The S&P 500 saw three session losses during the past week’s holiday shortened trading week. As a result the week finished with a retreat of 0.83 percent. The weekly retreat was the index’s third loss in the past four weeks and it has finished lower in 24 of the past 40 sessions. For the second consecutive year December finished with a loss, as it slipped 1.75 percent lower. The price dip in the final trading week of the year also sent the S&P 500 to a small yearly loss, dropping 0.73 percent below the 2014 finish. It was the first yearly loss on the index since 2011 finished 0.003 percent lower.
The Department of Labor reported that initial claims for unemployment increased drastically during the past week. The weekly report noted that the seasonally adjusted initial claims increased 20,000 from the previous week’s 267,000 to 287,000. The seasonally adjusted average remained near a 42 year low and below the 300,000 threshold many consider an indication of a strong job market. The unadjusted jobless claims, or the real number of people that made new claims for unemployment during the week, has not fared as well. It increased 26,978 to 346,619, and remained above that 300,000 threshold for a fifth consecutive week and also well above the 42 year low.
MasterCard SpendingPulse reported that it estimated retail sales increased by 7.9 percent during the Black Friday to Christmas Eve holiday shopping season. The results make it appear overall sales were helped immensely by online sales, which increased about 20 percent compared to 2014. Although not explicitly stated as so, the report’s wording makes it appear that brick and mortar store sales probably continued to slump. The report noted the holiday season got off to a slow start before finishing more strongly, reflected in only a 4.6 percent year over year sales growth from November to December. This and other reports make it seem possible the late rebound in sales could have been aided by longer and larger price discounts on merchandise along with free shipping or other incentives. Although overall sales may have increased, it appears profit margins may have been tight due to the discounts and added costs. It therefore seems possible the increase may not have resulted in comparable year over year profit increases.
As reported earlier, the S&P 500 saw a decline in third quarter earnings below the year ago quarter on an even weighted basis. This decrease was seen based on the constituents in the index at the time these earnings were reported. However; a recent update completed to the earnings database shows that on a current constituent basis, earnings actually saw a small increase over those a year ago in the third quarter.
A closer look shows this was primarily due to a decrease in earnings seen in the year ago quarter due to fairly large increase in spin-off companies being added over the past year. These spin-off companies did not reported earnings in the year ago quarter and replaced a constituent that did, thereby reducing the year ago total on a same constituent basis. Based on recent earnings of those that have reported since, it seems very likely the entire increase was due to these missed earnings in the year ago quarter.
To a lesser extent, mergers and acquisitions amongst constituents also appeared to increase overall earnings. This was mainly through the addition of a constituent, as most mergers resulted in an overall reduction when compared to the combined earnings of the individual companies of a year earlier. Some of these mergers along with the constituent additions resulted in an overall decrease in earnings. Similar overall decreases in earnings to the index after mergers in the past appears to be an indication that companies could be merging at too high of stock prices.
It was also affected by several underperforming stocks being replaced during the past year as their earnings and stock prices plummeted. This stock price reduction resulted in a market cap that was no longer representative of the large cap stocks, hence leading to their replacement. Many of the stocks that saw price reductions leading to their deletion in the past year were added to the index within the past six years. The three most recent deletions of these fairly new additions include Noble Corp. (NE), Joy Global Inc. (JOY) and the soon to be deleted Fossil, Inc. (FOSL). All three were deleted within the past six months and all saw their stock price fall in excess of 70% prior to exclusion.
The recent increase in deletions of fairly new additions led to further research. The database held on additions and deletions shows that deletions of new additions are fairly common within the first six years after being added, although some have lasted ten years or more before being deleted. Not all new additions are met with eventual deletion, but the data seems to indicate those that were added due to market capitalization increases have a far greater chance of eventually being deleted due to a later reduction in market capitalization.
Barring other circumstances that lead to a higher market cap stock being deleted, the lowest market cap stocks in the S&P 500 are usually targeted to make room for a higher cap stock addition. Although exceptions are seen, in bullish times the deleted stocks are often seeing rising stock prices or are in relatively minor declines. The last deletion in 2014 due to market capitalization was Bemis Company, Inc. (BMS), which was less than 10% from all-time highs when replaced and continued to new highs after being replaced. All nine deletions of the lowest market cap stocks announced in the past year were stocks in large price declines and all but one had seen over a 40% price reduction from relatively recent highs prior to being replaced. One of the nine announced changes will not be made until after the New Year. The eight replacements that were made in 2015 have all fallen lower since being replaced. Although inconclusive, as this database does not extend to the beginning of the S&P 500, the data available appears to show that the rates of deletion of stocks in large price declines that resulted in large market cap reductions often increase prior to and during large retreats on the index. This makes the past year’s replacement data appear very bearish.
During the year the S&P 500 announced 28 constituent changes resulting in 5.6 percent turnover rate, with all but one of these changes occurring during 2015. The last change announced in 2015 will see Fossil, Inc. (FOSL) replaced by Willis Group Holdings PLC (NYSE:WSH) in the S&P 500 after the close of the first session of the New Year on Monday. Willis Group is merging with S&P 400 constituent Towers Watson & Co. (TW) and after the deal is completed, they will change names and ticker symbol to Willis Towers Watson PLC (WLTW). Due to nearly a $100 stock price reduction resulting in a reduced market cap that is now more representative of the mid-cap index, Fossil will take the place of Towers Watson in the S&P 400. Although these changes have not yet been made, they are reflected in the data presented below.
No earnings were found for S&P 500 constituents that reported fourth quarter earnings in the past week.
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 13 cents. There were 9 constituents that had a fourth quarter projection increase while 25 saw decreases. Those that have already reported fourth quarter earnings saw a 5 cent reduction in first quarter earnings projections. There were no increases and three constituents saw decreases.
The S&P 500 constituents saw current year earnings projections decrease by 30 cents compared to a week ago. There were 31 constituents that saw their current year projection increase while 29 saw decreases.
The S&P 500 saw 287 constituents that finished the week below their 200 DMA, up from the 281 seen in the finish a week ago. There were 314 constituents that finished the week either below their 200 DMA or less than one dollar above it, up from 304 a week ago. There were 281 constituents that finished the week with a 200 DMA in decline compared to 300 a week ago.
The S&P 500 saw 314 constituents finish the week greater than ten percent below 52 week highs, up from 307 a week ago. There were 33 constituents that saw new 52 week highs while only 2 constituents reached new 52 week lows during the week. There are 57 constituents that are less than five percent from 52 week lows, compared to 29 a week ago. The stocks that reached 52 week highs during the past week finished the week with an average P/E of 30.72, the highest seen since tracking began in these articles. The average even weighted TTM P/E of the index decreased with the index price to 19.29.
There were 265 of the S&P 400 constituents that finished Friday beneath their 200 DMA, compared to 251 a week ago. The index finished Friday with 295 constituents either below or less than one dollar above their 200 DMA, compared to 281 a week ago. There were 246 constituents that had a 200 DMA in decline, compared to 251 a week ago.
There were 295 of the S&P 400 constituents that finished the week greater than 10 percent below 52 week highs compared to 272 a week ago. The mid-caps saw 19 constituents reach new 52 week highs while only 6 fell to new 52 week lows during the past week. The S&P 400 finished the week with an average TTM P/E of 19.63.
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, and (+)/- 90 D indicators are currently active. The 90 E will reactivate on Tuesday. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The S&P 500 saw Monday’s session open lower at the session high and fall into the 2035 to 2055 MRL before rebounding at the session low of 2044.20 and finishing slightly above that MRL at 2056.50. Tuesday opened higher covering Monday’s gap lower. It continued higher into the lower half of the 100 L at 2100, but fell short of the likely resistance from 2085 to 2100 at the session high of 2081.56, before falling to a close near the 2075 lower boundary of the 100 L at 2078.36. Wednesday opened lower at the session high and slipped to a finish below the 2065 to 2070 MRL at 2063.36. Thursday opened lower but rebounded to partial cover that gap before falling to a finish within the 2035 to 2055 MRL at 2043.94.
The S&P 500 left an open gap lower on Wednesday and Thursday. Gaps lower on July 22, Dec 2, Dec 7 and Dec 8 remain open along with a gap higher on Sept 30, Dec 21 and Dec 23. 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 / +3.33 percent. This indicator will begin its expiration period on Tuesday and activate the 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 / +1.24 percent.
The -2% H and +2% H indicators saw no correct indications in the past week. These indicators returned to a high level of probability due to the upcoming reactivation of the 90 E. Most supporting indicators remain in extreme levels; although some eased slightly during the past week.
The average daily volume slid 17.41 percent from the previous week. Volume was highest on Thursday and lowest on Wednesday. The five day volume variance decreased 285.28 percent to finish the week at 88.07 percent. Volume levels were affected by the low volumes normally seen during the sessions between Christmas and New Year. The five day volume variance fell from the extremely high levels seen in the previous week, but remained elevated due to the shortened trading session seen on Christmas Eve. Volume levels remained in what are considered more bullish levels during the past week; however this drop off in volume appears to be largely seasonal.
The 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 and remain active for an extended time. The 90 E indicator’s presence is potentially bearish. Many of the traits commonly seen during its presence are volatile. It will also 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. This potentially bearish period with a potentially bearish indicator active, will begin with nearly 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 in recent weeks. Although the past week saw a large drop off in numbers reaching new 52 week lows, there was an increase in those nearing new 52 week lows. Many that have rebounded from previous trips to 52 week lows appear to be falling to retest these lows. Many shattered strong major support levels in earlier retreats and rebounded at weaker minor support levels. Many broke minor supports levels in subsequent retreats before rebounding again, but few reached a likely strong support in these retreats. These rebound points are still vulnerable to failure 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 reported, have warned that earnings will fall short of earlier projections.
The index charts were showing potential breakdowns during early in the month, but the charts appear to be inconclusive as to whether this breakdown is continuing. Most have are showing short term indications that this failure might not continue, however these indications were weak and unconvincing.
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 during the New 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 currently has investments in JOY and BMS but has no current investments in NE, FOSL, WSH, TW or WLTW. He is currently about 56 percent invested long in stocks in his trading accounts. The investment level decrease in comparison to the prior week was the result of dividend reinvestments in two issues with the costs of these purchases more than fully offset by the sale of two issues, dividend payments and cash in lieu of partial shares due to spinoffs. He will receive dividend payments from 16 issues in the coming week and 11 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 exited his remaining Mutual Fund investments in his 401K during the past week. The move resulted in a present allocation of 85% in stable value funds with the remaining 15% invested in company stock. He continues to hold an open order on company stock with a target price below the most recent lows. The percentage value of this potential purchase is close to but slightly greater than his most recent divestment in Mutual Funds. At this point he intends to hold this order open until it fills or expires; however as with all his investments due to his later perception of company performance, news and or economic conditions he may cancel or adjust this order accordingly.
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.