The Dow did not turn positive on Friday until the last 30 seconds of trading but it kept the streak of gains alive.

Weekly Statistics

Friday Statistics

The dip was bought on Friday with the Dow down 73 points and the Nasdaq down -34. The other indexes returned to positive territory throughout the day but the Dow waited until the last 30 seconds of trading to turn green. Another dip bought and another record close in the books. There was $1.5 billion to buy in market on close orders on the NYSE.

For everyone who is still waiting for a market decline so that overbought conditions can be equalized, I give you the following cartoon from Hedgeye. This has been the trend since the election and apparently, it is going to continue until buyers run out of money.

The economic reports were slightly negative but the market was already rebounding then they were released. The New home sales for January rose from 536,000 to 555,000 but that was well under the consensus estimate for 570,000 and Moody's forecast for 588,000. The recent peak in sales was 622,000 back in July.

January sales rose 3.7% from December and +5.5% over January 2016. The median price of a new home rose 7.6% YoY to $318,900. The Northeast saw the biggest percentage gain at 15.8% with the Midwest second at 14.8%. The South recovered from five months of negative sales to rise 4.3% and the West posted its first sales decline since September at -4.4%.

The end of month revision for Consumer Sentiment for February rose slightly from the first reading at 95.7 to 96.3. This is still down 2.2 points from the 98.5 in January. This was the first monthly decline since October. January was a multiyear high.

The present conditions component rose from 111.3 to 111.5 and the expectations component declined from 90.3 to 86.5. That could be due to the waning honeymoon period that the new president was enjoying. Consumers are founding out that promises are easier than action in a divided government. Only 35% of respondents now expect their incomes to rise in 2017.

We have a very busy economic calendar for next week but the key event is the president's speech to a joint session of congress on Tuesday night. It is not officially a State of the Union speech but it will pass for that since there is no SOTU in inauguration years. Reports claim it will be a victory lap of sorts with the president restating all his victories and the things he has done since the election. He will also restate his promises for what he expects to get done in 2017.

The challenge here is that the president is stuck in a routine of giving campaign speeches and boasting rather than giving specifics about what lies ahead. In this particular prime time speech, he will have a full audience and they will be looking for a full meal of red meat. If there are no plan specifics and too much boasting, we could see a sell the news event on Wednesday. The market has rallied for four months on expectations without any details. If investors find that the emperor has no clothes there could be a general depression settle over the market until such time as actual details emerge.

Do not get me wrong. I believe the president has great intentions and the capability to do great things for the economy as long as he does not get bogged down in the political circus and spend too much time fighting the press. The senate is still delaying his cabinet appointments and this is the longest any president has gone without having his cabinet approved. There is a phrase that goes something like this. "When you are up to your neck in alligators, it is hard to remember that your initial objective was to drain the swamp." That means it is easy to lose sight of the initial objective and be caught up in tasks and subtasks that are only remotely related to the original goal. If the president gets caught up in fighting the minor battles, it could significantly slow the bigger goals.

I am not the only investor that understands these facts. If the speech is a letdown for whatever reason, the market could suffer.

The Richmond Fed Manufacturing Survey and the ISM Manufacturing Index are the next two reports of importance. Everything else is important but they are not market movers.

There was a flurry of earnings on Friday but JC Penny (JCP) and Foot Locker (FL) garnered the most headlines.

JC Penny reported earnings of 64 cents that beat estimates for 61 cents. Revenue of $3.96 billion was just shy of consensus estimates for $3.97 billion. They guided for full year earnings of 40-65 cents. Analysts were expecting 52 cents and that is right in the middle of the guidance. The company said it was closing 140 stores and cutting 6,000 workers in order to adjust to the world of lower mall traffic and strong online competition. They are also shutting two distribution centers. The restructuring will save Penny about $200 million a year and they will take a $225 million charge in Q2. Penny's sales are less than half what they were at the peak in 2002. They forecast same store sales of -1% to +1% for 2017.

Foot Locker reported earnings of $1.37 that beat estimates for $1.31. Revenue of $2.11 billion matched street estimates. Full year profits were $4.91 per share. Same store sales rose 5.0% and beating estimates for 4.5%. The CEO said "we are facing a challenging retail sales environment as we enter 2017. However, we believe the strategic initiatives we have in place, coupled with strong vendor relationships, will enable us to deliver another year of record performance." Marketing 101. Paint a grim picture of the problems you will have to overcome but promise to do your best. If events go against you, the warning was there. If events turn out in your favor, you did a good job under tough circumstances.

The company cited strong demand for Nike, Puma and Adidas shoes but did not mention Under Armour. Shares spiked 9% on the earnings.

Applied Optoelectronics (AAOI) reported earnings of 84 cents compared to estimates for 79 cents. Revenue of $84.9 million beat estimates for $82.7 million. Guidance for the current quarter was 80-88 cents with revenue between $87-$91 million. AAOI makes fiber optic components used by cable TV providers. Shares spiked 23% to $46 on the news. They were under $10 in June.

Intuit (INTU) shares spiked 6% after the company reported earnings of 26 cents compared to estimates for 25 cents. Revenue of $1.02 billion met estimates. They guided for current quarter revenue of $3.5 to $2.55 billion and analysts were expecting $2.45 billion. The tax season got off to a slower than normal start and the company said activity was finally starting to increase.

Berkshire Hathaway (BRK.B) reported a 15% increase in earnings for Q4. The company reported adjusted earnings of $2,665 per share compared to analyst estimates of $2,717. Warren Buffett said that "absent a recession, earnings will likely grow in 2017 thanks to the acquisition of Duracell and Precision Castparts." Berkshire shares rose 29% in 2016.

Berkshire disclosed the company had paid an average of $110.17 for 61.2 million shares of Apple and that position is up $1.6 billion since the acquisition. Buffett also said the company bought $12 billion in stocks immediately after the November election. Berkshire shares are up 18% since the election.

In Q4 Dow Chemical (DOW) converted Berkshire's $3 billion in preferred shares into more than $4 billion of common stock. Dow shares rose more than $11 in Q4 so that worked out for Berkshire.

Buffett's letter to shareholders is always insightful reading. Here it is in PDF form: Warren Buffett Letter to Shareholders

Despite the Q3 earnings cycle coming to an end there are still some good sized companies reporting next week. Priceline, Costco, Broadcom, Sears and Best Buy are the highlights.

According to Factset, 92% of S&P companies have reported Q4 earnings and 66% have beaten estimates with 52% beating on revenue. Blended earnings growth for Q4 is now 4.9%, up from estimates for 3.1% on December 31st. For Q1, 67 companies have given negative guidance and 31 have issued positive guidance. The forward PE for the S&P is now 17.7 compared to the ten-year average of 14.4.

Dow component Goldman Sachs (GS) was downgraded from hold to sell at Barenberg based on valuation. The company said all the good news was already priced into the stock. Goldman fell -3.84 and knocked more than 26 points off the Dow.

Goldman warned they did not believe the market rally would continue. They said investors are reaching "the point of maximum optimism" that will eventually lead to a pullback. They reiterated their call for the S&P to close out the year at 2,300, below its current level of 2,367. They believe the market could gain another 2% during the year but decline 4% from that level to reach their end of year target.

Goldman said investors have grown too confident that tax cuts and other initiatives would have a major impact on the economy. Goldman said once investors realize that policies do not change overnight and this is a long-term process, the market will have to adjust. David Kostin said, "Financial market reconciliation lies ahead. We are approaching the point of maximum optimism and the S&P will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tail wind to corporate earnings than originally expected." He also warned that guidance with Q4 earnings was slightly negative with full year guidance down 1%. He said there was "cognitive dissonance" in the market with expectations outpacing reality. Investors are feeling optimistic while analysts are cutting expectations based on guidance and economic data.

The king has fallen. Nvidia (NVDA) has crashed. If you believe all the hype "now is the time to sell." Seriously? The double top at $120 would have been the time to sell. Now is the time to buy. Nvidia is at the leading edge of technology today and nobody else is even close.

Short seller Citron Research said they closed their short on Nvidia after making a good call on December 28th. Citron had targeted $90 but said the quick decline to $95 as of Friday morning had exhausted the sellers.

Helping accelerate the decline was a downgrade from buy to sell by Romit Shah at Nomura. He had a call similar to the Goldman call on the market saying investors were at maximum optimism on Nvidia. He cut his price target from $100 to $90.

On January 31st, Nvidia was the second most shorted stock by hedge funds according to market cap with 7% of the shares sold short. This is what makes a market. On Friday, UBS reiterated a buy rating with a $132 price target saying datacenter sales would double.

At the opening low on Friday, Nvidia shares were down nearly $15 in two days as investors began to take profits in Nasdaq stocks. With support at $99 and a $25 decline since February 10th, the stock has gone from being very overbought to very oversold.

I am disappointed it broke through the 50-day average but things happen. That has been support for the last 15 months. I firmly believe any decline in Nvidia is a buying opportunity and this is definitely a bargain level. I have said several times in these pages I would like to see a dip to $90 as an opportunity but I am doubtful we are going there unless the market corrects.

Citron said they were transferring their profits in Nvidia into a short on Mobileye. Citron called them a one-trick pony. In the self-driving sector they are "bringing a knife to a gunfight" according to Citron. They are competing with Google, Apple, Nvidia, Uber and dozens of other companies but they are spending less on R&D and trying to rest on their early engineering advances. However, they have been bypassed in the sector. Even Tesla has dropped their technology. Insider sales have been booming and their PE is twice that of Nvidia. Citron is targeting $35 on MBLY.

Prison stocks exploded higher after the new Attorney General Jeff Sessions signaled a reversal of the Obama directive to phase out private prisons. The prior administration directed the Bureau of Prisons to withdraw or decline contracts for private prison operators at their expiration. Session issued a memo on Thursday saying the prior directive "impaired the Bureau's ability to meet future needs of the correctional system."

Prison stocks have been moving rapidly higher since President Trump won the election in anticipation of the prior directive being rescinded. Stocks had fallen about 50% after the initial directive was issued.

CBOE Holdings (CBOE) will replace Pitney Bowes (PBI) in the S&P 500 at the open on March 1st. PBI will replace CBOE in the S&P-400. CBOE is acquiring Bats Global Markets (BATS) and the combined company will have a market cap worthy of the S&P-500.

Incyte Corp (INCY) will replace Spectra Energy (SE) in the S&P-500 at the open on Tuesday. Spectra is being acquired by Enbridge (ENB).

Regency Centers (REG) will replace Endo International (ENDP) in the S&P-500. Endo will replace Regency in the S&P-400 and Nuskin (NUS) will replace Equity One (EQY) in the S&P-400 at the open on Thursday.

Dillards (DDS) will replace Intersil Corp (ISIL) in the S&P-400 at the open on Tuesday. CyrusOne (CONE) will replae Clarcor (CLC) in the S&P-400 on Wednesday at the open. Clarcor is being acquired by Parker Hannifin.

Here is one for the "What the heck" category. On the 17th, somebody bought 70,000 of the Union Pacific (UNP) January $130 calls for $2.57 each. I made a note of it but never got back to do the research. When I was reviewing my notes this weekend I discovered that somebody had bought 140,000 of those calls and sold 140,000 of the January $150 calls at 50 cents. They put on 70,000 contracts on January 30th and another 70,000 contracts on February 17th. This is important because they spent just over $29 million in premium to put on this January spread with UNP at $108. I am betting that you have to be pretty sure of a trade to invest $29 million for a spread that is roughly $25 out of the money.

Somebody knows something. After Warren Buffett bought BNSF Railway, maybe somebody else is looking to grow by acquisition. I have no clue what is going on but you do not bet $29 million just because you are feeling lucky.

Crude prices continued to tick slowly higher as we near the end of February and should start getting some production cut numbers from OPEC. They continue to brag about how successful this program is but talk is cheap.

Meanwhile energy equities continue to slide and most stocks at three-month lows. There is definitely a disconnect between crude prices and equities. This is typically a low point of the year for energy equities and we are definitely approaching a buying opportunity.

The growth in active rigs slowed last week with a net gain of only 3 rigs. Gas rigs declined -2 to offset a gain of 5 oil rigs. We may have reached a saturation point until crude prices move over that $55 resistance level. At $60, we could see another wave of activations.




The Dow has closed at a record high for 11 consecutive days. That is the longest streak since 1987. If the Dow can stretch that streak to 13 days, that will be the longest ever. Thanks to the barely positive close on Friday, the streak of daily gains is now tied with the longest in 25 years. The Dow gains have been an exercise in stock rotation. There have been different winners nearly every day and yesterday's winners can be today's losers only to revert back to leaders over the next couple days. It has been interesting to watch.

The Dow is only 179 points from Dow 21,000. At this point, it would seem inconceivable that we will not touch that level in the next several days except for the possible volatility event surrounding the president's speech on Tuesday night. That could be a major pothole in the market road or a launching pad for a new leg higher. It all depends on the tone, substance and delivery of this critical speech.

Friday's gains came on the back of Home Depot's earnings, which are still powering a move higher in HD shares plus an outsized gain in Johnson & Johnson. The number of positive stocks helped to overcome the declines in the six big losers. The energy sector and financial sector were both weak and provided an anchor for the index.

The Dow is up 2,898 points since the election and real support is nonexistent above 20,000. The actual support is coming from the dip buyers rather than a line on the chart where technicals provide guidance.

The S&P closed at a new high on Friday and is well above support at 2,300 and the rising 30-day average. The 2,350 level would probably produce a decent pause on any material decline. Friday's gap down open only succeeded in reaching 2,355.

The 2,300 level would now be a 3% decline and should be major support if there was an earthquake on Wall Street.

The Nasdaq broke its string of gains with the decline on Thursday and Friday's rebound came mostly at the close with the index in negative territory until 15 min before the bell. This would probably qualify as three consecutive down days despite the spike at the close. While there was a solid top on the index at 5,828-5,830 for the majority of the day, the intraday candles were progressively shorter as the dip buyers pressed the sellers. The final breakout in the last 15 minutes was a capitulation event on an intraday scale. Initial support is now 5,800.

The Russell 2000 struggled back from a 12-point decline to close flat with only a .10 loss. The Russell did make a lower low at 1,382 and continues to fight the prior resistance at 1,400. The small cap stocks are trying to shake off the depression but they need another injection of tax cut expectations to provide stimulus. The Russell was up 16% after the election and they have stalled at that early December resistance at 1,395 for the last three months. That is a long time to trade sideways in an otherwise bullish market. When a Russell move finally appears it could be strong regardless of direction.

You may have noticed that the bond market has decided it no longer believes in the equity rally. Treasuries are suddenly being bought in volume and the yield on the ten-year treasury closed at 2.317% on Friday and a three-month low. This is important. If treasuries are suddenly seeing large inflows of cash, it means equities have a little less firepower behind their record run. Bond investors appear to be losing confidence in the potential for big political changes. This could be a warning for equities.

This has turned into a "hold your nose and buy" market. The meltup has been gradual rather than a violent rally and that is actually the best kind. It is just hard to look at a chart that has been breaking out to new highs for several weeks and get excited about buying that chart.

Sometimes you have to "just do it" (Sorry Nike) and take the plunge. Just keep your position sizes manageable since we all know there will be a day of reckoning eventually.

Random Thoughts

The bullish sentiment rose by 5.4% to 38.5% and the highest since January 12th. Bearish sentiment remains only 1.5% below the highest level since the week before the election. The survey ends on Wednesday and that was before the late week softness.

Last week results

According to CFRA's Sam Stovall, since 1945 there have been 27 times when the S&P made positive gains in both January and February. The S&P went on to post gains for the full year in 27 of those 27 years with an average annual gain of 24%. Sam cautions with the "past performance is no guarantee of future results" warning.

February is typically the second worst month of the year for the S&P. The S&P has now seen 93 sessions without a 1% decline. The last time the S&P lost 1% in a single day was October 11th and the Cubs were in the World Series. Source

Cybersecurity is going to get a lot tougher this year. Security company FireEye said Iran and Russia were actively trying to penetrate government and military installations not only in the U.S. but also in Europe. The company said the new administration has created a lot of uncertainty that foreign adversaries are trying to unravel with their hacking.

Iran is not just intent on hacking to gain information. They were credited with destroying more than 10,000 computers in Saudi Arabia with the malware called Shamoon. If Iran were to go proactive against the U.S. there could be serious consequences. U.S. computers focus their protection on firewalls to prevent intrusions. There is little or no protection once a firewall is breached and that could lead to entire networks being taken down by Iranian malware.

FireEye said Russian hackers were very active around political institutions in Europe with a target of disrupting or influencing the coming elections. Russia is also planting false news and creating an "information operation" using social media trolls. Source


Enter passively and exit aggressively!

Jim Brown

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"In my many years I have come to a conclusion that one useless man is a shame, two is a law firm and three or more is a government."

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