The Dow has officially moved into irrational exuberance mode and 12 Dow components report earnings this week.

Weekly Statistics

Friday Statistics

Since the 21,787 close on September 8th, the Dow has gained 1,541 points or 7% for an average daily gain of 51.37 points over 30 trading days. The Dow is a perfect example of price chasing.

Any portfolio manager holding cash at the end of the summer and expecting to pick up some bargains in the normal Sept/Oct volatility was left waiting at the station because the train has already left. Typically, the market begins to move higher after October option expiration because the volatility has passed. We never had the volatility and now the race is on to get positioned for the "normal" end of year rally. Since none of the normal seasonal trends played out as expected this year, you have to wonder if the normal end of year rally will appear on schedule. November 1st is the start of the best six-month period of the year. Will that trend appear on schedule?

There is nothing to suggest the rally will fade. A budget was passed in the Senate, similar to the one passed in the House and now they would go to a conference committee to be merged. However, House leadership is signaling they do not want to go through the conference committee process and will vote on the Senate version next week. If that is passed, it will go directly to the president for signature and tax reform will immediately take center stage. However, there is one hurdle left. That is the debt ceiling, which expires on December 8th. Since they passed a budget, you would think they would pass a debt ceiling extension to go along with it. Of course, that would be rational thought and Washington is rarely rational.

Part of the lifting power on Friday was the news the House would take up the Senate bill and cut weeks out of the process. If they can pass a debt ceiling bill at the same time it would remove all the political hurdles in front of the market. That would allow them to concentrate solely on the tax reform package and investors would begin to hyperventilate at the possibilities.

This all means the markets could continue to post gains, but not likely as vertical as the Dow's gains last week. There is always the potential for some unforeseen event but all the events we can see this weekend are rapidly diminishing in their capability to halt the market.

Even the economic reports continue to surprise and create their own headline flow. The big news was the record low jobless claims on Thursday of 222,000. While that was the lowest level since March 31st, 1973, there was an external reason. Power and communications outages caused by Irma and Maria are still disrupting the claims processing in Puerto Rico and the Virgin Islands. Infrastructure has been so damaged that people are more concerned with getting food and water than walking miles to file a claim. The prior 4-week moving average of 258,000 is more representative of reality.

Existing home sales for September rose slightly from 5.35 million to 5.39 million. The number was boosted by a flurry of home buying in the Houston area where rental corporations and fix/flip companies are buying up flooded homes by the hundreds to repair and either sell or rent until property values return. Prices have been reported as low as 40 cents on the dollar compared to pre hurricane levels. Those homes with 6-8 feet of water damage have to be completely gutted and repaired. The floodwaters had large amounts of human wastewater from flooded treatment plants, animal wastes, dead animals, chemicals, etc. It was a toxic nightmare and insurance companies are wholesaling them off rather than repair them. After seeing what they looked and smelled like after the floodwaters receded, homeowners are bailing out to look for homes on higher ground.

The supply of existing homes is holding at 4.2 months for the last 5 reports. The median selling price declined from $253,100 to $245,100.

The economic calendar for next week is short but contains some important reports. There are two manufacturing surveys from the Richmond Fed and Kansas Fed. New Home sales and Pending Home sales will round out the home sales reports for the month. The third and last revision of the Q2 GDP will be on Friday and analysts are looking for a sharp drop from 3.1% to 2.5% as a result of the hurricanes.

General Electric (GE) was sucking all the oxygen out of the market before the open on Friday after reporting the first earnings miss in 2.5 years. The company reported adjusted earnings of 29 cents compared to estimates for 49 cents. That is not a typo. It was ugly. GE has not missed estimates by more than a penny in more than nine years. Revenue rose 14% to $33.47 billion and beat estimates for $32.51 billion. The new CEO said it was a very challenging quarter and cash flow was "horrible" despite solid performance by most of their businesses.

The CEO said everything is under review and they plan to divest $20 billion in assets to improve cash flow and profitability. They have an investor meeting on November 13th and most analysts believe they will cut the dividend before the meeting. This would be only the second dividend cut since the Great Depression. With 8.7 billion shares outstanding and a 96-cent annual dividend, that is $8.35 billion a year in dividends. The company guided for full year earnings of $1.05-$1.10, down from the prior range of $1.60-$1.70. Analysts were expecting $1.54.

With the new CEO inheriting a company with good businesses but serious problems, he has already gone into kitchen sink mode and you can bet they will miss earnings in Q4 as well after they throw everything possible into the quarter to clear the books for 2018.

GE shares fell more than $2 (10%) to $21.47 before the open but rebounded during the conference call and then struggled higher all day to actually close with a 25-cent gain at $23.67. Volume was 192 million shares. Average volume is 43 million. Some analysts were recommending a buy here because all the bad news is priced into the stock, now at a two-year low.

Procter & Gamble (PG) was the biggest Dow loser and erased 22 points after reporting earnings of $1.09 that only beat estimates by a penny. Revenue of $16.65 billion rose only 1% and missed estimates for $16.69 billion. The company reaffirmed its full year revenue growth estimates of 2% to 3% and EPS growth of 5% to 7%. Investors were not excited with what they considered anemic growth. The grooming business that sells Gillette razors and Braun epilators saw a third consecutive quarter of declining sales. They blamed the hurricanes for their poor performance.

Synchrony Financial (SYF) reported earnings of 70 cents that beat estimates for 64 cents. Revenue of $3.88 billion beat estimates for $3.78 billion. Loans rose 9% to $77 billion. Deposits rose 9% to $54 billion. Interest and fees rose 11%. They ended the quarter with total liquidity of $22 billion. They repurchased $390 million in stock. Shares rose 4%.

Schlumberger (SLB) reported earnings of 42 cents that matched analyst estimates. Revenue of $7.91 billion also matched estimates. Investors are rarely happy with matches and shares fell to a two-year intraday low. The bigger problem was a warning that investments in North America were moderating as producers elected not to expand their drilling programs with oil prices hovering around $50. The company said Gulf of Mexico activity continued to decline and the outlook remained weak based on customer plans.

PayPal (PYPL) reported earnings of 46 cents that rose 31% and beat estimates for 44 cents. Revenue of $3.24 billion rose 21% and beat estimates for $3.17 billion. They processed $114 billion in payments and person to person payments rose 47% to $24 billion. The Venmo app processed $9 billion in payments for 93% growth. They added 8.2 million new active members. They guided for the current quarter to earnings of 50-52 cents and for the full year for $1.86-$1.88. Shares spiked 5% on the report.

As we move into the center of the Q3 earnings cycle, 88 S&P companies have reported with 70.5% beating earnings estimates. This is below the average for the last four quarters of 72% and down from the 80% rate just a week ago. Of those companies, 71.6% have beaten on revenue with the four-quarter average at 60%. The consolidated earnings forecast has slipped slightly from 4.4% to 4.2% growth. The revenue growth estimate is stable at 4.4%. There have been 80 earnings warnings and 49 instances of positive guidance. There are 183 S&P companies reporting earnings next week.

Amazon (AMZN) and Alphabet (GOOGL) are the big dogs on Thursday but there are 12 Dow components including Microsoft and Intel. Amgen, Biogen and Gilead Sciences also report as the biggest biotechs on the Nasdaq. The three largest energy companies COP, CVX and XOM report and guidance will be critical.

DBV Technologies (DBVT) said its drug for peanut allergies did not meet the goals in a highly anticipated late-state study. The drug, was delivered in a 250 microgram daily stick-on patch called Viaskin Peanut, missed the main goal for increased tolerance to peanuts. The patch must be replaced daily over a long period to desensitize people to peanuts. After 12 months of treatment, only 35% of patients developed any statistically significant tolerance. Peanut allergies are the leading cause of food-induced allergic reactions in the US. The number of children affected more than doubled from 1997 to 2008 and now affects 2% of newborns. Shares were crushed for a $29 loss in afterhours.

Celgene (CELG) said a phase III trial for a Crohn's disease drug would be terminated. The Data Monitoring Committee, which assesses benefit/risk of ongoing trials, recommended ending it early. This suggests the risks being seen in the trial outweighed the benefits. Shares fell $14 on the news.

Apple (AAPL) was crushed on Thursday after China's Economic Daily News reported the company had slashed component orders for the iPhone 8 by 50% due to weak sales. This is the first time orders have been cut this early after a debut and by the largest amount. This is a good news, bad news story. This suggests tens of millions of customers are delaying their purchase of an 8 because they want to look at or buy an iPhone X. With only a couple hundred dollars difference in price, customers are thinking about stepping up to the cool new toy. The good news is that Apple will make more money on the X. The bad news is the very slow production cycle. Another news story reported Apple will only have 3 million phones in inventory when the order lines open on the 27th. This means significant delays, upset customers and revenue being kicked into Q1 rather than Q4. Apple reports earnings on Nov 2nd and guidance is going to be critical.

Bitcoin surged again to trade at $6,079 on Friday. Bitcoin owners are thrilled while the rest of us have a coulda, woulda, shoulda pity party.

Oil prices rose early in the week on Iraq's movement to take over the oil fields around Kirkuk. When there was no material conflict and production continue to flow, prices declined slightly. There was more chatter out of OPEC about extending the production cuts until the end of 2018 but at this point, they are just trying to talk up the market. There was also chatter that Russia would not agree to an extension. They are not even going to make the decision until January so everything you hear now is just propaganda. The next OPEC production meeting is not until November 30th.

OPEC should be happy about the sharp decline in active rigs in the US. There were 15 rigs deactivated last week to reduce the total to 913 and the lowest level since May 26th. That was 7 oil rigs and 8 gas rigs. This confirms the Schlumberger warning that capex spending is declining in the US. Apparently, a few producers are trying to get off the drilling treadmill until prices firm significantly.


The S&P closed at a new high on Friday but it also posted five consecutive days of gains. That may sound routine but it has only happened 17 times in the last 90 years. The last time was in 1998. It was a struggle with a couple days of only minimal gains but they were still gains. This is further proof that markets do not simply move higher every day even in a bull market.

Thursday's 14-point drop at the open put that streak in jeopardy but the dip buyers were waiting. Not only did they recover that 14 points to close positive but the buying accelerated into the close and continued on Friday. After nine days of miniscule gains and losses that added only 10 points, the index rebounded 27 points in two days. Investors do not like to buy market highs. They would rather buy the dips.

The index is now in blue-sky territory with no material resistance in sight. Keene targeted some short-term resistance at 2,585 in his Wednesday market wrap. Plotting resistance targets on a market breakout this long always proves challenging. Support is clearly defined at 2,550.

Resistance is going to end up being the analyst estimates. The reported consensus estimate for year-end is 2,475 but the most recent estimates I can find average 2,534. The highest forecast on the street is 2,700 by Morgan Stanley and the lowest is Mizuho at 2,300. Goldman Sachs says 2,400 without tax reform and 2,650 if something is passed. Federated is targeting 3,000 but they don't specifically say by year end.

The grouping at 2600-2650 are the most recent and that is more than likely where the S&P will top out for the year unless there is a tax cut. If enough analysts target that range, an equal number of investors will start to take profits at that level. However, the Morgan Stanley target of 2,700 has a nice round number feel and that is only a 5% gain from Friday's close. Once the bulls are charging anything is possible and there will be constant talk of tax reform even if it is not passed in 2017.

Sam Stovall noted in a recent post that "since WWII the market has had 56 pullbacks between 5% and 9%, 21 corrections between 10% and 19.9% and 12 bear markets with drops of more than 20%. On average, only six months have separated the end of one decline and the start of the next." We have now gone 475 days or nearly 16 months without even a 5% decline. There has not been a 10% decline since the one that ended in February 2016. We are due for some profit taking and the longer we retain a bullish bias the worse the decline will be when it finally arrives.

The S&P finally blew past the 2,555 resistance after two weeks of struggle. That level should now be short-term support.

The Dow has now posted six consecutively daily gains. Back in late September, it ran for 9 days before breaking stride. To say the Dow was overextended would be an understatement but it does not mean it cannot go higher. With 12 Dow components reporting next week we know there will be volatility. Whether that is up, down or both we will not know until it happens. CAT, MCD and MMM have a good chance of moving the index. All three report before the open on Tuesday.

Like the S&P there is no clear resistance with the Dow in breakout mode. The round numbers will take on more importance the higher it goes. The 23,500 level could be tested next week. I would bet that some traders have 25,000 as a whisper number by the end of December. That would definitely be round number resistance and portfolio managers would be taking profits with both hands ahead of year-end statements.

The Nasdaq rebounded sharply from the Thursday dip to regain 71 points but it did not close at a new high on Friday. The Nasdaq missed a record close by 3 points and put it right back against resistance that held for the prior 4 days. The big cap techs were mixed and those that did finish positive only gained a little with the exception of Adobe. That Adobe spike came on raised guidance on Wednesday evening that prompted a 22-point gain over two days.

The Nasdaq has been posting minor gains like the S&P while investors wait for some earnings catalysts. Amazon and Alphabet could do that on Thursday night.

Short-term resistance is 6,630 and support is 6,560.

The Russell 2000 recovered from its three days of declines under the support at 1,500 and retested the prior record high. This is encouraging because there was a lot of profit taking potential on the Russell and the majority of investors failed to run to the sidelines. The two week dip was minimal.

The investor sentiment survey did not show any major changes last week. With the markets holding at the highs everyone seems pretty confident about their positions. I would have expected bullish sentiment to rise slightly since the herd is normally the most bullish at the highs.

The Dow is overbought and facing another week of earnings volatility. That could continue the rally or send it into a ditch. You cannot predict market direction in the middle of earnings season. There are too many headlines driving individual stocks. So far, we have not had that much impact from the hurricane ate my earnings excuse but it has not been forgotten.

In theory, the market should continue higher because all the fundamentals are positive and there is a lack of negative headlines on the horizon. We escaped the week without North Korea doing anything stupid but I doubt rocket man will simply roll those missiles back into their caves. He may be biding his time looking for a new opportunity OR he may have considered his survival options and decided to launch stupid comments instead of missiles.

I would continue to buy the dip until that trade no longer works. Remember the statistics I quoted above. We are long overdue for pause but I doubt it will be this week.

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Jim Brown

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