The S&P 500 started the week with loss, but rebounded in the next three sessions before slipping lower again on Friday. The mid-week sessions pushed the index to a gain of 1.16%. The rebound began before the index fell into oversold conditions, which could be bullish. The S&P 500 appeared to be finding resistance within the likely resistance in the upper half of the 100 L, leaving a continued move higher in doubt.
Supporting volatility indicators continued to hold in the high levels they have been for some time. Although the US markets have so far remained relatively immune, many of the world markets have continued to see volatility since these indicators spiked higher. These elevated levels were first seen just before China’s stock market crash, and China’s market again appeared to respond to an increase seen last week with bearish volatility during this week. The Shanghai Composite saw an 8.48% drop on Monday, shedding most of the earlier government backed market stabilization gains in that retreat. It continued lower on Tuesday before seeing a 3.44% rebound on Wednesday. That rebound was followed by a third volatile session on Thursday as it dropped 2.20% and it continued lower on Friday to erase Wednesday’s gain.
Many of the other world markets saw volatile session retreats during the week. Russia’s RTS Index shed 2.18% on Monday with that drop following a 2.87% decline on Friday. It slipped in five straight sessions before rebounding volatilely in a 3.17% gain on Wednesday and then edging slightly higher on Thursday, before sagging again on Friday. Taiwan’s Weighted Index saw a four day slide capped with a 2.41% loss on Monday. It rebounded in three of the next four sessions to regain about half of Monday’s loss.
France’s CAG 40 Index slipped 2.57% on Monday. The index fell short of yearly highs prior to slipping in six of seven sessions, culminating with Monday’s loss. It saw two volatile session gains and opening gaps that accounted for nearly 50% of the move higher from July 7 lows prior to that retreat. Germany’s DAX Composite saw a fifth straight session loss end in a 2.56% volatile drop on Monday. It also used opening gaps in nearly 50% of its move higher off a July 7 low that saw two volatile session gains. It fell well short of yearly highs before retreating again. Both indexes used small gains in the final four sessions to regain Monday’s losses. These indexes still appear to be in possible retreats from the earlier highs.
The volatile sessions are increasing the jaggedness seen in many of the world’s stock market index charts. Even those that have not seen recent volatility, like Korea’s Seoul Composite or London’s FTSE are showing jaggedness near their recent highs or during retreats. Many are maintaining downtrends or have established bases that appear to be in danger of failing. Many have reached correction or crash proportions in these retreats or are nearing these levels. All still appear highly overpriced on a historical basis.
To make matters worse, earnings problems are not limited to the US. Many companies may be beating current projections, but earnings projections have been in reduction modes prior to actual reports for three straight quarters. Overall earnings are falling well short of earlier growth expectations worldwide and many stocks were already priced above the earlier higher expectations of growth. As a result, most stocks are not getting any cheaper, even into price declines. Not all are reporting bad earnings, but the good reports tend to send these stock prices higher still and most already appeared to be highly overpriced.
The S&P 500 saw its largest single week of earnings reports in the past week. Given the rebound in stock prices it would seem that better earnings were seen during the week, but the larger number of results in the past week turned out even softer than the poor reports in the previous week. Based on the even weighted second quarter earnings projections gathered at the conclusion of first quarter reports, it seems very likely the index could fall well short of the then expected 6.25% earnings growth rate.
Reported earnings were found for 166 of the S&P 500 constituents. There were 107 of the constituents that reported earnings above those they reported the same quarter a year ago, 57 reported earnings below the year ago quarter and two reported earnings even with their year ago earnings. These reports resulted in an even weighted TTM earnings increase of $3.10 over the previous week’s total, less than the increase of $3.63 in the 111 constituents earnings reports found the week before. This increase represented a 0.15% increase over the index total TTM earnings; lower than the previous week’s 0.18% increase. The TTM earnings increased an average of 0.47% in the 166 constituents that reported earnings; also below the previous week’s increase of 0.78%.
Some blame current earnings shortfalls entirely on the Energy Sector. This week’s earnings did appear to be unduly affected by large decreases in Energy Sector earnings. Seven of the eight largest earnings decreases compared to the same quarter of a year ago were reported by Energy Sector constituents. Even so, not all in the Energy Sector reported losses. In fact Valero Energy (VLO) reported the largest year over year increase in quarterly earnings of any constituent during the past week.
For comparison, the largest seven Energy Sector losses were removed. The remaining 159 constituents still only reported 1.89% growth. Based on the index’s TTM P/E of 20.25 and unchanged stock prices, it would take 16 quarters of this growth rate to reach a TTM P/E of 15.01.
It is not just the Energy Sector that is reporting large drops in earnings though. Comparable or even larger losses than the next largest losses below the top seven in the Energy Sector were seen in the Consumer Discretionary, Health Care, Industrial and Information Technology sectors during the past week. Since earnings shortfalls appear to be widespread, just the 107 that saw earnings increase over the year ago reported numbers were looked at. They managed only a 4.63% growth rate, and still far below the earlier projections for the full index. If the index returned to an overall 4.63% growth rate, it would take seven quarters to break below the general considered even value P/E of 15 with unchanging stock prices. Yet those 107 stocks with positive earnings growth had a higher average P/E than the index.
With the past week’s large number of reports it leaves less than a third of the constituents left to report. Although there could be some surprises left in those that have yet to report, it seems unlikely an overall even weighted earnings growth rate of above 1% could still be seen. Some have given good guidance for the coming quarter, but most of the reports continued to seem very soft. At this point it seems possible the index could have a hard time achieving an overall growth rate near 4.63% during the third quarter.
The reports also show additional headwinds could be building; many continue to mention cost savings in these reports, including layoffs, downsizing that includes selling or idling assets, and now a noticeable increase of plans for reductions in cap ex spending outside the large decreases in the Energy and Materials Sectors. Although they may temporarily improve or preserve earnings, these types of cost saving measures tend to hurt earnings in other companies. They are also often seen leading into recessions and it seems likely these actions may actually cause these slowdowns.
The indexes rebounded in the past week, but appeared to reach potentially troubling resistance levels. The Dow Jones Industrial Average rebounded in two sessions before finding resistance at the 13 EMA and 200 DMA that it has established highs near before slipping lower for three sessions. The New York Stock Exchange found resistance at the 200 EMA for two sessions before a gap above it on Friday, but the run was turned back at the 50 EMA and then slipped to finish the session back below the 200 EMA. The S&P 500 saw its last three highs push up near the likely resistance from 2012 to 2025 in the upper half of the 100 L, before settling to lower closes. The Russell 2000 pushed above its 13 EMA Friday, but slipped to finish below it. The NASDAQ pushed near to the previous highs in June, before falling lower Friday.
The index rebounds to this point looked somewhat bullish, but appear to be finding resistance at areas that could turn them lower. Although many companies are beating the estimates at the time of their reports, earnings continued to be very soft across all sectors. Several sectors that had been fixtures in runs have seen several companies report large setbacks in earnings recently, including large reductions in forward guidance. It seems likely others could still provide shortfalls ahead.
The number of S&P 500 constituents below their 200 DMA at Friday’s close decreased to 236 from the 262 in the previous week. There were 276 constituents that finished Friday either below their 200 DMA or less than one dollar above it, down from the 297 in the previous week. This data reflects changes scheduled for the current week covered in last week’s article.
The S&P 400 finished the week with 197 constituents below their 200 DMA on Friday, a decrease from the 211 in the previous week. The index finished Friday with 235 constituents either below or less than one dollar above the 200 DMA, a decrease from the 242 in the previous week. The data for the S&P 400 does not include the constituent change scheduled after Friday’s close.
There were 155 S&P 500 constituents that had a 200 DMA in decline from the previous week’s level and two saw the 200 DMA unchanged. There were 251 with a 200 DMA either in decline or that increased less than $0.10 week over week. There were 48 of the constituents that saw an increase in their 200 DMA of less than $0.10 that finished a greater distance below their 200 DMA than it had increased. There were 19 constituents that finished greater than $5 below their 200 DMA that still have a rising 200 DMA. Five of those constituents finished greater than $10 below their 200 DMA and one greater than $20 below it. Since the 200 DMA is slow to change, the charts make it seem possible that the numbers of constituents with a 200 DMA in a downtrend could increase even if the index continues to rebound in the coming week.
The S&P 500 constituents saw their overall current year earnings projections increase by $6.61 during the past week. There were 159 constituents that saw current year projection increases while 128 saw decreases.
The current quarter earnings expectations for those yet to report second quarter results saw an overall increase of $0.11. This was the second straight weekly increase in current quarter earnings estimates, although the two week total was only $0.18. The past week saw 12 constituents that had yet to report second quarter earnings see projection increases while 16 that have not reported saw decreases. Even though the constituents yet to report saw an increase in current quarter estimates, they saw overall current year earnings estimates slide $0.35 lower.
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 index rebounded again in the past week, but has still not reached a close equal to or greater than the May 21 record close of 2130.82. As a result the index remains within the significant drop from the upper half of the 100 L. The index fell to a significant level during the presence of a 90 E, although not present during all market tops, the 90 E indicator has been present during or very near many of the past market tops seen prior to corrections or crashes.
During the past week the S&P 500 covered the July 13 gap higher during Monday’s retreat, but left the July 9 and July 10 gaps higher open as it rebounded in the midweek sessions. The rebound has so far left the small gap lower seen on July 22 open. The index also left a small gap higher open on Wednesday.
The index began to hit resistance near the likely resistance from 2112 to 2125 in the upper half of the 100 L late in the week. The index pushed to intraday highs of 2010.60 Wednesday, 2010.48 Thursday and 2014.24 Friday before retreating to lower closes. Given the very large numbers of lackluster earnings reports, it seems possible the index could again succumb to this potential resistance.
Overall earnings reports remained very weak and even some of the good reports still left reason for concerns. Increases in activities that could put additional pressures on other company’s earnings are also a concern. The overall feel from the current reports so far makes it seem possible current growth expectations for the third quarter could again be too high. Earnings failures and guidance reductions in the companies that were fixtures in the run higher continue to be seen.
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% / -0.17%
The -2% L and +2% L indicators failed to provide a correct indication in the past week. Supporting volatility indicators remained at elevated levels. These volatility indicators continue to suggest higher than normal potential for volatile session moves. Although several foreign markets appear to have reacted to these indicators, aside from a single volatile session on the S&P 500, so far the index has remained pretty much immune to their presence. The 30 day period that is most likely to see additional volatile moves will complete in seven trading days. If no volatile moves are seen during this period, the -2% and +2% indicators will fall into a dormant state. Even though it seems possible supporting indicators could remain within high levels in this fall into dormancy, they are not considered controlling indicators so would not hold these indicators in an active condition.
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% / -0.73%
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 increased 7.41% from the previous week. The lowest volume was seen during Thursday’s session and Tuesday saw the highest session volume. The five day volume variance slipped 4.19% to finish the week at 15.04%. Monday’s volume again did not reflect the norm at market turning points from lows. A long absence of normal market volumes at market lows seems concerning, as it seems to point to a possible lack of investor support for the ensuing rebounds.
With over two thirds of the constituents already reporting second quarter earnings, it seems likely that earnings season could complete well below earlier earnings growth projections. Although some contend that earnings problems are confined to the Energy Sector, it seems possible that the second quarter’s earnings could fall short of earlier projections when considering just those that are reporting year over year earnings increases. It therefore seems likely the quarter could complete with weak earnings for a third straight quarter. Much of the wording in the current earnings reports makes it seem possible companies are creating additional headwinds, and these headwinds along with current earnings difficulties makes it seem possible current growth expectations for the third quarter could also be too high. Although many continue to beat the earnings estimates at the time of their reports, these estimates have been mostly falling prior to reports for three quarters, artificially maintaining high beat rates. Of course not all appear to be having earnings problems, and some have given stellar reports, but the numbers continue to dwindle. Earnings problems are not confined to the US, earnings appeared to be mostly soft throughout the world.
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.
As can be seen in the links provided above, many of the world indices are also in established downtrends. Several have reached crash levels in these retreats. Many continue to have volatile market conditions that appeared to coincide fairly closely with supporting volatility indicators. The presence of volatile conditions is generally a bearish indication.
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 does not currently have investments in VLO. Ron is currently about 58% invested long in stocks in his trading accounts reflecting an increase over the past week’s investment level. The change was the result of the purchase of four issues and dividend reinvestments in four issues with the cost of these purchases partially offset by the sale of one of the purchased issues and dividend payments. He will receive dividend payments from four 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.