The Dow was the clear winner for the week and the Nasdaq was the sinner.
The Dow gained over 250 points for the second consecutive week and has now closed up for 9 consecutive days with 8 consecutive record highs. Every day saw a different group of stocks leading the charge while the others rested. This was textbook rotation but this scenario cannot last forever. Streaks of consecutive anything are always broken and the August weakness typically begins in the second week of the month.
The Nasdaq did finish positive on Friday thanks to some weekend short covering but the index is still poised for disaster. The Nasdaq is holding over support at 6,335 but the pattern of lower highs and daily support tests suggests there could be a failure soon and the 6,100 level will be the next target.
The FAANG stocks were leading to the downside with the exception of Apple. Amazon lost -3.2% for the week, Facebook -2.2%, Netflix -2.6%, Alphabet/Google -1.9% and Apple gained 4.1% on their earnings.
The markets moved up at the open after the Nonfarm Payrolls for July came in above estimates. The headline number was a gain of 209,000 compared to estimates for 183,000 and 231,000 in June. The prior two months were revised with a net gain of only 2,000. Private employment rose 205,000 and the unemployment rate dropped one tenth to 4.3% (6.981 million) and a 16-year low. The larger U6 unemployment rate was unchanged at 8.6% (13.962 million).
Goods producing industries gained 22,000 jobs, manufacturing employment rose 16,000, service industries rose 187,000. Professional services rose 49,000, education and healthcare 54,000, leisure and hospitality gained 62,000. The government sector posted only a minor gain of 4,000 after a big jump of 37,000 in June. Average hourly earnings rose 0.3%. Another 349,000 people joined the workforce after a big addition of 361,000 in June. The labor force participation rate rose one tenth to 62.9%. The separate household survey showed a gain of 345,000 jobs.
With job growth averaging just under 200,000 per month and about twice the number required to absorb new immigrants and graduates, the country is on pace for sub 4.0% unemployment in 2018.
The strong jobs numbers will allow the Fed to remain on its path for policy normalization. They are more than likely going to announce the beginning of QE tapering and the reduction of the balance sheet. There is currently only a 1.4% chance of a rate hike at the next meeting in September. That jumps to only a 48% chance of a hike at the December meeting.
The trade deficit declined slightly from the -$46.4 billion in May to -$43.6 billion in June. Exports rose $2.4 billion and imports declined -$400 million. Automotive imports rose 2.9% after a 4.9% rise in May. Exports of food and beverages rose 5.9%. This is a lagging report for June and it was ignored.
The Dollar rebounded from a 12-month low on the strength of the jobs report. The declining dollar was good for the market because it would raise earnings for companies doing business overseas. The losses for currency conversion would decline and U.S. products would be cheaper overseas. This is more than likely a temporary bounce.
Treasuries sold off on expectations for higher rates as a result of Fed policy changes.
The calendar for next week is devoid of any market moving events. The Producer and Consumer price indexes will be the most watched of the group because of the inflation considerations. We are still three weeks away from the Fed's Jackson Hole conference and Yellen's keynote speech where she is likely to set the stage for the QE taper announcement at the September FOMC meeting. That speech could be a market mover depending on the tone and terminology but it is too soon to worry about it.
The earnings calendar will again take precedence but the number of high profile reporters is dwindling fast. During the coming week only 32 S&P 500 companies report and one Dow component (DIS). More than 420 S&P companies have reported. The current projection for Q2 earnings is a rise of 12.0%. Of those 420 companies, 72.9% have beaten on earnings and 68.5% have beaten on revenue. That is above the long-term averages of 64% and 56% respectively. There have been 44 guidance warnings and 33 positive guidance upgrades. The 12 month forward PE is currently 17.9 and slightly elevated. The Shiller cyclically adjusted PE or CAPE 10 is now 30.29 and the second highest level in history.
The highlights for next week are Priceline, Nvidia and Jack in the Box. Also of interest are Blue Apron and Snap Inc. They are both poorly performing IPOs for 2017 and earnings could be ugly. This is the first quarterly earnings for Blue Apron since coming public in late June. Snap has reported once since they went public in March and it was not good.
Blue Apron announced on Friday they were cutting 1,270 jobs only a month after their IPO. There was an initial furor in the market over how a company could go public as a high growth enterprise and then cut 20% of their staff a month later. However, it was later learned they were closing a plant in New Jersey at Jersey City and consolidating into a new fulfillment center in Linden, NJ about 15 miles away. Of the 1,270 jobs being eliminated, about 800 workers have agreed to move to the Linden location leaving only 470 job losses. They employ about 5,100 in total. Shares fell 6.3% on the news. They have fallen nearly 50% from their IPO high at $11.
Back on July 27th, Automatic Data Processing (ADP) shares spiked from $103 to $121 over three days after news broke that Bill Ackman was adding a stake. On Friday, news broke that Ackman had accumulated more than 8% and was still adding to that stake as of Friday morning. He said he was going to ask for 5 board seats, out of the existing 10 and would push the company to cut costs and improve returns. He also wants to oust the current CEO, Carlos Rodriquez. Later in the day, Ackman said he was willing to work with current management OR a new external CEO. Ackman must nominate his slate of directors by August 10th or wait until the 2018 shareholder meeting.
Shares declined because ADP came out in full support of Rodriquez with a strong anti-Ackman position. Ackman said he had accumulated the stake using derivatives (options) and that means ADP can cause him a lot of grief if they can delay any actions for 12-18 months.
Cigna (CI) reported earnings of $2.91 that rose 47% and beat estimates for $2.48. Revenue of $10.3 billion rose 4% and beat estimates for $9.98 billion. Company medical enrollments rose from 15.1 million to 15.7 million. Their company benefit programs provided the majority of their earnings growth. They guided for the full year to earnings of $9.75-$10.05, up from $9.35-$9.85. The company said it had $7-$14 billion in capital it could use in 2017 on mergers and acquisitions, including Medicare Advantage for older people. Shares declined -$3.50 despite the good earnings and guidance.
Medicare and Medicaid provider WellCare Health Plans (WCG) reported earnings of $2.52 compared to estimates for $2.23. Revenue of $4.31 billion beat estimates for $4.27 billion. They guided for the full year for earnings of $6.75-$6.95. Earnings were boosted by higher enrollments in those health programs. Memberships in the government backed Medicaid plans increased 16.6% to 2.83 million as of June 1st. Membership in WellCare's Medicare business rose 46% and 10.3% in their Medicare prescription drug plans. The company paid out 86.8% of every dollar received for Medicaid and 86.4% for Medicare. Despite the good earnings, shares crashed $9.31.
Yelp (YELP) shares spiked 28% after the company said it was selling its Eat24 business to Grubhub (GRUB) for $287.5 million in cash. They also said they would use $200 million of the proceeds to buy back stock. In addition, Yelp is partnering with Grubhub in a long-term strategic partnership which would integrate online ordering from restaurants on Grubhub's website.
Yelp reported earnings of 9 cents on a 20% rise in revenue to $209 million. Analysts were expecting a loss of 8 cents and revenue of $205 million. They guided for Q3 to revenue of $217-$222 million and analysts were expecting $219.67 million.
A company rarely mentioned in the news, Aerojet Rocketdyne (AJRD), reported earnings of 32 cents that beat estimates for 14 cents. Revenue of $459.6 million beat estimates for $426.5 million. Aerojet makes the booster motors for the THAAD missile interceptor and the Exoatmospheric Kill Vehicle used in the latest interception. They were also selected by Boeing as the main propulsion provider for the new XS-1 experimental space plane. Order backlogs are now $2.1 billion. Shares spiked 14% on the earnings.
Arista Networks (ANET) shares spiked 19.4% on better than expected earnings. The company reported earnings of $1.34 compared to estimates for 95 cents. Revenue rose 50.8% to $405 million and analysts were expecting $361 million. They guided for the current quarter for revenue of $405-$420 million and analysts expected $378 million. Their gross profit margin rose to 64.4%.
Crude prices were flat for the week and held just under $50. Declining inventories, falling rig counts and the Saudi sleight of hand on cutting exports by 1.0 mmbpd, kept prices from falling. The $50 level is likely to be a top since we only have four weeks left in the summer driving season. Oil demand will fall off a cliff the week after Labor Day and inventories will begin to rebuild again.
Active rigs appear to be peaking, which matched what Halliburton said a couple weeks ago about a rig plateau unless prices rose well above $50 a barrel. Active onshore rigs declined -4 last week with oil down -1 and gas -3. However, the big news was the giant 7-rig drop in the offshore category to 17 rigs. I do not have a historical chart on offshore rigs but that is the lowest since the same week in 2016.
Three weeks ago on July 20th, the S&P closed at 2,476 and that is where it closed on Friday as well. While the Dow is benefitting from spikes in individual stocks, the S&P is suffering from the early stages of post earnings depression. There is no trend other than sideways consolidation but there has not been any serious attempt at profit taking either. The low volume, averaging about 6.3 billion shares for the week, is evenly divided with daily gains and losses of 3-5 points. There is no conviction by the sellers but traders are buying every minor dip. They are just not chasing prices higher.
Everyone appears to be waiting to see if the typical August weakness is going to appear next week. The Aug/Sep weakness normally begins in the second week of August. However, the market has completely ignored every seasonal trend in 2017. With the lack of sellers on the S&P, this may be another departure from normal.
The S&P has been down in August on 5 of the last 7 years. The S&P has only risen in August in 5 of the last 20 years. The historical odds are pretty convincing for a decline but there is never a guarantee.
Current support is around 2,465 with resistance solid at 2,483. That is an 18-point range and the S&P has used every bit of it over the last three weeks but closed right in the middle on Friday.
You cannot tell by looking at the chart but the S&P closed exactly 1 point from a new high. On July 26th, the close was 2,477.83. The August 2nd close was 2,477.57 and Friday's close was 2,476.83. Despite the sideways trend, the S&P continues to hold right below breakout levels.
The Dow benefitted from a surge in Goldman Sachs to add 39 points to the index with Home Depot and JP Morgan providing the assist. There are 30 components in the Dow and over the last two weeks, we have seen 2-3 rotate to the top of the leader board every day. It is not the same ones back to back but a clear rotation pattern that could continue. The Dow has posted 9 consecutive days of gains and 8 consecutive record highs. Strings will be broken but that does not mean the break will instantly drop 500 points.
The index is severely overbought but you may remember back in February the index closed up for 14 out of 18 days and those 4 declining days were only minimal declines. If the August weakness does not appear, the Dow could break its streak with a minor decline and continue higher. While I do not expect that, it is entirely possible.
The Nasdaq Composite is the weakest big cap index. The tech index is poised right on the edge of a 250-point cliff. If the current support at 6,335-6,350 breaks on a closing basis, there could be a significant drop to the 6,100 level. The FAANG stocks are already weak but they could weaken even further. If an index rallies on the backs of a few stocks on the way up, those same stocks can take it lower just as easily. Priceline, Nvidia and Jack in the Box report this week and they could be critical for the daily sentiment and movement.
The Russell 2000 retraced -3.3% since the prior Wednesday high at 1,452 and rebounded only 0.5% on Friday. That was a lackluster performance and powered by the financials with the sector up 1% intraday on Friday. Critical support is 1,400 and the index dipped to 1,402 on Thursday. If the index falls below that level it would be a major blow to market sentiment. I am surprised the 3% decline has not had a larger impact on the market already.
Unless you owned one of a dozen Dow stocks, you probably had a frustrating week. With the other indexes either flat or declining, the majority of normal stocks were flat to down. I cannot tell you that is going to change next week. If the typical August weakness arrives on schedule, then we could be having a different discussion next weekend. However, if the Dow leaders continue to rotate and the S&P closes at a new high, there could be another round of short covering and price chasing.
What I can tell you is that there is no reason to jump into the market. Be patient and see if a new trend develops. Buying stocks just because one index is in rally mode is not a strategy. Watch the Nasdaq for a support break and watch the S&P to see if it picks a vertical direction.
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There was a big change last week despite a tame market. Bearish sentiment shot up nearly 8% and neutral sentiment crashed -9.4%. The bulls managed to convert a couple percent to their side but the direction was clearly bearish. 64% still believe the market is not going higher.
Bank of America chief investment strategist, Michael Hartnett, is dead set on letting everyone know of his market call. It seems like every other week for the last six weeks he has warned of an impending market correction but the market continues to move higher. To be fair, he is not expecting it until the September-October period. Unfortunately, in his best imitation of Chicken Little, he is losing credibility with each refresh of the warning. Obviously, if he turns out to be right, he will get the credit and he can say for years that he made the big call when the market was going higher.
Hartnett believes the markets are going to correct and "correct quiet meaningfully." He said his warning about an "Icarus"-like run up in stocks this year and then a letdown appears ready to play out. He bases this on the bank's Bull and Bear sentiment indicator. It is currently flashing a 7.6 on a scale of 0-10 where 10 is extremely bullish. Reaching the 8 level triggers a sell call for risk assets. He said the indicator has hit the sell signal 11 times since 2002. The last time there was a buy signal was February 2016 when it went to zero. That was the end of the last correction. The indicator is made up of 18 components.
He warns this will not be an "average correction" but something a little more meaningful. He is not calling for a new bear market, because there is no recession in sight. He expects a 10% to 15% decline in equities.
He is the first to admit that nobody believes him and his warning. "Everybody has gone to Goldilocks mode rather than Humpty Dumpty." He warned a change in QE or monetary policy could be the trigger.
Paul Singer, CEO of Elliott Management, said passive investing is "destructive to the growth-creating and consensus-building prospects of free market capitalism." Global ETFs now have more than $1 trillion more in assets than hedge funds. Approximately $2.2 trillion is indexed to the S&P-500 alone. Not counting index funds there are $4.17 trillion in ETFs. It should be noted that Elliott manages $32.8 billion.
"In a passive investing world, small shareholders have little-to-no voice and no realistic possibility of banding together, while the biggest shareholders have no (repeat, no) skin in the game so long as the money manager does not underperform the index."
In 2016, passive funds saw inflows of $504.8 billion while actively managed funds saw outflows of $340.1 billion. We are seeing similar money trends in 2017.
The S&P has gone for 72 sessions without a gain of 1% or more. That is the longest streak since early 2007. The CBOE's Russell Rhoads, said this is the least volatile market since the 1960s. The trend for the last 18 months has been declining volatility. There will be an eventual eruption.
Enter passively and exit aggressively!
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