The S&P 500 started the week with a small gain on Monday, but slipped in the final four sessions. The index finished the week with the largest session loss in a 1.07% retreat Friday. The index slipped 2.21% for the week and has retreated in four of the past five weeks.
Earnings season came into full swing during the past week as a large number of S&P 500 constituents reported earnings. Earnings continued to be considerably lower than earlier earnings growth estimates. Many of the stocks that had not seen much earnings pressure in the previous two quarters saw their numbers slip with these reports. There were several of the S&P 500 constituents that began to see considerable earnings weakness with this report. There were some very good earnings reports, but for the most part those that reported higher earnings than a year ago, did so by small amounts. The overall earnings continued to be weak for the second quarter.
Reported earnings were found for 111 of the S&P 500 constituents. These reports resulted in an even weighted TTM earnings increase of $3.63 over the previous week’s total. This increase represented a 0.18% increase over the constituent’s total TTM earnings of the previous week. The TTM earnings increased an average of 0.78% in the 111 constituents that reported earnings. There were 67 of the constituents that reported earnings above those they reported the same quarter a year ago, 42 reported earnings below the year ago quarter and two reported earnings even with their year ago earnings.
Many of the stocks that saw large gaps higher beat estimates, but actually appeared to have very poor reports. Here is a look at the top two gainers on Thursday and Friday.
Thursday’s largest gainer was SanDisk (SNDK). It raced higher after reporting earnings that soundly beat estimates, reporting $0.66 EPS compared to $0.33 estimate. Normally a 100% beat of earnings is reason for a stock price to jump, but SanDisk saw earnings fall 53% from the $1.41 in the same quarter a year ago and is expected to continue to fall short of year ago earnings for the remainder of the year. These earnings were also very close to the previous quarter’s $0.62 per share earnings, indicating this was probably not so much an earnings beat, as a projection miss. The past two quarters earnings reflect the large losses in business that SanDisk has seen, with both under half of the same quarter the year before. SanDisk finished the session with a P/E a little shy of 16, but will likely shed over $1.30 more in TTM earnings over the next two quarters, giving it a P/E of about 23 on current year reported and estimated earnings. The projections for 2016 earnings look better. These projections make it seem possible SanDisk could bounce back to near their prior year earnings, yet it seems unlikely these earnings are going to be as good as projected unless they can win back the Apple (AAPL) business they lost and tanked these earnings to begin with.
Thursday’s second largest gainer was Under Armour (UA). It also shot up by beating estimates; reporting seven cents per share instead of the expected five cents. Sales increased and revenue climbed 29% from $609.7 million to $783.6 million, but so did expenses. A large part of these expenses are due to large increases in player and team endorsement payments. Under Armour has been piling on endorsement expenses, including top players like Tom Brady of the New England Patriots, Stephen Curry of the Golden State Warriors and pro golfer Jordan Spieth the winner of the Masters and the U.S. Open, along with a very long list of other top players.
They are also increasing team endorsements. They inked a ten year deal with the Fighting Irish of Norte Dame last year that ESPN reported as the most lucrative college endorsement ever at a cost of $90 million. More recently a deal that began July 1 with the University of Cincinnati Bearcats was signed in April for $4.7 million a year. As the numbers indicate, these endorsements don’t come cheaply and as a result earnings slipped from $17.7 million or eight cents a share in the same quarter a year ago, to $14.8 million and seven cents per share they just reported. Despite the large increase in revenue, it seems they can’t increase earnings nearly as fast as they are increasing the costs of new endorsements. They finished the session with TTM P/E above 102.
Fridays’ largest gain was seen in Amazon (AMZN). Amazon reported a surprise profit of $0.19, when they were expected to report a loss of $0.14. As a result the stock gapped to open 20.08% higher before retreating from session highs and finish with a 9.80% gain. Even with the positive earnings Amazon has a TTM loss of $0.43 per share. The profit this quarter was only the fourth positive result in the past eight quarters. Amazon has never made a profit that could even remotely support the current stock price and continues to report yearly earnings very close to or below the breakeven point ever since becoming an amazing growth story, that never grew. They don’t have a niche business to produce this kind of income. Everything they do, somebody else does better, and that includes their core business.
Investor’s bets that Amazon’s will somehow miraculously increase earnings seem unreasonable. For this stock to trade at even value, based on a TTM P/E of 15 and Friday’s closing price of 529.42, yearly earnings need to reach $35.29 per share. Amazon saw sales growth, but that growth increased operating costs too. Although they saw some cost savings in the current quarter, the bulk of these costs are basically fixed and won’t ever go away, even if they replace all of their highly overpriced upper management with robots too. They cannot cut costs enough to produce this income; they need to dramatically increase sales. Based on the percentages of sales to profits in the current quarter they would need to increase yearly sales to over $4.3 Trillion to produce the $35.29 per share even value profits. It therefore looks very unlikely this stock will ever be able to reach the profits necessary to make the current price reasonable.
Earnings projections for 2016 jumped after this report, giving them a 126 P/E on those projections, but Amazon also has a very long history of falling well short of the coming year projections when it comes time to report earnings. This is partly due to overzealous expectations.
The second largest gain on Friday was 4.63% increase held by C.R. Bard, Inc. (BCR). Bard had a fairly good report seeing single digit sales increases that is if you can overlook the litigation issues the company faces. It reported a loss of $0.74 due to $343.7 million being set aside for this litigation. The earnings report makes these charges appear to be a onetime fee, but it seems very likely more will follow. The District Court ordered them to prepare for trial on 200 cases to be followed by an additional 300 cases, so it seems likely losses could be much larger given the $15 million in attorney’s fees before a single case was even heard. It seems likely legal fees could reach billions as most companies involved in similarly large numbers of cases see these types of legal expenses. That does not even consider the potential losses if they are found liable and with a loss of a single case, it is likely the number of cases waiting to be heard will increase dramatically. Bard has a TTM P/E of about 20, but stocks with these types of potential losses often trade with P/E’s in the single digits.
Many of the stocks that moved higher in the past week have real issues that investors continue to ignore. Some of those issues that were ignored earlier are beginning to pop up too. Friday Biogen Inc. (BIIB) saw the largest percentage decline in the S&P 500 as it fell over 22% after it missed earnings and revenue expectations and slashed its outlook. The lower guidance was due to a continued slowdown in the expected rise in sales of its multiple-sclerosis treatment Tecfidera. Even with the large slip in stock prices Biogen still has a lofty TTM P/E above 24. Others in the sector appear to have current or future earnings expectations that appear too high.
With the largest week of earnings reports so far, overall earnings appeared to fall short of investor expectations. All of the major indexes began to pullback from overbought levels. The coming week will also see a large number of reports. Given the broad range of sectors seeing earnings difficulties during the past week, it does not seem likely the tide will turn for the better in the coming week’s reports.
The Dow Jones Industrial Average and New York Stock Exchange both slipped back below their 200 EMA during the week. The Russell 2000 slid the nearest to its 200 EMA since breaking below it on Dec 16, as it finished Friday resting slightly above it. All of these indices neared or exceeded previous cycle lows in the past week’s retreat.
The S&P 500 and NASDAQ fared better in their retreats. It seems likely much of this was due to opening gaps higher in stocks that “beat” expectations, yet reported earnings and expectations that arguably do not support their current stock prices. The S&P broke below its 13 EMA on Thursday but was turned lower Friday near the 13 EMA to finish the session well below it. The NASDAQ broke and finished below its 13 EMA on Friday.
The indexes began to fill the earlier gaps higher in these retreats. All broke below moving averages that make a continued pullback seem possible.
AT&T (T) completed its acquisition of Direct TV (DTV) on Friday. As a result Signet Jewelers Limited (SIG), a foreign company headquartered in Hamilton, Bermuda, will replace Direct TV in the S&P 500 after the market close on Tuesday. Since this change has not yet occurred, it was not reflected in the data presented below.
The past week’s retreat saw the number of S&P 500 constituents that slipped below their 200 DMA at Friday’s close increase to 262, up from the previous week’s 231. There were 295 constituents that finished Friday either below their 200 DMA or less than one dollar above it, up from the 257 in the previous week.
The S&P 400 finished the week with 211 constituents below their 200 DMA on Friday an increase from the 189 in the previous week. The index finished Friday with 242 constituents either below or less than one dollar above the 200 DMA also an increase from the 223 in the previous week. The data for the S&P 400 includes changes that are scheduled for the coming week.
The S&P 500 constituents saw their overall current year earnings projections decreased by $2.30 during the past week. There were 123 constituents that saw current year projection decreases while 98 saw increases.
The current quarter earnings expectations for those yet to report saw an increase of $0.07. This was the first weekly increase in current quarter earnings expectations since earnings season began. The past week saw 40 constituents with current quarter earnings projection increases and 41 constituents with decreases.
Several constituents appear to be failing at resistance levels after reaching fully overbought conditions. Many have seen retreats drop progressively further after each failure at these levels previously.
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. A new 90 D indicator became active with Tuesday’s close and a discussion on this indicator is included below. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The current turn lower on the S&P 500 started from a highest close of 2128.28 Monday that fell short of the May 21 record close of 2130.82. Since the current retreat began from a high that did not equal or exceed the previous high, the index remains within the significant drop from the upper half of the 100 L.
The index saw a very small gap lower on Wednesday as the intraday high reached 2118.51 after opening a little lower than Tuesday’s 2119.21 close. The continued retreat later in the week left this gap open. The past week’s retreat began to cover open gaps higher seen in the rebound, but has yet to fully cover gaps left open on July 9, 10 and 13. Open gaps are nearly always filled eventually. A retreat to fill the July 9 gap higher would take the index very close to previous lows. The index has fallen from fully overbought conditions, but is still far from fully oversold. It seems possible additional downside could be seen in the week ahead.
The past week’s earnings results were mixed, but mostly weak. Several of the stocks that had carried the index higher appeared to see stress crack as their charts broke lower and some saw very large retreats in the past week. Others continue to show these potential stresses in their charts. Earnings have been lackluster so far, so it seems possible others that have yet to report could see stress breaks lower.
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% / -1.32%
The -2% L and +2% L indicators failed to provide a correct indication in the past week. Supporting volatility indicators increased during the past week, but the -2% and +2% indicators still fell to a low level due to the expiration of the 90 E. There is the potential for a fringe moves on the 90 E. Fringe moves occur when conditions normally seen during the presence of this indicator happen a few days before or after its active period. If this is the case, dropping these indicators to a low level could be premature. The -2% and +2% indicators will remain active in a low level due to a volatile session less than 30 trading days before. The presence of an additional volatile session would return these indicators to a high state.
The 90 E indicator expired after Friday’s close. Although it did not see the bearish potential that seemed possible during its presence, the S&P 500 fell to a significant level, saw a volatile session and had a 3% price direction change. All are conditions commonly seen during the presence of 90 E indicators. The current move lower on the index started during its presence, leaving the potential of a second price direction change in a continuation move.
The average daily volume increased 12.38% above the average of the previous week. The lowest volume was seen during Monday’s session. Daily volume levels increased progressively through the week into Friday’s highest session volume. The five day volume variance rose 7.22% to finish the week at 19.23%. Although the index finished the week with four straight session losses, the five day volume did not reach bearish levels.
A volume stringer reached a length required to activate a new 90 day indicator during the past week. The stringer broke after reaching ten days. The last day the stringer remained intact was Tuesday and is considered the starting point, hence it will be known as the 90 D indicator that became active on July 21, 2015. The new indicator has performed as follows to this point in the standard format: highest close / lowest close / last close.
0.00% / -1.87% / -1.87%
Note: The highest close only considers closes higher than the starting point; if there are none higher it is reported as zero percent.
There are many things to consider when projecting a possible outcome during this indicators presence. Recent issues seem like a good place to start. A potential pitfall over the Greek debt issues seems resolved, or at least temporally. Investors seemed satisfied as stock prices rebounded, but the underlying issues that caused the problem appear to have been yet again made worse in the fix than they were to begin with. It seems likely the issue will resurface again and probably sooner than most think. Unless negotiations begin on debt restructuring, it seems likely this issue will only fester into an ugly mess in the background for the time being.
China’s stock market appears to be heading higher again after the recent crash, although still grossly overpriced. Like earnings in the US, China’s companies are showing some of the same earnings weakness, making the high P/E in their markets more of a concern. This issue was patched, but it seems possible it could return during the active period of this indicator. It also seems possible recent buoying of China’s market might keep it from leading in a turn lower as thought possible earlier, but instead it might follow the US markets lower.
Commodity prices again broke lower in the past week. Gold broke support and began a move lower that could reach the 900 to 1000 range before it finds meaningful support again. These price slips could bring added earnings pressures in those companies and countries with earnings dependent on these prices. Again the recent collapse in the commodity super cycle could bring long term benefits, but they are much slower to develop than many believe. The loss in one sector is not replaced with an immediate increase in another. Eventually all will likely benefit, even those that saw losses initially, but the full benefits could take four years to develop, not a few quarters.
Earnings season is in full swing as over a third of the S&P 500 constituents have reported earnings. Earnings have been soft across many sectors, and many are missing earlier growth expectations including the index as a whole. After three consecutive quarters of lackluster results, many stocks were punished as they reported earnings this quarter.
This slowdown in earnings is happening with the index at a historically high P/E ratio. Many stocks are trading at prices four or more years forward of arguably high forward expectations. The continued softness in current earnings makes these forward earnings seem even less likely.
There are still likely to be good earnings reports and some will likely have stellar reports. Some will move higher simply because they beat estimates regardless of the underlying earnings factors investors should probably be concerned with. At the same time stress fractures seen in several stocks that were once fixtures in the move higher and the charts showing others with these potential stress breaks could be an added concern.
This is happening at the same time the S&P 500 has seen increasing numbers of stocks break below their 200 DMA in retreats, and this includes many that broke lower from long runs higher. It has also seen an increase in the numbers that have a 200 DMA that is trending lower. Market tops seldom start with all stocks breaking lower at once, the numbers in falls slowly increases until the weight pulls the rest lower with them.
The turns lower in many stocks has produced a long period of flatness near highs on the S&P 500. Since the Dec 5 high of 2075.37, the index has only moved 2.67% higher to the May 21 record close of 2130.82. It finished Friday only 4.28 points higher than the Dec 5 close. During the period it has also seen an increase in significant drops and price direction changes including 13 weekly retreats in the past 23 weeks, giving this flatness near these highs a choppy appearance.
Although the 90 E indicator recently expired, it is often seen at or near market tops. The index saw a significant retreat during its presence, which it has not recovered from.
Reports continue to surface of surveys showing investors are increasing cash levels and of large selloffs in equities. Soft earnings are not likely to increase inflows from this sidelined cash, but could continue to build it. Many of the recent market moves higher appeared to be more like selloffs than rebounds; this includes recent gaps higher in stocks that beat earnings in the past week but finished these sessions well below the initial gap higher.
The past week’s reports of the lowest weekly initial claims for unemployment in 42 years was very encouraging, unfortunately the unadjusted year over year numbers show more are unemployed now, than a year ago. They also show overall job growth has slowed. More and more companies are announcing layoffs as a cost savings measure. Some of these layoffs are occurring overseas but many have not yet happened. Even if these layoffs did not spike the new claims numbers here, when companies are laying workers off, they are not hiring.
Economic growth continues to be a concern. There have been several lower revisions in world growth during the year. Many countries have economic growth concerns.
Long term currency trends and current plans of interest rate hikes in the US make a continued rebound in the US dollar seem likely. As a result currency exchange rates are likely to continue to give companies with overseas earnings trouble.
The index has seen an increase in the numbers of constituents that have cut dividend payouts during the past year, mostly in the Energy and Material Sector stocks. Similar increases in the rate of dividend cuts had been seen before nearly every major downturn in stock prices.
There were other considerations and data mulled over before the following projection was written for the 90 D indicator that became active on July 21, 2015:
It seems possible earnings are finally becoming an issue, as a third straight quarter of soft earnings are being reported and stocks have subsided substantially into the largest earnings week so far. Given the overvalued conditions of stocks worldwide, there appears to be little reason for stocks to move higher into these soft earnings. More and more of the constituents are seeing dips below their 200 DMA and more are seeing this moving average begin to trend lower. Recent increases in sidelined cash are likely to reduce the upward pressure on stocks. Charts show many of the stocks that had been fixtures in the run higher appear to be under stress, and several saw this stress break lower. It seems others could follow in the weeks ahead. There are many bearish indications in supporting indicators at the current time including volatility indicators that have held within high levels for an extended time. Most of the major indexes appear to be in established trends lower. The S&P 500 has held very flatly to highs since December, while seeing an increase in choppiness at these highs. The index has seen few rallies last more than a few weeks since and has seen 13 weeks finish lower in the past 23, which also makes a downturn seem possible. Conditions continue to make it seem possible a large pullback could be seen. It still seems likely a retreat to the lower trend line or lower support could be seen before the end of the year and that the current lackluster earnings could provide this downturn. The long trend sideways has allowed the lower trend line and lower support line to push much higher. The upper trend line will be at about 1858 or about 10.75% lower than Friday’s close at Monday’s open and the lower support line will be at about 1711 or about 17.72% lower. It is not likely this drop would be straight down, so the drop to these trend lines would likely be smaller. It seems possible a drop that reaches 10% could be seen during this retreat if it were to occur. Therefore the indicator is given a full – (minus) rating. If this drop were to occur, the indicator will expire in late November, and during a time that often sees rebounds from drops that are in progress. The rebound could depend largely on the third quarter earnings being reported at that time. At this time it seems possible these earnings might not be as good as currently expected either, but if they are better than currently expected it seems possible the index could fully recover from this drawdown. The indicator is given a + (plus) rating indicating it seems possible it could rebound from this setback, but it is encased in parenthesis due to doubts that earnings will be as good as expected for the third quarter. Therefore the full rating of the indicator is -/(+) 90 D.
The largest earnings week so far saw second quarter earnings reports continue to be lackluster. Earnings increases were seen, but mostly below earlier growth expectations. The coming week will also contain a large number of reports. It seems possible since many stocks are currently highly overpriced, continued weakness could see the selloff accelerate.
Several of the indexes appear to be falling in established downtrends. Two have broken below the 200 DMA for the second time in three weeks. Over half of the constituents of the S&P 500 and S&P 400 finished the week below their 200 DMA.
Current chart formations along with past timelines and worldwide stock overvaluations continue to 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 currently has investments in T. Ron does not currently have investments in SNDK, AAPL, UA, AMZN, BCR, BIIB, DTV or SIG. Ron is currently about 56% 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 one issue with the cost of this purchase partially offset by dividend payments. He will receive dividend payments from seven issues in the coming week and four 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.