Here is the preview of the coming week on the S&P 500 from Traverse City, Michigan.
The S&P 500 closed higher in three of the five trading days this past week, edging slightly higher for the week with a 0.12% and extending the push higher to the seventh consecutive week. Daily moves on the index during the past week were quite small, with the largest move being Tuesday’s close of 2.42 points higher. The index has closed higher in 21 of the past 33 sessions.
A few of the stories involving constituents I found interesting in the past week included:
S&P 500 constituent Constellation Brands Inc. (STZ) rebounded resoundingly from the large retreat it took only a week earlier on renewed hopes of a deal with InBev (BUD) to buy the remaining 50% stake in Modelo’s US import business. Constellation had fallen over 18% when the Department of Justice filed suit in Federal Court to block the previous deal. Constellation agreed to buy one of Modelo’s breweries to address DOJ concerns it would not have pricing control after the acquisition of the import rights. The purchase of the brewery and planned expansion to allow it to produce enough to supply all imports to the US is hoped to appease the DOJ concerns. The stock rebounded over 38% on the news. The deal will give Constellation Brands Inc. full control of Crown Imports, and full US distribution rights to the Mexican beers Modelo and Corona doubling revenues.
S&P 500 constituent Berkshire Hathaway (BRK.B) and 3G Capital announced plans to buy S&P 500 constituent H.J. Heinz Co (HNZ) for $23.2 billion in an all cash deal of $72.50 per share. Including the assumption of debt, the deal is valued at about $28 billion. Much has been made of Berkshire’s recent divestures in stock holdings, particularly in Johnson & Johnson (JNJ) and Proctor & Gamble (PG) but it now looks like these divestures were being made for the purchase of Heinz, and not the bearish annotations that many tied to what was called Warren Buffet divestures. Billionaires (and companies run by billionaires) sell positions all the time and Berkshire did very well with the investments in Johnson & Johnson and Proctor & Gamble that Buffet made. They are just as likely to do well with the purchase of Heinz, even though the purchase price seems a bit high, it is a fair offer to Heinz shareholders.
A couple of the highest yielding dividend stocks of the S&P500, Cenurylink, Inc. (CTL) and Cliffs Natural Resources (CLF), made substantial cuts to their dividends in the past week and these stocks took large pullbacks as a result. The cuts caused some ripple effects in other high yielding stocks in the index. Although several constituents have made cuts in the past year or so, dividend cuts by the constituents remain fairly rare, and several raised dividend payouts in the past week.
Several are beginning to complain the offer for Dell Inc. (DELL) is too low. I tend to agree. The company has over $15 billion in cash which belongs to shareholders, so the purchase offer of $24.5 billion valued the company at about $9.5 Billion. The 44th ranked company in the Fortune 500 (down from 24th in 2011) is worth $9.5 billion? That is less than three years of Dell’s 2012 profits reported in these rankings. The 244th ranked Heinz is valued at $28 billion (including debt). That’s over 28 years of Heinz 2012 profits.
A low ball offer for Dell would be ten times profits, or about $35 billion plus the $15 billion cash for $50 Billion. A reasonable offer would be 15 times profits or about $53 million plus the cash for $68 Billion. The current offer shouldn’t even be considered by shareholders as anything more than a feeler.
Major Stock Market Indexes
The five major stock market indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000, continued to show bullish tendencies in the past week.
The Russell 2000 rebounded from the several touches of the 13 EMA during the previous two weeks to again gap above the 13 EMA in a higher trend in about the same trajectory as it began the year in. The Russell 2000 continues to show the most bullish chart.
The S&P 500 covered one of the remaining two open drop resistances Wednesday, leaving only one between it and new all-time highs. The S&P 500 has moved higher in smaller portions over the past three weeks. This has resulted in a move higher at a slightly lower slope while it has continued to hold firmly above the 13 EMA.
The NASDAQ pushed to new 52 week highs twice this past week, and has begun to trend higher quite a bit above the 13 EMA and is holding course at about the previous slope.
The NYSE continues to work its way through resistance and although it pushed to higher intraday highs during the week, it finished the week lower than it began for the second week in a row. The NYSE chart now appears to be wedging against resistance just short of the 9000 level, and this wedge will likely break in one direction or the other, possibly in the coming week.
The DJIA continues to struggle with resistance at the 14000 level and finished the week slightly lower for the second week. As a result the chart is starting to flatten at the top, however it appears this resistance is weakening as the Dow Jones pushed back above this level and closed at a higher high Tuesday. It fell back below this level later in the week but appears to have rebounded from a higher low. It also continues to narrow the wedge it has been forming on this resistance. The higher high, higher low makes it seem fairly likely this wedge could break higher when it finally gives way.
The current uptrend is reaching a duration that is likely to see a pullback of one to three weeks. Two of the indexes have dropped slightly for two consecutive weeks, while the others continued higher. It is beginning to look like the break of this streak may not produce much of a pullback in the indexes.
Earlier pullbacks to the 13 EMA and subsequent rebounds back into trend in many of the indexes make it look like it may have brought the indexes to the lower level that could be expected at about this point in the run higher. A drop to the lower trend line in the major trend will probably be seen at some point, but it continues to look like it might not occur for a while yet.
The indexes continue to strengthen bullish tendencies and it continues to look likely the indexes could hold in or near overbought for extended timeframes. It also seems possible the indexes will remain trading near the upper trend line and pullbacks could remain light for the time being. Although a couple of the indexes are currently pushing through resistances and have flattened causing a retreat from the upper trend line, a break of these resistances would likely bring them back to or possibly above this trend line. Pullbacks to, near or even above the 13 EMA again appear to be buy signals. A drop to and rebound off the lower trend line in the major trend looks less likely at the current time, although it remains likely it could be seen at some point in the future.
S&P 500 Constituent Charts
The S&P 500 constituents’ charts continue to show most are in strong uptrends with very bullish characteristics. Most of the constituents remain in very bullish moves, riding higher on or above the 13 EMA and many continue to hold in or near overbought for extended periods of time with any drops from these levels rebounding well before reaching fully oversold conditions. Most of the constituents continue to push to higher highs while rebounding from higher lows in any downturns.
During the course of this run several of the constituents have taken very large drops during a session to a few sessions, only to recover the entire drop and move higher a relatively short time later.
Although some of the constituents fell fairly deeply due to earnings that missed expectations or announced dividend cuts in the past week, several moved higher on good earnings or other news and many continue to run higher after good news or reporting better than expected earnings earlier.
A few of the constituents established downtrends in the past week, but some have also broken downtrends. This tradeoff in trends is generally bullish.
The index has seen three weeks of progressively smaller moves higher, and although this could signal the run is exhausting, it has allowed many constituents to fall from highly overbought levels, and into areas that rebounds might be expected. The index has moved higher in a consecutive week run streak that is rare, but nowhere near a record duration.
The pullback to the 13 EMA on the index last week reached levels that were deeper than any seen earlier in the run higher from the last significant drop. That pullback fits a drop that could be expected at about that point in a run higher. Subsequent rebounds from this drop make it look less likely a deeper drop will be seen immediately, although a pullback to the lower trend line is still likely to happen at some point in this run, it seems possible it might be weeks away.
A couple of the indexes have slipped slightly lower in the past couple weeks as they have pushed higher into resistance levels they are currently wedging against. Even though these pullbacks were small, they reached durations that could be expected for a pullback at about this point. These indexes appear to be pushing through these resistances, and it looks possible they could break these wedges higher. Breaks in these wedges are likely to help to carry the S&P 500 higher.
The S&P 500 is also breaking through resistance at the current time, even though I have closed the 1520.27 drop resistance for my record keeping purposes, this resistance has not completely fallen yet. The reasons for closing this drop resistance are explained below. The chances are very high that it will continue higher through this resistance.
The NASDAQ is also pushing higher through resistance seen near the 52 week high it is breaking though. It does not seem unlikely all of these resistances could break concurrently, and this might cause a surge higher on the indexes. It doesn’t seem unlikely many of the indexes could push back to or through the upper trend line and continue to hold a slightly higher trend for some time after these breaks.
Overall the constituent charts continue to look bullish and it continues to seem likely stocks will move higher in the weeks ahead.
The -2% H is currently active. See a more detailed description of the indicators I have developed through my research here.
The relative absence of indicators is generally bullish as it shows a declining chance of volatility.
The -2% H (precautionary), indicator did not provide a correct indication in the past week. The S&P 500 moved above the 1520.27 drop resistance, and the precautionary status was removed from this indicator after Wednesday’s close. The S&P 500 is within the influence of the final drop resistance at 1549.38. This resistance level is untested in the rebound and being so it holds a greater chance of producing a pullback of this proportion. Even though the chances are greater due to this untested drop resistance, most indicators remain very bullish, so it continues to look unlikely that we will see a downward move of 2% or greater in a session.
The 1549.38 drop resistance does look like it could cause a pullback that would probably occur near the upper portions of this resistance level. If this pullback develops, it does not appear this pullback will reach significant levels (that of 3% or greater). If this pullback occurs it is possible it could drop to the lower trend line in the major uptrend from the November lows.
The lower trend line in the major trend is currently over 3% lower than the current price, and even though it seems unlikely the drop will reach significant levels, the current depth of the trend line makes look like it could. A rebound at the trend line is not a certainty, only the most likely support in a pullback. It is not impossible this pullback could break this trend line and fall lower, but it seems extremely unlikely the pullback would exceed 5% if it does.
Even though the trend line is currently deeper than a significant level, a drop to it might not reach significant levels. The gap between the current price and the lower trend line has been narrowing over the past few weeks, as the index has encountered several resistance levels that have combined to slow its accent. It is possible the index could continue to see a slower accent for the time being, further narrowing the gap.
Significant drops are also measured based on closing prices, not intraday highs or lows. My research shows that false signals were present when using intraday highs and lows. This being the case, the total fall could exceed the 3% level; however a strong intraday rebound off this trend line could leave the high and low closing prices under a significant level.
Not all drop resistances cause pullbacks. Even though it seems likely a pullback will be seen at the 1549.38 drop resistance, there is no certainty that this pullback will happen. There are some reasons to doubt this pullback will occur and some have been discussed previously.
The Dow Jones components are also all S&P 500 constituents. The Dow Jones appears to be ready to break the long standing 14000 barrier and a break higher in the Dow Jones would probably pull the S&P 500 higher with it. This would be especially true if the Dow reaches or nears an all-time high in this resistance break.
If the S&P 500 moves more than 1% higher than the 1549.38 drop resistance, it would move outside the normal influence of this resistance and a pullback at this level is no longer likely. The next most likely place a pullback would occur would be between 1575 and 1625 (with the highest probability seen between 1590 and 1610).
Wednesday’s close of 1520.33 covered the 1520.27 drop resistance. For my record keeping purposes I have closed this drop resistance level.
The closing of this resistance level might seem contrary to the above statements of the 1% influence level and that this resistance has not fully been broken in the Constituent Charts section, but there are two reasons this resistance level was closed. The first is a significant drop was seen that was influenced by this resistance, once a drop resistance covers after a significant drop, it is very unlikely the resistance will cause another drop. The second is my record keeping rules, when there are two or more drop resistances active at the same time, as soon as a lower resistance covers, any drops are attributed to the next higher open drop resistance. Although there could be evidence that a drop was caused by an already covered lower resistance, it is impossible to determine for certain which resistance actually caused the drop, so the lower resistance is closed as soon as it covers. Of course any possible influence of the closed resistance would be noted in the drop attributed to the higher level, but to this point, there are none to note.
The cover of the 1520.27 drop resistance was made nine trading days after the second closing price within a half percent of the drop resistance. This was the seventh second failure of the three day rule discussed in last week’s Preview, but none of those seven lasted more than ten trading days before covering the resistance.
The data continues to support a ten trading day timeframe for this indicator therefore I have extended it to ten trading days from the three I originally assigned to it. Again, the three day rule was developed during a market crash, and there are fairly strong reasons for keeping it this duration in crashes, so I might continue to use both depending on the market conditions.
The first half percent rule failure of the 1520.27 drop resistance took the longest of any in the history of the S&P 500 to cover, lasting 1304 trading days after the first close within a half percent of the drop resistance on Dec 10, 2007. Only four failures have taken longer than 100 trading days to recover.
There are many reasons to be bullish at the current time, and it seems fairly likely the trend will continue to be bullish for the foreseeable future, but the index is within the influence of an open drop resistance, so there is reason to show some caution.
The S&P 500 has pushed through the 1515.96 and 1520.27 drop resistances, covering the 1515.96 resistance with the Feb 8 close and the 1520.27 resistance with Wednesday’s close. The index is within the influence of the final drop resistance of 1549.38. It seems most likely that if this level provides a significant or near significant pullback, it will come nearer the upper levels of this resistance, probably around or above 1540.
This resistance holds a higher chance of producing a significant pullback, however historically resistance drops seen in the upper levels when nearing new all-time highs tend to remain fairly shallow. If a significant pullback is seen at this level, it will probably remain less than 5% and might not reach a significant level.
It also seems likely the lower trend line in the major uptrend from the November lows is a very likely rebound point in a drop, based on similar chart patterns. Although patterning charts can be very effective, there is no certainty that a pattern will continue to play out, even though the chances are fairly high that it will.
There has been much written and talked about that the market has run for an extreme duration without a 10% drop. Based on the S&P 500, in 2003 there was not one 10% drop; there were none in 2004, 2005 or 2006 either. There was not a single 10% drop from late December 1990 thru mid-February 1997. Fact is there are many very long periods without a single 10% correction, much longer than we have seen now. The large number of pullbacks that exceeded 10% during the rebound from the March 2009 crash lows appears to be the exceptions, not the norm. Doesn’t mean there won’t be another, only that much of the current talk of 10% drops seems to be very misleading.
Many of these sources of information were used in this article.
Have a great day trading,
Disclosure: I currently have investments in CTL, CLF and DELL. I do not have any investments in STZ, BUD, BRK.B, HNZ, JNJ or PG. I am about 89% invested long in stocks in my trading accounts. Although my investment level was reduced in the past week, it remained at the same level due to rounding. During the past week I purchased two issues with the cost of these purchases more than offset by the proceeds from the sale of four issues and dividend payments. Although I feel I may be slightly oversold at the current time, I am not pressuring buys and will continue to sell issues that reach long or short term targets. I will receive dividend payments from 4 issues in the coming week and 17 in the following week, if I make no further investment changes during this timeframe, these dividend payments will not change my investment level.
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 stock market will do. If the stock market performs as I expect, it only means I am applying the stock 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.