The S&P 500 saw a second consecutive week of losses as it shed 1.37% for the week. The index finished four of five sessions lower. Volatile conditions remained absent as there were no session moves of 2% or greater during the week. The S&P 500 has finished lower in three of the past four weeks and 29 of the past 48 sessions.
Several of the indexes slipped to losses in the late session Friday as investors scrambled out of the Biotech stocks. The exit followed statement by Democratic Presidential hopeful Hilary Clinton that she would announce a plan to stop price gouging for specialty drugs. This issue is likely to gain support among other candidates. It does not seem unlikely debates could include that price limitations be mandated on all new drugs, with large price reductions required after R&D costs are recouped. It also seems possible patent protection periods could come under fire, with the talk of reducing this time period to five or seven years from the current ten.
Many in the Health Care Sector, not just Biotech stocks, are trading in excess of four years forward on projected earnings. Many of these projections appeared to have potential pitfalls even without the talk of pricing limitations. Several have begun showing the flaws with these earnings projections in recent quarters and it does not seem unlikely many others could see similar problems in the quarters ahead. Many began turns lower long before the current talk of price limitations surfaced. Some Health Care stocks got dragged higher with the sector buying frenzy, but expected earnings reductions in the coming years and as a result are trading at very high multiples of current earnings, many with a P/E near or greater than 30 and negative growth potentials. Investors appeared to be buying the only hot sector left without fully investigating the sector earning potentials or risks with the very high forward earnings expectations. Although many stocks have turned considerably lower, downside in the Health Care Sector still seems potentially very large.
Companies continued to announce new planned layoffs in the past week. A couple found notable were Marvel Technologies Group Ltd. (MRVL) that announced it would lay off 17% of its work force Friday. Marvel is exiting its mobile business and plans to discontinue its smart phone chip manufacturing. The cost savings due to this restructuring is expected to save the company between $170 million and $220 million a year. Caterpillar Inc. (CAT) announced it would lay off 10,000 workers Thursday, nearly 10% of its remaining 111,247 full-time workforce. This is in addition to the 31,000 jobs the company has shed since mid-2012.
Reuters ran an interesting story on the ripple down effects that Caterpillar’s business reduction is having on some of its suppliers. Although some of it larger suppliers failed to comment, it shows the increases in layoffs that can be expected from these types of layoffs at some of Cat’s smaller suppliers.
How desperate are investors for good earnings? Friday Nike (NKE) reported earnings that beat estimates soundly by 12.60% and the stock raced 8.89% higher. The stock finished the session with a TTM P/E of 29.06, which makes it seem possible the stock was priced to a larger increase than that seen. If Nike can increase year over year quarterly earnings each quarter by the same 23% it did in its just reported quarter, it will take almost four years for the stock to reach an even value P/E of 15. The chances they can increase year ago earnings every quarter at this rate for almost four straight years seems very slim, since they have been able to match or beat this rate of increase only 8 times since 2006. Nike has been putting out very good earnings over the past couple years, but even if they can continue to average these types of earnings increases, they are over four years forward on earnings. Maintaining this type of increase for this long of a time period will be very difficult. Nike has not been able to sustain this type of growth for this long of period in the past; making it seem unlikely they could now. Again, stocks that are putting out good earnings are being snapped up by investors, but they seem priced far forward of likely earnings, and therefore highly overpriced. If they should break lower, they appear to have considerable downside potential.
No volatile sessions were seen in the US markets during the week. However, the world markets saw a stark increase over the previous week after a slow start on Monday. Europe indexes led in 2% or greater volatile moves during most of the week. Europe saw 19 of its indexes in volatile declines on Tuesday, nine fell volatilely on Thursday and 14 bounced volatilely higher and one fell in a volatile decline on Friday. Asia led on Monday with four in volatile retreats and Wednesday with eight in volatile drops. Although not to the extent seen in Europe, the Americas also saw an increase in volatile moves for the week.
All ten of the world’s largest economies have seen their major stock indexes fall to at least correction levels. Several have reached crash potentials. Overall the world charts give the feel that a deeper drop could yet be seen. All appear to be in weakening support patterns. Many are trending lower in recent rebounds. Several broke earlier support in steep drops during the past. Some continued to the lowest closes seen in this retreat.
Most world indexes have seen three to five legs down since breaking lower earlier this year and many broke lower again in the past week. In the Americas the Argentina MERVAL Index shattered previous support as it shed nearly 14% in five sessions before rebounding 5.50% on Friday. The world’s seventh largest economy in Brazil saw its Bovespa Stock Index slip lower in seven straight sessions seeing two volatile losses in the stretch and losing 7.66% as it broke a recent uptrend off lows and nears the previous lows in this downturn.
In Europe the fourth leading economy in Germany saw its DAX Index slide to the lowest closes seen in the fall so far, although it did not reach the intraday low seen in the Aug 24 whipsaw drop and rebound. The sixth largest economy in France saw the CAC 40 Index also slip to the lowest closes in this retreat, although it too stayed above intraday lows in the Aug 24 whipsaw move. The fifth largest economy in the United Kingdom saw the London FTSE break a developing wedge pattern lower earlier and after a rebound saw the past week break lower still. Russia’s tenth leading economy saw the Russian Trading System Index rebound from Aug 24 lows, but has continued to see lower highs in rebounds along with falling lower than the previous cycle in the most recent retreat. Italy with the eighth leading economy saw its FTSE MIB index slip steeply from resistance in three volatile falls in five sessions before rebounding volatilely on Friday.
In Asia the World’s third leading economy in Japan saw its Nikkei Index break a wedge pattern lower in a drop that is nearing the previous lows. The ninth largest economy in India saw the Bombay Stock Exchange Index break lower from a lower cycle high in a volatile drop on Wednesday, and although it moved slightly higher in the past two sessions, appears to have additional downside potential as it is still near overbought conditions.
The second largest economy in China saw the Shanghai Composite have only one volatile session during the past week. It finished Wednesday with a 2.19% loss. The index appears to be struggling to maintain support after two relatively weak rebounds failed to gain traction and slipped lower again. Considering China’s very soft economic reports of the past week along with those earlier, those weak rebounds make it seem possible buyers are dwindling. It continues to seem possible a break lower could be seen.
The world’s largest economy major index charts show the Dow Jones Industrial Average, S&P 500, NASDAQ, Russell 2000 and New York Stock Exchange all continued lower after breaking developing wedge patterns. All indexes turned lower at or near the 13 EMA in Friday’s rebound, with only the Dow breaking above it before falling back below it into the finish.
The Dow Jones and NYSE finished Friday with gains. The Dow appeared to rebound near support it has seen near 16,000 in its last three lows and bounced above the 13 EMA before slipping to finish below it. The NYSE fell below previous support it had found near 9800, then fell short of the 13 EMA in Friday’s rebound before falling into the finish.
The other three indexes finished Friday with losses. The NASDAQ appeared to find support near 4650, but was turned back as it reached its 13 EMA and fell to close near the session low. The Russell 2000 slipped below the previous cycle low before seeing a rebound Friday turned lower at the 13 EMA and then fall to a finish near the session low. The S&P 500 appeared to find support near 1900 on Thursday and pushed into the 13 EMA Friday before being turned back to a finish near the session low.
The indexes all reached oversold conditions in the past week’s sell off. Some of the indexes appeared to rebound off earlier support, although they fell back towards this support late in Friday’s session. A rebound from these conditions seems possible; however the bearish reaction to news Friday makes it seem possible that what appears to be a very highly overpriced Heath Care sector could continue to weigh on index prices. World indexes also reacted very bearishly to poor economic news from China on Tuesday. The potential seems high a news event could push stocks lower. Many stocks broke support levels in their recent retreat; this makes it seem possible the indexes could follow in these moves lower.
On Thursday the S&P Dow Jones Indices announced that share repurchases in the second quarter of 2015 slid 8.7% to $131.6 billion from the $144.1 billion spent on share repurchases in the first quarter. They reported total shareholder return reached a record $923.3 billion in the second quarter. Total shareholder return is the sum of dividend payments and share buy backs. It was also noted that 105 of the constituents used share buybacks to increase per share earnings by 4% or greater in the second quarter, up from 104 in the first quarter.
Earnings were found for 16 of the S&P 500 constituents that reported third quarter earnings since the last update two weeks ago, although not all that reported during the past two weeks are included and the results could include some that reported earlier. The constituents reported total earnings that were $3.82 higher than the same quarter a year ago. This represented a 0.18% increase over the index’s total trailing twelve month earnings from the week before and an average increase of 3.89% in the TTM earnings for the 16 constituents. There were 15 of the constituents that reported earnings greater than the same quarter of a year ago and one reported earnings of less than a year ago. Although a large number of those that reported outperformed the year ago quarter, the average increase was relatively small.
Projections for third quarter earnings decreased during the past two weeks. The S&P 500 constituents that have yet to report third quarter earnings saw projections decrease by $1.97. There were 94 constituents that saw third quarter projection decreases while 41 saw increases.
The S&P 500 constituents saw current year earnings projections increase by $3.62 during the past two weeks. There were 113 constituents that saw their current year projection decrease while 68 saw increases. The increase seen during this time period was unduly affected by constituents that had fiscal year changes after reporting earnings. The largest year over year change was seen in Auto Zone (AZO), which saw current year projected earnings increase by $4.65 at the change of its fiscal year.
There were 290 S&P 400 constituents that finished Friday beneath their 200 DMA, compared to 283 two weeks ago. The index finished Friday with 317 constituents either below or less than one dollar above their 200 DMA, compared to 310 two weeks ago. There were 306 of the constituents that finished Friday greater than 10% below 52 week highs and compared to 299 two weeks ago.
The S&P 500 saw 372 constituents that finished Friday below their 200 DMA, an increase from 360 seen two weeks ago. There were 399 constituents that finished Friday either below their 200 DMA or less than one dollar above it, an increase from the 376 seen two weeks ago. The S&P 500 saw 383 constituents finish Friday greater than 10% below 52 week highs, an increase from the 373 seen two weeks ago.
The number of S&P 500 constituents with a 200 DMA in decline continued to edge higher during the past two weeks. There were 316 constituents in decline, an increase from the 307 seen two weeks ago. The continued increase appears to show a breakdown in breadth has occurred.
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, -/(+) 90 D, +2% H, -2% H, -/(+)9 Day 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 slipped lower and appeared to find support in the upper half of the 100 L at 1900 on Thursday as it reached oversold conditions. Friday’s rebound turned abruptly lower at the 13 EMA after news that the Health Care sector could again come under fire for drug overpricing. Since the sector was one of the few bright spots in the recent earnings downturn, many of the sectors’ stocks seem priced well forward of projected earnings.
Gaps lower remain open from July 22 and Sept 18. Although all of these gaps are likely to be filled at some point, current conditions make it seem possible some of these gaps lower could remain open for some time. Gaps higher seen on Aug 26, Sept 8 and Sept 15 were filled. A gap lower was left open on Tuesday.
Monday opened higher and fell to a low of 1955.80 that found support just above the 1940 to 1955 MRL and rebounded to finish at 1966.97 and outside support. Tuesday opened with a gap lower at the session high of 1961.39. It fell to a low of 1929.22 before rebounding to finish within the 1940 to 1955 MRL at 1942.74. Wednesday opened higher and reached a high of 1949.52 within the 1940 to 1955 MRL before slipping to a low of 1932.57 and rebounding to finish at 1938.76. Thursday opened lower and fell a low of 1908.92 that found support within the upper half of the 100 L at 1900, but rebounded to close outside support at 1932.24. Friday opened higher but slipped to a low of 1921.50 within the upper resistance of the 100 L at 1900 and pushed to a high of 1952.89 finding resistance in the 1940 to 1955 MRL, before falling to a close of 1931.34.
Thursday turned higher at support within the upper resistance of the 100 L at 1900 and found support higher in this resistance on Friday. Friday was turned lower at the 13 EMA which was also within resistance in the 1940 to 1955 MRL. Friday continued lower into the close and for the third week in a row, its finish was outside support levels. The index fell into oversold levels during the week, but also finished the week in a retreat in reaction to news that could cause a larger drop in stocks that appear highly overpriced.
The (-)/(+) 90 D indicator that became active on May 22, 2015 appears to have bearish potential. This indicator will expire in 7 trading days. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
+0.99% / -11.38% / -8.35%
Despite what appeared to be a potentially explosive appearance, so far the 90 E indicator has little to show. The S&P 500 has retreated in all but one session since it became active, dropping 3.21% from the Sept 16 high for a significant price direction change. Although volatile conditions seemed likely, to this point the index has not seen any of these conditions. Aside from the single significant direction change, little has been seen of the things that have commonly occurred during this indicator’s presence during past potentially bearish appearances.
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% / -8.87%
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 appears to have bearish potential. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
0.87% / -2.36% / -2.36%
The -2% H and +2% H indicators did not provide a correct indication in the past week. World markets saw increases in volatile conditions indicating it is likely these conditions could continue. Although volatility increased, volatility indicators eased below the earlier extreme levels. Even so, chances of additional volatile conditions remained at very high levels.
The average daily volume decreased 9.84% from the previous week. Volume was lowest on Wednesday and highest Thursday. The five day volume variance slid 71.75% lower to finish the week at 28.23%. Both volume and variance levels fell from the bearish highs seen in the previous week.
Volatile conditions remained absent in the US markets but increased dramatically worldwide. Although some saw volatile rebounds after volatile retreats, it seems likely additional flip flops in volatile direction could be seen. Volatility indicators retreated from extreme levels during the past week, but remained at very high levels.
Although very early in the earnings season, so far this quarter more constituents are seeing a year over year increase in earnings than in the preceding quarter, although the overall increase in earnings was small. Current estimates have about 45% of the constituents yet to report expected to see year over year earnings decreases during the third quarter. Overall earnings are expected to decrease over the year ago period.
Drops to the lower trend line are often retested. Many things appear to be happening that have led to larger retreats in the past, making it seem possible that a larger retreat could happen if this retest occurs.
Current chart formations along with past timelines, 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 the index is still within the influence range of the 100 L since it has not yet reached this resistance level. 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 CAT and has no investment in MRVL, NKE or AZO. Ron is currently about 56% invested long in stocks in his trading accounts reflecting an increase over the previous week’s investment level. This investment level change was the result of the purchase of four issues and dividend reinvestment in 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 25 issues in the coming week and 8 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.