The big cap and small caps indexes posted another day of minor declines but the Nasdaq bucked the trend.

Weekly Statistics

Friday Statistics

Four of the FAANG stocks posted gains but Google closed fractionally lower. The Nasdaq was helped by a big $13 gain in Amazon after Mark Cuban said the stock was significantly undervalued and still in "startup" status. He believes Amazon has so many efforts underway where they have less than 5% of the market that the stock could be significantly higher in the coming years. That gain helped improve Nasdaq sentiment and lift Facebook, Apple and Netflix. The Nasdaq Composite only gained 5 points but the Nasdaq 100 big cap index gained 12. Chip stocks and biotechs also contributed to the gain that pushed the $NDX to a new closing high.

The small cap Russell 2000 closed back below critical support at 1,388 because Friday was "ranking" day for the Russell indexes. Every June the Russell company rebalances their indexes and moves stocks in, out and around in their classifications. Currently there are only 2,935 stocks in the Russell 3000 because of companies that merged with others over the last year. Russell Rebalance Info

In the middle of May, Russell calculates their ranking of all stocks by market cap. They will provide a list in early June of which stocks will be leaving the indexes and which stocks will be added. This published list allows traders to game the system and jump in front of fund managers that will be selling stocks that are leaving the index and buying new stocks at the close on June 23rd.

The movement in individual stocks leaving the index can be significant. There is roughly $12.5 trillion dollars indexed to the various Russell indexes. About $9.7 trillion is indexed to active funds. Source Obviously all of that money is not indexed to the Russell 2000 but there is a significant amount.

The normal rebalancing process depresses the Russell indexes on the notification dates because traders are selling the stocks that are leaving the indexes and buying the stocks that will be added. The indexes only benefit from half of that scenario since buying stocks not currently in the index does not impact the index but selling current index components does have an impact.

Friday was ranking day at the close. Since the methodology of the reconstitution is well known, portfolio managers and hedge funds can do their own ranking based on the market cap at the close on Thursday. This allows them to speculate on which companies will be added and dropped before the Russell lists are actually published. Many have already calculated their own list and stocks were bought and sold on Friday in anticipation of the official ranking.

Russell will release the preliminary list of official changes on June 9th and update it again on June 16th. The actual rebalance will be at the close on Friday June 23rd. More than 15 billion shares traded on the June 24th rebalance last year.

Historically, the rebalance has weighed on the Russell indexes around the critical dates. However, this is a six-week period and volatility around the critical dates will be higher but over the entire six weeks the impact is negligible but it is normally negative. I suspect there was an impact on the Russell 2000 on Friday because the 0.53% decline was more than triple the percentages on the other indexes.

The economic events were positive on Friday but the retail earnings missed estimates. The Retail Sales for April rose +0.4% compared to estimates for +0.6% and a minor +0.1% gain in February. Sales excluding autos were +0.3%. The strongest areas were electronics at +1.3%, building materials +1.2% and non-store retailers at +1.4%. The weakest sectors were home furnishings -0.5%, food and beverages -0.3%, clothing -0.5% and general merchandise at -0.5%. Overall, retail sales are up 4.5% over the same period in 2016.

The Consumer Price Index (CPI) for April rose +0.2% after a -0.3% decline in March. The headline number matched analyst estimates. Food rose +0.2%, goods fell -0.2% and services rose +0.1%. On a year over year basis, the CPI is up 2.2% and in line with Fed expectations.

Consumer sentiment for May rose slightly from 97.0 to 97.7 in the first release. That is only slightly below the 12 year high of 98.5 in January. The present conditions component was flat at 112.7 and the expectations component rose slightly from 87.0 to 88.1.

Business inventories for March rose +0.2% and the smallest gain since October but it was higher than estimates for +0.1%. Retail inventories lead the gains at +0.49% compared to wholesalers at +0.18% and a drop of -0.01% by manufacturers.

The slightly better than expected inventories plus the rise in retail sales helped lift the Atlanta Fed real time GDPNow forecast for Q2 to 3.6% growth.

The economic calendar for next week is highlighted by the Philly Fed Manufacturing Survey on Thursday. This is considered a proxy for the national ISM manufacturing in two weeks. The new home construction on Tuesday would be the next most important with a sharp increase expected.

ArcelorMittal (MT) is doing a reverse 1:3 stock split next Friday.

Ball Corp (BLL) is splitting 2:1 on Tuesday. They increased their dividend by 54% to 20 cents. They have a post split buyback authorization for 20 million shares. They have 175 million shares outstanding and will have 350 million post split.

Ball is an interesting company. They make aluminum cans for beverages and consumer products. They make billions of soda cans, aerosol paint cans, etc. They also develop spacecraft, satellites, radio systems and defense systems. If there was ever a company that needed to do a spinoff to separate it is Ball. Unfortunately, the chart is terrible because the diverse businesses have choppy earnings patterns.

Advertising platform company The Trade Desk (TTD) reported earnings of 18 cents on revenue of $53.4 million. Analysts were expecting a 3-cent loss and revenue of $43.4 million. Shares exploded higher for a 30% gain.

JC Penny (JCP) reported adjusted earnings of 6 cents but that included sales of $125 million in assets. Analysts were expecting a loss of 21 cents but that did not include the asset sales. Revenue of $2.7 billion missed estimates for $2.8 billion. Same store sales declined -3.5% compared to estimates for a -0.7% decline. The company reaffirmed full year guidance for earnings of 40-65 cents and comp sales in a range of -1% to +1%. Analysts were expecting 48 cents.

The Penny's earnings came the day after Nordstrom (JWN) reported an -0.8% drop in same store sales. Earnings of 37 cents beat estimates for 26 cents and revenue of $3.3 billion matched estimates. Shares of Nordstrom fell almost as much as Penny's.

The retail sector is struggling. Online retailers are making inroads into the normal bricks and mortar sector and it is slowly taking its toll. U.S. retailers caused their own problems over the last decade as they overbuilt with a mall at every major intersection. The U.S. has four times the retail space per capita by square foot as Europe and six times the space in Japan. Chains like Macy's, Kohl's, Penny's, Sears and other big box retailers competed to be the anchors in every mall. The smaller stores inside the malls are struggling even worse. With the malls dying, there have been more than a dozen retail chain bankruptcies and analysts believe there will be a dozen more.

Macy's (M) is in the midst of a restructuring and closing of 68 non-performing stores. Analysts claim they need to close 100 more. They reported earnings earlier in the week of 24 cents that missed estimates for 36 cents. Same store sales declined -5.2% and revenue fell -7.5%.

Sears Holdings (SHLD) shares plunged after CEO Eddie Lampert went off on the media and blamed them for the decline in Sears sales. He complained in multiple forums that the appearance of a slow spiral into bankruptcy was because of media coverage. Consumers read a headline about the impending bankruptcy and they mentally drop Sears as a potential stopping point in their shopping trip. Personally, I think it is because they have been to a Sears recently and saw there was no inventory and no employees and found no reason to return. I have posted pictures of empty stores multiple times over the last year. Sears shares fell -20% over two days on the rant from Lampert.

There are more retailers reporting earnings next week with BOOT, DKS, HD, SPLS, TJX, URBN, AEO, LB, SMRT, TGT, BKE, BONT, ROST, SSI, WMT and FL. This is the heaviest week for retailers. If we look at the results from the prior two weeks, the overall expectations are negative. However, Dicks, Home Depot, Target and Walmart should perform the best.

Other highlights include Jack in the Box, Alibaba and Dow components include HD, CSCO and WMT.

More than 450 S&P companies have reported earnings. The average growth rate is 14.7%. More than 75% have beaten estimates and above the long-term average of 64% and the short-term (4 quarters) average of 71%. More than 63% have beaten on revenue compared to the 59% and 53% averages. For Q2, 59 companies have issued negative guidance and 30 have issued positive guidance. Only 19 S&P companies report earnings next week and 39 over the next two weeks. The earnings cycle is rapidly drawing to a close.

Apple (AAPL) sold $7 billion in new debt to bring their total debt to more than $98 billion. Apple borrows money at roughly the same interest rate as the 10-year treasury so they do not have to transfer cash from overseas and pay a 35% or higher tax rate. If Apple sells a phone in the UK, it pays income taxes in the UK on that profit. If Apple transfers the money to the U.S. it has to pay income taxes again at a much higher rate. Apple and other companies with billions overseas are hoping President Trump can get a repatriation tax cut if a bill ever makes it to a vote. That is no longer expected in 2017. The interest they will pay on the debt is far less than they would pay in taxes. Apple is using the money for buybacks and other corporate purposes.

On a side note, we reached $700 billion in 2017 corporate debt issuance and the fastest year on record to that number. Intel and Amgen also did debt offerings recently to avoid bringing cash back to the states.

Apple shares gained another $2 on Friday after Goldman Sachs said the iPhone 8 will definitely cost over $1000 and could "drive meaningful upside in revenue over the next 12 months." Goldman raised their price target from $164 to $170. The analyst said the base models will probably start at $999 and $1,099 and go up from there. That compares to $749 as the base price of the 128GB iPhone 7. The average selling price (ASP) of the phones is going to explode higher and with expected full year sales of 243 million phones the revenue is going to rocket higher. Analysts believe the actual costs to manufacture the phone will rise $79 to $104 each. That is $35 for the new OLED screen and $19-$24 for faster memory and various increments for other components.

Sprint and Softbank have started merger talks with T-Mobile (TMUS). Softbank is the majority owner of Sprint and Deutsche Telekom owns 64% of T-Mobile. Telecom mergers have been barred for almost a year by the FCC as they conducted $20 billion in wireless spectrum auctions. The ban specified that merger talks could begin after April 27th. Sprint tried to buy T-Mobile in 2014 but the deal was blocked. Since then T-Mobile's market cap has risen to $55 billion and $23 billion more than Sprint.

Despite having the lowest rates in the U.S., Sprint is having trouble adding customers. They are currently fourth place in market share. With AT&T trying to buy Time Warner for $85 billion, Sprint believes it could also receive offers from other cable companies like Charter or Comcast.

General Electric (GE) was downgraded by Deutsche Bank from hold to sell. The analyst cut the price target from $28 to $24 citing weak earnings and weak cash flow. "GE's weak cash flow has become worse in recent quarters. On an operating basis, excluding GE Capital dividends and proceeds from business and asset divestitures, GE does not appear to be generating sufficient cash flow to sustain its operations." Despite revenue of $27.7 billion in Q1, the company was -$1.6 billion cash flow negative. The company is trying to sell its consumer lighting business, GE Water and GE Industrial Solutions. Combined they generate about $5 billion in annual revenue. Shares fell 2% to a 52-week low at $28.

Boeing (BA) said it had resumed flights of the 737 MAX and it had received approval from regulatory agencies. The flights had been halted after a potential problem was found on LEAP 18 engines with a part manufactured by CFM International, a joint venture of GE and France's Safran. CFM said potential flaws in the forging of a disc inside the engine could have led to cracks. The company said they expected to have the problem parts replaced within "a few weeks." There was no problem with any operational aircraft and planes without the LEAP 18 engines were still flying. Boeing expects to make its first commercial delivery of a 737 MAX later this month.

Wal-Mart (WMT) said it acquired, a retailer that specializes in outdoor apparel and camping gear. Moosejaw carried brands including Woolrich, Marmont, Camelbak, Patagonia, North Face and 400 others as well as its own Moosejaw brand of apparel. Wal-Mart purchased for $3 billion last August and for $70 million in December. Wal-Mart is racing to grab market share from Amazon and recently changed their online store to free two-day shipping for orders over $35. Wal-Mart's ecommerce sales rose 20.6% in the last quarter. Wal-Mart reports earnings this week.

Crude prices rebounded nicely for the week to close at $48 after the EIA reported a -5.3 million-barrel decline in inventories. This was actually the fifth consecutive weekly decline but also the largest. OPEC meets on May 25th to discuss future production cuts and expectations are growing for an extension and possible an increase in the cuts.

The blue line is the current oil inventory level and the gray band is the five-year average range. Clearly, we have been above that range for a long time but the direction is positive. We could be back in the five-year range in the next several weeks. This would be positive for prices.

This is a long-term chart of crude inventories and you can see how levels spiked from the surge in shale production just two years ago. It would take a major event to put the inventories back into the "normal" range. Our best hope of that happening is the roughly 1.5 million bpd annual increase in demand. If OPEC could maintain limits on production for a couple years the normal depletion rate plus the normal demand increase, would solve the problem.


All the major indexes traded down for the week with the exception of the Nasdaq. The week started good with the S&P trading over 2,400 on Tue/Wed and even closing at 2,399.63 and a new high on Wednesday. Unfortunately, the Dow was not cooperating and the steady weakness that started after Tuesday's open, dragged the big cap indexes lower.

The S&P dipped to 2,394 on Thursday Morning and the low for the week. The dip was bought but the index could not make it back to positive territory. Friday's decline was due to weekend event risk and the loss was minimal and on the lowest volume since April 17th at 6.06 billion shares. The market decline over the last three days was not a sell off. It was a lack of interest. We are lacking any material catalysts and we have plenty of political diversions.

Current support on the S&P is just above 2,380 and there are no indications of material selling pressure.

Apple is doing an excellent job of supporting the Dow and the Nasdaq. McDonalds has continued to make new highs with Home Depot and Visa not far behind.

The Dow chart is bearish. The index closed below support at 20,900 and dipped below secondary support intraday on Tuesday at 20,800. The Dow needs a catalyst. With HD, CSCO and WMT reporting earnings this week we could have some catalysts but they may not all be positive. The Dow is suffering from post earnings depression since the majority of its components have already reported.

Friday's close was critical. It was only 4 points under support so for our purposes it held. However, any further declines will begin to target a gap fill from the two short squeeze gaps at the end of April. The Dow has been moving slowly sideways in a very narrow trading range since that short squeeze. The bias has changed to bearish and it will turn more so if support at 20,900 is violated any further.

The Nasdaq indexes remain the most bullish. The Composite made a new high on Wednesday and closed only 8 points lower on Friday. The Nasdaq 100 big cap index closed at a new high on Friday by 5 points. Facebook, Apple, Amazon and Netflix all contributed but Google was a fractional laggard. Chip stocks and biotechs also provided support with the Biotech Index up +38 points or +1.07% in a weak market.

As you can tell by the Nasdaq 100 chart below, the tech stocks are very overextended and they will eventually rest. Whether that is this week or even this month, nobody knows but it will happen.

Both small cap indexes broke down with a three-week low on the S&P-600. This could be related to the Russell rebalance but that would be speculation. The steep declines over the last two days suggest portfolio managers are taking cash off the table.

Event risk has returned but not in the form that we would have expected. On Monday, Washington was talking about healthcare and tax reform and then on Tuesday Comey was fired. The manner it was done, the conflicting stories and excuses, the slander of Comey and the threat of secret recordings, all combined to cause a violent uproar in the media. Healthcare and tax reform have been forgotten and the witch-hunt for Russian collusion has now taken on a new importance for the democrats.

Trump had the right to fire Comey. Reasons were unimportant because he is appointed at the will of the president. It was all the other headlines that made it important. Investors were laser focused on tax reform and healthcare. Now that they have been pushed onto the back burner, the potential dates have slid significantly. One prominent senator said we will be lucky to get healthcare in 2017, if at all, and tax reform may have to wait until after the midterm elections.

This is eventual death for the stock market. All the optimism built into the post election rally was fueled by tax reform, deregulation and infrastructure spending. Healthcare was of lesser importance to the market. Once investors understand that everything has been pushed back by months instead of days, it will be market negative.

Everyone was previously targeting getting healthcare reform signed into law before the August recess. That is only 39 working days away for the House and there is no chance of even getting a bill voted on before then in the Senate, much less spending a couple months battling it out in the conference committee and the amended version making its way to both the House and Senate again. Most investors do not understand this 39-day calendar. As realization dawns, it may not be pretty.

Right now, nobody wants to sell and pay taxes on profits if those taxes are going to be cheaper several months from now. If the market begins to decline and tax reform has shifted to 2018, there could be a mass exodus from equities. The yield on the ten-year treasury closed at the low for the week on Friday as investors began to realize the market could be in jeopardy.

Adding fuel to the event risk fire, North Korea tested a new ballistic missile on Saturday. The missile flew 435 miles and was considered successful. This will put pressure on President Trump to do something. This could give also him an opportunity to move the focus off the Comey problem and back on to the geopolitical scene. However, any action against North Korea has significant risk because of Seoul being only 37 miles from the border with 20,000 pieces of artillery aimed in its direction.

With the MACD sell signal only a day or two away on the best six months of the year strategy, I think this could be a pivotal week in the market. It is also option expiration and once those options expire, there is nothing to keep funds in the related equity positions. I would recommend caution in adding long positions.

Random Thoughts

Cautious bulls jumped back on the fence despite new highs in the market on Tue/Wed. The survey closes on Wednesday so the late week declines are not in the numbers. It was interesting that bearish sentiment did not budge. Neutral sentiment is now 6% over the average and most of that came from last week.

Last week results

The founder of the world's largest hedge fund said the "magnitude of the next downturn will be epic." Bridgewater's Ray Dalio said the global economy is "at or near its best" with few, if any major risks on the horizon. However, "we fear that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, will likely produce much greater social and political conflict than currently exists."

He said, after 8 years of rebound the global growth is stabilizing. However, central bankers have stimulated this long-term growth by keeping interest rates at abnormally low levels. Meanwhile, President Trump has vowed to implement an array of policies that will stoke fresh animal spirits in the U.S. economy and equity investors worldwide appear to have pinned their hopes on those pro business policies coming to fruition.

Dalio warned that debt is building in the system and pension and healthcare entitlements are slowly rising to squeeze the economy and the market.

"The US is in a period of exceptional political uncertainty as the new administration's policies continue to take shape." He believes equity investors may have 1-2 years of additional gains before the music stops.


I am sure everyone has heard about the ransom ware outbreak in 74 countries. The malware is triggered by an email click then runs rampant on office networks to infect every computer it can find. Your files are encrypted and you have to pay a ransom in Bitcoin to get them released. After 3 days the price doubles.

An enterprising 22-yr old malware research tech in the UK stumbled on to the "kill switch" on Saturday morning. While dissecting the malware code they discovered a call to a nonexistent website. If the call to the website came back unsuccessful, the malware was executed on the PC and the propagation begun. If the website responded present, the code self destructed and that attack ended. The tech quickly registered the nonexistent website and pointed it to a "sinkhole" server and the outbreak immediately stopped. It took several hours for the existence of the website to propagate across the global Internet but once it did, the outbreak was over. Our servers were attacked continuously from late Friday afternoon until the attack ended late Saturday. We have good firewalls so we could watch the attacks occur even though they were being blocked. Millions of people owe that technician a thank you.

Source - MalwareTech Blog

40 years ago in a galaxy far, far away, a new science fantasy film that cost a whopping $10 million to make, was opening at the box office. Star Wars opened at the box office on May 25th, 1977. I can still remember waiting in line to see the picture and being amazed by the opening scene with the Star Cruiser soaring over the top of the screen for what seemed like forever.

Star Wars had the best opening weekend since Jaws at $2.6 million from a puny 43 theaters. By the end of 1977 the film had grossed $197 million on a $10 million budget. By today's standards that is small. Guardian's of the Galaxy 2 opened last week at $175.9 million and almost the full year's take for Star Wars. Of course you would have to convert 1977 dollars to 2017 dollars to make a fair comparison. ($197 million in 1977 equals $788 million today) Star Wars has only made $775 million in total but it spawned billions of dollars of prequels, sequels and associated product sales.

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Enter passively and exit aggressively!

Jim Brown

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"Wise men speak because they have something to say; fools because they have to say something."



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