The S&P 500 saw the low Friday nearly erase the week’s gains before it mounted an afternoon rally to finish the session with a 10 cent gain. The index broke above the upper trend line of the current down trend during the early week push higher, but settled back below trend in Thursday’s retreat. Friday’s rebound into a slightly higher close rested nearly at the trend line. The S&P 500 had four session gains during the week and finished 0.52 percent higher. It has seen 13 higher closes in the past 23 sessions.
The past week saw a large uptick in the number of constituents reporting earnings. The coming week will see an even greater number report. Although beat rates remain high, relatively few of the constituents are doing well with earnings. Many that saw large stock price increases after earnings beats had flat or even negative earnings growth.
Some are still contending all earnings problems are due solely to the Energy Sector. There is no doubt that the Energy Sector is doing poorly. The few that have reported so far all had losses compared to the same quarter of a year ago, some reported the lowest first quarter in over a decade. Current projections have only about 11 percent of the sector beating the year ago first quarter.
However; the S&P 500 even weighted operating earnings data appears to show earnings problems are much more widespread than just the Energy Sector. Current data has every sector but Utilities with at least one constituent that reported first quarter earnings. All reporting sectors saw constituents report earnings below the same quarter a year ago. Although the current data collection did not include any in the Utilities Sector, more than half are currently expected to see a drop in earnings compared to the year ago quarter. The large fall off in utilization seen in that sector during the past quarter makes it seem possible several might not do as well as currently expected.
Excluding the Energy Sector; 35 percent that reported first quarter earnings were below the same quarter a year ago. Many reported the lowest first quarter earnings in several years. Those earnings averaged 26.43 percent lower than the year ago quarter. The same companies reported declines from the year ago quarter earnings of 11.09 percent during the 2015 fourth quarter and a 1.00 percent in the 2015 third quarter. Looking forward, they are currently expected to see second quarter earnings 11.52 percent below and third quarter earnings 1.86 percent below the corresponding quarters of 2015.
Both quarterly projections are currently trending lower. If these projection down trends follow those seen in earlier quarters during the past year, these quarters could see projections fall to or below those in the current quarter before these reports are made. A portion of these decreases have been documented nearly weekly in this report for about three quarters after they were identified.
Of those that reported same quarter earnings above those seen in 2015, nine percent saw earnings declines when compared to the same quarter two years ago. This indicates a small earnings rebound in year over year earnings, but lacks recovery from the earnings problems these companies began to see a year ago. Many times this increase was provided through share repurchases and not revenue growth as companies continue to use share repurchases to mask earnings growth problems. Others that saw revenue decreases during this time frame have used share repurchases to mask their earnings problems. Absent share repurchases, current same quarter misses would likely be at least ten percent higher.
The trend lower in forward earnings estimates are also seen in the overall projections for the S&P 500. The overall forward earnings forecast of the index has been dropping fairly steadily for over a year. Again, this degradation of forward earnings projections is not limited to any one sector, but includes all sectors. Constituents that once held some immunity from these earnings growth decreases, are now also seeing earnings growth slip.
Current earnings problems are getting larger, not smaller. This is consistent with many factors that have been discussed in past articles that tend to be seen in stocks during earnings downturns. These factors are still present, and are also growing. Despite hopes that earnings will rebound, unless changes are seen in these tendencies earnings problems are more likely to worsen.
Even so, not all companies are doing poorly. Some are still doing well with earnings, but most have seen earnings growth rates slow considerably. The earnings downfall seen in a large portion of the index is masked in the overall data by relatively few companies. These companies saw large per share earnings increases year over year. Even though the dollar amount of these increases was large, the percentage of increase in these earnings was much smaller than the percentage of decreases they covered.
The S&P 500 and S&P 400 each saw one constituent change during the past week. The two indexes swapped constituents as GameStop Corp. (GME) was moved to the S&P 400 and Global Payments Inc. (GPN) was moved to the S&P 500. Global Payments acquired Heartland Payment Systems (HPY) and the combined company was more representative of the large cap space. Due to recent reductions in share price, GameStop’s market cap was more representative of the mid-caps. Even after a large rebound GameStop is trading about 35 percent below 52 week highs and almost 50 percent below the high of about three years ago. This replacement continues the trend of large price declines spurring market cap replacements in the S&P 500.
The following earnings update may not include all constituents that reported earnings during the past week and it could include some that reported earlier. Earnings were found for 89 of the S&P 500 constituents. These constituents reported total earnings that were 22 cents lower than they reported the same quarter a year ago. This was a 0.01 percent decrease in the index’s total trailing twelve month earnings from a week ago and an average decrease of 0.05 percent in those constituents’ TTM earnings. There were 53 constituents that reported earnings greater than the same quarter of a year ago and 30 reported earnings below the year ago quarter.
Those that have not yet reported first quarter earnings saw a $2.83 reduction in first quarter earnings projections. There were 35 constituents with increases and 96 with decreases.
Those that had already reported first quarter earnings prior to the current week saw second quarter earnings projections slip eight cents lower. Two constituents saw projection increases and ten had decreases.
The S&P 500 constituents saw current year earnings projections decrease by $1.38 compared to a week ago. There were 131 constituents that saw their current year projection increase while 133 saw decreases. Five constituents reported fiscal fourth quarter earnings and as a result their current year earnings changed from 2016 to 2017. The majority of the fiscal year earnings changes resulted in small increases that were partially offset by one small decrease, providing a net increase of 14 cents.
The S&P 500 saw 143 constituents that finished the week below their 200 DMA, compared to 201 three weeks ago. There were 183 constituents that finished the week either below their 200 DMA or less than one dollar above it, compared to 228 three weeks ago. There were 251 constituents that finished the week with a 200 DMA in decline compared to 285 three weeks ago.
The S&P 500 saw 262 constituents finish the week greater than ten percent below 52 week highs, compared to 276 three weeks ago. There are five constituents that finished the week less than five percent from 52 week lows, compared to three seen three weeks ago. There were 53 constituents that saw new 52 week highs while two constituents reached new 52 week lows during the week. The constituents that reached 52 week highs finished the week with an average P/E of 23.03. The average even weighted TTM P/E of the index increased with the index price to 20.10.
There were 119 of the S&P 400 constituents that finished Friday beneath their 200 DMA, compared to 164 three weeks ago. The index finished Friday with 157 constituents either below or less than one dollar above their 200 DMA, compared to 198 three weeks ago. There were 219 constituents that had a 200 DMA in decline, compared to 255 three weeks ago.
There were 236 of the S&P 400 constituents that finished the week greater than 10 percent below 52 week highs, compared to 247 three weeks ago. There were three constituents that finished the week less than five percent from 52 week lows, compared to two seen three weeks ago. The mid-caps saw 46 constituents reach new 52 week highs while one fell to new 52 week lows during the past week. The S&P 400 finished the week with an average TTM P/E of 20.34.
Several of the constituents in the S&P 400 and S&P 500 that saw new 52 week highs in the past few weeks did so as old 52 week highs fell out of the trailing 52 week period. Several of these stocks are 20 to 30 percent lower than they were within the past 18 months. Some stocks could find themselves at 52 week highs in the weeks ahead, yet be greater than 50 percent off highs seen in the past 18 to 24 months. If this were to occur, the increase in 52 week highs could lead to a false perception that stocks are more bullish than they really are.
This same fall off in old highs is also reducing the distance stocks are from 52 week highs. Although a falloff in the numbers that are ten percent or greater from 52 week highs has been seen, some of these reductions were helped more by old highs dropping out of the trailing 52 week period, than from recent runs higher.
Many of the stocks that are seeing their 52 week highs drop off are seeing long term drop resistances built. If the index also begins to build these long term drop resistances, the chances of a crash become very high as long term drop resistances on the index are almost exclusively found in market crashes.
The 100 L at 2100, +2% H, -2% H and -90 D indicator are currently active. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The 90 D indicator that became active on April 4, 2016 appears to hold bearish potential. It has performed as follows to this point in the standard format of highest close / lowest close / last close: +1.76 percent / -1.17 percent / +1.23 percent. Although stocks pushed higher, most earnings do not appear particularly bullish although beat rates remain high. First quarter earnings projections are sinking lower into the days just before earnings are reported. Many of the 96 earnings reductions in the past week were in companies that are expected to report in the coming week and this is feeding the illusion that stocks are beating already too low projections. Many are reporting the worst first quarter earnings in several years. Third quarter projections continued to slip lower, especially in those that just reported. This seems to be putting a damper on the second half earnings rebound expected earlier. Although some companies are showing limited optimism of future earnings growth, many are still facing earnings headwinds. Many are in positions that could see these headwinds build beyond current expectations.
Supporting volatility indicators edged back into extreme levels during the past week. This was partly due to an increase in bearish volatility seen on world markets during the past week. It was also affected by a sudden increase in volatile setbacks seen in domestic stocks in drops from or near 52 week highs. Increases were also seen in other supporting factors.
Have a great day trading.
Disclosure: Ron has investments in GME and has no investments in GPN or HPY. He is currently about 54 percent invested long in stocks in his trading accounts reflecting an increase in his rounded investment level from the prior week. The increased investment level was the result of the purchase in one issue partially offset by the sale of one issue and dividend payments. The purchase was in an issue he already owns that pays a fairly high dividend yield. Recent events offer this stock a certain degree of downside protection along with a certain degree of upside potential most stocks do not currently seem to have. The purchase price was also at a level he feels the stock could re-attain at some point in the future if this downside protection was lost and an overall downturn in stock prices was seen. He may continue to offset the purchase price of this issue with sales of other issues. He may also sell all or part of this investment if it reaches his target price.
The opinions expressed by Ron are his own and may or may not reflect those of byteclay.com. His opinions are the result of many years of data collection, evaluation and extensive research along with his perception of the current conditions and what he thinks is the most probable outcome based on the conditions, data and other variables. This article is not intended to provide investment advice; but instead to provoke thought about investment possibilities. Although several of his forecasts have been very close, 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 historical data to the current conditions correctly. His perception of the data is not always correct and acting on any 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.