The S&P 500 saw the past week begin to retreat from the previous Friday’s rebound back into the likely resistance in the lower half of the 100 L. The index slid lower in four sessions breaking a three week winning streak with a significant fall of 3.72 percent for the week. The index neared a volatile session during Friday’s 1.94 percent loss and although the session lows surpassed the two percent threshold research considers volatile, the index rebounded into the close to finish short of this volatile level. The S&P 500 has finished lower in 18 of the past 27 sessions.
The overall market reacted to a strong retreat in oil prices during the week. Crude oil prices slid in an excess of ten percent lower during the week capped by a 3.84 percent drubbing on Friday. The price reaction was blamed on OPEC plans to keep production levels at their historical highs, increasing worries that oversupplies seen throughout the world and weak demand growth could further deteriorate prices.
Energy markets were also unraveled by continued soft economic data abroad. China reported a fourth consecutive monthly contraction in its PMI, with November showing the worst decline during the stretch. The components of China’s PMI are showing trends that are even more disturbing to growth prospects. The employment levels and raw material inventories in the manufacturing sector have been in monthly retreats for over a year.
China’s PMI report notes that small and medium size businesses have endured the brunt of the decline, while large businesses have seen overall increases. The overall decline shows that large businesses are becoming outweighed by their smaller counterparts, and the smaller businesses are now in a deepening trend lower. Growth in China’s large businesses might continue in the short term, but it seems possible they could too fall into declines. Although no supporting data was found, earlier reports make it seem possible the current increases could be due to cost savings maneuvers in large multinational manufactures as they try to decrease expenses with cheaper labor. If so this influx appears limited and could peak soon.
Growth problems could be hitting the US too. The high inventory levels noted in third quarter earnings reports appear to be shrinking fourth quarter GDP growth and could also decrease the earlier third quarter GDP estimates. According to Commerce Department estimates for wholesale inventory levels slid 0.1 percent lower during October as companies continued to work towards a reduction of stockpiled goods. Inventory levels are a key ingredient of the GDP estimates.
The Commerce Department also reduced the estimated inventory increase for September to 0.2 percent from the earlier reported 0.5 percent increase. The lower inventory estimates for September aroused speculation that the second estimate of GDP growth for the third quarter could also be reduced from the earlier estimate.
The softening growth prospects are not only a problem for the Energy Sector, but for the overall market too. Nearly half of the constituents of the S&P 500 saw year over year revenue declines in the third quarter when increases in inventory levels were seen. The lower inventory levels indicate weakening product demand. The slower growth along with increased currency and pricing pressures makes it seem possible further revenue contractions could be seen.
The Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 charts show a potential breakdown occurred during the past week. The Dow Jones and NASDAQ fell very near support levels they established after the rebound in late September, but so far held above it. Meanwhile the New York Stock Exchange, Russell 2000 and S&P 500 broke below support levels they established after that rebound. The NYSE fell to a level not seen since Oct 2, the Russell to a level not seen since Oct 5 and the S&P 500 to a level not seen since Oct 15.
All but the NASDAQ finished Friday below their 200 EMA, with the NASDAQ’s finish only a little above it. The S&P slipped to close below its 200 EMA on Friday after breaking below it during Wednesday’s session. The Dow also finished below its 200 EMA on Friday after Wednesday fell to and rebounded off it. The NYSE and Russell have only seen a few sessions close above their 200 EMA since breaking below it in August. Both have seen their 200 EMA in a bearish trend falling mostly lower since they broke below it.
The NYSE and Russell 2000 also saw a bearish cross of their 50 EMA below their 13 EMA during the past week. The two have seen both their 13 and 50 EMA remain bearishly below their 200 EMA since these trend lines broke below the 200 EMA between July and August.
The Dow Jones dipped 1.76 percent lower to finish Friday with the smallest loss of the five major indexes. The Dow’s session low fell just short of a two percent loss. The NYSE shed 1.92 percent and the S&P 500 slipped 1.94 percent. Both rebounded from session drops in excess of two percent to finish above, but near volatile two percent losses. The Russell and NASDAQ finished with volatile losses as both fell to a finish with a 2.21 percent session loss. The presence of volatile conditions increases the chances of continued volatility. Volatility is generally bearish.
Earnings were found for four of the S&P 500 constituents that reported earnings in the past week. Although one of these reports was for third quarter earnings and the rest for the fourth quarter, they are all reported together. These constituents reported total earnings that were $1.19 higher than they reported the same quarter a year ago. This represented a 0.06 percent increase over the index’s total trailing twelve month earnings from the prior week and an average increase of 2.65 percent in the TTM earnings of those constituents. Two constituents reported earnings greater than the same quarter of a year ago and two reported earnings less than a year ago.
Projections for fourth quarter earnings decreased from those of the previous Friday. The S&P 500 constituents that had already reported third quarter earnings but had not yet reported fourth quarter earnings saw fourth quarter projections decrease by $1.74. There were 25 constituents that had a fourth quarter projection increase while 59 saw decreases.
The S&P 500 constituents saw current year earnings projections decrease by $1.12 compared to the previous Friday. There were 40 constituents that saw their current year projection increase while 69 saw decreases. One constituent saw a fiscal year change after reporting earnings and saw current year earnings projections change from 2015 to 2016. This fiscal year change resulted in a projected earnings increase of 72 cents in that constituent.
The S&P 500 saw 331 constituents that finished Friday below their 200 DMA, up substantially from the 251 seen a week ago. There were 357 constituents that finished Friday either below their 200 DMA or less than one dollar above it, up from 293 in the prior week. On Friday there were 310 constituents with a 200 DMA in decline and up from the 284 a week ago.
The S&P 500 saw 340 constituents finish Friday greater than 10 percent below 52 week highs, a large increase from 276 a week ago. There were 25 constituents that saw new 52 week highs while 53 constituents reached new 52 week lows during the week. There are 89 constituents that are less than five percent from 52 week lows, compared to 45 in the previous week. The stocks that reached 52 week highs during the past week finished Friday with an average P/E of 25.47. The average even weighted TTM P/E of the index decreased with the index price to 19.03.
One constituent change was made to the S&P 400 after the market close on Friday and this change is reflected in the data below. There were 279 of the S&P 400 constituents that finished Friday beneath their 200 DMA, a very large increase from 218 a week ago. The index finished Friday with 317 constituents either below or less than one dollar above their 200 DMA, compared to 257 a week ago. There were 251 constituents that had a 200 DMA in decline, up from the 224 in the prior week.
There were 296 of the S&P 400 constituents that finished Friday greater than 10 percent below 52 week highs compared to 249 a week ago. The mid-caps saw 16 constituents reach new 52 week highs while 46 fell to new 52 week lows. The S&P 400 finished Friday with an average TTM P/E of 19.75.
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, +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 began a significant retreat from Friday’s rebound back into likely resistance in the lower half of the 100 L during the past week. The current retreat began from the previous Tuesday’s high that edged slightly into the upper half resistance of the 100 L. The overall retreat is considered part of the retreat from the May 21 highest close of 2030.82, since the index has yet to recover that high. Although this high was outside the normal resistance area of the 100 L, it remained within an area that research suggests resistances still have influence over and returned relatively quickly back to this resistance and is therefore considered to have been caused by the 100 L at 2100. The index has seen seven significant retreats, those of three percent or greater, off cycle highs since moving lower from that May high, although it may have seen other retreats of 3% or greater within these cycles. The large number of significant retreats from cycle highs without recovering the first retreat is a bearish indication.
The S&P 500 retreated in the first three sessions, falling to a low of 2036.53 on Wednesday before finding temporary support in the 2035 to 2055 MRL. Thursday rebounded to a high of 2067.65 before finding resistance in the 2065 to 2070 MRL. Friday gapped lower and continued to fall into the upper half resistance of the 100 L at 2000, but the low of 2008.80 fell below possible support of the likely resistance in the upper half of that MRL from 2010 to 2020 before rebounding to a finish of 2012.37 within this likely resistance. The break of this possible support before rebounding back into it makes it a possible resistance.
The S&P 500 left open gaps lower on Monday, Tuesday and Friday and filled the gaps from the previous week. A gap lower from July 22 and a gap higher on Sept 30 remain open. 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 -/(+)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 of highest close / lowest close / last close: +6.66 percent / -4.87 percent / +1.73 percent.
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 of highest close / lowest close / last close: +4.50 percent / -0.33 percent / -0.33 percent.
The 90 E indicator saw a third significant price direction change as the index slid in excess of three percent lower. Friday’s session neared a volatile finish, but rebounded to finish above the two percent threshold that research suggests is a volatile level. The index has seen one volatile session to this point. Significant price direction changes and volatile session moves are traits commonly seen during this indicator’s presence. Although this instance of the 90 E has seen some common traits to this point, its presence has been quiet compared to others in the past.
This occurrence of the 90 E will be considered inactive after Tuesday’s close, although the “fringe” area a few days before or after an active 90 E often sees market conditions that fit within its normal traits. The 90 E will reactivate 12 trading days after it expires; as the currently active 9 Day indicator reaches its expiration period during the second session of the New Year. After it reactivates; the 90 E will then remain active for 56 straight trading days as the 9 Day and 90 D indicator’s expiration periods overlap.
The -2% H and +2% H indicators saw no correct indications in the past week. A near volatile move was seen Friday as the index rebounded from an excess of two percent lower to finish at 1.94 percent lower. The historical data suggests that occasionally near volatile moves like that seen Friday appear to provide offsetting moves. However; this data is not conclusive as near volatile moves have also been followed by volatile offsetting moves. Although conditions leading into the current time frame make it seem likely volatility could remain low, supporting volatility indicators remain in extreme levels.
The average daily volume increased 8.06 percent from the previous week. Volume was highest in Wednesday’s retreat and lowest in Thursday’s move higher. The five day volume variance increased 2.02 percent to finish the week at 18.03 percent. The average volume remained within generally bearish levels.
Although the conditions leading into the current time of year made it seem possible volatility might remain calm, volatile conditions appear to be increasing. The presence of volatile conditions increases the chances of additional volatility. Volatility is generally bearish.
The index has seen a large number of significant retreats off cycle highs since moving lower from the May high. The large number of significant retreats from cycle highs without recovering the first retreat is a bearish indication.
Although a few reports will trickle in beforehand, fourth quarter earnings will not begin to be reported in earnest until after the New Year. Many of the third quarter reports and statements in these reports make it seem possible fourth quarter earnings could be ugly. A continued fall in earnings could send the index P/E spiking higher. A P/E that spiked higher was seen in 2001 and 2008 as earnings deteriorated.
It appears likely earnings and sales in the coming two quarters could be softer than the already low third quarter numbers. Although some are doing well, the numbers that are not are increasing. Several that are doing well are doing so at the expense of others by increasing sales through competitive moves. Although this competitiveness increased their profits, the increase in earnings appears to be offset with a decrease in another’s earnings. The S&P 500 saw weighted earnings fall below the prior year’s quarter for a fourth straight quarter, while the even weight earnings slipped to its first loss during the third quarter.
Companies are increasing characteristics that they tend to exhibit prior to larger downturns. Cost reductions are at high levels and increasing. Reductions in stock buybacks, reduced rates of dividend increases and an increase in dividend cuts have been seen. The index has seen increases in the number of constituents that have negative TTM earnings along with a large increase in those that have seen quarterly earnings losses.
Most stocks have continued to hold within long or short term downtrends. Many that have rebounded from previous trips to 52 week lows appear to be falling to retest these lows, and many have broken lower in these retests while it appears others are likely to follow. Many shattered strong major support levels in earlier retreats and rebounded at weaker minor support levels. These minor supports are much more likely to fail if retested.
The S&P 500 broke below the lower trend line in a previous retreat from the upper half resistance in the 100 L. 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, conditions continue to make a retreat that breaks lower in this instance seem likely.
Current chart formations along with past timelines, increases in characteristics companies’ exhibit prior to larger downturns, softening economic conditions, worldwide stock overvaluations and continued lackluster earnings make it seem possible the S&P 500 could see a large retreat begin 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.
Have a great day trading.
Disclosure: He is currently about 57 percent invested long in stocks in his trading accounts. Although his investment level remained unchanged from the prior week, he purchased one issue with the purchase cost partially offset by dividend payments. He will receive dividend payments from 15 issues in the coming week and three in the following week. If no further investment changes are made during this time frame, these dividend payments would not change 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.
The opinions expressed by Ron are his own and may or may not reflect the opinions of byteclay.com. This article is not intended to provide investment advice; but instead 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.