The markets pulled back from their intraday highs ahead of Friday's close as event risk loomed.

Weekly Statistics

Thursday Statistics

With almost daily headlines pushing the market around, traders were worried that the weekend could provide yet another set of headline troubles. With the Syrian gas attack nearly a week ago, there were fears there would be a weekend attack and Russia would respond as promised and try to sink U.S. ships that fired the missiles. Russian state TV was warning citizens to stockpile food and water and find their nearest bomb shelter because war with the U.S. was imminent. This was before the market closed.

At 9:PM ET Friday, the U.S., France and Britain launched an attack on Syrian chemical warfare assets. Russia is having a fit and claims there will be consequences and plans are already underway but nothing has happened as of Saturday afternoon. On Friday, a Russian warship was shadowing the destroyer USS Donald Cook and its 60 Tomahawk missiles. A Russian admiral, Vladimir Masorin, said they would not have to sink the Cook if they fired missiles at Syria but a single torpedo could cause a lot of damage. Although the Cook was in position to launch against Syria, they did not participate and the confrontation was avoided. Russia has been talking a big game all weekend but so far, just talk.

The markets were struggling with resistance even before the weekend event risk. The S&P has been struggling with the 2,675 level for three weeks. Even without the weekend event risk, the markets were not healthy. They tried to move higher for the week but it was a fight. On Friday, the Dow traded as high as 163 in the morning and declined -239 in the late afternoon before closing with a -123 loss.


On the economic front, the first Consumer Sentiment for April declined from 101.4 to 97.8 and a three-month low. The present conditions component plunged from 121.2 to 115.0 thanks to all the tariff talk in the headlines. The business conditions component declined from 70 to 58 because of those concerns. The expectations component declined from 88.8 to 86.8. Those respondents expecting good economic conditions to continue over the next year declined 7% to 47% and the first time under 50% this year.


The Job Openings and Labor Turnover Survey (JOLTS) showed new positions increased at a 3.9% rate. That has been the average for the last eight months. There were 6.052 million open positions. This was up 7.7% from the same period in 2017. Hires declined slightly from 5.574 to 5.507 million. Separations declined from 5.319 to 5.192 million. Quits rose from 3.191 to 3.210 million. Layoffs declined from1.784 to 1.647 million. This is a lagging report for the February period and it was ignored.

There is a lot on the calendar for next week with Retail Sales, Philly Fed Manufacturing, New Residential Construction and several other economic reports. The Fed Beige Book is out on Wednesday and it is expected to be a little more upbeat this month. Recent updates have overused the word "moderate" and based on the FOMC minutes they may have to use a different word.

There are ten Fed speeches this week.


The big news for next week is the start of the Q1 earnings cycle. Bank of America and Netflix lead it off on Monday and Goldman and IBM are the highlights on Tuesday. There are seven Dow components, UNH, GS, IBM, JNJ, AXP, PG and GE and 60 S&P-500 companies. The following week has 12 Dow components.

The regular earnings cycle should be market positive given the 18.6% expectations for earnings growth. I expect companies to give more detailed explanations for their use of the cash windfall from tax reform. There should be additional dividends announced as well as stock buybacks. Based on recent announcements it appears the buybacks are going to be larger than previously expected.

Some 30 S&P companies have already reported with 70% beating on earnings and 76.7% beating on revenue. There have been 73 guidance warnings and 61 positive revisions. The current forward PE is 16.4.


In stock news, we had three big banks, JPM, WFC and Citi report earnings before the bell. JP Morgan reported earnings that rose 35% to an all time high on a 10% increase in revenue. The company reported earnings of $2.37 that beat estimates for $2.28. Net revenue was $28.52 billion beating estimates for $27.68 billion. Net interest income rose 9% to $13.5 billion. Lower revenue from investment banking (-7%) was a serious drag on performance. Auto loans rose 8%, deposits rose 6%, client assets rose 13%, credit card transaction volume rose 12%, commercial loans rose 6% and equity-trading revenue rose 25% to a record high $2 billion. JPM remains the best bank but shares fell $3 on the report. JPM typically trades down immediately after earnings but is higher in the month that follows.


Wells Fargo (WFC) reported earnings of $1.12 that beat estimates for $1.06. Revenue of $21.9 billion beat estimates for $21.7 billion but declined from the year ago quarter. The scandal-plagued bank said it was considering a settlement with regulators investigating several different events. The size of the settlement would be $1 billion. The Federal Reserve recently put a cap on the banks assets saying they could not grow the business until they had made major changes in their operations. In Q1, deposits declined $32 billion as consumers moved to other institutions. Shares declined $1.81 to a 6-month closing low.


Citigroup (C) reported earnings of $1.68 rose 13% and beat estimates for $1.62. Revenue rose 2.8% to $18.9 billion and matched estimates. Operating expenses rose 1.9% to $10.9 billion. The bank said the volatile market helped it generate $1.1 billion from equity trading, the most since 2010. Fixed income trading fell 7% to $3.4 billion and missing estimates for $3.7 billion. Investment banking revenue fell 10% to $1.1 billion because of "episodic" deal activity in Q1. The bank said it was on track in its multiyear goal of returning $60 billion to shareholders. Shares declined $1 after initially gaining on the news.


Qualcomm (QCOM) shares rallied intraday after news broke that former CEO and Chairman Paul Jacobs is leading a fundraising effort to take the $83 billion company private. He left the board in March after stating his plans for a buyout. He is talking to strategic investors and sovereign wealth funds and expects to submit a bid over the next couple months. If he is successful, the company would remain in the U.S. and he would become CEO, a position he held for 9 years starting in 2005.

This would block a future takeover attempt by Broadcom if he were successful. Qualcomm is still trying to acquire NXP Semiconductors (NXPI) a $39 billion company for $44 billion. Qualcomm raised its bid from $110 to $127.50 per share for NXPI in an effort to block the Broadcom takeover attempt. Broadcom required Qualcomm to drop the NXPI acquisition attempt if it accepted Broadcom's bid. Currently only 16.2% of NXPI shareholders have tendered their shares. Qualcomm cannot consummate the acquisition until China's MOFCOM regulator approves the transaction. The company has already received approval from 8 of the 9 required regulators. MOFCOM is the last one. With the current trade war tensions, China is not in any hurry to process the acquisition request.

If by chance the NXPI acquisition occurs, it will make the task for Paul Jacobs a lot harder.



After the bell on Thursday, Broadcom (AVGO) announced a $12 billion stock buyback program that will run through Nov 3rd, 2019. The company said it was maintaining a policy of returning 50% of free cash flow to investors while maintaining the rest of the cash flow for acquisitions and "opportunistic buybacks." They were expected to increase their repurchase program after the original Qualcomm acquisition was blocked. The company's market cap is currently $101 billion so that represents about 12% of the outstanding shares.


Zillow Group (Z) announced its plans to buy and flip $2-$4 billion in homes. Yes, instead of just showing you homes online now they are going to try and sell you homes online. This is going to be a major change or addition to their business. The program will be called "Instant Offers" and will give consumers the chance to sell their homes to Zillow without a realtor and receive sale proceeds quickly without all the hassle of showings, contracts, contingencies, failed mortgage applications, etc. Zillow will buy the homes, renovate them and try to sell them within 90 days or less. While it is unclear how Zillow will interface with the realtor community, we all know not every homebuyer looks online for a home. Zillow is already the 800-pound gorilla in this space and they have the potential to increase that weighting with the home flipping effort. They will start the service in Las Vegas and Phoenix. It will probably be successful until the next housing recession and then it could go very wrong with inventories of unsold properties rocketing higher. Shares fell 6% on the news.


DropBox (DBX) was hit with a sell rating by Nomura with a $21 price target. While DropBox is a top line player in the cloud storage community it is having trouble converting users from free to pay. Currently the company has about 500 million users of which only 11 million are paying subscribers. Each free user gets 2 GB of free storage. If you want more you have to pay but apparently that is not happening. That means the overhead to support the 489 million users is going to be a real drag going forward. They announced DropBox for Business in 2017 but it has not taken off. The average revenue per user has actually declined since early 2017. DropBox has only been public since March 23rd. Options are available already but volume is microscopic.


Netflix (NFLX), which reports earnings on Monday after the close, was upgraded from hold to buy at Deutsche Bank. The analyst said, "What's evolved with respect to our view on the stock is that Netflix has changed the industry in a profound way and in doing so has given itself a significant lead, making it very difficult for the traditional media companies, or even other big tech companies, to catch up." He wrote that consensus estimates as well as Netflix's own guidance over the next two years looks conservative. He raised his price target from $240 to $350.

Also on Friday Comcast said it would begin offering video packages that include subscriptions to Netflix. Analysts believe this is an effort to prevent cord cutting in favor of Netflix. Comcast does not want customers dropping its service in favor of Netflix, Hulu, etc. if you cannot beat them, join them. On the Comcast Xfinity X1 service they have been offering Netflix separately since 2016. By making Netflix part of a package it will simplify billing since Comcast will collect the package payment and remit the correct fee to Netflix.


Allegiant Travel (ALGT) is heading for a crash. 60 Minutes will have a segment on Sunday criticizing the company's safety record. The show will focus on in-flight breakdowns. The double-length segment will focus on passenger's worst nightmares of in flight problems that could doom a flight. With an average of 12 million people watching 60 Minutes each week, describing why you should not fly an airline because of safety problems could cause an instant consumer backlash that could be long lasting. The stock already has a higher valuation than other airlines so there is increased risk of that being corrected. Shares fell $14 on Friday when the news broke of the scheduling.


Apple (AAPL) said it found 29 "leakers" last year and arrested 12. Apple is continually plagued by leaks to the press on production problems, new software updates, features coming on new phones, etc. This is damaging for the company. Reading an article on an Apple focused website like 9to5Mac.com about new features expected on some future generation iPhone makes many people put off purchase decisions until the new phones are announced. That damages sales in current quarters. For competitors, reading a blurb about some new feature gives them a head start in copying that feature in their phones. Apple has an entire group that focuses on nothing but tracking down leakers. Apple has 135,000 employees plus more than one million Foxconn workers that assemble the new phones. Leaks from manufacturing plants are also tracked and workers fired and prosecuted.

There are hedge funds, private funds, analysts, etc, that spend tens of thousands of dollars trying to get people to leak inside information because it can move the stock price when it later becomes public information. People sharing company secrets can get in serious trouble and spend time in jail for their efforts. Getting a job in the tech world after a stint like that could be very difficult.


Boeing (BA) is recovering from the tariff induced declines. The company got a boost from Citigroup when they reiterated their buy rating and said they have a $415 price target but the free cash flow projections support a price in excess of $500. With a backlog of 5,864 planes at year-end worth close to $1 trillion, the company is poised to continue expanding profits. In 2017, they delivered 763 planes but booked orders for 912. At the current production rate, that is 7-10 years worth of production depending on the model mix. Boeing is one of my favorite companies but the options are now so expensive they are impractical to own.


Crude prices rallied 9% for the week for multiple reasons. The easing of tariff fears between the two largest consumers on the planet helped reduce fears of slowing demand. Analysts estimate a full-blown trade war could reduce demand by 1 million bpd. Secondly, Saudi Arabia shot down additional missiles fired from Yemen and targeting Saudi cities and oil facilities. Add in the impending attack on Syria and the warnings of repercussions from Iran and Russia and there was a full-blown bout of Middle East tensions lifting prices higher. If there are no meaningful repercussions from Russia over the weekend, prices should decline next week. This is the highest price since late 2014.




Markets

Week after week, we try to assign some sanity to the market by discussing the technical points on the charts. Lately that has been an exercise in futility because all the market movement has been coming from the headlines. They S&P has made an intraday move of 1% or more on 19 of the last 23 days. The Dow has posted intraday moves of 300 points or more on 21 of the last 25 sessions. Some of those swings have been over 700 points.

Volatility has been ridiculous. Typically bouts of high volatility last 4-6 weeks. This one we well into its third month. However, over the last two days, the VIX has actually gone down and Friday saw a 400-point intraday dip on the Dow with a -123 close. This is encouraging. A sharply declining VIX in a negative market suggests investors are cashing in their S&P puts thinking the next market move will be higher.


On the S&P the 50-day crossed below the 100-day and the index stalled again at the 2,675 resistance level. If a trader suddenly woke up from a month long coma and knew nothing about the political and geopolitical events and you showed him this chart, he would be bearish. The repeated failure at resistance in a longer-term downtrend and the bearish average cross, suggests the S&P is going lower.

However, if you add in the approaching earnings cycle, the potential for the tariff headlines to fade and the successful completion of the Syrian attack, the outlook for the market "should" be positive. We cannot do anything about the political headlines other than hope the market grows tired of the constant soap opera and ignores them.

Technicians claim all news is always factored into the chart. The market is an excellent discounting mechanism and technicians believe the worry about upcoming events is always factored in on a continuing basis. To some extent, I agree with that. However, we have been hit with so many "out of the blue" events lately, the market was reacting rather than anticipating. The declining VIX could be the market anticipating a positive week because all the bad news is already factored into the market.

Let's hope that is the case and we have another gap open on Monday that takes us through that 2,675 resistance level and the resistance at 2,700. Nothing promotes a bull market better than bullish market gains. Gains produce additional gains, until an unexpected event appears.

There are analysts predicting another retest of the recent lows around 2,580 or even just the 200-day at 2,599. Fortunately, they are going to give us a nice short squeeze if they are wrong. The more people who predict a retest the less likely it will happen.


The Dow A/D line was almost dead even on Friday with the majority of the decline coming from just three stocks. With seven Dow components reporting next week there is a good chance we will see some additional volatility. The Dow actually traded well over resistance at 24,500 on Friday with a 24,646 high before the 400-point afternoon decline. If the Dow can close over 24,500 and preferably 24,700 as well, we could see some significant short covering. Assuming the earnings are good and post earnings depression is minimal, the next major resistance is 25,000.



The Nasdaq big caps were also evenly matched between advancers and decliners. The minor 33-point decline for the day knocked the index back to prior resistance at 7,100 after trading as high as 7,183. That is a major decline but the index still closed over that critical 7,100 level. Netflix and IBM will determine Nasdaq direction early in the week. IBM is not on the Nasdaq but it is a monster tech stocks that will drive direction.



The small cap Russell 2000 closed well over resistance at 1,550 on Thursday but was knocked back on Friday. The small caps have been nearly as bullish as the Nasdaq but they need to continue their recent upward trend or the broader market could weaken as well.


We have no control of the headlines but assuming nothing new appears this weekend, I am slightly bullish about the outlook for next week. The bank earnings were a downer on Friday but with a broader spectrum of reports due out next week, the market should improve. The keyword there is "should" and markets tend to have a mind of their own.

If we get another lower open on Monday, I would be a buyer. If traders rejoice about Syria being behind us and the market gaps open, I would be cautious about chasing it. Look for an intraday retracement in order to avoid buying options at the high for the day. Remember, you do not have to trade on Monday. It is perfectly allowable for traders to simply watch on Monday as all of last week's forces fade as new ones become front and center. There is a reason the second day of the week is called Turnaround Tuesday because that tends to happen a lot at least on an intraday basis.

Enter passively and exit aggressively!

Jim Brown

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