The S&P 500 closed lower in four sessions, but finished the week with a 0.20% gain on the strength of the week’s only higher finish on Wednesday. The index has seen gains in five consecutive weeks. The push higher has appeared to slow as it reentered the 100 L resistance. It has finished six of the past nine sessions lower.
Although the Energy Sector has seen a great deal of job losses and cost cutting in the past few quarters, news given by Chevron (CVX) on Friday shows that cost cuts in the sector could continue. Chevron announced plans to trim its costs by 25% in the coming year, including idling another 10% of its 64,700 employee workforce. The company also said it could continue shedding costs through 2018. They easily beat third quarter estimates, reporting earnings per share of $1.09 compared to consensus estimates of $0.76. Earnings were helped largely by a 7% reduction in operating and administrative costs and increases in its downstream operations, but those savings were more than offset by a large decline in revenue in upstream operations.
The S&P 500 underwent a change after the market close on Friday due to a planned merger and a spinoff by constituents. The Hewlett-Packard Co. (HPQ) is expected to complete its spinoff of Hewlett Packard Enterprise Co. (HPE) on Sunday and after the spinoff is completed the parent stub will change its name to HP Inc. Hewlett Packard Enterprise was added to the index on a zero price basis on Friday and will replace Hudson City Bancorp Inc. (HCBK), which is being acquired by S&P 500 constituent M&T Bank Corp. (MTB) in a deal that is also expected to close on Sunday. As a result Hudson City will be removed from the index at the close of trading on Monday.
Company officials at Hewlett-Packard note that once separated, the two companies will immediately begin restructuring. This undoubtedly means both will engage in more layoffs and other cost savings. Hewlett-Packard had last announced planned layoffs in September; expecting to idle 31,500 more employees. These followed two planned layoffs announced in May. The sum of the layoffs announced since May currently total 51,000.
Since HP Enterprise will not actually begin trading until Monday, and Hudson City will not be removed until Monday, no changes were made to this week’s data collection. However these changes will be reflected in subsequent data.
The past week saw the largest number of constituent earnings reports so far. The constituents reported the best earnings of the quarter in the past week and saw a high rate of earnings beats in these reports. Although better than those seen earlier, they still seemed far from bullish. The coming week will again have a large number of constituent reports, but the weekly numbers will fall off significantly afterwards as nearly 90% of the constituents will have already reported.
Earnings were found for 157 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 $4.94 higher than the same quarter a year ago. This represented a 0.24% increase over the index’s total trailing twelve month earnings from the prior week and an average increase of 0.79% in the TTM earnings of those 157 constituents. There were 94 of the constituents that had reported earnings greater than the same quarter of a year ago, 58 reported earnings less than the year ago quarter and 5 reported earnings the same as those a year ago.
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 $0.21. There were 21 constituents that had third quarter projection decreases while 17 had increases. When including the constituents that have changed to fourth quarter earnings, the current quarter’s earnings projections fell by $11.98 week over week.
The S&P 500 constituents saw current year earnings projections increase by $5.98 compared to the previous Friday, providing one of the best weekly increases seen this year. There were 118 constituents that saw their current year projection decrease while 147 saw increases. Although there was an increase over the previous week, the week over week change was largely due to constituents that reported fiscal yearend earnings in past week. Eight of the ten largest increases were due to fiscal year earnings changes from 2015 to 2016, and the nine that reported fiscal yearend results saw an increase of $4.72 due to those fiscal year changes. During the past year current year earnings increases due to fiscal year changes often saw estimates that started high, but saw these estimates soften considerably later in the year. For instance two of the four largest earnings projection decreases in the past week were in constituents that had changed fiscal years in the preceding quarter.
The S&P 500 saw 267 constituents that finished Friday below their 200 DMA, a decrease from 279 seen a week ago. There were 311 constituents that finished Friday either below their 200 DMA or less than one dollar above it, a decrease from the 312 in the prior week. There were 251 constituents with a 200 DMA in decline, a decrease from the 277 seen a week ago.
The S&P 500 saw 296 constituents finish Friday greater than 10% below 52 week highs, a decrease from the 297 seen a week ago. There were 61 constituents that saw new 52 week highs while 22 constituents reached new 52 week lows during the week. There are 26 constituents that are less than 5% from 52 week lows, unchanged from the previous week. The stocks that reached 52 week highs during the past week have an average P/E of 26.09, identical to that seen in the previous week. The average even weighted P/E of the index increased to 19.82 during the past week.
The S&P 400 saw one constituent change during the past week and these changes are reflected in the following data. There were 240 of the S&P 400 constituents that finished Friday beneath their 200 DMA, compared to 235 a week ago. The index finished Friday with 274 constituents either below or less than one dollar above their 200 DMA, compared to 270 a week ago. There were 202 constituents that had a 200 DMA in decline, down from the 212 in the prior week.
There were 259 of the S&P 400 constituents that finished Friday greater than 10% below 52 week highs compared to 263 a week ago. The mid-caps saw 45 constituents reach new 52 week highs while 23 fell to new 52 week lows.
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, and (+)/- 90 D indicators are currently active. The 90 E will reactivate on Friday. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The S&P 500 started the week in retreat as it slipped lower Monday to finish at 2071.18 and below the 2075 lower boundary of the 100 L at 2100. Tuesday continued lower, finishing the session at 2065.89 and just above the just above the lower boundary of the 2065 to 2070 MRL. Wednesday was the only session with gains as it opened with a gap higher and finished the session at 2090.35 and back within the lower half resistance of the 100 L. Thursday and Friday saw highs edge slightly higher into this resistance, but both sessions slipped to finish lower, although both held onto finishes within the lower half resistance of the 100 L at 2089.41 and 2079.36 respectively.
The index continued to push higher into the resistance in lower half of the 100 L during the week, but is also showing signs that this resistance could be formidable. The index had seen two significant retreats from within this resistance during the push to new highs. Although many stocks are reaching new 52 week highs, most were already priced far ahead of the earnings they had seen to that point and most are overbought on short and long term indicators. The numbers falling to new 52 week lows seems quite high in comparison to those seen during index moves higher earlier, both on the S&P 500 and S&P 400.
With almost 75% of the constituents reporting, about 70% of the constituents have beaten estimates. Although many reported earnings that beat consensus estimates, earnings seemed lackluster. Many beat estimates that fell in the weeks just prior to these reports and many more beat estimates that have been softening for over a year. Some stocks are doing well with earnings, but they are relatively few and the numbers continue to dwindle as several that had been doing well earlier began to show weakness. Most saw very small year over year earnings increases or reported earnings below the year ago quarter. Many that saw these increases did so with share buybacks or cost savings. Most of the stocks that are doing well with earnings are already trading to high premiums.
A gap lower remains open from July 22. The index has left gaps higher open on Sept 30, Oct 5, Oct 14, Oct 22, Oct 23 and on Wednesday. Although all of these gaps are likely to be filled at some point, current conditions make it seem possible the gap lower could remain open for some time.
The -/(+) 90 D indicator that became active on July 21, 2015 appears to have bearish potential. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
0.00% / -11.87% / -1.88%
Note: The highest close only considers closes higher than the starting point; if there are none higher it is reported as zero percent.
The July 21, 2015 90 D indicator will enter its expiration period on Friday. The expiration period of a 90 day indicator lasts 27 trading days, beginning 13 trading days prior to the expiration and continuing 13 trading days after the expiration. As a result the 90 E will reactivate. The 90 E is a potentially bearish indicator.
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.
+5.68% / -4.87% / +5.12%
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.
+3.54% / 0.00% / +2.99%
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 edged slightly higher during the past week and remain within extreme levels. Even though volatility indicators remain near extremes, the + 2% and – 2% indicators might have fallen into a low level of likelihood after Friday’s close, provided there were no volatile moves during the coming week. This would have been due to a 30 trading day absence of volatile session finishes. However; the activation of the 90 E on Friday provides a supporting indicator, and the likelihood of volatile market sessions during the 90 E indicator’s presence is high. Being so, the +2% and -2% indicators will remain in a high state.
Although the index has not seen a volatile session for some time, the constituents have seen an abundance of volatile session price moves. On Friday there were 78 constituents that saw price moves in excess of 2%, with 41 moving higher and 37 lower. This type of individual stock volatility has been common over the past few weeks, with many moves in excess of 10% and several moves in excess of 20% being seen. But like Friday, this volatility has been fairly evenly split between rises and retreats. If a common direction is found, volatile conditions could again be seen on the indexes.
The average daily volume increased 9.48% from the previous week. Volume was highest Wednesday and lowest on Monday. The five day volume variance increased 3.97% and finish the week at 38.76%. The average weekly volume reached generally bearish levels and the five day volume variance is also within a somewhat bearish level.
Although beat rates continued to be near historical highs, earnings continued to appear lackluster. The overall earnings projections for those left to report third quarter earnings continued to slip lower. Many companies gave indications in their reports that their earnings problems could be far from over. Many saw forward earnings projections slip. The numbers showing year over year earnings increases that support the stock price increases seen over the past year are slipping.
Volatility indicators turned higher during the past week. These indicators have been in or near extreme levels for a considerably long time period. These indicators suggest that volatile conditions could elevate again. Although the S&P 500 has seen a period of low volatility, the constituents are showing high levels of daily volatility. If a common direction in these individual volatile conditions is found, it seems likely the index could again see volatile conditions.
The 90 E indicator will reactive after a short absence on Friday. The 90 E often sees activity that is common during its presence during the fringe areas around its active period, generally a few days before or after its active period. The 90 E is a potentially bearish indicator. During its past presences it has shown increased levels of volatile daily price moves on the S&P 500 along with significant price direction changes on the index, amongst increases incidences of other bearish activities. It seems possible this indicator could become active in this instance while the index is within a resistance level that could cause a significant retreat.
After reactivating on Friday, the 90 E will be active in 80 of the following 92 sessions. When considering its most recent active period, it will have a stretch of activity in 107 of 129 sessions. Long periods of high activity levels of 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 seems like reason to show caution with investments.
History tends to repeat itself. The current earnings reports show that most companies continue to increase in activities that appear to have caused economic downturns in the past. These activities cause slowdowns in others, which further increases the occurrences of these activities. It appears this cycle could have reached a point of acceleration.
Many of these companies’ cost savings activities could have detrimental economic effects. 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.
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. All are common prior to larger stock price slips.
Although the current rebound looked bullish, most stocks remained within short or long term down trends. Most stocks are also near resistances that they could turn lower at and many have appeared to turn lower at these resistances. Most stocks are overbought on short term indicators, but many are also overbought on long term indicators. Stocks falling from long term overbought levels tend to see longer and larger pullbacks. It also appears an abnormally high number of constituents were falling to new 52 week lows during the recent push higher on the index.
The S&P 500 has broken below the lower trend line. 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 HPQ and HCBK, he has no investments in CVX and prior to the planned merger he had no investments in MTB. He is currently about 57% invested long in stocks in his trading accounts reflecting an increase over the previous week’s investment level. The increase was the result of the purchase of three issues and dividend reinvestments in two issues with the cost of these purchases partially offset by the sale of one issue and dividend payments. He will receive dividend payments from four issues in the coming week and five in the following week. If no further investment changes are made during this time frame, these dividend payments would reduce 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.