Investors flocked into stocks as companies beat the extremely low earnings estimates during the past week. As a result the S&P 500 pushed 2.07% higher, mainly due to the higher finishes on Thursday and Friday. The index has run higher for four weeks and has seen 14 of the past 19 sessions finish with gains in the current rally.
Although many of the constituents reported earnings well below the same quarter a year ago and many reported very disturbing revenue losses, a lot of companies are beating earnings expectations. Some are still seeing year over year earnings per share increases, but many of those with earnings increases made these increases due to stock buy backs and cost savings. Earnings reports are showing that cost savings in one company are hitting revenues of another. This in turn is causing increased cost savings activities in the other companies.
It seems possible the current reductions in revenues are not likely to allow buy backs to continue at the record levels seen earlier. As the S&P Dow Jones Indices reported earlier, most are already paring back on stock buy backs. As buy backs dwindle, revenue misses are likely to start hitting the bottom line too, as they can no longer be hidden in those shares reductions.
The revenues of the constituents are expected to come in about $6 billion short of those a year ago, but current and earlier shortfalls make it seem possible the shortfall could be larger. If it was not for the expected increase of $7 billion in revenues for the Utilities sector, the estimates would show a decrease in quarter over quarter sales too. Although the Utilities might make this projection as it is in line with year over year increases seen in the sector for the past few years, the projected revenues for the sector seem high.
The utilities reported first and second quarter revenue that was about $2 billion short of the year ago quarter. Several companies noted large revenue losses due to a decrease in usage by drillers, and although some have continued to drill, the numbers are still much lower than a year ago. Utilities also noted that the increased use of energy efficient lighting and appliances by customers as additional reasons for earlier revenue shortfalls. These types of losses seem permanent and will probably increase over time as old appliances are replaced and LED lighting becomes cheaper. These factors make it seem likely the normal year over year increase could be absent this year.
Historically the sector has seen an increase in revenue during the third quarter over the second quarter of between $2.5 and $3 billion. This increase is generally due to the hottest summer months increasing air conditioner use. Although there were areas that had normal or even above normal temperatures, several parts of the country saw July and August temperatures below normal. Overall it seems likely this seasonal increase in use was probably at about normal levels. Adding this normal increase to the proceeding quarter’s revenue makes it seem likely revenue expectations for the sector are probably about $4 billion too high for the third quarter. Similar studies of data for other sectors makes it seem likely revenue levels could be much softer than expected in these sectors too.
A few of the recent reports that were found interesting included 3M (MMM). They reported earnings per share of $2.05 on Thursday that beat expectations of $2.00 on flat income. The manufacture also reported a 5% decline in sales and saw revenue slide to $7.7 billion from $8.1 billion a year ago. As a result they reduced the high end of the current year guidance from $7.93 per share to $7.78. The company stepped up cost savings plans as they expect to save about $130 million a year through job reductions. The current plan is to cut 1,500 jobs during the coming year with these job reductions mostly in the US. The stock raced higher on negative sales growth and it seems possible these revenue woes could get worse not better. The stock already had a TTM P/E nearing 20, but finished the week at 20.18.
Microsoft (MSFT) had a similar report on Friday. They saw per share profit rise, largely on the strength of $6.9 billion in stock buybacks during the quarter, but saw revenue slide 12%. Despite the reduction in sales, the stock raced over 10% higher and ended the session with a P/E above 18.5. Microsoft also increased cost saving maneuvers and said it will cut about 1000 jobs. These cuts are in addition to their plans to shed 7,800 employees announced in the previous quarter.
Amazon (AMZN) had a great earnings report, by Amazon’s standards. It raced to new 52 week highs when it reported $25.348 billion in sales and earnings of $0.17 per share, or $0.04 per share on a comprehensive income basis. They reported they handed out $544 million more in stock based compensation during the quarter, $465 million more than they reported as income and $523 million more than they earned on a comprehensive basis. During the first three quarters of this year the company has handed out over $1.513 billion that was $1.399 billion more than they had reported as income. At least the extremely high stock price is making the incompetents running the company extremely rich, albeit at a great expense to shareholders.
Considering Amazon’s closing stock price on Friday and their current quarter earnings and the revenue needed to generate those earnings reported in their Edgar filing; if they can increase revenue to $5.957 trillion a year, they could earn enough to justify Friday’s closing stock price of $599.03 based on an even value P/E of 15. It doesn’t seem very likely sales will ever reach this level; the revenue of the entire S&P 500 was less than $1 trillion last year.
Based on their reporting methods for stock based compensation, which is only a fraction of the actual stock awarded, it seems more likely they could hand out over a trillion in shareholder value before reaching an even value P/E. It finished Friday with a TTM P/E of 817.26, but they finally have a positive P/E. As WC Fields said, “There is a sucker born every minute.” If he was still around today he would probably add, “And they own 468 million shares of Amazon stock.”
Forward earnings projections in the Health Care Sector continued to unravel on Wednesday when Biogen Inc. (BIIB) announced plans to scrap several drug development programs. The company said the move was made to focus more on its key drug development areas of Alzheimer’s disease, multiple sclerosis and spinal muscular atrophy. The plans to end development of these drugs also included an 11% reduction in their workforce. Others in the sector reported or preannounced earnings glitches too. It continues to seem likely more of these types of actions could be seen in the sector in the quarters ahead. Forward earnings projections for the sector continue to seem unrealistic.
Although stocks continued higher on earnings beats of current estimates, those projected earnings have spiraled lower for over a year. Although some did well with earnings, the overall earnings for the S&P 500 were not very good. Earnings were found for 110 of the S&P 500 constituents that reported third quarter earnings, although all that reported during the past week may not be included and the results could include some that reported earlier. These constituents reported total earnings that were $3.51 higher than the same quarter a year ago. This represented a 0.17% increase over the index’s total trailing twelve month earnings from the week before and an average increase of 0.39% in the TTM earnings of those 110 constituents. There were 59 of the constituents that reported earnings greater than the same quarter of a year ago, 44 reported earnings less than the year ago quarter and 7 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 $0.87. There were 76 constituents that had third quarter projection decreases while 33 had increases.
The S&P 500 constituents saw current year earnings projections decrease by $1.97 compared to the previous Friday. There were 148 constituents that saw their current year projection decrease while 96 saw increases.
The S&P 500 saw 279 constituents that finished Friday below their 200 DMA, a decrease from 300 seen a week ago. There were 312 constituents that finished Friday either below their 200 DMA or less than one dollar above it, a decrease from the 331 in the prior week. There were 277 constituents with a 200 DMA in decline, a decrease from the 312 seen a week ago.
Even though the index has rebounded a great deal off recent lows, the numbers of constituents remaining in these bearish divergences are far greater than the numbers seen at an equal index value in the decline. A comparison of the data present in the Aug 10 preview that was based on the S&P 500 finish of Aug 7 at 2077.57, and very close to Friday’s finish at 2075.15, shows this very clearly. This increase appears to show the dwindling numbers of stocks that are left moving the index price higher. The charts tend to support the apparent data.
The S&P 500 saw 297 constituents finish Friday greater than 10% below 52 week highs, a decrease from the 325 seen a week ago. There were 69 constituents that saw new 52 week highs while 24 constituents reached new 52 week lows during the week. The stocks that reached 52 week highs during the past week have an average P/E of 26.09, compared to the average even weighted index P/E of 19.69. There are 26 constituents that are less than 5% from 52 week lows. The numbers remaining this near 52 week lows appears abnormally high this far into a rebound compared to data collected and presented in earlier articles.
The S&P 400 saw one constituent change and one stock change its name and ticker symbols after a recent merger during the past week. These changes are reflected in the following data. There were 235 S&P 400 constituents that finished Friday beneath their 200 DMA, compared to 247 a week ago. The index finished Friday with 270 constituents either below or less than one dollar above their 200 DMA, compared to 279 a week ago. There were 212 constituents that had a 200 DMA in decline, down from the 231 in the prior week.
There were 263 of the constituents that finished Friday greater than 10% below 52 week highs compared to 267 a week ago. The mid-caps saw 40 constituents reach new 52 week highs while 24 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. A new 90 D indicator became active at the close of trading on Wednesday and a projection of the possible outcome of this indicator is included below. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The S&P 500 finished Monday nearly unchanged before slipping lower in the following two sessions from highs near the 2040 resistance at 2039.12 and 2037.97 respectively. Thursday gapped higher at the open and continued higher in a bullish rebound, falling from a session high of 2055.20 slightly above the 2035 to 2055 MRL before slipping to a close within this resistance. The index gapped higher at the open Friday too, but seemed to stutter after the initial large move higher. After the index broke back into the lower level of the 100 L at 2100, it fell to find support near the lower boundary of the 2065 to 2070 MRL, and then retreated off the subsequent rebound to finish the session just inside the 2075 lower boundary of the 100 L at 2075.15.
Although the index retreated near the potential resistance at 2040 on Tuesday and Wednesday before finishing each session lower, the resistance did not hold and fell rather easily during Thursday’s surge higher. Past data evaluations made it appear resistance at this level has some kind of significance. Revisiting these evaluations came to the same conclusions, although at this point it appears possible these evaluations are incorrect. The break above this resistance seems potentially bullish. Friday fell to and found support within a likely support level. Earnings reports continue to give the impression that serious problems could be brewing, but investors appear to be buying the high beat rates and ignoring all else. If investors continue to ignore what companies are saying in these reports and the constituents continue to beat very low expectations, stock prices could continue to rise.
At the same time, stocks are not cheap. Most are trading to a premium and investors could expect premium levels of earnings. The rebound has taken most stocks into extremely overbought conditions, and they are reaching these levels as the index nears resistance in the 100 L that has sent it lower several times. It does not seem unlikely profit taking could take place as the index reaches this resistance again.
A gap lower remains open from July 22. A gap higher was left open on Sept 30, Oct 5, Oct 14 and on Thursday and Friday. 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% / -2.08%
Note: The highest close only considers closes higher than the starting point; if there are none higher it is reported as zero percent.
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.
+4.91% / -4.87% / +4.91%
The -2% H and +2% H indicators did not provide any correct indications in the past week. World indexes continued to see higher than normal volatility and overall volatility increased slightly from the prior week. Volatility indicators retreated slightly during the past week, but remained within extreme levels, indicating the potential that volatile conditions could continue to increase is still very high.
The 90 E indicator expired after Friday’s close. Conditions appeared primed for a potentially explosive appearance of this indicator, but S&P 500 saw only one volatile session (although several other sessions had volatile intraday moves) and two significant price direction changes during this presence. This indicator will only be inactive for a short period before reactivating during the upcoming expiration period of -/(+) 90 D indicator that became active on July 21, 2015. That 90 D will begin its expiration period on Friday Nov 6.
A new 90 D indicator became active when a stringer controlling this indicator broke on Thursday. The beginning date of 90 day indicators is considered to be the last day the stringer remained intact; this indicator will therefore be referred to as the 90 D indicator that became active on Oct 21, 2015. There are many things to consider but one thing seems to stand out; earnings. Although many other considerations were focused on in the final projection and some are touched on briefly in the discussion leading to that projection, only earnings are discussed in depth in the following evaluation.
On a weighted earnings per share basis the S&P 500 constituents have seen three consecutive quarters of earnings below those of the same quarter of the prior year. Based on current projections and information contained in the earnings reports already given, it seems very likely when the current quarter’s reports are all in, it could extend this string to a fourth consecutive failure to reach the prior year’s earnings.
Investors currently appear to be buying the high earnings per share beat rate and ignoring all the other data. Although a few stocks are doing well, the high beat rates are mainly the result of falling estimates and not the results of very good earnings across a broad range of stocks as is normally seen with these high beat rates. After noticing that earnings had been falling for some time, many just prior to their reporting earnings, the current quarter and current year earnings have been chronicled in these articles for some time. These reports have shown that aside from a few weeks that had seen earnings projections increases, most have seen decreases. Many of those weeks with increases were due to reasons other than an actual week over week increase in earnings projections.
In just the past 21 days, the total S&P 500 weighted earnings estimates for each of the following five quarters have fallen between two and three dollars. The drop seen during this period is not uncommon to those that have been seen for over a year. These reductions are not limited to the Energy and Materials sectors as many seem to believe, these reductions are across the board. A few sectors continue to show earnings growth potential, but earnings growth is not at healthy levels across a broad range of the sectors. Most stocks are priced many years forward of these earnings. Some stocks appear to have little chance of ever reaching even value earnings.
There are many reasons for these continued earnings reductions. Currency devaluations and price drops in commodities are two that are pointed at the most, but there are others that are causing earnings weaknesses. As a result many companies are telling investors they are not able to make the earnings projections they gave earlier. It is not weakness in a few sectors; it is weakness in most of the companies in the S&P 500 and the numbers having earnings problems are growing. This includes many that have been doing very well, until recently.
Many companies are seeing alarming reductions in sales revenues. Although many are beating earnings estimates, many are also missing on revenue estimates and have been for several quarters. To this point much of the revenue reductions have been masked from the earnings per share numbers by large stock buybacks and cost savings. But data shows that companies are now reducing share repurchases. As a result the EPS increases seen through these buybacks are likely to decrease in the coming quarters. It seems likely the slowdown in share repurchases could increase with further revenue reductions.
The earnings reports are showing that the cost savings measures are causing ripple effects and reducing sales in the other constituents. Due to these lost sales these companies are also increasing cost savings measures. This hurts the earnings in a larger number of companies. Eventually it comes full circle and hits the earnings of those that first started cutting costs, so they increase cost savings measures and so on. This cycle of cost cutting is evident in the earnings reports prior to most of the past economic downturns beginning, so its growing presence now is reason for concern.
It appears the speed that these cuts are circling back to hit earnings of those with cuts is increasing. Companies that had announced cost savings measures in just the past quarter increased these measures in the current quarter. Many further cut capital expenditures, increased layoffs, announce additional store or plant closings, are selling property, equipment or vehicles deemed as excess, abandoning projects or research and even divesting in noncore portions of their businesses. These same types of activities are seen even in very bullish business environments, but the levels that they are currently at are not normal in bullish business cycles. The frequency that these types of reports are being seen has increased dramatically in the past couple quarters. This could be a warning that economic conditions are deteriorating and is also reason for concern.
The index P/E is at historically high levels, this would be less of a concern if a broad range of companies were increasing earnings at rates to cover the price to earnings gaps in 24 months. This is not the case, many companies are in excess of 48 months forward on projected earnings, and many of these projections appear to be flawed. If earnings deteriorate, this P/E could move much higher very quickly. Although P/E ratios were high in 2000 and 2007, the bulk of the increase in the P/E was seen as earnings deteriorated. Prior to earnings deteriorations during the 2007 crash, the S&P 500 had a lower even weighted P/E ratio than it does now. Companies are giving many reasons to believe that earnings could deteriorate.
Investors appear to be buying earnings beats and not paying attention to the information provided in earnings reports. Many of the stocks that have seen large gains have not given stellar reports and already appeared overpriced. Forward earnings projections are slipping fast, and have been for over a year. Earnings reductions are being seen in a far greater number of stocks that earnings increases. Most stocks appear overpriced to likely earnings and appear priced far forward of likely earnings. Many of the forward projections are dependent on conditions that have proven to have failure rates in the past that are much higher than accounted for in these projections.
The coming two quarters are not as earnings friendly as the third quarter. Aside from early in rebounds from crash lows, the fourth and fist quarters generally report earnings less than the preceding quarter. Although some have their best earnings quarters during this time, many companies report their lowest earnings of the year during these quarters. To make matters worse, several that have their best earnings quarter during this time period appear to be planning for failure, although those in the same sectors that are planning for success could do very well, those that are planning for failure are very likely to have subpar quarters as these plans are likely to come to fruition.
Many stocks appear to be overpriced to earnings expectations and or priced very far forward of earnings expectations. There are 208 of the constituents that have a TTM P/E above 20 or have negative total earnings in the past 12 months. Most of these companies will have to report at the best quarterly earnings percentage rate increases they have seen in the past six to ten years, every quarter for the next four or more years, just to get back to an even valued P/E of 15. A fairly large portion of the 157 constituents have a P/E below 15 have seen large decreases in earnings and expect earnings to fall further still. Many of these stocks still have forward P/E’s well above 20. This condition is also evident in a large portion of the stocks between the two extremes. Even into the depths of the previous downturn, it appeared well over half of the constituents were priced too far forward of expected earnings.
Many stocks have earnings projections that do not seem realistic. Some stocks are priced to estimated earnings from unproven sources or markets. Many of these unproven sources or markets have failed to provide the income stream expected in the past, making it seem likely failures could also be seen in these income streams in the future. These unproven sources also have a high percentage of failures after eating away billions in development costs. A large number have a long history of failing to provide expected earnings, and pushing these expectations out another year. Based on current earnings and revenues, some would have to increase sales beyond reasonable expectations for the market they are in.
Many of the economic indicators appear to be showing trends that make an economic downturn seem possible. Some of the data makes it appear a contraction may have already begun. Several economic indicators are giving signals or appear likely to produce signals that are often seen prior to economic slowdowns. The numbers of indicators that appear to be showing these trends or giving these signals make it seem possible an economic slowdown could begin. It seems likely many of the things companies are doing to preserve earnings could add to these economic woes.
Economic data worldwide is showing sluggishness. Many countries are showing early signs of economic contraction. As a result companies worldwide are beginning to use cost saving measures as a means to preserve or increase profits. Past data appears to show these actions usually worsens economic conditions.
Most of the world’s major economies are in the northern hemisphere. As a result most see seasonal slowdowns due to winter weather at the same time. Although many continue to predict economic increases in the coming two quarters, it seems possible normal seasonal reductions have stacked the cards against these increases.
Although many countries are using stimulus in attempts to right their economies, many appear to be using the types of stimulus that data makes it appear have no real economic benefit or that appear inappropriate for the economic conditions. Some of these measures appear to give relief, but data appears to show they really provide negative impacts both to their own and other countries’ economies. Although drops in interest rates have shown to provide short term economic stimulus, many countries failed to increase rates at appropriate times leaving them without this measure if economic downturns should begin or continue. The long durations of low interest rates have actually caused economic problems.
Many appear to be trying to prop markets up that have become highly overvalued. Past data tends to make it appear these actions could cause more harm than good. Chart formations continue to make it seem likely the support levels built with these actions could fail. It seems possible the bulk of the measures available to prop these markets up have already been spent. It also seems possible likely earnings problems in these markets could provide a breaking point. With measures needed to provide a rebound spent to prop these markets in overvalued conditions, a breakdown now could be troublesome.
Although the US markets have seen a great deal of immunity from foreign market collapses in the past, many US companies have greatly increased exposure to these foreign markets since. The US markets are still more likely to weather a downturn better than foreign markets, but maybe not quite as well as they have in the past.
The index is approaching a time frame that is generally more likely to produce gains than losses; however the beginning of this timeframe varies widely. The rebound may have begun, or it might not be seen until after Thanksgiving. Although these gains are not always large, end of year rallies are fairly common. At the same time, if an end of year rally was to develop, it could be tough to find bona fide reasons for it to continue after the New Year.
Most years see gains into the end of year, but not all do. These gains seem to run in streaks, and the past year’s break of a streak of gains in December makes it somewhat less likely that the current year could see gains. Although large retreats have been seen during the final two months of the year, most of the year’s that finished with an end of year pullback, saw only small losses.
As the current active 90 Day indicators reach expiration periods, the 90 E indicator will be active nearly continuously during the following 92 sessions. The 90 E just completed an appearance on Friday. It will become active again on Nov 6 and then fall dormant 27 sessions later. After remaining inactive for 12 sessions in will reactivate and remain active for 53 consecutive sessions. The 90 E indicator is potentially bearish.
Similarly long stretches where the 90 E indicator was active are seen in the past. Most often these long durations are seen during market crashes, or rebounds from these crashes.
Volatility levels have remained elevated in the world markets. Volatility indicators have also been in very high or extreme levels for an extended time. Although volatile conditions provide volatile rebounds, volatile conditions are generally bearish. Volatile rebounds often turn volatilely lower too.
Chart formations appear to show that the constituent stocks have tipped over. It seems likely this tip over pattern will continue to develop, and that stock prices could fall considerably. The index broke below the lower trend line in the most recent retreat. Breaks of this trend line have led to larger drops in ten of the past 11 occurrences.
After pondering over these and other considerations, the following is the projection for the (+)/-90 D indicator that became active on Oct 21, 2015:
It appears there are many things that happen during or prior to large market downturns that are occurring at the current time. Many economic indicators are giving signals that make it seem possible an economic downturn could be developing. Many companies are doing the things that appear to have ushered this slowdown in during the past. Many chart formations are showing patterns that are common prior to large retreats. Volatility indicators have remained at levels for long durations as seen prior to large retreats in the past. There was a large increase in volatility seen after a long relatively calm period. Stocks are near historically high P/E ratios, and earnings do not seem sufficient to sustain these high price levels. Stocks are reducing buy backs from historical highs. Dividend decreases are on the rise. Dividend increases are slowing. Revenue levels are decreasing. Forward earnings projections are decreasing. Foreign markets appear to be showing economic distress. The list could go on and on. The sheer numbers of conditions that are seen prior to large market retreats do not seem coincidental and are concerning on their own, but they are also happening at a level that research suggested a market crash could occur at. When discussions of this level began in March 2014, none of these conditions existed. The market still seemed bullish then and there did not appear to be a catalyst for this downturn. But many conditions have changed dramatically since. Many CEO’s have given the same message in recent earnings reports and that is the earnings environment has become increasingly challenging. Many have chosen to fight these challenging conditions with job cuts and cost reductions, but these actions are only likely to increase the earnings challenges others face. Investors seem to be unconscious to what seems like warnings given in earnings reports and in their comatose state have continued to do what they have been programmed to do, they bought stocks due to high beat rates. Investors flocked in even though these beat rates were due to a yearlong drop in these earnings projections. Many of these stocks have high P/E ratios and are showing negative earnings and or revenue growth. Investor comatose might continue, so stock prices could still move higher, although it seems possible a ceiling could be in place. Stocks often end the year in a move higher, but not always so. A run into the end of the year seems somewhat less likely to happen this year. At the same time if a pullback is seen, it seems likely to be small until after the New Year. At that point fund managers are less likely to try to push stock prices higher and might even participate in a selloff if it should materialize. It also seems likely that fourth quarter earnings could be soft and normal economic cycles could cause economic troubles to be more evident. It seems possible if a large pullback were to occur, it could begin during the first quarter of next year. It therefore seems possible the current run could continue higher, but that this run probably has limited upside. This indicator is therefore given a plus rating, but it is encased in parenthesis (+) indicating upside is probably small. If a pullback is seen, it seems possible it could be large and possibly take the index to crash potentials. It seems likely that if this downturn develops, the index could still be in retreat when this indicator expires in March. This indicator is therefore also given a minus rating. The full rating is as follows (+)/- 90 D.
The (+)/- 90 D indicator that became active on Oct 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.
+2.78% / 0.00% / +2.78%
Note: The lowest close only considers closes lower than the starting point; if there are none lower it is reported as zero percent.
The average daily volume increased 8.71% from the previous week. Volume was highest Thursday and lowest on Monday. The five day volume variance increased 5.30% and finish the week at 34.79%. Volume levels seen into the end of the week neared bearish levels.
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 has reached a point of acceleration. At this point it seems very likely a recession could be seen, if one has not already started.
Many of these activities could have detrimental economic effects. Several economic indicators are showing potentially bearish indications.
Earnings continued to be lackluster. It does not seem likely the lack of earnings will be ending soon, projections for the current year and quarter along with the coming two quarters continued to spiral lower. These lowered earnings projections are likely to keep beat rates high, giving the illusion of good earnings reports. Investors appear to be so earnings starved they spiked stocks higher in the past week on an earnings beat that would likely have seen losses had they given the same dismal report a year ago.
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.
Volatility indicators eased slight, but remained in extreme levels during the past week. These indicators suggest that volatile conditions could elevate again.
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. 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.
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 MSFT and has no investments in MMM or AMZN. He is currently about 55% 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 one issue and dividend reinvestments in three issues with the cost of these purchases partially offset by dividend payments. He will receive dividend payments from seven issues in the coming week and four in the following week. If no further investment changes are made during this time frame, these dividend payments would not change his investment level.
Disclaimer: The information provided in the Stock Market Preview is Ron’s perception of the current conditions and what he thinks is the most probable outcome based on the current conditions, the data collected and extensive research he has done into this data along with other variables. It is intended to provoke thought of the possible market direction in his readers, not foretell the future. Ron does not claim to know what the stock market will do. If the stock market performs as expected, it only means he is applying the stock market history to the current conditions correctly. His perception of the data is not always correct.
This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.