There was no follow through after Thursday's short squeeze on the big cap indexes.
The Dow gapped about 100 points lower at the open on Friday and then traded in a very narrow 30-point range after 10:30. The Dow gave back more than half its gains from Thursday. For an expiration Friday, volume was moderate at 6.2 billion shares. There was no excitement and worry over the tax reform details filled all the headlines.
The S&P also gapped lower but only gave back 7 points and about a third of Thursday's gain. After trading in a narrow range, the index declined near the lows of the day at the close.
The economic calendar was very busy on Friday with almost as many reports as we will see for all of next week.
New residential construction rose from 1.127 million starts to 1.290 million and blew away estimates for 1.180 million. This was a 13.7% gain. Multifamily starts surged from 302,000 to 413,000 for a 36.8% gain. Single-family starts edged up from 833,000 to 877,000. Housing permits were also strong with a rise from 1.225 million to 1.297 million. Those broke down to 839,000 single-family and 458,000 multifamily. Housing completions rose sharply from 1.094 million to 1.232 million for a 12.6% increase. Considering the impact of the hurricanes these were very strong numbers.
Internet E-Commerce sales for Q3 rose from $111.5 billion to $115.3 billion. Sales were up 15.5% year over year. E-commerce sales as a percentage of all sales rose to 9.1%. Internet sales have risen for 35 consecutive quarters. With labor markets tight and labor costs rising, more companies are going to invest in their online sales portals. Without a recession, these totals are only going to rise.
The Kansas Fed Manufacturing Survey dipped sharply from 23 in October to 16 in November. This is still in the high range for the last 10 years and growth is still strong. This was the 4th best reading over the last 12 months. New orders declined from 27 to 22 and back orders dropped from 23 to 12 for a big drag on the headline number. Employment fell from 21 to 16 and production dropped from 20 to 15. Any numbers over zero represent economic growth. On a positive note, inventories fell from 18 to 2 suggesting manufacturers will have to gear up to replenish those inventories.
The Atlanta Fed real time GDPNow forecast for Q4 dropped from 3.5% to 3.4% growth after the housing starts were released on Friday. I am sure nobody is going to complain if we finish this quarter at anything over 3.0%.
The CME Fedwatch tool is forecasting a slight chance of a larger than a 25 basis point rate hike in December. This is crazy because multiple analysts are now talking about the Fed skipping the December rate hike. I personally believe it will be a benign 25-point hike and the last one Janet Yellen can claim. Her term expires on January 31st. The confirmation hearing for Jay Powell is on November 28th.
The calendar for the holiday week is light with the FOMC minutes the most important event. Second in importance are the existing home sales. All of these reports are likely to be ignored because of the holiday mood and light volume. Very few traders will be paying attention to the market.
The earnings calendar has also dried up. Salesforce.com and the Hewlett Packard twins will be highlights on Tuesday followed by Lowe's and Dollar Tree.
According to Thomson Reuters, Q3 earnings are now expected to rise 8.2% and well over early estimates. Of the 474 S&P companies that have reported, 72.2% have beaten on earnings and 67.7% have beaten on revenue. Revenue growth for Q3 is now expected to rise 5.4%. There have been 56 guidance warnings and 31 guidance upgrades. The forward PE is 18.2 and 15 S&P companies report earnings this week to close out this cycle.
On Friday, Foot Locker (FL) reported earnings of 87 cents that beat estimates for 80 cents. Revenue of $1.87 billion beat estimates for $1.84 billion. Same store sales fell -3.7%, up from the -4% to -5% expected. Shares rose only slightly until the company said they were expanding their marketing relationship with Nike (NKE) to include a pop-up store called Sneakeasy NYC that will open on Nov 22nd. The store will only be open one week and will feature Nike and Jordan products. Foot Locker said they were now taking reservations on the Special Air Force-1 priced at $160.
Foot Locker said it was hiring new employees with Nike training who will serve as full-time "Nike Pro Athletes" and "Nike Pro Leads." They are going all out to bring awareness to the Nike brand and try to move some of those high priced shoes. For Q4 Foot Locker is expecting same store sales to decline 2% to 4% and slightly better than prior guidance of -3% to -4%. Earnings are expected to decline 15% to 25% to $1.03-$1.16 and below analyst estimates for $1.18.
Shares exploded higher on the less bad results and the new Nike marketing program. I am surprised the Nike news overpowered the negative same store sales and 15% to 25% drop in earnings guidance. Time for a short here?
The much-maligned Abercrombie & Fitch (ANF) reported earnings of 30 cents that beat estimates for 24 cents. Revenue of $859.1 million rose 4.5% and beat estimates for $820.3 million. Same store sales rose 4.0%. The company guided for revenue growth in Q4 of mid to high-single digits and same store sales of low single digits. I hate it when companies give that kind of guidance that cannot be tracked. "Low single digits" gives them a 4% range on same store sales when everyone else is giving exact numbers of maybe a 3% to 4% growth outlook. This kind of guidance is seen as a "get out of trouble free" card because of the wide range. It is a big target and that gives them a wide margin of error. I definitely think this is a short opportunity.
Hibbett Sports (HIBB) reported earnings of 37 cents that easily beat estimates for 22 cents. Revenue of $237.8 million beat estimates for $219 million. The company guided for full year earnings of $1.42-$1.50 per share, up from prior guidance of $1.25-$1.35. Same store sales are expected to decline in mid single digits, up from mid to high single digit declines. Shares rallied 15% on the change from mid to high to simply mid single digit declines? If they can beat on earnings with sales declining investors should be happy but you can only cut costs so much.
Buckle Inc (BKE) reported earnings of 41 cents on revenue of $224.3 million. Estimates were 39 cents on revenue of $223.4 million. Shares gained 4% on the minor beat.
Splunk (SPLK) reported earnings after the bell on Thursday of 17 cents that beat estimates for 14 cents. Revenue of $328.7 million beat estimates for $309 million. The company guided for Q4 revenue of $388-$390 million. Analysts are expecting 32 cents in earnings and $384 million. During the quarter, Splunk signed 450 new enterprise customers. Shares spiked 18% on the news.
Shares of Square (SQ) posted a 5% gain after Evercore ISI upgraded their rating to outperform with a $51 price target. That is twice their old target at $25. The analyst said revenue could grow 40% in 2018 and 35% in 2019. That is compared to consensus estimates of 31% and 28%. Shares jumped the prior day on a report they had introduced an option to buy Bitcoin through the Square Cash app. The app allows you to buy and sell Bitcoin through an exchange but it does not allow you to use them to buy products or services or pay people with Bitcoin. However, several analysts said Square is positioning itself to take that next step at some point in the future.
Bitcoin rallied another $2,000 for the week to $7,800 on Thursday. I am still kicking myself.
Tesla (TSLA) shares posted a muted gain of $2.55 after the company showed off its two new vehicles. The first was a semi truck with a 500-mile range on a single charge and all electronic cab. They can go 0-60 in 5 seconds and 0-60 in 20 seconds with a full 80,000 pound load. They also have bulletproof windshields to protect against road debris. Wal-Mart immediately said it would order 10 for a test in Canada and 5 for a test in the USA. Trucker JB Hunt said it had reserved "multiple" units. The "Tesla Semi" is scheduled to begin production in 2019. The Class 8 semi market is about $30 billion in size making every 1% of market share worth about $300 million. The Tesla Semi is expected to save owners about $25,000 a year in operating costs at $1.26 per mile to operate compared to $1.51 for a diesel truck. Elon Musk said they would have a one million mile warranty.
At the end of the truck demo, Musk said oh by the way, customers are always asking us when we are going to make a new roadster. Well, here it is, as a red roadster drove up behind him. The car will go 0-60 in 1.9 seconds and have a 620 mile range. There is a catch. The first 1,000 will cost $250,000 each and be a limited edition "Founders Series" with a $50,000 deposit. After 1,000 are sold, the standard model will start at $200,000. Production to start in 2020.
Not a word was said about the 450,000 Model 3 deposits Tesla is still holding because they cannot make the cars fast enough. How they are going to make two additional models is still unknown.
Crude prices traded in a wide range for the week with the concern over the Saudi "corruption sweep" fading and the API showing a larger than expected build in inventories. Prices fell sharply mid-week. They rebounded on Friday after a pipeline leak caused the Keystone pipeline to be shut down for repairs.
The Saudi problem has taken on a new dimension. Reportedly, Mohammed Bin-Salman (MBS) has offered to settle with the princes he has detained if they will sign over 70% of their accumulated wealth to the state. By doing this he can escape the challenge of proving any potential corruption and he will appear as a hero of the state to the younger population. Of course, that is going to be a problem for some of the high profile billionaire princes. If they agree to surrender their wealth, it will appear they were guilty. There is no easy answer here and there are several chapters still to be written. Without the rule of law, any court proceeding could easily be rigged on fake evidence and testimony.
Another problem for oil prices are some growing doubts that Russia will agree to extend the production cuts. With US production at a record 9.65 million bpd and possibly 10.0 mmbpd by the end of December, Russia and others are worried the US is going to take market share with our increasing exports. With oil at $57 they feel it is no longer necessary to cut back on production just so the US shale producers can thrive. We have the makings for a new price war in 2018.
Brent crude spiked to more than $64 last week and the highest level since 2015.
OPEC meets on November 30th to discuss production.
Oil rigs remained flat last week at 738 but gas rigs surged +8 to 177. Gas prices are trading near 5-month highs and we saw the first week of gas withdrawals from storage for the winter demand season. Gas inventory levels declined -18 Bcf for the week.
Bullish investor sentiment appeared to fall off a cliff last week except you have to remember this survey closes on Wednesday and that was when the indexes all closed at multi week lows. For our purposes, this graphic is worthless this week because of the ending date.
It was an interesting week with the major indexes closing at 3-week lows or longer on Wednesday and then rebounding sharply on Thursday with the Nasdaq Composite closing at a new high. How do you play that trend? The short answer is that you don't play it, the market plays you. Stuff happens and headlines become market moving. It helps a lot when the market is leaning bearish when Wal-Mart and Cisco Systems beat earnings at the same time and add roughly 90 Dow points by themselves. The short covering in the Dow ETFs added the rest.
The Dow and S&P rallied right to resistance and failed in the afternoon. The follow through on Friday was to the downside. The Dow gave back 100 of the 187 points it gained on Thursday and the S&P gave back 7 of its 21 points. Neither decline was convincing and all the movement occurred in the first 30 minutes of trading. From that point on everyone was just trying to run out the clock.
The S&P rallied to the top of its congestion range on Thursday and then closed in the middle of that range on Friday. Upside resistance is now 2,590 and support remains 2,565 followed by 2,555. The range has not changed in three weeks. The S&P was consolidating its gains while the Q3 earnings cycle played out and the tax reform proposals worked their way through committees.
The Dow rebounded from 23,242 intraday on Wednesday to test resistance at 23,485 on Thursday. The decline on Friday took the index right back to within 8 points of support at 23,350. That support was broken twice last week only to recover sharply. The Dow is the most at risk index because of its narrow construction and all the components have now reported earnings. That magic growth elixir of strong earnings is now behind us for another 8 weeks.
Thanksgiving week is normally positive for the Dow. Investors home for the holidays with some cash in their account tend to gravitate to the blue chips and the big cap tech stocks. Whether those "sitting at home bored with nothing to do investors" can overcome negative headlines from the tax legislation is unknown. Fortunately, the Senate is not in regular session this coming week so the headlines should be minimal.
The Dow Transports have been in a steady decline and weighing on the Dow Industrials. The transports closed right on prior resistance, now support, on Friday. If the transports can hold at this level or even rebound slightly, it would take a lot of pressure off the Dow Industrials.
The Nasdaq struggled on Friday but did not pull back far from Thursday's record close. The -10 point drop was very minor profit taking. The Nasdaq 100 did worse with a 25-point drop because most of the big cap stocks were negative. Microsoft lost 80 cents but knocked -5.4 points off the Nasdaq 100 while Alphabet lost 12 points but only erased 4.1 points from the index. Apple accounted for 4.3 points and Intel for 4.2 points.
The tech indexes are positioned to move higher if the right market catalyst appears. I have no idea what that would be today.
The Russell 2000 Index and the S&P-600 Small Cap Index were the only two major market indexes to close positive on Friday. Why the small caps were being bought and the big caps were being sold is a question for Karnack. The small caps have resistance at 1,500 and they came close on Friday with a high at 1,497.
With the house and senate on vacation next week, we are going to see a lot of headlines about the four GOP senators opposed to the wording in the senate version of the tax bill. The proposal cannot pass unless at least two of them can be convinced to come back from the dark side and vote in favor of its passage. The bigger battle will be once the house and senate bills are merged together and the senate has to pass it again with even more points not to like. This is going to be a battle, probably the week before Christmas.
There is also the fight over another continuing budget resolution and debt ceiling hike that must be passed by December 8th. Paul Ryan said they would probably go with a short-term continuing resolution to avoid causing problems ahead of the vote on taxes. That does not mean the continuing resolution will be a slam-dunk. It will still face opposition but nobody will want a government shutdown two weeks before Christmas.
House & Senate Calendar
We are also headed into tax selling season. Offsetting that will be corporate buybacks. Over the first 9 months of the year buybacks declined 10% but authorizations rose 20%. There are a lot of unfinished authorizations outstanding and companies like to tidy up loose ends going into year-end. We will also see some end of year window dressing in December. With the markets up 18% (Dow) to 29% ($NDX) heading into December, fund managers will not want any cash on the books on December 31st. This suggests portfolio managers who have been holding off on purchases in hopes of a decent dip, will eventually hold their nose and buy something. Cash is trash on year-end fund statements.
Lastly, all of those items above could set us up for a major decline in January. Once the tax year rolls over to 2018 and hopefully a new tax schedule, the selling could be extreme.
There is a new provision in the tax plan for forcing FIFO (first in, first out) accounting. That means if you have 400 shares of Nvidia that you bought in 100 lot increments at different prices over the last couple of years, any sales of Nvidia shares will be assumed to be the first ones purchased. That provision will force higher gains and higher taxes and could trigger some sales before year-end to avoid the FIFO rules.
Personally, I believe we could move higher in December but the odds of some additional profit taking are high. A December peak may not be at the end of the month. I would continue to buy dips but wait for a rebound to occur. Don't try and catch the falling knife.
Enter passively and exit aggressively!
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