The Dow pulled close to 20,000 today and found sellers waiting once it moved over the 19,900 level.
The Dow is nearing a market inflection point at 20,000 and the next 89 points could be tough. As soon as the index pushed through 19,900 this morning, the sellers began to appear. There was not a lot of volume but you could tell the trend had changed. The opening spike over 19,900 was immediately sold to push the index back to 19,850 by 10:30. Another run began shortly after that succeeded in pushing the index even higher to 19,953 but that was also sold immediately to close the Dow back at 19,911.
The Dow 20,000 level is such a large round number target that traders will become confused once it is hit. It is like a dog chasing a car. He does not know what to do once he catches it and that is the most dangerous part for the dog. Touching Dow 20K could be the most dangerous market event for the week other than the Fed decision.
The economic reports today were ignored. The Manpower Employment Outlook Survey for Q1 was neutral. In the USA 73% of employers expected no change, 6% were planning on decreases in employment and 19% expected to hire. That is a 13% net number for increases compared to 16% for Q4. In other words hiring plans shrank slightly but the holiday quarter always shows a high number because of the temporary holiday workers.
The NFIB Small Business Optimism Index for November rose from 94.9 to 98.4. Hiring plans increased and sales forecasts rose. Those expecting the economy to improve rose from -7 to +12. Expectations for higher sales rose from 1 to 11. The rest of the components were basically flat.
Import prices for November declined -0.3% compared to a +0.5% gain in October. Energy was the main driver with a -3.9% decline after a +6.9% gain in October. Crude oil prices fell -4.7%. Import prices excluding oil and products were flat for the month. The continued weakness in import prices is helping to keep a lid on inflation in the US.
The December Fed meeting started today and they are expected to announce a quarter point rate hike on Wednesday. Strangely, the CME FedWatch Tool declined -2% from the 97.2% reading on Friday.
The rate hike is already priced into the market. It is the guidance that could be a stumbling block. Continued dovish guidance could send the market even higher while an uptick in hawkish guidance could cause a market decline.
After the Fed decision, the next most important economic event is the Philly Fed Manufacturing Survey on Thursday. That is expected to show a minor gain. This is a preliminary view of what the ISM report should look like two weeks from now.
The Valeant saga may never die. Bill Ackman's Pershing Square fund said it sold more than 3.4 million shares in order to generate a tax loss for investors. Pershing's cost in those shares was thought to average more than $200 each. Shares are trading at $14.77 today. The sale cut Pershing's position to 7.8% of Valeant ownership. The drug company also announced the resignation of three top executives including Rob Rosiello, the former CFO. He had previously announced he was leaving in August but decided to stay after they sweetened his compensation. Today he decided to call it quits. I can imagine working on all the accounting problems at Valeant would not be a fun job. The other executives leaving were Anne Whitaker and Ari Kellen, both EVPs.
Wells Fargo (WFC) failed the living will requirement of the Federal Reserve. Regulators said Wells would damage financial markets if it were pushed into bankruptcy. They forced new rules on the bank after a second review under the post recession bankruptcy scenario. The living wills are required to outline how the bank would be dissolved and unwound in an orderly fashion. Wells was one of five banks to fail the requirement in April. On Tuesday, regulators announced the will had fallen short and Wells would face sanctions over the default. That means the bank cannot acquire any non-bank subsidiaries or establish any international banking entities. Wells has until March 31st to submit an amended will and regulators could remove sanctions if that document passes the test. The other banks that previously failed were approved in this latest analysis. They were JPM, BAC, STT and BK. Shares of WFC were flat on the day.
Hertz Global Holdings (HTZ) shares fell -4% in afterhours after CEO John Tague said he was stepping down from his post as CEO and president. Kathryn Marinello will become the new president and CEO. Carl Icahn, the company's biggest shareholder praised the move because of Marinello's experience.
Boeing (BA) said it was cutting production of the 777 passenger jet to five per month beginning next summer, due to a slowdown in sales. That is about a 40% reduction from the current rate. The company said it would not impact its earnings. Boeing has booked orders for 17 planes in 2016 compared to 58 in 2015. The company also increased its quarterly dividend 30% to $1.42 and authorized $14 billion in share repurchases to start in January. That brings the dividend yield to 3.6%. They repurchased $7 billion in shares in 2016. The company has a current backlog of more than 5,600 orders for commercial jets. Just last week Boeing scored a $3.5 billion order for Apache attack helicopters for the UAE. This week they said they had completed a deal to sell 80 planes to Iran Air for $80 billion. Unfortunately, that deal has to be approved by the Congress and president. Shares surged to a new intraday high on Tuesday but faded into the close.
FedEx (FDX) surged to a new high after JP Morgan initiated coverage with an overweight weighting and price target of $233. Shares closed at $201. UPS and FDX are both struggling to keep up with holiday shipping volumes that have rapidly exceeded even their most optimistic forecasts. UPS has temporarily relocated hundreds of workers from the headquarters areas to help at shipping hubs around the country. Both companies have already suspended delivery guarantees and extended delivery windows on many routes. Despite their best efforts, analysts say on time delivery rates were continuing to fall as the holiday package crush accelerates. Air shipments by UPS had fallen to only a 90.3% on time delivery rate, down from 98% or more in normal times. Both companies are increasing hours and overtime despite hiring nearly 200,000 temp workers. Analysts claim the extra workers, frantic relocations and late deliveries indicate the supply chain is already clogged and deliveries next week could become even more erratic.
I have noticed many items on Amazon this week that are in stock but the delivery window has already shifted into January. You can still get the items before Christmas but you have to pay a stiff expedited delivery charge of more than $20 in some cases. I suspect this is Amazon's way of recovering some of their shipping expenses since an in stock item should only be 3 days away at most. They know frantic shoppers will sometimes elect to pay the additional shipping to get that item delivered on time.
Crude prices declined slightly from their $54.51 post OPEC meeting high to close at $52.52. The headlines from the weekend meeting are starting to fade and the prices are starting to sink. The $50 level is likely to hold until we begin to get some of the follow on news on how the actual cuts will be handled when there is no monitoring of the process and no penalty for not cutting.
The big cap tech stocks finally found some traction and powered the Nasdaq 100 index to a new high. This index had been the weakest link with solid resistance at 4,900. Thanks to the big caps today, the NDX closed at 4,935 and a new historic high.
Apple was responsible for 11 of the NDX points, Amazon 8, Microsoft 7, Google 7 and Facebook 6. The Technology Sector SPDR (XLK) closed at a 16 year high.
Chief technical analyst at BTIG, Katie Stockton, warned investors should be prepared for a market pullback after the Fed decision. She warned there are some flashing sell signals with the markets showing signs of exhaustion.
Other analysts believe if the markets can survive the first week of January, they could easily move up another 5% to 10%. I want whatever they are smoking. They believe the combination of reduced regulation, fiscal stimulus, tax reduction and continued accommodative Fed, could boost S&P earnings by 15% to 18% in 2017. Since the odds of getting a tax program approved in 2017 are slim and if it happens it probably would not take effect until 2018, I think those earnings estimates are somewhat exaggerated.
However, headlines are the key. As long as the headlines show the new administration moving in that direction, the bullish sentiment could last for months. It is the "getting past January" part that I think is a deal breaker. I just do not believe we can get through January without a significant decline. Once that happens, I think we are good to go for a long-term rally.
The S&P continues to surge higher and was helped today by the big cap tech stocks. However, the overbought conditions continue to worsen and there will eventually be some pain. Support is well back at 2,215 and 2,190.
The Dow continues to amaze with another strong performance as it targets the 20,000 level. While I would not buy this index for any reason, a lot of investors are buying the components. Only seven components were in negative territory and the leaders continue to rotate from day to day. Support is well back at 19,250. The 20K level could be a big sell the news event but it depends on how we get there. If the Fed gives us an early Christmas present on Wednesday and the Dow blows through that level with a 200+ point gain then all bets are off and the short covering could be crazy. However, if the Dow creeps up to the 20K level, that could promote some wider selling.
The Nasdaq Composite had a good day but still finished -23 points below its intraday high. There were some sellers at the close but it was not serious. The rally in the big caps helped to support the composite. Support is now 5,400.
The Russell 2000 could be the canary in the coalmine or in this case the market. The index posted only a 1-point gain on Friday, a 15-point decline on Monday and only a fractional gain today when the rest of the market was very bullish. The problem for the Russell is the monster gains on some of the small cap stocks. While the Russell was up 20.1% on Friday from the post election bounce, many of the small cap stocks are up 30% or even 40% over the last four weeks. In my universe, those gains cannot hold. There has to be some major profit taking soon. Maybe I have entered a new alternate reality where the laws of gravity no longer apply but until I receive some proof of that transformation, I am still expecting a decline.
The last two days have seen a bullish market. However, the Volatility Index ($VIX) has risen on both days because of the high volume of put buying because many investors do not expect the rally to last. That poses something of a problem. If there are so many investors expecting a decline, will that decline actually happen? Normally when everyone expects the market to move in one direction, the alternate direction appears.
I think it should be pretty obvious from my recent commentaries that I am expecting a decline in January. The normal post Fed volatility could be muted this time but that depends on their statement and Yellen's press conference. She could send the markets into orbit or she could trigger a collapse. I believe she will try to thread the needle and say just enough to suggest the Fed plans to hike rates in 2017 but not enough to scare the market. Hopefully she will be successful.
I do expect a choppy market until Christmas. I cannot conceive that we will simply keep making new highs every day for two more weeks. I have been fooled before and I am sure I will be fooled again. I recommend keeping your stops tight and not adding new long positions until after we see what January brings.
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