The S&P 500 closed lower in four sessions, but unlike the two previous weeks that finished higher with only three gains in the ten sessions, the index slumped 3.63% lower for the week. The past week’s slide broke a six week string of gains as it began the third significant retreat from resistance within the upper half of the 100 L. It has finished seven of the past eight sessions with losses since turning lower from the Nov 2 highest close and has also seen losses in 13 of the past 19 sessions.
The retreat turned more strongly lower late in the week, posting its largest losses on Thursday and Friday. This appeared to coincide with the earnings reports in the retail sector that revealed a continued slackening in sales. Although many gave other reasons for the reduced sales, it seems likely it is due to an unfortunate byproduct of companies cost savings techniques. As cost savings and layoffs are announced it increases uncertainties about job security. This generally causes employees that are not laid off to tighten their belts right along with their employers and those that were laid off.
On Wednesday Macy’s (M) reported sales declined 5.2% for the third quarter. Although the company blamed the sales slump on unusually warm weather that kept shoppers from buying cold weather items, Macy has not seen sales growth since the fourth quarter of last year. Due to the slowdown in sales they were left with excess inventory that will need to be liquidated in the fourth quarter. This added headwinds to what is already shaping up to be a challenging holiday shopping season. Many others also reported the same types of inventory problems due to slack sales. Due to the continued weakness in sales Macy’s now expects the full year’s sales to be down 1.8% to 2.2% against an earlier forecast of flat sales for the year. As a result they reduced full year guidance to $4.20 to $4.30 per share from the $4.70 to $4.80 earlier guidance. Macy’s also took an impairment charge of $111 million on the 35 to 40 stores it plans to close.
On Thursday Grand Rapids, Michigan based SpartanNash Co. (SPTN) reported third quarter sales slipped 1.9% below the same quarter a year ago. The food supplier said the sales decline was largely the result of soft sales to the military and retail grocery store chains. They reported earnings per share of 40 cents compared to an EPS of 45 cents a year ago.
Fossil Group Inc. (FOSL) reported third quarter earnings that were 45% below those a year ago on Thursday as the company reported lower than expected sales. It slashed its earlier full year guidance of $4.80 to $5.60 per share to $4.15 to $4.75 per share. The company also nearly doubled its estimates of full year sales decline to be between 8% and 10.5%, considerably lower than earlier estimates of yearly sales declines of between 4% and 8%.
Not all saw sales decline, but many are still seeing softness in sales. Advanced Auto Parts (AAP) noted in its earnings report on Thursday they had a much smaller increase in sales than expected during the third quarter. They reported sales that were near flat showing only a 0.5% increase. The company also expects soft sales to continue and projected fourth quarter sales could slacken further. The auto parts retailer said it would close another 30 stores in addition to its earlier announced plans to shutter 10 stores.
Some retailers are showing sales growth, but not earnings growth. Khol’s Corporation (KSS) fared slightly better on sales, seeing an increase of about 1% over the year ago quarter. They also beat earnings estimates, but saw profit decline below the year ago quarter. They reported earnings of 63 cents a share compared to the year ago quarter’s EPS of 70 cents.
JW Nordstrom Inc. (JWN) reported a 6.6% increase in sales Thursday, but missed earnings expectations of 72 cents a share. The company reported earnings of 42 cents a share that were far below the 73 cents reported a year earlier. They cut full year guidance greater than the current quarter miss, to $3.30 to $3.40 a share from earlier guidance of $3.85 to 3.95. The company also reduced full year sales growth projections to 7.5% to 8% from 8.5% to 9.5%.
The Utility Sector reported revenue much better than the about $4 billion shortfall projected in an earlier article. The sector appeared to benefit more than expected from an increase in air conditioner use due to warm summer weather. Although there was a large shortfall, the sector finished only about $2.15 billion short of the analyst projections at that time. Several other sectors saw revenue totals that were lower than expected. As a result the 2.04% quarter over quarter revenue increase for the third quarter expected on Oct 23, has melted to a 0.86% increase as of Friday.
Nearly half of the constituents that have reported so far saw declines in revenue compared to the same quarter a year ago. As of Friday, there were 232 constituents that reported a year over year increase in revenue, while 226 saw declines. Even though slightly more than half saw increases, total revenues for the index declined 3.89% below those reported the same quarter a year ago.
The revenue numbers for the quarter appear somewhat misleading, as many of the largest revenue increases were due to mergers or acquisitions and not due to an overall increase in sales. If the numbers with mergers and acquisitions are looked at on a same store sales basis, increases were much smaller than the reported numbers imply or even decreased from the same quarter a year ago. Without these mergers and acquisitions clouding the picture, it seems very likely the year over year decline in revenues would have easily exceeded five percent, but probably neared or exceeded six percent.
Earnings were found for 17 of the S&P 500 constituents that reported third quarter earnings, although these results may not include all that reported during the past week and could include some that reported earlier. These constituents reported total earnings that were $1.13 higher than they reported the same quarter a year ago. This represented a 0.05% increase over the index’s total trailing twelve month earnings from the prior week and an average increase of 0.87% in the TTM earnings of those 17 constituents. There were ten constituents that had reported earnings greater than the same quarter of a year ago and seven reported earnings less than a year ago. Adjustments made to earnings for those that had already reported, resulted in those earnings falling an additional $1.40 below those previously reported.
Projections for third quarter earnings decreased from those of the previous Friday. The S&P 500 constituents that have yet to report third quarter earnings saw projections decrease by $0.03. There was one constituent that had a third quarter projection increase and two had decreases. When including the constituents that have changed to fourth quarter earnings, the current quarter’s earnings projections fell by $8.17 week over week.
The S&P 500 constituents saw current year earnings projections decrease by $1.12 compared to the previous Friday. There were 84 constituents that saw their current year projection decrease while 93 saw increases. One constituent saw a fiscal year change during the past week and as a result saw current year earnings projections change from 2015 to 2016, although it made little difference as the change only resulted in an increase of 6 cents.
The S&P 500 saw 328 constituents that finished Friday below their 200 DMA, up from 258 seen a week ago. There were 367 constituents that finished Friday either below their 200 DMA or less than one dollar above it, an increase from the 298 in the prior week. There were 262 constituents with a 200 DMA in decline, an increase from the 244 seen a week ago. The index saw a one week period without over half of the constituents with 200 DMA in declines, before returning to over half in the past week. The quick return appears to be a continuation of this bearish divergence.
The S&P 500 saw 335 constituents finish Friday greater than 10% below 52 week highs, an increase from the 284 seen a week ago. There were 17 constituents that saw new 52 week highs while 43 constituents reached new 52 week lows during the week. This was nearly a complete reversal from the previous week when 49 reached new 52 week highs and 16 reached new 52 week lows. There are 70 constituents that are less than 5% from 52 week lows, compared to 26 in the previous week. The stocks that reached 52 week highs during the past week have an average P/E of 30.02, well above the average P/E of 26.84 seen in the prior week. The average even weighted P/E of the index decreased to 19.22 as it fell from 19.93 in the previous week.
They were 271 of the S&P 400 constituents that finished Friday beneath their 200 DMA, a large increase compared to 222 a week ago. The index finished Friday with 304 constituents either below or less than one dollar above their 200 DMA, compared to 256 a week ago. There were 209 constituents that had a 200 DMA in decline, up from the 189 in the prior week. As with the S&P 500, it saw a one week period with less than half of the constituents with a 200 DMA in decline, before returning to over half the following week.
There were 279 of the S&P 400 constituents that finished Friday greater than 10% below 52 week highs compared to 249 a week ago. The mid-caps saw 28 constituents reach new 52 week highs while 40 fell to new 52 week lows. In the previous week 44 constituents reached new 52 week highs while 21 fell to new 52 week lows.
Both the large caps and mid-caps exhibited unusually high numbers of constituents reaching new 52 week lows during the recent rebound. Most large rebounds like the one seen recently see few if any stocks falling to new 52 week lows. The high number of stocks reaching new lows in this rebound seems to indicate an increasing weakness in stock prices.
During recent investigations into companies’ debt levels something alarming was noticed. The study showed the six largest total debt levels in the S&P 500 are held by six of the “too big to fail” financials. Listed in descending order of total debt levels they include: Bank of America Corp. (BAC), JP Morgan Chase & Co. (JPM), Citigroup Inc. (C), Wells Fargo & Co. (WFC), The Goldman Sacs Group Inc. (GS) and Morgan Stanley (MS).
Bank of America’s leading total debt is $1.711 trillion, and the six combine for over $6.746 trillion in total debt. They account for an astonishing 41.3% of the total debt of the entire S&P 500 and have a total debt that accounts for about 35.6% of the market cap of the S&P 500. These companies’ average total debt is $274.60 per share, led by Goldman Sacs at $1,385.52 per share. The other 494 constituents average total debt of $33.16 per share.
Although the total debt of these six is incredible, most of this liability is in the form of deposits, making some believe it is not a concern. The problem is the concentration of this deposit liability and the desire of those in charge of this money to take unreasonable risks to increase profits. All six still engage in derivatives trading, and all could see large losses due to this trading.
This large concentration of US deposits is one of the reasons there are laws against monopolies, although regulators appear to have little understanding of these laws considering the many mergers and acquisitions that were allowed that clearly undermined these laws, not only in the banking industry but across the board. They have even allowed many companies that were split by the courts in antitrust cases to recombine.
These banks truly are too big to fail, but they are not too big to split apart. None of the US banks should ever be allowed to hold more than 1% of the total US deposits. Just like investments, diversification limits potential losses. Very few smaller banks trade in derivatives and the few that do have much smaller liabilities. Smaller banks just don’t have the assets to play derivative Russian roulette with. As a result smaller banks don’t lose tens or hundreds of billions before figuring out somebody is doing something wrong.
Even though total debt levels include deposits, long term debt levels do not and seem more concerning. The largest long term debt in the S&P 500 is held by JP Morgan Chase and totals $292.9 billion. The six listed above combine to hold a whopping 23.6% of the total long term debt of the S&P 500. They also average long term debt per outstanding share of $54.76, well above the $15.06 of the remaining 494 constituents. Goldman Sacs leads on a per share basis, owing $603.18 per share in long term debt.
Although they do not hold the top six spots in long term debt, they all fall within the top seven. General Electric (GE) sneaks into the third position with a great deal of its debt due to Synchrony Financial (SYN), GE’s credit arm, which caused it all kinds of earnings pain in the previous downturn. GE expects to complete the spinoff Synchrony on Wednesday. The eighth highest total is held by Navient Corp, (NAVI) the SLM Corp. (SLM) spinoff that deals largely with student loans.
The long term debt of these six looks manageable at the current time, but could become a concern in a downturn that increases loan defaults. A considerable amount of this debt comes due in the next two years. As the Fed continues to drag its feet on an interest rate increase, one more of the problems low rates has created becomes evident; had interest rates been allowed to increase as they normally would have, these debt levels probably would be much lower today.
The six combine for a huge portion of the index’s debt, but only account for about 4% of the total revenues. This makes these debt levels appear too high for their income. Only Wells Fargo increased revenue over the previous year’s quarter during the third quarter, managing a meager 2.8% increase. In the third quarter the six combined for a revenue decline that totaled $5.285 billion less than the same quarter a year ago, dropping an average of 4.6% below the year ago quarter’s revenue. Goldman Sacs again led with a revenue decline of 13.1%.
Overall debt in the S&P 500 appears very high too. Total debt for the constituents is over $16.3 trillion and accounts for over 86% of the total market cap. Considering the current P/E ratio, the market cap appears overpriced to likely earnings in the coming 24 months, so it seems possible companies have current liabilities that are greater than their true market value. The high debt levels also appear to be a byproduct of extended low interest rates.
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% H, -2% H, -/(+) 9 Day, (+)/- 90 D and 90 E indicators are currently active. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The S&P 500 continued to slip lower from resistance found in the upper half of the 100 L during the previous week. Although it broke below the lower boundary of the lower half of the 100 L at 2075 in each of the first three sessions, it rebounded into the close to finish at or above it. Wednesday’s finish at 2075.00 was the last time the index held within this resistance level as Thursday opened with a gap lower at the session high, and finished near the session low. Friday also opened lower at the session high and finished near the session low as the index fell to a significant level in the retreat from the Nov 2 high.
Gaps lower remain open from July 22 and the index added gaps lower in each of its largest retreats on Monday, Thursday and Friday. During the past week the index covered all previously open gaps higher except the gap higher seen on Sept 30. Although all of these gaps are likely to be filled at some point, current conditions make it seem possible some of the gaps lower could remain open for some time.
The -/(+) 90 D indicator that became active on July 21, 2015 appears to have bearish potential. This indicator will expire after eight sessions. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
0.00% / -11.87% / -4.54%
Note: The highest close only considers closes higher than the starting point; if there are none higher it is reported as zero percent.
Due to the July 21 90 D entering its expiration period, a 90 E indicator became active. The current pullback began a couple days prior to this indicator’s presence, with this two day period often referred to as the “fringe” area around this indicator. The index has seen a significant retreat from those highs, and significant pullbacks are one of the bearish traits often seen during this indicator’s presence. Current conditions make the potential for this indicator to show additional bearish traits seem high.
The -/(+)9 Day indicator that became active on Sept 15, 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.
+6.66% / -4.87% / +2.27%
The (+)/- 90 D indicator that became active on Oct 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.
+4.50% / 0.00% / +0.20%
Note: The lowest close only considers closes lower than the starting point; if there are none lower it is reported as zero percent.
The -2% H and +2% H indicators did not provide any correct indications in the past week. Volatility indicators remained nearly steady and within extreme levels. Although the index has seen a fairly long stretch without a volatile session, the constituents continue to see high levels of volatile sessions on an individual basis. There appears to be an unusually high number of constituents seeing sessions with double digit percentage declines recently. It continues to seem possible the high level of volatile activity in individual stocks could result in index volatility if a common direction is found.
The average daily volume decreased 0.16% from the previous week. Volume was highest in Friday’s selloff and lowest in Tuesday’s move higher. The five day volume variance decreased 22.56% to finish the week at 16.20%. The average weekly volume remained within generally bearish levels.
A 90 E indicator has shown a significant retreat from resistance in its first week of activity. This retreat began with a lower finish on Nov 3, two days before the indicator became active, but within the fringe area traits common to this indicator are often seen in. The retreat from resistance during this indicator’s presence is potentially bearish.
After reactivating on Nov 6, the 90 E will be active during a vast majority of the following 92 sessions. When considering its previous active period, it has a stretch of activity encompassing 107 of 129 sessions. Long periods with high levels of activity for this indicator have been seen in the past, but they are most often seen during market crashes or during rebounds from market crashes. Therefore this long period of activity could be reason to show caution with investments.
Volatility indicators remained steady within extreme levels during the past week. These indicators have been in or near extreme levels for a considerably long time period. These indicators holding near or within extreme levels for extended time periods was commonly seen during large market retreats in the past. When these indicators are in high or extreme levels there has also been a much higher incidence of volatile conditions in the past. Therefore these indicators appear to suggest that volatile conditions could elevate again, and could be warning that a larger retreat could be forthcoming.
Although beat rates for third quarter earnings were near historical highs, overall earnings continued to appear lackluster. Many beat the current estimate, but saw year over year earnings declines. The index has seen little overall earnings growth in the past year. Many companies gave indications in their recent reports that their earnings problems could be far from over. Many reduced forward earnings guidance and many expect to earn still less in the coming year than did this year.
After the initial rebound from market crashes, the third quarter’s earnings are generally the best earnings of the year. Fourth quarter projections are currently falling like a rock. It seems possible the fourth quarter earnings could provide losses compared to the subpar earnings in the same quarter of the previous year. Although purposely under projecting earnings could still provide near historically high beat rates, earnings are not good now and it appears are likely to soften further. Again after the initial rebound from market crashes, historically the first quarter generally provides earnings that are less than the fourth quarter.
The numbers of companies using cost saving techniques that tend to hurt earnings in other companies remains at high levels. It appears the effects of these activities are being seen in the earnings reports of others, and in turn increasing cost savings activities. It appears the past cycles of cost savings activities could have caused economic slowdowns. History tends to repeat itself.
Companies are also increasing other characteristics that they tend to exhibit prior to larger downturns. Reductions in stock buybacks, reduced rates of dividend increases and an increase in dividend cuts have been seen. The index has also seen an increase in the number of constituents that had negative earnings in the past year. All are common prior to larger stock price slips.
Several economic indicators are showing potentially bearish indications. At this point it seems very likely a recession could be seen, if one has not already started. Although a small quarter over quarter revenue increase was seen, the falloff in revenue over the same quarter of a year ago makes a GDP decline for the year seem possible. A two consecutive quarter decline in the GPD indicates a recession.
Although the S&P 500 has seen a period of low volatility, the constituents continue to show high levels of daily volatility. The numbers of constituents seeing very large session declines appears to be abnormally high. If a common direction in these individual volatile conditions is found, it seems likely the index could again see volatile conditions.
The numbers falling to new 52 week lows during the recent rebound were also abnormally high. This appeared to show overall weakness in that rebound. The numbers reaching new lows in the past week’s retreat increased considerably, making it seem likely this weakness could intensify in a retreat.
Although the recent rebound looked bullish, most stocks remained within short or long term down trends. Most stocks appear to be turning lower at resistances within these downtrends. Most stocks were overbought on short term indicators as they turned lower, but many were also overbought on long term indicators. Stocks falling from long term overbought levels tend to see longer and larger pullbacks.
The S&P 500 broke below the lower trend line in its previous retreat from the upper half resistance in the 100L. Ten of the past 11 breaks of the lower trend line have seen subsequent dips finish deeper below this trend line. Seven have continued to or below the lower support line. Although not a certainty, current conditions continue to make a retreat that breaks lower in this instance look likely.
Current chart formations along with past timelines, increases in characteristics companies exhibit prior to larger downturns, 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 since the index has not yet reached this resistance level it is still considered within the influence range of the 100 L. 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 Google 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 has investments in SPTN, KSS, BAC, MS, GE and NAVI has no investments in M, AAP, FOSL, JWN, JPM, C, WFC, GS or SYN. He is currently about 58% invested long in stocks in his trading accounts. Although his rounded investment level remained unchanged from the previous week, he purchased two positions with the cost of these purchases nearly offset by the sale of three issues, a tender offer filling and dividend payments. He will receive dividend payments from nine 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.