Stock market preview for the week of May 11, 2015
The S&P 500 finished higher in three sessions during the past week and with a 0.37% gain. It spent much of the week below the previous week’s close until Friday’s fairly large run up erased early week losses along with most of the previous week’s losses.
Friday’s rebound was largely due to U.S. Department of Labor’s Bureau of Labor Statistics reporting better than expected nonfarm payroll increases for April. It was a fairly good report, but maybe not as good as the market reaction.
According to the BLS Employment Situation Summary released Friday, April’s seasonally adjusted nonfarm payrolls increased 223,000, which was a little higher than the consensus estimates of 218,000. The report noted that March’s nonfarm payroll estimates were revised lower from 126,000 to 85,000 and February’s estimates were revised higher from 264,000 to 266,000. With these revisions, the prior two month’s netted 39,000 fewer jobs than reported in previous estimates.
The report noted that the unemployment level remained virtually unchanged. The unemployment rate remained steady at 5.4% as did the number of unemployed persons at 8.5 million.
This was partly due to an increase of 241,000 in the short term unemployment numbers during April. Short term unemployment is defined as those without work for five weeks or less. The numbers of companies announcing large layoffs as cost savings measures to stabilize profits are increasing. Increases in the short term unemployment numbers could reflect the effects of these layoffs. If the numbers of companies using layoffs as cost saving continues to trend higher, employment levels are likely to suffer. In the long run, large numbers of companies using layoffs as cost savings usually compounds earnings problems, not solve them.
The BLS reported that the numbers of unemployed workers decreased by 1.1 million in the past year. It also noted that long term unemployment fell by 880,000 during the past year. The long term unemployed are defined as workers that remain jobless for 27 weeks or longer. Most lose unemployment benefits at this stage, and once off unemployment benefits, they no longer show up in the unemployment statistics at all. It therefore seems possible the yearly decrease of 1.1 million unemployed only saw 220,000 of those workers that actually found jobs in the past year.
In earlier articles it had been noted that volume levels seemed inversed of normal trends during price retreats and rebounds. This inversed volume seemed to point to a possible selloff occurring in stocks. A recent survey published by Bank of America Merrill Lynch shows that there was indeed a large outflow in equities occurring during much of the time stocks appeared to have these inversed volume levels.
That report noted that equities have seen a $99 billion reduction in investments since the beginning of the year. The chart provided in a related article is very interesting. It shows that over half of the investment inflows into equities since 2010 have left the market with this increase in outflows.
With such a large, steep and sustained selloff it is hard to believe stocks could hold on to gains, let alone move higher. Part of the reason stocks continue to move higher could be due to what appears to be a larger than normal number of opening gaps higher in stock prices. The large gaps higher seen on all of the indexes and most stocks prior to Friday’s open were further evidence of these gaps. Very small volumes seen in post and pre-market trading hours can cause very large stock price changes, both higher and lower. With these large outflows, it seems possible these gaps could be reason for concern.
The Major Stock Market Indexes
The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 continued to chop up and down during the past week with some fairly large daily price fluctuations. Most finished higher in the past week, but all were lower prior to the very large gap higher at Friday’s open. All retreated early in the week from a high short of the previous cycle high and all fell to a low that was lower than the previous cycle low before rebounding. Friday’s gap higher took a couple indices to a higher cycle high in that rebound.
The Russell 2000 was the only index of the five to finish with four sessions higher, yet managed only a small weekly gain. The Russell saw Monday move higher, but as it neared the 50 EMA, it fell sharply to finish with a small gain. Tuesday fell deeply, breaking to a new low in the current downturn. Wednesday and Thursday finished with small gains, but the index saw the 13 EMA take a bearish cross as it slipped below the 50 EMA during these sessions. Friday gapped higher at the open, but again was turned back at the 50 EMA and it fell to a finish only slightly above the opening gap.
The other four indexes finished the week with three gains. The NASDAQ started Monday with a gap above the 13 EMA, but slipped off highs to finish the session about where it started. Tuesday retreated fairly deeply, breaking below both the 13 and 50 EMA in the retreat. Wednesday gapped above the 50 EMA at the open, but slipped steadily reaching a low quite a bit lower than the previous cycle before rebounding somewhat into a close below the 50 EMA. Thursday pushed above the 50 EMA, but retreated to finish the session resting on it. Friday gapped widely higher with a start above the 13 EMA, but traded in a narrow range and finished only a little higher than it began the session; and with a small loss for the week.
The New York Stock Exchange started Monday with a small gap higher, but traded in a narrow range and finished only a little higher. Tuesday fell fairly steeply, rebounding off the 50 EMA in this retreat and to a finish a little above it. Wednesday gapped higher at the open, but slipped steeply falling below the 50 EMA and the previous cycle low before rebounding to a finish below the 50 EMA. Thursday fell slightly lower than Wednesday before rebounding to a finish slightly above the 50 EMA. Friday gapped widely higher and started above the 13 EMA. Although it traded in a fairly narrow range after that gap, the NYSE finished near session highs and above the previous cycle high.
The Dow Jones saw Monday start higher and push higher, but gave up about half the day’s gains before the close. Tuesday slipped lower breaking to a finish below both the 13 and 50 EMA. Wednesday started with a gap higher, but slipped deeply off the session high above both the 13 and 50 EMA to finish below both. The session also slipped below the previous cycle low. Thursday pushed above the 50 EMA and to the 13 EMA before falling to a finish below both but only slightly below the 50 EMA. Friday gapped higher at the open, but due to a *manipulation in the opening price and the gap was much smaller than the total of the opening gaps higher that the components saw. The Dow pushed well above the 13 and 50 EMA and traded in a narrow band of the price only seconds after the open, but finished near session highs and above the previous cycle high.
The S&P 500 gapped higher on Monday and pushed higher before retreating and giving up over half the session’s gains before the close. Tuesday fell deeply through the 13 EMA and to the 50 EMA before rebounding to close slightly above it. Wednesday started with a gap higher and continued higher to the 13 EMA before reversing and falling very steeply to a low well below the previous cycle’s low, but rebounded to finish the session well off session lows. Thursday moved higher and broke above the 50 EMA before slipping to finish the session resting on it. Again, a *manipulated opening price masked a huge gap higher at the open Friday, instead replacing it with a small one in the record books. The S&P 500 also traded within a narrow range of the price seconds after the open, but finished near session highs and well above the 13 EMA.
*The S&P Dow Jones Indices is owned by McGraw-Hill Financial Inc. (MHFI). They began to manipulate the opening price on the Dow Jones and S&P 500 to reduce or eliminate opening price gaps on the indexes some time ago. The practice of changing index values outside the actual market values at the time of the open seems corrupt. It also tends to hide valuable information from those that study the indexes.
Stocks broke substantially higher on Friday but without the gaps, or in the case of the S&P 500 and Dow Jones Indices, undisclosed gaps higher, the indexes did not move much on the jobs report. It wasn’t a bad report and the monthly rebound in employment numbers was encouraging, but it was not a great report either as it shows some possible problems could be developing with employment. The stock price movement after the open was pretty much in line with the report, ho hum. All of the indexes traded in a small range and finished only a little higher than the open, or the price a few seconds after the open.
The indexes saw rebounds without falling into fully oversold conditions during the past week. This rebound could continue without reaching fully oversold, but there appears to be reason to believe the indexes could retreat further too.
All of the indexes fell from a lower cycle high and reached a lower cycle low before rebounding. A couple finished Friday at a higher cycle high, but it seems questionable they would have reached this high without the large opening price gaps.
All appeared to show failures at or near the 13 and or 50 EMA during the week before Friday’s gap higher, and some even into that rebound. Although the indexes finished with fairly large gains Friday they moved little higher after opening gaps, making it appear investors were not as enthusiastic over the jobs report, or that many were selling into these gaps higher. Gaps higher do not always fill quickly, but they nearly always fill.
Overall, earnings do not look very good and many reports continue to give reason to step back. Growing numbers of the stocks that were doing well with earnings earlier are seeing problems with earnings recently. The current year earnings guidance and projections continued to tick lower with the earnings reports. Weekly earnings projections decreases are small overall, but consistent and the S&P 500 has seen only one weekly increase this year. These small consistent decreases are adding up into a large number. This also followed fairly substantial drops beginning in June during 2014. Relatively few stocks appeared to be undervalued, many were fairly valued to the higher earnings expectations at that time and many appeared overpriced. Drops in earnings and guidance since make many stock look overvalued.
The indexes and many stocks are near resistances that could turn them lower. These resistances have been troublesome in the past and it seems possible they could continue to be roadblocks.
The US Treasury Charts
The 20 year US Treasury Bond broke considerably lower in the first three sessions of the past week. Tuesday’s finish slightly below the 200 EMA was the first finish below this level since April 3, 2014. That retreat also took the 20 Year Bond to a lower cycle low than seen in the previous cycle. Wednesday continued lower still breaking deeper below support and to a finish near session lows. Thursday’s rebound fell slightly short of the 200 EMA before settling to a lower close before Friday gapped higher to an open above the 200 EMA, but slipped to a fourth consecutive close below the 200 EMA and only a small session gain. Treasuries have again decoupled from normal trading patterns as they appear to be trading more or less in step with stock prices. The 20 Year is fully oversold although the late week rebound took it out of extreme levels. This chart continues to show bearishness that makes a deeper overall drop seem possible.
Treasury prices again decoupled from stock prices. Although not always so, decoupling periods are sometimes a warning signal as it shows investors may feel both asset classes are overpriced.
The interest rates on the 10 year US Treasury Note began the week with three increases before slipping in the final two sessions. The Ten Year rate increased in eight straight sessions before the late week retreat. As a result it broke and closed above the 200 EMA on Tuesday for the first time since Sept 24, 2014. The rate finished above the 200 EMA in three sessions before Friday’s retreat broke back below it. The rebound appeared to find resistance near the previous cycle high as it reached fully overbought levels. Although this chart continues to show bullishness, it seems possible the retreat could continue lower from overbought conditions to cover an earlier gap higher in this run. The Ten Year rates seem too low, and a rebound higher through the resistance that sent it lower seems possible.
Gold trended flatly early Sunday until a small push higher after the Hong Kong open. The trend continued slightly higher as it finished the night a little above 1183.
The slow trend higher continued early Monday as gold reached 1185 before the London open. It trended slowly lower until a midmorning rally in New York spiked gold to about 1192. It slipped and moved slightly higher in a retest of that high, but began a bouncy trend lower off that retest lasting into the nights finish below 1187.
Early trading Tuesday saw gold push close to 1190 but settle back to 1187 in afternoon London trading. Gold began to trend strongly higher after a brief flatness before slipping a little prior to the New York open. The rally reignited at the NY open as gold pushed near to 1199 before settling back to about 1193 before the Sydney open. Gold cupped in a slow trend higher off that low to finish the night just short of 1196.
Gold held near Tuesday’s finish early Wednesday, but began to slip off these highs near the London open in a fall to about 1187 in this retreat. Gold rebounded at the New York open in a push back above 1197, but after holding near this high for a few hours, slipped nearly as steeply back to about 1189. Gold took a bouncy trend higher off that low that lasted into the Sydney trading session, but turned lower from about 1195 early in Sydney trading. The retreat leveled near but above 1190 before slipping lower after the Hong Kong open and again leveling near the night’s finish below 1188.
Thursday saw gold trade flatly near 1188 before turning lower prior to the London open and falling to about 1182 in London. Gold rebounded back to about 1186 by the New York open, but slipped back to 1179 shortly after the open. It bounced relatively quickly back to 1188, but slipped nearly as quickly back to 1182. Gold flattened there and traded within that low and three points higher into the night’s finish a little below 1183.
Gold continued to trade flatly early Friday, before a modest rebound to about 1188 into the London open. It again flattened, trading mostly above 1185 and below that high into the New York open. Gold pushed higher after the NY open to 1192, fell quickly to 1182 and then retested the high before slipping back to 1184. Gold rebounded off that retreat to trade fairly flatly near the New York Spot close of 1187.50 and a finish of higher than the previous week’s New York Spot close of 1177.80.
Gold traded fairly range bound during the week, trading nearly entirely within a 20 point spread. It found resistance mostly above but near 1190 and support mostly above but near 1180.
The S&P 500 Constituent Charts
Friday’s rebound took many constituents higher. Many opened with gaps well above the previous close. Many started at potentially bullish points, like above the 13 EMA, but saw little movement higher after the open. Many appeared to see these rebounds halt at likely resistance, and retreat prior to the close. Many moved higher during the session, but finished a little above or even below the starting gap higher. Several filled these gaps prior to the close. Not all opened with gaps higher, and some retreated in this move due to bad earnings, lowered guidance or other corporate news.
Some pushed higher after these opening gaps and finished near session highs, but they seemed to be in the minority. Overall it appeared there was little support in the price move higher after the initial opening gap higher.
This gap higher may have distorted the charts to a certain extend this week. Some stocks that still appear oversold gapped well into previous rebounds that would have taken them very near or into overbought levels. It seems possible they could have difficulty continuing these moves higher.
Many of the indicator stocks opened with gaps higher, but finished well below this opening gap. Some continued higher, but the overall move was small. Others continued much higher, but finished about where they started. Most of these stocks held well within current downtrends. Few seemed to show undue support for this price movement.
Several constituents have broken to or below their 200 EMA in the past couple weeks that have not seen a break or touch of the 200 EMA in many months, some in well over a year. Several that had seen long trends higher in their 200 EMA have seen it flatten at or near their current prices. Although some have seen recent upturns in the 200 EMA over the past couple weeks, nearly twice as many have seen turns lower in their 200 EMA during the same time periods.
These chart formations sparked a look at data downloads with moving average statistics. The longest timeframe included in this data was the 100 Day Moving Average (DMA). Although the Exponential Moving Average (EMA) is preferred and a longer timeframe was hoped for, this data was looked at. Some of the findings that seemed interesting are included below.
On Friday March 27, the day after a market low and a finish still near this low, the constituents averaged 2.37% above their 100 DMA and 226 finished below their 100 DMA. A week later on Friday April 2, and again a day after a market low and a finish still near this low, the constituents averaged 2.50% above their 100 DMA and 202 constituents finished below their 100 DMA.
On Friday April 27 the day before a market high with the S&P 500 finishing very near that market high but below Friday’s close; the constituents averaged 2.91% above the 100 DMA and 154 finished below their 100 DMA. This past Friday May 8 and with the S&P finishing near a market high, the constituents averaged 2.30% above the 100 DMA and 189 finished below their 100 DMA.
Two data points are of interest. The first is the increase in constituents that finished Friday below the 100 DMA in comparison to the April 27 finish near a recent market high. The other is the decrease in the percentage the constituents are riding above the 100 DMA compared to the two recent market lows. This comparison of the moving average appears to show increasing numbers of constituents faltering at highs or beginning moves lower. The charts tend to support this data evaluation.
Please note: There were several constituent changes made during the time periods the data was collected and used in these 100 DMA comparisons. Although this is not a direct comparison of the current constituents or the same constituents, the constituent changes did not appear to make a much of a difference in the numbers above. Most of those changes tend to make Friday’s outcome look slightly better than it would have if no changes had been made.
Nearly all in the Materials and Energy Sectors are expected to see further reductions in current earnings and many reduced forward guidance with their last reports, but only seven in the Material Sector and four in the Energy Sector are currently trading below their 100 DMA. Many of these stocks saw large decreases earlier, but likely earnings makes current prices still seem very high. In contrast 28 Industrial, 33 Consumer Discretionary, 17 Consumer Staples, 16 Health Care, 32 Financial, 22 Informational Technologies, three Telecommunications Services and 27 Utilities Sector constituents were trading below their 100 DMA at Friday’s close. Many are due to recent earnings misses and or reductions in forward guidance, but some are for other reasons like investor dissatisfaction over recently announced deals, or normal trends lower from recent highs.
Several constituents still continued higher after guiding earnings substantially lower in their previous reports. Several are currently running at or near the highest levels above the 100 DMA.
Although changes to 2016 earnings continued to help buffer the current year earnings projection slide, the current constituent’s saw current year earnings pared back another $4.10 on an even weighted basis. The constituents have seen weekly earnings projection declines in all but one week since the beginning of the year, but nearly two thirds of the constituents had seen earnings projection declines during the June 2014 to December 2014 period before that.
The current earnings season continues to have its highs and lows. The sectors that were expected to be hot seemed cool as many reported earnings and or guidance that was not as good as many expected. These lower earnings and earnings guidance make earlier sector growth projections seem high in several sectors. Not all are doing poorly, but many are not doing nearly as well as expected only a short time ago. Many of these stocks were already trading at high valuations that required substantial beats of the higher earnings estimates months ago, not the whittled down projections that were beaten, or in some cases missed, at the time of their reports.
Overall it did not seem the constituent stock price movement supported the gap higher on Friday. Many of the constituents gapped higher at Friday’s open. Some filled these gaps, but many were left open, adding to an already large number of open gaps. Given the large outflows in equities, there appears to be reason for concern over these price moves that were created outside normal market hours.
The indicators featured 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 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 –/(+) 90 D indicator that became active on Feb 26, 2015 has performed as follows to this point in the standard format: highest close / lowest close / last close.
+0.33% / -3.34% / +0.25%
This indicator along with many supporting indicators continues to show potential bearishness.
The S&P 500 saw Monday gap higher with a start at the session low of 2110.23, it pushed to an intraday high of 2120.95 before slipping lower to close at 2114.49. Tuesday opened lower at 2112.63, but rebounded to a high of 2115.24 to cover that gap, then proceeded lower to the session low of 2088.46, covering Monday’s gap higher in that drop before finishing slightly higher at 2089.46. Wednesday opened higher at 2091.26 and continued to a high of 2098.42, before slipping to a low of 2067.93 and rebounding to a finish of 2080.15. Thursday started slightly lower at 2079.96 but reached a high of 2092.90 before slipping to a low of 2074.99 and a close of 2088.00. Friday started with a gap higher to the session low of 2092.13 and continued to move higher to 2117.66 and finished near this high at 2116.10.
Monday found resistance within likely resistance from 2112 to 2125 in the upper half of the 100 L, before slipping and finishing below this resistance and rebounding back into it at the close. Tuesday began near the lower boundary of the likely resistance in the upper half of the 100 L and moved a little higher into this resistance before slipping to find support in the likely resistance from 2085 to 2100 in the lower half of the 100 L. Wednesday found resistance near the upper boundary of the likely resistance in the lower half of the 100 L and then retreated beneath the lower boundary of the 100 L resistance before finding support in the 2065 to 2070 MRL. Thursday found resistance within likely resistance in the upper half of the 100 L before slipping to find support slightly below the lower boundary of the 100 L from 2075 to 2125. Friday gapped higher, but probably really started closer to 2109 than 2092, it traded in a narrow band shortly after the open and finished slightly off the high and within likely resistance from 2112 to 2125 in the upper half of the 100 L.
Monday turned back from a lower high than the previous cycle high. Wednesday’s rebound point was at potentially bullish support, but fell to a cycle low that was lower than the previous cycle. The lower high and lower low combination are generally a bearish indication and often considered a confirmation move in a likely further retreat. Friday’s gap higher was both bullish and bearish too, as it moved strongly higher, but it left a large gap that will likely be filled at some point later. The index traded narrowly after that gap finding resistance near the session finish in an earlier retreat. Friday’s high fell short of Monday’s, potentially being another lower high.
The index recovered from the first significant drop from likely resistance between 2112 and 2125 in the upper half of the 100 L. Although not always the case, rebounds from significant drops that recover previous highs most often push past the resistance level and move higher to the next likely resistance. Resistance within the upper level of the 100 L still appears stout, and has turned the index back several times after it recovered from this drop, so this continued rebound is not a given. A break lower below 2040 could be a bearish indication.
The average daily volume decreased 6.31% below the previous week. The highest volume was seen in Tuesday’s large retreat and lowest in Monday’s small increase. The five day volume variance decreased by 10.73% to finish the week at 22.72%.
Several companies, both inside and outside the S&P have announced plans to reduce costs with large workforce reductions. These reductions usually have large upfront costs which limits savings to begin with, but if those taking this cost savings avenue continues to increase, it does not seem unlikely job growth could begin to suffer. If job growth stalls or begins to decline, many will likely see reductions in earnings guidance as this guidance is dependent on increasing numbers of consumers buying their products.
This tends to fuel the fire and usually begins an ugly cycle of job reductions based on cost savings to increase earnings, but nearly always ends in earnings reductions across the board, in addition to the large costs associated with these job reductions. When economic conditions improve, these companies again loss money recruiting, hiring and training a new workforce. They often are unprepared for the increases in the business cycle and lose sales due to not seeing the increases coming.
Several companies have come to the conclusion that these actions are growth killing. Instead of falling into the cycle of layoffs and rehiring, they retain workforces during downturns and use them to improve their business for the upcoming rebound. When the rebound begins they are fully staffed and ready to take opportunities from competitors that are understaffed or have untrained workforces. Many of these companies are leaders in their industries for these very reasons.
Some investors get caught looking at the potential cost savings with layoffs, but they often do not produce the earnings results expected. Sometimes the better investment is a competitor that does not participate in these types of cost savings.
Earlier inversed volume levels during rebounds and retreats on the index appeared to point to a possible outflow of investments in stocks. A recent report by Merrill Lynch appears to support that notion. That survey noted a $99 billion reduction in equity investments since the beginning of the year. This amounts to over half of the equity investment inflows since 2010.
It has also been noted that runs higher in the past year appear to have left a higher than normal number of open gaps. New gaps continue to be made and a few have been filled, but the numbers of unfilled gaps continue to grow. It seems possible these gaps helped to push the index higher into this large outflow in equities. It seems possible the reduction in investment based leaves these gaps more vulnerable to retreats. Open gaps higher nearly always fill eventually.
April finished with a small gain and since rebounding from the summer retreat in October 2011, the S&P 500 has seen 31 months finish with gains and only 12 finished with losses. Since July 2014 it has seen six finish with gains and five with losses. After the July retreat the index has seen nearly half of the monthly losses since October 2011, in a little over a quarter of the total time. It was earlier reported in error there were six monthly losses during this span.
This increased volatility coincides closely with resistances in the 2000 to 2140 range. This period began with the first significant pullback from the likely resistance in the lower half of the 100 L at 2000 from the July 24, 2014 intraday high of 1991.39. It also began after the index pushed above the upper trend line from crash lows.
Volatility on the S&P 500 has increased even further since Dec 5. The index has seen three significant drops and several significant price direction changes while within these drops. This same increase in bearish volatility is seen prior to large retreats in many market tops.
Most earning reports are beating current estimates, but many are reporting drastically reduced earnings. The large numbers of constituents reporting earnings in the past week coupled with those that have already reported make it seem very likely the constituents could see the first quarter over quarter double digit earnings percentage decline since the fourth quarter of 2009 on an even weighted basis. Earnings declines are widespread, affecting all sectors. Some are still doing well, but most are not doing as well as expected earlier. Many stock prices still reflect the earlier expectations.
Higher P/E’s than the index currently has have been seen in the past, but most of these higher P/E’s were seen into an earnings slide like that currently being seen on the index. Unless the index price retreats as higher earnings quarters drop off and are replaced with lower earnings into the current higher stock prices, it seems possible P/E’s near these historically high levels could be seen later in the year.
The index has seen a reduction in active indicators over the past few weeks. A reduction in active indicators is generally a bullish indication. At the same time most supporting indicators continue to suggest bearishness. Even if all other remaining indicators should become inactive, the –/(+) 90 D indicator will remain active. It continues to show potentially bearish characteristics.
Many of the stocks that appeared to rebound from lows too early previously appear to have repeated this move. A retest of previous lows seems likely. Although many beat lowered earnings estimates at the time of their reports, many saw large quarter over quarter and year over year earnings decreases and guide for still lower current year earnings. Many of these stocks appear very expensive based on current and likely future earnings.
The index is nearing the “Sell in May” period. An earlier article on this subject shows that buying the low in May and selling a rebound afterwards usually provides very good returns. It also shows that in many years waiting until September to rebuy resulted in buying stocks at higher prices as index decreases were seen only about 45% of the time. Current earnings make it seem possible this year could be one of the exceptions though.
Current earnings reports make it seem possible more of the constituents that were pushing stock prices on the S&P 500 higher could be running into earnings problems. These earnings problems make it seem possible these stocks could begin to retreat. As fewer and fewer stocks remain in these runs, the weight of those moving lower is likely to overcome the dwindling numbers moving higher. Conditions appear to be developing that could be very punishing to stocks that appear overvalued.
Past breaks above the upper trend line on the S&P 500 have all produced large retreats that reach the lower trend line or lower support line at some point. It is not uncommon for the index to see one or more significant drops before seeing a retreat to one of the two trend lines. The index initially broke above the upper trend line on Dec 26, 2013 and has seen seven significant retreats since. Five of these significant retreats have been seen since July 2014 and three since Dec 2014.
If the index continues in past patterns, runs above the upper trend line have always fallen back to or below the lower trend line or lower support line within two years. The only exceptions were during trend changes, but these trend changes also occurred during a rebound from a drop to one of these two lines. The index returned to the prior trend from the last drop to one of these trend lines, so it does not appear to be in a trend change from that rebound. It therefore seems likely a break to the lower trend line or lower support line could happen within the next 7 months.
Although commodity prices have rebounded modestly, it still seems likely the breaks lower seen in commodity prices could continue for some time to come. These rebounds have been seen in the past also, but commodities fell lower still afterwards. Although the stock market currently perceives it as such, a rebound in crude prices is not a bullish indication.
Ultimately the direction that the stock market takes from here could be influenced by news events. These news events could include some of the past problems that resurfaced or market conditions that have historically repeated into current market conditions.
When the S&P 500 broke above 2000 it entered a level research suggests could contain a large pullback. Data evaluations make it appear resistances met between 2000 and about 2140 could have the potential to cause a large drop, possibly reaching crash proportions.
When these potential drop levels were first discussed, there did not appear to be a catalyst for this large drop. Since that time the commodity super cycle appeared to collapse, and this collapse has sent earnings levels much lower in a large portion of the index. The dollar also rebounded considerably and this too brought foreign earnings potentials lower in many of the constituents. These lower earnings also had a ripple effect, first sending earnings lower in other constituents that supply these sectors and now in sectors that are feeling an earnings pitch due to spending reductions caused by these reduced earnings. Although many companies are beating drastically lower earnings projections, it seems likely the index could see first quarter earnings fall by double digit percentages quarter over quarter. Current earnings reports make it seem possible the earnings slide has not finished.
To this point the largest downturn of the four after the index breached the 2000 level was seen in a fall to the Oct 14, 2014 low from a pullback within the 100 L at 2000. That retreat did not reach the levels that could have relieved the index of a possible deeper drop. Yet the index appears to continue the development of the tip over pattern, which makes a deeper drop seem likely.
The index recovered from a significant drop from likely resistance between 2112 and 2125 in the upper half of the 100 L. Like the resistances found in the 2065 to 2070 MRL and lower half of the 100 L at 2100, the upper half of the 100 L appears to hold resistance stronger than originally anticipated.
Chart formations tend to make a fall in excess of 10% seem possible. Past chart formations seen during large retreats on the index closely match those that are present now. It continues to seem fairly likely a significant fall could reach the lower trend or lower support line with a move lower probably staying within the 10% to 20% range. If a drop to crash potential is seen, it probably does not exceed 24% by much, but could possibly reach 35% if many of the constituents fall to lower support levels. Research suggested if a crash were to occur from within resistances in the 2000 to 2140 range, it probably finds bullish support somewhere near the two previous tops in 2000 and 2007. The index’s highest close finished slightly greater than 26% above the 2007 high.
The next likely resistance level above the 100 L at 2100 could be seen at the 2140 to 2160 MRL. This resistance has the potential to cause a significant pullback. The potential for these drops could change drastically depending upon the outcome at the lower resistance and being so no drop projections have been made for this resistance at this time.
Reasons to become bearish appear to be increasing as time progresses; even so the longer term seems bullish. The index continues to show patterns that are common prior to large retreats. If a large pullback is seen on the index, it could be prudent to increase stock holdings into this drop.
Lower commodity prices and a stronger dollar are actually bullish for longer term earnings growth, but the positive effects of these changes are slow to develop. Many expected these increases to be seen immediately, but they were not. They do not appear to be in the first quarter earnings either; many reports made it apparent that consumers are not spending recent fuel savings, but saving them. The good news is savings are rebuilding, making future spending increases seem more likely. Provided fuel prices remain moderated the spending increases are still likely to be seen, just not as quickly as most expected.
If gold should rebound into a large sell off in stocks, it could provide the best remaining opportunity to take profits in gold holdings. If stocks rebound strongly from this downturn as it seems fairly likely they could, it seems possible gold could shatter support at about 1190 in this retreat and might not find solid support again until near 700. A drop directly to this level seems unlikely and gold probably finds temporary support in the 900 to 1000 range before slipping lower. Ultimately, even the support at 700 is likely to fail with gold probably returning to the 200 to 300 level at some point in the future.
Gold rebounded again above 1190, but failed to hold above it. Resistance appeared to be building in the ten point range above 1190 in the past week.
These data evaluations do not mean a crash is certain within the 2000 to 2140 range. The data evaluations only identified this level as one with a high potential to cause a large drop, possible reaching the 25% to 35% range; although a fall seen low in this range might not reach these levels. This range also holds most of the specifications identified in the first crashes of a market entering into a secular bull. Many chart formations that occur near large pullbacks became apparent as the index neared this resistance.
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 may have contributed small amounts of information. Stock and Treasury charts used for analysis and commentary were provided by StockCharts.com 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 has no current investments in MHFI. Ron is currently about 54% invested long in stocks in his trading accounts reflecting a reduction in his rounded investment level from the past week. This decrease was the result of the addition of one issue with the cost of that purchase more than fully offset by the sale of one issue and dividend payments. Ron feels he is overbought given the current market conditions and will likely continue to reduce his overall investment level. Since his investment level is already below the levels originally planned for months ago, he may also reinvest a portion of these sales. Ron 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 rounded 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.