The S&P 500 rebounded in the first three sessions before turning steeply lower in the final two sessions of the past week. The whipsaw resulted in two significant price direction changes of three percent or greater, the first in a 3.02 percent higher move before falling 3.37 percent to finish the week with a second consecutive weekly loss of 0.34 percent. The week’s largest price change was seen in Friday’s quadruple witching selloff. The S&P 500 has finished lower in 20 of the past 32 sessions.
The market initially moved higher from oversold conditions into and after the Federal Reserve announced a much anticipated rate hike on Wednesday. The rally lost steam quickly though, as the S&P 500 found resistance at 2076.72 on Wednesday and again on Thursday at 2076.37, both slightly above the lower boundary of 2075 in the lower half resistance of the 100 L at 2100. The week finished in what appeared to be a fairly large selloff into Friday’s quadruple witching on high volumes.
The late week retreat may have been aided by lackluster earnings. Although few have reported fourth quarter earnings and early reports have been mixed, those that have reported could be giving early indications for those yet to report.
Although new car sales still appear to be doing well, Friday saw CarMax Inc. (KMX) give indications that used car sales could be slipping. CarMax missed earnings estimates when it reported 2016 fiscal year third quarter earnings of 63 cents a share, well below the 68 cent estimate. The used car dealer noted a 0.8 percent decline in same store sales, or those at stores open at least a year, following a 7.4 percent increase in the previous quarter. Despite a reported 4.1 percent increase in overall sales due to new store openings, CarMax reported a profit of $128.2 million that was down from $130 million a year ago. The new dealerships helped increase year over year revenue, but the openings also increased costs including an increase in advertising expenses.
Even though CarMax saw a decline in profit, they increased their earnings per share over the 60 cents of those a year ago, with this increase entirely due to share repurchases. The company press release reported they repurchased 7.7 million shares at a cost of $445.7 million and in doing so increased their revolving credit balance to $564.0 million. The report noted the increase in debt was largely due to stock repurchases and seasonal inventory increases.
The CarMax report shows that weakness in retail sales could be expanding into the big ticket items like autos and homes. This is concerning as these sectors have held overall retail sales aloft during earlier softness in small ticket items. This softness could also be an early indication of continued weakness in the overall retail sector during the fourth quarter. Lastly, as many earlier reports had indicated, the report shows that many companies are now borrowing to repurchase shares in an effort to keep the illusion of earnings per share increases rolling despite slides in overall earnings.
The problem is many companies are repurchasing these stocks at or near all-time highs, just as CarMax has been doing. CarMax bought those 7.7 million shares at an average price of $57.88. CarMax’s stock price had first reached that price only about a year ago, and finished Friday well below that average purchase price at $53.49. Even after the downturn from earlier highs, the stock finished Friday with a still high TTM P/E of 19.17.
The high stock prices paid for these repurchases make it seem possible many companies are repurchasing shares at prices that shareholders should consider poor investment choices of shareholder capital, but even poorer investments when increasing debt levels and unnecessary interest costs. It is also concerning to see so many companies that had cut costs through workforce reductions or cutting capital expenditures, the resources needed for earnings growth, instead borrow money and increase interest costs for share repurchases.
It is hard not to cringe anytime talk of good employment numbers is heard. Since employment levels are at the highest levels since the employment data began being gathered, it gives the perception to many that employment levels are high. Employment increases have softened considerably in the past year. Employment levels are not increasing when gaging them by the percent of the population that is employed. Job increases have been only adequate to cover the increases in new additions to the population at the previous rate for more than a year. The unemployment rate is falling due to decreased participation rate and not due to the additional jobs as many perceive.
First we will take a look at the perception that employment data is good due to a new employment high. According to data gathered from several source documents available from the Bureau of Labor Statistics, when data collection began in 1944 the non-institutionalized population was a little more than a third of that today. Nearly twice as many are employed now than there were in the total civilian non-institutionalized population in 1944. There are more people that are not considered a part of the workforce now, than were in the total non-institutionalized population then.
The total civilian non-institutionalized population increases every day as new workers are added. Employment levels need to increase to sustain the economy. Therefore the new employment highs are nearly meaningless when looking at this data.
The previous employment cycle high was seen in 2007. Many proclaimed great employment numbers and a full employment recovery when the total number of persons employed finally poked 0.08 percent above the highs of eight years ago in November, but a common sense analysis of the numbers seems to point otherwise.
Since the jobs rebound in 2007 never recovered the 64.4 percent rate of the total civilian non-institutionalized population that was employed in 2000, it cannot really be considered a full employment barometer. However, since it was the last employment high, it will be used. The civilian non-institutionalized population has grown by 7.9 percent since the 2007 high. When the 2007 employment high was reached, 63.0 percent of the total civilian non-institutionalized population was employed. In November only 59.3 percent were employed. Since 2009 had the same 59.3 percentage rate of the total civilian non-institutionalized population employed, it seems possible all that was really recovered in November, was the employment level at the bottom of the last crash.
This would not be as much of a concern if the rate of population employment was still increasing indicating job growth, but this rate has remained very flat near 59.3 percent for over a year. Job increases are being seen, but since this rate is not increasing the increases are basically only covering additions to the workforce at the current rate of population employment. This indicates a stagnated workforce, not an expanding workforce. It is coming at a time when many companies are beginning workforce reductions, so to this point flat is better than down.
One thing is certain; the current rate of the total civilian non-institutionalized population that is employed is closer to those seen during the recessions since 1980, than those during employment recoveries during the same time period. This stagnation is also coming at a time that appears to be seeing increases in cost saving activities by companies. In the past these increases appear to have led to reduced hiring and increases in layoffs. Being so, a developing trend lower in this rate is probably not a good sign.
A recent study by Georgetown University touched on similar employment issues, unfortunately the actual report was not found on the Georgetown University website as the full study would have been very interesting to see and compare findings with. The source article quoted the study concluded that 6.4 million jobs needed to be added to reach the report’s perception of full employment. The reported findings concluded that 205,000 jobs needed to be added a month until 2020 to reach full employment. The study brings to light many valid concerns including those holding temporary or part time jobs, those holding jobs below their education level and stagnant wages.
Based on the information provided, using the 205,000 employment increase supplied by this study along with the average increase in the total non-institutionalized population seen during the past 12 months, shows that this monthly increase would add 12.505 million jobs through December 2020. The higher jobs increase than stated above appears to include adjustments made for population increases, but they are well below the recent population employment rate averages since 1980. The total civilian non-institutionalized population employment rate would only increase to 60.73 percent during this time, and still fall far short of the 63 percent 2007 population employment rate, which seems like a better gauge of a return to the employment levels seen in 2007.
Given the low rate of wage growth, a family of three with earnings of one household member at $10 an hour, a common service industry wage, that works 40 hours per week for 52 weeks, would put the family under the 2015 Federal poverty level of $20,090. This was not the case in 2007. Wage stagnation therefore requires more two income households and or multiple job holders to maintain prior living standards, not just of those near the poverty line, but pretty much across the board. Factoring in this change, which really began to become reality during the 1970 era and beyond, probably makes the higher population employment rate seen in 2000 too low to be considered full employment anymore.
One last thing to consider; although the unemployment rate appears to be dropping, the employment participation rates have been falling nearly unabated since the first quarter of 2000. November saw a participation rate of 62.5 percent, a 0.1 percent increase from the previous month, yet recent participation rates have fallen to levels not seen since October 1977.
Since the unemployment rate uses a fluctuating participation rate as a basis and is a number that can go against workforce population increases, it is an imperfect indicator. If the same participation rate was used that was seen in 2009, the unemployment rate would still be at the 9.3 percent rate seen in 2009, again showing the current employment levels have only made it back to crash lows. Substituting the participation rate seen in 2000, gives an unemployment rate of 11.6 percent. Using this current basis of calculation for unemployment rates, employment levels could fall to zero and the current unemployment rate of five percent would eventually be reached.
Data evaluations show that when jobs are added, the participation rate increases, when jobs are not being added the participation rate falls. In 2000 when participation rates were at a high, the unemployment rate was still four percent. It is interesting that this four percent unemployment rate was seen with 64.4 percent of the total workforce population working, while there is only a five percent unemployment rate in 2015 with 59.3 percent of the total workforce population working.
The source article also noted the report stated a GDP of two percent was needed for this jobs growth. Research seems to indicate that a low rate of jobs growth actually reduces the GDP growth, not the other way around. To provide a viable response would take too much time for this article; however earlier data from discussions of GDP were updated and looked over along with other research into GDP. US GDP is very high already, making a sustained increase of two percent increasingly difficult. The impressions from this data make it seem possible that just to sustain a two percent rate of growth through 2020, could take employment increases nearing multiples of those suggested.
The charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 show the potential breakdown of the previous week could be continuing to develop. All of the indexes rebounded from oversold conditions early in the week, but all reversed direction before reaching the previous cycle high. The NASDAQ, NYSE and Russell have so far maintained above previous cycle lows, but the Dow Jones and S&P 500 have already slipped to lows beneath the earlier cycle.
Due to an extended amount of research required for this week’s article, some of which was not included, the article length and low level of reported earnings during the past week; the earnings, earnings projections and weekly comparisons portions of this article are not included. They will be updated and available in the next article; provided of course similar circumstances do not prevent their inclusion.
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% L, -2% L, -/(+) 9 Day, and (+)/- 90 D indicators are currently active. The 90 E expired after Friday’s close; it will reactivate on Jan 5. The +2% and -2% indicators fell to a low likelihood (L) after the market close on Friday. These indicators will return to high likelihoods (H) on Dec 30. A discussion leading to this change is provided below. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The S&P 500 rebounded significantly during the first three sessions. After dipping lower Monday, the index wrestled with likely resistance from 2010 to 2020 in the upper half of the 100 L at 2000. It popped into and dropped out of the resistance several times before breaking higher late in the session into the finish at the session high and just above the likely resistance at 2021.94. The continued rebound from that resistance break found resistance near the 2075 lower boundary of the lower half resistance in the 100 L at 2100 during Wednesday’s and Thursday’s sessions at 2076.72 and 2076.37 respectively. The index retreated significantly from that resistance during the week’s final two sessions to finish lower than the early week rebound began. Friday closed very near that session’s lows at 2005.55. That finish rested within the upper half of the 100 L at 2000, but below the likely resistance from 2010 to 2020. The fall to a finish lower than the previous low and with this finish below likely resistance in the 100 L, along with the difficulties breaking back above this likely resistance level from oversold conditions on Monday, make the weekly close seem potentially bearish.
The S&P 500 left an open gap lower on Friday. It filled the gap lower seen on Dec 11. A gap lower on Dec 2 was mistakenly reported as covered during the previous week. Although the Dec 8 gap was partially covered before the index broke lower, gaps lower on Dec 2, Dec 7, Dec 8 and July 22 remain open along with a gap higher on Sept 30. Although all of these gaps are likely to be filled at some point, current conditions make it seem possible some of the gaps 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 / +1.39 percent. This indicator will begin its expiration period on Jan 5. The expiration period begins 13 trading days before the expiration data, and lasts 13 trading days after. The expiration period activates a 90 E indicator.
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 / -0.66 percent / -0.66 percent.
The 90 E indicator expired after Tuesday’s market close, and is now considered inactive. It will reactivate on the second session of the New Year. During its active period the S&P 500 saw three significant price direction changes of three percent or greater, one volatile session with over a two percent daily price change and one near volatile session that saw over a two percent daily price change during the session, but finished below this level. Although this presence of the 90 E was calm compared to many in the past, these are common traits seen during presences of this indicator.
The index was within a rebound that reached a significant price direction change on Wednesday at 3.02 percent. The index fell from that significant price direction into a close on Friday that provided another significant price direction change, as it finished the session 3.37 percent below Wednesday’s close. Traits normally seen during the 90 E presence are also often seen during the three days prior to or after an active 90 E, as these two significant price direction changes were.
The -2% H and +2% H indicators saw no correct indications in the past week. They were reduced to a low level of likelihood (L) after Friday’s close. This change was made due to two controlling factors and was influenced by recent market moves and also normal occurrences at this time of year. The change was made despite a continued extreme reading on supporting indicators. These indicators will return to a high likelihood on Dec 30, three days prior to the next 90 E becoming active, or if a volatile session is seen prior to that time.
The controlling factors included the expiration of the 90 E indicator. Volatile daily price changes are more likely to occur during this indicators presence or fringe area three days before or after this indicator’s active period. The other controlling factor is that the ten day period that most volatile offsetting moves are seen passed on Friday. There is still a higher than normal likelihood that this offset could be seen during the thirty day period, but this likelihood is lower than during the ten day period.
This change was influenced by the near volatile move that was seen on Dec 11. The historical data suggests that occasionally near volatile moves appear to provide offsetting moves. Although this data is not conclusive, it occurred during the ten day period that most offsets are seen and the 90 E, an indicator that generally points to a higher potential of volatile daily moves, expired. It was also influenced by market conditions normally seen during December after relatively long periods of calmness leading into the month. These past occurrences indicate the probabilities of additional volatile sessions during December are low. Based on these past occurrences if a volatile move is seen, it is slightly more likely to be higher than lower, working against the higher potential of an offsetting move lower.
This adjustment to a low level of likelihood could be incorrect. Supporting indicators remain in extreme levels, suggesting the potential for volatility is very high. The supporting indicators actually edged slightly higher during the week due to the presence of two volatile significant price direction changes on the index. Recent chart formations on the index and many of the constituents also make it appear the potential of volatility remains at extreme levels. Many other factors used in these indicators remained constant in very high or extreme levels. This adjustment was also made because it seems more likely that volatility could be seen after the New Year during the presence of a controlling indicator (90 E) or during the fringe area of this indicator just prior to the New Year. Therefore they will return to a high likelihood on Dec 30. If a volatile session is seen prior to that time, they would return to high likelihoods immediately.
The average daily volume increased 19.51 percent from the previous week. Volume was highest during the retreat during Friday’s quadruple witching and lowest in Thursday’s retreat. The five day volume variance increased 36.40 percent to finish the week at 54.44 percent. Although Friday’s witching sent the week’s average volume much higher, the average volume of the other four sessions remained within generally bearish levels.
Friday’s witching saw volume levels 54.44 percent above Thursday and 3.64 percent above the December witching of a year ago. These higher volumes and the fairly large retreat during the session could indicate investors exercised options and sold the underlying securities. Although difficult to make an accurate read based solely on this data, it could indicate a shift towards a more pessimistic view of potential price movements.
Although the conditions leading into the current time of year made it seem possible volatility might remain calm, volatile conditions continue to be seen. The past week saw two significant price direction changes. Significant price moves on that happen slowly are less likely to be volatile, but significant price changes that happen quickly are considered volatile. The presence of volatile conditions increases the chances of additional volatility. Volatility is generally bearish.
The index charts appear to be showing that the potential breakdown of a week ago could be continuing. The five major indexes regularly covered saw oversold rebounds early in the week, but retreats began from lower cycle highs late in the week and two have already fallen to lower lows. These charts along with many individual stock charts are showing bearish potential at the current time.
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. Earnings per share totals could still increase in some stocks even with these profit slides, as many are still repurchasing large numbers of shares. Earlier reports noted a possible increase could be seen in those using credit to repurchase shares. Some of the companies that have used cost savings to reduce workforces or capital expenses are buying shares with credit and increasing nonproductive interest costs. Many of these companies are buying these shares at high P/E ratios and near all-time highs. Based on similar foolhardy uses of credit in the past, it seems likely some many could end up refinancing short term credit facilities used for these purchases into long term debts at higher rates later.
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. Some that are continuing share repurchases are using credit to do so. 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: Ron has no investments in KMX. He is currently about 57 percent invested long in stocks in his trading accounts. Although his rounded investment level remained unchanged from the prior week, he purchased one issue and reinvested dividends in three issues with the purchase costs partially offset by the sale of one issue and dividend payments. He will receive dividend payments from three issues in the coming week and 14 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 those 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.