The last two days have been almost perfect in terms of textbook bullish consolidation.

Weekly Statistics

Friday Statistics

The indexes fell hard at the open and then rallied back to neutral by lunch time. The Dow fell -176 on Thursday and -203 on Friday before recovering in a calm and orderly fashion. These were not short covering bounces but thoughtful dip buying sessions where investors were picking their entry points on individual stocks rather than wholesale buying of indexes. The early morning declines gave investors excellent entry points but were not enough of a drop to scare investors away.

The most encouraging part of the move was the return to resistance each day. For the last three days the S&P has been testing resistance at 2,600 in the afternoon and almost closed at a new 4-week high on Friday just below that level. It appears the S&P is poised to breakout over that resistance on Monday assuming the weekend headlines cooperate.

Investors were obviously not worried about weekend event risk with almost the high close for the week. The big cap indexes did not post a gain, but the declines were minimal.


The economic reports were market friendly on Friday. The Consumer Price Index (CPI) came in with a -0.1% headline decline for December. Energy prices were the big drag with gasoline prices falling -7.5% and crude oil down -11.4% producing a -3.5% decline in the energy component. The core CPI rose 0.2% and the third consecutive month at that level.

On a year ago basis the headline CPI was up 1.9% and the core up 2.2%. Those are very tame numbers considering the strong economy. This report did not give the Fed any reason to be concerned about raising rates. With headline inflation declining they can afford to be "patient and flexible."

With wage growth barely rising and employment very strong, the Fed should be on hold for several more months. Rising wage inflation is a critical issue for the Fed and it is almost nonexistent.

The California Manufacturing Index for Q1 slipped from 65.0 and the recent post-recession peak to 61.2. Anything over 50 still represents expansion but only at a slower pace. New orders declined slightly from 64.9 to 64.1 and employment fell from 62.9 to 57.6. Production slipped from 72.8 to 65.0. The tariff issues and trade war with China was credited with the decline in the index. The Los Angeles and Long Beach ports are critical for Chinese imports and a slowing of commerce would be negative for the area.

The calendar for next week has a couple of important events. The next vote on the Brexit plan will be on Tuesday and many analysts do not believe it will pass. With the hard exit date in March, they need to get a plan approved ASAP so everyone can begin preparations. A failure of the vote could put May back in hot water and eventually there could be a new election to decide her fate.

The Fed Beige Book on Wednesday outlines the economic conditions in each of the Fed regions. With several recent economic reports showing weakness this could tell us where that weakness is appearing. It is not normally a market mover unless there is an unexpected change in the outlook.

The Producer Price Index will give us the inflation rate at the producer level and it is also expected to be benign.

Retail sales on Wednesday could be a surprise after multiple retailers lowered guidance after the Q4 holiday season. Since the weekly Redbook sales from Chain stores has been averaging about 9% growth, I would not expect the monthly overall report to be a disaster. We could see weakness, but sales should be rising.

The Housing Market Index could be a surprise after a persistent decline in the other home sales indicators.

The Philly Fed Manufacturing Survey will be on Thursday. In the last report the headline number declined from 11.9 to 9.1 and the lowest level since 2016. This weakness seems to be a trend in the various regional reports.


The coming week is the start of the Q4 earnings cycle and nearly every major bank is reporting along with several Dow components. JPM, Goldman and American Express should be the most watched financials but Citigroup, Bank America, Wells Fargo, US Bank, Blackrock and Morgan Stanley also report.

The biggest market mover will be Netflix on Thursday after the close. The stock is up $106 since the December 26th low at $231.

With 20 S&P 500 companies already reported the blended earnings growth is 14.5% and revenue growth of 5.6%. This is significantly under the forecast for 22% and represents several disappointing reports. However, 20 companies are just a small fraction of the total to report so that earnings number is going to change significantly as the weeks progress.

Even at 14.5% it is more than double the expected 6.8% growth for Q1. The S&P 500 is currently trading at a PE of 15.1 and the Russell 2000 at 19.5.

Total S&P earnings for 2018 are expected to be around $161.68. For 2019 that rises to a record $172.04 and 2020 is expected to hit $191.32.


There was very little stock news on Friday because everyone is in their quiet period ahead of earnings. Netflix (NFLX) garnered two upgrades and rallied again. UBS upgraded them from neutral to buy with a price target of $410. Raymond James upgraded from outperform to strong buy with a price target of $450. Morgan Stanley reiterated a buy rating.

The Raymond James analyst said the company is approaching a "profit inflection" given their solid content slate. We believe there is an upward bias to their 2020 earnings and revenue. The UBS analyst said after six months of the outlook being debated in the investment community, the bad news is already discounted by investors and reflected in the stock price. "We see the competitive moat widening around Netflix's global positioning."

Morgan Stanley said the Netflix opportunity is coming from the $500 billion annual global TV market where over the top subscription services have less than 5% of their revenues. "The shift towards a vertically integrated streaming business is accelerating." "This should translate into 1) a deeper moat, 2) greater operating leverage, and 3) meaningful free cash flow long term."


Jeff Bezos may be getting a divorce, but the stock did not react to the news. Activision said it was getting a divorce from Bungie after an 8-year marriage and shares imploded with a 10% decline. For those that do not know, Bungie developed the Destiny game and Destiny 2 was the third best selling game title in 2017. The NPD has not yet released the 2018 rankings. Bungie and Activision made the joint announcement and Bungie said they would begin self-publishing future games including the Destiny franchise.

Piper Jaffray expects the split to cost Activision $400 million in revenue and 15 cents in earnings this year. RW Baird also saw a 15-cent drop but only $300 million in lost revenue. The Baird analyst said he was not surprised with the split because Activision had said it was going to "pull the plug on underperforming games" and Destiny may have run its course. BMO capital had the same outlook that Destiny revenue was likely fading.

Not everybody was cutting estimates. The Benchmark Company reiterated a buy rating and $87 price target. Stephens initiated coverage with a buy rating and $65 target. Piper Jaffray only cut their price target by $2 to $55. The biggest hit came from Keybanc with a target price cut from $80 to $64.

Shares fell 9% but remain over support at $45.


PVH Corp (PVH) rallied 7% after raising Q4 and full year guidance. For Q4 they now expect revenue of $2.4 billion and full year revenue of $9.6 billion. They guided for Q4 earnings of $1.75 and 15 cents above the high end of their prior guidance. Full year earnings are now expected to be $9.50. The company said it was relaunching the Calvin Klein brand under a new name. Shares gained $7 in a weak market.


GM shares rose 7% after the company raised guidance for 2018 and 2019. For 2019 the company said it expects earnings of $6.50-$7.00 and analysts were only expecting $5.92. The company said it expects free cash flow of $4.5-$6.0 billion. They guided for full year 2018 earnings to beat expectations and FactSet was looking for $6.24. The CEO said they were making ambitious changes to Cadillac in order to challenge Tesla in the EV market. She said Cadillac would be the tip of the corporate spear on electrification.

She said the plan to sell the Lordstown Ohio, small car factory to Tesla fell through because Tesla was not interested in the GM workforce represented by the UAW.


Shares of Caesars Entertainment (CZR) spiked 9% after a rumor broke that Carl Icahn may have taken an activist stake. A year ago, Tilman Fertitta offered to buy Caesars for $13 a share. When the deal did not go through shares fell to $6. Credit Suisse said Caesars was in an ideal position in the Las Vegas gaming market after renovating "long-neglected" assets and focused on creating new convention space. There was no confirmation of Icahn's position, but the stock has been on fire since December 24th.


Starbucks (SBUX) dipped at the open after Goldman said they would be the next company to warn on earnings because of business declines in China. The analyst cut the stock from buy to neutral with a $68 price target. Starbucks has 3,600 stores in China and Goldman said a falling GDP driven by a decline in consumer spending was going to slow retail sales. Shares fell about $3 at the open but recovered to end with only a fractional loss.

Goldman also cut Yum Brands (YUM) to a sell citing valuation and concerns about US sales at Pizza Hut and Taco Bell. The analyst cut the price target from $83 to $76.



The Wall Street Journal reported on Friday that Apple will release three new versions of the iPhone in 2019. There will be a successor to the troubled XR and have an LCD screen. The highest priced model will be above the current XS and have a triple rear camera while the lower end models will have a double rear camera.

Also on Friday multiple headlines reported significant discounts from Apple to retailers and partners in China by as much as 20%. Reportedly lower priced phones with more features from companies like Huawei and LG are taking market share at Apple's expense.

In the current Qualcomm trial with the FTC we learned on Friday that Apple demanded a $1 billion payment from Qualcomm to be considered as a modem chip supplier in 2011. Apple did not give any assurance whether it would buy the chips after the payment or how many chips it would buy. Apple then complained in the trial that had they chosen to use a chip from another manufacturer, Qualcomm would halt their rebate program and that would force the cost higher on the alternate chips.

OK, lets see if I can make this understandable. Apple demanded $1 billion a year just to allow Qualcomm the potential to sell their chips. If Apple bought a $100 chip from Qualcomm the company would give them a $25 rebate. (sample numbers only). If they decided to buy an equivalent chip from another company for $100, Qualcomm would not give them the rebate. So, Apple sued Qualcomm for noncompetitive practices that raised the cost of the phone if they bought chips from somebody else. It looks to me that Apple was the culprit here, but I am sure we do not have all the details. We do know that Apple went to the FTC and donated thousands of pages of documents in an effort to get the FTC to sue Qualcomm and cost them billions in legal fees at the same time Apple was suing Qualcomm. That is just wrong.

Warren Buffett had a bad Q4 because he lost $23 billion on his apple shares since early October. Buffett owns 252.5 million shares as of the end of Q3. If Buffett followed his own advice to buy when others are fearful, he probably bought more on the way down. That loss was from the high on October 3rd. Obviously Buffett did not buy all his shares at the high. He has been buying them for several quarters, so his basis is probably a lot less than the $233 high for the stock on October 3rd. Regardless of when he bought the shares it is likely he has lost billions. Some 130.2 million shares were bought between Jan 1st, 2016 and March 31st 2017 so those are still profitable. Another 110 million were bought between April 1st, 2017 and March 31st 2018. Those are probably underwater. It will be interesting to see his next SEC filing to see if he liquidated any on the way down or bought more thinking he was getting a bargain.


Tesla's Elon Musk tweeted a picture of the new SpaceX "super heavy" rocket which he plans to use to send 100 people to Mars in the early 2020s. The rocket looks like something from a Buck Rogers movie in the 1950s. It is huge and supposed to be reusable. This particular rocket is for initial suborbital testing. The actual rocket used for orbital flights and beyond will be longer and have better curves according to Musk. The first test flights are expected to be in March or April.



I mentioned earlier that Jeff Bezos and his wife MacKenzie are divorcing after 25 years. They were married one year before he started Amazon, so community property rules apply. She did work in the business in the early days, so she definitely has community rights. There is reportedly no prenup since he had no money and worked out of his garage in the beginning. They have been separated for some time and are just now making it official with a joint statement. The National Enquirer was preparing a story where they tracked Bezos dating a former Fox TV anchor, Lauren Sanchez, 49, who is married to Hollywood talent agent Patrick Whitesell. Jeff and Lauren have been dating since April 2018. The rumor is that Lauren is also divorcing. They were friends of the Bezos for years. MacKenzie reportedly knew they were dating.

The real point if this commentary is that the couple will split in some form, Jeff's 80 million shares of Amazon which are worth $131 billion. Including Jeff's other companies, he is thought to be worth $137 billion and the richest man alive. If they do split the estate evenly, he would drop to fourth richest. Because Amazon's value is linked to Jeff remaining in total control, it is unlikely the ownership shares would be split. MacKenzie and Jeff contribute billions to charities and have multiple nonprofits together. If shares were split it is more likely that Jeff would retain voting rights to protect the value of Amazon and of the shares.

Supposedly it is going to be a friendly parting and the joint statement said they would remain partners and friends. I doubt it is about the total amount of the split. After all, once you have $10-$15 billion does it really make any difference. This will go down as the most expensive divorce regardless of the split percentage. Currently the record is held by Steve and Elaine Wynn with a $1 billion settlement. Harold Hamm wrote a check for $974.8 million in 2012 to end his divorce battle. MacKenzie will likely become the richest woman in the world.

Amazon shares did not react because investors believe the parting will not have any material impact on Jeff's control.



Crude prices rebounded to $52 for a gain of $10 from the $42 low on Christmas Eve. This is due in part to repeated comments from Saudi Arabia that they are going to accelerate production cuts and restrict the amount of oil sent to the USA. Getting over the $53 level could be a challenge if inventory levels in the US do not decline. We saw a sharp rise in refining activity over the last week of December and first week of January but inventory levels barely dipped. Inventories of refined products moved sharply higher, so we may still see a decline in crude numbers that were missed in the holiday reporting.




Markets

The markets have now risen for three consecutive weeks. The Dow has gained 1,449 points over that period and is only about 200 points away from recovering the 1,655 points it lost in the week before Christmas.

It has been a good three weeks with only one day with a material loss thanks to Apple. The S&P has closed just under 2,600 for three consecutive days and the intraday dips on each day were quickly bought and the index returned to that resistance.

On Friday the big cap averages failed to close with a gain but they were only minimally lower. I attribute that to normal weekend event risk and the political battle underway in Washington. While that does not directly impact the stock market it probably weighed on investor sentiment and they saw no reason to continue buying the highs until resistance has been broken.

Assuming there are no disaster headlines over the weekend I would expect to see a resistance breakout attempt on Monday. Should the S&P move over 2,600 the next material resistance is 2,632 and that could prove tougher to break.

With a sudden flurry of earnings warnings, we could see investors slack off on their buying until we get some of the actual earnings behind us. If the trend in warnings continues and earnings growth remains in the 14% range, we had last week, that could trigger some more caution. We need some big reports with big earnings and even stronger guidance to move the markets through that 2632-2800 congestive resistance range on the S&P. There are multiple resistance levels in that range at 2,700 and 2,740.


To say the Dow components were lackluster on Friday would be an understatement. Advancers and decliners were dead even and only three stocks moved over $1. UnitedHealth added 19 Dow points and Apple and 3M subtracted 19 Dow points leaving the index flat.

The Dow is struggling with round number resistance at 24,000 and stalled there on each of the last three days. The next major resistance should be around 24,300 then 24,750. Once into the congestion range of 24300-26000 we could see several weeks of choppy trading unless sentiment changes significantly.




The Nasdaq has the worst resistance path of the big cap indexes. Round number resistance begins at 7,000 and again at 7,300, 7,400 and 7,500. Congestive resistance starts at 7,000 to 7,500. This is where the Nasdaq was extremely volatile from late October until early December. Many investors that took positions in this volatility have been underwater for the last month. They will be happy to exit for a breakeven.



The Russell 2000 has had a great rebound. It has posted gains on 12 of the last 13 sessions. The amount of the gains has slowed, and the index was barely positive on Friday. The declining risk of Fed rate hikes is the reason for the rally. However, the index is headed into some serious congestive resistance and until it closes over 1,600 again, there is going to be a daily fight for higher ground.


I believe the market will be positive next week. The earnings excitement has been blunted by the earnings warnings, but it still exists. Fund managers still have excess cash and buybacks are still in progress. There were $1.1 trillion in announced buybacks in 2018 and we should see another wave with the Q4 earnings because stock prices are cheap. I would try to buy your favorite stocks on dips. Once we move a little higher in to the Oct/Nov congestion ranges we should see a little more volatility in individual stocks.

Enter passively and exit aggressively!

Jim Brown

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"Success is not final, failure is not fatal: it is the courage to continue that counts."

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