The major indexes overcame strong bearishness at Friday's close to rally back to the resistance highs.

Market Statistics

The markets charged out of the gate this morning but the Dow stumbled after hitting 24,864 at the open. The resistance at 24,850 immediately took control again and the index declined to 24,741 at 11:AM and -123 points below the opening high. The +145 gain at the open turned into only a 22-point gain for about an hour. However, the surging Nasdaq reenergized the other indexes and the last couple hours were bullish.

The S&P made a new high about 1 point over its prior intraday high. Resistance at 2,694 is still intact. The Nasdaq made a new closing high at 7,007 and 4 points above its prior intraday high. The Dow closed at resistance without making a new high but the Russell 2000 posted a fractional new closing high.

These resistance lines will be the line in the sand for the market. If the Dow and Russell can push through this strong resistance, we should see a strong rally because there has been a lot of shorting at those levels over the last couple of weeks.



The market was fueled by some analyst upgrades and several high profile calls on potential M&A activity in 2018. Noted tech analyst, Gene Munster, rocked Target's (TGT) stock when he predicted Amazon would buy the retailer in 2018. Munster believes the future of retail is a combination of both online and bricks and mortar. Amazon already saw this future when they bought Whole Foods. With that acquisition under their belt, they have learned the pros and cons and could be ready to go all in on a $50 billion acquisition that would give them 1,800 large footprint stores all across the US plus a major retail warehousing and distribution business. Target has large warehouses and large stores with plenty of backroom space. This would allow Amazon to ramp up its same day, next day delivery business all across the country instead of just in major population centers. It would also provide them with major retail outlets for its Amazon branded products of which there are quite a few. A quick search of Amazon produced 1,826 results for their private label brand.

An acquisition of Target would be a major step forward for Amazon and a major challenge to other retailers. There could be significant regulatory challenges to the deal. President Trump already believes Amazon is a monopoly and has far too much power. Going after Target could put Amazon squarely in the spotlight of the Trump tweet machine and the regulatory agencies.

While this would be a great deal for Amazon, I would not hold my breath.



The other potential acquisition making the headlines was a repeat of the Apple buys Netflix scenario. Citi analysts Jim Suva and Asiya Merchant said there was at least a 40% chance Apple would buy Netflix. Apple needs to buy the streaming video company to compete with Disney and their acquisition of the Fox movie assets. Disney is going big into streaming and Apple is going to be a distant third despite their recent efforts.

Apple has about $260 billion in cash overseas. After repatriation taxes they would have about $225 billion. If they gave $50 billion back to investors in dividends and buybacks they would still have more than enough to acquire Netflix, current market cap of $75 billion, and have plenty of cash left over to generate new content. Apple is struggling. Their phone business is growing old even with the new models. The higher the prices the less they are going to sell because of the dozens of less expensive models offered by competitors. Apple can continue to have the best high tech phone in the space but not everybody can afford to buy a BMW. Apple knows it needs to diversify and Netflix would provide them with a steady stream of rising revenue to offset the peaks and valleys of the phone business.


The analysts also said Disney (DIS) could be an Apple target but at $175 billion, that would be a huge deal and Apple is not a big deal company. That would solve a lot of Apple's future problems and dramatically diversify income but I do not see that happening. Activision Blizzard (ATVI), Electronic Arts (EA), Take Two Interactive (TTWO) and even Tesla (TSLA) were mentioned as possible candidates. Apple wants to get into the electric, autonomous car business and buying Tesla ($54 billion) would be a giant leap into the business. Apple has the cash to fund the growing pains and the Tesla brand is the equivalent of the iPhone X in its space. That would be something Apple might find appealing. It would be cheaper to buy Tesla than continue down the development road on their own.

All of the companies mentioned in the Citi note saw a big jump in their share price. There was massive short covering after Friday's closing lows.




Analysts were breaking out a significant number of ratings changes for 2018.

LB - upgraded from neutral to outperform at Baird.

JNJ - downgraded from overweight to neutral by JP Morgan.

LEN - upgraded from market perform to outperform by Wells Fargo.

ABT - upgraded from neutral to overweight by JP Morgan, Morgan Stanley.

GCO - upgraded from hold to buy at Jefferies with $40 target.

ALL - downgraded from market perform to underperform at Keefe Bruyette & Woods.

JWN - Upgraded from underweight to neutral at JP Morgan.

PLNT - downgraded from buy to hold at Jefferies.

DECK - downgraded from buy to hold at Jefferies.

SIRI - downgraded from neutral to underweight at JP Morgan.

Will the last employee please turn out the lights? We learned today that Sears (SHLD) and subsidiary Kmart has not run any national TV ads since November 24th. This covered the critical holiday shopping season where competition is brutal. Not running any ads is the equivalent of throwing in the towel. Ad research firm iSpot said Sears did not pay for any ads in that period compared to $8.4 million for Sears and $6.5 million for Kmart in the year ago period. When questioned, Sears said they were devoting more effort to digital and social network channels.

By comparison, Macy's (M) spent $32 million from Dec 1st-31st and JC Penny (JCP) spent $27 million. Sears shares are slowly drifting towards zero as their store count is declining by about 200 per year. The 118 year-old retailer is heading for an ugly end because they were unable to make the timely transition to online sales.


There was only one economic report of note on Tuesday. The PMI Manufacturing Index for December rose from 53.9 to 55.1 and the highest level of growth since 2015. New orders improved and employment hit a 3-year high. Business conditions were described as "robust."

On Wednesday, we get the ISM Manufacturing. Estimates are for a reading of 58.0 compared to 58.2 in November.

The FOMC minutes at 2:PM will be of interest since analysts are split between 2 and 3 rate hikes in 2018. The minutes could shed more light on the outlook.

The ADP Employment report has shifted to Thursday because of the holiday and expectations are for a gain of 190,000 jobs.

The government funding deadline of January 19th is still the biggest potential pothole for the market. The House will be back at work on Monday and that is when the headline activity will increase. Both sides appear to be growing farther apart rather than closer to agreement.


Markets

Volume was moderate at 6.5 billion shares and the most since December 19th. The advance/decline line was 2:1 in favor of advancers and volume was 3:1 in favor of advancing volume.

Despite the strong gains, the volume appeared to be concentrated in the tech sector and on those stocks with headlines.

The rally was encouraging, especially after the big selloff at Friday's close. However, that sharp decline may have set the stage for today's short covering.

We need to remember that one day does not make a trend. 2018 has started with a bang and the S&P futures are positive again tonight. We all hope this will turn into a new trend higher and the Dow and Russell will begin posting new highs on Wednesday.

The S&P closed just barely over prior resistance at 2,594 and just enough to claim a new closing high. This was not a breakout and more of a minor break of resistance right at the close. The S&P gained 4 points in the last 15 min on a surge of buying.

Resistance remains 2,694-2,695 until there is a breakout. With S&P futures up +3.50 right now, that could happen at the open but there is a lot of darkness left before the dawn.


The Dow remains stuck below strong resistance at 24,850 as it has been for the last two weeks. Strong support remains 24,720. The Dow is still targeting 25,000 and I still expect a major sell the news event when that level is touched. I could be completely wrong and time will tell. Apple and Disney were the biggest gainers thanks to the various headlines about the pair.



The Nasdaq Composite exploded higher thanks to strong gains in the big cap tech stocks. This is a completely different graphic than what we have been seeing over the prior two weeks where the big caps were choppy and trending lower. You may remember the Nasdaq closed at two-week low on Friday with a 45 point loss. The choppy decline over the last two weeks setup a lot of short positions expecting an implosion of profit taking once we entered January. Those who were short were not happy campers.

The index closed at 7,007 and +4 points over the 7,003 intraday high on December 18th. While this was a new record high, it was not a breakout high. It was just a minor peek over that resistance to see what would happen. The Nasdaq surged 12 points in just the final minutes of the day on a sudden surge of volume.

Resistance remains that 7,000 level until the index can break away and add some more points. Gravity is still in play until a real breakout occurs.



The Russell 2000 small caps came to a dead stop once again at 1,550 BUT it was a new closing high. The index closed just a fraction of a point over the 1,550 level as it tried to post its own breakout. The index surged 6 points in the final minutes on a burst of buying.

A real breakout over 1,550 would be very bullish for the broader market because the Russell is the fund manager sentiment indicator for the market. If they are buying small caps they are not concerned about a future decline.


The Santa Rally is now in progress. There is one more day in the normal 7-day rally period and it would take a complete reversal of today's gains to negate the rally. In theory, as the first day of the year goes, so goes January. As January goes, so goes the year. That only works out about 50% of the time but the saying persists.

I am thrilled to see the gains because I was dreading a sharp bout of profit taking ahead of Q4 earnings. However, one day does not make a trend. Once we get through Friday's close, we will have a lot better idea of what January will look like because everyone will want to be invested before Q4 earnings begin on the 16th and we will be a week closer to that earnings deadline. If there is going to be any profit taking it should begin this week. If we can escape into next week, we should be good to go for an earnings rally.

Enter passively, exit aggressively!

Jim Brown

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