The inauguration was completed successfully and without a lot of market volatility.
Friday's volume was unexpectedly high at 6.6 billion shares. While that is not high on a normal basis, it was the second highest day of the week. Traders did not participate while the inauguration was ongoing but there was a big spike at the open and another uptick at the close. The market fell to its lows, giving back more than half its opening gains as President Trump spoke but when it did not collapse completely the dip buyers began to appear. Advancers were nearly 2:1 over decliners and the volatility index declined -10% to close just over 11.
In theory, this should be the all clear signal politically. However, the president has said he could sign as many as 200 executive orders on Monday. Late Friday before going to the festivities, he went to the oval office where he signed multiple executive orders including one to reduce the effectiveness of Obamacare by limiting any financial penalties, unwarranted financial and regulatory burdens. The order tells agencies to waive, defer or delay any Obamacare provisions that impose fiscal penalties or involve extra ordinary measures. The administration also implemented an order that halts all new regulations without specific administration approval. This can impact new regulations recently announced but not fully implemented.
The markets have had a dozen chances to move lower over the last several weeks and all the dips were bought. With the event risk over, investors should be able to concentrate on earnings and economics. The last hurdle will be any backlash on Monday from the barrage of executive orders. They should not discourage investors but there is always the potential for that bump in the road. I expect the deluge of earnings news to overshadow any remaining political headlines.
I showed a graphic last week where the S&P averaged a -2.6% decline in the 30 days after a change in presidents. That risk still exists but the pro-growth policies of lower tax rates and reduced regulation should negate that risk somewhat. However, Sam Stoval, a long time S&P tracker, reminded us that since 1953 the S&P is normally 1.6% higher after the first 100 days in office. That suggests we should buy any dip.
There were no economic reports of note on Friday.
The calendar for next week is highlighted by regional Fed manufacturing reports from Dallas, Richmond, Chicago and Kansas City. The big report for the week will be the first look at the Q4 GDP on Friday. The initial Q4 forecast is 2.1% growth compared to the unsustainable 3.5% number from Q3. The Atlanta Fed GDPNow forecast is 2.8%.
There was almost zero stock news on Friday. The news headlines were totally dominated by the inauguration details. One stock probably wished they were invisible after a major hit. Bristol Myers Squibb (BMY) said it would not seek accelerated approval for its lung cancer treatment using Opdivo and Yervoy. The company said the decision was made based on a review of the data available at this time. That suggests the data was not favorable and may not have withstood FDA scrutiny. Shares fell -11% on the news.
GE reported earnings of 46 cents that matched analyst estimates. Revenue declined slightly to $33.09 billion and missed estimates for $34.15 billion. Revenue in their oil and gas business declined -22% and the energy and lighting division saw a 29% decline in revenue. The transportation segment saw a 23% decline. The company said for the full year they returned $30.5 billion to shareholders with $22 billion though share buybacks.
Since GE shed its financial businesses, analysts are expecting better earnings. For GE, just matching estimates is almost an earnings miss. They signed deals in 2016 for $40 billion in asset sales. They have shed $197 billion in restructuring deals since 2015. Having restructured into a pure play industrial company analysts are expecting better results. In October, they signed a deal with Baker Hughes (BHI) to merger their oil and gas business with BHI and create the second largest energy services business. This will further insulate the GE industrial business from the wide swings in the energy sector. This was a handicap for GE earnings over the last couple years. Shares fell -2% on the earnings.
Qualcomm (QCOM) is not having a good year. On January 17th, the FTC sued the company for anti-competitive practices saying QCOM forced Apple to use its products exclusively in exchange for lower fees. On Friday, Apple said it was suing Qualcomm for $1 billion for improperly charged royalty fees. Apple said, "Qualcomm built its business on older, legacy standards but reinforces its dominance through exclusionary tactics and excessive royalties." A month ago, South Korea levied an $850 million fine against Qualcomm for monopolistic practices. Apple said Qualcomm withheld $1 billion in fee rebates because Apple helped South Korea investigate Qualcomm's business practices. A year ago, China fined the company $1 billion for basically the same reason. A billion here and a billion there and pretty soon that adds up to a lot of money. Shares fell -2.4% on the news.
Apple (AAPL) shares were flat for the week with resistance at $120 still holding the stock down. That is a 14-month high and the stock cannot seem to break through. Earnings are January 31st. The company is meeting with the government of India on January 22nd to negotiate terms for setting up manufacturing units in that country. Apple is asking for a 15-year tax holiday on the importation of equipment and components into the country. This would help India because it provides thousands of jobs and further improves the "Made in India" manufacturing effort. India is also the world's fastest growing cellular market. If the government does a deal with Apple, the phones would be cheaper for their citizens and further accelerate the trend. Samsung currently has a 23% market share in India because of their lower price points. India charges a hefty tax on imports and that raises the current iPhone price.
Dow Component Procter & Gamble (PG) reported earnings of $1.08 compared to the $1.06 analysts expected. Revenue of $16.86 billion narrowly beat estimates for $16.8 billion. Foreign currency exchange knocked 2% off of revenue. The company guided for a 2% to 3% increase in revenue for 2017 but the strong dollar is expected to reduce sales by 2% to 3% so actual revenue will be flat. They guided to full year earnings of $3.67 per share. Shares rallied $2.75 to add 18 points to the Dow.
Schlumberger (SLB) reported earnings of 27 cents that matched analyst estimates. That was a 58.5% decline. Revenue fell -8.7% to $7.07 billion and missed estimates for $7.11 billion. The company said there was strong activity in the Middle East and North America but Latin America and Europe were weak. The company said drilling activity in North America should increase 30% in 2017 led by the Permian Basin. Shares declined only fractionally.
Moody's downgraded Sears (SHLD) credit rating from Caa1 to Caa2. Moody's said Sears is running out of stuff it can sell for cash. They only have 211 properties that are unencumbered and worth about $2.5 billion. With the company burning cash at the rate of $1.5 billion a year they are rapidly approaching the end of the line. Moody's said they could raise cash with the sale of the Kenmore and Diehard brands but after that, they are done. There is nothing left to sell that will produce a large inflow of cash. Shares were positive despite the downgrade.
With 12% of the S&P-500 already reported, the blended earnings growth is now 3.4% for Q4. Over 61% have beaten on earnings but only 47% have beaten estimates for revenue. The earnings beat percentage is below the 5-year average of 67%. The average earnings beat is 4.2% while the average revenue decline is -0.4% below estimates. Next week 70 S&P companies will report earnings including 12 Dow components.
The Dow components are in pink. Nearly 25% of the market cap of the Nasdaq reports earnings on Thursday with BIIB, GOOGL, INTC and MSFT.
The OPEC monitoring committee meets this weekend to work out a means to measure compliance with the promised production cuts. The odds of actually getting the 1.758 million bpd of production cuts are nearly zero. That is 1.2 mbpd for OPEC and 558,000 bpd for non-OPEC producers. Just because they have to meet to come up with a compliance procedure should tell you the odds are pretty slim. Several OPEC members have said 50% to 60% would be good and 70% to 80% compliance would be outstanding. When OPEC members think 60% would be good, that tells you they are expecting a lot of cheating.
The IEA said OPEC's historical compliance with prior production cuts has averaged around 60%.
The key here is that the production cuts are voluntary and there is no penalty for failing to follow through with their promised cuts. There have been some suggestions that the monitoring committee will "name and shame" any country that does not comply. Good luck with that.
On Saturday, OPEC and Russia said they were ahead of schedule implementing the cuts. Saudi Arabia, Algeria and Kuwait have already made deeper cuts than required, while Russia claims they have already cut by 100,000 bpd. The Saudi Oil Minister Khalid Al-Falih said producers have already removed 1.5 million bpd from the market. If this is true and that is a capita IF, it would be a major change in OPEC compliance. However, since those three countries have reportedly cut more than they pledged, it suggests other countries are lagging.
Prices have been declining as the headlines questioned whether the actual cuts would be sufficient to reduce existing inventories.
The prior week there was a decline of six active rigs. I speculated at the time there was probably a lag in getting workers back from holiday breaks and there had been some very severe winter weather the prior week that could have impact rig relocations. This week the active rigs rose by a whopping +35 rigs to 694. That was an addition of 29 oil rigs and 6 gas rigs. Apparently, whatever problem was preventing those rigs from restarting, has been solved. With this pace of rig additions, we could see a significant rebound in oil production six-months from now.
The S&P has gone 69 days without a 1% decline. That is the longest streak since 2006 when the index went 94 days without a significant drop. The difference is that other than the five-weeks after the election, the S&P has gone sideways almost the entire time. October 11th was the last drop of more than 1%. I am pretty sure everyone would much rather have the chart pattern from 2006 than the current chart. That 2006 rally was a once a decade type of event.
The number of analysts expecting a market decline soon, continues to grow. Jeff Saut, an excellent analyst from Raymond James, said the models continue to point to a post inauguration decline of several percent and it would be a "big surprise" if a rally appeared instead.
Jeff, I would not put a very big bet on that decline. While it can still happen, the market has had many chances to fall hard in December/January and each time the dip buyers were ready and waiting. Some $14 billion in new money has flowed into the SPY ETF and another $6 billion into the financial XLF ETF. Investors are betting on a continued gain. Obviously, they can be just as wrong as you or me but they have the big bucks.
I am very surprised we did not have an early January decline. I positioned for it and it never came. At the same time, there was no rally either, except for the big cap techs. With the Dow and Russell 2000 closing at five-week lows on Thursday, it looked like a decline was imminent. Now, I believe those chances are slipping away. We will have an eventual drop but it will be on the market's schedule not ours.
Of course, as soon as I begin to turn short term bullish it will be the kiss of death for the market. I am going to maintain my downside hedges for another few days but I am going to start adding some long positions.
The S&P has to break over 2,280 in order to trigger a new round of short covering and price chasing. Of course, the Dow needs to break through 20,000 but the S&P is the one to watch next week. An S&P breakout will lead to a Dow breakout.
The S&P stalled at 2,277 on Friday and that was at the open. The initial spike was quickly sold so there were still some ready sellers at that level. After the intraday dip and the closing bounce, the S&P closed at 2,271 and about 10 points below the level that could trigger a new leg higher. We are less than half a percent from a new high. A move over 2,300 could be explosive.
Note that the S&P candles are still clustered near the top of the recent range. That suggests a breakout could be imminent.
The Dow got a big lift from IBM and PG on Friday. IBM added 25 Dow points and PG added 18. With 12 Dow components reporting next week we could see some increased volatility. Those are MCD, DD, JNJ, MMM, TRV, VZ, BA, UTX, CAT, MSFT, INTC and CVX. Tuesday is a big day with 3M and Travelers. They could be market movers. Verizon, JNJ and DD are the same day but should not be big movers.
The Dow closed at a five-week low on Thursday and then rebounded back over prior support at 19,800 on Friday but only by 27 points. The Dow chart pattern is still negative until it pushes though 20,000.
The Nasdaq was held back on Friday by the biotech sector once again. The sector was hit by the drop in BMY shares and by continued worries the president could comment again on high drug prices at any time.
The Nasdaq is only 19 points below its closing high and a gain like that could happen at any time. The Nasdaq and S&P are the most bullish indexes. Without the inauguration event risk we could see a decent move next week.
With GOOGL, INTC, MSFT and BIIB all reporting earnings on Thursday that could make next Friday's open another volatility event.
The small cap Russell 2000 is the weakest index with the Dow a close second. The Russell closed at a five-week low on Thursday and rebounded only slightly on Friday. The Russell failed to close back above support at 1,355. The Russell and the Dow are the market sentiment indicators and they are on opposite ends of the market spectrum. To have them both be negative while the S&P and Nasdaq are positive, presents a market mystery for analysts. However, the stocks in each index were the biggest gainers in November and therefore have the most profit at risk that needs to be consolidated. The Nasdaq stocks had a big decline in late December to force traders to exit and provide a new entry point for others. The Dow and Russell have not seen that sharp decline.
If the Russell closes at a new low next week, that would be a signal of trouble ahead. The chart is short-term negative so watch it closely.
When President Trump was inaugurated, everyone on the floor of the NYSE cheered and applauded. That should be a clue to how traders/investors view the market and economy in the coming months. Lower taxes could mean an increase in S&P earnings of 10% or more. The current PE for the S&P is 17 with earnings estimates at about $133.50. If earnings rose 10% and the PE stayed the same, that would be 2,500 on the S&P. Some analysts believe earnings could rise 16% in 2017 on a combination of organic growth and a lower tax rate. That would be somewhere in the 2,635 range if the PE did not change.
Obviously, those earnings are not going to happen overnight because the legislative process is messy. The republicans may have a 2 vote majority in the senate but in reality it is a fragile coalition that could self destruct at any time on any topic. Nothing should be taken for granted just because of those 2 votes.
We do not know how the governing process is going to work with President Trump. For someone who is used to getting his way and dominating everything he touches, it may be a real challenge to play nice with lawmakers. While everyone wants to think we are just going to follow the yellow brick road to market profits because a new sheriff is in town, that may not be the case. We are going to need to see a few weeks of actual governing before we can breathe easier.
Regardless of what happens with the new administration, the market will adjust. As long as earnings are increasing and the economy is not tanking, the market should move higher. The markets have lived through 44 previous administrations and are less than 1% from historic highs. They will adjust but there could be some volatility if the governing process turns into a perpetual Twitter storm.
There was a major change in sentiment last week with the bulls running for cover. This survey ended on Wednesday so the Friday event risk was causing a minor panic. We saw this reflected in the market with the Dow and Russell 2000 closing at a 5-week low on Thursday.
Last week results
ISIS was calling Inauguration Day, "Bloody Friday" and calling on followers to attack in any way possible. They failed. The lack of an attack shows that ISIS is limited in what they can actually do even if they are willing to die in the effort.
The security around the inauguration was so tight that protestors could not even get close, much less ISIS followers.
This does not mean we should let our guard down for even one second but it also means we should not live our lives in fear. While ISIS and Al-Qaeda are spreading into other countries, they are no longer capable of carrying out another 9/11 style attack. We are entering a new phase of the terror cycle and President Trump is likely to take the battle them very quickly.
For everyone that got an Amazon Echo for Christmas, this post is for you. For everyone else, I am sorry, maybe you will get one next year.
For those with an Echo you know there are Easter Eggs hidden in Alexa's programming. I recently spent more time than I care to admit compiling an extensive list of these eggs. If you have an Echo you know how addictive this can be. Some of these are simple and some will drive you crazy. Most will be good for laughs when you have company over. If you have found some that are not on the list, please send me an email.
This is a PDF file of 400 eggs. Enjoy!
400 Alexa Easter Eggs
Enter passively and exit aggressively!
Send Jim an email
"An investor without investment objectives is like a traveler without a destination."