The S&P 500 saw only two retreats in the past week, but both fell to finishes below the two percent threshold research considers volatile. The first volatile retreat was seen on Wednesday as the index shed 2.50%. That pullback was followed by a fairly strong rebound on Thursday and brought the index to near even for the week, before the second volatile retreat on Friday shed 2.16%. As a result the index dropped 2.17% and fell to a third consecutive weekly loss. It has finished lower in 30 of the past 50 sessions.
Volatile conditions continued in the World markets. Although the past week’s sessions all finished with higher than normal volatility levels, Wednesday saw a marked increase in volatile activity and all the major US indices saw volatile declines. Volatile activity calmed on Thursday before spiking higher again on Friday. Friday’s session saw 44 of the world’s major indices in volatile declines of two percent or greater, while several other indices finished within a tenth of a percent of volatile levels.
Since the beginning of the year China’s Shanghai index has seen volatile conditions increase dramatically, by the sixth session of the year it had matched the four volatile sessions it had during December. The index has seen volatile or near volatile finishes in eight of the first ten sessions of the New Year including losses of 6.86 percent, 7.04 percent, 5.33 percent, 2.42 percent and 3.45 percent. These losses were sandwiched around a volatile rebound of 2.25 percent and two rebounds that finished near volatile levels, both with 1.97 percent gains. The increase in volatile conditions dropped the index to very near the August intraday lows and Friday’s finish fell below the lowest close seen in August. Year to date the index has shed 18.03%. There are three major world indexes with worse year to date totals, but they are also Chinese indexes and each has shed in excess of 20%.
China’s market rebound in August was manufactured with stimulus and trade restrictions, but the rebound fell well short of the highs it began from. Many of the trade restrictions imposed have recently expired and their economy has continued to deteriorate despite further stimulus attempts. Most of China’s stocks are still highly overpriced. A break below this support level could be very bearish for Chinese stocks.
Past failed attempts to stem market collapses have generally resulted in a ceiling resistance being built near the attempted support level once it was breached. Many of those past failures took the index over a decade to break back above this ceiling resistance once it was established. There is no way to tell for certain how China’s market will react; however the potential for gains to be capped near current levels for many years makes Chinese investments seem very risky at this time.
Like China, many of the world’s major indices failed to recapture the highs seen prior to the August retreats before dipping to lower closes in the recent retreat. Many of these indices have fallen back to crash levels. Most world indices have been trending lower off highs for over six months.
The major US Index charts show the indexes continue to show bearish tendencies. Fairly strong rebounds are being countered with stronger retreats. The indexes all saw rebounds during the past week, but all saw volatile session retreats erase these rebounds, leaving the indexes still within steep retreats. Rebounds are also falling well short of the 13 EMA before turning lower again. None of the indexes regained earlier highs they reached prior to the late summer drop before turning sharply lower in the current large retreat. In the week ahead, all of the indexes covered below will have reached downtrends of over six months since they began retreats from those highs.
The S&P 500 had three session gains during the week, but saw two volatile declines erase those gains. The S&P broke to new 52 week lows as Friday’s session low eclipsed the intraday low seen on August 24, 2015. The S&P rebounded to finish the session above the August 25 lowest close, but the retreat gave the index an 8.00 percent loss for the year. It finished Friday 11.76 percent below the May 21 highest close.
The Dow Jones Industrial Average also saw three gains and two volatile retreats that erased those gains. The Dow held above its August lows during the past week’s retreat. It finished the week with an 8.25 percent loss for the year and 12.69 percent below its May 19 highest close.
Although the NASDAQ has yet to reach new 52 week lows, it has finished higher only twice in the past 12 sessions. The NASDAQ has seen four volatile session declines since the New Year and has dropped 10.36 percent this year. The NASDAQ finished Friday 14.00% below its July 20 high. The NASDAQ is likely to see a bearish cross of the 50 EMA below the 200 EMA during Monday’s session.
The New York Stock Exchange saw two of its three yearly gains in the past week, but saw two volatile retreats as it broke to new 52 week lows. The week’s retreat included two volatile session declines. Although the NYSE has only shed 8.32 percent for the year, it has maintained within a deeper downtrend than the indexes above since breaking lower from May highs. As a result the index has shed 17.26 percent from its May 21, 2015 highest close and is less than three percent shy of reaching a crash.
The Russell 2000 has continued in a deep break lower since the beginning of the year. It has dropped in seven of the ten sessions that included three volatile declines in the process of shedding 11.28% so far this year. The Russell has also maintained within a deeper downtrend since breaking from June highs. The past week’s drop gave it the distinction of being the first of the five major US indexes to reach crash potential. The Russell fell in excess of 20 percent below its June 23, 2015 highest close of 1295.80 during a 3.30 percent loss on Wednesday. It finished the week 22.23 percent below the June high.
The indexes are oversold, but it still seems possible they could maintain in or near oversold levels. It is not uncommon for the indexes to remain in or near oversold conditions for over a month in large downturns. It did so last August through September, but has held in or near oversold conditions for much longer periods in the past. The index fell out of overbought in May 2008 and did not return to overbought until April 2009. Although it did not remain fully oversold during this entire time, it did fall to and remain near oversold conditions. It also fell rather deeply during that time.
The indexes have all seen at least three volatile retreats without seeing an offsetting volatile rebound. The multiple drops without an offset dramatically increases the chances a volatile rebound could be seen. Although the chances of this rebound are very high, it does not mean that additional volatile retreats could be seen before or after this rebound.
A volatile rebound is a possibility, yet recent rebounds on the world indices have reversed quickly into stronger moves lower. The recent fairly strong rebounds in the US indices have also been countered with stronger retreats. It seems possible some could play recent lows and oversold conditions as a bottom. This could cause a rebound in stocks, possible even a volatile rebound; however current conditions and chart formations make it seem likely it could result in a dead cat bounce as investor caution levels appear to be increasing.
Weakness was seen in several of the large tech stocks late in the week. The Russell 2000’s larger drop than the other indexes shows a more profound weakness in the small caps during the recent downturn. The data below also shows the mid-caps are reaching new 52 week lows at a higher rate than the large caps. The shedding of tech, small cap and mid cap stocks tends to happen as investors become more cautious with investments.
It seems possible this caution is spilling over into large cap earnings reports. Early fourth quarter reports appear to be showing that simply beating a low earnings estimate might not result in stock prices moving higher like they did earlier. Investors appear to be scrutinizing earnings reports more thoroughly, probably due to recent growth concerns in the world’s leading economies. It appears they may have become more interested in what companies are saying in these reports, than the bottom line. Most reports in the past few quarters gave reasons for concern that appeared to be ignored; it seems possible they might not be ignored this time around. These heightened caution levels give the feeling that a deeper drop could still be brewing.
Just because stock prices have slipped does not make stocks cheap. Stocks were valued to perfect earnings conditions and in many cases unrealistic earnings expectations. Perfect earnings conditions do not exist at this time, many are reporting earnings below the year before, and many are expected to see still lower earnings in the coming year.
The S&P 500 saw a constituent change in the past week. S&P 500 constituent ACE Ltd. (ACE) completed its acquisition of S&P 500 constituent the Chubb Corp. (CB) and after the merger completed, ACE changed names and ticker symbols to Chubb Ltd (CB). As a result of the merger leaving an unfilled space in the index, S&P 400 constituent Extra Space Storage Inc. (EXR) was moved to the S&P 500 after the close of trading on Friday. The S&P 400 saw a total of two constituent changes in the past week. All changes to the indexes in the past week are reflected in the data presented below.
This following earnings update may not include all that reported earnings during the past week and it could include some that reported earlier. Earnings were found for four of the S&P 500 constituents that reported fourth quarter earnings. These constituents reported total earnings that were 17 cents lower than they reported the same quarter a year ago. This represented a 0.01 percent decrease of the index’s total trailing twelve month earnings from those a week ago and an average decrease of 1.35 percent in the TTM earnings of those constituents. One of the constituents reported earnings greater than the same quarter of a year ago, one the same as a year ago and two reported earnings below the same quarter of a year ago.
Earnings season will begin to heat up in the coming week. A much larger number of constituents are expected to report earnings in the coming week. The numbers reporting earnings will increase further in the following two weeks, after which the majority of the S&P 500 constituents will have reported.
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 $2.01. There were 43 constituents that had a fourth quarter projection increase while 107 saw decreases. Those that have already reported fourth quarter earnings prior to the current week saw a 1 cent reduction in first quarter earnings projections. There were three constituents that had an increase and two constituents saw decreases.
The S&P 500 constituents saw current year earnings projections decrease by $1.37 compared to a week ago. There were 46 constituents that saw their current year projection increase while 118 saw decreases. All four constituents that reported earnings in the past week reported their fiscal fourth quarter earnings and as a result all four changed current year earnings to 2016 earnings from 2015. These fiscal year changes are reflected in the data above. The total of this change resulted in earnings that were 8 cents lower than those for 2015. Two saw increases and two saw decreases.
The S&P 500 saw 403 constituents that finished the week below their 200 DMA, up from 391 a week ago. There were 424 constituents that finished the week either below their 200 DMA or less than one dollar above it, up from 409 a week ago. There were 368 constituents that finished the week with a 200 DMA in decline compared to 346 a week ago.
The S&P 500 saw 424 constituents finish the week greater than ten percent below 52 week highs, up from 404 a week ago. There were four constituents that saw new 52 week highs while 173 constituents reached new 52 week lows during the week. There are 189 constituents less than five percent from 52 week lows, compared to 168 a week ago. The stocks that reached 52 week highs during the past week finished the week with an average P/E of 41.73, by far the highest seen to this point. The average even weighted TTM P/E of the index decreased with the index price to 17.79.
There were 344 of the S&P 400 constituents that finished Friday beneath their 200 DMA, compared to 330 a week ago. The index finished Friday with 353 constituents either below or less than one dollar above their 200 DMA, compared to 342 a week ago. There were 313 constituents that had a 200 DMA in decline, compared to 296 a week ago.
There were 353 of the S&P 400 constituents that finished the week greater than 10 percent below 52 week highs compared to 354 a week ago. There were 168 constituents less than five percent from 52 week lows, up from 165 a week ago. The mid-caps saw only one constituent reach new 52 week highs while 173 fell to new 52 week lows during the past week. The S&P 400 finished the week with an average TTM P/E of 18.03.
The high numbers reaching 52 week lows during the past week continue to make it appear that the indexes have broken down. The two indexes combined to see 346 new 52 week lows and only 5 new 52 week highs. Well over a third of the 900 constituents reached new 52 week lows during the past week.
The constituent charts make it appear these numbers could continue to grow. Many of the stocks that fell to new yearly lows look like they are above or have already fractured potential support levels. This makes continued drops to new lows seem likely in many of the stocks that have already reached new 52 week lows. At the same time many others appear to be in breakdowns heading towards new lows.
Overall the charts appear to show potential downside on the two indexes could still be very high. In addition to the stocks that recently broke to new 52 week lows that appear to have additional downside or are in drops heading towards these lows, it appears many of the other stocks trending lower are still quite far above likely rebound points in these drops.
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 continued to push lower in the downturn from the lower half of the 100 L resistance at 2100 during the past week. Friday’s intraday low slipped below the low seen on August 24, but the index rebounded to finish the session above the Aug 25 lowest close.
The S&P 500 opened Monday higher but fell to fill this gap with a low of 1901.10, finding support near the centerline of the 100 L at 1900. It reached a high of 1935.65 before finding resistance between resistance levels and falling to a close of 1923.67 within the upper half resistance of the 100 L at 1900. Tuesday also opened higher, but fell to a low of 1914.35 and found support in the upper half of the 100 L. The index reached a high of 1947.38 before finding resistance in the 1940 to 1955 MRL that sent it lower to a close at 1938.68 between resistance levels. Wednesday again opened higher and pushed to a high of 1950.33 before again finding resistance in the 1940 to 1955 MRL. That resistance sent the index lower until it found support at 1886.41 in the lower half of the 100 L at 1900 and then rebounded to close at 1890.28 within that 100 L resistance. Thursday again opened higher, but it slipped off that high to a low of 1878.93 finding support near the lower boundary of the lower half of the 100 L. It reached a high of 1934.47, again finding resistance between likely resistance levels, before slipping to a finish of 1921.84 in the upper half of the 100 L. Friday gapped lower at the session high of 1916.88 and slid to a low of 1857.83 to find support in the 1850 to 1865 MRL before rebounding back to finish at 1880.33 and within the lower half of the 100 L at 1900.
Friday was the only session to start lower, and the only session that left an open gap. The drop found support within likely support and rebounded fairly strong during the final two hours of trading to finish within a likely resistance level. The open and earlier trading seemed very bearish, but it found support in this drop to rebound into a somewhat bullish finish, although it still finished with a volatile drop.
The S&P 500 left an open gap lower on Friday. The open gap higher on Sept 30 was filled. Gaps lower on July 22, Dec 2, Dec 7, Dec 8, Dec 30, Dec 31, Jan 5 and Jan 6 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 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 / -4.94 percent / -4.94 percent. This indicator will expire in five trading days.
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 / -6.87 percent / -6.87 percent.
The -2% H indicator had two correct indications during the past week. The first was in a 2.50% decline on Wednesday and the second during a 2.16% drop on Friday. Supporting indicators remain in extreme levels and saw increases during the past week. Several of these indicators have reached the highest levels seen since they were developed.
The +2% H indicator did not have a correct indication in the past week. The presence of multiple two percent or greater retreats dramatically increases the chances that an offsetting move higher could be seen. Although chances are high that an offset could be seen, recent rebounds have been met with stronger retreats not only in the US, but on many of the world’s indices. Charts and current conditions make it seem possible that a larger retreat could still be in the works. If a volatile offset higher is seen, it might not be bullish move higher.
The current presence of the 90 E has seen three volatile sessions. The index also saw a significant price direction change. Although the drop began during this indicator’s three day fringe period before activation, it reached significant levels after this indicator became active and has continued much lower. A session that reached volatile levels intraday was also seen during this fringe period.
The average daily volume increased 14.49 percent from the previous week. Volume was highest on Friday and lowest on Monday. The five day volume variance decreased 18.27 percent to finish the week at 18.69 percent. Volume increased with each session during the past week and volume remained in levels generally seen during bearish periods.
A stark increase in volatile conditions was seen across the major world indices after the New Year. Volatility has remained at high to very high levels in the World indices. Volatile conditions continued to be seen on the US indices in the past week. The increase in volatile conditions has sent many of these indices to large losses. Many have reached or returned to crash proportions in these declines.
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 before the recent large turn lower. Many have breached earlier lows in these declines. Most stock and index charts appear to be showing bearish breakdowns or are nearing potential bearish breakdowns.
During the past week the S&P 500 had 34.6 percent of its constituents reach new 52 week lows. The S&P 400 saw 43.25 percent of its constituents reach new 52 week lows. This left 900 of the largest publically traded companies combining to see 38.44% reach new 52 week lows. The indexes combined to see over four times more constituents reach 52 week lows in the past week, than have reached 52 week highs in the past month.
The S&P 500 has seen yet another significant retreat from the 100 L at 2100 and the second large retreat from this resistance. 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.
The S&P 500 broke back below the lower trend line during the previous week’s retreat and slightly deeper than the previous break’s low in the past week. With this retreat, 11 of the last 12 breaks of the lower trend line have seen subsequent dips finish deeper below this trend line. Seven of the 11 previous drops 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 19.34 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 four occurrences of traits that are common during its presence in the first nine days, three volatile market sessions and a large significant price drop.
Most stocks have continued to hold within long or short term downtrends. Bearish activity continues to increase the numbers of the largest 900 publically traded companies within bearish downtrends below their 200 DMA. Many stocks have broken support levels that make larger retreats seem possible.
The fourth quarter earnings will begin to be reported in earnest in the coming week. Most of the S&P 500 constituents will have reported fourth quarter earnings within three weeks. Some of the S&P 500 constituents have already reported earnings. Although the overall beat rates of estimated earnings are very high, several stocks saw large declines after beating estimates. Recent worldwide growth concerns may have increased investor awareness of potentially problems seen within these reports. Many reported problems earlier that appeared to be ignored. The recent heightened scrutiny over wording in these reports makes it seem possible they will not be ignored this time. A large number of the constituents that have not yet reported are seeing fourth quarter projections slip. Several that have not yet reported also warned that earnings will fall short of earlier projections. Conditions make it seem possible forward guidance could continue lower in many companies with the upcoming reports.
The indexes saw rebounds in the past week, but dropped more strongly in the sessions following these rebounds. Several 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. The Standard and Poors Dow Jones Indices reported continued large reductions in dividend increases and increases in dividend cuts or suspensions during the fourth quarter. Howard Silverblatt also projected these decreases to continue in the S&P 500. 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.
Large increases in the numbers of stocks falling to 52 week lows, decreases in the numbers reaching 52 week highs, a break lower below the lower trend line, 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 has no investments in ACE, CB, or EXR. He is currently about 55 percent invested long in stocks in his trading accounts. Although his rounded investment level remained unchanged from the previous week, he purchased one issue and reinvested dividends in two issues with the cost of these purchases partially offset by dividend payments. He will receive dividend payments from six issues in the coming week and seven 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.
The initial evaluations of Ron’s past year’s performance in the previous article pointed to the large cash balance he kept as being somewhat of a hindrance to performance, however further evaluations show otherwise. The initial evaluation was based on the small interest income from cash and lost dividend income from the stocks he sold that would have covered the difference. Chart comparisons of investments and divestments shows holding most stocks he parted with would have increased overall losses. It also shows he was too earlier in repurchasing some of these stocks that were in declines. The more detailed evaluation shows had he been more aggressive in selling stocks near highs and or less aggressive in adding stocks in retreats, he would have easily outperformed the S&P 500 in the past year.
At the same time that investment path went against his earlier plan to maintain a basket of core holdings into a possible downturn. He instead reduced holdings into planned levels and maintained investments near those levels. If a large drop were to develop as it currently looks very likely it could, he will continue along the planned path and add slowly into this downturn.
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.