Lucid Dreaming!

“Experts in the phenomenon known as lucid dreaming, where sleeping people are aware that they’re in a dream, say dreamers should look for reality checks, or details that look different in dreams than in real life. . . . Some lucid dreamers are able to control elements of their dreams once they realize they’re dreaming. They do what’s impossible or unlikely in real life, like fly or meet famous people. ... Others use the technique to solve problems, spur creativity, overcome nightmares or practice physical skills, says Daniel Eracher, a professor at the University of Bern’s Institute for Sport Science, who has conducted surveys of lucid dreamers. ... [Researchers] found that people with frequent lucid dreams are better at cognitive tasks that involve insight, like problem-solving. Other researchers have shown that people who dream of practicing a routine can improve their abilities in that activity in real life.”... The Wall Street Journal, by Shirley S. Wang (8-12-14)

Evidentially, the “lucid dreamers” on Wall Street practiced their skills two weeks ago as professional traders were sneaking large “buy orders” into the equity markets on the closing bell. Simultaneously, the Commitment of Traders’ Report showed those same traders were dramatically reducing their “short sale” bets. At the time I was writing that the inference of such actions suggested the “pros” were betting the anticipated decline, which began in July, was going to be just another 5% - 7% pullback before the uptrend resumed. Last week, that strategy looked like the correct call with the S&P 500 (SPX/1955.06) having bottomed the previous week at a ~4.3% decline before accelerating to the upside last week. As written, I thought said acceleration was driven by the week’s option expiration, which felt like an upside squeeze into Friday’s “witch twitch.” And, it looked like that was the way it was going to play, until Friday’s Russian Roulette.

I warped in around 6:00 a.m. on Friday to find the alleged humanitarian aid convoy, of some 240 Russian trucks, had stopped short of the Ukrainian border, but 23 Russian military vehicles had snuck past the border guards during the night. Evidentially the equity markets thought nothing of such shenanigans as the preopening futures were printing higher with the “pros” still wanting to be “long” going into the afternoon option expiration. However, things changed dramatically at 10:30 a.m. when news stories swirled around the world’s trading desks that the Ukrainian army had engaged the Russian convoy with shots being fired. At the time, nobody knew if body-bags were necessary, so equity markets swooned and bonds rallied. The Dow Dive typified the world’s markets with the senior index losing ~138 points from the previous session’s close, and an eye-popping 200-points from that session’s intraday high. The consternations continued into the 2:30 p.m. “pivot.” (The equity markets tend to have two pivot points. One occurs at 11:30 a.m., when traders “square” their positions and leave for lunch. The other is at 2:30 p.m. when again they square position going into the final hour of trading.) After Friday’s 2:30 p.m. “pivot point,” however, there was no second-shoe to fall on the Ukrainian/Russian situation and a rally attempt ensued into the close. In a pre-interview with my friend Susie Gharib, for last Friday’s CNBC Nightly Business Report, she asked me, “What is going to happen in the markets next week?” I replied, “It all depends on geopolitical events over the weekend.”

For the week the D-J Industrials (INDU/16662.91) gained 0.66%, the economically-sensitive D-J Transports (TRAN/8264.12) improved by 2.12%, the D-J Utilities (UTIL/548.81) were up 1.13%, but the big winner was the NASDAQ 100 (NDX/3987.51) at a +2.56% gain. The week’s biggest winning sectors were Healthcare (+2.32%), Information Technology (+1.75%), and Consumer Staples (+1.41%), while by my work the only two sectors currently oversold are Energy and Industrials. On the commodity front, all of the ones I monitor were down for the week save Corn (+4.01%) and Palladium (+2.31%). Yet within the bookends of the week there were some pretty interesting events. Japan’s economy contracted at an annualized 6.8% rate; the U.S. Treasury noted that our budget deficit was “only” $95 billion; the EPA intends to close another 200 coal-fired electricity generating facilities; Libya’s recently-appointed leader (Col. Mohammed Suwasysi) was assassinated leaving effectively no government operating in Tripoli; in the course of the last six months more jobs have been created in the U.S. than at any time since 2006 (but while U.S. job creation has soared, pay is 23% less); German 2Q GDP fell 0.2% causing German Bunds to briefly travel below 1%; French 2Q GDP was flat leaving France teetering on recession, France’s finance minister warned that his country would no longer attempt to meet EU deficit targets; U.S. new mortgage loans fell to their lowest level since 2000; U.S. 2Q preliminary figures suggest further decline in Personal Income Taxes; Saudi Arabia and the U.S. are using crude oil as a weapon; Bill Gross is reducing his holdings of U.S. Treasuries; Iraq’s Maliki stepped down; the NFIB Small Business optimism index recorded its second highest reading of the economic recovery; there are only 11 countries in the world that do not have some form of conflict; and the list goes on.

Susie also asked me about the message from the T’bond market, “Does the bond market have it right (recession), or does the stock market have it right (economic expansion)?” I told her that IMO the rally in U.S. treasuries is a flight to quality, as well as a relative yield play with the German Bunds at 1% and the U.S. dollar improving against the world’s currencies. The other thing I related was that with the European economy appearing to be “slipping,” and with the euro weakening vis-a-vis the U.S. dollar, it should drive European investment dollars into U.S. equities for multiple reasons. As well, most European accounts remain massively under-invested in U.S. stocks given that the benchmark they are compared to, the MSCI All Country World Index, has about a 48% weighting in U.S. equities.

For whatever reason, the SPX finally broke out above its 1940 – 1950 overhead resistance zone that has served as a ceiling for the past few weeks. While it was not a decisive upside breakout, and it was reversed on Friday’s geopolitical gottcha, a breakout is still a breakout and has tilted the weight of the evidence towards my sense that a sustainable low happened on August 7th. Moreover, a trader’s “buy signal” was triggered last week when the 14-day Stochastic traveled above its moving average. Also of interest was that despite Friday’s Fade, “they” could still not break the SPX back below 1940. Accordingly, as I told Susie, this week we will put “rabbit ears” on for the world’s geopolitical events, as well as four different housing reports, the CPI, PMI, LEI, Philly Fed (see chart 1), and the all-important Jackson Hole confab where Ms. Yellen will discuss the employment situation.

Turning to earnings, with the earnings season almost over, it’s proven again to be better than the bears have suggested with 58.6% of ALL reporting companies beating estimates, while 60.7% bettered revenues estimates. As for sectors, Technology fared the best with a 68.3% revenue beat and 66.7% earnings beat rate. Healthcare was a close second at 66.7% and 63.0%, respectively (see chart 2). Drilling down into the Raymond James’ Research Universe saw five companies beat earnings/revenue estimates and guide forward earnings expectations higher. These five have positive ratings from our fundamental analysts and screen positively on my proprietary algorithms. We offer them for consideration on your “shopping lists.” They are: Advance Auto Parts (AAP/$131.47/Strong Buy), AmerisourceBergen (ABC/$76.33/Outperform), Monolithic Power (MPWR/$44.06/Outperform), Skyworks (SWKS/$54.39/Strong Buy), and UnitedHealth (UNH/$81.47/Strong Buy).

The call for this week: I am in Boston seeing portfolio managers and speaking at a couple of events, as well as a national conference. If past is prelude, my Boston sojourn will see some kind of dramatic action in the equity markets. My hope is that a sustainable low has been achieved on 8-7-14 and the subsequent action will be on the upside. If so, the rally that began a week ago should gain “legs” from the option expiration upside “squeeze” and the de-escalation of the Ukraine situation. A decisive breakout above 1950 would suggest at least a test of the all-time highs and likely more.

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