The blowout in the June Nonfarm Payrolls led to a monster short squeeze and a short squeeze in the markets.
The market was poised for a positive open after the European markets had a green Friday. The shock value of the Brexit appears to be wearing off in Europe but this could be cyclical and return to haunt us multiple times in the future as events unfold.
The S&P futures were trading up slightly at +4 in the pre-market but that turned into a strong rally and a +14 point jump to +18 points after the job numbers were released at 8:30. That set the market up for a giant short squeeze after the S&P closed right on resistance at 2,100 on Thursday. The shorts were ready for another dismal report and were caught off guard with the big number.
New jobs for June came in at +287,000 and well over estimates at 175,000. The miserable +38,000 gain for May was revised down even further to +11,000 but the +123,000 number for April was revised higher to +144,000 for a net decline over the two months of -8,000.
The unemployment rate jumped from 4.7% to 4.9% because 414,000 people joined the workforce after 820,000 left the workforce over the prior two months.
Helping to push the headline number higher was the return of 35,000 striking Verizon workers. Leisure and hospitality gained a whopping 59,000 low wage jobs, information technology +44,000, retail +29,900, manufacturing +14,000 and temporary workers 15,200. Construction was flat after falling -16,000 in May.
Unfortunately, you know there it always a fly in the soup. The separate Household survey showed a gain of only 67,000 jobs. The number of unemployed workers rose +347,000.
Even worse 259,000 of the 287,000 new jobs went to workers age 55 or over. Only 28,000 went to workers in the critical 25-54 age bracket. The under 24 age group lost 107,000 jobs. Do not let people tell you the falling labor force participation rate is because of people retiring. Workers 55 and over are the fastest growing employment bracket. Since 2007 more than 8 million jobs have been gained by the 55 and over group while the 25-54 bracket has lost -3.4 million jobs. Source
On the positive side the number of workers employed part time for economic reasons fell dramatically by 587,000 suggesting full time jobs were more readily available.
The rebound in jobs was directly related to the abnormally low number in May. Some analysts theorize the uncertainty over the Brexit vote may have kept employers from adding staff in May. Other believe it was the strong comments by the Fed members in May suggesting there may be 2-3 rate hikes in 2016. After the Fed's tone changed at the June 14th meeting to almost no hikes in 2016 those business owners may have breathed a sigh of relief and immediately started adding workers. Whatever was holding back employers in May completely evaporated in June.
Analyst David Rosenberg at Gluskin Sheff, warned that at turning points in the economy it is the Household survey that gets the numbers right. He also pointed out that applying the same "adjustments" to the Household survey that we have in the Nonfarm payrolls, would have the Household number falling -119,000 jobs in June and down -517,000 jobs over the last three months. He also pointed out that the annualized six-month jobs trend has fallen below zero and clearly a warning.
The jobs numbers raised the chance of a Fed rate hike at the September meeting to 11.7%, the November meeting to 11.5% and December meeting to 27.6%. A couple more jobs report like the one we had on Friday and the September meeting could come back into focus. The market will catch on to this increase in expectations eventually but for right now the forecast is so far into the future the market is not worried.
The California Manufacturing Survey for Q3 rose 1 point from 58.3 to 59.3. This is up from a low of 56.7 in Q1 and three quarters of declines. This report was ignored.
The calendar for next week does not have any critical economic reports but there are a whopping 13 Fed speeches. I am sure we will hear the full range of outlooks for rate hikes from "maybe in 2018" to "still expecting two hikes in 2016." This will confuse investors and send them to their safe places.
The biggest event is the start of the Republican convention the following Monday. Democrats are spending more than $1 million to organize protests and demonstrations outside the convention. This could be really ugly and could weigh on the market.
The horrific shooting in Dallas did not seem to impact the markets. It did provide some gains for gun makers Sturm Ruger (RGR) and Smith & Wesson (SWHC) and body camera makers Taser (TASR) and Digital Ally (DGLY).
The gun used in the Dallas shooting was reportedly an SKS. The guns were originally designed in 1943 in the Soviet Union by Sergei Garvilovich Simonov. They have been made in Russia, Yugoslavia, Romaina, Albania, East Germany and North Korea and copied by several other countries including China. They were used by the Viet Cong in the Vietnam War. The Norinco brand in China made millions in the 1980s/1990s and they sold in the U.S. for about $90. They are not especially accurate but that did not seem to stop the shooter, who was in the Army reserves and had received tactical training. A 20 to 50 year old gun imported from overseas might take some of the heat off the U.S. gun manufacturers but citizens are going to be hitting the gun stores this weekend to buy any gun they can before a new law is passed.
One version of a SKS Rifle
The FBI released the background check numbers for June. They processed 2,131,485 checks for a 39% increase in purchases over 2015. The 2015 number was a 10.5% increase over 2014. For the first six months of 2016, they have processed 13,829,491 background checks which was 60% of all 2015. Assuming nothing changes in the economy, we are well on our way to a new record for the year.
Intel (INTC) was upgraded by Bernstein from underperform to market perform and hiked the price target from $26 to $30. Shares rallied +2.4% on the uninspiring upgrade. The analyst said Q2 results are "unlikely to miss consensus projections" due to the relatively positive view for the PC channel and baseband markets. He also said his efforts to, "short Intel has not worked." I doubt I would rush out to buy Intel just because they were unlikely to miss estimates.
Shares of The Gap (GPS) rallied 5% after the company said same store sales rose +2% in June. That was the first increase in same store sales after fourteen months of declines. However, there was a catch. That was the average across all three brands. The Gap chain declined -1% and the Banana Republic brand fell -4% while the Old Navy brand rose +5%. Analysts warned that the shift of the Memorial Day weekend into June probably accounted for the gains.
Polycom (PLCM) has agreed to sell itself to privately held Siris Capital group for $12.50 a share in cash. That is a 15% premium to the prior close or roughly $2 billion. Polycom already had a deal to be acquired by Mitel (MITL) and will have to pay a $60 million termination fee. The Mitel deal was for cash and stock and a slightly lower price than the Siris deal, which is all cash. Polycom said the telecom business is transitioning from a hybrid on-premise and cloud based Unified Communications environment. They felt they had a better chance to continue as a best-in-class communications provider as a private company.
Shares of Juno Therapeutics (JUNO) were crushed for a 32% loss after a pivotal study on the chemotherapy drug JCAR015 was halted. This is a chemotherapy drug for acute lymphoblastic leukemia. The FDA put a clinical hold on the study after two patients died. The FDA wants Juno to submit a new Complete Response (CR) to the clinical hold as well as a revised patient informed consent form, a revised investigator brochure, a revised study protocol. Juno intends to present all the requested documents next week. The company said plans for its other CAR-T cell products candidates, including JCAR017 were not affected by the clinical hold.
The JCAR015 drug is one of Juno's most advanced pipeline candidates. RBC Capital, Michael Yee, said the stock would recover because the halt was temporary and the drug had passed earlier trials. He said shares were trading as though JCAR015 was dead and it is not. JP Morgan was not as optimistic and they cut Juno from overweight to neutral.
Barracuda Networks (CUDA) said it earned 20 cents last quarter compared to estimates for 11-cents. Revenue of $86.7 million also beat estimates for $83.9 million. The network security provider said recurring subscription revenue rose 20% to $65.3 million while appliance revenue declined -10%. Active subscribers rose 14% to 286,000. Shares rose 19% on the news.
The Q2 earnings cycle kicks off next week with the major banks reporting. Add to that YUM Brands and Delta Airlines and the Q2 cycle will be off and running.
FactSet is predicting a -5.6% decline in Q2 earnings and the fifth consecutive quarter of earnings declines. On March 31st, the estimate was for a -2.8% decline but warnings from the tech sector and analyst downgrades have doubled that decline estimate. For Q2, 81 S&P companies have warned on guidance (72%) and 32 have issued positive guidance. Revenue is expected to decline -0.7% for the 6th consecutive quarter of declines. For Q3, earnings are expected to grow +0.7% and then a +7.2% growth spurt in Q4. Revenues are expected to rise 2.2% in Q3 and 5.1% in Q4. The reason for the growth is the lower comps in the year ago quarters.
Facebook (FB) said it has begun testing end-to-end encryption on its popular Messenger application to prevent snooping on digital conversations. Messenger has 900 million users. They began offering encryption on the WhatsApp platform three months ago. That platform has more than 1 billion users. Multiple other companies already offer encrypted conversations. Messenger will use the same encryption as WhatsApp, that uses a protocol known as Signal, which was privately developed by Open Whisper Systems.
Facebook users must turn on the encryption but all WhatsApp messages are already encrypted. The problem Facebook will have with Messenger is that encrypted messages can only be read on the device that started the conversation. You cannot switch from your phone to your tablet or continue the conversation on your PC. The encryption key is tied to the device not the message. You cannot send videos over an encrypted conversation or make payments. The messages can also be set to self-destruct after a certain period of time. Both of these applications are going to cause trouble for SnapChat. That app has 10 billion disappearing messages a day.
Crude oil tumbled -7% last week on worries over a continued glut and a fast recovery in inventory levels when summer driving demand ends on Labor Day. The EIA inventories on Thursday showed a decline of only 2.2 million barrels when analysts were expecting a decline of 6 million because of the buildup to the July 4th weekend. Gasoline supplies are still high and only declined slightly. Ships trying to unload in NY/NJ have been forced to wait offshore because there is no available storage.
Libya is set to resume exports from two of its largest oil terminals next week after being closed since 2014. The Es Sider and Ras Lanuf are the 2nd and 3rd largest terminals in Libya. ISIS has abandoned the terminals under constant pressure from the Petroleum Guard. The country has only been exporting 330,000 bpd compared to the 1.6 mbpd before the civil war destroyed the country. They could quickly return to 800,000 bpd because the country's rival oil companies have agreed to merge into a single National Oil Company and that would improve communication and cooperation between the various fields and facilities.
Oil prices typically peak in August and decline into the fall. We may have already seen the peak when prices moved above $50 when the Canadian wildfires shutdown production by -1.5 mbpd and another 1.5 mbpd was offline in other countries led by Nigeria.
Analysts are starting to talk about prices under $40 again after demand slows in the fall.
Drillers do not seem to be afraid of a second dip in prices. Active rigs rose by another 9 rigs to 440 after a gain of 10 rigs the prior week. This is still more than 1,500 rigs below the peak in 2015. Oil rigs rose +10 to 351 and gas rigs declined -1 to 88.
This could be a really pivotal week. With the Dow and S&P close to new highs we could either break out and run like the wind as unbelievers race to cover shorts OR we could fail at this level again and create a potential double top.
Despite the questionable jobs numbers the economy is muddling along at a 2% rate. While that is hardly setting the world on fire, we are the best house on a bad block for storing your money. Since you will not earn much in treasuries that makes equities more appealing.
Ironically, the markets are threatening to breakout to new highs but Lipper claims mutual funds have seen 17 consecutive weeks of cash withdrawals. Gold funds have seen 10 consecutive weeks of inflows with $2 billion being added last week alone. Stock funds saw outflows of $6.1 billion. Source
Investors are fleeing the market but the Dow and S&P are at new highs. The strength of the post Brexit rally caught investors by surprise. Portfolio managers are suffering from performance anxiety and a breakout to new highs means they will have to chase prices to keep the market from running away from them.
Since most portfolio managers are already negative for the year there could be an aggressive race to buy the leaders in hopes of capturing some gains before the rally runs out of steam.
The indexes could lose traction at any time. Friday's rally was purely short covering on the payroll numbers. This close to new highs there was already some price chasing in progress and each factor fed the spike.
On the S&P the high close last July was 2,128.28 and Friday's close was 2,129.90. Technically we closed at a 52-week high but the actual historic high close was 2,130.82 from May 2015. If you are following along you probably realized we were right here one year ago and the rally failed. Markets do have a memory and that July 20th failure was traumatic with a -267 point drop to 1,867 on August 24th. That was a significant decline!
The stage is set for either a repeat of last summer's decline or a breakout to new highs and a new chapter in this 7-year-old bull market.
Unfortunately, the volume was light at 7.1 billion shares. When the Dow rallies +250 points, you would like to see a significant increase in volume. Recently the higher volume has been on the days with a market drop.
The internals were positive with up volume 8:1 over down volume, which is normal in a massive short squeeze. The advancers were 6:1 over decliners, which means almost everybody got squeezed.
There were 648 new highs and 92 new lows so quite a few stocks are in breakout mode. That is not the definition of a classic short squeeze to have stocks already at their highs pushed even higher. Normally a "short" squeeze means stocks that were heavily shorted are pushed higher and normally those stocks have been under recent pressure. That would be stocks like TWTR, GPRO, SQ, etc that have been under pressure for a long time and short interest is high.
I saw a lot of buying on Friday in stocks like NVDA and ATVI that were already at new highs. This looks like price chasing where portfolio managers are buying performance in hopes of riding the wave higher.
I look at about 1,000 charts a week in managing the roughly 95 active plays in the various newsletters. The last several days I have seen a lot more bullish activity in the "crowd" with stocks of all types starting to turn positive or extending an already positive streak.
This is perplexing because I have been bearish due to repeated failures at 2,100 on the S&P and 18,000 on the Dow. I have tried to keep a balance of longs and shorts just in case a summer rally appeared. Historically the July-September period is weak and when summer rallies do appear, they can be aggressive because everyone is betting on the historical weakness.
IF we do breakout to a new high next week and hold it for a couple days, the rules of the game will have changed. That would suggest the potential for an aggressive market surge. That is still a capital IF. Markets rarely bottom on Fridays but they often continue gains on Mondays.
As Johnny Carson would say, we are at the fork in the road. I would like nothing better than to see Adam Parker's (MS) original bullish target of 2,425 from last August come to pass. That has since been reduced to 2,175 because of the continued drop in earnings. I do not know if he has reduced his target of 3,000 for 2020 yet but while that would be nice we just need to get through July first and then worry about surviving August. We can worry about 2020 later.
Remember, the Republican convention starts next Monday and it promises to be a daily riot. The market is likely to pause and try to understand the potential outcomes once that convention starts. That still gives us a week and it is an option expiration week. That suggests heightened volatility in both directions.
If I were forced to bet on direction for Monday, I would bet on a new high assuming Asia and Europe do not meltdown over the weekend.
The weekly MACD and RSI are positive and getting stronger. The Brexit crash eliminated all the weak holders and allowed portfolio managers an entry point. The setup appears to be bullish and the bears are going to have a nervous weekend.
The Dow chart is not as convincing because it has a few more points to capture before it hits a high. The high close from last May was 18,312.39. The intraday highs on May 19th/20th were 18,351 and 18,350. The decline began on the 21st and ended with the 15,370 low on August 24th for a decline of about 3,000 points.
On my chart, the line I drew at 18,200 is a personal preference. That connects the tops on the most candles representing the number of times the Dow failed at that level on the weekly chart. That is the level where it has the greatest chance of failure again. However, we are so close I believe traders have that bulls-eye goal in sight. When the indexes near historic highs they tend to hit them. Once there it is not unusual to see weakness because there is no longer a target. Traders take profits and wait to see what develops.
The market has been choppy and lackluster for a year. This may be the time that we actually exceed those highs and keep going. While Q2 earnings are going to be negative, Q3 and especially Q4 earnings are going to be positive. Portfolio managers like to look out six months in advance and that would be year-end after a strong Q4. While those earnings will not be released until Jan/Feb the election will be two months behind us and the market typically rallies after the results are known. I would not be surprised to see portfolio managers setting up for year-end and any Aug/Sept dips could be weak.
I know half the people reading this will think I have overdosed on the Kool-Aid but I am just trying to speculate on the future. If the markets fail at these levels on Mon/Tue and crash back to the lows we can all have a good laugh about my bullish fantasy.
I am not convinced we are going higher. I am just considering the options and trying to prepare in case that is the direction. The market exists to make fools out of the most analysts possible at any given time.
The Dow broke over 18,000 and that has been strong resistance for a year. That should count for something even if it is just temporary.
The Nasdaq blew through resistance at 4,900 but failed to reach its prior failure point at 4,968. The big cap Nasdaq stocks were on fire led by Amazon, Google and Priceline. The rest of the support came from the biotech and semiconductor sectors. However, biotechs were spotty. There were some big gainers and some that did not gain at all. The Biotech Index only added 25 points or 0.8%.
Traders will probably be adjusting some positions next week in order to avoid holding over earnings reports the following week. When tech stocks disappoint they tend to drop sharply the following morning. Very few experienced traders want to take that risk.
If the Nasdaq does move over 4,968 and then 5,000 the real resistance band is from 5,100 to 5,165. That has not even been tested since December.
The Nasdaq 100 big cap index has solid resistance at 4,575 and again at 4,737.
The Russell 2000 gapped over resistance at 1,155 and 1,165 but is still below strong resistance at 1,205. The Russell has gained more than 8% since the June 27th post Brexit low at 1,086. That is a lot of accumulated profit at risk for those that bought the dip. Extending those gains through 1,205 could be a challenge.
Traders appear to be fixated on the historic highs. If they can continue the momentum from Friday, we could see those highs on Monday. What happens after that is anybody's guess. I know we would like to see portfolio managers with performance anxiety continue chasing prices higher but we rarely get exactly what we want. While it is possible, there is still a large contingent of traders that see the rally for what it is and that is a liquidity fueled buying binge caused by $13 trillion in overseas government bonds yielding a negative interest rate. It is not driven by economic fundamentals in the USA or the expectations of a big Q2 earnings surprise. Remember, US equity funds have seen net cash outflows for the last 17 weeks. Fund managers are not driving prices higher. This was institutions and probably a lot of money being shifted to the USA markets because we are the best house on a bad block.
If this continues, the U.S. fund managers will have to participate regardless of the reason. They cannot afford to sit idly by and watch the market run away from them. The week before Brexit, equity funds had near record cash levels. I am sure some of that was put to work window dressing for quarter end but they probably still have some dry powder.
I would continue to caution about being overly long until we know if this is a breakout or a double top. Remember last year. The S&P fell -267 points from May 15th to August 24th.
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Bullish sentiment rose to 31.1% and the highest level since April 20th at 33.4%. It has been below its historical average of 38.5% for 35 consecutive weeks and for 68 out of the last 70 weeks. Neutral sentiment rose 4.6% to 42.3% and well above its historical average of 31.0% for the 23rd consecutive week. Bearish sentiment fell to 26.7% and the lowest level since April 20th. The historical average is 30.5%.
Survey respondents (45%) said the uncertainty over the presidential election was the top factor for caution and 39% said global economic uncertainty was the second major worry. Only 17% cited valuations as a concern. Only 13% said earnings were a problem.
JP Morgan said their odds of a recession within the next 12 months rose to 37%. This is the highest level the index has reached in this economic cycle. The sharp 5% decline in auto sales in June and the lack of loan growth in the senior loan officer opinion survey were big contributors. The ISM Nonmanufacturing sentiment was the second biggest contributor. Source
Deutsche Bank said last week their recession prediction model was up to a 60% chance and the highest since 2008. They said the "relentless flattening of the yield curve was worrisome" since a flat or inverted yield curve historically precedes a US recession.
Bank of America has given up on an earnings rally. They warned that corporate buybacks, the main driver of the market over the last two quarters, will be in a blackout period over the next four weeks as the S&P reports earnings. Companies representing more than 89% of the total market cap of the S&P-500 will have reported by August 5th. Analyst Dan Suzuki expects the Q3 earnings estimates will decline into negative territory as the Q2 cycle plays out and guidance is lowered. He warned that an earnings recession lasting well over a year is not normal. He said "the profits recovery is unlikely to live up to expectations." Source
To date in 2016, 509 people have been killed by police. In 2015 there were 990 deaths. The statistics should surprise you given the current hysteria over recent killings.
Male 484, female 25
White 238, Black 123, Hispanic 79, unknown 46, other 23.
Weapon used by the dead person:
Gun 304, knife 88, vehicle 35, unarmed 35, unknown 27, other 20.
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