For the second consecutive week a volatile rebound on Friday saved the S&P 500 from a weekly loss. Although there were other session gains, Friday’s gain of 2.48% was the only session to finish with a weekly gain. With the rebound the index posted a 1.75 percent gain for the week. The index has finished lower in 33 of the past 59 sessions.
Friday’s session was the fifth volatile finish of the New Year. Two sessions also reached volatile levels intraday, but rebounded to finish with losses of less than the two percent research considers volatile. Although recent volatility has resulted in bullish sessions, volatile conditions are generally bearish in nature.
The S&P 500 weekly chart pictured above shows Friday’s volatile rebound was stopped at the lower trend line. A retreat that begins at or below the lower trend line is a very bearish indication. Drops from resistance found at this trend line in the past have generally fallen to or through the lower support line. Subsequent resistance in a rebound to the lower support line, have often led to falls that reached crash potentials.
Friday’s seasonal adjusted initial claims for unemployment probably helped investors part with their money. The Department of Labor’s weekly report noted a decrease of 16,000 during the past week as the seasonally adjusted initial claims dropped to 278,000 from the prior week. The prior week’s estimate was upwardly revised 1,000 to 294,000. The past week continued to hold below the 300,000 threshold many consider a barometer of an expanding job market. The unadjusted jobless claims dropped by 81,930 during the past week. The actual initial claims totaled 296,817 and broke a seven week stint above the 300,000 threshold.
Volatile conditions remained at higher than normal levels in the World markets during the past week. The week’s final session again saw a large increase in volatile rebounds, as 42 of the world’s indices pushed two percent or greater higher, including all nine of the US indices. This followed several indices that had strong volatile moves lower earlier in the week. Many in these drops extended the crash level losses they have already seen.
One of those seeing volatile declines was on China’s Shanghai Composite. It slipped steeply below the support turned resistance near September’s lows as Tuesday’s session cascaded 6.42 percent. The drop followed Monday’s continued move back towards the recently established resistance, but the sharp turn lower fell before reaching it. Wednesday slipped to a finish 0.52 percent lower before Thursday saw another volatile decline of 2.92 percent. The volatile gain Friday rebounded 3.09 percent to recapture a small portion of the week’s losses. The steep fall from the resistance that established near previous support makes it seem possible a ceiling resistance may have formed. Although it is impossible to tell for certain how the Chinese market could react in this case, most markets saw very large losses after breaking lower from a likely ceiling resistance. Many were unable to break back above this resistance for over a decade once it was established. Even after the large declines already seen, most of China’s stocks are still highly priced, making a continued fall seem possible.
Although many downplay the Chinese market downturn, it seems it could be more of a concern than many realize. The US is China’s largest trading partner, China’s slowdown points to a US slowdown. US data appears to reflect this slowdown. The influence that China has over the US markets increases every year. Many companies reap a large percentage of their profits through China. This does not include just those with manufacturing operations in China, which is far larger than many seem to believe. Many supply raw materials for this manufacturing stream. Nearly every product produced in US has some Chinese content in it. Many retailers make a large proportion of their sales through Chinese products.
The major US Index charts of the S&P 500, Dow Jones Industrial Average, NASDAQ, New York Stock Exchange and Russell 2000 show that Friday’s volatile rebound broke and finish above the 13 EMA. All saw this rebound stop at or near a previous drop resistance. The rebound over the past two weeks has carried the indexes out of fully oversold conditions. Several are nearing overbought conditions.
The rebound in prices has also brought most stocks out of oversold conditions. Many are finding resistance at the 13 EMA in these rebounds, and many have slipped back below the 13 EMA after short breaks above it. Others have continued in declines below the 13 EMA. Many of those that have seen rebounds break above the 13 EMA have already reached fully overbought conditions and many of these stocks appear to be at or near likely resistances. This is a bearish indication.
There were two constituent changes to the S&P 500 during the past week. S&P 500 constituent Avago Technologies Ltd. (AVGO) neared completion of its acquisition of constituent Broadcom Corp (BRCM). As a result, Broadcom was replaced by S&P 400 constituent Federal Realty Investment Trust (FRT) in the S&P 500 after the close on Friday. In the second change S&P 500 constituent Berkshire Hathaway Inc. (BRK.B) also neared competition of its acquisition of constituent Precision Castparts Corp. (PCP) and Citizens Financial Group Inc. (CFG) replaced Precision after Friday’s close. The S&P 400 saw three constituent changes in the past week. The past week’s changes to both indexes are reflected in the data presented below.
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 108 of the S&P 500 constituents that reported fourth quarter earnings. These constituents reported total earnings that were $3.78 lower than they reported the same quarter a year ago. This represented a 0.18 percent decrease of the index’s total trailing twelve month earnings from a week ago and an average decrease of 0.73 percent in the TTM earnings of those constituents. There were 51 constituents that reported earnings greater than the same quarter of a year ago, two the same as a year ago and 55 reported earnings below the same quarter of a year ago.
It is not uncommon for companies to restate prior quarter’s earnings in the final quarter of their fiscal year. Several constituents have restated earlier earnings during the current quarter. Restated earnings in the past week resulted in the TTM earnings of the constituents to fall $6.19 below those reported earlier.
Projections for fourth quarter earnings decreased from those of a week ago. The S&P 500 constituents that have not yet reported fourth quarter earnings saw their current quarter projections decrease by 78 cents. There were 27 constituents that had a fourth quarter projection increase while 58 saw decreases. Those that have already reported fourth quarter earnings prior to the current week saw a 61 cent reduction in first quarter earnings projections. Four constituents had increases and 20 constituents saw decreases.
The S&P 500 constituents saw current year earnings projections increase by $24.53 compared to a week ago. There were 117 constituents that saw their current year projection increase while 112 saw decreases. The constituents that saw fiscal year changes are reflected in this data and appeared to adversely affect this week’s outcome.
There were 87 constituents that reported their fiscal fourth quarter earnings and as a result changed current year earnings to 2016 or 2017 from 2015 or 2016. The change of fiscal year earnings resulted in earnings that were $28.48 higher than those in the just completed year. There were 32 that saw increases, one remained the same and ten saw decreases. Many of these projections do not yet reflect the lowered forward guidance many companies gave during the current quarterly reports. Others have a long history of failures to meet rosy forward guidance projections. It seems likely many of these projections could be dropping lower during the year ahead.
The S&P 500 saw 358 constituents that finished the week below their 200 DMA, compared to 388 a week ago. There were 384 constituents that finished the week either below their 200 DMA or less than one dollar above it, compared to 414 a week ago. There were 373 constituents that finished the week with a 200 DMA in decline compared to 384 a week ago.
The S&P 500 saw 373 constituents finish the week greater than ten percent below 52 week highs, down from 401 a week ago. There were 16 constituents that saw new 52 week highs while 50 constituents reached new 52 week lows during the week. There are 32 constituents that finished the week less than five percent from 52 week lows, compared to 67 a week ago. The stocks that reached 52 week highs during the past week finished the week with an average P/E of 28.43. The average even weighted TTM P/E of the index rebounded with the index price to 18.41.
There were 302 of the S&P 400 constituents that finished Friday beneath their 200 DMA, compared to 336 a week ago. The index finished Friday with 332 constituents either below or less than one dollar above their 200 DMA, compared to 351 a week ago. There were 312 constituents that had a 200 DMA in decline, compared to 324 a week ago.
There were 330 of the S&P 400 constituents that finished the week greater than 10 percent below 52 week highs, compared to 358 a week ago. There were 25 constituents that finished the week less than five percent from 52 week lows, compared to 51 a week ago. The mid-caps saw 18 constituents reach new 52 week highs while 37 fell to new 52 week lows during the past week. The S&P 400 finished the week with an average TTM P/E of 18.66.
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, (+)/- 90 D and 90 E indicators are currently active. The -/(+) 9 Day indicator expired after Monday’s close. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The S&P 500 finished the first four sessions at a weekly loss before a volatile rebound on Friday pushed the index to a weekly gain. Although a pair of volatile Friday rallies may appear bullish, volatility is generally bearish. Each week of the past two weeks could have easily finished at a loss without the volatile push higher in the week’s final session.
The S&P 500 opened lower on Monday at the session high of 1878.79 and fell to a low of 1875.97 finding support near the 1875 lower boundary of the 100 L at 1900, before rebounding slightly to finish at 1877.08. Tuesday opened higher at the session low of 1878.79 and continued to a high of 1906.73 before slipping to close at 1903.63 and resting in upper half resistance of the 100 L. Wednesday opened lower and fell to a low of 1872.70 outside likely support levels and reached a high of 1916.99 in upper half resistance of the 100 L before finishing the session at 1882.95 in the lower half of the 100 L resistance. Thursday opened higher at 1885.22, fell to a low of 1873.65 again outside likely support and reached a high of 1902.96 in the upper half of the 100 L before again retreating to finish at 1893.36 in the lower half of the 100 L. Friday gapped higher to open at the session low and continued to finish at the session high of 1940.24 just inside the 1940 to 1955 MRL.
Friday’s higher open was the only session that left an open gap. A gap higher on Jan 22 and gaps lower on July 22, Dec 2, Dec 7, Dec 8, Dec 30, Dec 31, Jan 5, Jan 6 and Jan 15 also remain open. 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 expired at the close of Monday’s session. It finished as follows in the standard format of highest close / lowest close / last close: +6.66 percent / -6.00 percent / -5.11 percent. The projection summary discussed below can be found in the Indicator section of the Sept 21, 2015 preview.
The projection summary of the possible outcome during this indicator’s presence appeared to be very close in several aspects. Some of these include that it was felt that many stocks could fall deeper than they already had. The large increase in stocks reaching new 52 week lows appears to show this is occurring. It appeared possible an increase in divestures by investors could be seen. Recent reports show the largest divestments in mutual funds since 2007 occurred during this 90 trading day period, although to this point the effects of these divestures have been softer than expected. It seemed possible continued economic deterioration could be seen. Many economic indicators both at home and abroad appear to suggest further deterioration has occurred.
Some of the projections were partially correct and they include that it appeared possible that the lower trend line could be retested and support at this trend could fail during this indicator’s early presence. The retest was seen and the trend line support did fail a couple weeks later, although it rebounded quickly after only a short drop below the trend line during that failure. It seemed possible a deeper drop; possibly reaching the lower support line might be seen during that failure. It was also felt that a rebound could be seen after this retreat. Although it was thought this rebound would probably be seen in November and December, the bulk of this rally occurred during the potentially bearish October. It seemed probable that a subsequent drop could again be seen late in this indicator’s presence and the recent retreat appears to fit that portion of the projection.
At that time it did not seem likely the full retreat would be seen before this indicator expired. Is still seems possible this portion of the projection could still hold merit.
Overall the fundamentals of the projection appeared fairly close, but the depth of the retreat was shallower than thought and the rebound in October occurred earlier than expected. Although a drop nearing the lower support line was seen in the most recent retreat, the index has not yet tested the lower support line, as it seemed likely it could. As a result the indicator did not reach the ten percent retreat projection that seemed likely. Even so, the overall projection seemed to have more merits than faults. It is therefore considered mostly correct in this instance.
The (+)/-90 D indicator that became active on Oct 21, 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: +4.50 percent / -7.91 percent / -3.90 percent.
The -2% H indicator had no correct indications during the past week. The index has seen two volatile moves higher without an offsetting move lower and this increases the chances that this offset lower could be seen. The supporting volatility indicators remained in extreme levels. Although several supporting indicators settled slightly lower during the week, they turned higher again with Friday’s volatile session.
The +2% H indicator had another correct indication in the past week. Friday finished with a gain of 2.48 percent and the second volatile rebound in the current retreat. The rebound sent most stocks into overbought conditions, increasing the chances of a volatile offset. Charts and current conditions make it seem possible that a larger retreat could still be in the works.
This presence of the 90 E saw its fifth volatile session during the past week as the S&P 500 rebounded 2.48 percent Friday. Friday’s volatile rebound provided a second significant price direction change as the index finished the session 4.17 percent above the Jan 20 close. The index has also seen two volatile intraday drops that rebounded to finish above volatile levels. One during this indicator’s active period and the other the day before the indicator became active but within the fringe area found within the three days before or after an active period. The current leg down began with a drop on Dec 30, the first day of this fringe period.
The average daily volume slipped 11.07 percent lower from the previous week. Volume was highest on Friday and lowest on Tuesday. The five day volume variance decreased 4.74 percent to finish the week at 26.15 percent. Although volume levels slipped, they continue to hold within bearish levels.
The major world indexes continued to see high levels of volatile activity in the past week. The world indices saw a second consecutive Friday rebound volatilely, but many indices saw retreats leading into these volatile rebounds. Several broke considerably lower before this rebound. Many finished Friday at or in a drop off likely resistances. Continued high levels of volatile conditions are generally a bearish indication. A dead cat bounce was not unexpected.
Overall; the worldwide earnings do not appear to justify current stock prices. Although there are some stellar earnings reports, fewer reports are showing the earnings growth required to push stock prices higher. More and more companies appear to be having earnings problems and participating in cost saving activities that will likely worsen problems.
Most World indices failed to regain earlier highs before turning sharply lower again. Although these downtrends were small in some, most of the World’s indices have been in downtrends lasting over six months. Many have breached earlier lows in recent declines. Most stock and index charts appear to be showing bearish breakdowns or are nearing potential bearish breakdowns.
Since the first of the year the current constituents of the S&P 400 and S&P 500 combined to see 48.00 percent reach new 52 week lows; as 432 constituents reached new 52 week lows. During the same time the indexes combined to see only 4.89 percent reach new 52 week highs; as 44 saw new highs. The high numbers of stocks reaching new 52 week lows is a bearish indication.
The S&P 500 is within the second large retreat from the 100 L at 2100. 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.
Seven of the 11 previous drops below the lower support line 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. Six of these seven previous retreats include: The near crash in 2011 that fell 19.39 percent, the crash in 2007 that fell 56.78 percent, the crash in 2000 that fell 49.15 percent, the near crash in 1998 that fell 19.34 percent, the near crash in 1990 that fell 19.92 percent and the crash in 1987 that fell 33.51 percent.
The 90 E is active and will remain active for an extended time. This active period coincides with a time frame that has historically shown an increased likelihood of volatility. The 90 E indicator’s presence is potentially bearish. Many of the traits commonly seen during its presence are volatile. The indicator has shown seven occurrences of traits that are common during its presence in the first 19 days, five volatile market sessions and two significant price direction changes.
Most stocks have continued to hold within long or short term downtrends. Most of the largest 900 publically traded companies remain within bearish downtrends below their 200 DMA. Many stocks have broken support levels that make larger retreats seem possible.
The beat rate of current earnings projections is very high with over 72 percent beating projected earnings. Yet during the week with the largest number of earnings reports so far, over 50 percent of the S&P 500 constituents reported earnings below those they reported a year ago. Many are also reporting lower revenue, including many that increased year over year earnings. Last year’s fourth quarter was a very poor earnings quarter, making the high numbers missing year ago earnings very concerning. Several that reported earnings better than a year ago, still missed earnings they had in the same quarter two years earlier. Although many continue to blame poor earnings on the Energy Sector constituents, only two Energy Sector constituents have reported so far. Poor earnings are widespread, getting worse and are being seen in every sector.
The indexes again saw volatile rebounds in the past week. Just as earlier volatile retreats increased the chances of an offsetting volatile rebound, the volatile rebounds increases the chances of an offsetting volatile retreat. Many charts have given very bearish indications. These indications are generally seen during deeper retreats than seen to this point.
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. Many earnings reports in the past week included plans for hundreds of millions to billions of dollars of new cost savings. 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. Early reports seem to indicate the numbers reporting quarterly losses could also continue to increase.
Large increases in the numbers of stocks falling to 52 week lows, decreases in the numbers reaching 52 week highs, increasing numbers of indices within crashes, a break lower below the lower trend line and continued retreat, 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 during the New Year, possibly reaching crash potentials.
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 is currently about 56 percent invested long in stocks in his trading accounts, unchanged from the prior week. He reinvested dividends in two issues with the cost of these purchases mostly offset by the sale of one position and dividend payments. He will receive dividend payments from four issues in the coming week and four 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.