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Stocks closed Friday with modest gains as volume declined. While earnings results sent some leading issues flying higher or crashing lower, the latest jobs report (a 209,000 jump in U.S. payrolls for July, well above expectations) appeared to justify Wall Street’s months-long bullish stance.
XAutoplay: On | OffThe Nasdaq composite added nearly 0.2% for only its second gain in seven sessions. However, at 6351, the premier major U.S. index is keeping an air pocket above the critical 50-day moving average.
The Nasdaq also lost just 0.4% for the week after going on a three-week 4% run that began in early July. The tech-heavy index also lies less than 2% below its all-time peak of 6460.
The S&P 500 added 0.2% and rose about the same amount for the week, while the Dow Jones industrial average, getting a nice boost from its financial components JPMorgan Chase (JPM) (up 2.6%, just below a 94.08 entry in a 3-1/2-month saucer base pattern), Goldman Sachs (GS) (in saucer building mode) and Visa (V) (in buy range, 4.3% above a 96.70 narrow flat-base entry), advanced 0.3% and closed above the 22,000 level.
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Small caps outperformed. The S&P SmallCap 600 rallied 0.4% while the Russell 2000 gained 0.5%.
Volume fell on both exchanges.
Despite the solid jobs report, which also showed a 4.3% unemployment rate and a 2.5% year-over-boost in average hourly earnings, some observers stress the importance of an overall rise in inflation, not just wages, in convincing the Federal Reserve to make another hike in short-term interest rates.
“This report should move projections (for the fed funds rate to go to a 1.25%-1.5% target range) above the 50% mark, but there needs to be more evidence of higher inflation to get to a 90% chance of one more rate hike,” Quincy Krosby, chief market strategist at Prudential Financial, told IBD.
Wages also rose 0.3% on a month-to-month basis.
Back to equities, Apple (AAPL) rallied 0.5% in quiet trade to 156.39. Shares rallied 4.6% for the week and are just beneath a new breakout point of 156.75. Apple had formed a nearly three-month flat base, then broke out Wednesday following an acceleration in quarterly EPS and revenue growth.
In addition to the prospect of further top- and bottom-line growth, two more reasons why Apple shares can continue to flourish:
One, Apple’s most recent base is just second stage. On Jan. 6-9, the iPhone giant hurdled over a 118.12 entry in a first-stage cup with handle. Early stage bases have a higher chance of succeeding.
Two, Apple’s valuation may be considered good value on both the growth and value sides of the investment management landscape. In addition to strong fundamentals, Apple continues to pay a healthy dividend (1.6% annualized yield and rising) and buy back shares.
The current price-to-earnings ratio for Apple is 18, and just 14.5 times the estimated FY 2018 EPS forecast of $10.76 a share (up 20% from FY 2017), according to William O’Neil + Co. Apple is expected to earn $8.97 a share in fiscal 2017 (ending in September this year), up 8%.
In the just-ended fiscal third quarter, Apple’s earnings grew 18% to $1.67 a share. That represented a third quarter in a row of EPS acceleration, following a 15% drop in Q4 2016 (September), a 2% rise in FY Q1 2017 (December) and a 11% hop higher in FY Q2 (March).
Revenue rose 7% to $45.4 billion, up from year-over-year changes of -15%, -9%, +3% and +5% in the prior four quarters.
The Street sees fiscal Q4 earnings rising 13% to $1.88 a share on a 9% top-line increase to $50.99 billion.
Apple’s RS Rating, as seen in IBD Stock Checkup, has improved to an 87 vs. a lowly 59 at the start of 2017 on a scale of 1 to 99. Yet, while most smaller companies may break out of fine bases while their Relative Price Strength Rating is 80 or higher, in the case of big cap like Apple, a stock that forms long bases or goes sideways for six to 12 months or longer may show a lower RS Rating and still succeed.
The Composite Rating for Apple has brightened to a very respectable 93 on a scale of 1 to 99. This proprietary rating takes into account all of IBD’s special ratings plus the stock’s recent price action. (Notice on the Stock Checkup how the Checkup doctor is not grinning, but not frowning either. But as for the SMR Rating, Apple’s A grade puts a smile on the Checkup doctor’s face.)
The SMR rating stands for Sales + Profit Margins + Return on equity. In general, growth investors should focus only on those companies with a return on equity of 17% or higher.
Other big winners for the week included Grubhub (GRUB) (a top play in online food ordering services, now up 15% since its July 12 debut on Leaderboard), Stamps.com (STMP) and video game software developer Take-Two Interactive (TTWO), featured in IBD’s new special Stocks Near A Buy Zone feature on Monday.