The "end of uncertainty" rally is ignoring calls for its demise and continues making new highs. We will eventually pay for this excess.

Weekly Statistics

Friday Statistics

The markets shook off the midweek slump to surge forward on Friday to close at another new high. The Russell 2000 is now up 15 consecutive days for a gain of 16.4%. As each day passes with a new gain the odds increase for a significant bought of profit taking. With each move higher there is a better chance for a deeper decline when that profit taking appears.

A normal retracement would be 2%-3% but we are well past normal in this rally. We could see 5%. It all depends on how it happens. A couple days of bottomless declines could be the equivalent of ripping off a band aid followed by an equally strong rebound. Or, we could see a week or more of choppy declines as traders rotate out of winners and into stocks with smaller gains. The only guarantee is that we will see some profit taking soon and next week is the logical place since the holiday is over.

There was only one economic report on Friday. The International Trade deficit for October was -$61.99 billion compared to -$56.1 billion in September. Exports declined -2.7% from September to October. Imports rose +1.1%. This is going to be a drag on Q4 GDP because we are seeing the impact of the soybean exports that were pulled forward into Q3. However, the Atlanta Fed GDPNow is tracking at +3.6% growth for Q4 so we have room for a little deterioration and still have a great number. That is nearly double the blue chip consensus estimate for only +2.1% growth. The trade report was ignored because everyone was shopping.

We have a monster calendar for next week. There will be another flurry of Fed speakers telling us the Fed is going to hike soon. The December meeting is on the 14th and you can bet there will be a rate hike. Of the 10 Fed heads charting their expectations on the "dot plot", five of them expect to end 2017 with interest rates between 1.5% and 2.0%. The CME FedWatch Tool is projecting a 93.5% chance of a December hike.

This is also employment week with the ADP forecast at 160,000 jobs and the Nonfarm Payrolls at a whopping 215,000 jobs. Obviously at least one of those estimates is very wrong. Since November is the start of the holiday shopping/shipping season, I would bet the Nonfarm number is the closest to accurate.

The Fed Beige Book is on Wednesday and that summarizes the economic conditions in the various Fed regions. The last report was slightly weaker than the prior version but it was ignored.

Wednesday is also notable because of the OPEC production decision. This could send crude prices back to $40 or over $50 in the coming weeks so the decision is critical.

It is also month end and there will definitely be some window dressing for November after the big rally. That may not move the market since the MSCI quarterly index rebalance comes at Wednesday's close with monster volume that could overpower any window dressing gains. Link to MSCI changes (PDF)

We will get the ISM Manufacturing Index on Thursday and the expectation is for a minor rise from 51.9 to 52.5.

In stock news Swiss biotech Actelion (ALIOY) shares rose 20% on news Johnson & Johnson (JNJ) had offered to acquire the company for $17 billion. The company is working with an advisor to analyze strategic alternatives. Shire (SHPG) was the last company to make an offer to acquire the company.

United Technology (UTX) shares were up slightly over the last two days on news Trump had reached out to subsidiary Carrier Air Conditioning about keeping their plant in Indiana and was reportedly making progress. This would keep 1,400 jobs in Indiana that had been slated to move to Mexico. Nobody knows what Trump has offered or threatened but it would have to be serious. Carrier workers in Indiana make between $16 and $20 per hour. When they complete the move to Mexico, they will pay Mexican workers $3 an hour. Multiply that by 40 hours a week and 1,400 employees and the incentive would have to be more than $44 million a year to offset the additional employee costs. However, in terms of available tax incentives that number would be a drop in the bucket. (CTRP) reported earnings of 17 cents compared to estimates for 11 cents. Revenue of $835.5 million beat estimates for $801.8 million. The company also said it signed an agreement to acquire the travel search site Skyscanner for $1.74 billion.

Tesla (TSLA) appears to be recovering from the SolarCity acquisition and shares have moved up for the last week. Morgan Stanley continues to dump on the acquisition saying it makes no financial sense and will become a black hole for Tesla cash. Musk feels different and Tesla stores have already begun selling energy products. Musk and Tesla reported a project to completely power the American Samoa island of T'au with a solar grid and 60 Tesla battery power packs. While that feat could be accomplished by any of the major solar manufacturers, it is confirmation that Tesla is moving rapidly to integrate the two companies. Shares have risen from $180 to $196 over the past few days.

How high is too high? U.S. Steel (X) shares have risen 61% since the election. The fundamentals really have not changed and could actually be worsening. Steel costs are expected to rise and coal is used to make the steel. Coal prices are also expected to rise. With the dollar at 13-year highs, exports of steel are going to be more expensive. I believe this stock has gotten well ahead of its skis and could be headed for a nasty fall. A lot of traders believe this as well because the January $32 put is $2.39 and very high on a historical basis. Open interest is 3,659 when most strikes averaged only a couple hundred in open interest a month ago.

Goldman Sachs (GS) said S&P-500 companies have about $1 trillion in cash overseas. Capital Economics said total cash held overseas is closer to $2.5 trillion. Trump has pledged to change the corporate tax rate to 15% and pass a 10% repatriation tax. Goldman believes that will happen in the second half of 2017.

Goldman expects about $200 billion to be immediately repatriated with a significant portion being used to fund stock buybacks. They expect $150 billion of that to be added to buybacks to increase the total by 20% to $780 billion. That will only be the second time in the last 20 years that S&P companies spent that much on share repurchases. Total cash returned to shareholders through buybacks and dividends would rise to $1.2 trillion. If there is no change in the repatriation tax rate, Goldman said buybacks would only rise about 5%.

FactSet said the blended earnings growth rate for Q3 has risen to +3.2% now that more than 98% of S&P companies have reported. That compares to estimates for a decline of -2.2% at the beginning of the quarter. However, Q4 estimates have declined slightly to earnings growth of +3.3% and 5.0% revenue growth. Earnings for all of 2017 are now forecast to show 11.4% growth and +5.9% revenue growth. That would be a good year but those forecasts change monthly and are normally optimistic at the beginning of the year. The forward PE is now 16.8 and well above the 10-year average of 14.3.

The dollar hit a new 13 year high on Wednesday as the Euro fell to a 13 year low. The turmoil surrounding the Euro is increasing as other countries discussing leaving the currency bloc. The dollar strength is the primary reason for the slight decline in earnings estimates for Q4. At these levels, it is very damaging to anyone exporting products and selling overseas.

Mortgage applications fell -9% last week as interest rates surge. Borderline borrowers are being told they no longer qualify for mortgages because of the higher rates. The annual pace of new home sales fell from 593,000 to 563,000 last week as the selling season ended and those buyers still shopping were scared off by the rates. The yield on the 10-year treasury rose to 2.41% intraday on Wednesday to hit a 15-month high.

Crude prices fell -$2 on Friday after Saudi Arabia cancelled their appearance at a meeting of non-OPEC producers scheduled for Monday, two days before the regular OPEC meeting on Wednesday. With OPEC members in rebellion mode and cannot even agree among themselves about a production cut/freeze/ceiling, there was no reason for Saudi officials to meet with Russia and others to explain an agreement that does not exist and try to get those producers to trim production as well. Saudi officials said they were not attending the meeting in order to focus on reaching a consensus within the organization first. The Monday meeting was supposed to "seal the deal" on a joint cut between OPEC and non-OPEC producers.

OPEC has managed to keep prices from collapsing for the last two months by routinely floating headlines that suggested there could be a deal this time. Unfortunately, they have run out of time and if there is no "credible" deal announced on Wednesday, oil prices will collapse. OPEC had record production in October and probably again in November. Based on the comments out of other OPEC producers, if there is going to be a material production cut, it will have to come from Saudi Arabia and they have said repeatedly they would not accept that fate. Barclays said Saudi could cut 500,000 bpd, the UAE and Kuwait 100,000 bpd each or possibly 200,000 bpd each but Iran, Iraq, Libya and Nigeria will be increasing by an equal amount so there would be no real production decline.

Iran is expecting Trump to impose new sanctions so they will not voluntarily agree in advance to restricting production. They will want to produce every barrel possible until the sanctions hit again.

Most analysts believe OPEC will announce some "face saving" agreement of some sort but nobody will actually comply with the terms. It will strictly be a political statement to make it appear they are doing something. I would expect a sell the news drop on the announcement unless it is much stronger than expected.

The alternative view from Bank of America is that OPEC will be forced to cut production for several reasons related to the Trump victory. Interest rates and the dollar are rising. That forces the price of oil lower on a commodity basis. Trump has also threatened to boost U.S. production significantly and raise the current supply glut and force prices lower. BofA thinks the threat to Iran of a Trump presidency will force them to freeze production with OPEC in an effort to raise prices. BofA believes Iran cannot increase production significantly from current levels without additional foreign investment. Those potential investors will be taking a wait and see attitude before committing additional funds that could get trapped in a new sanctions program.

Active rigs rose by 5 with three of those oil rigs and 2 gas rigs. Activations this week are likely to be low as producers wait to see what the OPEC decision does to prices.




Volume was not just low on Friday, it was nonexistent. Only 3.0 billion shares traded across all markets. Nobody expected any volume but that was still 200 million shares more than the 2.8 billion on the same day in 2015.

Internals were still positive with 4,445 advancers to 2,339 decliners. There were 835 new 52-week highs. Tuesday saw the most with 936 new highs followed by 896 on Wednesday.

With month end on Wednesday along with the MSCI index rebalance we should see a significant volume increase on Tue/Wed that could overpower any directional trend. High rebalance volume is typically neutral for the market because stocks are being bought and sold in relatively equal dollar volume.

BofA said prior to the election more than $130 billion had been taken out of equity funds year to date. Since the election, more than $30 billion has flowed back into equities. If we really are at the start of the Great Rotation from bonds back into equities, there are hundreds of billions of dollars still to flow. It will not all happen at once but as long as the markets keep making new highs that is a powerful incentive to accelerate the rotation.

Most professional traders and analysts are taking a wait and see approach. The market has gone too far, too fast and while they would like to add more long positions, they would rather do it on a dip. This thought process suggests any profit taking dips in the near future are likely to be shallow.

The S&P blew through the next to last line of uptrend resistance at 2,205 on Friday with a nearly 9-point gain to close at 2,213. The next level of concern is 2,225. The index is overbought and could/should rest at any time. The 2,175 level should be worst-case support but I would be shocked if we dipped to that level.

The Dow has moved into blue-sky territory with no material resistance in sight. There is light uptrend resistance from 2014/2015 around 19,500. The biggest problem for the Dow this week is simply its overbought status. Some individual components are eventually going to weaken and that will create the drag needed to slow the ascent. The prior uptrend resistance is probably going to be support when the profit taking appears. That is 18,900 today and where I would be a tentative buyer.

The Dow is setting up for an attack on 20,000 by year-end. That would be the mother of all sell the news events. After what would be a monster rally to get to that point, the touch of 20K could be the equivalent of a lightning strike. There will be year-end tax trading considerations as well as severe inauguration risk. With as many as two million protestors reportedly ready to converge on Washington to block the event, this could turn into a very ugly mess. I hate to be talking about this well in advance but portfolio managers with billions at risk, have teams of people that do this kind of research in order to avoid surprises.

I am looking for the Dow to make new highs in December but every step higher increases the year-end event risk. January's have not been kind the last two years and investors tend to remember those events.

The Nasdaq Composite finally kicked into gear and started making new highs as well. The big cap techs are still hit and miss with choppy trading from day to day. Note that none of the FANG stocks are in the list of gainers below. The smaller tech stocks including the chip sector are doing well. Unfortunately, the biotech sector lost traction and struggled all week to close with a minor loss. This held the Nasdaq to some mediocre gains.

The Nasdaq has uptrend resistance around 5,500 and that would be a good target for year end after some minor retracements for profit taking along the way.

I am bullish on the market over the next several weeks but expect any continued gains to be interspersed with some bouts of profit taking. I believe money from bonds will be flowing into equities but maybe not at a breakneck pace until after the inauguration.

We cannot continue the recent gains but dip buyers should keep any declines relatively shallow. The market is making new highs and that is the drug of choice for investors. Everybody wants to chase new highs for fear of missing out on a long-term rally. Retail investors do it because they do not really understand. They are hooked on the momentum. Fund managers do it because they have to or their performance will lag their peers and they risk losing their jobs. Try not to be lured by the Pied Piper of new highs and plan on buying the dips instead.




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Random Thoughts

The surge in bullish sentiment continues. Bulls are almost over 50% and bearish sentiment is at a five-month low. Bullish sentiment has risen from 23.6% at the beginning of November to 49.9% a rise of more than 100%. This survey ended on Wednesday.

Last week results

David Stockman, Director of Office of Management and Budget under President Reagan, does not share the bullish view of most investors. He is calling this the "Greatest Suckers Rally of All Time." "This 5% eruption is meaningless. It is some robot machine trying to tag new highs." He said he "sees a recession in 2017 and the market is going to go down and stay down long and hard because for the first time in 25 years there is nothing to bail it out." "Sell stocks, sell bonds. Get out of the casino. Bonds have already lost $2 trillion globally and have miles to go." Complete Source Article

General James Mattis is being considered for the Secretary of Defense. Mattis is a soldier's general. He and President Obama did not get along because Mattis was too aggressive in his desire to take the fight to ISIS. He was called "Mad Dog Mattis" by the soldiers under his command and his codename was "Chaos." Nobody wants to fight a war. However, if we do have to fight, then the goal is to win, not play to a draw or political retreat. Mattis is the kind of general a soldier wants to follow.

In late 2003, a colleague of General James Mattis wrote to him asking for a few words on the importance of reading and military history for the officer, even where it might seem that one was "too busy to read." The general was known to carry a library of 6,000+ books with him everywhere he was assigned. His response went viral.

"The problem with being too busy to read is that you learn by experience (or by your men's experience), i.e. the hard way. By reading, you learn through others' experiences, generally a better way to do business, especially in our line of work where the consequences of incompetence are so final for young men.

Thanks to my reading, I have never been caught flat-footed by any situation, never at a loss for how any problem has been addressed (successfully or unsuccessfully) before. It does not give me all the answers, but it lights what is often a dark path ahead.

With TF 58, I had with me Slim's book, books about the Russian and British experiences in AFG, and a couple others. Going into Iraq, "The Siege" (about the Brits' defeat at Al Kut in WW I) was required reading for field grade officers. I also had Slim's book; reviewed T.E. Lawrence's "Seven Pillars of Wisdom"; a good book about the life of Gertrude Bell (the Brit archaeologist who virtually founded the modern Iraq state in the aftermath of WW I and the fall of the Ottoman empire); and "From Beirut to Jerusalem". I also went deeply into Liddell Hart's book on Sherman, and Fuller's book on Alexander the Great got a lot of my attention (although I never imagined that my HQ would end up only 500 meters from where he lay in state in Babylon).

Ultimately, a real understanding of history means that we face NOTHING new under the sun. For all the "4th Generation of War" intellectuals running around today saying that the nature of war has fundamentally changed, the tactics are wholly new, etc, I must respectfully say… "Not really": Alex the Great would not be in the least bit perplexed by the enemy that we face right now in Iraq, and our leaders going into this fight do their troops a disservice by not studying (studying, not just reading) the men who have gone before us.

We have been fighting on this planet for 5000 years and we should take advantage of their experience. "Winging it" and filling body bags as we sort out what works reminds us of the moral dictates and the cost of incompetence in our profession. As commanders and staff officers, we are coaches and sentries for our units: how can we coach anything if we don't know a hell of a lot more than just the TTPs? What happens when you're on a dynamic battlefield and things are changing faster than higher HQ can stay abreast? Do you not adapt because you cannot conceptualize faster than the enemy's adaptation? (Darwin has a pretty good theory about the outcome for those who cannot adapt to changing circumstance - in the information age things can change rather abruptly and at warp speed, especially the moral high ground which our regimented thinkers cede far too quickly in our recent fights.) And how can you be a sentinel and not have your unit caught flat-footed if you don't know what the warning signs are - that your unit’s preps are not sufficient for the specifics of a tasking that you have not anticipated?

Perhaps if you are in support functions waiting on the warfighters to spell out the specifics of what you are to do, you can avoid the consequences of not reading. Those who must adapt to overcoming an independent enemy's will are not allowed that luxury.

This is not new to the USMC approach to warfighting - Going into Kuwait 12 years ago, I read (and reread) Rommel's Papers (remember "Kampstaffel"?), Montgomery's book ("Eyes Officers"…), "Grant Takes Command" (need for commanders to get along, "commanders' relationships" being more important than "command relationships"), and some others. As a result, the enemy has paid when I had the opportunity to go against them, and I believe that many of my young guys lived because I didn’t waste their lives because I didn't have the vision in my mind of how to destroy the enemy at least cost to our guys and to the innocents on the battlefields.

Hope this answers your question. I will cc my ADC in the event he can add to this. He is the only officer I know who has read more than I.

Semper Fi, Mattis"


Enter passively and exit aggressively!

Jim Brown

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"Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria."

John Templeton