The Dow did not return to positive on Friday until a couple minutes after the close as the final trades were settled.

Weekly Statistics

Friday Statistics

The major indexes battled back from an early morning decline and the Dow was actually up 15 points at its high at 3:35 before fading into negative territory in the last 30 minutes. After closing with a 3-point loss, it slowly regained positive territory after the bell as the final trades were settled. Volume was 6.6 billion shares and the lightest day of the week but it was a Friday.

The Dow only gained 0.8% (+183) for the week despite the 303-point gain on Wednesday. Both small cap indexes actually lost ground for the week despite the big gains on Wednesday. This was definitely a large cap rally and I cannot decide if Friday was bullish or bearish. More on that later.

The only material economic report on Friday was the ISM Nonmanufacturing Index. The headline number rose slightly from 56.5 to 57.6 for February. That is the highest reading since October 2015. The sector has now shown a positive gain for 86 consecutive months. New orders rose from 58.6 to 61.2 and backorders from 48.0 to 52.0. Employment edged up slightly from 54.7 to 55.2. Respondents were very upbeat with one saying the improvement in business starting in December has been "dramatic."

It may take a few months for all the optimism to translate into real business development but that optimism definitely exists.

The economic calendar for next week is headlined by the job reports from ADP and the Bureau of Labor Statistics. I believe the numbers will be strong. One reason for my optimism is the collapse in weekly jobless claims. Last week there were only 223,000 claims and a new cyclical low and the lowest level in 41 years. The four-week moving average is 234,000 and also a new low for this economic cycle. There were some comments that the low claims were artificial because of the President's Day holiday skewing the numbers. However, claims have been falling for months (green line) and there were 5.5 million unfilled job openings in the January JOLTS report. There are plenty of available jobs. Secondarily, spring weather arrived early this year and people are already busy looking for spring/summer employment.

Moody's Chart

The ADP estimate is for a gain of 180,000 jobs compared to the 246,000 in January. The Nonfarm estimate is for 175,000 compared to the 227,000 jobs January. I will be very surprised if the actual numbers are not over 200,000 on both BUT, I am not an economist. I just read the various reports and form an opinion. We will see who is closest this week.

The big challenge for the market is the following week. The debt-ceiling deadline on Wednesday is the same day as the Fed meeting decision. The Fed is widely expected to hike rates. The CME Fedwatch tool tracking a March rate hike spiked from an 18% chance two weeks ago to an 80% chance at Friday's close. On Friday, Janet Yellen said as clear as possible that assuming the jobs report is not abnormally low the Fed will hike rates in March. The market did not even blink. That tells us that a hike is already priced in and the market believes it is due to improving economic conditions and optimism about the future.

The Fed is still targeting three hikes for 2017 and the targets for additional hikes are now May at 8%, June at 42%, July 50%, September 68%, November 71% and December 86%. Obviously all those numbers will change significantly after the March meeting and statement. More than likely the Fed will hike in June and December, economy permitting.

Last November, congress and the Obama administration avoided a debt crisis by postponing the debt-ceiling crisis until March 15th, 2017. Currently the spending limit has been "suspended" but that ends on the 15th. After that date, the government can use "extraordinary measures" to avoid defaulting and that can extend the crisis until late June or early July. However, that means halting spending on some programs, putting off payments for non-critical purposes, postponing projects and borrowing money from other accounts to keep operations going. If we go past the 15th without a new debt ceiling resolution, you can bet that every day will see more headlines about some program or department that has no funding. This would kill the current optimistic environment.

I believe we can expect the volume of debt ceiling headlines to increase daily starting next week. You may remember back in August 2011 when the S&P dropped 250 points in about two weeks when there was a fight over the debt ceiling and S&P cut the rating on U.S. debt. While I do not expect this kind of response this time around, this will be the first major congressional test for the new president. Given the current hostility between the democrats and republicans, the headlines are going to be ugly if there is not a quick resolution to the issue.

Costco (COST) was a big loser on Friday after they reported earnings of $1.24 compared to estimates for $1.36. Revenue of $29.13 billion rose 6% but missed estimates for $28.85 billion. Same store sales rose 3% but missed estimates for 3.6%.

The company announced it was raising membership fees by $5 to $60 effective June 1st with executive memberships rising by $10 to $120. Costco has about 35 million members with roughly half of them executive members. The 2% maximum reward associated with executive memberships will rise from $750 to $1000 a year. The minor increase in fees is not likely to cause material subscriber flight. Costco members are very loyal. The membership increase will produce another $260 million in annual revenue for Costco with no additional costs.

Unfortunately, the earnings miss caused an $8 drop in the stock price but it was up $36 since the election so this was minor profit taking. The stock closed at $170 and $167 should be decent support. I would look to be a buyer in that range. There is much stronger support at $162 so buy early and avoid the rush.

Autodesk (ADSK) reported a loss of 28 cents that beat estimates for a loss of 33 cents. Revenue of $478.8 million beat estimates for $474.1 million. The company is losing money because they are converting from a software sales model to a subscription model and that always causes a short fall in the first 12-24 months of the process but results in larger profits in the future. New subscriptions rose 26% to 1.09 million, up 227,000 from the same period in 2015.

The company guided for the current quarter for a loss of 21-27 cents on revenue of $460-$480 million. Analysts were expecting $503 million and a 13-cent loss. Shares declined $2 on the news. This stock has an $80-$82 buy point.

Big Lots (BIG) reported adjusted earnings of $2.26 compared to estimates for $2.22. Revenue of $1.58 billion just missed the estimate for $1.59 billion. Same store sales of 0.3% missed estimates for 1.1% but was offset by a smaller number of stores.

BIG guided for earnings of 95 cents to $1.05 for Q1 and analysts were expecting $1.01. For the year, they expect $3.95-$4.10 and analysts expected $4.45. They guided for same store sales in Q1 of 0% to 2% compared to estimates for 0.4%. Shares gained 4% on the news.

Snap Inc (SNAP) had a very strong IPO but the real market has not yet appeared. Shares were priced at $17 and rocketed to $29.44 on its second day of trading before fading back to $27. However, there is one key fact. You cannot short the stock until after the settlement date or 3 days after the IPO. The instant those shares are settled and available to borrow, the price could decline sharply.

Four analysts have already issued ratings on SnapChat. Pivotal Research initiated coverage with a sell rating and $10 price target. Nomura initiated with a reduce, same as sell, and a price target of $16. Aegis Capital initiated with a hold and $22 price target. Susquehanna initiated at neutral and price target of $22. You can bet there will be additional ratings next week as everybody jumps in on the overly hyped stock. There are close to a dozen reasons why analysts are negative. I will not list them all but the general idea is that Snap is another Twitter with a minimally growing user base that leans towards the teenager category and they are not going to draw a lot of advertisers.

Snap added 21 million users in Q2, 10 million in Q3 and only 5 million in Q4. The excitement on the messaging app is already fading.

Jim Cramer must have gotten some IPO shares because he says it is going to $100 soon. That is a clear sell signal.

If you need another reason, NBCUniversal, parent of CNBC, bought $500 million in the IPO and agreed to hold them at least a year. Why does NBC think SnapChat is worth $28 billion, the current value of the IPO? If you subtract the shares held by NBC there are only 150 million shares in the market and the volume for Thursday was 217 million and 148 million on Friday.

Deutsche Bank (DB) announced Friday afternoon they were considering a secondary offering for $8.5 billion in order to pay off some if its fines and problems. In December, DB agreed to pay the Dept of Justice $7.2 billion related to issuance of residential mortgage-backed securities or RMBS ahead of the financial crisis. The bank is also expected to raise $1.8 billion in a sale of other assets. Shares fell -4% on the news.

Bill Ackman is throwing in the towel on Chipotle (CMG). After the bell on Friday, Ackman's Pershing Square Capital Management filed a prospectus with the SEC to sell 2.88 million shares of Chipotle or 10% of the company. The prospectus said Pershing does not have immediate plans to sell the stake but reserves the right to do so at any time. Ackman disclosed his stake in September and said he was working with management to streamline the cost structure and boost shareholder value. Apparently, those efforts have hit a brick wall because the shares are the same price today as when Ackman announced the stake. Ackman has had some challenges lately with various investments and cash is probably tight. Since CMG shares are not responding to his efforts this would be an easy way to raise a lot of cash. That stake was worth $1.2 billion at Friday's close.

Walmart (WMT) said it paid $51 million to acquire outdoor retailer Moosejaw. They retail outdoor clothes and equipment online. This was the third acquisition in the last five months as it tries to broaden its brands and web presence to compete with Amazon. Moosejaw sells brands like North Face and Patagonia that Walmart does not sell. Acquiring Moosejaw gives Walmart an immediate entry into that space for next winter. Walmart recently acquired for $4 billion and ShoeBuy for $70 million. Walmart now offers free two-day shipping for online purchases of more than $35. Their e-commerce sales rose 20.6% in Q4.

Important earnings for next week are concentrated on Thursday with Sears, Staples and Ultra Cosmetics. This is the last active week of the Q4 earnings cycle.

With 98% of the S&P companies reported the blended earnings growth for Q4 is 4.9% and revenue growth was also 4.9%. More than 65% of companied beat on earnings and 53% beat on revenue. The average percentage of companies beating earnings estimates is 71% so this cycle was slightly weaker.

As of Friday, 74 S&P companies have issued negative guidance and 30 have issued positive guidance. The forward PE is now 17.9 compared to the 14.4 10-year average.

Crude prices fell to $52.57 on Thursday after Russian production numbers for February showed 11.11 mbpd and only 100,000 bpd below the October levels. Russia had pledged to cut 300,000 bpd and claimed to cut 118,000 bpd in January even though actual production for the month was higher than December.

OPEC continued to claim compliance with the promised cuts was 94%, which would be a record high for any promised cut, ever. However, only three OPEC countries have actually complied and those three including Saudi Arabia, Kuwait and the UAE, actually cut more than promised to make up for the noncompliant members.

The non-OPEC producers including Russia committed to cut by 558,000 bpd but the OPEC compliance committee said compliance in January was roughly 48% and that rose to just over 60% in February.

Active oil rigs rose by 7 to 609 but active gas rigs declined -5 to 146. The surge in active rigs appears to be slowing since prices are no longer rising on the promise of OPEC production cuts. U.S. production rose to 9.032 mbpd and the highest level since March 18th. U.S. inventories rose to a new record high at 520.2 million barrels.




I was talking with a reader by email this weekend about the never-ending rally. I promised him that when I went bullish in the newsletter that would be a capitulation event and the rally would end. For the last several weeks, I have been expecting the nonexistent dip we could buy. That dip continues to be elusive and the day I change that outlook to go all in, that would be the day a correction appears. We just need to remain wary that a dip will eventually appear. I believe it will be a buying opportunity so whether we continue to rise or dip first, the outcome should be the same long term.

On Wednesday, the S&P gained 32 points or 1.37% on 8.22 billion shares and the highest volume since December 16th. That leap was powered by a whopping $8.0 billion in inflows into the S&P-500 ETF (SPY) according to Bank of America. That was the largest cash inflow since December 19th, 2014.

Bank of America's Savita Subramanian raised her price target on the S&P from 2,300 to 2,450 saying there is increasing likelihood the bull market is entering a terminal phase. "We are entering a typical end-of-bull-market rally where fundamentals take a back seat to sentiment and technicals." She said the fair value for the S&P today would be 2,230 and well under the 2,383 close on Friday. She pointed out that historically, the last two years of a bull market in stocks returned a minimum of 30%. The current bull market is approaching its 8th anniversary on March 9th and is currently the second longest ever. When the S&P reaches 2,467 it will become the third largest bull market gain ever.

Wells Capital Management's chief investment strategist, Jim Paulsen, said the S&P is likely to rise to 2,600 then fall back to 2,200 before closing the year at 2,350.

Morgan Stanley's Andy Chase is rated as the number one market strategist by Barron's. He believes the market will gain 50% over the next two years, which would put the S&P at 3,600. I want some of whatever he is smoking.

The S&P has now gone 96 days without a 1% decline. On Saturday, the S&P celebrated its 60th anniversary. It was launched 60 years ago on March 4th, 1957. Today there is more than $2.4 trillion indexed to the S&P and no other index even comes close. Standard & Poors combined the Industrials, Transportation, Utility and Financial indexes in 1957 to create the S&P-500.

Only a third of the analysts listed below expect the S&P to move higher from here.

Year End 2017 Forecasts:

2,275 Fundstrat, Tom Lee
2,280 Wells Fargo, Scott Wren
2,300 Credit Suisse, Andrew Garthwaite
2,300 Goldman Sachs, David Kostin
2,300 Morgan Stanley, Adam Parker
2,300 UBS, Julian Emanual
2,325 Jefferies, Sean Darby
2,325 Citigroup, Tobias Levkovich
2,335 CFRA, Sam Stoval
2,340 Canaccord, Tony Dwyer
2,350 BMO, Brian Belski
2,350 Deutsche Bank, David Bianco
2,350 BNY Mellon, Leo Grohowski
2,350 Wells Capital Management, Jim Paulsen
2,400 JPMorgan, Dubravko Lakos-Bujas
2,400 Barclays, Jonathan Glionna
2,400 Societe Generale, Roland Kaloyan
2,424 Piper Jaffray, Craig Johnson
2,450 Bank of America, Savita Subramanian
2,450 Oppenheimer, John Stoltzfus
2,500 RBC Capital Markets, Jonathan Golub
2,600 Deutsche Bank, Binky Chadha

The S&P spent most of the day in negative territory on Friday and only managed to gain 1 point. Given the 32-point gain on Wednesday and the 14-point loss on Thursday, I am having trouble deciding if the minor gain on Friday was a positive or a negative for the outlook. The index is holding over half of its Wednesday gains but it was not able to rebound from the Thursday decline.

My first impulse is that the weak Friday showing is a sign of things to come. However, the dip buyers are alive and well but do not normally jump right in on a Friday because of the weekend event risk. The answer to my dilemma requires another day of trading. Monday could be a significant day for market direction. If the S&P begins to move up again it would be a good sign. If there is an early dip that is bought that lifts the index back to a decent gain before the close, that would also be a good sign. Any decline that is not bought would produce a negative outlook for the week.

Initial support is now 2,375 followed by 2,360. The support at 2,360 should be decent because we traded at that level for six days prior to the speech. Minor dips were immediately bought.

The Dow remains significantly overbought and the very minor gain at the close was probably financial engineering by some large trader. That minor gain only took a 50-cent addition to any stock to lift the index from negative to positive ahead of the weekend.

The Dow will be under pressure as those four weeks of gains are digested. The 20,750 level is initial support and then there is a lot of air before we begin to see support again in the 19,800-20,100 range.

Only two stocks had moves over $1 on Friday and most were just trading around the flat line most of the day. With earnings over and the president's speech now distant history, the optimism that lifted the Dow to this level could begin to fade ahead of a rate hike and the debt ceiling battle.

The Nasdaq Composite is more tightly clustered at the top than the Dow or S&P. There is not as much separation on the chart between the last three days and the prior five days. This suggests some of the overbought conditions are bleeding off the index and the 5,800 level should remain decent support. The uptrend support is also converging if the index can remain over 5,800 for another week or two.

The small cap indexes remain the weakest link. The S&P-600 did not actually breakout to a new high even though it closed a few pennies over the prior high. The support at 846 is now critical. A breakdown there targets 820 and a break below 820 would be ugly. The critical level on the Russell 2000 is 1,388.

We constantly try to find excuses for why a market goes up or down. Unfortunately, the market does not need an excuse. It can rise unexpectedly at any point and the biggest declines are always the ones nobody expects. Sentiment as measured by Investors Intelligence is at a 30 year high at 63.1% and the highest level since 1987. A reading above 55 is normally considered a sell signal. The term irrational exuberance is being used almost daily to describe the current market rally.

Obviously, markets can remain bullish far longer than analysts expect and then turn on a dime once everyone converts to the bullish mindset. We cannot predict where this market will go other than to caution that an eventual correction will find a lot of unbelievers buying the dip over and over and giving back a lot of their bullish gains.

Enjoy the rally but refrain from being overly long. There will eventually be a dip that is not bought. Until then, buy the dip. I know that sounds like a contradiction of terms but we are better off adding risk on dips than at new highs. When the real dip appears, we will lose less than those chasing prices higher.

Random Thoughts

This was a very interesting week for sentiment. The survey ends on Wednesday and that was the day of the market blowout over 21,000 and 2,400 on the S&P. Instead of seeing sentiment explode higher, we saw the opposite. The bullish sentiment declined slightly but bearish sentiment rose 3.3%. That restores my faith in crowd sourcing to some extent that retail traders believe the market may be overbought and are exercising at least a little caution.

Last week results

More than 45,000 voters in France have signed a petition urging Barack Obama to run for president. They are putting up posters all over France that translate to "Yes, we can." Supporters hope to have one million signatures by March 15th. While Obama is wildly popular in France, he is not French and cannot be elected. The supporters are doing this as a joke and a way to signal they want change in the government.

On another Obama topic, it was announced last week that Penguin Random House has signed a joint book deal with the president and Michelle Obama for $65 million. Each will pen a separate book about their time as president and first lady. Bill Clinton received $15 million and George Bush received $10 million. Who says politics does not pay.

In the commentary above I listed Bank of America's S&P target as 2,450 from analyst Savita Subramanian. Michael Hartnett, chief investment strategist for BofA, has called the Trump rally the "Icarus Trade." Icarus was the son of labyrinth-designer Daedalus, who constructed a pair of feathered wings held together by wax for his son. In the fable, Icarus flew too close to the sun and the wax melted sending him crashing back to earth.

In this modern day fable, Hartnett has pegged S&P 2,500 as the peak for the Icarus market. Hartnett believes the market will continue to rise in the first half of 2017 to that 2,500 level before crashing back to earth in the second half as the reality of getting policy changes approved by congress comes back to haunt investors.

Hartnett also believes not only the Fed but also central banks around the world will begin to scale back on stimulus. The bond market has not yet priced in this eventuality and once that pricing begins, it will be negative for the equity markets.

The Fed has only hiked rates twice in the last ten years. On March 15th, they will hike rates for the second time in three months. If the market suddenly begins to expect a hike every quarter, we could see a change in sentiment. That would mean the Fed funds rate could rise to 2% by 2018. Remember, the Fed is continuing to reinvest the funds when a treasury matures. Once they halt that reinvestment and begin to let the balance sheet decline that will be another hurdle for the markets. Basically, the Fed is maintaining the QE levels from prior years by keeping their balance sheet at $4.5 trillion. Once they begin to let that run off, interest rates could take another turn higher.

The "sell in May and go away" trade could be significant in 2017.


Enter passively and exit aggressively!

Jim Brown

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"A government which robs Peter to pay Paul can always depend on the support of Paul."

George Bernard Shaw


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