Here is the preview of the coming week on the S&P 500 from Traverse City, Michigan.
The S&P 500 edged higher in four of the five trading days this week and finished the week just under a percent higher with a 0.95% gain. The index has closed higher in nine of the past 14 sessions.
Earnings were somewhat mixed this week but overall fairly strong. Of the 38 reports I found the unofficial tallies were: 26 (68.4%) beat, 6 (15.79%) missed and 6 (15.79%) were inline. Friday’s reports were very strong with nine of 10 beating estimates and one reporting inline with estimates. I hope to do a full monthly earnings update next week.
I continue to read that earnings estimates for the fourth quarter dropped from 10% to 2% beginning in October. Let’s look at this a little deeper. This number is a blended earnings growth, which uses the past two quarter’s earnings and the forward two quarters estimates. The third quarter’s earnings came in very much higher than expected as discussed in the earnings reports for October and November, they in fact finished higher than the highest projected earnings collected for the fourth quarter based on the un-weighted operating earnings of the then current constituents.
As also discussed in these reports, the fourth quarter’s projections did decline, but a very large part of the blended growth rate decrease is due to the very large increase in earnings in the third quarter, and not so much the decline in projections. If the third quarter would have come inline with estimates, we would probably be looking at about a 7% increase, instead of 2%. I also noted that it might be difficult for the fourth quarter to match the earnings reported in the third quarter, since they were so much higher than expected. Based on reported earnings to this point and business interconnections that can be drawn from these reports, it looks quite possible they could beat the numbers reported in the third quarter.
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 indexes continue to trade fairly close to the upper trend line, although none are hugging tightly to it and most finished Friday below this level.
The DJIA joined the NYSE, S&P 500 and Russell 2000 in reaching the highest closing price in the past 52 weeks on Friday, although it fell short of the intraday high. It was also the highest closing price on the Dow in the past five years.
I mistakenly noted that the Russell 2000 finished the past week at a five year high when it actually finished the week at an all-time high, which it increased during this past week.
The NASDAQ continues to be slowed by highly weighted stocks, first with a downturn in Apple (APPL) and then Friday being dragged down with investor’s dissatisfaction over the Intel Corp. (INTC) earnings report. Even so the NASDAQ continues to hold fairly tightly to the upper trend line.
Overall the earnings reports were pretty good this past week. Much of what I read was encouraging. Yes some continue to have trouble and lowered guidance, but many of these companies pointed to a brighter second half of the year. Again I noticed companies are pointing to upticks in China and developing countries and again some are looking for Europe to bottom out and begin to rebound, while some seem to be seeing a rebound starting in Europe already.
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. Drops near or even above the 13 EMA are probably buy signals.
S&P 500 Constituent Charts
The S&P 500 constituent’s charts continue to show bullish tendencies with most remaining in strong uptrends.
The constituents continue to run up to multiple top resistances, in both long and short term durations. Several more broke through these resistances in the past week, adding to the many that had breakouts earlier. Most of those that have broken these resistances have continued very strongly higher. This trend looks likely to continue.
Many of the constituents are in uptrends that riding the 13 EMA higher, with some riding above the 13 EMA. This is very bullish.
We continue to see a large number of stocks reaching 52 week highs. In many cases these 52 week highs are also all-time highs. Friday saw 19 of the constituents finish the session at new 52 week highs, 120 closed the week less than 1% from 52 week highs and 266 are 5% or less from 52 Week highs. This shows widespread support from the constituent stocks in this run.
Several of the stocks that looked likely to begin to trend lower earlier, found support and instead rebounded higher in the past week. Of course not all the constituent stocks are in uptrends and not all that looked likely to trend lower changed directions to move higher. Not all of those that bounced higher have broken to a higher high yet, but some did.
Most of the constituent stocks continue to distant themselves from 52 week lows. None finished the Friday session within 1% of 52 week lows, there were two less than 2%, 16 less than 5% and only 37 remain less than 10% from 52 week lows.
Most of the constituents that saw a pullback in the past week had pullbacks that were kept shallow. Most rebounded to a higher high from a higher low.
Overall earnings in the past week were very good, but investors found reason to be cautious in some of those that soundly beat the estimated earnings. Several fell on rehashed news in these reports, on events investors knew, or should have known, would be forthcoming long before these reports were made. Many of these stocks appeared to already be priced to this news and the fall now looks out of place.
Overall the constituent charts continue to look very bullish. It continues to seem likely stocks will move higher in the weeks ahead.
The -2% H (precautionary) and +10E indicators are currently active. See a more detailed description of the indicators I have developed through my research here.
The -2% H (precautionary), indicator did not provide a correct indication in the past week. It continues to look unlikely that we will see a downward move of this proportion in a session.
The 90E expired with Thursday’s close. This indicator is active for 25 trading days, 12 prior to and 12 after the expiration date of a 90D indicator, along with the expiration date. This indicator became active on Dec 12, 2012 and appeared to point to a bullish push higher in stock prices.
The S&P500 closed Dec 11, 2012, the day prior to this indicator becoming active, at 1427.84 and finished Thursday at a five year high of 1480.94 representing a gain of 3.72%. The lowest close on Dec 28, 2012 of 1402.43 was 1.78% lower than the prior close.
The largest drop was from the Dec 18 close of 1446.79 to the Dec 28 close, measuring 3.07%, the only drop making significant levels (that of 3% or greater) during the indicators presence. Drops or rises of significant levels indicate direction changes, so there were two direction changes during the presence of this indicator, the first lower to the Dec 28 close, the last form the Dec 28 close 5.60% higher to the Jan 17, 2013 close. In the past we have seen an increase in significant direction changes on the index while this indicator is present and it is one of the traits of this indicator. These direction changes usually cease after the indicator expires.
The S&P 500 also moved above the highest closing price that the index obtained prior to the pullback from the drop resistances, closing the significant pullback for my record keeping purposes. The close of a significant pullback level nearly allows points to a move above the drop resistance that caused the pullback, and a move higher to the next drop resistance. Not all drop resistances cause significant pullbacks.
Although we won’t know how accurate this indicator is until the S&P500 eventually tops, it would appear that it may have pointed to the beginning of a bullish run higher during the time is was active. This run will likely continue higher until it reaches a higher drop resistance that causes a significant pullback or breaks to a likely pullback level after reaching a new all-time high. Since not all drop resistance cause pullbacks, and there is only one remaining above the 1515.96 and 1520.27 drop resistances, and the data makes me believe these two will act as a single resistance, it seems possible the S&P 500 could be on a run to a new all-time high.
Many of the other indexes like the Russell 2000 and Dow Jones Transports, have already reached new all-time highs. As indexes begin to break to new all-time highs, it tends to increase the push higher in other indexes, so it seems likely others will follow in the weeks ahead. The S&P 500 is less than 100 points from an all-time high. The highest close was 1565.15 on Oct 9, 2007, and intraday high was 1576.09 on Oct 11, 2007.
The +10D indicator expired with the market close on Monday. It was correct in this instance as the index moved over 3% higher during its presence. The +10D finished as follows in the format: highest close / lowest close / final close
+4.97% / 0.00% / +4.87%
Lowest close only considers closes lower than the starting date, if none are lower it is reported as 0.00%.
The S&P 500 broke through the lowest level of resistance from the 1515.96 and 1520.27 drop resistances and continued higher on a metered pace. Although this might indicate a higher level of resistance in these levels than anticipated, it was more likely due to some highly weighted stocks that did not perform very well during the week that sent ripple effects across sector stocks.
Had a couple earnings reports had headlines that read differently, some of these heavily weighted stocks might have performed better and these ripple effects would likely have been higher too. For instance, many of the Intel (INTC) earnings report headlines were “Intel Reports 27% Lower Earnings” or something similar and the stock price dropped substantially. If these headlines were “Intel Beats Earnings and Revenue Estimates on 3% Lower Revenue” as they did, the stock might have run instead of tanked.
The fact is Intel expected an earnings decline, warned of it well in advance and consensus estimates were for a larger drop in earnings than actually occurred. The stock price had already fallen considerably due to the early warnings and was priced for the larger drop in earnings. There really wasn’t anything new in this report, other than filling in some of the details on plans already in progress that are very likely to increase earnings later and better than expected earnings for the quarter.
CEO Stacy Smith also noted that the late release of Windows 8 had an adverse effect on PC sales for the quarter. The release was scheduled during the back to school shopping season which is one of the hottest times for computer sales and caused significant supply shortages as manufactures slackened production prior to the release to reduce Windows 7 computer inventories. There were also significant resupply lag times after the release that further hurt sales. It brings into question whether the lower PC sales during the quarter were really indicative of the market. The headline was the old story and not the news.
Current Cautions
The index broke through the lower levels of the 1515.96 and 1520.27 drop resistances after stalling near the resistance at around 1475 for about a week. It would appear the bulk of the resistance in these drop resistances was in the lower ranges and the push through and above this resistance will likely continue. As expected the index did not push directly through these resistances, but there continues to be very little chance they will cause another significant pullback (one of 3% or greater).
Dig below the headlines, the current atmosphere for earnings reports continues to appear to be biased towards the negative.
Many of these sources of information were used in this article.
Have a great day trading,
ronz
Disclosure: I currently have investments in INTC. I am about 94% invested long in stocks in my trading accounts. I am also short 20 year US Treasuries. During the past week I purchased two issues with the cost of these purchases partially offset by the proceeds from the sale of four issues and dividend payments. Although I sold more issues than I bought, my investment level increased slightly due to the sales being of smaller positions than those that I added. I continue to plan to offset sales with purchases relatively quickly and continue to look at new issues to expand my portfolio. I will receive dividend payments from 3 issues in the coming week and 8 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.
Comments