The Dow has posted an 8-quarter winning streak for the first time in 20 years.

Weekly Statistics

Friday Statistics

The Dow is getting all the headlines for its performance for the quarter but it only gained 4.7% for the entire quarter. However, the Russell 2000 is up 9.9% just since the August 21st lows. The small caps are the real performers and helped boost sentiment so that the big cap indexes could reach those new highs.

All the major indexes, except for the Dow, closed at new highs on Friday. The Dow missed a new high by 7 points. This was the first time since 2013 that the market posted gains in September. The Dow gained 4.7%, S&P 3.8%, Nasdaq 5.7% and Russell 5.4%.

Friday's economic reports were ignored just like all the prior week's reports. Investors are not concerned with economics because we are growing very slowly and the numbers lack any enthusiasm. The hurricanes are another reason the economic numbers will be ignored until 2018. The next three months will have choppy data that does not relate to the normal trend and skewed by the storms.

Personal Income for August rose +0.2% after a revised +0.3% gain in July. Personal Spending declined -0.1% after a +0.2% rise in July. This was the first decline since January and analysts blamed it on the hurricanes.

The final revision for the September Consumer Sentiment showed a -1.7 point drop to 95.1. This is still strong but the first half excitement is fading. The present conditions component rose fractionally from 110.9 to 111.7. The expectations component declined from 87.7 to 84.4. Rising gasoline prices because of Hurricane Harvey were a big hit to current sentiment.

We have an active economic calendar for next week with the payroll reports, ISM reports and another 12 speeches from Fed officials including Janet Yellen on Wednesday. We learned on Friday that President Trump had interviewed four people for the job of Fed chairman and he said he would announce his decision in 2-3 weeks. Personally, I believe Trump's type A personality does not jive with Yellen's meek, laid back, nerdy economist style. He surrounds himself with strong individuals. He has met with Kevin Warsh, a former Fed governor, about the position and he would be a perfect candidate for Trump, assuming Gary Cohn did not rehabilitate his standing before the president made a decision.

Picture from CNBC

The payroll reports are expected to show declines as a result of the storms. Business stopped in Houston and Florida after the hurricanes hit. Many businesses were closed for weeks with quite a few still closed. Temporary cleanup jobs may inflate the numbers slightly but whatever the numbers are, they will be ignored.

There are very few earnings on tap for next week with Costco the highlight on Thursday. I expect Costco to beat expectations and raise guidance and end all the Amazon/Whole Foods worries.

Yum China and Constellation Brands also report on Thursday. The pace of earnings does not accelerate until the second week of October.

KB Homes (KBH) reported earnings of 51 cents that beat estimates for 47 cents. Revenue of $1.14 billion beat estimates for $1.12 billion. The builder said damage from Harvey and Irma was minimal but they expected closings to be delayed by the storms and the impact on closings of homes buyers were selling in order to buy a KBH home.

Lennar (LEN) reports earnings on Tuesday and they said the storms had delayed deliveries on about 700 homes from the current fiscal quarter into next quarter. Harvey impacted about 120 new orders and will delay 130 deliveries in Q4.

Tyson Foods (TSN) raised its guidance and announced a restructuring that includes layoffs. The company raised earnings guidance for fiscal 2017 from $4.95-$5.05 to $5.20-$5.30 per share. They guided for fiscal 2018 for earnings of $5.70-$5.85, which would be the 7th consecutive year of record earnings. They are cutting 450 jobs with most positions coming from within the corporate office. They will take a charge of $140-$150 million this year but they plan to save $1.2 billion over the next three years. They credited the increased 2017 earnings to strong beef segment performance.

Nearly two million people watched at least a portion of the Amazon live stream of Thursday Night Football. There was a pregame show with Amazon products advertised and there were some streaming issues including slow feeds and buffer issues. Obviously, Amazon has the capability to fix the bandwidth issues by next week. Analysts said it appeared to be a successful first test. Actual viewers averaged about 372,000 for the duration of the game. Amazon said there were viewers from 149 countries.

Whole Foods said customer card information had been stolen from its restaurants, taprooms and other venues in its stores but not from the regular grocery checkout process. The onsite services businesses use a different point of sale system than the regular store system. More than 40 Whole Foods stores sell beer on tap. None of the Amazon related systems were involved.

The WSJ said Amazon sold $1.6 million in Whole Foods branded products on the Amazon website in just the first month. They would have sold more but most products sold out.

The Whole Foods CEO, John Mackey, said Amazon saved them from the "whole paycheck" trap. That was the nickname for Whole Foods because of their high prices. Mackey said, "We were in that trap and I couldn't quite figure out how to get out of it." Within two weeks of the closing, prices fell 25% to 43% over a broad range of products. "I feel like Houdini now that I have escaped the trap." Bernstein said Amazon's next big push will be into the retail pharmacy industry. The analyst, Lance Williams, said Amazon is already in talks with distributors and could easily buy or partner with a pharmacy benefit manager (PBM) to drive volume growth. The addressable market for Amazon in this sector would be in the $300 billion range. Williams said it would be simple for Amazon to gain significant market share in the sector because an estimated 70% of subscriptions are already heading to online fulfillment. The risk is to CVS, WBA and RAD.

Jefferies said Amazon is going to control the toy market this holiday season. With Toys-R-Us in bankruptcy, Amazon is going to have less price competition. In the last two months of 2016 Amazon sold about $2 billion in toys compared to $4.66 billion by Toys-R-Us. Those numbers could reverse in 2017. Toys-R-Us owes more than $500 million to the top 20 toy makers. The odds are good they are not going to be getting more toys on credit.

Apple said it received a record number of national security requests for data in the first half of 2017. They received more than 13,250 requests on more than 9,000 accounts. They are prohibited from giving the exact numbers. In the same period in 2016, they received over 5,750 requests. Google said it received up to 500 requests affecting more than 1,000 accounts over the same period. These companies do not have to respond to the National Security Letters (NSLs) and requests from the Foreign Intelligence Surveillance Act (FISA) but they do because they do not want the headache of picking a fight with the government when the odds are good they would lose.

There are multiple reports that the iPhone 8 has a battery problem. When charging the batteries swell and push the fronts off the phone. On some of their phones, Apple uses Samsung batteries, the same company that made the exploding batteries on the Note 7. Apple has confirmed that it is looking into the problem.

Every day there are more headlines about slow sales of the iPhone 8. Several analysts have tried to decide just how bad it is and found out that sales are conforming almost exactly to Apple guidance. The guidance suggests sales of the 8 and X are expected to be about 50:50 and most buyers are waiting for the X before they decide which phone they are going to buy. That means November sales could be dramatic "if" Apple can deliver enough model X phones. Apple reports earnings on Oct 31st, just a few days after orders open for the model X and before the phone actually begins delivering. Guidance will be super critical.

Digitimes reported that Apple told its suppliers last week to ship only 40% of the original iPhone X components and hold the rest until released by Apple. Reportedly, Apple wants to see how many orders it receives on Oct 27th before moving forward with additional production.

Apple shares fell after the product announcement as expected. The 8.3% decline was a little more than the normal 4-6% because of the staggered delivery and worries over production problems. Normally the decline lasts about 3-4 weeks.

Susquehanna Financial said on Friday they believe the reports that British retailer Sports Direct is in talks to buy Finish Line are accurate. Sports Direct has been building a position which rose to 8% in mid August. Overall Susquehanna believes the company has acquired as much as 21% through "contracts for differences" or CFDs, which is a type of derivative, with ETX Capital acting as the counterparty. Sports Direct operates 468 stores in the UK and 289 internationally. Finish Line has 950 stores in US malls.

In late August, Finish Line adopted a poison pill intended to thwart a takeover attempt by Sports Direct. The UK retailer recently completed a US acquisition in June of 50 Bob's Stores and Eastern Mountain Sports adventure schools. Wedbush said in mid September the poison pill was to force conversation with Sports Direct and prevent an outright change of control through share accumulation. The pill becomes effective if anyone acquires more than 12.5% ownership in the shares. The board has the right to cancel the poison pill at any time as long as the trigger threshold has not been reached.

Zogenix (ZGNX) said an experimental treatment for a rare form of epilepsy met the goals in a late-stage study. The drug was being tested against a placebo in children having Dravet syndrome, a genetic dysfunction in the brain that leads to potentially fatal, long-lasting, fever-related seizures that do not respond to standard treatment. The drug ZX008 demonstrated statistically significant improvements including clinically meaningful reductions in seizure frequency and seizure free intervals. The number of seizures declined 63.9% to 72.4% in various groups and dosages. Shares spiked 172% on the news.

Albemarle (ALB) shares rose $4 after Chile said there was no reason not to approve the company's request to increase annual lithium production from 80,000 tonnes to 125,000 tonnes. ALB recently said it had discovered a new technology that would allow them to produce more lithium without using more brine from the Atacama salt flat in northern Chile. ALB said they would invest $1 billion in Chile over the next five years if the request were approved. The rapid advance in electric car production is creating high demand for lithium batteries.

Conn's (CONN) spiked 7% at the open after Oppenheimer raised their rating to outperform and set a $40 price target. The analyst said the outlook for their credit business had improved. The business is now under the direction of a new CEO, Norm Miller, and a freshly assembled team of senior leaders. The analyst said, "The market appears to meaningfully under appreciate the nearer and longer-term EPS power of a better functioning business model." Shares spiked 10% for the day.

Crude prices declined slightly after trading as high as $52.86 on Thursday. The $52 level is seen as strong resistance. There is no fundamental reason for the rise in prices other than miscellaneous headlines and speculation. US production rose to 9.547 million bpd and just shy of the 2015 peak at 9.61 million bpd.

The rise in crude prices prompted the activation of six additional oil rigs for the week ended on Friday. As long as prices remain over $50, we should see additional rigs added. The $50 level is the magic number. Cost to produce a barrel in the Permian, Eagle Ford and the SCOOP is between $24-$27. Prices over $50 allow producers a profit after allowing for transportation and discounts for the ultralight shale oil. It also allows them to hedge future production for a profit and continue to maintain an active drilling program in the months ahead.


Analyst Ryan Detrick pointed out that the S&P has only moved a daily average of 0.4% in September but hit a record high after being up 10% for the year. This has only happened 12 times since 1950 and 92% of the time the S&P gained 6% in Q4. That works out to 11 of those 12 times. Since Q4 is normally strong, it is even stronger when there is strength in September and throughout the year leading up to it. Detrick said the S&P could rally an additional 6% in Q4.

It has been 455 days since the S&P had a 5% decline. The average is twice a year. This is the fourth longest period in history without a 5% decline. That means there are a lot of investors still waiting on the sidelines for a buying opportunity. As evidenced by the Russell spike last week, a few portfolio managers gave up on waiting and started chasing stocks.

Friday was the nine-year anniversary of the worst point decline ever on the Dow after the House of Representatives rejected the $700 billion bailout plan in September 2008. The Dow declined -777 points on the news.

The changes in sentiment never seem to be what I expect. With the market setting new highs, bullish sentiment declined nearly 7%. This does end on Wednesday and the Dow was negative the first three days of the week and that was probably the cause for the sentiment decline. Next week's survey will be interesting.

Volatility is evaporating from the market on a daily basis. The VIX has now traded below 10 for 47 days in 2017. The 24-year closing low is 9.36 and we came close on Friday at 9.51.

One analyst explained it this way. In 2002, there were 110 ETFs. Today there are more than 1,800 ETFs. In 1995 the Vanguard S&P-500 ETF had $12 billion in assets. Today it is nearly $600 billion and takes in roughly $25 billion a month. More than 38% of the money invested in the market is in index ETFs. Investors have changed to a passive investment strategy rather than picking stocks. This is probably due in part to the aging of the baby boomer generation. They are moving their portfolios into ETFs and bonds rather than personal investments.

This does not mean volatility will not return. I am very confident we will see volatility back over 30 at some point in the future. Historically, periods of low volatility are always followed by periods of high volatility. Some event(s) arrive that rock investors and everyone runs to the exits at once. Numerous analysts have warned that the shift to ETF investing will eventually create higher volatility because a significant event could create a wave of selling and there will not be any buyers. We saw this in the flash crash several years ago when bids for ETFs disappeared and they went into free fall.

Fortunately, there are no expectations for this in the short term. There are no obvious events on the horizon that should produce significant volatility until early December when the budget battle and debt ceiling come back to haunt us.

The S&P surged to 2,519 at the close and well over the prior resistance at 2,508. This is a clear breakout and we could see additional gains as end of quarter retirement funds hit accounts on Monday. Friday's surge was probably window dressing for those quarter end statements.

Helping to keep investors in the market is the beginning of Q3 earnings two weeks from now. Everyone is placing their bets for the earnings cycle. Q3 is not going to be as strong as the rest of the year but it is still positive earnings growth. Earnings for the year are listed below. Q3 is expected to fade slightly but rebound in Q4.

Q1 15.3%
Q2 12.3%
Q3 6.2% est
Q4 12.2% est

If we were to actually get a tax reform package where corporate earnings were slashed, it would be very positive for the 2018 market. Every 1% decline in corporate taxes is expected to add $2 a year in S&P earnings. For 2017, the S&P-500 is expected to earn $131. For 2018 that rises to $140. The current PE ratio is 17.8 so that $9 rise is worth 160 additional S&P points in 2018. If taxes were cut by 5% that would add $10 to earnings and at the current PE ratio of 17.8 it would add another 178 points to the S&P. That is 338 points total. Obviously, the rise in the S&P based on earnings expectations is easy to calculate but nearly impossible to actually occur. There are far too many variables but 338 is a potential possibility based on pure math.

For next week, we just want to see the S&P add a few more points and stay above the red uptrend resistance line on the chart below.

The Dow has now posted eight quarters of consecutive gains and that has not happened in the last 20 years. That means we have another streak that will eventually fail. This is like watching a roulette ball fall on a red number for 8 consecutive spins. Everybody will be piling up money on black. I have seen a lot of money lost on that strategy. In Reno I saw 21 straight red numbers. Thousands and thousands of dollars were lost betting on black for the last 15 rolls. By the time black finally appeared, all those betters were broke. A roulette ball has no memory. Where it falls is truly up to chance.

In the market, investors have a memory. That means streaks matter and investors will be more cautious betting on a continued streak higher. Fortunately, a quarter is an eternity in the market and memories tend to fade as investors see the dollar signs increase. Investors already believe the market cannot decline and every miniscule dip is bought. Eventually reality will return.

The big cap tech stocks were positive on Friday but only the high dollar stocks (PCLN, GOOGL, AMZN) posted a decent gain. The move was broad based with Nasdaq advancing volume 1.2 billion to declining volume of 505 million shares. Advancers of 1,560 beat decliners of 1,179. It was nice to see the leadership broaden out but there is still plenty of room for improvement with nearly 1,200 decliners.

The index surged at the open to reach its intraday high about 1:PM and then held those gains the rest of the day. I firmly believe this was related to quarter end window dressing in an already positive market.

Resistance is well above at 6600-6650 with support well back at 6,350 and Monday's lows.

If there was ever a chart that demonstrated short covering and price chasing this is it. The big rebound from the August 21st lows barely stuttered when it hit resistance at 1,450 and when there was no selling, the shorts raced for the exits as portfolio managers chased prices as they window dressed for the end of the quarter. With big caps relatively weak since Monday it appears there was a lot of rotation underway with managers exiting those big cap stocks and loading up on small caps for the Q3 earnings and best six months of the year, which starts on Nov 1st.

This was the best monthly gain for the Russell since Nov 2011.

It may appear that any worries over profit taking or the impact of various headlines have disappeared. Unfortunately, that is not the case. In the news this weekend, we have North Korea moving fighters with anti-air missiles and extended range fuel tanks to the eastern coast where US planes flew a mission last week. With Kim saying war has been declared and we can shoot down US planes wherever we find them, this positioning of long-range fighters has ominous repercussions.

Secondly, it was reported on Friday that several long-range missiles have been moved from the development facility and have disappeared from satellite tracking. On October 10th, North Korea celebrates becoming a communist country and there are big celebrations and Kim likes to do something provocative just to prove he can. If he does not do it on the 10th then Oct 18th is a big celebration in China and he has done missile launches and bomb tests during that celebration to show he is not afraid of China.

If he just launches another missile, the market will ignore it. If he tries to shoot down US or South Korean planes, it will not be ignored. If by chance he follows through with his threat to launch an H-bomb over Japan and explode it in the Pacific, the market is likely to react badly. There are also reports that Russia and China are massing troops on the North Korean border.

There is always a geopolitical event somewhere in our future. The expected events will be ignored. It is the unexpected events that cause trouble in the market.

The fundamental market outlook is strong. Earnings are good, the economy is growing, the Fed is on hold until December and tax reform is in the wind. It may be in the wind until 2018 but at least the constant headlines will keep investors interested in the market.

Monday and Tuesday should be positive from inflows of end of quarter retirement cash. Yellen's speech on Wednesday could be a hiccup if she feels she needs to clarify her confusing comments in last Wednesday's speech where she was both hawkish, dovish and confused in the same speech.

With the Russell gaining 9.9% in just over a month, there is a very good chance we will see some profit taking. The Dow is lagging the rest of the market and until it breaks out again, there is always risk.

I would make a list of stocks you would like to buy at cheaper prices and set some money aside just in case a buying opportunity appears. The market does not need a reason to take profits. Sometimes it just appears. Until then, the trend is our friend.

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Enter passively and exit aggressively!

Jim Brown

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"The attitude that you have a parent is what your kids will learn from you, more than what you tell them. They do not remember what you try to teach them. They remember what you are."

Jim Henson