The S&P 500 closed lower in three sessions, but finished the week with a 0.95% gain. The index has seen gains in six consecutive weeks, the longest stretch of weekly gains seen this year. Although the index moved briefly into the upper half resistance of the 100 L, it has continued to struggle with this resistance level and slipped back into the lower half of this resistance level in the late week retreat. It has finished nine of the past 14 sessions lower.
The October jobs report came in higher than expected Friday. Consensus estimates were that 185,000 jobs would be added during the month, but the Department of Labor’s Bureau of Labor Statistics reported that 271,000 jobs were added. Although the numbers beat estimates, it seems possible they were probably largely seasonal additions.
Wal-Mart (WMT) had noted that it would add 60,000 jobs for the holiday shopping season a couple months ago. If you have been in the Traverse City Wal-Mart recently, you may have noticed it is already setting up for the Christmas shopping season. It isn’t unlikely this is the case in other Wal-Mart stores across the nation, so it seems likely many of these planned hires were made in October. It also does not seem unlikely other retail stores began adding staff for the holiday shopping season too. The BLS report noted the retail sector added 44,000 jobs during the month, but this number is “seasonally adjusted” and being so was probably far greater than indicated.
An earlier article discussed a signal that is extracted from the employment data that appears to have the potential of indicating when a recession could start. The signal is extracted from the Not Seasonally Adjusted Total Non-Farm Series ID: CEU0000000001 available from the website of the Bureau of Labor Statistics. Although October saw a year over year increase, it was only the third month this year to see an increase in the month over month change from the previous year. The increase was fairly large, but did not erase September’s losses and the two month total stands at 91,000 less than the year before and still very near the 144,000 required for this signal. These numbers are not seasonally adjusted, so when layoffs of temporary help added for the holiday shopping season begin in December, it seems possible this indicator could still provide a true signal for the September through December period.
Even though October saw good employment numbers, companies continue to use layoffs and plant closings as cost cutting tools. On Wednesday the Kraft Heinz Co. (KHC) announced it would trim its workforce by 2600 and close seven of its remaining 41 plants. Six of the seven plants scheduled for closure are in the US and the remaining is in Canada. The plant closings will eliminate about 2500 mostly US manufacturing jobs as the company tries to reduce excess capacity and overlapping operations due to it recent merger. The latest round of job cuts are in addition to the 2500 layoffs the company announced in August. The two layoffs total over 11% of its workforce, but the company has eliminated over 7000 jobs in the past 20 months. Comments by the company make it seem possible additional job cuts could be announced later as they continue to streamline their business.
A few of the announcements that were found interesting have been chronicled during the third quarter reports. This was done after noticing a disturbing increase in cost savings and layoff activities announced outside the Energy and Materials sectors during the first and second quarter’s earnings reports. Many that announced cost savings plans earlier have intensified their cost savings plans and many that had not yet begun to cut costs began to do so during the current quarter. Past data tends to make it appear these actions are the actual cause of most recessions. The current quarter reports make it appear companies’ cost savings are causing cost savings in other companies. In the long run, this cycle tends to deteriorate earnings of all.
Earnings were found for 120 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. One of these constituents had not reported earnings in the prior year due to it being a spinoff, so it was not included in the following data. These constituents reported total earnings that were $6.96 lower than they reported the same quarter a year ago. This represented a 0.33% decrease over the index’s total trailing twelve month earnings from the prior week and an average decrease of 1.65% in the TTM earnings of those 119 constituents. There were 64 of the constituents that had reported earnings greater than the same quarter of a year ago, 50 reported earnings less than the year ago quarter and 5 reported earnings the same as those a year ago. Adjustments made to earnings of several of those that had already reported resulted in earnings falling an additional $0.29 below those reported a year ago.
Projections for third quarter earnings increased from those of the previous Friday. The S&P 500 constituents that have yet to report third quarter earnings saw projections increase by $0.06. There were 4 constituents that had third quarter projection increases and none had decreases. When including the constituents that have changed to fourth quarter earnings, the current quarter’s earnings projections fell by $4.81 week over week.
The S&P 500 constituents saw current year earnings projections increase by $1.62 compared to the previous Friday. There were 138 constituents that saw their current year projection decrease while 149 saw increases. The week over week change was impacted by nine constituents that reported fiscal year ending earnings, and as a result had current year earnings change from 2015 to 2016. Even though four of the nine are expected to see earnings below the estimates of the recently completed fiscal year, this change resulted in an earnings increase of $2.46. These results were also negatively affected by the recently completed spinoff of Hewlett Packard Enterprise Co. (HPE) from HP Inc. (HPQ). HP Inc. saw current year earnings per share adjusted $1.85 lower, while estimates for HPE are not yet available.
Due to a late return from a weekend vacation, the remaining data discussions normally seen will not be included. However; they will be updated in the coming week’s edition.
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 broke into the upper half of the 100 L resistance as it started the week with an uncovered gap higher on Monday. It continued higher on Tuesday; peaking at a daily high of 2116.48. Daily highs and lows begin to trend lower in the final three sessions as the index finished the week with three consecutive losses. The index has reached a weekly string of gains longer than any stretch this year. The push higher has taken it into extremely overbought conditions, making a pullback seem fairly likely. Although the index continued higher for the week, many of the constituents appeared to continue in trends lower from recent highs during the week.
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 Monday. 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% / -0.94%
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 entered its expiration period on Friday. As a result the 90 E reactivated. 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.
+6.66% / -4.87% / +6.12%
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.
+4.50% / 0.00% / +3.98%
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 virtually unchanged and within extreme levels. The activation of the 90 E on Friday and the likelihood of volatile market sessions during the 90 E indicator’s presence are high. Although the index has seen a fairly long stretch without a volatile session, the constituents continue to see high levels of volatility sessions on an individual basis. This high level of volatile activity 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 Monday’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.
Although beat rates for third quarter earnings were near historical highs, overall earnings continued to appear lackluster. The index has seen little earnings growth in the past year. It seems possible the index could see the smallest four consecutive quarters of earnings growth since 2008. Many companies gave indications in their recent reports that their earnings problems could be far from over. Many saw forward earnings projections slip and many expect to earn less in the coming year than in the past year.
The numbers of companies using cost saving techniques that tend to hurt earnings in other companies remains at high levels. It appears these types of activities in the past could have caused economic slowdowns. History tends to repeat itself.
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.
Volatility indicators remained virtually unchanged within extreme levels. These indicators have been in or near extreme levels for a considerably long time period. When these indicators are in high or extreme levels there is a much higher incidence of volatile conditions. Therefore these indicators appear to suggest that volatile conditions could elevate again. Although the S&P 500 has seen a period of low volatility, the constituents continue to show 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.
A 90 E indicator became active on Friday. This indicator’s presence as the index reaches resistance is potentially bearish. During this indicator’s presence the index has a high incidence of volatile conditions. Although the index has remained relatively calm over the past month, the constituents continue to see high levels of daily volatility.
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 could be reason to show caution with investments.
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 HPE, and has no investments in KHC. He is currently about 58% 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 with the cost of these purchases partially offset by the sale of one issue and dividend payments. He will receive dividend payments from five issues in the coming week and nine 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.