The S&P 500 saw Wednesday close above the upper trend line of the current down trend, but the index slid back into trend as April finished with the month’s largest two consecutive day losses. The index fell briefly to a monthly loss during Friday’s retreat, but rebounded to finish off the session low and post a 0.27 percent gain for the month. The index slipped in three sessions during the past week, finishing the week below the 100 L at 2100 resistance and 1.26 percent lower.
Part of the reason the stock market turned lower late in the week was due to large stock price decreases in companies that beat estimates and reported earnings above those in the year ago quarter, but saw only small earnings growth. Many companies are priced far ahead of earnings and these retreats make it appear investors could be starting to feel some anxiety over the low growth rates. This anxiety could build as the overall projections for second, third and fourth quarter earnings sank during the past week’s reports. Given many companies’ growth forecasts, it seems possible these projections could continue to soften.
The earnings season shifted into high gear during the past week, seeing the largest weekly total of S&P 500 constituents reporting so far. Well over half the constituents have now reported earnings. Although most reports are coming in better than expected, the numbers missing expectations increased considerably during the week’s last two sessions. Although the misses were fairly widespread, several utilities missed expectations as seemed likely earlier. The earnings picture should continue to clarify as more report, but those that have reported so far are seeing earnings expectations for the second half begin to melt away, just as expectations of an earnings rebound in the first half did.
At this point there appears to be good reason to believe these projections could continue to slip lower. Although many companies expect to see improved earnings in the quarters ahead, many of these outlooks are not as bright as they were earlier. Generally speaking, the first quarter’s earnings are the weakest of the year. Improvements over first quarter earnings are normal. Current reports make it seem possible these increases might not be as good as normally seen or as good as currently expected.
Some companies are still doing well, but the overall earnings for the quarter were not very good. About 37.8 percent of the constituents have reported earnings below those they reported in the same quarter a year ago. Those that missed year ago earnings averaged over 38.6 percent lower. Improvements in earnings are expected in the coming two quarters, but compared to the year before these companies are still expected to see double digit percent declines in the second quarter, with current earnings expectations nearly 17.0% lower. The third quarter is also expected to be lower than the prior year, currently projected over 5.6% lower. Data downloads show these projections trended lower in each session of the past week and it seems likely this trend could continue.
These that have beaten the year ago earnings are averaging almost 20 percent higher. However; almost a quarter of the total earnings increase over the year ago level was seen in just one company’s report. Equity Residential (EQR) beat their same quarter of a year ago by $9.27. This large earnings increase was due to the sale of several properties during the quarter and not an increase in repeatable income. Since the profits from these property sales were a onetime increase, they were not really operating earnings although they are currently being reported as such. It is not uncommon for those that generally report operating earnings to later adjust these earnings to reflect the portion that is operating earnings.
The large earnings beat is bitter sweet for Equity’s shareholders, although they were rewarded with an $8 dividend after the sale, as a result of lost income from those sales Equity’s forward earnings are likely to fall about ten percent lower in future quarters. The potential earnings shortfall appears to be reflected in current forward estimates. Being a Real Estate Investment Trust (REIT) which requires a percentage of earnings to be paid in dividends, the expected future earnings drop also appeared to be reflected in about a ten percent decrease in the their last quarterly dividend paid on April 8.
Those that have reported earnings that beat or met year ago earnings are also seeing their overall earnings projections trend lower. They are currently expected to increase year ago earnings by 9.2% in the second quarter and 7.6% in the third quarter. If these companies meet the current expectations, it would break a five consecutive quarter string of overall double digit growth seen in these companies. An indication of further trouble ahead is that overall earnings expectations for these companies fell in each of the next three quarters as the past week’s reports were made.
Another concern in the current quarter’s earnings reports is the growing numbers of companies that saw or continued year over year earnings decreases that included a large portion of those pushing index prices higher earlier. A few of those that were carrying the index higher that saw earnings turn sour included Apple Inc. (AAPL) that saw earnings slide 18.5 percent below those they reported a year ago, American Electric Power (AEP) whose earnings skidded 20.3 percent, AIMCO Properties (AIV) earnings fell 74.1 percent, Boeing (BA) slipped 11.7 percent, Crown Castle (CCI) dropped 67.7 percent and Chipotle Mexican Grille (CMG) reported a quarterly earnings loss leading to a 122.7 percent earnings plummet.
This sample was taken alphabetically with a few notable decreases across sectors. They were all near the top of the list; the full list is long, across all sectors and has many that reported much worse results than those listed above. Many are projecting earnings problems to extend past the current quarter. With fewer and fewer left holding the index up, eventually the weight of those in retreats could drag all lower.
The S&P 500 saw one constituent change names and ticker symbols in the past week. McGraw Hill Financial Inc. (MHFI) changed names and ticker to S&P Global Inc. (SPGI). Once The McGraw-Hill Companies, Inc. (MHP), this is the second name change S&P Global has made in the past few years. Although nothing comes to mind in this instance, some published investment advice specifically warns to avoid companies that change their names frequently without extensively checking their past, as they are often trying to hide a shady past. The current name fits the company better, so it seems likely this was the reason in this case, just the same advice of this sort is made for good reasons.
The S&P 500 and S&P 400 will each see constituent changes after Monday’s close. S&P 500 constituent The ADT Corp. (ADT) is being acquired by Apollo Global Management, LLC. As a result S&P 400 constituent Acuity Brands, Inc. (AYI) will replace ADT in the S&P 500 and S&P 600 constituent ViaSat Inc. (VSAT) will take Acuity’s spot in the S&P 400. Since these changes have not yet been made, they are not reflected in the following data reported, but will be included in any after the changes are made.
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 166 of the S&P 500 constituents. These constituents reported total earnings that were $6.34 higher than they reported the same quarter a year ago. This was a 0.31 percent increase in the index’s total trailing twelve month earnings from a week ago and an average increase of 0.93 percent in those constituents’ TTM earnings. There were 97 constituents that reported earnings greater than the same quarter of a year ago and 65 reported earnings below the year ago quarter. As noted above, this week’s increase was unduly affected by the $9.27 earnings increase of Equity Residential.
Those that have not yet reported first quarter earnings saw a 78 cent reduction in first quarter earnings projections. There were 16 constituents with increases and 44 with decreases.
Those that had already reported first quarter earnings prior to the current week saw second quarter earnings projections slip 61 cents lower. There were 19 constituents that saw estimate increases and 35 had decreases. Although not covered regularly since it is difficult to track and time consuming, earnings in those that reported earnings and changed current quarters to the second quarter during the week saw total estimates fall in each session after reporting during the week. Although results were not captured at the time they were noted and subsequent updates hid the previous sessions results, daily drops were generally larger than the full week results in those that had already reported. A similar trend was noted in third quarter estimates. Although still at a somewhat slower pace, other data sources suggest a fall off in fourth quarter estimates also occurred.
The S&P 500 constituents saw current year earnings projections decrease by $1.01 compared to a week ago. There were 131 constituents that saw their current year projection increase while 143 saw decreases. Three constituents reported fiscal fourth quarter earnings and as a result their current year earnings changed from 2016 to 2017. All three fiscal year earnings changes resulted in relatively small increases that totaled 38 cents.
The S&P 500 saw 165 constituents that finished the week below their 200 DMA, compared to 143 a week ago. There were 204 constituents that finished the week either below their 200 DMA or less than one dollar above it, compared to 183 a week ago. There were 249 constituents that finished the week with a 200 DMA in decline compared to 251 a week ago.
The S&P 500 saw 278 constituents finish the week greater than ten percent below 52 week highs, compared to 262 a week ago. There are 13 constituents that finished the week less than five percent from 52 week lows, compared to five a week ago. There were 39 constituents that saw new 52 week highs while four constituents reached new 52 week lows during the week. The constituents that reached 52 week highs finished the week with an average P/E of 24.83. The average even weighted TTM P/E of the index decreased with the index price and bump in earnings to 19.84.
There were 71 of the S&P 400 constituents that finished Friday beneath their 200 DMA, compared to 119 a week ago. The index finished Friday with 97 constituents either below or less than one dollar above their 200 DMA, compared to 157 a week ago. There were 214 constituents that had a 200 DMA in decline, compared to 219 a week ago.
There were 248 of the S&P 400 constituents that finished the week greater than 10 percent below 52 week highs, compared to 236 a week ago. There were six constituents that finished the week less than five percent from 52 week lows, compared to three a week ago. The mid-caps saw 38 constituents reach new 52 week highs while three fell to new 52 week lows during the past week. The S&P 400 finished the week with an average TTM P/E of 20.19.
The 100 L at 2100, +2% H, -2% H and -90 D indicator are currently active. See a more detailed description of most of the indicators developed through research and featured in these articles here.
Supporting volatility indicators edged further into extreme highs. Bearish volatility on world markets continued to uptick, although not yet at levels seen earlier this year. Volatile retreats started in the Asian markets, but have been spreading to other markets since. Friday finished with nine of the world’s indexes in volatile retreats.
Although the major domestic indexes have not yet seen any volatile moves, an increase in the numbers of domestic stocks seeing volatile sessions has been noted. There has also been a notable increase in socks finishing with very large percentage price moves. Although volatile moves are currently being seen in both price directions, offsetting each other to a certain extent, the heightened presence of volatile sessions in stocks increases the chances a common direction could be found. This makes the potential for volatile index sessions very high.
Average volume increased 3.23% over the prior week’s average volume. Average volumes had increase to and then held fairly steadily within normally bearish levels during the past three weeks. Although volume levels slipped in the first two sessions, the past week’s increase was mainly due to the increased volumes seen during Thursday and Friday’s retreats. The uptick in volume in these sessions is a potentially bearish indication.
Have a great day trading.
Disclosure: Ron has investments in AIV and has no investments in EQR, AAPL, AEP, BA, CCI, MHFI, SPGI, ADT, AYI or VSAT. He is currently about 54 percent invested long in stocks in his trading accounts reflecting no change in his rounded investment level from the prior week. He sold one position in the past week.
The opinions expressed by Ron are his own and may or may not reflect those of byteclay.com. His opinions are the result of many years of data collection, evaluation and extensive research along with his perception of the current conditions and what he thinks is the most probable outcome based on the conditions, data and other variables. This article is not intended to provide investment advice; but instead to provoke thought about investment possibilities. Although several of his forecasts have been very close, 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 historical data to the current conditions correctly. His perception of the data is not always correct and acting on any 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.