Here is the preview of the coming week on the S&P500 from Traverse City, Michigan.
The S&P500 saw two small gains, two small losses and a large drop Tuesday. The four days with small moves nearly offset, so Tuesday’s fall resulted in most of the 1.48% loss for the week.
Overall the earnings of the S&P500 constituents this week were very strong, putting the S&P500 on trek to set a new quarterly earnings record based on the un-weighted operating earnings of the current constituents. The many that reported better than expected earnings this week were overshadowed by a few of the heavy watched that did not meet expectations, including the earnings miss by Apple (AAPL).
Major Market Indexes
All five of the major stock market indexes continued to show bearishness during the week.
The S&P500 has a pair of lower highs and lower lows, but still doesn’t appear to have established a downtrend channel. Although the drop over the past six days took it to its deepest level so far, this chart still appears to be in a sideway pattern. The S&P500 appears to have found support, and it is deeply oversold.
The DJIA chart looks much like the S&P500; it is without an established downtrend channel that gives it a sideway pattern appearance, it took a deeper drop that appears to have found support, and is deeply oversold.
The NYSE chart continued to fall from the higher high it established in the last up cycle after a subdued rebound at apparent support Monday, resulting in a move to a lower low. This chart too looks like a sideway run, looks to have found support and is deeply oversold.
The NASDAQ spent the entire week hugging the lower trend line in the current downtrend, although it saw increases in three of the five trading days, it failed to rebound much. It has fallen the deepest of any of the indexes to this point, but did not fall as deeply as most of the other indexes during the past week. It appears the NASDAQ could be finding support at the tops of the sideway pattern it held last summer and is deeply oversold.
The Russell 2000 also held the apparent support it found Friday the following Monday, but slipped deeper Tuesday. It spent much of the past week near the lower trend line in the current downtrend, but may have found support in the fall Tuesday, as the low has held up since. It too is oversold.
All of these charts appear to have found support, and all are oversold. It seems likely we could see a bounce higher in the week ahead.
S&P500 Constituent Charts
The constituent charts appear to have lost much of the bullish luster seen in the previous week’s charts. Many of the breakouts seen in the previous week did not provide continuation moves and many fell from these highs, although most held above the breakout level and appear to be finding support they could rebound from.
More of the constituents appeared to have breached lower trend lines in uptrends they were in this past week, than at any point in this rebound so far. At the same time many that broke these trends did so in Tuesday’s fall, but most did not continue much lower and appear to have found support in these drops. Breaches of lower trend lines do not allows indicate trend reversals. Stocks often rebound from these setbacks or begin to trade sideways.
The charts also shows that a high number of the constituents are trading lower together, a setback to the initial signs that a breakup of the unison trading pattern was occurring in the previous week.
Although the charts have lost much of the bullishness seen in the previous week, the overall appearance is not yet bearish.
Many of the constituents have continued in established uptrends.
Although the numbers were not as high as the week before, some constituent stocks broke above resistance in the past week, several of these did so on Friday. It seems likely many of these could begin to trend higher after these resistance breaks, replacing some of those that might trend lower after breaking the lower trend line of their uptrends.
Many of those that were in long downtrends appear to have flattened or began to round out of these trends in the past week. Although many of these stocks have not yet broken their downtrends, it is seems fairly likely some could also begin to trend higher, replacing others that appear to have broken uptrends.
Many of the constituents are deeply oversold and many appear to be at support levels.
Although the news continues to ignore it, many of the constituents are breaking earnings records. Many of those that are not breaking earnings records have record levels of booked orders, record sales levels, record profit margins, etc.
We are entering a time period that has historically been the most bullish part of the year.
Overall it still seems likely the constituents could continue to trend higher in the weeks ahead.
The +90 day, -2% L (precautionary), +2% L and +2% P indicators are currently active. The current pullback on the S&P500 began just shy of the lower ranges of both the 1515.96 and 1520.27 drop resistances. See a more detailed description of the indicators I have developed through my research here.
The -2% L (precautionary) indicator did not provide a correct indication in the past week. This indicator will remain active during the time the index is within or near the influence of the drop resistances, however it seems possible this indicator could expire without incidence.
The +2% L activated during the past week as the current market conditions favor a move of these proportions. This indicator will toggle on and off during periods that favor a daily move of this proportion due to the presence of the +2% P. The +2% P indicates it is more likely the next 2% or greater move will be higher than it is it will be lower.
The +90 day indicator that became active on Aug 20, 2012 has performed as follows to this point in the format: highest close / lowest close / last close.
+3.36% / -1.32% / -0.44%
The indicator weakened somewhat during the past week however it continues to show an overall bullish reading.
The +10 D indicator is near a high state. A high toggle of this indicator suggests that a move in excess of 3% is likely within the next ten trading days. This indicator may or may not toggle high, but near toggles of this indicator are often bullish.
Despite many indicators pointing to this as a very unlikely event, the pullback from the Sept 14, 2012 close of 1465.77 reached a significant level (that of 3% or greater) with the drop on Tuesday. The current low in the pullback was Wednesday’s close of 1408.75 and 4.05% lower than the Sept 14 high. In this instance these indicators failed to provide the expected outcome.
Although this pullback began very near the lowest levels of the drop resistances, it is the first significant pullback in the rebound from the March 2009 lows that did begin within a drop resistance, or after a fall from a drop resistance and before recovering the highs from the initial pullback from a drop resistance. In this instance this indicator failed to provide the expected outcome.
We are entering into a period that has been historically very bullish, averaging over 40% of the total yearly gains.
The index began the recent pullback near the lower levels of the drop resistances at 1515.96 and 1520.27. Pullbacks from drop resistance levels (or in this case very near a drop resistance) have historically been shallow when this close to recovering the previous highs from a crash. It seems possible this drop may have already reached its lowest levels.
The resistance at the remaining drop resistances would appear to be relatively light, and the current pullback could have lessened this resistance as it may have scared many that held funds for a rebound to this level out in this pullback.
Despite the continued hype of poor earnings, based on the un-weighed operating earnings of the current constituents, the S&P500 companies are well on the way to another record earnings quarter. Estimates at the beginning of the quarter were for earnings to fall short of last quarter’s record earnings, but those estimates have been increasing over the past month, and so has the number of companies beating the estimates.
Of the 269 S&P500 constituents I found earnings for in this month’s earnings update, 62% beat the estimates, 11% reported earnings that matched the estimates, and 27% missed the estimated earnings.
These aren’t the low bar powder puff easy to beat estimates the news continues to make them out to be, these estimates have increased substantially since the beginning of the quarter. They are at record levels and many companies are beating them. Even some of those that are missing the earnings estimates are still reporting record earnings.
There have been some disappointing earnings, there have been some earnings warnings, and there have been some reductions in forward guidance, but earnings are at record levels and most of the guidance reductions do not call for huge decreases. Overall it looks likely the constituents will continue to report new quarterly earnings records for at least the next two quarters.
It looks to me that about 30% of the companies aren’t performing up to expectations, but less than 5% aren’t doing well with earnings. Does the market fall further on the less than 5% that aren’t doing well?
Many continue to point to the top line estimate misses. I find it pretty easy to overlook the top line estimate misses when the bottom line is a record. Top line misses with the bottom line at record levels shows that when the top line comes back up, and it will, the bottom line has a lot higher to go. Revenues are way higher than in 2007, but the S&P500 is priced way lower, so I just don’t think the top line is worth worrying much over.
Others point out that companies are buying back shares, but a lot of companies sold shares into the downturn too. Some issued a third or more of their total outstanding shares. Companies also issued shares in mergers and acquisitions along with many splits. There are still way more shares out than there was in 2007, yet per share earnings are much higher, what does that say?
Stock buybacks are not the reason earnings are at record levels. Earnings are at records because revenues are higher, earnings are at records because costs are lower and earnings are at records because profit margins are higher. But they had to be to get to record earnings levels to begin with; there is a much higher base share balance.
I hope to publish this month’s earnings updates early in the coming week.
Europe is slowing, and much is being made of drops in exports or production of US operations there. The US imports more from Europe than it exports. If the US makes more of what it imports here instead of there, in the long run the US GDP goes higher (it beat estimated growth rates in Friday’s report). Many companies are seeing their European operations as detrimental to business and this move could be starting to heat up.
Many US companies are announcing plans to pull up stakes in Europe reducing operations and closing plants, and some of these stakes are likely to be reset in the US, as they continue to have strong earnings growth here. Some of these operations contained product that was made in Europe and imported and sold in the US.
Not so good for Europe, but probably not as bad for the US as many believe. The slowdown in Europe is not all bad news, well maybe it is for Europe.
The idiot leaders there still haven’t figured out that austerity was a poison pill. They didn’t increase taxes on businesses or the rich, cut jobs, wages and benefits to the workers to improve the business climate, and the business climate is falling apart because they stripped this income and then taxed the middle class into poverty.
Much of the lower classes in austerity stricken Europe can’t buy food or pay for shelter, how are they going to buy anything else? With the low sales, these businesses are now leaving and taking with them the production they sent elsewhere, including back to the States. The result of all this austerity has proven to do two things; increase the unemployment rate and balloon the debt it was supposed to reduce.
Many continued to think they are on the right path, and continue to preach the masses will be better off in the long run if they stay the course. That was when it wasn’t hitting the home economies.
Many of the recently announced operations reductions and plant closings are scheduled for Germany. They are no longer immune to effects the cuts and increased taxes to the middle classes of other countries have caused and that they had taken such a hard line to defend.
Eventually Europe’s leaders might see their mistake, or they might wait for the masses to show them they were wrong. In either case things will probably get better there, at least for all except those that perished in the civil war, if it comes to that.
Much of Romney’s plans to fix the US debt problem sound very much like what did not work in Europe.
The republican plan so far has been very clear, cut taxes at a disproportionally higher level to the rich, and then shift nearly the entire burden to the middle class through increased taxes and cuts to middle class jobs, pay and benefits to pay for these tax reductions. It has been; give the middle class a dollar tax cut, then take three back with small increases in dozens of taxes someplace else.
The tax cuts to the wealthy eliminated over 1 million public service jobs (police, fire, schools, social services, road maintenance, etc.) and cut wages and benefits for many of those remaining, and the vast majority of these cuts were to jobs with pay of less than $50,000 a year.
I don’t like everything about Obama. I think he was too slow at allowing the tax breaks to the wealthy to expire. It could have saved hundreds of thousands of jobs that were cut due to lack of funding during his four years.
Romney’s plan is to increase the tax cuts, and eliminate more jobs through attrition to pay for them, but these jobs are still lost from the labor force. As soon as one retires, quits or is fired, the job leaves with them and is not refilled. It is just a slower erosion of workforces than layoffs are. His plans to create jobs are to allow the pipeline and more oil drilling. These are temporary jobs that won’t even cover the permanent job degradation his plan will create.
I think that there are many flaws in Obama Care, but they can be fixed without repealing the law and the good things it does do. I don’t like much about Dodd/Frank, but it can be fixed without repealing the law and the protections it does provide.
The Republican plan is to repeal these laws, and start over. The alternatives to Obama Care he favors have most reputable defenders of the middle class, like AARP, saying they believe these plans are likely to falter in the long run and could leave many without health insurance or under insured after they retire.
Both have the misconception that decreasing taxes to businesses will increase job growth, but I have found no data to support these claims. Fact is the data I have studied would indicate the exact opposite. Look at Europe.
Both say that signing more free trade agreements will increase exports and they point to the past increases in exports after free trade agreements as proof. The past data is proof these trade agreements do not work. Yes exports increased after these free trade agreements, but at about the same rate they had been before the free trade agreements were signed. The problem is these free trade agreements saw imports continue to grow at over two fold the pace of exports. It has caused the trade deficit to explode since George Bush went on a free trade signing binge.
It has also caused over 10 million jobs to leave the US as it opened many lower cost labor markets to US company exploitation. McDonald’s even considered replacing the drive through window attendant with operators in India. That is minimum wage job with no benefits, believe me the 10 million job loss figure is probably way low.
There are other things I don’t like about Obama, but I just can’t see Romney doing any better. It looks to me his plans are the same as every other Republican plan, they will make things worse for the majority of Americans, but better for the top 2%.
Historically speaking, Republicans haven’t been good for the stock market, they have 7 of the 9 crashes since 1953, and all of those greater than 30% since 1929. See my Presidents of the S&P500 article for more interesting data about the Presidents from 1953 to present along with a slideshow of my charts.
Many of these sources of information were used in this article.
Have a great day trading,
Disclosure: I have no investments in AAPL. I am currently about 92% invested long in stocks in my trading accounts. I am also short 20 year US Treasuries. The change in my investment level was due to the purchase of two issues with the cost of this purchase partially offset by dividend payments. I continue to plan to offset sales with purchases relatively quickly. I will receive dividend payments from 9 issues in the coming week and 3 in the following week. These cash payments will not change my investment level unless I make additional changes.
Disclaimer: What I provide in the Stock Market Preview is my perception of the current conditions and what I think is the most probable outcome based on the current conditions, the data I have collected and the extensive research I have done into this data along with other variables. It is intended to provoke thought of the possible market direction in my readers, not foretell the future. I do not claim to know what the market will do. If the market performs as I expect, it only means I am applying the market history to the current conditions correctly. My perception of the data is not always correct.
This article is intended 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.