Alan Greenspan must be taking sleeping pills at night after this recent rally.
After a strong first week, the markets opened sharply lower on Monday but immediately rebounded to finish the week sharply higher. The Dow gained 2%, small caps 2%, biotechs, banks and brokers 3% and oil and the transports up more than 4%. Euphoria is breaking out all over.
This has turned into a classic FOMO market (fear of missing out). The difference in the market over the last four weeks could not be more profound. The last two weeks of 2017 were dead flat with the Dow closing at 2-week lows. The first two weeks of 2018 have been nearly vertical with the Dow gaining 1,083 points in only nine days. If we gain another 200 points next week to 26,000 it will be the fastest ramp ever between 1,000 point levels.
The market has now posted the best two weeks to start the year since 2003 and S&P targets just keep rising. Fundstrat's Tom Lee said his base case for 2018 is now 3,025 on the S&P but we could easily see 3,300. Let's hope he is right.
In a strange twist of circumstances, the AAII investor sentiment survey retreated from the 59.8% high for bullish sentiment we saw last week. This survey does end on Wednesday and that was the day the market dipped sharply by -130 points at the open on the China worries. It is entirely possible that one hiccup seriously dented sentiment. I am sure the back-to-back 200-point gains on Thr/Fri have converted some of those fence sitters back into the bullish camp. Next Wednesday's survey will be interesting.
The prior week's 59.8 bullish reading was the highest level in 7 years. The last time sentiment was that bullish was December 23rd, 2010 at 63.3%. Bearish sentiment at 15.6% was the lowest since November 6th, 2014 with the historical average 30.5%. Even without the Dow dip on Wednesday, we were due for sentiment to fade slightly.
Helping lift the market on Friday was the retail sales report for December. The headline number rose +0.4% and just slightly under estimates for +0.5%. The number for November was revised higher by one tenth to 0.9%. Building materials and nonstore retailers saw the biggest rise at 1.2% each. Food service rose +0.7%, furniture and furnishings +0.6%, food and beverages +0.5% and general merchandise +0.1%. Sporting goods fell -1.6%, clothing -0.3% and electronics/appliances -0.2%.
It was a strong holiday season with October rounding out the quarter at +0.7%. Overall December sales were 5.4% above December 2016.
The Consumer Price Index (CPI) rose only 0.1% for December indicating that inflation is still weak. The headline number was weakened by a -1.2% decline in energy prices. The core CPI, excluding food and energy, rose +0.3%. Natural gas was a big drag and offset rising oil prices. Food prices rose +0.2%. The core CPI is up only 1.8% over year ago levels. However, services are up 2.6% while goods are down -0.8%. Goods inflation has been negative on a year over year basis since February 2016. The Fed is going to be hard pressed to hike rates more than 2-3 times in 2018.
The California Manufacturing Survey for Q1 slipped from 64.9 to 61.8. Anything over 50 is growth so they are still expecting the economy to expand but at a slightly slower rate. Despite the decline in the headline number, the index is still at historical highs. New orders declined from 69.1 to 65.4 and employment fell from 62.5 to 57.6. The commodity cost component rose from 72.7 to 76.2 suggesting future prices for goods are going to rise.
Business inventories rose +0.4% in November, up from a -0.1% decline in October. The October number was revised up to zero. Wholesalers saw a 0.8% rise in inventories and manufacturers inventories rose +0.4%.
The economic reports for the week combined to lift the Atlanta Fed real time GDPNow forecast for Q4 to 3.3% growth. This is up from 2.8% on January 10th. If these numbers hold and there is no reason why they should not, this will be the third consecutive quarter of GDP growth over 3% and this has not happened since early 2005. The first release of the actual Q4 numbers will be on January 26th and any number over 3% is going to get a lot of press and that will help to lift the economy even further if people begin to believe this economic recovery is in rally mode. Strong growth promotes additional growth.
There are no market moving economic reports due out next week. The Philly Fed Survey and the Fed Beige Book are the most watched but they are not likely to get anyone excited.
The biggest challenge is going to be the potential government shutdown on Friday. After the preliminary agreement was shot down on Thursday and President Trump made the s***hole comment, the democrats are even more determined to shove their immigration desires through the process. However, Trump is not the guy you want to push into a corner or unexpected events could occur. The president has 46.6 million followers on Twitter and he is not afraid to use that pulpit. He is already slamming them and their "missed" DACA opportunity on Twitter a couple times per day.
The odds of a government shutdown appear to be increasing but there is always the possibility of another can kick down the road in order to buy more time on the budget resolution.
The Q4 earnings cycle has begun with several of the big banks reporting on Friday. The cycle will gain some speed next week with four Dow components and another round of banks reporting.
So far, 26 S&P companies have reported and 76.9% have beaten earnings estimates and 84.6% have beaten on revenue. The current earnings forecast is for 12.1% earnings growth and 7.0% revenue growth. There have been 70 earnings warnings for Q4 and 45 positive guidance upgrades. There are 27 S&P companies reporting this week.
Facebook (FB) shares were knocked for an $8 loss on Friday after Mark Zuckerberg said they were making changes to the news feed to prioritize user interactions and reduce the amount of non-advertising content from publishers and brands. Facebook has been criticized for allowing too much fake news into user pages and this is one way they are going to try and combat it. The company said the new ranking system would hurt non-advertising content from publishers and brands, like news stories and viral video posts, but not change the ranking of paid advertisers.
Shares were crushed because Zuckerberg said page views and user time on Facebook could decline with the change. However, what this means is that publishers and advertisers will have to pay up and increase their spending to get the same number of page views they got in the past. Advertising agencies immediately warned that prices would go up. With fewer opportunities and more advertisers bidding for those opportunities, it becomes a seller's market. Analysts were at first worried it would impact revenue for Facebook but if you read the news it says "non-advertising content" will be restricted. I believe this is a buying opportunity.
There is strong support at $176 from the 100-day average, uptrend support and horizontal support. You know they are going to beat on earnings estimates when they report on January 31st. Lastly, Zuckerberg has warned three times before on changes they were going to make to the news feed and every dip was bought.
Gamestop (GME) shares fell 11% after they reported a big spike in holiday sales. The problem came from an impairment charge of $350-$400 million related to their technology brands business. They said gamers were not upgrading their phones as rapidly as in the past. The longer upgrade cycle, limited availability on the iPhone X and changes made by AT&T to the compensation structure prompted the charge.
For the 9-week holiday period same store sales rose 11.8% globally and 18.7% in the US. Overall sales rose 10.6% to $2.77 billion. Hardware sales rose 38.3% thanks to the Nintendo Switch and Xbox One X. Video game accessory sales rose 33.7% but pre-owned sales declined -8.1%. They guided for full year 2017 earnings "near the middle" of prior guidance for $3.10-$3.40 and same store sales growth of 4% to 6%.
If the chart were not so ugly, I would have said this was a buying opportunity as well. Their sales are exploding and they are writing off the phone business. However, they have been plagued with constant gaps lower on earnings and they will not report actual earnings until late March.
A rumor broke shortly before Friday's close that Viacom (VIAB) and CBS (CBS) were talking about merging. The two companies were one over a decade ago and split. Both are controlled by Sumner Redstone or more correctly by his daughter Shari Redstone. She is vice chairman of both companies. Shares shot higher but less than an hour later the rumor was rebutted saying the companies were not involved in active discussions.
Apparently, Shari had discussed at some point in the past the idea of recombining the two companies because one larger company would have a better chance of competing in today's market. There was an attempt to talk up a merger in 2016 but it failed. Shares declined only slightly off their highs despite the rumor denials. Even in afterhours, shares held their closing levels. Traders are probably thinking "where there is smoke, there is fire" and just talking about it in the news could rekindle the merger talks from 2016.
Kohl's (KSS) shares rallied to a new two-year high after RBC Capital and JP Morgan upgraded the stock on the same day. RBC upgraded from sell to neutral but JPM upgraded from neutral to overweight, the equivalent of a buy rating. Citigroup reiterated a buy rating and $69 price target on Wednesday. JPM called Kohl's a "rare large cap 'value' idea." The analyst said the company focused on households earning over $75,000 a year and with store locations outside of malls. They expect Kohl's to generate multi-year high-single to low-double-digit EPS growth.
Lowe's (LOW) shares rallied 5% after news broke that activist investor D.E. Shaw was building a stake in the company. The firm plans to agitate for changes at Lowe's. The store needs some help. While Home Depot raised earnings estimates significantly after the hurricanes, Lowe's kept full year estimates the same and below analyst forecasts. The store chain is not as aggressive as Home Depot and they are losing the market share battle. Their prices are also higher than Home Depot for the same items. On the positive side, Lowe's locates its stores in higher income areas that can afford the higher prices.
Aflac (AFL) shares fell 7% after a story in The Intercept claiming the company was defrauding its contractors. Supposedly, the company pushes a high-pressure contract scheme on employees. Reportedly, the company exploits its employees by forcing them to register as contractors and then pressure them with sales goals that push workers to sell policies to customers without the customer's consent. They also claimed that Aflac attracted new sales associates and contract positions with the promise of earning an unrealistic amount of money, with new hires only making a small percentage of those promised earnings. Then Aflac reportedly pushes these new associates to sell policies to friends and relatives, while also making them targets to be recruited.
The article in the Intercept was only the first in a series of articles that claims they will explain in detail how Aflac implements this scheme, pending lawsuits on these claims and what employees have to say about the scheme. Aflac spokesman Jon Sullivan said "these allegations are baseless and we will be filing to have the suits dismissed." These claims are being propagated by a very small number of contractors and does not represent the thousands of Aflac employees.
JP Morgan (JPM) reported earnings of $1.07 compared to estimates for $1.69. Revenue of $25.45 billion beat estimates for $25.15 billion. However, the earnings included a 69-cent charge or $2.4 billion for accounting changes caused by the tax reform law. Excluding the charge the net income would have been $6.7 billion, down -1% from the year ago level. Provision for credit losses rose from $864 million to $1.3 billion. The bank took a mark to market loss of $143 million for a margin loan to a single account.
Corporate and investment banking net income fell 32% from $3.43 billion to $2.32 billion with revenues declining -12%. Revenue in markets and investor services fell -22% caused by a 26% drop in markets revenue.
The results were definitely lackluster but shares spiked nearly $2 to a new high. The motive power came from rousing comments from Jamie Dimon that despite the big charge for tax changes, the new law would make banks more competitive on a global basis and more profitable in future quarters. Unless revenue begins to rise again he is going to have a tough task proving those comments.
Wells Fargo (WFC) reported earnings of $1.16 compared to estimates for $1.23. Revenue of $22.05 billion missed estimates for $22.45 billion. The bank reported a $3.35 billion benefit from the tax bill where other banks have large liabilities. Wells had a tax deferred liability instead of deferred tax assets held by the other banks. Unfortunately, they also booked a $3.25 billion charge for litigation related to their past problems related to bogus accounts, car insurance forced on auto-loan customers and bogus fees assessed on mortgage loan clients.
Residential mortgage originations were $53 billion, down from $59 billion in Q3. Auto loan originations declined 33% to $4.3 billion as they intentionally cut back on that sector. Loan loss provisions declined from $805 million to $651 million.
Blackrock (BLK) reported earnings of $6.24 compared to estimates for $6.07. Revenue of $3.47 million also beat estimates for $3.35 billion. For the full year, they reported a profit of $30.23 per share or $4.97 billion on revenue of $12.49 billion. The company said assets under management rose to more than $6.3 trillion with the strongest inflows in history at $367 billion. CEO Fink said the stimulus from the tax bill is likely to drive more money into investment products and push stock and bond prices even higher. The CEO said the tax bill is going to do "wonderful things" for small businesses and raise the GDP.
The Bitcoin Investment Trust (GBTC) announced a 91:1 stock split. The trust will reward holders on January 22nd with 90 additional shares for every share they own. The actual split date will be January 26th. This will turn the 1,916,000 current outstanding shares into 174,510,600 shares. Shares closed at 1,970 on Friday and a 91:1 split will reduce that share price to about $21.65 each depending on how much movement there is over the next week. Currently a share of the trust represents ownership in 0.092 bitcoin. After the split, each share will represent roughly 0.001 bitcoin. The good news is that the shares will be significantly cheaper and you can buy a lot of them and still not invest a lot of money. The bad news is that at 0.001 bitcoin per share, the price of bitcoin will have to rise a lot for the GBTC shares to move significantly.
Since the majority of investors will have no clue about the operation of the trust, there will probably be a lot of new buyers and the shares could rise immediately after the split simply from the new demand. If you are going to play this, I would buy some shares at the current price so you will be in the split. I would then sell them several days after the split when the initial price bump is over. If they were to rise just a buck or two post split, that would be worth a couple hundred presplit dollars. Of course, there is always the possibility they do nothing.
Because of the rise and flow of demand for GBTC shares, they have traded as much as 2.32 times the value of the bitcoins they hold. The median price is about 42% higher than the corresponding bitcoin value. This is an example of how the speculation factor works when investors do not understand the underlying holdings.
Crude prices rose almost $3 for the week to close at $64.40. This was due to another large decline in inventories but also a monster decline in the dollar. The dollar index closed at a three-year low on Friday. Gold prices have surged to $1,338 and only $27 below their $1,365 highs from 2016.
The rise in oil prices well over $60 and the end of the holidays caused a big spike in rig activations. Oil rigs rose by 10 to 752 and gas rigs rose by 5 to 187 for the week ended on Friday. That is not likely to be a one-week event. With oil prices closing in on $65, the shale drillers will be throwing caution to the wind and ramping up drilling programs on the hopes of generating some big profits. Just a month ago, the big producers had been calling for calm in the sector and a return to a reasonable drilling rate with restrained capex spending. It is amazing what an $8 rise in oil prices can do to the animal spirits in the oil patch.
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For the first full week of the year, Bank of America said there were inflows of $24.4 billion into equity funds. That was the sixth highest inflows ever. Inflows into bond funds were $13.1 billion, also abnormally high. With the dollar crashing, investors are racing to put those dollars into anything that can supply a return.
The expected benefits to earnings from tax reform are the number one bet in the market today. Analysts worried all December about the impact already being priced into the market and the gains from 2018 having been pulled into 2017. So far in 2018 that does not appear to be the case.
Every day the market moves higher we are moving father into dangerous territory. There is a tremendous risk that Q4 earnings and guidance could get messy. Nobody really knows what impact the tax reform will have on all corporations. Just like JPM took a huge charge for the accounting changes and WFC booked a $3.35 billion gain. Nobody knows what to expect other than lower taxes going forward.
This should be good for further market gains for the next four weeks. Once the Q4 earnings start to fade, the rally will be at risk for major profit taking. At that point, the 2018 guidance will be known and profit expectations will be known and priced into the market. I hope I am wrong but somewhere around February option expiration there could be some increased volatility.
For next week, the S&P is likely to hit 2,800. For those analysts like Goldman Sachs with 2018 targets of 2,850 they are probably starting to get nervous. However, I do not recall a single analyst regardless of their yearend target that does not think we will have a summer decline. That potential dip seems to be a recurring theme this year.
The S&P is well above critical support but in some cases when a stock or index breaks out of a well defined regression channel, the prior uptrend resistance becomes support. If that is the case today that would put support around 2,750 and well within range for a short-term test.
The Dow actually used the top of the long-term regression channel as support last week and proves that case. The index has sprinted more than 430 points above that line with back to back 200+ point gains over the last two days. That puts current support around 25,400.
Boeing continues to be the point leader and has added 265 Dow points over the last six trading days. Over that same period of time the Dow has risen 728 points and Boeing was 36% of those gains. Eventually, Boeing is going to rest.
The earnings from Dow components begin next week with UNH, IBM, AXP and GS. Goldman already warned of a $5 billion charge on tax accounting so the bad news is already priced into the stock. None of these four have been big gainers over the last couple of weeks so there is not a lot of risk to the Dow but there is always the potential for an unexpected report.
The Nasdaq, like the other indexes, is completely out of character compared to the last six months of movement. The index had been returning to its uptrend support every 2-3 weeks. If that were to occur today, it would be about a 250-300 point drop to around 6950-7000. I am not predicting it but simply making an observation. The 7,000 level should be support but that is a mighty big drop. I would expect a pause at 7,120 and roughly the lows from Wednesday if a retracement were to occur.
The Russell 2000 exploded higher on Thursday with a 1.73% single day gain. That was dramatically out of character for the index with the last gain of that magnitude back in September. There was a dead stop at uptrend resistance at just below 1,600. After several weeks of single digit point gains, I would be very surprised if the index just blew through 1,600 without looking back.
On Saturday morning, civil defense workers in Hawaii pushed the wrong button twice and sent out a ballistic missile warning using the emergency alert network to everyone in range. It was over 30 minutes before they officially used the same service saying it was a false alarm. The island was in panic mode and the news services have been blasting the headlines all day. Who knows if this will have any impact on the market on Tuesday? While it was traumatic while it was happening, there is no reason for it to carry over into next week. If we were to get an opening dip, it would be a buying opportunity.
As I stated earlier, I expect the market to continue higher, maybe not in a straight line, until somewhere around expiration week in February. The external event that could derail continued gains would be the potential for a government shutdown next Friday. I would like to think they would finally kick the can farther down the road if they cannot come to an agreement but both sides seem to have dug in on their positions and a fight is brewing.
If we were to have a shutdown, I would expect it to also be a buying opportunity for traders. There is the potential for it to damage sentiment and cause the market to lose traction. Currently investors appear to be euphoric. If that euphoria is damaged, it may not return.
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