After Friday's morning dip the market never strayed very far from the flat line except for a short sell program at 1:PM. It was a very quiet option expiration.

Weekly Statistics

Friday Statistics

The market open was calm for an expiration Friday and the earnings were mostly positive. The constant chatter was more about the French elections than the saber rattling around North Korea. President Trump and Steve Mnuchin made separate comments about releasing their new healthcare proposal and the tax reform proposal next week. Those comments lifted the Dow off its morning lows but the ever-present weekend event risk kept investors on the sideline. The most volatility came from a sell program about 1:PM. It could have been a headline reaction instead but I could not find anything at that time. The Dow fell nearly 70 points in just over 5 minutes.

The only economic report that mattered was the Existing Home Sales for March. The headline number rose from 5.47 million to 5.71 million homes at an annualized rate. This was the fastest rate of sales since the 5.75 million pace in July 2008. That was a 4.4% increase from February and 5.9% increase from the year ago period.

The median single-family home price fell -0.5% to $245,300 and the price for a condo declined -0.4% to $231,690. Those prices are still up +6.8% from year ago levels. The supply of homes on the market was flat at 3.8 months. Sales in the Northeast rose 10.1%, Midwest 9.2%, South 3.4% and sales fell in the West by -1.6%. Listings for single-family homes rose slightly to 1.61 million thanks to the arrival of spring. Average days on the market for a home have fallen to record lows due to a shortage of inventory and more than half the homes coming to market are sold in less than 30 days.

We have a very busy calendar for next week with four regional Fed reports. There are two home sales reports and the first GDP release for Q1. The GDP report is not expected to be good. The official forecast is for +0.8% growth but the Atlanta Fed real time GDPNow is currently forecasting only 0.5% growth. This is the lowest forecast since the Fed began tracking it back in early February.

If the actual GDP is close to the GDPNow, the market may suddenly decide it is too optimistic for the current conditions. The Q1 GDP is the result of the prior administration because Trump policies and directives have either not yet been enacted or it is too soon for any impact. It will be Q1-2018 before there is any meaningful policy impact.

With the PE of the S&P-500 at 18.0, you really have to be optimistic with a 0.5% GDP. There could be a reality check if the actual number is low.

The Fed meets again the following week to consider rates. Currently there is only a 4.3% chance of a rate hike at that meeting. However, they could reveal more of their plans for reducing their QE balance sheet and that could have more of a market impact than another rate hike.

The French elections on Sunday should be good for a 10% move in the European markets. The direction depends on who wins. This is a four-person race and the top two finishers will compete head to head in another election in June. The most current polls have Le Pen at 22% and Macron at 23% with Fillon and Melenchon at less than 20% each. There is one other candidate at 8% but Hamon has no chance of winning.

The terrorist attack in Paris last week should give an edge to Le Pen because of her anti immigration, anti terrorist platform.

Citigroup believes Le Pen and Macron will be the top two in this election. In the runoff in June, they expect Macron to win with 65% of the vote and Le Pen 35%. If Sunday's election plays out like Citigroup expects, they believe the European markets will rise 5% to 10% over the coming months on the expectation for Macron to be the runoff winner. However, should Le Pen post a much stronger showing on Sunday it could be enough to cause chaos in the market since she wants to exit the euro and go back to the franc.

The ideal scenario for the U.S. markets would be a strong showing by Macron that suggests he will win the runoff. The chart below is before the terrorist attack.

FiveThirtyEight Chart

Lastly, the government funding battle is starting to heat up with democrats talking about poison pills in the resolution that will be deal killers. The stage is set for a confrontation but there is talk of implementing a short-term continuing resolution for a week or two to give lawmakers time to work out a solution. That is the right attitude. Stay away from the potential government shutdown as long as possible but eventually there will be a showdown. The farther away from the current earnings cycle the better.

The earnings cycle heats up next week with 194 S&P companies reporting. There are 12 Dow components reporting. The current forecast for Q1 is for earnings growth of 11.2%. Of the 95 S&P companies that have already reported, 75.8% have beaten estimates for earnings. That is higher than the average of 71% over the prior four quarters. Only 62.1% of the companies have beaten on revenue but that is still above the recent average of 53%. So far, in Q1, there have been 83 earnings warnings and 33 companies have issued positive guidance. Over the next two weeks, 325 S&P companies will report. When you add the 95 already reported a whopping 420 S&P companies will have reported in only three weeks. According to StarMine, companies expected to beat earnings estimates next week include NOC, FTI, AMZN, AMT, AAL, AJG, EQIX, CNC, XL, PEP and NEM.

Thursday is especially jam packed with tech stocks with INTC, MSFT, AMZN, GOOGL, SBUX, UPS and WDC.

On Friday, Dow component GE got the ball rolling with earnings of 21 cents that beat estimates for 17 cents. Revenue declined -1% to $27.66 billion but still beat estimates for $26.37 billion. The energy division continued to drag on results and they said they were on track to merge that division with Baker Hughes (BHI) on schedule around the middle of 2017. The company guided for full year earnings of $1.60-$1.70 per share. Analysts expected $1.63.

GE said they closed the acquisition of LM Wind Power for $1.65 billion. The company makes rotor blades for wind turbines.

CEO Jeffrey Immelt said global growth was accelerating while the U.S. continued to improve. During his trips overseas, he said China, Southeast Asia, Latin America and Africa were all stronger than in 2016. Shares fell -2.4% on the report.

Honeywell (HON) reported earnings of $1.66 compared to estimates for $1.62. Revenue declined slightly to $9.492 billion but beat estimates for $9.328 billion. The company guided for the full year for earnings of $6.90-$7.10 per share, a 5-cent increase on the low side. They said the "commercial aftermarket within aerospace and the global distribution business within home and building technologies remained strong." The demand for performance materials and technologies were boosted by "low-global warming products." Shares rebounded $3 to a dead stop at resistance at $127.

Stanley Black & Decker (SWK) reported earnings of $1.29 that beat estimates for $1.19. Revenue rose 5% to $2.806 billion and topped estimates for 2.75 billion. That was even more impressive since they took a 1% hit from currency translation and 2% from divestitures. They paid dividends of $86.7 million and repurchased $17.3 million in shares. They guided for the full year to earnings of $7.08-$7.28, up from prior guidance of $6.98-$7.18. Shares spiked $5 on the news.

SunTrust Banks (STI) reported earnings of 87 cents compared to estimates of 84 cents. Adjusted revenue of $2.21 billion rose 7% but barely beat estimates for $2.20 billion. Deposits averaged $158.9 billion with the average loan balance $143.7 billion. Provision for credit losses rose 18% to $119 million. Shares declined slightly on the news.

McDonalds (MCD) coverage was initiated at BMO Capital with an outperform rating and a $153 price target. The analyst said "McDonalds was a premium brand in the early stages of mounting a comeback with a favorable risk/reward profile." Shifting to fresh, never frozen, beef for their Quarter Pounder was a major step and the first of many changes ahead. The analyst also initiated coverage on Wendy's with an outperform rating saying the company had a "defensible" premium position following structural enhancements.

Domino's Pizza (DPZ) rebounded from its recent funk after Guggenheim rated the stock a buy, saying the company has scale, disciplined decision making and an excellent franchise network. The pizza company has had a rough few weeks after a report by M Science warned the company's domestic sales growth would be "well below consensus for Q1." M Science would not respond to analyst questions on why they are projecting a miss. Shares of DPZ fell -$13 on the news in early April.

Wal-Mart (WMT) has declared war on the grocery sector. The retailer is slashing prices in its grocery dept with a goal of being 15% cheaper than everyone else at least 80% of the time. Barclay's checked prices on identical items at competing chains and found Wal-Mart was 4% cheaper than Kroger because the smaller chain is trying to compete with Wal-Mart's cuts to retain market share. Wal-Mart was cheaper on 74% of the items checked. Wal-Mart was 5.6% cheaper on nonperishable and frozen items. Kroger's "fresh products," currently not on sale, were 15% more expensive than Wal-Mart. Kroger runs constant sales on some fresh items as loss leaders to convince shoppers their prices are cheaper overall. Barclays said Kroger was a better operator but Wal-Mart's scale made them almost unbeatable. This grocery price war is great for consumers and Kroger shares are suffering while Wal-Mart shares are rising.

This is another reason why analysts believe Kroger should buy Whole Foods Market with 460 stores. It would give Kroger access to millions of shoppers who are not specifically price conscious. Kroger already owns a dozen chains with different brands and adding Whole Foods would be simple. Currently Whole Foods is suffering from lower grocery prices in general rather than a price war with Wal-Mart on the lowest level products. A can of beans may cost 65 cents at Wal-Mart, 75 cents at Kroger and 85 cents at Whole Foods. Whole Foods profits would benefit from the greater scale of Kroger's operation.

Whole Foods shares are rising on the almost daily commentary about somebody making an offer. A couple weeks ago, it was revealed that Amazon had considered buying the company to jump-start their entry into the grocery business. Just knowing that Amazon was thinking about it should scare Kroger into action to keep Amazon from acquiring that foothold.

Bebe Stores (BEBE) announced on Friday it would liquidate all merchandise and close all of its stores by the end of May. They are selling the merchandise, furnishings, fixtures and equipment. They will take a $20 million charge from deferred rents on the closed stores and employee terminations. The company had 180 stores on Decc-31st. Previously they had said they planned to close only 25 stores. There have been more than 3,000 announced retail store closings in 2017.

BEBE did a 1 for 10 reverse split in December to avoid being delisted.

Oil prices imploded and fell more than 6% for the week. The $2 decline on Wednesday was probably due more to futures expiration on Thursday. Everyone hoping for a big jump in prices from the EIA inventory report on Wednesday morning, were forced to bail out when that spike did not come. There was almost no movement in the futures on Thursday but volume rose again on Friday with more than 665,000 contracts trading compared to a daily average of 525,000 contracts.

The CFTC showed speculative long positions as of April 18th rose to 355,077 contracts and the highest level in more than a month.

Another factor in the price decline was news from Clipperdata that there was more waterborne imports arriving from the Middle East than in recent months. There is more waterborne crude today than there was before the OPEC production cuts were enacted in January. OPEC can say it has cut production but the tanker shipments tell the tale. A country like Saudi Arabia with tens of millions of barrels in storage, can brag they cut production but continue exporting more oil with the extra coming out of storage.

There are multiple views today on whether OPEC and Russia will extend the cuts for another six months. Russia has refused to answer the question more than once on whether they would honor any extension. Nordic Bank believes OPEC will end the cuts because a spike in prices over $55 would benefit the U.S. shale drillers and cause another production spike.

Producers added another 10 rigs last week to raise the total to 857. This was the 14th consecutive week of activations with 367 rigs activated since October 1st. U.S. production has increased 220,000 bpd in just the last eight weeks. Analysts expect that rate to grow significantly over the next six months as the roughly 5,000 drilled by uncompleted wells in inventory on January 1st are put on production. Completing those wells is the fastest way for producers to generate additional production and income.


The markets traded sideways for the week on low volume with a minor increase in volatility. The Dow closed at a two-month low on Wednesday before a major short squeeze lifted it back into consolidation territory on Thursday. Despite the rebound the Dow remains under resistance at 20,600 and the chart remains bearish.

The reasons for the bearish breakdown was a combination of earnings from several high profile Dow components and a new round of event risk from North Korea, France and impending budget battle in Washington. There is always a reason for a decline or at least commentators will blame something. They forget the market does not need a reason to take profits.

I wrote over the prior two weeks that the market normally declines immediately after April 15th as funds are extracted to pay the tax bills. That deadline was extended to April 18th and the market declined for two days. Coincidence?

The markets appear to be poised for a big move. North Korea is a paper tiger and I do not apply any credence to their warning for a "super-mighty preemptive nuclear strike." Some people may be concerned over the headlines but Little Kim has suddenly found himself in a lot of trouble. China quit accepting his coal shipments and suddenly his gas stations are out of gas thanks to a lack of imports. China has gotten his attention and they can continue squeezing the noose tighter since they supply 90% of the country's oil imports.

The risk for Monday is a stronger than expected showing in the French election by Marion Le Pen. Saturday headlines are reporting a sudden surge in the polls after the Paris attack. She is very strong on restricting immigration and the attack has given voters another reason to pick her. Forbes said on Saturday if Le Pen captures 30% or more of the vote, she could go on to win the runoff in June. Goldman Sachs said Le Pen was in the "pole position" and they were short French bond futures as a precaution. As of Saturday morning, more than 30% of French voters had not yet decided on their candidate. The election carries a 5% to 10% downside risk for the European markets, which would carry over into the U.S. markets.

The local event risk is the budget battle. Democrats are making headlines this weekend saying they will shut down the government if the republicans add funding for several items or fail to add funding for the democrat's desires. This could be a rocky week if the two parties cannot pass a temporary continuing resolution to avoid a shutdown.

An ideal outcome for the U.S. markets could be for Macron to emerge the vote leader in France and for lawmakers to pass a CR first thing on Monday to remove all the drama from the process. Unfortunately, I am not expecting either event to occur.

The Dow has minor support at 20,400 where it bounced on Thursday. The index closed under resistance at 20,600 with 20,750 the next level higher. I am using a line chart this week to better show the Dow direction. I believe investors get distracted by the triple digit moves in both directions and forget the overall direction is still down.

The S&P rebounded from 2,330 on Monday and moved slowly higher in choppy trading the rest of the week. The index gained 19 points but had to fight for every point. Thursday's close was over critical resistance at 2,350 but the index slipped fractionally below that again at Friday's close.

This has been a big cap rally. The top ten companies in the S&P have accounted for more than 20% of the index gains. Roughly, 130 companies are trading below their 200-day average and more than 70 are within a few percentage points from their lows.

The big caps in the Dow were mostly responsible for the rough week in the S&P with the multiple earnings disappointments dragging the rest of the S&P lower. This coming week will see 194 S&P companies report. The majority are expected to meet or beat estimates. This should help provide support in an otherwise rocky environment.

Despite the rebound, the chart is still bearish. That rebound could be a good start for a move higher but until that happens and the index closes over 2,370, the chart will still be bearish.

The Nasdaq big caps are still controlling the broader market. The Nasdaq Composite closed at a new high on Thursday and gave back only 6 points on Friday. Thursday will be tech earnings day with multiple major companies reporting. That expectation for good earnings could hold the Nasdaq at the highs. Obviously, a general market meltdown as the result of those headlines listed above would negate those expectations.

The Russell 2000 was strong on Friday despite the weakness of the big caps. The Russell declined -15 points intraday then rebounded strongly to regain 10 of those points to close with just a minor loss. The Russell was very strong on Thursday with a 17-point gain to put the index very close to strong resistance at 1,388. If the Russell were to break through that level it would be a major boost to market sentiment.

I have already beaten this event risk horse to death so I will not repeat it. The Russell rebound suggests investors are not as worried as it would appear from the Dow and S&P weakness. The Russell and the Nasdaq are strong and ANY positive news over the next several days could send us significantly higher.

If there were a Brexit like dip as a result of the French election, it would be a buying opportunity. As long as President Trump and Steve Mnuchin continue to hype the "massive" tax reform program coming, the market will have a bullish bias. If they announce the details and the democrats and conservative republicans denounce it, like they did the health care reform, then we could see the beginning of the "sell in May and go away" cycle for 2017. Mnuchin said getting tax reform passed before the August recess was not realistic and others have said they expect it in the first half of 2018. Once investors see this reality, we could see market optimism fade quickly.

Random Thoughts

Individual investors are playing a sort of musical chairs in their sentiment position. The details have not changed much over the last three weeks with the bulls gaining a little the prior week and the bears lost a little. Those gains/losses reversed this week but the changes were not material. We still have 74.3% that believe the market is not going higher.

Last week results

Google, one of the largest internet advertisers on the planet has decided to include an ad blocker in its Chrome browser. I know what you are thinking. They will probably allow you to block all the ads except for the ones they provide. This is not true because they would be opening themselves up to the largest class action suit ever.

Google has talked with the Coalition for Better Ads, a group representing the online advertising industry. The group includes Facebook, News corp, Unilever, Procter & Gamble, etc. The current plan would be to adhere to industry standards, which are still being determined, and would be friendly to both advertisers and consumers. With standards including size of the ad, speed to load, content restrictions, etc, Google is trying to improve the browsing experience rather than eliminate ads.

I view thousands of web pages a week tracking news articles on potential stocks. Some websites are nearly unusable without an ad blocker. I have found that Adblock Plus, (Google for the free download) is by far the best. It will not block all the ads but it gets most of them. For instance, the page containing the story on Google had 14 ads blocked by Adblock. Now all I need is a reliable SPAM blocker for my Thunderbird email client.

Researchers have made some progress in locating Malaysian flight MH370 in the Indian Ocean. Some months ago, a wing part appeared on La Reunion island along with two other misc pieces. Researchers plotted the ocean currents and put an identical wing part in the ocean near Hobart, Tasmania. They tracked this wing part to the same destination. Being able to accurately track and plot the path and backdate the original finding suggests the plane is farther north than the old search zone that covered 46,000 square miles. The new target area is about 10,000 square miles and somewhat north of the original search zone.

The original search for the plane was the most expensive ever and led by the Australian Navy with help from dozens of other volunteer ships.

On four days last week Russian Tu-95 Bear, nuclear capable bombers and/or Ilyushin IL-38 spy planes flew into the U.S. ADIZ around Alaska. Three times the planes were met by Air Force F-22 fighters and CF-18 Hornets. Once, an E-3 Sentry AWACS plane was launched to make sure there were no other Russian planes trying to sneak in at lower altitudes while the air controllers were distracted with the bigger targets.

Earlier in the week, a Russian news report claimed the armed forces had an electronic warfare weapon that could render U.S. planes, ships and satellites completely ineffective. I reported a couple years ago that a Russian SU-24 had disabled the electronic systems on the USS Donald Cook in the Black Sea in April 2014. Reportedly, the Russian system codenamed "Khibiny" disabled the state of the art Aegis warfare system on the destroyer and allowed the unarmed SU-24 to make 12 simulated missile attack runs against the destroyer before leaving the scene with another SU-24 that was watching the event from a distance.

They also claimed they have an electronic dome they can erect instantly over bases and forces to make them invisible from radar and protect them from attack.

We have to remember that the Russian media is controlled by the state and this could be a total propaganda effort to give enemies (U.S.) a reason to rethink any conflict.

A G2 class geomagnetic storm is scheduled to hit the earth on Mon/Tue after a major crack (coronal hole) opened on the sun and caused a large solar flare. The fissure on the sun is currently pointed in our direction and there could be more storms to follow. Officials are warning of potential temporary blackouts, magnetic interference in radio and TV and disruptions of satellites. This is expected to be a moderate storm. The ratings scale goes from G1 to G5. The ones we need to worry about are the X class CME events. Those happen on average 4 times every 11 years and fortunately they are seldom pointed at the earth.

The black spot is the massive crack in the Sun as of Saturday.


Enter passively and exit aggressively!

Jim Brown

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"Those who were seen dancing were thought to be insane by those who could not hear the music."



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