The major indexes rocketed higher from the December low only to stagnate the closer they get to the record highs.

Weekly Statistics

Friday Statistics


Please read the important announcement
at the bottom of this commentary.


The S&P remains locked in a range from 2895-2910 with the record high close at 2,930. We are very close but every attempt to move higher is sold. There is no excitement about the new highs or the better than expected earnings.


The small cap sector which should be leading the market, is weakening after failing for five consecutive days at 1,585. This is bearish for sentiment.


The Nasdaq 100 ($NDX) has closed at record highs for the last two days but that also failed to generate any excitement. The normal "breakout" when a new high is made, turned into a slow crawl higher. That is still positive, but it failed to ignite the breakout rocket.


There was a ton of economic reports on Thr/Fri. The weekly jobless claims came in at 192,000 and the lowest level since September 6th, 1969. Claims have declined for five consecutive weeks suggesting the payroll report for April is going to be a blowout. The four-week moving average fell to 201,250 and the lowest level since November 1st, 1969. The insured unemployment rate was 1.2% and the lowest rate on record is 1.1% so we are close to a record low. Employers are reluctant to layoff workers because they know they will not be able to find replacements.

The Philly Fed Manufacturing Survey for April declined from 13.7 to 8.5. That comes after a 17.8-point jump in the March reading. New orders exploded higher to 15.7, up from 1.9. Inventories declined sharply from 17.2 to 2.6 suggesting a pickup in manufacturing in the coming weeks. Backorders declined slightly from 3.1 to 0.4. Employment also rose sharply from 9.6 to 14.7.

Prices paid and received went in opposite directions and not in a good way. Prices paid rose from 19.7 to 21.6 and prices received declined from 24.7 to 20.0. There is a margin squeeze in progress and inflation is declining rather than rising. New orders rose for 39.4% of manufacturers and declined for 23.8%. Some 26.8% of manufacturers reported increased hiring, which suggests stronger metrics ahead.


Retail sales for March rebounded sharply from -0.2% to 1.6%. While that sounds good on the surface, the majority of the gains were driven by rising gasoline prices. Gas prices have been rising for nearly two months. If you exclude autos, sales rose 1.2%. If you exclude autos and gasoline, sales rose 0.9%. Motor vehicles and parts rose 3.1% and gasoline stations rose 3.5%. Furniture and fixtures rose 1.7%, electronics 0.5%, food and beverages 1.0%, clothing 2.0%, general merchandise 0.7%, food service and drinking 0.8% and non-store retailers 1.2%.

The headline gain was the largest since September 2017. Year over year sales were up 3.6% overall. Analysts claim tax refunds may have boosted spending. As more people go to work, spending will increase.

Conference board leading indicators rose 0.4% after a downwardly revised 0.1% in February. Employment was credited with supplying the biggest boost. The report suggests the economy is poised to accelerate in the months ahead. The leading indicator report takes numbers from all the other reports to predict future economic growth.

Business inventories rose 0.28% in February and less than the 0.5% analysts expected. This was the lowest level in three months after a 0.86% rise in January. Motor vehicle parts rose 0.3% and auto parts dealers saw inventories rise 0.4%. In theory the slowing of the inventory build cycle suggests either sales are increasing, or manufacturers are letting inventories deplete after the weak retail sales in February. Fortunately, low inventories mean higher manufacturing activity at some point in the near future.

New residential construction for March declined slightly from a 1.142 million annualized pace to 1.139 million. Single family starts declined slightly from 788,000 to 785,000. Multifamily starts were flat at 354,000. Starts in the Northeast declined -4.4%, Midwest -16.6% due to weather, South -7.2%. Starts in the West rose 31.4% as the spring building season arrived. Permits, a leading indicator for future starts, declined from 1.291 million to 1.269 million.


The Atlanta Fed real time GDPNow forecast for Q1 GDP rose sharply from 2.3% at the beginning of the week to 2.8% thanks to the housing starts, retail sales and inventories. The first quarter is normally a blackhole for GDP but this one is shaping up nicely. We get the first official look at the GDP from the BEA on April 26th.

This is far from the outlook at the end of 2018 when the S&P was down 19% and analysts were worried about a recession. This suggests Q2 will be even stronger, especially if there is a China trade deal.


The calendar for next week is led by home sales and the Richmond Fed Manufacturing Survey. The survey is not a market mover, but strong home sales numbers could lift the economic outlook.


We have a big week of earnings ahead with a lot of big names on Wednesday and Thursday. Earnings have been coming in better than expected with many companies beating estimates by 5-7%. The average beat in prior quarters is about 3.5%. However, there are still a few companies every day that stink up the place. There have been 77 S&P companies that have reported and 77.9% have beaten on earnings with 48.1% beating revenue estimates. The current earnings forecast for Q1 is -1.7% and a 5.0% increase in revenue. It is very unusual to see earnings decline when revenue is increasing. The forward PE is 16.8. There have been 85 earnings warnings for Q1, and 31 companies issued positive guidance. During the coming week 155 S&P companies report earnings.


In earnings on Thursday Union Pacific (UNP) was a big winner. The company reported earnings of $1.93 that beat estimates for $1.89. Revenue declined 2% to $5.38 billion and that missed estimates for $5.48 billion. However, expenses declined -3% to $3.42 billion allowing them to increase profits on less freight. The company said severe cold weather flooding along the Missouri river impacted schedules for more than three weeks and led to the lower overall volume. They guided for volume to grow at a low single digit rate in 2019 but they also projected another $500 million decline in expenses. Shares gained $7 to a new high on the news.


Honeywell (HON) reported earnings of $1.92 that beat estimates for $1.83. Revenue declined sharply from $10.39 billion to $8.88 billion but beat estimates for $8.63 billion. Aerospace revenue fell 16% to $3.34 billion but still beat estimates for $3.24 billion. For the full year they raised their guidance from $7.80-$8.10 to $7.90-$8.15. Revenue guidance rose from $36.0-$36.9 billion to $36.5-$37.2 billion. Shares rallied $6 to a new high.


Travelers (TRV) reported earnings of $2.83 that beat estimates for $2.72. Revenue rose to $7.671 billion and beat estimates for $7.113 billion. Net premiums written rose 3% to $7.057 billion. They increased their dividend by 6.5% to 82 cents payable June 28th to holders on June 10th. Earnings came from lower catastrophe losses, which offset a decline in net investment income. Shares spiked to a 52-week high at the open.


Dover Corporation (DOV) reported a 37.7% rise in earnings to $1.24 that beat estimates for $1.12. Revenues rose 5.3% to $1.725 billion and beat estimates for $1.687 billion. Organic growth rose 8.3% and results were impacted by a 3.4% revenue hit from the strong dollar. Bookings at the end of Q1 were $1.78 billion and order backlogs increased 6% to $1.42 billion. Shares closed at a new high.


Checkpoint Software (CHKP) did not have a good day. The company reported earnings of $1.32 that narrowly beat estimates for $1.31 and only 2 cents over the year ago quarter. Revenue rose 4% to $472 million and barely beat estimates for $471 million. For the current quarter they guided for $474-$500 million and earnings of $1.31-$1.40. The revenue was in line, but the earnings guidance was 2 cents below analyst estimates. Shares fell nearly $10 on the weak guidance.


Genuine Parts (GPC) reported earnings of $1.28 that missed estimates for $1.31. Revenue of $4.74 billion also missed estimates of $4.8 billion by 1%. Net sales rose 3.3% but 2% was due to acquisitions. They also suffered a 2% headwind due to the strong dollar. Revenue from the automotive segment rose only slightly from $2.56 billion to $2.62 billion. Industrial parts revenue rose from $1.55 billion to $1.64 billion. For the full year they guided for revenue to rise 3-4% and earnings of $5.81-$5.96. Shares fell $7 on the missed earnings.


Phillip Morris (PM) reported earnings of $1.09 that beat estimates for 98 cents. Revenue declined -2.1% to $6.75 billion and narrowly beat estimates for $6.74 billion. Cigarette volume was flat at 164.3 billion units. Marlboro shipments rose 3.4% to 60.0 billion units. For the full year the company guided for earnings to rise from $4.84 to $5.09 but missed estimates for $5.18. The tobacco sector also took a big hit from a new bill introduced to raise the age for purchasing tobacco from 18 to 21.



Intuitive Surgical (ISRG) reported earnings of $2.61 that missed estimates for $2.70. Revenue rose from $847.5 million to $973.7 million. Analysts expected $975 million. Shares fell $35 in afterhours to cap a monster decline impacting the sector from the Medicare for All proposal Bernie Sanders announced earlier in the week. The biotech and drug stocks were crushed. ISRG said the number of procedures rose 18% and they delivered 235 Davinci systems in the quarter. These are great numbers and ISRG should recover once the sector rout is over.


Energy services giant Schlumberger (SLB) reported earnings of 30 cents that matched estimates. Revenue rose only slightly to $7.879 billion but it was enough to beat estimates for $7.810 billion. Both numbers were lower than the prior quarter. The company projected lower activity in land rigs in North America and seasonal slowness in international markets. North American revenue was down -3% because of pricing weakness. They do expect the overall market to improve as production cuts overseas take effect. They also warned that four years of slowing investment in the sector would result to lower services activity in the years ahead.


Multiple analysts have warned that higher long-term oil prices are coming because of this significantly lower investment. If the market turned sharply higher today it would take 5-7 years for investment and production to catch up. Currently there is a massive number of drilled but uncompleted (DUC) wells in North America. There is no reason for producers to continue punching holes until pipeline capacity catches up and these 8,500 DUCs are completed.


Crude inventories declined slightly last week despite this being the season for refinery utilization to rocket higher. There have been several unplanned outages and that is impacting the numbers. Utilization should be over 90% by now with the summer driving season just ahead.

Crude prices are stuck just under $65 and have been for more than a week. While there are multiple levels of instability as in Libya and Venezuela, we are in that low demand period before summer driving accelerates. We are also seeing a spike in gasoline prices as a result of the refinery outages and the normal price ramp that peaks around Memorial Day. Gasoline prices have been up sharply since mid-February. This will impact summer demand.

Active rigs declined by another 10 rigs last week with 8 oil and 2 gas rigs dropping out of service.

Natural gas prices fell to two year low on warner than normal late winter weather. Demand has declined and we have seen injections into storage for the last three weeks.






Zoom Technologies (ZOOM) saw a huge bump in their stock price over the last month as investors confused them with Zoom Video (ZM), which IPOed on Friday. Investors who had been holding ZOOM shares at 25 cents since late 2014 were rewarded with a surge to $6 over the last week. Anyone paying attention could have received a monster windfall. Even after the difference in tickers was widely discussed in the news the shares closed at $2.70 on Friday.


Zoom Video (ZM) surged $26 on the first day of trading for a 72% pop after the IPO. Underwriters left a lot of money on the table on this one. The CEO immigrated from China 22 years ago at the age of 27. He spoke only a little English and learned while he helped build WebEx, which Cisco bought in 2011 for $3.2 billion. Eric Yuan is a much-respected CEO with a 99% approval from his employees. He was named Glassdoor's big company CEO in 2018. Today he is worth roughly $3 billion. This is why everyone wants into the USA because we are the land of opportunity. Zoom posted 118% revenue growth in 2018 and actually made a profit.


Pinterest (PINS) shares opened at $23.75 and well over the IPO price of $19. After spiking over $25 intraday they closed at $24.50 and a 28% gain. Pinterest lost $63 million in 2018 on revenue of $756 million. They had 291 million monthly active users on March 31st, up 22% from the year ago period. Pinterest shares may struggle some in the months ahead until the company can turn a profit.


Sears Holdings (SHLDQ) creditors are suing former Chairman Eddie Lampert, his hedge fund ESL investments and other members of the board including Treasury Secretary Steven Mnuchin. The suit alleges that Lampert stripped Sears of its most important assets in order to repay ESL investors for their initial investment in Sears when Lampert took over in 2005. The complaint seeks billions of dollars in value "looted" from Sears over his term.

For instance, Lampert spun off 266 of Sears best stores into an entity known as Seritage Growth Properties. This benefitted investors linked to Lampert and forced Sears to begin paying large rents on these 266 stores that they had previously owned outright. This guaranteed income to Seritage and saddled Sears with billions in lease obligations. Lampert also sold Lands End and Sears Hometown Outlets in spinoffs/sales of more than $2 billion. Lampert rejected a bid for Lands End for $1.6 billion and instead spun it off to himself, ESL and others. Sears received only $500 million in the form of a dividend. Lampert won a bid to buy the remaining Sears assets through a bankruptcy auction and will reduce the store count to 425, down from the 3,500 at the time of the merger he orchestrated in 2005. I always wondered how he was getting away with the self-dealing as Chairman of Sears. Maybe he has not escaped after all.



Markets

We are so close to new highs but there is very little momentum. The S&P has been trapped in a very narrow range for over a week. The Dow has been struggling with plunging prices on shares of UnitedHealth and volatility in the tariff sensitive stocks. However, the index is still moving slowly higher.

The Nasdaq Composite has been posting minimal gains while the Nasdaq 100 has quietly made new highs. The Russell 2000 is struggling to hold on to recent gains and appears to be losing the battle.

This is a perfect example of a few mega cap tech stocks leading the market higher while the broader market flounders around looking for direction.

All the major indexes were positive on Friday with the Dow adding 110 points. However, the overall market saw 3,774 advancers and 3,773 decliners. You could not make that up. The market was exactly even and the individual indexes showed similar ratios but not dead even.

The market needs a catalyst to produce a real directional move. Earnings have been better than expected but the forecast is still negative for Q1 and every post earnings spike is sold.

Reportedly, all the major details have been worked out on the Chinese trade agreement and everyone is just waiting for President's Trump and Xi to announce the date for a meeting in Florida. Chines economics have improved, and the announcement of a deal could provide a significant boost in their market. This has already been priced into the US markets although we could see a short-term bounce when the meeting is announced.

Brexit was put off indefinitely since October 31st is years away in market time. This hurdle is no longer a factor in the current market.

So, what are investors waiting for as a signal to buy stocks? As I have warned for weeks, we could be facing a sell the news event when the major indexes reach the prior highs. The markets are up 20% in 2019, more if you count from the December lows, and with earnings negative, there is little excitement about buying a market top. Everyone appears to be waiting for a dip to buy. With the summer doldrums ahead, we could see a sell the news event and a slide into summer given the weak earnings.

With the Nasdaq 100 at new highs and the other indexes only 1% or so below their highs you would expect investor sentiment to be strong. However, 62% of investors are either neutral or bearish. Bullish sentiment actually declined despite the Nasdaq 100 highs. On a contrarian basis this could provide a big boost if there was an unexpected catalyst because so many investors would have to cover shorts and chase prices. Unfortunately, I do not see a large catalyst on the horizon. The summer is shaping up to be boring with months of additional collusion/obstruction headlines overpowering economic news.

AAII Investor Sentiment

While we are close to new highs, sentiment is lackluster at best. That could be predicting a coming decline. Granted, sentiment can change very quickly but normally it requires a sudden change in outlook for either economics or earnings. The challenge here is that the main earnings push will be over in two weeks and the stocks with the weaker earnings will begin to report and the overall earnings growth forecast will begin to decline.


Thank you, UnitedHealth! After two weeks of volatility and erasing roughly 275 Dow points at the lows, the stock rebounded on Friday to return 31 of those Dow points. Once investors feel the bad news is priced in, we should see the stock rebound sharply and drag the Dow higher.

Merck and Pfizer accounted for -117 points of negativity on the Dow over the last two weeks as the Medicare for All proposal tanked their shares. Now that the fiscal stupidity of that proposal has been disseminated, we should see those stocks begin to recover.

Clearly, if it were not for those three stocks erasing nearly 400 Dow points, we would already be at a new high on the Dow. That does not mean there will not be some more surprises as other Dow components report but the worst should be over.

The Dow is only 269 points below a new high. We could do that in one day with the right catalyst. The key is whether the index surges over that level or remains pinned to that level.

There is always the potential for a head and shoulders pattern on the Dow. We are right at the right shoulder and a material decline from this level could trigger significant technical selling.




Like the S&P, the Nasdaq has stalled in a tight range just below 8,000 for the last five days. The prior high was 8,109 so the index is only 109 points below its high. So why can't it gain 100 points in five days? The A/D line on the broader Nasdaq composite is almost dead even and that includes the big cap stocks in the graphic below. Advancers beat decliners 18:12 but the amount of the gains was minimal with the exception of the top four, which almost perfectly overcame the bottom four. The index was up 2 points for the day. The overall AD was 1,449 advancers to 1,535 decliners.

As I have said for the last week there is no conviction by either the buyers or the sellers.



The small cap index remains the weakest link and the Russell typically leads the broader market. With the major indexes stalled and the Russell weakening, there is no incentive for investors to leave the safety of cash. If the Russell suddenly pushed over 1,600, I think it would trigger a broad market rally. If it falls back below the 50-day average at 1,556, it could trigger a broad market decline. Investors are waiting for the Russell to commit to a direction.


I recommend we continue to be cautious until the S&P and Dow move to new highs on decent volume. I don't mean just a few points over the prior highs but a real breakout that triggers some short covering and price chasing. The Blackrock CEO, Larry Fink, said investors were sitting on near record amounts of cash that could be put to work on a breakout. I hope he is right. Personally, I would rather use that cash to buy a summer dip than a market top, but a true breakout could be powerful.

IMPORTANT ANNOUNCEMENT

It is with a heavy heart that I make this announcement this weekend. For nearly 22 years I have published this newsletter on a daily basis. We have written through market highs and market lows. I wrote back in early January that I had some health issues that were causing me to rethink sitting in my chair seven days a week cranking out research. At age 72 I need to get out of my chair and spend what time I have left with my family. I always joked that someday my wife would find me dead, slumped over my keyboard. As that possibility becomes more real, it is no longer a joking matter.

I have looked for months for someone to take over the management of the newsletters and give me some time off. I still want to write because I love what I do. I love the market and writing about it. I have been unsuccessful in my quest. I have found numerous people who would write five paragraphs and three ads and call it a market wrap. I have higher standards than that for the newsletter. As I wrote earlier, I have found many people who would pay good money just to get access to the subscriber database. That is not going to happen. I have never sold access to the names and never will.

I have decided to convert the newsletter to a weekly publication starting this week. The Option Investor and Premier Investor newsletters will be published on the weekend along with the LEAPS Investor newsletter. I will include more plays in the weekend editions to compensate for the lack of daily play updates. The Option Writer newsletter will be published on Wednesday. I will continue to search for a quality person to manage the newsletters and return to a daily publication.

I am in talks with one individual regarding starting an ETF newsletter and possible a Crowd Funding newsletter. I am not going away.

I appreciate your continued support. Some of our readers have literally been with us since we started on Thanksgiving weekend in 1997. I hope I can continue to count on your support for years to come.

Enter passively and exit aggressively!

Jim Brown

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"A good plan violently executed now is better than a perfect plan executed next week."

George Patton


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