It has been five months since the October 10th crash and most of the losses have finally been erased.

Weekly Statistics

Friday Statistics

The S&P has recovered the 14% decline since October 10th, but it still has about 4% to go to reach the 2,930 high close from September 20th. I would say as long as we can avoid a headline disaster over the next couple weeks, the odds are good we will retest that high. The hard part is over with the close over 2,815. If the market can confirm on Monday with an added gain, the price chasing should begin. The break over 2,815 should trigger a fear of missing out (FOMO) response. The prior high is now so close it will become an even stronger price magnet for the index.

The Nasdaq Composite lost 1,919 points since the August 29th high at 8,109. That is a 31.0% decline. Since the Christmas bottom the Nasdaq has rebounded 1,497 points or 24.2%.

Those two indexes have recovered the majority of their losses and are moving towards a retest of the highs. The Russell 2000 fell from 1,740 to 1,267 or -473 points, -37.3%. It has yet to rebound through 1,600 and Friday's performance was disappointing. The index rallied 14 points intraday then gave it all back. Only a last-minute surge kept the Russell from closing negative.

Here is the key point. The Russell is 2,000 stocks, mostly domestic companies and representative of all sectors. The broader market is not participating to the degree of a few big cap stocks. The rally this week was liquidity driven and led by a few large cap techs. Next week's market performance will depend on the small caps participating to some extent. The Russell is the sentiment indicator for fund managers. If sentiment does not improve, the big cap rally will falter.

Here is a risk. The high in January 2018 was 2,872. What is the possibility for a head and shoulders pattern at that level given the negative earnings forecast for Q1 and the delays in a China trade agreement? While this is a possibility, I think there is a greater chance of testing the 2,930 high and then failing for those same reasons. Hopefully, I am wrong.

Friday was a good news, bad news day for economics. The Job Openings Labor Turnover Survey (JOLTS) for January showed a near record 7.581 million job openings. That is 4.8% of all current employment and a monster number. This is also 15% higher than January 2018. The record was 7.626 million in November. There was a drop to 7.479 million in December but that looks like just a blip in the trend. There are more jobs than there are unemployed workers looking for jobs with only 0.9 workers for available job.

Hires rose from 5.717 million to 5.801 million. Separations rose from 5.469 to 5.550 million. Quits rose from 3.391 to 3.490 million. Layoffs declined from 1.751 to 1.723 million. The gap between openings, 7.581 million and hires at 5.717 million is a clear indication of how difficult it is to find qualified workers.

This report confirms the big Nonfarm Payroll miss at 20,000 jobs last Friday was a complete fluke. There is something wrong with the data because this report spans the survey period for the payroll report. If there was a dramatic change it would have been reflected here.

Consumer sentiment for March rose from 93.8 to 97.8 as the effects of the government shutdown fade away. Tax refunds are starting to appear and that always lifts sentiment. The present conditions component rose from 108.5 to 111.2 and the expectations component rose from 84.4 to 89.2. The delay in refunds due to the government shutdown will delay the rebound in sentiment and likely depress retail sales and GDP for Q1.

Those respondents expecting wages to rise over the next year rose from 51.6% to 54.6%. Once we get out of tax season and the China trade agreement is completed, we should see a significant spike in sentiment. When the political campaigns shift into high gear late in the year, sentiment will fall again. Politicians get elected by telling people how bad things are and how they will fix them when they get to Washington. Consumers remember the bad points. With 14 announced democrats and another 17 likely to announce there will be an unbelievable amount of mud slinging against each other and against president Trump. This is going to be a very ugly campaign that will depress consumer sentiment.

Industrial production for February rose from -0.6% to +0.1%. It is hard to get excited about 0.1% especially when analysts expected a 0.4% reading. As always, I think this is a bogus number. Utility production rose 3.7% due to the abnormally cold weather. That lifted the headline number significantly. I do not think utility production should be included in this report.

The Empire State Manufacturing Survey for March fell from 8.8 to 3.7. This was the weakest number since May 2017 and analysts were expecting 8.5. This is down from 21.4 as recently as November. New orders fell from 7.5 to 3.0. Backorders rose slightly from -0.7 to +2.2. Employment spiked from 4.1 to 13.8 and was the most bullish component. Bearish components included a rise in prices paid from 27.1 to 34.1 and a decline in prices received from 22.9 to 18.1. They paid more and sold for less. That is not a good scenario.

The recent string of negative economic reports has depressed the real time Atlanta Fed GDPNow forecast to 0.4% growth for Q1. This is a direct result of the government shutdown, a month without spending by 800,000 workers and the delay in millions of tax refunds. This will improve but not materially until Q2. The Fed is still expecting 1.4%-1.6% growth in Q1 and they will update those numbers next week.

The yield on the ten-year fell to 2.58% intraday on Friday as the economic outlook soured, China's industrial production fell to a 17-year low and a complicated Brexit is looking more likely as each day passes. The 52-week low is 2.55%.

The US pulled all its administrative people out of Venezuela saying their presence limited our response to the humanitarian disaster. The president sent 5,000 troops to neighboring Columbia as a rapid reaction force. Russia sent several thousand Spetsnaz special forces troops into Venezuela to support the Maduro regime. China has several thousand troops in country for "humanitarian" reasons. China wants to protect its $20 billion in oil backed loans. Cuba has over 1,000 troops working as presidential protection details and to maintain civil order. The potential for a violent conflict in Venezuela is growing by the day. That is causing a flight to safety in treasuries.

The economic calendar for next week is uninspiring. The biggest event is of course the FOMC decision and press conference on Wednesday. Normally the day before a FOMC meeting is positive. In the current market I believe we could see Monday positive as well assuming we can avoid a headline disaster over the weekend.

The Fed is not expected to change rates. The current consensus does not expect a rate hike until December. That target is slowly moving into the future and quite a few analysts now believe it could be mid 2020 and others believe the next rate change could be a rate cut.

With China pouring on stimulus and the EU facing a stimulus situation as a result of Brexit concerns and a slowing economy, the Fed is not going to raising rates in that environment.

Analysts are hoping the Philly Fed Business Survey will return to expansion after falling into contraction in February. The Philly Fed survey is the most important of the regional reports. Another month in contraction could easily turn equities negative.

As you can tell by the small graphic below the earnings cycle is over. The three big names for this week are FedEx, Micron and Nike. These are all Q1 reports, actually for the three months ending on February 28th. They are considered Q1 reports for our purposes. Nine S&P companies will report earnings next week.

To date, 496 S&P companies have reported Q4 earnings. The final total is expected to show 16.8% earnings growth and 5.1% revenue growth. The current PE is 16.7. There have been 79 guidance warnings for Q1 and 30 guidance upgrades.

The current forecast for Q1 earnings growth is a decline of -1.5% but it has stabilized at that level for the last week. It has stopped moving lower at least in the short term. Since earnings estimates normally rise about 4% during the reporting cycle, Q1 could still end up with positive earnings growth. Q2 earnings growth is projected at 3.1%, Q3 2.9% and Q4 9.3%. The earlier quarters have much higher comps. For all of 2018, earnings are expected to rise 24.0%. For 2019 the forecast is 3.6% and a significant difference. Actual S&P earnings in 2018 were (projected) $162.03. They are forecast to rise to $167.93 in 2019 and $168.05 in 2020. That is VERY slow growth through 2020 and not much to power the market.

There were no earnings of consequence on Friday. There were four big reports Thursday evening that moved those stocks.

Broadcom (AVGO) reported earnings of $5.55 per share that beat analyst estimates for $5.22. Revenue was $5.79 million and narrowly missed estimates for $5.82 billion. The company no longer provides quarterly guidance, but they reaffirmed full year revenue guidance for $24.5 billion. They also said they would return $12.5 billion to shareholders through buybacks and dividends in 2019. They said chip sales would bottom in Q2 during the seasonal smartphone slump but then accelerate sharply in Q3/Q4.

Deutsche Bank raised their price target to $330 and Barclays's raised their target to $275. Credit Suisse raised their target to $320. Shares rallied 8% on the results to $290.

Shares of Ulta Beauty (ULTA) spiked 8.3% after the company reported earnings of $3.61 that beat estimates for $3.56. Revenue of $2.12 billion rose 10% and beat estimates for $2.11 billion. Same store sales rose 9.4% with a 25% jump in online sales. Analysts were expecting 7.9%. Amazon is starting to be a challenge. Ulta offers more than 20,000 products from 500+ brands including their private label. Amazon is gaining market share in the cosmetics sector. Despite the broadening product line at Amazon, Ulta said they are holding their own because customers want to come into their stores and shop. "Four out of five millennials enjoy experimenting with different brands" and they can do that in the store.

The company guided for full year earnings of $12.65-$12.85 based on a 24% tax rate and share reductions from a $700 million stock buyback program.

Oracle (ORCL) reported earnings of 87 cents and analysts expected 84 cents. Revenue declined from $9.68 billion to $9.61 billion but still beat estimates for $9.58 billion. The company guided for a current quarter drop in revenue below estimates for $11.15 billion. The Co-CEO said the strengthening dollar would be a 3-cent headwind to earnings.

On the positive side, cloud services revenue rose 27.9% and slightly better than the 21.5% industry average. Shares fell $2 at the open but rebounded to close flat.

Adobe Systems (ADBE) reported earnings of $1.71 that beat estimates for $1.62. Revenue of $2.6 billion beat estimates for $2.55 billion. The company guided for current quarter earnings of $1.77 on revenue of $2.70 billion. Analysts were expecting $1.88 on $2.72 billion. Shares fell -4% on the news.

All of Adobe's segments grew sharply with overall revenue up 25%. They blamed some of the Q1 weakness on a shift in accounting standards from ASC 605 to ASC 606. We will see multiple companies mention this in their 2019 reports.

S&P announced that Adobe will be added to the S&P-100 at the open on March 20th. They are replacing Twenty-First Century Fox that is being acquired by Disney.

Tesla (TSLA) announced its new Model Y crossover SUV and was met with poor reviews. The car will use 75% of the parts used in a Model 3 and analysts said the new car looked like an oversized Model 3. In theory it seats 5 but it would be a very crowded trip.

Deliveries of the high-end version will begin in late 2020 with a price tag in the $69,000 range. Deposits to place a reservation rose to $2,500 compared to the $1,000 for a Model 3. There were no comments about how many people had reserved, unlike the constant bragging about the 400,000 people that reserved a Model 3. Analysts said the higher deposit suggested a cash bind since the car will not be available until late 2020. The car is expected to be built at Gigafactory 1 in Nevada. When completed, Gigafactory 1 will have 15 million square feet and be the largest building in the world. Tesla just broke ground on Gigafactory 3 in Shanghai. Gigafactory 2 is in Buffalo NY.

There was a lot of negative press about the enthusiasm for the new car. The presentation was low key and Musk was even heckled from the audience at the invitation only event. The cult of Musk appears to be fading. Cowen reaffirmed their sell rating and $200 price target.

If you are thinking about buying an EV checkout the Jaguar I-Pace.

Apple shares had a good week with a surge from 170 to $186. It was not that all the news was good but there was enough to create a buying frenzy. A judge ruled that Qualcomm had to pay Apple $1 billion in rebates that had been withheld because of Apple's nonpayment of royalties due to Qualcomm. This is just a temporary ruling since the bigger cases against Apple are still in progress.

In another court a jury found in favor of Qualcomm claiming Apple violated three patents and awarded Qualcomm $1.41 for each phone manufactured with that technology. The total was $31 million but this is just one more small step as the big cases wind through the courts. With every patent case Qualcomm wins against Apple, that is one more patent claim they do not have to litigate in the big cases. That becomes settled law.

The competition watchdog for the EU is considering a probe against Apple and monopoly concerns over the App Store. Spotify filed a complaint against Apple saying the company should not get to charge the 30% fee on customers making Spotify purchases because Apple had its own music service. US lawmakers have been talking about splitting up Apple and breaking out the app store because of its unfair advantages. Apple gets to decide who is allowed into the store and then charge them the 30% fee on purchases.

Morgan Stanley analyst Katy Huberty said she was seeing signs of iPhone stabilization in China. She said Apple gained market share in January and February after losing share in December. They also did not revise estimates lower for builds after a long string of cuts. She said estimate cuts have "overshot to the downside" and replacement cycles have converged. She reiterated an overweight rating and $197 price target.

The Apple Watch was found to be able to detect irregular heartbeats that signal the need for further monitoring and investigation. The Atrial Fibrillation study with 400,000 participants was funded by Apple. Patients with AFib are five times more likely to have a stroke. About 2,000 study participants received notifications to be tested and one third of them were found to have AFib. This study was done with the prior version of the watch and not the current Series 4 model, which has the ability to take an electrocardiogram to detect heart problems.

Bank of America upgraded Apple from neutral to buy and raised their price target from $180 to $210. Cowen initiated coverage with an outperform and $220 price target.

Facebook (FB) did not have a good week. The service suffered a major outage on Wednesday that lasted most of the day. The company blamed it on a server configuration change.

They also announced the chief product officer, Chris Cox, who has been with Facebook since 2005 was leaving along with VP of WhatsApp, Chris Daniels. Zuckerberg's pivot to a "privacy focused social platform" with encrypted communications has created some internal unrest. This privacy pivot is an effort to head off attacks by dozens of regulators around the world on Facebook's lack of privacy and sale of customer data.

According to the NYT, federal prosecutors are looking into partnerships and data distribution agreements for Facebook and others. We know from recent disclosures more than 150 companies had access to user data on Facebook despite prior claims from Facebook that the data was private or had been restricted at some point in the past. Apparently, nearly every retailer including Amazon had nearly full access. For instance, Amazon was able to see friends and family data while Netflix and Spotify were able to see private messages between friends.

On Friday, Apple released a 60 second commercial suggesting Apple was the only company that took customer privacy seriously. It is a humorous plug in a crowded sector. See it here.

Crude prices rallied to a four-month high at $59 on Friday as the production outages in Venezuela continued. The power outage across most of Venezuela is impacting production, which is now around 900,000 bpd, down from 2.5 million bpd about two years ago.

Natural gas prices remained flat despite a 204 Bcf decline in inventories last week. Current inventories in the US fell to 1,184 BCF, only about five weeks of supply if the cold weather continues to plague the Midwest and Northeast. Investors are betting warmer weather will appear before we run out of gas. With the first day of spring on Wednesday, the odds are good warmer weather is coming soon.

The rig count only declined by one rig after a -24 rig drop over the prior three weeks. With oil prices beginning to rise into the Memorial Day peak we are not likely to see any major rig declines in the weeks ahead.


The quadruple witching option expiration and the quarterly rebalance of the S&P caused a 4 billion share spike in volume on Friday. Nearly 11 billion shares traded.

S&P rebalances their indexes to account for the reduction in outstanding shares as company's buyback their stock.

There were more than $1 trillion in buybacks announced in 2018. In the 4-6 week period surrounding earnings, most corporations respect a blackout period on buybacks. They do not want to be blamed for trying to influence their stock prices around an earnings report. With buybacks currently running about $265 billion a quarter, they are a major support for the market. If you take that support away from April 1st to May 15th at a time when investors are selling stock to pay their tax bills, we could see some market weakness.

The S&P movement on Friday was no doubt influenced in part by the rebalancing. In theory it should be a zero-sum day. Index funds must sell stocks that have bought back a lot of shares and then buy stocks that did not pursue buybacks because their weighting rose by default. In theory a fund selling $50 million in stocks with reduced weightings, should have spent that same $50 million on stocks with increased weightings. As Yogi Berra once said, theory never works in practice.

Regardless of the reason for the rally, we did get a strong close over the 2,815 resistance on the S&P. Now we need some confirmation on Monday with a higher close. If we fall back below 2,815 because the Friday factors are no longer lifting the market when we get to fight that resistance all over again. The next material resistance is the prior high at 2,930 and that is a big target. Normally when the indexes get this close to those major levels, they succeed in touching them but it is the post touch reaction that counts. Breakout to new highs or failure at a double top? Time will tell.

The Dow has a way to go to retest resistance at 26,191. The decline in Boeing erased more than 300 points from the Dow and that made the Dow fall behind the Nasdaq and S&P. Boeing appears to have bottomed at $370 and gained more than $5 on Friday, so its drag on the Dow should be over. Since this is a liquidity driven rally, the large caps are being favored and the Dow should catch up with the S&P in the days ahead.

The Nasdaq closed over prior resistance and appears poised for a run to the prior high at 8,109. The A/D line was not overly positive at 3:2 advancers over decliners but there were 112 new 52-week highs. Considering the declined in ADBE, FB and GOOGL, I am surprised the index did so well, but Broadcom and Amazon overcame the weakness in those stocks.

As I said earlier, this has been a liquidity driven rally led by a few large cap stocks, mostly in the tech sector. The Russell has not participated and traded almost perfectly flat for the last four days. As the fund manager sentiment indicator, we need for the Russell to wake up quickly or the big cap rally could fail.

I am positive on the market ahead of the FOMC decision. Tuesday before a decision is normally positive and recently Monday has tended to be positive as well although not with a lot of conviction. The Monday after a quadruple witching expiration is normally flat as investors clean up their portfolios from the expiration leftovers. People who wrote options can wake up on Monday with stock in their account that they need to sell. Others that saw a lot of margin freed up by expiration can begin establishing new positions for the April option cycle.

The wild card here remains the China trade talks. I am shocked that moving the target date for a meeting into April was not met with more selling. Obviously, the claims of "concrete progress" and that President Xi wanted to conclude negotiations with a state visit to the US, offset any concerns that the talks could fail. This remains a risk until a deal is completed.

Enter passively and exit aggressively!

Jim Brown

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"Opportunity does not knock, it presents itself when you beat down the door."

Kyle Chandler

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