The S&P 500 saw three session gains during the past week that provided a weekly increase of 0.67% on the index. The past week’s gain recaptured about half of the prior week’s losses. The index has seen increases in two of the past three weeks, but weekly losses in five of the past eight weeks. Since breaking lower from July 20 highs it has seen 12 lower finishes in the past 19 sessions.
The Chinese Yuan caused market turbulence during the past week, but its effects seemed short lived. The People’s Bank of China surprised markets on Tuesday as it devaluated the Yuan by 1.6% overnight. The Yuan’s value continued to slide as the People’s Bank reduced valuation in excess of one percent more on Wednesday and devalued it further yet on Thursday before finally posting a slight 0.05% increase on Friday, leaving total losses for the week near three percent.
China’s recent currency devaluation did something that appeared to go unnoticed. Due to currency exchange rates, the devaluations reduced earnings that US companies with Chinese operations can expect to see by similar percentage amounts. At this point it does not seem likely the Yuan could regain these loses before companies report third quarter earnings. It therefore seems likely this unexpected drop in valuation could further pressure upcoming earnings in an already very difficult earnings environment. Many companies have positions in China that could be affected by this devaluation. It therefore seems possible the downward earnings pressure from this devaluation could have a significant impact on upcoming earnings reports.
China’s central bank’s unprecedented actions caused instability in the Yuan’s exchange rates, but also devalued currencies that hold the Yuan. These actions were taken without preannounced intensions allowing for market adjustments prior to these actions as most central banks do. The lack of warning prior to these actions could make many that have recently agreed to trade in China’s currency or hold their currency to rethink these positions. This leaves the potential for further devaluation.
Many are quick to point to increases in exports as reason to weaken currencies, but few do the math that proves they are most often detrimental. On a constant currency basis, the drop in currency value requires a GDP growth equal to the devaluation just to offset the devaluation. China’s GDP was expected to see growth above a seven percent rate before the devaluation. To break even, it now must see GDP growth in excess of ten percent. Based on past devaluations, the GDP increases are not likely to come near to offsetting the actual devaluation losses. If any increase in GDP is seen later, many will likely point to it as proof that the devaluation worked, even though it is likely to provide a net loss on a constant currency basis. This devaluation appears to have come up against a developing economic slowdown; it isn’t likely to stop this slowdown but could instead worsen the effects elsewhere.
The past week also saw markets rebound Monday after Berkshire Hathaway (BRK/B) announced it would acquire Precision Cast Parts (PCP). Warren Buffet deserves great admiration and respect, although his actions are not always agreed with. The purchase prices for the recent acquisitions of Kraft and Precision Cast Parts were at a very fair market value to the shareholders in these companies, which is also admirable. The long term outlook for these companies seems very good too, but unlike a similar premium that was paid for Heinz when stocks were still undervalued, these purchases were made near all-time market highs and as most stocks appear to be reaching overvalued conditions. Even though Precision Cast Parts was purchased in a downturn and at a price considerably below the 52 week high, current conditions make it seem possible that the price offered could be too high in the short to midterm.
Although the market finished the week with gains, the rebound seemed ominous. After a strong gapping gain higher on Monday that fell short of previous cycle highs, the indexes saw gains nearly erased on Tuesday and fell deeply early on Wednesday. Most of the indexes reached new cycle lows n current downtrends before rebounding to finish the session with either small losses or small gains. The indexes saw mixed results during the remainder of the week but finished with gains overall.
Despite an overall rebound in index prices, bearish signals continue to be seen on the index charts. The Dow Jones Industrial Average saw Monday’s rebound stop near the upper trend line of a steepening fall that appeared to be developing, before falling Tuesday and continuing to a new low Wednesday. The small late week rebound continued within the steepening falls trend. Monday’s rebound also fell well short of the 200 EMA, as the Dow has finished ten straight sessions beneath this average. The index also saw a “death cross” as the 50 DMA slipped below the 200 DMA on Tuesday.
The Russell 2000 finished Monday’s session above its 200 EMA, but fell directly off this high to finish the following four below it. The Russell saw a bearish cross as its 13 EMA slipped below the 200 EMA on Thursday. It has finished lower in seven of the past ten sessions. It also appears to be showing a possible steepening in the current retreat.
The NASDAQ has retreated in 12 of 19 sessions since reaching a record high July 20. Aside from three straight gains that finished on July 30, it has not seen two consecutive gains during this stretch. It has finished six of the past seven sessions below its 50 EMA and the 13 EMA rests just above a bearish cross of the 50 EMA. The NASDAQ also shows a possible steepening in the drop and established a downtrend channel.
The S&P 500 saw its first break below the 200 EMA since July 9 during Wednesday’s retreat and with this retreat established a downtrend channel. It saw a bearish cross of the 13 EMA below the 50 EMA in the previous week. Since Monday’s retreat it has not been able to maintain a break above the 13 EMA into a session close. Since retreating from July 20 highs, it has seen 12 lower finishes in the past 19 sessions and aside from three straight session gains that finished on July 30, without two consecutive gains.
The New York Stock Exchange saw Monday rebound to a finish above the 200 EMA for only the second finish above it in the past 18 sessions. Like the past three rebounds above the 200 EMA, the index retreat as it neared the 50 EMA and fell directly back below the 200 DMA. The NYSE also saw a “death cross” as the 50 DMA fell below the 200 DMA on Tuesday and neared a bearish cross of the 50 EMA below the 200 EMA. Even though Wednesday’s retreat appeared to hold support near but slightly above previous lows, the index continues to hold below the upper trend channel in a downtrend established off May 21 highs, developing a downward biased wedge on that support.
The indexes rebounded as they neared fully oversold conditions in the past week, but continued to show bearish divergences in their charts. Although the rebound began strongly, it softened quickly. For a third consecutive quarter, earnings did not appear to support a move higher on the indexes. Although the indexes could continue to rebound in the week ahead, downward pressures appear to be building. It seems possible a continued move lower could be seen.
Second quarter earnings were found for 18 of the S&P 500 constituents, although not all found reported earnings during the past week. These constituents reported total earnings that were $0.36 higher than the same quarter a year ago. This represented a 0.02% increase over the index’s total trailing twelve month earnings from the week before and an average increase of 0.59% in the TTM earnings of those 18 constituents.
Although many blame weak second quarter earnings entirely on the Energy Sector, earnings shortfalls compared to the year ago quarter were widespread, even in those that had year over year earnings growth. Considering just those with positive earnings growth over the same quarter a year ago, these constituents saw year over year earnings growth less than half of what was seen the same quarter a year ago by the entire index. If overall earnings for the index had done as well as those with positive growth over the year ago quarter, the index still appears nearly two years forward on earnings based on a generally considered even value P/E of 15.
It appears earnings headwinds could be continuing to build and possibly on additional fronts. Although some continue to beat current earnings expectations, it seems possible many of the stocks near highs are in excess of four years forward of reasonable earnings growth expectations, even if they can continue to beat expectations at higher rates than they currently are.
Most of those with positive earnings did not show the growth required to support their current stock prices at the time of their report, let alone increases seen after these reports. Several began to show the flaws in long term growth expectations during the past quarter and it seems possible others could display these flaws in future earnings reports. It is not easy to double earnings faster than it has happened in the past. Most individual companies cannot do it, let alone the current expectations for whole sectors to do so.
Despite a rebound in stock prices, the S&P 400 again finished the week with over half of its constituents below their 200 DMA. There were 206 constituents that finished Friday beneath it, a decrease from 210 in the previous week. The index finished Friday with 244 constituents either below or less than one dollar above their 200 DMA, also a decrease from 249 in the previous week. There were 225 of the constituents that finished Friday greater than 10% below 52 week highs.
The S&P 500 had 235 constituents finish below their 200 DMA at Friday’s close. This was a decrease from the 245 in the previous week. There were 263 constituents that finished Friday either below their 200 DMA or less than one dollar above it, down from 281 in the previous week.
There were 252 of the constituents that finished Friday greater than 10% below 52 week highs, putting over half of the S&P 500 constituents greater than 10% below 52 week highs, but the index P/E has not decreased into these retreats. Even though the majority of stocks are seeing prices retreat, stocks are not becoming any cheaper into this retreat.
Despite the overall increase in stock prices during the past week, the number of constituents with a 200 DMA in decline increased to 167 from 136. The charts made it seem likely this increase in 200 DMA declines might have happened during the previous week, but instead the number with a declining 200 DMA decrease unexpectedly to 136 from 155. This decrease was due to upturns in the 200 DMA as October lows fell off the 200 DMA aided by the very sharp rebound off these lows.
The current year earnings projections increased by $3.08 during the past week for the S&P 500 constituents. There were 100 constituents that saw current year projection increases while 108 saw decreases.
The current quarter earnings expectations for those yet to report second quarter results saw an overall decrease of $0.07. There were seven constituents that had yet to report second quarter earnings that saw projection decreases and two saw increases.
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 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 gaps lower seen on Aug 7 and higher on July 10, but left gaps open near the price extremes as the July 9 gap higher and the gap lower on July 22 went uncovered. It also added an opening gap lower on Tuesday.
The index saw Monday’s rebound fall short of likely resistance from 2012 to 2025 in the upper half of the 100 L as the index began to retreat from a high of 2105.35. Wednesday’s retreat continued to a low of 2052.09 before rebounding from likely support within the 2035 to 2055 MRL. The fall prior to likely resistance and rebound from likely support makes a continued move higher seem possible. Even after considering the large run Wednesday had off lows to finish with a small gain, the index looked very weak after Tuesday’s retreat.
Although Monday’s retreat was outside a normal resistance area, it was near a possible resistance as the index retreated near the upper trend line of a downtrend channel from recent highs. Thursday’s high of 2092.93 and Friday’s high of 2092.45 also found resistance within likely resistance from 2085 to 2100 in the lower half of the 100 L along with resistance normally found near the 13 EMA. This makes it seem possible the index could move lower.
Second quarter earnings were awful, while the best economic news of late is mediocre and the worst is concerning. Stocks might move higher, but there does not appear to be good reason for a move higher. Increases in bearish chart formations in stocks and the indexes make additional caution seem prudent.
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% / -0.75%
The -2% L and +2% L indicators failed to provide a correct indication prior to Tuesday’s close and as a result fell into dormancy. Despite these indicators falling into normally dormant conditions, supporting volatility indicators pressed higher and neared extremes in the past week suggest a high potential for volatile sessions. If daily volatile conditions are seen prior to the +2% and -2% indicators scheduled reactivation during the fringe area of an upcoming 90 E, they would reactivate into a high level.
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% / -1.31%
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 7.07% from the previous week. Friday had the lowest volume and Wednesday’s the highest session volume. The five day volume variance increased by 30.57% to finish the week at 52.71%. The five day volume variance increased considerably during the past week. Although the index finished the week with a gain, the large increase in volume variance is potentially bearish while the small decrease in average volume is somewhat bullish.
As the October lows fell off and a furious rebound in stock prices followed, it appeared to provide a temporary setback in the numbers of stocks seeing trends lower in their 200 DMA. Although the full effects of the October change in stocks price has not fully worn off of the 200 DMA, a substantial increase in stocks seeing the 200 DMA trend lower was seen during an overall rebound in stock prices. Over half of the constituents finished the week greater than 10% below their 52 week high.
China’s currency devaluation could provide yet another headwind for earnings. 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 are not accounting for these potential shortfalls.
There were some very good second quarter earnings reports, yet most of these companies are already priced well forward of likely future earnings. Many point to the Energy Sector as the reason for poor earnings growth, but when considering that just those constituents with positive year over year earnings growth fell short of half of the growth seen by the entire index a year ago, it seems more likely overall earnings were the problem.
Many US stocks are seeing a marked increase in volatile daily activity, with several sessions finishing with more constituents in volatile moves than during past volatile index moves. Even though this increase is present, it appears these moves continue to have just enough offsetting counterparts moving in the opposite direction that the US indexes have so far not seen this volatility. The continued presence of this increased volatility in stocks makes the chances of a common direction eventually being found increase.
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 AOL 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 59% invested long in stocks in his trading accounts reflecting an increase over the past week’s investment level. This change was due to the purchase of one issue with the cost of this purchases partially offset by dividend payments. He will receive dividend payments from eight issues in the coming week and five 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.