The S&P 500 slipped in four sessions during the week as it retreated from resistance in the upper half of the 100 L. As a result the index fell 1.25% lower for the week. The index has slipped lower in five of the past six sessions and has seen weekly losses in five of the past seven weeks.
It appears share buybacks are becoming ineffective at increasing earnings per share ratios and therefore expensive to shareholders. Many stocks that are buying shares back are trading at very high P/E ratios. As a result companies are paying a high multiple on these shares, while pressuring stock prices higher and pushing the P/E ratio higher still in the process. In some cases early retirement of debt makes more sense as the resulting interest reductions would do far more to increase earnings than share repurchases. In other cases increasing dividends or paying special dividends with these funds would probably be better way to return value to shareholders. Dividend payouts could also provide added economic stimulus, especially if timed prior to or during the upcoming holiday shopping season. Foregoing either of these, simply reinvesting these funds into the company could go farther than repurchasing shares that are already too expensive, provided of course that it is used in needed capital expense spending and not through mergers or acquisitions of similarly overpriced companies.
This week earnings updates were found for 111 of the S&P 500 constituents, although not all found reported earnings during the current week. There were 57 constituents that reported earnings above those they reported the same quarter a year ago, 51 reported earnings below the year ago quarter and three reported earnings even with their year ago earnings. These reports resulted in an even weighted TTM earnings decrease of $3.14 below the previous week’s total. This represented a 0.15% decrease in the index total TTM earnings and an average TTM earnings decrease of 0.66% in those 111 constituents’ reported earnings.
The Energy Sector again weighed heavily on these numbers. The top seven earnings decreases compared to the same quarter of a year ago were in that sector. The Energy Sector again held the constituent with the largest year over year earnings increase as Tesoro Corp. (TSO) reported an increase of $2.92 over the year ago quarter. The Tesoro increase nearly offset the first and seventh largest losses in sector. Five others in the sector saw smaller increases over the same quarter of a year ago.
Again beyond the Energy Sector’s seven largest losses, losses were widespread. The Consumer Discretionary, Industrial, Financial, Information Technology, Material, Utility and Consumer Staple Sectors all saw constituents land in the top 20 losses. All sectors saw companies that reported year over year decreases and several sectors had more that reported losses from the same quarter of a year ago than gains.
The 57 companies reporting year over year earnings increases saw an average earnings increase of 6.76%. Tesoro accounted for nearly a fifth of the total year over year earnings increase. The average P/E ratio of those with increases was 20.27 and slightly higher than the overall index P/E of 20.15. Those that are reporting earnings increases are for the most part far overpriced already. There were 31 that finished Friday with a P/E above the average, while only 14 finished with a P/E below 15. Although they managed increases over the previous year in this quarter, many of the lower P/E stocks still face earnings headwinds.
Current quarter earnings have been found for nearly 90% of the constituents. The totals so far make it seem likely the second quarter will finish with a growth rate well under one percent and the current week’s overall loss makes a finish below a half percent seem probable. Although the Energy Sector is weighing heavily on these earnings, several other sectors could finish the quarter with more constituents reporting losses than gains compared to the year ago quarter earnings.
There continued to be constituents announcing plans to use layoffs as a means of cost savings. Although many of these job cuts will be outside the US, a fairly large number of the constituents along with companies outside of the S&P 500 plan to reduce work forces by 10% or greater. Some announced these large reductions on top of earlier announced layoffs. These reductions are likely to cause ripple effects yet to be seen as could many of the other cost savings measures companies plan to use.
The indexes appeared to begin retreats from resistance levels during the past week. All turned lower short of previous highs. The Dow Jones Industrial Average, NASDAQ and Russell 2000 saw these retreats slip below the previous cycle lows. The S&P 500 neared the previous low in Friday’s retreat before rebounding into the close.
Unlike many of the earlier retreats, the New York Stock Exchange fared the best in the recent downturn as it held the highest above its previous cycle lows. Even so this chart is showing increasing bearishness. It has finished above its 200 EMA only eight times in the past 29 sessions and only once in the past 13 sessions. Although it did not retreat as sharply as the other indexes in the past week, it continued to hold within an established downtrend channel.
The Dow Jones has seen eight of the past 11 sessions finish below its 200 EMA. It also appears to be establishing a downtrend channel in the retreat from May highs. The past two retreats appear to show a possible steepening in this drop could be developing. The Russell 2000 also appears to be establishing a downtrend channel. This week’s retreat fractured the 200 EMA for the second time after it fell below it briefly in the earlier retreat. It has finished the past two sessions below this level.
Although the S&P and NASDAQ have not yet established downtrend channels, they continue to show possible failures in recent runs. The S&P 500 has been extremely flat for an extended period of time. Flatness tends to weaken support levels over time. Current earnings reports appeared to give little reason for the index to continue higher, making previous support levels look vulnerable.
The NASDAQ saw a more recent push to new highs, but it also appears to be more overvalued than the other indexes. It saw several key components report earnings misses or give weak guidance while others gave lackluster reports. Many of the stocks that have pushed it to highs easily look four years ahead of reasonable earnings expectations. Others look to have no reasonable chance of producing earnings to justify their current stock prices in the next decade, yet investors continue to pile into these stocks even though they have reported little or no earnings for six straight years while continuing to issue new shares and building new debt faster than earnings, further eroding share value.
Most of the indexes fell into or near fully oversold conditions in the past week’s decline, making a temporary rebound in stock prices seem possible during the week ahead. At the same time overall earnings were soft. It appears most with good earnings already made gains in excess of these good reports, probably limiting additional upside. Few are left to report, leaving time for investors to read earlier reports. It seems possible they may not like what they see in these reports. A rebound from oversold conditions is not a given.
The S&P 400 finished the week with over half of its constituents below their 200 DMA on Friday, as 210 finished beneath it, an increase from the 197 in the previous week. The index finished Friday with 249 constituents either below or less than one dollar above the 200 DMA, an increase from the 235 in the previous week. The data for the S&P 400 includes a constituent change scheduled after each Friday’s close in both this week and the previous week.
The S&P 500 had 245 constituents finish below their 200 DMA at Friday’s close, an increase from the 236 in the previous week. There were 281 constituents that finished Friday either below their 200 DMA or less than one dollar above it, up from 276 in the previous week. Although the S&P 500 finished Friday with less than half below their 200 DMA, combining the total with the S&P 400 shows greater than half of the 900 largest publically traded companies finished below their 200 DMA.
An interesting thing happened during the past week that was not anticipated, the numbers of S&P 500 constituents with a week over week 200 DMA in declined decreased to 136 from 155 in the previous week, even though 311 of the constituents saw a week over week decrease in stock prices. As can be seen by the numbers with lower stock prices during the past week, the overall decrease was not primarily due to stock price increases as most that saw an increase in their 200 DMA during the past week, finished with lower stock prices and below their 200 DMA. This increase occurred when the lows during the October dip in stock prices fell off the 200 day moving average. The rebound off these lows was fierce in many stocks, causing the 200 day average to bounce higher as those lows dropped off, even though nearly all that saw a weekly trend change higher, finished with a lower stock price during the past week. This also prevented several declines in the 200 DMA that looked likely to begin in the previous week’s charts. The rebound off the lows in October could continue to affect this moving average in the coming week, although probably not to the extent it did this week.
The S&P 500 constituents saw their overall current year earnings projections decrease by $0.65 during the past week. There were 155 constituents that saw current year projection increases while 133 saw decreases.
The current quarter earnings expectations for those yet to report second quarter results saw an overall decrease of $0.03. The past week saw three constituents that had yet to report second quarter earnings see projection decreases while the rest remained unchanged.
The featured and supporting indicators discussed below are not always correct, but they have been many times. Being so they are worth reading about and taking note of.
The 100 L, (-)/(+) 90 D, +2% L, -2% L and -/(+) 90 D indicators are currently active. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The S&P 500 remains within the significant drop from the May 21 record close of 2130.82. During the past week the index covered the small gap higher during the previous Wednesday, but left the July 9 and July 10 gaps higher and the small gap lower seen on July 22 open. Friday’s retreat also added a small gap lower.
The index continued to retreat from the previous Friday’s 2014.24 high within the likely resistance from 2112 to 2125 in the upper half of the 100 L. The only session to finish with a gain for the week was Wednesday and it pushed back into the likely resistance with a high of 2112.66, before settling to a close within the lower half resistance. The retreat continued on Thursday and Friday with the finish rebounding to just hang on to the 2075 lower boundary of the 100 L at 2077.57.
Overall second quarter earnings appeared weak. With nearly 90% of the constituents reporting, it seems possible the constituents could finish with less than a half percent year over year earnings increase for the quarter. Although there were some with very good reports, most that saw increases over the same quarter a year ago did so by small amounts. Most stocks that saw increased earnings already have P/E’s well above the historically high index average.
The (-)/(+) 90 D that became active on May 22, 2015 appears to have bearish potential. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
+0.91% / -2.88% / -1.42%
The -2% L and +2% L indicators failed to provide a correct indication in the past week. These indicators will become dormant after Tuesday’s close provided no volatile sessions are seen prior to that close. Supporting volatility indicators continued in elevated levels and suggest a higher than normal potential for volatile sessions. If volatile conditions are seen after Tuesday’s close, these indicators would activate again. Otherwise they will remain dormant for 24 trading days until the fringe area prior to the activation of a 90 E, which will become active due to the expiration period of the (-)/(+) 90 D that became active on May 22, 2015.
Although the index has not seen volatile sessions, many of the constituents have. The past week saw 12 constituents see price drops in excess of ten percent and three see price increases in excess of ten percent.
The -/(+) 90 D that became active on July 21, 2015 also appears to have bearish potential. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
0.00% / -2.43% / -1.96%
Note: The highest close only considers closes higher than the starting point; if there are none higher it is reported as zero percent.
The average daily volume decreased 2.15% from the previous week. Monday had the lowest volume and Thursday the highest session volume. The five day volume variance increased by 7.10% to finish the week at 22.14%. The five day volume variance increased somewhat into the downturn, but did not reach bearish levels.
Over half of the 900 largest publically traded companies again fell below their 200 DMA in the past week. The furious rebound in stock prices in October appeared to provide a temporary
There were some very good earnings reports, but overall earnings appeared soft for the second quarter and guidance appeared soft for the third quarter. Many companies announced cost savings initiatives that will likely produce additional shortfalls in earnings for other companies in the coming quarter. It seems possible current earnings projections for the third quarter could be too high.
Although the past week saw a rebound, it appears several of the indexes maintained within established downtrends. All appeared to hit and retreat from possible resistances levels during the past week, leaving a continued rebound in doubt.
Volatile conditions continued on several world indices, while others renewed volatility after several weeks of quiet like Australia and Brazil. Greece’s markets reopened after over a month long hiatus, and promptly fell over 16%. That retreat was followed by two more volatile sessions.
Current chart formations along with past timelines, worldwide stock overvaluations and continued lackluster earnings make it seem possible the S&P 500 could see a large retreat before the end of the year.
The next likely resistance level above the 100 L at 2100 could be seen at the 2140 to 2160 MRL. Earlier highs on the S&P 500 could have seen the effects of this resistance level, but the index is still within the influence range of the 100 L since it has not yet reached this resistance level. Therefore this resistance is not yet considered active. This resistance appears to have the potential to cause a significant pullback.
Please note there is no established resistance in the MRL levels before the index has reached these levels. Several instances have proven to hold resistance once reached; however MRL levels that the index has not yet reached are only the most likely levels that resistance will be seen based on research. Back tests of the data used to project these resistance levels work well, but they are not always exact, and these resistances could react sooner or later than expected, it is also possible the resistance will not be seen at all.
Data provided for the S&P 500 was derived from the historical daily data tables, similar data can be found at Google Finance. Earnings information was gathered from Yahoo Finance, CNBC, Edgar Filings, Scottrade Elite, AOL Finance and Morningstar, although other websites, including company websites, may have contributed small amounts of information. Stock and Treasury charts used for analysis and commentary were provided by StockCharts.com, Scottrade Elite or from those that Ron created from his data. Gold charts used for analysis and commentary were provided by Kitco.
Have a great day trading.
Disclosure: Ron is currently about 58% invested long in stocks in his trading accounts reflecting no change over the past week’s investment level. Although his rounded investment level was unchanged, he bought two issues with the costs of these purchases more than fully offset by the sale of three issues and dividend payments. He will receive dividend payments from five issues in the coming week and eight in the following week. If no further investment changes are made during this time frame, these dividend payments would not change his investment level.
Disclaimer: The information provided in the Stock Market Preview is Ron’s perception of the current conditions and what he thinks is the most probable outcome based on the current conditions, the data collected and extensive research he has done into this data along with other variables. It is intended to provoke thought of the possible market direction in his readers, not foretell the future. Ron does not claim to know what the stock market will do. If the stock market performs as expected, it only means he is applying the stock market history to the current conditions correctly. His perception of the data is not always correct.
This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.