The S&P 500 rebounded in the first three sessions before trimming gains slightly during a shortened session on Christmas Eve. The index finished 2.76% higher for the week. Although the S&P 500 finished the holiday shortened week with three gains, it has finished lower in 21 of the past 36 sessions.
The early beat rates of fourth quarter earnings estimates continue to be high, but beating the current earnings estimate might not be reason for celebration anymore. Early fourth quarter reports for several of the small and mid-cap stocks that beat earnings expectations, saw stock prices fall due to the continued deterioration in forward expectations. Many have been warning of this potential shortfall in their earnings reports for three or more quarters, but they continued to beat lower earnings expectations. Instead of their stock prices slipping with these lower earnings then, many maintained near highs with increasing P/E ratios during this time. Eventually earnings matter and investors finally decided these reductions had extended long enough.
It appears investors could have even less tolerance of earnings misses. Many of the stocks that have missed expectations have seen stock prices fall brutally. First day retreats in excess of 20 percent are not uncommon. This type of unforgiving drop was seen in Grand Rapids, Michigan based Steelcase Inc. (SCS) when they reported earnings that missed by three cents during the past week.
According to earnings data from Standard and Poors Dow Jones Indices for the S&P 500, the first three quarters saw the weighted per share operating earnings fall below those reported in the same quarter of 2014 by 5.53 percent in the first quarter and 10.91 percent in the second quarter, while preliminary results show a 14.05 percent decline in the third quarter. The second and third quarter’s earnings also fell below those reported in the same quarter in 2013 two years ago. Fourth quarter expectations are currently 8.19% above those in 2014, but the 2014 earnings had slipped 5.31% below those in 2013, resulting in expectations of only a 2.44% increase over 2013 earnings.
On a weighted basis, the earnings slide in the past four quarters earnings reports have effectively erased all of the prior year’s increase and a good portion of those in the year before. Much like the small and mid-caps, the S&P 500 index has remained relatively flat during these earnings disappointments. It seems possible if these failures continue, earnings could eventually begin to matter in the large caps too.
Earnings projections for 2016 are still optimistically high, but these projections continue to see weekly ticks lower, just as those in 2015 did. According to data collected from Standard and Poors on Dec 31, 2014 and on Dec 24, 2015; all four of the current 2016 quarterly earnings per share estimates for the S&P 500 have already fallen below the expectations for 2015 of about the same time a year ago.
The projections for 2015 earnings of a year ago were much too high. When 2015 earnings were reported companies continued to beat earnings expectations at near historical highs, but the reported operating earnings per share of the index were between 15 percent and 23 percent lower than the beginning of the year projections in each of the first three quarters. Current expectations for the fourth quarter are about 17 percent lower than they were about a year ago.
It seems possible earnings headwinds could still be building giving reason for further reductions in 2016 projections. The majority of the most recent reports make it look like the overall projections for 2016 earnings could be too high. Of course not all of the constituents are currently having earnings problems, but they are in dwindling numbers, while most are arguably priced too far forward of likely earnings.
The S&P 500 will see a constituent change after the close of trading on Monday. Intel Corp. (INTC) is acquiring S&P 500 constituent Altera (ALTR) and as a result S&P 400 constituent Church & Dwight Co. (CHD) will replace Altera in the S&P 500 after the close. S&P 600 constituent SYNNEX Corp. (SNX) will be moved into the S&P 400 to replace Church & Dwight. The S&P 400 also saw constituent Hubble Inc. (HUBB) reclassified its shares on Dec 24 and as a result, they changed their ticker symbol. Although some of these changes have not yet been made, all of these changes are reflected in the data presented below.
Since the following earnings and comparison portion was last included, S&P 500 constituent Edwards Life Sciences Corp. (EW) split its stock two for one. S&P 500 constituent Nike Inc. (NKE) also split its stock two for one on Dec 24. Adjustments were made in the data to reflect these changes.
Unlike the earnings and earnings projections from Standard and Poors above, the earnings and earnings projections included below are not weighted to the index. Also unlike those weighted earnings that have seen four consecutive quarters of year over year decreases, the even weighted earnings have so far only seen a year over year decrease in the third quarter. Although the other three quarters did not see decreases, the earnings growth rate slid well below that seen in earlier quarters. However very much like those weighted earnings; earnings projections in a large portion of the index were too high in 2015, and fell throughout the year. The even weighted earnings are also seeing weekly downticks in 2016 earnings projections.
The following contains all earnings reports found since the last update was included two weeks ago. Earnings were found for 14 of the S&P 500 constituents that reported fourth quarter earnings. These constituents reported total earnings that were 78 cents higher than they reported the same quarter a year ago. This represented a 0.04 percent increase over the index’s total trailing twelve month earnings from those two weeks ago and an average increase of 1.71 percent in the TTM earnings of those constituents. Eleven of the constituents reported earnings greater than the same quarter of a year ago and three reported earnings below the same quarter of a year ago. Although the beat rates of the same quarter of the previous year appears higher than those seen in earlier quarters, it should be noted that the earnings slide began in the fourth quarter a year ago. The earnings growth rate for the quarter was much smaller than earlier, and many reported earnings below those they reported in 2013.
Projections for fourth quarter earnings decreased from those of the Friday two weeks ago. The S&P 500 constituents that have not yet reported fourth quarter earnings saw their current quarter projections decrease by $2.42. There were 44 constituents that had a fourth quarter projection increase while 108 saw decreases.
The S&P 500 constituents saw current year earnings projections decrease by 82 cents compared to two weeks ago. There were 63 constituents that saw their current year projection increase while 126 saw decreases. Two constituents saw fiscal year changes after reporting earnings and as a result had current year earnings projections change from 2015 to 2016. This fiscal year change resulted in a total projected earnings increase of $1.19 in those constituents with both seeing increases.
The S&P 500 saw 281 constituents that finished the week below their 200 DMA, down from the 331 seen in the finish two weeks ago. There were 304 constituents that finished the week either below their 200 DMA or less than one dollar above it, down from 357 two weeks ago. There were 300 constituents that finished the week with a 200 DMA in decline compared to 310 two weeks ago.
The S&P 500 saw 307 constituents finish the week greater than ten percent below 52 week highs, down from 340 two weeks ago. There were 31 constituents that saw new 52 week highs while 65 constituents reached new 52 week lows during the two weeks. There are 29 constituents that are less than five percent from 52 week lows, compared to 89 two weeks ago. The stocks that reached 52 week highs during the past two weeks finished the week with an average P/E of 21.47, the lowest seen since tracking began in these articles. The average even weighted TTM P/E of the index increased from two weeks ago to 19.40.
There were 251 of the S&P 400 constituents that finished Friday beneath their 200 DMA, compared to 279 two weeks ago. The index finished Friday with 281 constituents either below or less than one dollar above their 200 DMA, compared to 317 two weeks ago. There were 251 constituents that had a 200 DMA in decline, unchanged from two weeks ago.
There were 272 of the S&P 400 constituents that finished the week greater than 10 percent below 52 week highs compared to 296 two weeks ago. The mid-caps saw 19 constituents reach new 52 week highs while 69 fell to new 52 week lows during the past two weeks. The S&P 400 finished the week with an average TTM P/E of 19.94.
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 +2% and -2% indicators will return to high likelihoods (H) on Wednesday. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The S&P 500 rebounded to near a significant three percent level in the first three sessions, gaining 2.93 percent in that run higher. Monday’s session opened with a gap higher into likely resistance from 2010 to 2020 in the upper half of the 100 L at 2000 and continued slightly above it, but later fell to nearly cover this opening gap. It again pushed into this likely resistance before retreating to near the session lows but then raced higher in the final half hour to a finish above the resistance at 2021.15. Tuesday opened with a gap higher, but fell to cover this gap and found support at 2020.49 slightly above the likely resistance before moving steadily higher. Wednesday opened at the session low with a large gap higher and continued higher before finding resistance near the 2065 to 2070 MRL at the session high of 2064.73 before slipping to a finish a little lower. Christmas Eve’s session pushed into the 2065 to 2070 MRL with a session high of 2067.36, but retreated to a finish below the MRL and with a small loss at 2060.99.
The S&P 500 left an open gap higher on Monday and Wednesday. It filled the gap lower seen on Dec 18. 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 / +4.19 percent. This indicator will begin its expiration period on Jan 5. The expiration period begins 13 trading days before the expiration date, and lasts 13 trading days after. The 90 E indicator is active during this expiration period.
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 / +2.08 percent.
The -2% L and +2% L indicators saw no correct indications in the past week. 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. Most supporting indicators remain in extreme levels and edged slightly higher during the week.
The average daily volume slid 38.15 percent from the previous week. Volume was highest on Monday and lowest in Thursday’s holiday shortened session. The five day volume variance increased 318.91 percent to finish the week at 373.35 percent. Volume levels were adversely affected by the low volumes due to shortened session on Thursday and the high volumes seen during the previous Friday’s quadruple witching. They were also affected by normal decreases seen during the Christmas and New Year holiday session.
Volume levels fell into what are considered more bullish levels during the past week; however this drop off in volume appears to be largely seasonal. Volume is also likely to remain at lower levels in the coming week due to these seasonal influences. Even though a large retreat in volume was seen during the past week as is normally the case during the holidays, when considering volume levels in the same time period of the past, the past week’s volume level appeared to remain elevated in comparison.
As the year draws towards a close; volatile and near volatile conditions continue to be seen. The holiday shortened trading week saw the index push very near to another significant price direction change in the first three sessions. The continued presence of volatile conditions during a time of year that usually remains fairly calm is somewhat of a concern, considering the upcoming change to a New Year puts the index in a time frame that is much more likely to provide volatile conditions.
The 90 E will reactivate on Jan 5, although market conditions considered traits of this indicator are often seen in the three sessions proceeding or following this active period. As a result the +2% and -2% indicators return to high levels of likelihood on Dec 30. This presence of the 90 E will extend past the normal 27 trading day period in this instance due to both of the current active indicators controlling the 90 E having overlapping expirations. As a result it will be active for 53 consecutive trading days. The earlier report of a 56 trading day active period accidently included the three day period prior to this indicators activation.
The 90 E indicator’s presence is potentially bearish. Many of the traits commonly see during its presence are considered volatile. It will be active during a period that has historically shown an increased likelihood of volatility.
Most stocks have continued to hold within long or short term downtrends. Based on information gathered for the S&P 500 and S&P 400 presented above, this potentially bearish period could begin with over 60 percent of the largest 900 publically traded companies already within bearish downtrends below their 200 DMA.
There has been a substantial increase in the number of stocks reaching new 52 week lows. 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 fourth quarter earnings will not begin to be reported in earnest until after the New Year, but some of the S&P 500 constituents have already reported earnings. Although the beat rates of estimated earnings are very high, beat rates remained near historical highs during the year over year earnings decline in the previous quarter. A large number of the constituents that have not yet reported are seeing fourth quarter projections slip. Several that have not yet report, have warned that earnings will fall short of earlier projections. Many of the companies that have reported or are warning of earnings problems tend to be useful as indicators across sectors. These indications tend to make it seem possible shortfalls could also be seen elsewhere.
The index charts were showing potential breakdowns during the prior two weeks, but the past week’s action on these charts appear to be inconclusive as to whether this breakdown is continuing. Most are maintaining within this breakdown pattern, but the past week saw the Russell 2000 break to and finish at a high that was higher than the previous cycle high. The New York Stock Exchange rebounded to this previous high, but appears to have found resistance at that high. The Dow Jones, S&P 500 and NASDAQ have so far fallen short of the previous cycle high. The Dow Jones and S&P 500 indexes are near a very bearish moving average cross of the 50 EMA below the 200 EMA. This bearish cross has tended to appear prior to or during very deep drops in those index prices, but is very seldom seen without resulting in a large retreat.
The S&P 500 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.
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 Standard and Poors Dow Jones Indices reported a rebound in stock buybacks during the third quarter. Reports elsewhere have noted a substantial increase in the use of credit for share repurchases. Although a rebound in share purchases was seen, it appears possible it only increased unnecessary and unproductive costs. 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.
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 current has investments in SCS and INTC and has no investments in ALTR, CHD, SNX, HUBB, EW or NKE. 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, the investment level decreased due to the sale of one issue and dividend payments. He will receive dividend payments from 14 issues in the coming week and 16 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.
Ron saw a long standing buy order in company stock fill in his 401K during the prior week’s large price retreat. At the time that purchase filled he canceled an additional buy order for company stock that would have later filled and reopened it at a lower price. To maintain an allocation mix he feels is appropriate for current market conditions, he sold two thirds of the positions invested in Mutual Funds purchased in late August or with contributions since during the past week. The proceeds more than fully offset his stock purchase and were invested in the stable value fund. He also reallocated his current contributions to 10% company stock and 90% stable value, eliminating contributions to Mutual Funds while increasing contributions to company stock and stable value. He is still considering fully divesting in Mutual Funds. He is currently about 20% invested in stock based investments and 80% in stable value funds.
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.