, the transports began to decline in March 2015 and it was not until July that the broader markets followed. Some do not believe we will see that lag time if the transports decline again.


On a closing basis, the S&P cannot move above horizontal resistance at 1,950. That level needs to be broken to sustain a continued rally. On an intraday basis, the S&P rallied to exactly the 50% retracement level at 1,963 and failed. This is an 8.5% rebound off the 1,810 lows from February 11th but a 50% rebound from the -306 point decline from the November highs at 2,116. This is a natural resistance point and from the selling on Friday there were a lot of traders watching that level.

The next material Fibonacci resistance is 1,999 and the 61.8% retracement level. With the market moving from oversold to overbought in two weeks that makes the resistance at 1,963 a continued target for sellers. However, for the last two days the S&P has closed right at that 1,950 resistance level and suggesting that is where the battle will be fought.

The RSI at 56.04 is approaching resistance at 60 dating back to November. The MACD is still bullish and suggesting there could be more upside.

The point here is that we have reached some significant resistance levels and just getting over 1,950 intraday does not mean the battle has been won. That is one battle in a larger war.

The Dow chart has the same problem as the S&P chart. The 50% retracement level is 16,718 and the index was sold the instant it moved over that level on Friday. However, the 16,500 resistance has been broken and the index closed well above the 16,665 resistance at 16,696 on Thursday. Because the Dow is only a 30 stock price weighted index, it tends to be less respectful of technical indicators like the Fibonacci levels or moving averages. However, the 50% retracement level is a beacon flashing "sell me."

The defensive stocks including PG, KO, JNJ, HD, MCD, PFE and VZ sold off on Friday, which normally happens when investors are putting risk on rather than taking it off. Portfolio managers may be preparing to move into higher risk asset classes like small caps, banks, biotechs or techs in general. It is also possible these safety stocks have just run too far too fast. It produces a problem for investors because there is no clear direction for next week.

The Nasdaq has a ways to go before it reaches the 50% retracement level at 4,692. The decline in the biotech sector has retarded the Nasdaq rebound. The index still has decent resistance at 4,600 and that is where is failed on Friday. There are no leaders on the index with different stocks outperforming every day and different laggards.

The Russell 2000 was the best performing broad market index last week with a +2.69% gain compared to +1.58% for the S&P and +1.51% for the Dow. The small caps are coming back but they have a long way to go. The resistance at 1,035 is in play and the Friday close at 1,037 is an example of its influence. There is also resistance at 1,050 but we do not begin to get into the Fibonacci levels until 1,078 and 1,120. That would be a significant rebound from here.

The small caps were crushed in the decline thanks to drops in the financials, biotechs and energy stocks. Once those sectors begin to heal, we could see a rapid recovery. The bounce over the last two weeks is very encouraging but we have to get over those 1035-1050 levels to really get the ball rolling.

I would like to think that the stall at the current resistance levels is temporary and we are going higher next week. However, until we get through that resistance at 1,950 on the S&P, 1,035 on the Russell and 4,600 on the Nasdaq there may be a lack of confidence by investors. If we can close significantly over those levels, we could see an influx of money into the markets.

The earnings cycle is nearly over and we have six weeks before it starts again. The bad earnings news is now priced into the market and everybody knows the dollar is killing revenue. That is an old story now.

The holdup for next week could be the employment reports. However, we could be back in the bad news is good news scenario where weak jobs and weak manufacturing is seen as good news because it keeps the Fed on the sidelines longer. With the ECB likely to announce more stimulus on the 10th that could also weigh on the Fed and force them to wait until June or later for their next hike. Raising rates at the same time Europe, Japan and China are lowering rates just makes the dollar stronger and reduces exports and revenue even further and pushes the manufacturing sector further into recession.

We need to trade what the market gives us and watch those resistance levels especially on the Russell and S&P. Those are the road signs on the market road ahead.

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Random Thoughts

There have been numerous articles and warnings in recent weeks about the potential for an ElectroMagnetic Pulse (EMP) attack in the near future now that North Korea has the capability to launch a nuclear weapon into orbit over the USA. Officials believe a successful EMP attack could kill up to 75% of the U.S. population in the 12 months that followed "through starvation, disease, and societal collapse" according to Peter Pry, executive director of the Homeland Security EMP Task Force in congressional testimony last May. An EMP would destroy the electrical grid and take years to restore power. Electronic devices like cell phones, computers, televisions, cars, trucks, etc would be destroyed by the EMP. Without electricity, there would be no water, food, gasoline, medical care, credit cards, ATMs, stock markets, etc for months or even years. PDF on EMP Impact

The members at the G20 meeting in China this weekend were unable to agree on a joint plan for new economic stimulus measures. While the ECB and Japan are expected to add stimulus the rest of the G20 world decided to wait on further economic reports in the coming weeks before making independent stimulus decisions. Several finance ministers warned that a UK exit from the eurozone would be a powerfully negative geopolitical shock. The exit vote is June 23rd.

Investor sentiment for the week ended on Wednesday saw bullish sentiment rise +3.6% and bearish sentiment decline -6.4%. Since Wednesday was a major decline and even larger rebound, I am surprised the bullish sentiment was not higher. That dip/rebound must have confused some traders because neutral sentiment rose 2.8%.

Venezuelan state run oil company PDVSA is facing debt payments of $5.2 billion in 2016 with most of it in October and November. Since the government spent the last $1.5 billion in cash reserves last week the outlook for PDVSA is grim. The socialist government has confiscated all the cash from PDVSA, banks, utility companies and any entity they can seize in order to stave off economic collapse and their bank account is still empty.

PDVSA is going to be in trouble before their debt comes due because they have to import ultralight oil to blend with their heavy crude to make it saleable on the open market. Without cash to pay for that light crude we could see a sharp drop in the crude available for export and further crimping the cash flow. Suppliers are already seeing significant delays in payments and PDVSA is being forced to look for other sources where they do not already have a large balance due. Existing suppliers already worry they will never get paid.

Venezuela exports about 2.0 mbpd and the inability to import light crude for blending would reduce that by about 250,000 bpd initially and more as the problem grows worse. Most of the output from PDVSA is secured against long-term loans so PDVSA does not get to use all the money when it is received. PDVSA has asked Chevron and Rosneft to supply some additional light crude for blending and that may have to be done outside Venezuela in order to keep the cash proceeds from being seized.

Socialism is great until you run out of other people's money. (Margaret Thatcher)

Honeywell (HON) chairman and CEO David Cote sold $36 million in stock, half his position in Honeywell only 3 days before the company announced the offer for United Technology (UTX). Shares of Honeywell fell -10% on the news. David, answer your phone. The SEC is calling.

Some analysts are still bullish on 2016. Oppenheimer's John Stoltzfus reiterated his 2016 price target on the S&P at 2,300 on Friday. He said the economic worries are overdone and the negative earnings are already priced into stocks. Let's hope he is right.

Other recent S&P target revisions

2000 JP Morgan
2000 Bank America
2100 Goldman Sachs
2150 Citigroup
2175 Morgan Stanley
2175 UBS
2200 Deutsche Bank
2200 Barclays
2300 Oppenheimer

Americans are well on their way to being the most overweight and diseased population in history. The U.S. Census Bureau said Americans gained more than 582 million pounds in 2015. That 1% gain was the most since 2011.

The average American man weighs 196 pounds, up 3 pounds in 2015. The average woman lost 2 pounds to 155 on average. There are 322 million people in America totaling 56.4 billion pounds.

The American obesity rate rose to a historic high at 28%. More than 42% of men reported they weight more than 200 pounds, up from 36% in 2014.

More than 29 million people or 9.3% of the population have diabetes with an estimated 8.1 million people undiagnosed. They spend more than $245 billion a year on healthcare. More than 86 million are considered pre-diabetes or 1 in 3 adults. Diabetes is nearly 100% curable by diet alone. We are eating ourselves into an early grave.


Enter passively and exit aggressively!

Jim Brown

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"Freedom is the last, best hope of earth. "

Abraham Lincoln.