The market appears to be setting up for an October rally but the timing is still unclear.

Weekly Statistics

Friday Statistics

The markets shrugged off negative news on Friday and celebrated a potential settlement deal between the Justice Department and Deutsche Bank. A news report just before the bell turned the S&P futures from seriously negative at -13 to a gap higher for the markets at the open.

With a pattern of higher lows, the markets may be getting ready to retest the highs but first we have to get through the first two weeks of October, which are famous for seeing many second half lows.

There were only two economic reports on Friday. The Personal Income and Spending for August showed incomes rose +0.2% and in line with consensus estimates. This compares to a +0.4% rise in July. Consumer spending was flat compared to +0.2% estimates and +0.4% in July. Auto sales were weak as were non-durable goods. The PCE Price Index rose only +0.1% compared to estimates for zero and the core index rose +0.2%. The headline inflation over the trailing 12 months rose to 1.0% with core inflation at +1.7% and inching closer to the Fed's 2.0% goal.

The final revision of Consumer Sentiment for September rose from 89.8 to 91.2 and the surge in the last third of the month suggests we could have a strong number in October in the 92 to 93 range. The expectations component rose 4 points to 82.7 but the current conditions component fell nearly -3 points to 104.2. Since gasoline prices are unusually low, the decline in the current conditions component is likely related to the political battle now in progress. Sentiment typically weakens late in the presidential cycle because the candidates are telling consumers how bad conditions are and what they will do to fix them.

The Fed heads are going to be out in force again next week with 9 speeches. With analysts already resigned to a rate hike in December, this will be another chance for the Fed to solidify those expectations.

This is payroll week with the ADP Employment on Wednesday with expectations for +170,000 new jobs. The Nonfarm Payrolls on Friday are expected to show a gain of +168,000 jobs. Neither number is exciting and both are right in the Goldilocks zone of not too hot and not too cold. Actual numbers in those ranges should have no impact on the future Fed decision.

The ISM Manufacturing Index on Monday could be a bright spot. The index is expected to rebound out of contraction territory at 49.4 to minimally expansive at 50.2. If the ISM were to surprise to the upside that would be market positive.

The vice presidential debate on Tuesday is not expected to generate any fireworks and should be market neutral. The population votes for the president not necessarily the vice president so the viewership will be considerably lower.

The S&P futures were down -13 points at 3:AM Friday morning. Deutsche Bank (DB) was setting new historical lows under $10 in the European market and all the commentary was negative. Just before the open, a rumor broke that DB was near a settlement with the Dept of Justice for $5.4 billion after a headline number of $14 billion was floated last week. Immediately shares began to rebound and the S&P futures exploded higher causing the market to gap higher on short covering.

The news report from AFP may not even be credible but it prevented a very ugly Friday in the U.S. markets. Reportedly, according to German law if a rumor appears in the market and the numbers are close to reality then the company has to issue a press release confirming the actual number. However, if the numbers are wildly wrong, the company does not have to do anything. DB did not issue a press release so the AFP article may be significantly in error. The report said a deal may not be reached for several days.

The big concern in the U.S. is that DB could turn into a Lehman moment for Europe. Numerous analysts have debunked that theory. The circumstances are very different. DB has deposits of 566 billion euros and 223 billion euros in liquidity. Their debt is high at 135 billion euros but they are not in danger of an imminent collapse. Secondly, despite claims to the contrary, Germany is not going to let its biggest bank fail. They would step in and orchestrate some kind of solution. DB continues to say it does not need to raise capital in a secondary offering so an immediate stock sale appears to be off the table.

Shares of DB rallied +14% in the U.S. and that does not take into account the sharp decline overnight in the European markets. This was a major short squeeze in DB shares.

There was very little stock news since most companies are moving into their quiet periods before the Q3 earnings cycle begins.

McCormick (MKC) reported earnings of $1.03 that beat estimates for 95 cents and posted a 21% rise thanks to acquisitions. Revenue of $1.09 billion was in line with street estimates. Revenue rose 6% on a constant currency basis. The company guided for full year earnings of $3.75-$3.79 per share, up from previous guidance of $3.68-$3.75. That is an 8% increase over the $3.48 in 2015. Analysts were expecting $3.75.

After the bell on Thursday Costco (COST) reported earnings of $1.77 that beat estimates for $1.73. Revenue of $36.56 billion was in line with estimates. The company said profits rose because they were paying lower fees to Visa than previously paid to American Express. Also, shoppers spent more on appliances, electronics and hardware. The company said grocery margins were under pressure from the constant deflation in food prices. There is a price war between the big chain stores and the smaller chains as each battle for market share by cutting prices. This led to a -1.0% decline in same store sales. If you exclude the impact of fuel and currency fluctuations, same store sales rose +2.0%. Shares spiked +3.4% on Friday to $152.51 after trading to nearly $155 at the open.

Alcoa (AA) said the board of directors approved the company's planned split in to two companies. One company will remain Alcoa and be the traditional aluminum business and the other, called Arconic (ARNC), will operate the high performance jet and auto parts business. The split will be effective November 1st.

In addition to the split into two companies, Alcoa is also planning on doing a 1:3 reverse stock split to raise the stock price before splitting the company. There is a shareholder meeting on Wednesday to approve the reverse split. With the shares currently at $10.14 that would make the stock price just over $30 when the company split occurs. I do not know if the company split will be even with each company having a $15 stock price or whether there will be a ratio where one might have a $20 price and the $10. Arconic will be the new parent company and will retain 85% of the company's $9 billion in debt. The new Alcoa will be spun off and existing shareholders will have 80.1% of the shares. Arconic will retain 19.9% after the spilt but plans to sell that stake eventually.

Paul Singer's activist fund Elliott Associates doubled their stake in Mentor Graphics (MENT) from 4% to 8.1% saying the company was significantly undervalued. The fund said it had "initiated a dialog with the management and board of directors regarding strategic opportunities." Shares spiked 7% on the news. (CRM) called for help in fighting Microsoft's acquisition of Linkedin (LNKD). Salesforce urged the EU to take a close look at Microsoft's acquisition plans. Salesforce plans to warn the EU that the acquisition threatens the future of innovation and competition. "By gaining ownership of Linkedin's unique dataset of more than 450 million professionals in more than 200 countries, Microsoft will be able to deny competitors access to that data and in doing so obtain an unfair advantage."

Salesforce also said insights gained from that professional data could give Microsoft a vast advantage over rivals. The EU is concerned Microsoft could apply artificial intelligence to the information to analyze business trends and company intentions that could aid sales of its other products. The deal has already been approved in the U.S. but it has not yet been presented to the EU for approval. An aggressive objection by Salesforce could add months to the approval process and possibly put some conditions on the deal approval.

Printer manufacturer Lexmark (LEX) spiked 14% after a consortium of buyers led by Apex Technology and PAG Asia Capital moved a step closer to acquiring the company. The Committee on Foreign Investment in the United States (CFIUS) approved the transaction. The consortium agreed to buy LXK for $40.50 per share. The transaction is expected to close in 2016.

Crude prices rose slightly on Friday but remain under resistance at $48.50. The OPEC agreement to "consider" a production cut at the regularly scheduled November 30th OPEC meeting is nothing but headline spam designed to lift prices in the normally weak Sept/Oct period.

In theory, the OPEC countries want to cut production back from the current 33.24 million bpd to 32.5 mbpd in order to "accelerate the ongoing drawdown of the stock overhang and bring rebalancing forward." The OPEC ministers said a committee of representatives from member countries would calculate recommended production levels for OPEC countries and consult with non-OPEC countries, namely Russia, and suggest production levels that would help stabilize inventories.

OK, so the OPEC member countries will show up at the November meeting and found out that their peers have suggested a 10% production cut is recommended and that will cut your cash flow by billions of dollars. Are countries just going to say "ok" and head for the bar? In my opinion, it is not going to happen. Meanwhile, for the next 60 days the price of oil will be artificially high thanks to the recurring headlines.

They have already suggested that Iraq, Iran, Nigeria and Libya can continue growing production until they reach "reasonable" levels. Just returning to pre civil war levels would add another two million barrels of production above and beyond the stated 32.5 mbpd goal. This is a production cut in name only and should not have any impact on reducing supplies.

Hurricane Matthew has been downgraded from a category 5 to a category 4 storm as it approaches Cuba and the first one of that magnitude in the Atlantic since 2007. Currently, sustained winds are 150 mph. It is expected to cross over Cuba on Monday evening and hit the Bahamas on Wednesday. The current path projections suggest it will only brush Florida and will not be a problem for the oil platforms in the Gulf of Mexico. However, it may be a huge problem for the East Coast.

If oil prices are going back to $50 on these headlines, the rebound in active rigs will accelerate. Last week 11 rigs were reactivated but there are still more than 1,400 sitting in storage lots rusting. There are 522 active rigs today and there were 1,931 at the peak in 2014. Some analysts claim there are as many as 4,500 drilled but uncompleted wells in the USA. Those can be brought online very quickly. If OPEC succeeds in lifting oil prices over $50 the U.S. production declines can be reversed in less than a year. Currently U.S. production is -1.113 million bpd below the 2014 peak. We could easily resurrect that in 12-18 months and even add to it. If OPEC suddenly got serious about cutting production and hiking prices, it would generate a drilling revival in the U.S. that would put 500,000 people back to work and erase their production cuts in a very short period of time.




The S&P futures declined -13 points to 2,135 at 3:AM on Friday. The Deutsche Bank rumor resurrected those futures and they rebounded to near 2,170 before the close. That is almost a 35-point move in a 12-hour period. Traders were heavily short going into Thursday's close in anticipation of more bad news for Deutsche Bank. The 2,140 level was support and it was punctured only briefly and we escaped a major market selloff.

Last week was the sixth week of the six most volatile weeks of the year. However, the volatility was relatively light and the indexes never pulled very far away from their prior highs. It was a tame six weeks.

Just because that historical period is behind us it does not mean we are out of the volatility woods. The markets normally set the lows for the second half in the first two weeks of October. The keyword there is normally. This has not been a normal year in any way.

While I believe the markets will be higher at the end of October, we do have a very hostile election process underway. That will continue to supply uncertainty for at least the next 8 weeks. Yes, that is two weeks past the election because the markets will adjust for whichever candidate eventually wins.

I would not be surprised to see some post quarter end portfolio restructuring next week. With quarter end window dressing over portfolio managers are now free to dump any stocks they held on Friday and add new positions before their fiscal year ends on October 31st.

If I had my wish, I would love to see a repeat of last October. The S&P added nearly 245 points (+13%) from the September 29th low at 1,871 to the Nov 3rd high at 2,116. That November 3rd high lasted until June 8th without being broken. Do I expect that to happen again? Definitely not. It could but we could also continue to move sideways until after the election.

On the positive side, Q4 earnings estimates are rising, currently +5.6% compared to a -2.1% decline for Q3. The third quarter will be the sixth consecutive quarterly decline in earnings. However, if analysts are to be believed, 2017 will be a banner year with earnings growth of 13% and revenue growth of 6.1%. If portfolio managers are going to buy stocks, they should do it going into an earnings recovery.

The S&P is currently moving higher at a pace resembling a drunken sailor with two steps forward and one step back. The alternating gains and losses is making it very hard to attack overhead resistance with any conviction. Investors are gun shy after weeks with no direction. Support remains 2,150 and 2,120 and resistance 2,175 and 2,185. The current intraday high is 2,193, which has been touched more than once.

The Dow has changed character completely over the last three weeks. We went from a very narrow range trade to a very broad range from 18,000 to 18,400. The last six days have all seen triple digit moves. In fact, since September 8th there has only been two days that did not see triple digit moves and one of those days was close at 98 points.

High intraday volatility is a symptom of market tops and bottoms. Since we are only 1.5% from the recent high, it would be hard to characterize this as a bottom. However, the majority of the moves have been headline related rather than market related. Deutsche Bank, the Fed, the Bank of Japan, etc have all produced triple digit moves.

The dip to 18,000 three weeks ago was a major move. The intraday ranges were huge. Those ranges have now shrunk and the intraday lows are moving progressively higher. I prefer to look at this period of volatility as a bottoming process for the early September decline.

We are approaching the earnings cycle again and we should see some pre-earnings anticipation begin to build in the Dow stocks. I went through the charts on the Dow 30 and only 7 stocks are showing any bullish trends. If the others are going to start rising ahead of earnings they will begin reversing higher soon.

With only 30 stocks in the index, disasters like Nike and Apple can and do impact the index movement. Hopefully there are not any earnings warnings in the near future from other Dow stocks.

With the pattern of higher lows, the Dow could be preparing to retest the overhead resistance at 18,600 but we still have to get through the next two weeks, which are typically rocky.

The Nasdaq Composite Index gained 43 points on Friday to close at 5,312 and only 27 point below the 5,339 new high from the prior week. Semiconductors and biotechs helped power the move but both sectors have been volatile for the last couple weeks so future gains are always in doubt.

The big cap techs helped lead the charge higher but late in the week the small cap techs also provided an assist. The Nasdaq is the most bullish index and a breakout to a new high at this point on the calendar would be bullish for the rest of the market.

Support formed at 5,250 and has not been tested in three days. The higher low pattern is bullish, especially this close to a new high.

The Russell 2000 small caps have been lagging the Nasdaq. Support at 1,240 is holding but resistance at 1,255 has been rock solid the last three days with the intraday highs at 1,255.58 to 1,255.94. There were no spike through and fall back days. That resistance level was rock solid. That could change in a heartbeat with a gap open market on Monday but any decline from here only reinforces it. The S&P-600 small cap index has an identical problem at 758. The buying in the small caps is without conviction. When resistance appears, the buyers fade away.

Monday is the start of Rosh Hashanah and the first day of the year 5777 on the Jewish calendar. For a long time, there has been a saying in the market, "Sell Rosh Hashanah, buy Yom Kippur." This year Yom Kippur is on October 12th. The idea is that many traders and investors are busy with the religious observance and family events. Positions are closed and volume fades, creating a low volume market with no buyers. According to the analysts at Bespoke Investments, that strategy has worked in 10 of the last 16 years. The average decline has been about 1.6%.

Rather than be worried about whether the market is going to go down over the next two weeks I would rather be planning what I am going to buy if it does take another dip. Since 1990, the fourth quarter has averaged a 4.54% gain and the stronger stocks have done much better. We are at that point on the calendar where buying the dip is even more important than ever.

We exited the sixth week of the six most volatile weeks of the year with a gain and while the gains and losses alternated, the volatility was not that bad.

We are approaching the point where the market "should" rally into Q4. Pick a few stocks on your shopping list and decide where you would like to buy them on a dip. If one appears, it may be brief.

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Random Thoughts

The Nasdaq is setting new highs and the S&P is only 1% below a record high but the number of bullish investors continues to decline. The alternating days of gains and losses is confusing. The lack of direction is keeping investors neutral or even bearish on the market.

Multiple companies warned of a new type of cyber attack launched last week. Millions of DVRs, security cameras and other internet connected devices were hacked and turned into drones to launch the largest denial of service attack ever. The attackers used more than one million Chinese made security cameras, DVRs and other devices to generate webpage requests and data requests that knocked their targets offline.

The head of security at Level 3 Communications said this might be just the tip of the iceberg. Everything from smart thermostats to internet connected TVs are designed to be controlled over the Internet. Very few of them ever have their software updated. Once installed and running they are forgotten unlike a PC that can warn you of threats and update the operating system automatically. PCs have firewalls and virus protection programs. DVRs, cameras, TVs, refrigerators and smart thermostats do not have protection. Once hackers learn how to hack into one device model, there are millions of identical models already in service that can immediately be used.

Akamai Technologies (AKAM) said even Wi-Fi routers are a growing source of concern because their software is never updated. Dahua, a manufacturer of smart electronics has 71 technology partners that put their names on Dahua products. It is the same OS whether it is called Canon, Sony, Magnavox or any other name. Once the hack is perfected on one device, the others are immediately vulnerable.

Akamai said malicious traffic on its network on September 20th reached 700 Gigabits a second. That is the equivalent of streaming 140,000 high definition movies at once. That was twice the size of the previous big U.S. attack. Arbor Networks is a security firm that handled some Olympic websites said home set top boxes and home routers were pounding those sites with more than 540 Gigabits a second of webpage requests.

This is going to force another round of security upgrades and enforcement. New devices will have to have an automatic firewall system and be continually refreshed by the manufacturer. This adds another level of complexity that manufacturers are not prepared to implement. Source WSJ

Nobody should ever complain they cannot make money. The United States is a breeding ground of entrepreneurs. You do not have to start the next Facebook or Google. You just have to think of something that fills a need. It does not have to be fancy. It just has to fill a need.

Everybody has probably heard of Amazon's KickStarter program. Aspiring entrepreneurs launch a KickStarter page to explain their new product. If people like the idea, they will contribute money so you can make your product and bring it to market.

A reader sent me this link. The device is called a Fidget Cube. Their goal was to raise $15,000. As of Saturday, more than 130,000 people had contributed $5,391,245. Apparently, the device is a huge hit. If people will invest more than $5 million on this toy, there is no limit to how much anybody can raise if they get off the couch, engage their brain and make something happen.

Fidget Cube Link

Ford unveiled the Ford GT in 2015 at the Detroit Auto Show. The car has a 3.5 liter twin-turbo V6 that produces 650 horsepower and a reported top speed of 205 mph. Last week three of the GT cars were clocked at 101 mph in a 50 mph zone on I-70 in Glenwood Canyon in Colorado. The officer that clocked them on radar knew he could not catch them so he radioed ahead and multiple officers pulled them over 35 miles later. The cars were outfitted with a significant amount of high altitude testing equipment and the drivers explained they were testing the cars for Ford. The officers were not impressed and wrote each driver a ticket. You cannot outrun a radio.

I mentioned this a couple weeks ago and received several emails from readers in disbelief. At the Fed's Jackson Hole conference a speaker mentioned buying stocks in addition to treasuries as a way to support the market in times of stress. Yes, we are rapidly becoming Japan.

Last week Janet Yellen mentioned the Fed could support the market if it ran out of treasuries to purchase by adding stocks to their asset purchase list. The idea has taken root at the Fed and that should scare everyone.

Quick, pass me the Kool Aid!

Larry Edelson, Money and Markets editor said, "The Dow Jones Industrial will lead the way higher and catapult to 31,000 over the next two years."

Ron Baron, CEO of Baron Capital agreed, "The Dow is going to 30,000."

Jeffrey Hirsch, editor of the Stock Trader's Almanac said, "The Dow Jones Industrial Average will surge to 38,820 in a 'super boom' beginning in 2017."

Paul Mampilly's hedge fund was named by Barrons as "One of the World's Best." Today he says, "Stocks are on the cusp of an historic surge. They could easily hit 50,000. It will be a bull market run that will dwarf the tech boom of the '90s. I’ve never been more certain of anything in my career."


Enter passively and exit aggressively!

Jim Brown

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"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Warren Buffett