The S&P 500 continued to see volatility in the past week. Monday provided a third straight volatile retreat as the index slid 3.94%. Although Tuesday did not finish at volatile levels, the session was volatile. It gapped higher into the open and continued to a session high that was 2.90% above Monday’s close before tumbling 4.19% off that high into a finish with a 1.35% loss. Wednesday saw a volatile rebound of 3.90% and Thursday followed with a second consecutive volatile rebound of 2.43%. Friday traded relatively flatly and spent most of the day at a loss before breaking slightly higher into a 0.06% session gain. Friday’s session gave the impression the move higher could be losing steam. The three day rally pushed the index 0.91% higher for the week. The index has seen five volatile session finishes in the past seven. Since breaking lower from a July 20 high, the S&P 500 has seen 18 lower finishes in the past 29 sessions.
The S&P 500 fell to session lows of 1867.01 on Monday and 1867.08 on Tuesday. The lower trend line was estimated at 1865 at Friday’s close using the six year weekly chart above, this estimate was not exact. However the chart makes it appear each of these lows may have rebounded off this trend line. Support at this trend line seems somewhat bullish and probably led to the volatile rebound seen afterwards. Volatile rebounds after large initial volatile drops are not uncommon, but not always bullish. The first retreats to or near the lower trend line often produce rebounds, but this trend line is often retested later.
The numbers of volatile moves seen in a very short timeframe, not just in the US but worldwide, make it seem highly likely additional volatile conditions could be seen. Large sudden increases in volatility often lead into longer periods with increased volatile activity. A much higher than normal concentration of volatile activity often lasts for months once increases like those in the past week are seen. Volatility indicators also remain near extreme levels making it seem likely additional volatility could be seen.
These volatile conditions are generally bearish in nature. This high potential for volatility and high likelihood that it could be bearish, could lead to a larger retreat than already seen. As seen in the past week, it is not uncommon during volatile conditions to see volatile countermoves. Volatile rebounds that reverse direction tend to lead to some larger daily losses in later volatile retreats. As a result volatile conditions tend to lead to a deeper overall drop.
At the current time earnings appear to be a dead weight. At the lowest close in this retreat on Tuesday, the even weighted TTM P/E of the S&P 500 constituents was 18.51. After the rebound into Friday’s finish the index saw the TTM P/E rise back to 19.37. Giving the current stock mix in rebounds, it seems possible the index could top a P/E of 21 in recapturing the previous high. Current third quarter estimates are for a 3.34% reduction in year over year earnings. It therefore seems possible the index could see the fourth consecutive quarter with negative or very low year over year earnings growth. Stocks are not cheap, and earnings do not seem good enough to push stock prices higher even if the index rebounds.
It therefore seems quite possible the index could retest the lower trend line. It also seems possible the support at this trend line could fail in that retest. A failure at that support could take the index to the lower support line. If this support were to fail, research suggests the index probably finds a low somewhere near the tops in 2000 and 2007, represented as a line at 1565 in the chart above.
Monday finished a string of three consecutive volatile losses on the index. Three consecutive sessions finishing with volatile losses on the S&P 500 are a rarity. The index has seen three consecutive volatile retreats only three other times. The first was the most memorable and provided the largest total three day losses. In that retreat the index slipped 2.34% lower on Oct 14, 1987 followed by a 5.16% loss on Oct 15 with those losses culminating during a plummet of 20.47% on Oct 16. That loss was the largest single session loss recorded on the S&P 500. The two other three day strings occurred during the last crash. The first began with a 3.08% loss on Oct 20, 2008 and was followed by a 6.10% loss on Oct 21 and a 3.45% loss on Oct 22. The last time three consecutive losses occurred was in a 4.17% loss on Nov 13, 2008, followed by a 2.58% loss on Nov 14 and a 6.12% loss on the following Monday Nov 17.
The longest string of volatile sessions is seven and also began on Oct 14, 1987. The four sessions following the three straight drops included above were a 5.33% increase on Monday Oct 19, a 9.10% increase on Oct 20, a loss of 3.92% on Oct 21 and another loss of 8.30% on Oct 22. Volatility was far from over after that seven day stretch though, the index saw 23 more volatile moves by Jan 25, 1988 before calming somewhat. Although volatile sessions were not as frequent afterwards, the index still saw 11 more volatile moves during the remainder of that year.
It is interesting that many were calling the past Monday’s retreat “Black Monday” but it hardly merited the phase. On a percentage basis, the session close wasn’t even in the top 40 single session retreats on the S&P 500 since its inception in 1957, finishing at number 42. If it had finished at the session lows, it would have eked into the top 20 at number 19. Yet in a comparison with all other sessions finishing at lows, it would have only finished at number 32. The pullback was large, but it was not large enough to be considered “Black Monday.” Past retreats with similar percentage declines early in the fall show there is a high potential that a larger session pullback could yet be seen in the current retreat.
The news that helped carry the index higher late in the week seemed somewhat bearish. The rebound on Wednesday was credited to comments by New York Federal Reserve President William Dudley. He was quoted as saying a rate hike in September “seems less compelling” due to recent market volatility. Although the market saw this as a positive, any further delay in a rate hike seems like a potentially bearish indication. The Federal Reserve may have already waited too long to increase rates to levels that would allow them to have any economic effect by lowering them again in a downturn. Data makes it seem likely rate increases probably should have begun even before then Fed Chairman Ben Bernanke first began discussing an increase in 2010.
Thursday’s rally was likely the result of the second estimate of second quarter “Real” GDP growth being much better than expected, coming in at 3.7% compared to the 3.1% consensus. The number looks larger than it was though. This number is the seasonally adjusted quarterly change annualized. The first quarter’s growth was very small. Due to this very small first quarter growth a rebound to a below average “seasonally adjusted” growth provided a relatively large quarter over quarter change during the second quarter. That change was annualized, meaning if the following quarters can also grow at the “seasonally adjusted” rate of increase seen in the second quarter, we can expect the GDP to grow by 3.7% in a year. It is a very good use of propaganda, taking a small increase and making it look much larger than it is. Actual year over year GDP growth in the second quarter was only 1.1%, and well below the 2% GPD growth projections. The year over year growth includes the past four quarter’s growth, basically showing stagnated growth during the entire past year.
Had earnings performed well during the quarter, this rebound in GDP might have been less of a concern, but earnings were very weak. The S&P 500 constituents saw about a half percent even weighted year over year earnings growth in the second quarter. Those with positive earnings growth saw a growth rate of about half of the total index’s year over year growth during the prior year. Late second quarter earnings results are about the same to slightly worse than the earlier results, showing little increase during the quarter. The flatness throughout the quarter makes it seem probable that this flatness in earnings could continue into the third quarter results. Expectations for third quarter earnings are already lower than those reported in the prior year.
During the second quarter earnings reports, the index saw the largest increase in constituents with negative trailing twelve month earnings since 2008. It seems likely the numbers with negative earnings could continue to grow. Increases of constituents with negative TTM earnings were also seen into and during the past two crashes.
China’s Shanghai Composite continued to see volatility. The index lost 8.49% Monday as it broke lower in the downward biased wedge pattern that had held at support on the previous Friday. It cascaded 7.63% lower on Tuesday and continued 1.27% lower Wednesday before seeing volatile rebounds of 5.34% on Thursday and 4.82% on Friday.
World market indexes became very volatile during the past week, with nearly every major stock market index in the world seeing at least one volatile session. A volatile session is defined as a finish with a loss or gain in excess of 2%. There are 30 major Asian market indexes with nine in China and four in Japan; all finished at a loss and all but Mongolia saw volatile retreats on Monday. The 29 major indexes in Europe’s indexes fared only slightly better, the only with a gain was Abu Dhabi while Israel, Jordan and UAE Dubai were the only others to finish with losses of less than 2%. The 15 major indices in the Americas, which included six in the US, fared a little better yet as Jamaica and Peru finished with gains and Mexico, Bermuda and Venezuela finished less than 2% lower. The other ten moved volatile lower.
The World markets became mixed on Tuesday but continued to see volatility. Of the 30 major Asian indexes 16 saw declines with all 13 of the Chinese and Japanese indexes seeing retreats at volatile levels of 2% or greater. Three of the 14 increases were volatile rebounds. Of the 29 major Europe indexes, 26 finished higher with 23 of those in volatile rebounds. None of the three in retreats saw volatile moves. The Americas started Tuesday’s session with most in volatile moves higher, but finished with all the US indexes lower. Five of the nine outside the US did finish higher but none greater than 2% and one of the four that finished in retreats had a volatile move lower.
Wednesday saw continued volatility in Asia, as 14 saw increases with six having volatile rebounds, while 16 slipped lower with four of the Chinese indexes still in volatile declines. In Europe 22 finished lower with two in volatile retreats and one of the seven that finished higher in a volatile rebound. The Americas had seven volatile moves higher including all six US indexes and only one index finished lower.
Thursday saw both Asia and Europe with 19 indexes each in volatile moves higher and one index each in decline. The Americas saw 2 indexes decline but had 11 in volatile moves higher, including all six of the US indexes.
Friday saw 14 Asian indexes in volatile moves higher and only two had losses. Europe saw four volatile moves higher and 11 finished lower. The Americas saw only one volatile move higher, and four with losses.
Although many of the World’s indexes saw rebounds late in the week, the large increase in volatility is an indication that volatile conditions could continue. Many that saw these rebounds are still far short of the beginning points of these falls. Many have reached correction or crash proportions. Volatile rebounds are common after large volatile retreats, but they often change direction and move lower again.
The VIX saw back to back sessions with large percentage increases of 46.45% on Friday and 45.34% on Monday. This led to some inquiries into the data. This investigation uncovered that the pair of large moves were the fourth and fifth largest daily percentage increases since the index inception in 1990. The largest was 64.21% seen on Feb 27, 2007, the second largest was 51.72% on Nov 15, 1991 and the third largest was 51.50% on July 23, 1990.
Second quarter earnings were found for 11 of the S&P 500 constituents, it is possible not all found reported earnings during the past week. These constituents reported total earnings that were $0.20 higher than the same quarter a year ago. This represented a 0.01% increase over the index’s total trailing twelve month earnings from the week before and an average increase of 0.39% in the TTM earnings of those 11 constituents. Two constituents that had reported earlier also saw their previous report reduced by $0.02 each. There are only five constituents remaining to report.
Although a volatile rebound was seen, the indexes continued to see increases in the numbers finishing beneath their 200 DMA. There were 273 S&P 400 constituents that finished Friday beneath their 200 DMA, an increase from the 266 in the previous week. The index finished Friday with 309 constituents either below or less than one dollar above their 200 DMA, also an increase from the 304 in the previous week. There were 295 of the constituents that finished Friday greater than 10% below 52 week highs and unchanged from a week ago.
The S&P 500 saw 347 constituents that finished below their 200 DMA an increase from 335 in the previous week. There were 372 constituents that finished Friday either below their 200 DMA or less than one dollar above it, also an increase from the 369 in the previous week. The S&P 500 saw 352 constituents finish Friday greater than 10% below 52 week highs, a decrease from the 357 seen in the previous week.
The number of constituents with a 200 DMA in decline increased much more quickly than expected in the past week. Well over half of the constituents are showing a weekly decline in their 200 DMA as 295 were in decline and a large increase from the 193 in the previous week. This increase appears to show a possible breakdown in breadth has occurred.
The S&P 500 constituents saw current year earnings projections decrease by $0.02 during the past week. There were 58 constituents that saw current year projection decreases while 29 saw decreases. The past week’s change was affected by companies that reported fiscal year ending results and as a result their current year earnings changed from 2015 to 2016. The decrease would have been larger without these changes.
Many stocks dropped very deeply Monday and Tuesday. Many reached or broke below supports in these falls before rebounding volatilely again.
Many of the constituents that moved higher appeared to do so in strong V rebounds. Many of these stocks appeared to be turning lower at moving averages or other resistance levels into the end of the week. Many also appear to be reaching or nearing overbought levels as they reach these resistances. The numbers of resistance breaks appear to be very small, with many lacking continuation after breaking higher. A fairly large number of stocks did not rebound appreciably in the past week. These stocks have remained near oversold levels. At this point it does not seem likely these stocks will contribute much to the current rebound. Although the rebound was very bullish, it could already be nearly out of gas.
Not all, but many of the indicator stocks that had rebounded earlier returned to or broke below previous lows during retreats in the past week. Several broke to or below support found prior to this rebound. Others that have not yet reached previous lows fell through the 50 or 200 EMA in these retreats. They later found resistance at these moving averages in rebounds. Many rebounded with the overall market, but many appear to be turning lower at or are beginning to find resistances at moving averages or other resistance levels. At this point most of the indicator stocks look to be trending lower and this generally indicates a further retreat could be seen.
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, -/(+) 90 D, +2% H and -2% H indicators are currently active. The +2% and -2% indicators reactivated into a high likelihood due to Thursday’s volatile market move. See a more detailed description of most of the indicators developed through research and featured in these articles here.
During the past week the S&P 500 fell to a new low within the significant drop from the May 21 record close of 2130.82. The index officially reached correction levels in Monday’s retreat, but retreated further into Tuesday’s close of 1867.61. Tuesday finished 12.35% below the May 21 high.
Open gaps lower remain from previous highs on July 22 and Aug 11 along with gaps lower seen on Aug 19, Aug 20 and Aug 21. Although all of these gaps lower are likely to be filled at some point, current conditions make it seem possible some of these gaps could remain open for some time. Gaps higher were seen on Wednesday and Thursday.
The S&P 500 opened deeply lower Monday, but saw volatile intraday price swings in rebounds higher before sinking back towards lows into the session finish. Session lows of 1867.01 found support near but above the MRL at 1850 to 1865, but also appeared to at or very near the lower trend line. The index did not finish Tuesday at a volatile level, but saw a volatile session none the less. The official open was quite far from the session high, but based on the opening prices of the constituents the index probably actually began much nearer to session highs and probably well over 2% higher. A small continued run failed in the late morning and fell over 4% lower from the day’s high during the session to finish at a 1.35% loss. Session lows fell to 1867.08, also near but above the MRL at 1850 to 1865 and near or at the lower support line.
Wednesday also probably started much higher than the official open. After beginning a retreat much like the one that took Tuesday to a lower close, it rebounded and finished with a 3.90% gain. Wednesday’s high of 1943.09 found resistance within the 1940 and 1955 MRL. Thursday again gapped higher, and again finished with a volatile gain of 2.43%. Friday traded very flatly compared to the volatile conditions seen earlier in the week. Thursday’s high of 1989.60 and Friday’s high of 1993.48 found resistance within likely resistance from 1980 to 1995 in the lower half of the 100 L at 2000.
The slowdown Friday appeared to be partially the result of lack of participation as many stocks did not appear to make appreciable moves higher off lows during the late week volatile rebound. Many of the constituents that made large quick moves higher appeared to be reaching or nearing overbought conditions or slowed as they reached resistances at moving averages or previously breached support levels. Many that were in moves higher appear to be already turning lower at resistances. Resistance breaks are fairly scarce. Many of the constituents that managed to break above resistances appeared to flounder after breaking higher, remaining flat with recent highs or even moving lower.
The volatile rebounds in the past week appeared to show another V bottom rebound is in progress on the index. This rebound might continue; however the recent increase in volatile conditions increase the chances volatile conditions could continue. If volatile conditions continue the chances this rebound could fail are very high. These types of rebounds can be seen all along the down channel during the falls in market crashes. There appears to be little real reason for a rebound in stock prices.
The support break at 2040 is also potentially bearish. It seems likely the failure at this support level could turn back into resistance. It also seems likely this resistance could become very stout. The volatile drop from around 2035 could also strengthen and widen this resistance band.
The (-)/(+) 90 D that became active on May 22, 2015 appears to have bearish potential. This indicator is nearing its expiration period and as a result a 90 E will activate on Sept 16. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
+0.99% / -11.38% / -5.62%
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% / -11.87% / -6.15%
Note: The highest close only considers closes higher than the starting point; if there are none higher it is reported as zero percent.
The -2% H indicator provided a correct indication when Monday’s retreat of 3.94% reached volatile levels. The +2% H indicator also provided two correct indications in the past week. As seemed likely the index also saw volatile offsetting countermoves on Wednesday with a 3.90% gain and Thursday with a 2.43% gain. Volatility indicators remain near extreme levels. This coupled with a large increase in volatile sessions on the S&P 500 and throughout the world indexes makes continued volatility seem likely.
The average daily volume increased 42.63% from the previous week. Volume was highest in Monday’s volatile retreat and lowest Friday as the index finished little changed. The five day volume variance decreased 7.54% to finish the week at 67.45%. Volume levels increased sharply during the week reaching potentially bearish levels while volume variance remained at levels normally seen during bearish conditions.
The index has seen five volatile sessions in the past seven sessions. One of the two not finishing at volatile levels saw both a volatile rebound and a volatile retreat during the session. The large increase in volatile market conditions makes it seem likely the index could be entering a period that sees a marked increase in volatile market conditions. If this volatility develops as it has in the past, it is not uncommon for these periods of heightened volatility to last for several months. Many of these periods have seen 30 or more volatile market moves. These volatile time frames are generally bearish in nature as usually lead to large market retraces.
This makes it seem possible the current retreat could fracture the support so far seen at the lower trend line. A break below the lower trend line is likely to see a further drop. Support could be found at the lower support line
There is no way to be certain that the current retreat will continue lower. The increases in volatile market moves make a continued move lower seem possible. Many things appear to be happening that have led into larger retreats in the past, making it seem possible that a larger retreat could happen. If this retreat develops, the S&P 500 could break support at the lower trend line and continue lower to the support line or rebound near the previous market tops in 2000 and 2007. The lower support line was at 1722 at Friday’s close. The 2007 market top was at about 1565.
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.
Compared to the same quarter a year ago, the overall earnings growth in the second quarter was very low. There were some very good second quarter earnings reports, yet most of these companies are already priced well forward of likely future earnings.
Current chart formations along with past timelines, softening economic conditions, increases in volatile conditions, 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 62% invested long in stocks in his trading accounts reflecting an increase over the previous week’s investment level. This increase was due to the purchase of four issues and dividend reinvestments in 3 issues, with the cost of these purchases partially offset by the sale of one issue and dividend payments. He will receive dividend payments from 19 issues in the coming week and 11 in the following week. If no further investment changes are made during this time frame, these dividend payments would not change his investment level.
During the recent downturn Ron moved about 12% of the account value of his 401K into mutual funds from stable value funds, leaving stable value funds with about 75% of his account value and the balance in company stock he added or held through the recent downturn. He also changed investment elections to include a 40% mix of mutual funds and company stock investments, with the remaining balance being applied to stable value funds. This was a change from a 10% company stock and 90% stable value mix he had changed to a few weeks ago. Prior to that a 100% stable value investment was made.
Ron plans to slowly reinvest through a continued downturn if it should develop as he believes it could, just as he slowly divested prior to the downturn. This could include selling some positions that were added into volatile rebounds to reinvest if they should turn lower again. If this downturn does not develop as he believes it could, he will likely remain in a largely cash position as he continues to feel most stocks are still overvalued at this time.
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.