This is almost a perfect market with minor intraday weakness and closing gains.

Market Statistics

If anything, the porridge is slightly on the warm side but well within limits. The positive news on China's trade talks and the impending earnings cycle are providing the headlines and portfolio managers with piles of cash from tax loss selling are providing the lift. The intraday weakness both yesterday and today helped to deflate expectations and give would be buyers multiple entry points. The Nasdaq opened with an 88-point gain but fell back to a -26 point loss intraday. In December we were seeing those opening selloffs deteriorate into triple digit declines to leave us down for the day. This dip buying in the face of negativity is very bullish. I am just a little worried that we are rebounding a little too quickly and we are setting up for a couple days of real consolidation.


The morning economics were slightly depressing with the NFIB Small Business Optimism Index for December declining from 104.8 to 104.4 and the fourth consecutive monthly decline. The internal components began to fade slightly. Those planning on increasing capital expenditures declined from 29% to 25%, those expecting the economy to improve declined from 22% to 16% and those thinking it was a good time to expand declined from 29% to 24%. The overall funk in Q4 and the December market crash were more than likely the cause of the declines. On the positive side hiring expectations increased slightly and companies with hard to fill job openings increased from 34% to 39% and a record high.

Those planning on raising prices fell from 29% to 25% so the Fed's expectations for inflation are likely to fade. Those who raised worker pay over the last 3-6 months rose 1% to 35% but those planning on raising wages declined 1% to 24%.

This was still a strong report. With the market recovering and the potential for a trade deal with China, I would not be surprised to see a sharp rebound in January.

Trading Economics Chart

The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings declined slightly in November from 7.131 million to 6.888 million. That is still a 16.1% increase over November 2017 but the second decline since the August peak at 7.293 million. Hires declined slightly from 5.928 million to 5.710 million. Quits declined from 3.519 to 3.407 million and separations declined from 5.621 to 5.507 million.

This was still a strong report and hires at 5.710 million are still well below openings at 6.888 million. Regional reports continue to show a rising tide of employment as we move into 2019. The minor decline in the headline number is a lagging indicator and November employment was well below the recent trend. That picked back up in December with 312,000 hires.

The most interesting chart is the number of unemployed people per job opening at 0.9. This has come way down since the 6.6 back in 2009.



Consumer credit for November was a nothing burger. Balances rose by $22.1 billion and just shy of the $25.0 billion rise in October. Analysts were expecting only a gain of $17.5 billion. This was the third largest increase in 2018 but it should not be a surprise. The market hit its highs on October 3rd and the decline had not fully registered with consumers. The tax cuts put more money in consumer pockets and they are using that to make credit card payments in order to extend their buying power. Lending standards declined in Q3 and that made more money available to a wider range of borrowers. Some 3.6% of banks reduced loan requirements on consumer loans and autos and 2.2% reduced requirements for credit cards. The economy is strong, employment is strong and consumer spending is strong. No surprise there.

The weekly API inventory report showed a decline of 6.13 million barrels of oil and twice what analysts expected. Gasoline inventories rose by 5.5 million barrels and distillates exploded higher by 11.7 million barrels. That was four times analyst expectations. I reported in the weekend commentary about the sharp spike in refinery utilization the last week of December as refiners tried to deplete oil inventories before the property tax deadline on December 31st. We obviously know what products they were producing. With distillates more profitable than gasoline they pushed as much of that through the system as possible.

Crude rallied to $50.35 in afterhours.


The calendar headliner for Wednesday is the FOMC minutes. Analysts will want to see if Powell has gone through a conversion experience since the last meeting because of the market crash. If the minutes are hawkish, the recent dovish comments could be discounted. The market would not be happy.

The Philly Fed Manufacturing survey on Thursday will hopefully be better than the recent ISM Manufacturing, which showed some significant weakness. This could lift the market if there is no weakness and suggesting the ISM reports were a one-month wonder.

The Consumer Price Index on Friday should be a non-event as far as Fed direction unless there is a major upside surprise.


Wednesday is homebuilder earnings day with KB Homes and Lennar. Constellation Brands will also be a highlight with news on their cannabis products. Bed Bath and Beyond will give us a look into holiday shopping strength.


Union Pacific (UNP) spiked $12 or 9% on news they hired long time Canadian National (CNI) executive Jim Vena as COO. This man is obviously well respected in the railroad community. Vena is coming out of retirement after working four decades for Canadian National as VP and COO. Vena was a protege of railroad superstar Hunter Harrison, who died in 2017. Harrison was the most successful manager in railroad history. Harrison pioneered the strategy called "precision scheduling railroads" (PSR) to make them operate more efficiently and profitably. Vena implemented the Harrison plan at Canadian National. UNP has always fought with scheduling challenges and congestion with its 23-state network. Multiple analysts upgraded UNP because of the addition of a PSR expert.

Cowen upgraded from neutral to outperform and raised the price target from $153 to $178. Seaport Global upgraded from neutral to buy with a $165 target.


Monster Beverage (MNST) was upgraded by SunTrust from hold to buy saying the potential for Coke to produce its own competitive energy drinks was overblown. Coke owns a lot of Monster and there is no reason for them to basically compete with themselves in a big way. They plan to create two new drinks that they claim are exempt from the 2015 partnership agreement. Monster believes that conflicts with their agreements and they are taking Coke to arbitration to resolve the matter. Coke distributes Monster's drinks around the world. There is also the risk for Coke that their two new products would not be successful while the partnership agreement would be damaged by the effort. SunTrust said they did believe the new products would clear arbitration, but they would not materially impact the Monster business. There have always been rumors that Coke would eventually buy the portion of Monster it does not already own. That would be one way to solve the problem and be able to create as many new drinks as they wanted. This may have been part of the motive force lifting Monster today.


MasterCard (MA) was downgraded by Bank of America/ML (BAC) from buy to neutral. BAC said MasterCard is expected to report a "solid" fourth quarter but still faces a "very challenging" 2019. The analyst cut the price target from $230 to $207. He said MasterCard had already released some metrics on holiday spending that pointed to robust results. However, he feels the consensus revenue growth estimate for 2019 of 12.7% was too high. Currency headwinds are likely to force a slowdown in cross border transactions and the strength of the dollar would also be a drag. The bank recommended Visa (V) as an alternative to MasterCard and they maintain a buy rating on that stock. MasterCard still posted a gain in a market where banks rallied.


JP Morgan (JPM) was downgraded by Jefferies from buy to hold. The analyst said revenue could miss high expectations after "excellent" results from last year. This may cause analysts to be overly optimistic about 2019 and expectations for rate hikes have declined. JPM currently trades at a premium valuation compared to the top five banks but the outlook for 2019 has changed and the banks should be rerated from here. JPM shares posted a fractional decline on the downgrade.


Only a couple days after denying Eddie Lampert's $4.4 billion bid for Sears, it appeared the company was headed for liquidation as of Tuesday morning. Later in the day the court ruled that Lampert would be able to bid in the liquidation auction to be held next Monday and he could be successful if none of the liquidation bids reach his number. His firm ESL Investments had to put up a deposit of $120 million in order to keep the bid alive. Keeping Sears alive will save 50,000 jobs at least temporarily. Given his track record as CEO over the last decade, it may be only a temporary reprieve. His bid had been rejected because it was not enough to even cover the bankruptcy expenses. Lampert protested and appealed the decision.

Sears bankruptcy lawyers are charging between $1,075 and $1,600 per hour for their work on the case and they have rung up millions in legal fees. If by chance Lampert wins the auction bid he would still have to structure a deal with the court by January 31st or it would fall back to the next bidder. Sears owes Lampert $1.8 billion for funds borrowed from his fund while he was CEO in order to keep the company alive.


BP Plc (BP) said it had discovered two new oilfields in the Gulf of Mexico and found an additional one billion barrels of oil at an existing field thanks to new seismic technology. They are going to spend an additional $1.3 billion to expand production at the Atlantis field in a Phase 3 development and drill eight new wells to be connected to a subsea production system and boost production by 38,000 bpd starting in 2020. BP expects to raise production in their Gulf fields from 300,000 bpd to 400,000 bpd by the mid 2020s. BP is also considering a Phase 4 and 5 on the Atlantis field.

The additional billion barrels at the Thunder Horse field was discovered by new state of the art technology within weeks of the start of testing rather than the year it would have taken with the older seismic technology. BP shares failed to rally because these are long term events.


After the bell, Skyworks Solutions (SWKS) warned on earnings and revenue for the current quarter. The company cited weakness among its "biggest" smartphone customers. On Monday Samsung warned it could see a 29% decline in profits because of increasing competition among smartphone suppliers. This follows Apple's warning last week and apparently it was not an Apple only problem. Everyone else is also struggling with lower sales.

Skyworks guided for earnings of $1.81-$1.84 compared to prior guidance of $1.91. They guided for revenue of $970 million compared to prior guidance of $1.1 billion. Normally you would expect to see shares crushed in afterhours. Instead shares rallied $3 because the revised guidance was better than analysts had expected. After Apple's warning they were expecting some serious doom and gloom.



Markets

The first five days of January are behind us. Under the January five-day rule if the market is higher over that period it will end the year higher. Apparently, it is not much of a rule. Since 1950 the first five days have been positive 44 times and only 36 times did the market close the year higher. For those 36 times the average gain was 13% so we can hope this will be a year where the rule is followed.

Thirteen percent sounds like a lot. However, the S&P is already up 8.5% from the post-Christmas low. Another 5% would put us at 2,700 or 130 points higher than today's close. Maybe Barclays knows something we do not. They cut their 2019 S&P guidance today from 3,000 to 2,750. Most analysts have started shaving their numbers but that 2,750 puts them close to the low end of the consensus estimates with 3,150 the current highest estimate.

I would rather worry about the rest of January than try to pin the forecast tail on the market donkey for 12 months from now.

The S&P rebounded 25 points to close almost exactly on the 50% retracement level from the December drop. The next resistance level is 2,580 followed by the 10% decline level at 2,637 and the double bottom in November at 2,630. The S&P has rebounded 228 points from the December low and only one day of material decline and that was the Apple warning. We are due for some consolidation soon.


The Dow got a huge boost from Boeing after news the scheduled two-day trade talks were being extended another day and the meeting appeared to be making some progress. China also said there would be a cabinet level meeting with the US later in January. That is where the real decisions will be made.

Apple rebounded after the Samsung warnings suggested it was not just an Apple problem. Other tariff sensitive stocks are also rising. There were four decliners, but the losses were minimal.

The next resistance on the Dow is around 24,000-24,145 and the 10% correction level. When the news headlines begin to proclaim the Dow is out of correction territory, the cautious traders will begin to return to the market.



The Nasdaq posted another decent gain of more than 1% despite the 114-point intraday drop. The rebound was strong, and we closed near the highs for the day. Amazon continues to be a leader as multiple analysts are projecting strong market share gains in 2019. The Samsung warning did not kill the chip sector and the Semiconductor Index only declined 5 points.

Bad news is being bought. Market dips are being bought. This is exactly what you want to see in a broad market rally. Nobody is selling on the headlines for more than a few minutes.

The Nasdaq is about to move into a 400-point period of congestion where there was high volatility on the way down. The 7300-7500 level is going to be critical. All of the moving averages are still in decline and they will all be resistance.



The Russell has rebounded 153 points since the December low or 12%. The index is up 89 points over the last three days and that is a 6.2% gain. The small caps are on fire now that the threat of rate hikes has faded. The Russell is due to rest and the 1,463 level could be the trigger.


The trend is finally our friend. The market is in rally mode ahead of earnings and we should see it continue assuming the China trade talks do not self-destruct or China attacks a US carrier in the South China Sea. The S&P futures are up +11 as I type this so the bullish sentiment is still alive. I would try to buy the dips rather than chase prices higher. There will be some consolidation soon and it will be good for the continued health of the market.

VERY IMPORTANT MESSAGE: Please read

I am posting this again because of the email problems we had over the weekend.

For 21 years I have published the Option Investor family of newsletters. I have endeavored to produce the best market commentary available. I have developed a loyal readership and hundreds of people I would call true friends. Unfortunately, all good things must come to an end.

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I do not want to just pull the plug and have Option Investor disappear into digital space. Unfortunately, that may be my only option if I cannot locate a successor by the end of January.

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