We are halfway through October and the next two weeks have a historically bullish bias.

Weekly Statistics

Friday Statistics

While there is no guarantee a historical trend will repeat, the next two weeks are normally bullish. The trend did repeat for the first two weeks of October with the markets coming very close to new lows for the second half of the year.

For the S&P the 2,114.74 intraday low on Thursday was the lowest point since July 8th and a three-month low. While technically that is not the low for the second half it only missed it by five trading days. As historical trends go that one certainly qualifies.

Friday saw a large opening bounce with the Dow spiking +163 points in the morning on some positive economics but fading to close at the lows with only a 39-point gain. The S&P and Nasdaq both ended with fractional gains of less than one point and all the rest of the indexes closed in negative territory. This is hardly the way to improve bullish sentiment for the second half of October.

The markets spiked early Friday afternoon after Janet Yellen seemed to say there was no rush to hike rates. She said it is useful to consider the benefits of a "high-pressure economy." She said the U.S. central bank normally stands vigilant over price pressures. However, the post-financial crisis period has pushed policymakers into "reconsidering the dynamics of inflation."

She pointed out that the economy has seen an unusual tendency of weak demand against strong supply, making it reasonable "to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a 'high-pressure economy,' with robust aggregate demand and a tight labor market." She said the financial crisis has forced central bankers to re-think their approach to monetary policy.

The spike was only temporary and the indexes faded into the close.

The morning opened with retail sales for September rising +0.6% compared to a -0.2% decline in August and expectations for a +0.6% rise. This lifted the year over year comparison to +2.7%. Sales excluding autos rose +0.5% and excluding autos and gasoline only +0.3%. Motor vehicles and parts rose +1.1%, furniture +1.0%, building materials +1.4%, gasoline stations +2.4% thanks to rising gasoline prices, sporting goods +1.4% and +0.8% for food service and bars. The only two categories to post declines were electronics and appliances at -0.9% and a -0.4% decline for general merchandisers like Walmart.

Spending slowed in Q3 from the Q2 pace but core sales were up +3.4% year over year. Department stores and malls are closing in near record numbers as online shopping becomes more commonplace. Job gains are slowing and energy prices could rise if OPEC actually cuts production. That will remove excess cash from consumer wallets as fuel prices rise.

At the same time the Producer Price Index for September rose +0.3% and the biggest gain since June. Expectations were for a +0.2% gain after zero gain in August and a -0.4% decline in July. However, 30% of the rise in prices came from higher gasoline prices. The headline number is now up +0.7% over year ago levels. That is hardly a disaster and gives the Fed plenty of leeway in being patient on rate hikes.

Consumer sentiment for October fell -3.3 points to 87.9 and the lowest level in over a year. The present conditions component rose slightly from 104.2 to 105.5. However, the expectations component declined sharply from 82.7 to 76.6 and the lowest since September 2014. Rising gasoline prices were said to be a contributing factor. Worries over the presidential election outcome were also blamed for the sharp decline. Consumers in both parties are very worried over what would happen to the nation if the other party's candidate were to win. With the political campaigns going lower than ever before, we can expect sentiment to decline even more in the weeks ahead.

Business inventories rose +0.2% in August and matched expectations. Manufacturing inventories rose +0.16%, retail inventories +0.63% and wholesale inventories declined -0.18%. The inventory to sales ratio remained flat at 1.39 for the third month.

There is a flurry of economic reports next week with the Philly Fed Manufacturing Survey on Thursday and the Fed Beige Book on Wednesday the two key reports. The Philly Fed report surged from 2.0 to 12.8 last month and is expected to give back a lot of that gain to show a 7.0 reading and mildly expansionary. The Philly Fed report is a proxy for the national ISM Manufacturing report due out in two weeks.

The Beige Book is a report on activity in each Fed region and it has been neutral recently with "moderate" the most overused adjective. Webster defines moderate as "average in amount, intensity, quality or degree." I have another word for our economic growth and that is "lackluster" and definitely not worthy of a rate hike.

On Thursday morning, Mario Draghi will hold the post ECB monetary policy meeting press conference. This could be a trouble spot for the U.S. markets depending on the outcome of that policy meeting.

Twitter (TWTR) was left standing at the altar by the last potential acquirer. Salesforce.com walked away from the deal on Friday saying it was not the "right fit" at this time. That means all the deep pocket bidders have all taken a hike and left Twitter to go it alone. The rumored asking price was $29 with no flexibility and that would have been a good deal for Twitter. However, most analysts believe the real price is more in the $14-$15 range because of the uncertainty over how to monetize Twitter users in the future. If the platform was growing the user base by a couple million a quarter, they could have gotten a better price. However, barely breaking even and always on the verge of losing users, is a problem nobody wanted to assume. Shares fell -5% to a two-month low at $16.88.

Bernie Sanders tweeted about a drug company on Friday and the stock fell -15%. Ariad Pharmaceuticals (ARIA) was under attack by Sanders in a tweet that said, "Drug corporation greed is unbelievable. Arian has raised the price of a leukemia drug to almost $199,000 a year." The drug is lclusig and it is used to treat chronic myeloid leukemia (CML) and Philadelphia chromosome positive acute lymphoblastic leukemia. Both are rare blood and bone marrow diseases. The company has raised prices on the drug four times in 2016. This is Ariad's only drug on the market and they only had revenue of $32.6 million over the last 12 months. Any material discount to the new price will dramatically reduce that revenue and limit future research.

The bigger problem is the damage to the biotech sector as a whole. With Sanders tweeting his outrage, Clinton is sure to pick up the pace of her drug price rhetoric on the campaign trail in order to appeal to Sander's voters. The biotech sector has been in freefall since the $50 gap lower on Illumina on Tuesday. Support at 3,250 failed and it appears to be headed to 2,800. This is a problem for both the Nasdaq and the Russell 2000 because of the high number of biotech stocks in each index.

Samsung continued to take blow after blow on the now discontinued Galaxy Note 7. The company said it will take a $5 billion loss on the phone and it still does not know why it is blowing up. The U.S. Dept of Transportation banned the phones on any commercial airliner starting at noon on Saturday. They cannot be taken on board or included in any luggage. I seriously doubt any owner would want to do that and risk crashing the plane with them on it. Several airlines have now acquired burn bags that will hold a burning phone or laptop and are rated up to 3,200 degrees. I just do not understand how they are going to pick up an explosively burning phone to put it in the bag.

Shares have taken a hit since the peak on Oct 7th but are not down as much as you would expect. Samsung has $69 billion in cash so the hit is painful but not life threatening.

Friday was bank earnings day with several of the big banks on the schedule. JP Morgan (JPM) reported a whopping $6.3 billion profit on an 8.4% rise in revenue. Earnings of $1.58 per share were actually down from $1.68 in the year ago quarter when they got a boost from $2.2 billion in tax benefits. Revenue was $25.5 billion and beat estimates for $24.2 billion. Fixed income trading revenue rose 48% to $4.33 billion. Equities trading revenue only rose 1% to $1.41 billion. They credited the Brexit vote for the monster spike in bond and currency trading revenues. Core business loans rose 14%. Provisions for bad loans rose 86.4% to $1.27 billion because of delinquencies and charge offs in the oil and gas sector. Shares rallied at the open but faded with the market.

Citigroup (C) saw earnings decline -11% to $1.24 but they still beat estimates for $1.15. Revenue fell -5% to $17.8 billion but beat estimates for $17.3 billion. Fixed income trading revenue rose 35% to $3.47 billion while revenue from equity trading fell -23% to $663 million. Total trading revenue rose 16% to $4.13 billion and beating guidance for a mid single-digit increase.

Wells Fargo (WFC) reported earnings of $1.03 that beat estimates for $1.01 per share. Revenue of $22.33 billion rose only 2% and barely beat estimates for $22.24 billion. The bank announced late Thursday that CEO John Stumpf had retired, effective immediately, and COO Tim Sloan had replaced him. Wells beat earnings estimates by reducing the amount of money being held for bad loans to $805 million from the $1.31 billion estimate. Total loans rose 6.4% to $961.33 billion.

PNC Financial (PNC) reported earnings of $1.84 compared to estimates for $1.78. Revenue of $3.83 billion rose only 1% and barely beat estimates for $3.82 billion. Commercial loans rose 5% to $138.2 billion.

Infosys (INFY) shares sank -6% after cutting fiscal year revenue forecasts to growth of 7.7-8.5% compared to 10-11.5% in prior guidance. In Q3 the company saw a 3.4% rise in revenue. This was the second time the company reduced guidance in the last three months. I am skipping the earnings and revenue numbers quoted in rupees.

Yahoo (YHOO) is teetering on the brink of a crash as it waits to see if Verizon is going to pull the plug on their $4.8 billion offer for the core company. Verizon and none of the other bidders were told about the cyberhack of more than 500 million accounts during the bidding process. Therefore, the later disclosure constitutes a material adverse change or MAC that allows a company to back out of a deal with no penalty. The bidders were told there had been attacks but only casually as if it was no big deal.

Now Verizon lawyers are said to be discussing a price closer to $3 billion or pulling out of the deal completely. Yahoo cannot give Verizon a dollar value on the potential liability because they do not know and may not know for a couple years. There are multiple class action suits being formed and there could be a giant penalty if the consumers can prove security was nearly nonexistent and the resulting attack was gross negligence. If the penalty were $20 per person in a class action suit representing the 500 million accounts that would be $10 billion dollars and more than twice the reported sales price.

Yahoo announced on Friday they would not have a conference call or webcast after earnings because of the intense negotiations with Verizon. I guess if you do not want to answer hard questions from analysts, you just cancel the call.

Amazon Web Services and competitor VMware announced a strategic alliance to build and deliver a seamlessly integrated hybrid offering that will give customers the full cloud experience from the leader in the private cloud, running on the world's most popular, trusted and robust public cloud. At least that is what the press release said. The VMware Cloud running on AWS will enable customers to run cloud instances anywhere and in any scale. It will be delivered, sold and supported by VMware as an "on demand, elastically scalable service." Giving customers the ability to run VMware instances on AWS is a win for both companies. AWS has 35 "availability zones" across 13 international geographic regions with more than one million active customers already running in the Amazon cloud. In the case of VMware, if you cannot beat Amazon, join them.

Gartner (IT) says Amazon has 50,000 to 80,000 servers in each of the 35 zones with more than two million active servers in total. By comparison, RackSpace has 100,000 servers across six datacenters. Google has three regions with eight datacenters. Microsoft has 17 regions. Steve Ballmer said Microsoft had more than one million cloud servers and Google had more than Microsoft.

In a Cycle Computing presentation, the company said Amazon regularly allows companies to rent and run monster programs on 10,000, 20,000 or even 100,000 computer cores at one time. Western Digital (WDC) used a program that ran on 70,000 cores to model the relationship between fluid dynamics and magnetism within its disk drives. The amount of computing power available on demand is beyond normal human comprehension.

Amazon is Skynet.

With 7% of the S&P already reported, 76% have beaten on earnings and 62% have beaten on revenue. The blended earnings projection by Factset is a -1.8% decline. If earnings for Q3 do end up with negative growth it will be the first time there has been six consecutive quarters of declines since Factset began collecting the data.

Factset warned that Q4 earnings could come in lower than expected because of the decline attributed to Hurricane Matthew. Businesses and restaurants were closed for several days and some are still closed. Banks and insurance companies are expected to report hits to earnings. After hurricane Sandy earnings declined significantly because of business closures and insured losses.

The Q3 earnings cycle gets underway with a bang next week. IBM and NFLX kickoff the tech cycle on Monday. They are followed by INTC, EBAY, YHOO and MSFT. There are 11 Dow components reporting and they are shaded in pink. This week has a little bit of everything from tech, biotech, energy, financial, industrial, transportation, etc.

The -4.9 million barrel decline in crude inventories managed to keep prices in the $50 range despite numerous articles questioning the potential for an actual production cut by OPEC. The Putin comments that Russia was ready to cooperate with OPEC in stabilizing prices also helped to keep prices level. Almost nobody expects a cut to actually occur and everybody expects OPEC countries to cheat even if they do formalize a production cut. For now, everyone is content to continue talking about the plans for a cut and talk is all it will ever be.

There was a large 15-rig addition to the active rigs last week but only 4 were oil rigs. Eleven of them were gas rigs. Analysts believe it will take a sustained rate of adding at least ten oil rigs a week to lift oil production significantly. In the most recent inventory numbers U.S. production fell by 20,000 bpd to 8.45 million bpd and the lowest level in the last eight weeks. Imports at 7.86 million bpd are also running about 1.0 million below levels we were seeing two months ago. Some of that decline is related to tankers that were delayed by two weeks because of Matthew blocking the entrances to the Gulf of Mexico. We should see imports increase in the coming weeks.




The second week of October is over. It was a holiday-shortened week in the bond markets and volume remained low despite the triple digit moves. Friday's volume was only 6.0 billion shares. The first two weeks of October normally have a negative bias and we saw that with losses for both weeks. The next two weeks typically have a bullish bias and start the best six weeks of Q4. Let's hope that trend continues.

However, the election is getting in the way. The market was hoping for a Clinton win and the republicans holding the house and senate. That would have meant continued gridlock for four more years. The Trump implosion has some analysts projecting a potential democratic sweep of the house, senate and the presidency. The market will panic if that becomes an eventuality.

For Clinton to have control of both houses, analysts believe it would mean higher taxes, more regulation, more deficit spending, drug price controls and the potential for major recession and a bear market.

Fear of this event could increase next week unless Trump was to pull a miracle out of his coat pocket during the last debate on Wednesday. If it were anybody else but Trump running against Clinton, it would be a landslide given all the negative material dumped on the Clinton campaign over the last month. Just the last week has seen enough revelations that any normal candidate would be 20 points down. Fortunately, for Clinton she is running against Trump and he is self-destructing.

That will more than likely be bad for the market. We already saw the sharp drop in consumer sentiment over the last three weeks and it will only get worse. In the equity markets, the small cap indexes are normally considered the sentiment indexes for the markets.

The Russell 2000 declined -2% for the week and the most of the major indexes. Support at 1,232 failed and support at 1,210 is in danger. If we get another big downdraft, the support at 1,200 could be in danger and a failure there would remove support from the rest of the market. There is a lot of white space on the chart under 1,200.

The S&P briefly penetrated critical support at 2,120 on Thursday and then closed at the low for the day on Friday. A failure at 2,120 could easily retest 2,040 or even 1,990. When markets decide to move directionally they can move quickly as we saw in that -123 point crash in late June from 2,113 to 1,990. That only took two days.

The S&P has been moving sideways since mid July and that is a lot of pent up stress. The three-month low on Thursday is a warning sign that we may not be going to follow the normal late October trend higher. I really hope I am wrong about the risk. The first two weeks of October normally scare investors and makes them nervous. The aggressive ones get short. When the end of October window dressing arrives, everyone races to cover and those in cash begin to throw money at the market.

Investors bought the dip on Thursday and were rewarded with a +161 point spike at Friday's open. When that spike evaporated it probably put a little fear back into those traders and anything is possible next week.

The Dow has 11 components reporting earnings next week. With the majority of the component charts already showing bearish patterns, we need some strong earnings and strong guidance to reverse the negativity or we will be retesting some lows once the post earnings depression kicks into gear.

The Dow has critical support at 18,100 and again at 18,000 and both levels were penetrated temporarily on Thursday. If it were not for the dip buyers, we would be having an entirely different conversation this weekend.

The preliminary earnings from a scattered selection of big cap stocks have not been pretty. The banks did ok but the earlier reporters including HON, DOV, PPG and others have not been encouraging. Revenue is declining, earnings were weak and guidance was negative. That is especially true for tech guidance with networking and cybersecurity stocks guiding lower.

The big caps are going to be guiding based on the recent highs in the dollar and lows in the British pound. That is going to be a stiff headwind. Rising oil prices are also going to be an increase in costs.

The Dow has strong resistance at 18300-18400 and weakening support at 18100-18000. That is not a recipe for a rally unless the earnings provide a significant upside surprise.

The Nasdaq remains the strongest index but the weakness in the biotechs is an anchor that has not yet found a bottom. The Nasdaq has strong support at 5,200 but that was broken intraday on Thursday. If the tech earnings next week are not strong, we could be looking at a drop that could be significant. Ironically, the Nasdaq 100 made a new historic high on Monday and I would hate to see it turn into the start of a material decline, a sort of sell on the news event.

IBM is not a Nasdaq stock but they report earnings on Monday and their comments will be critical for the tech sector. Netflix is also a major tech event on Monday and their recent earnings events have been disasters because of slowing subscriber growth.

Historically, the next two weeks are supposed to be positive as fund managers window dress their portfolios for their October 31st fiscal year end. With the election in a state of flux, they may not have a clear idea how they want to accomplish that this year. That means they could simply throw some money at large cap techs and industrials and avoid biotechs. Once into November, they can quickly reverse those trades and return to cash if the market is reacting negatively to the election outcome.

I really hope the next six weeks, which are normally the best six weeks in Q4, hold to that seasonal trend. Unfortunately, hope is not a valid trading strategy. We need to trade what we see and not what we want to see.

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Random Thoughts

The sudden decline in bearish sentiment we saw last week was quickly reversed. Bullish sentiment at 25.5% is well under the historical average of 38.5%. Even some of the gains in neutral sentiment were reversed with investors fleeing back into a bearish posture.

Everyone knows that the market will normally do whatever investors least expect. That would be a strong rally given the nearly 75% neutral/bearish sentiment. However, sometimes the herd is right.

Short interest in Amazon has reached a record high at $5.3 billion in stock value. Since Amazon has risen +170% since early 2015 it is not surprising that technical traders are betting there is a dip in our future.

The average short interest value has been $2-$3 billion between 2012 and 2015. In 2015 that rose to $4 billion on three occasions. Now in late 2016 it has reached $5.3 billion. Anyone that has bet against Amazon since February has lost a lot of money.

Amazon hit a high of $696 in late December and crashed back to $475 in February. That is a monster drop and the stock does have a habit of selling off as the holiday shopping ends. In January 2014, shares dropped from $408 to $338 in a two-week period. On Black Friday in 2014, shares hit $341 and then declined to $285 in January.

With shares at $825 after a $325 point run since February, it only makes sense to expect a seasonal bout of profit taking. Expectations are very high with multiple price targets in the $1000 range. Amazon is currently hitting on all cylinders and while I can see the lure in the short scenario, I would be very cautious about putting it into practice.

The number of stock buybacks in September were the lowest since 2011. Microsoft and American Express accounted for the majority of September's volume. Dividend growth over the last two quarters was the lowest level since late 2009 and early 2010. The data came from TrimTabs.com research.

Buybacks and dividend have been a major factor in powering the last seven years of the bull market. Now those factors are evaporating. Buybacks rise when corporations are feeling good about the business and cash flow is strong enough to support them. When cash flow shrinks and/or the outlook turns sour, the buybacks dry up.

In Q3, announced buybacks fell to $115 billion and more than a two-year low. Only 29 buybacks were announced in September and the lowest number since January 2011. This follows an eight-quarter low for buybacks in Q2. Two-thirds of September's announced volume came from a $40 billion announcement from Microsoft.

With buybacks and dividend hikes providing a significant portion of market movement over the last several years, the decline in both is a warning sign for the year ahead. Source

Two trillion is a huge number but it is just a fraction of a much larger number. Scientists reported last week that using the most up to date methods for counting galaxies that there are more than two trillion galaxies in the observable universe. That sounds like a lot but here is the catch.

A galaxy is a collection of stars and planets. The Milky Way is a galaxy. According to Wikipedia, the Milky Way contains between 200 and 400 billion stars and at least 100 billion planets. Link

You can easily see that trying to calculate the number of stars and planets in the entire universe assuming two trillion galaxies and even using a low number like 50 billion items in each galaxy would be a number the human mind cannot comprehend. That would be 1 followed by 23 zeros and that is on the low end of the estimates for heavenly bodies.
That is 100,000,000,000,000,000,000,000 or 100 sextillion.

One very small cross section of the Milky Way


Enter passively and exit aggressively!

Jim Brown

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Politicians creed, "It's easier to fool people than to convince them that they have been fooled."

Mark Twain