Here is the preview of the coming week on the S&P 500 from Traverse City, Michigan.
The stock market was closed Monday due to the Martin Luther King holiday. The S&P 500 closed higher in all four trading days finishing the week with a 1.14% gain. The index has closed higher in 13 of the past 18 sessions and it has also increased for four consecutive weeks.
Friday’s close of 1502.96 was the first close above the 1500 level since the Dec 10, 2007 close of 1515.96.
The holiday shortened week was not short of earnings reports. I found 85 of the S&P 500 constituents’ reported earnings for the week. The tick count shows the constituent earnings were again very good this past week.
The unofficial tick count shows the beat rate above 70% for the week. Most of those that were beating the current estimates were beating well above the 2% projected growth rate for the quarter, and nearly half of those that reported beat the estimates by double digit percentages, one in triple digits and one, Teradyne Inc. (TER), reported a quadruple digit beat with reported earnings 1300% above the estimates.
Most that did not beat the estimates, missed, but it left less than 30% missed the estimates. Generally those that are missing were missing by small percentages and amounts, with about a quarter of the misses being of double digit percentages.
I had hoped to do a full earnings update this weekend, but had an increase in hours at work this week, and to this point I have not been able to start. I also hoped to publish these reports during the coming week, but due to the extra work hours, these reports might be delayed if I am able to complete the update this weekend.
I continue to hear companies say they are seeing signs that the downslide in Europe is bottoming in their conference calls and in some cases rebounding. I am not seeing this only in the constituent reports I have read or listened to but also of those that are not constituents. Many that have not already seen this rebound continue to look for it in the second half of this year, but some have already seen a bottom and expect increases to begin in two to three months. Many of those that have seen these bottoms or rebounds are “leading indicator” companies, those that will generally see sales increases first. This makes it look likely the rebound in Europe will continue to develop.
It has been noted in past articles that many companies were offsetting all or most of the losses seen in Europe elsewhere, with record sales to these other regions. Many of these companies continued to report record earnings, despite the European slowdown. As Europe rebounds, these companies are likely to do very well. Europe is not likely to skyrocket off the bottom in the coming year, but the rebound from their economic wreck will likely last many years, giving the potential for increased earnings for some time to come.
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 close to the upper trend line, with the exception of the Dow Jones Industrial Average, which pushed above the upper trend line. The DJIA staged a catch up rally in the past week, after finishing last Friday at a new 52 week high, it pushed higher in a very steep four day run. This run has brought the DJIA chart to comparable levels above previous highs to those seen on the S&P 500 chart.
The NYSE and Russell 2000 continue to have the most bullish charts and both continue to trade within a very narrow bandwidth in the push higher. Both of these charts have been trading in a steep uptrend for the past four weeks.
Meanwhile the NASDAQ had another Apple (AAPL) moment this past week. Investors looked past the record sales, near record profits and earnings beat when Apple reported and instead focused on a perception that Apple’s growth is waning due to a miss on very high sales projections, and it sent shares plummeting. The highly weighted Apple’s large share price drop sent the NASDAQ lower for the day, although it has rebounded somewhat since and continues to trade fairly closely to the upper trend line. It still seems likely the NASDAQ will eventually mount a catch up rally of its own.
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
Many of the S&P 500 constituents’ charts continue to show strong uptrends and very bullish characteristics.
Many of the constituents are riding the 13 EMA higher. Many continue to push to higher highs and return to these higher pushes from higher lows.
The constituents continue to break resistances and many have taken very steep moves higher after these resistance breaks. As these resistance breaks are made, a new batch of constituents advance into resistance levels renewing the potential for breakouts. Given the overall bullishness of earnings reports, it appears likely these resistance breaks will continue in the weeks ahead.
Several of the constituents made strong rebounds to break downtrends in the past week. They have not yet established uptrends but it seems likely they could.
Although the pullback Apple saw limited upside on the index Thursday, overall the constituent stocks had favorable price moves, offsetting the large downslide in the highly weighted Apple and the S&P500 finished $0.01 higher for the day.
Overall earnings in the past week were again very good, but investors again found reason to be cautious in some of those that soundly beat the estimated earnings and also sold off fairly heavily in some that missed on projections.
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. The +10E will expire on Tuesday. 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. It continues to look unlikely that we will see a downward move of this proportion in a session. This indicator will continue in the precautionary state until the S&P 500 moves above the 1515.96 and 1520.27 drop resistances, at that time the precautionary status will be removed and it will become a normal -2% H. The reason being the index will be within the influence of the next higher drop resistance at 1549.38 and although it seems likely this resistance will not increase volatility or cause a significant pullback, it is an untested drop resistance and being so it holds a higher likelihood that a drop of this proportion could happen.
The indexes continue to hold near overbought levels. Although a pullback is not unlikely, the majority of initial runs that trade closely to the upper trend line last six weeks. Some are shorter and some are longer. Chances are fairly good that if we see a pullback, it will probably remain shallow for at least two more weeks.
You might be thinking, initial run? We have been pushing higher since Nov. 16. This is true, but we had a direction change lower with the significant drop of 3.07% between Dec 18 and 28 making this the initial run in the direction change higher. The 3% level is significant not because of its depth, but because of the way the market often reacts to moves of these proportions.
Treasury prices also rebounded to the upper trend line in their current downtrend before breaking lower Friday. It seems fairly likely they will break to a lower low continuing the current down trend. Treasury prices often move opposite of stock prices, as many investors tend to swap investments between treasuries and stocks. Although treasuries trended higher with stocks for a short time, the push lower here is an indication stocks prices are probably moving higher still, as those that bought treasuries for a short term uptrend return to stocks as treasuries move lower. Based on timing patterns, it seems fairly likely treasuries would probably hit the lower trend line in about two weeks.
If the index actually moves higher for two more weeks in this run, it seems fairly likely the index could be near the upper band of the 1549.38 resistance. Runs like those we are seeing now most often continue higher, but around the six week duration, they often pullback for one to three weeks. This pullback is normally larger than those seen in the weeks during the run and often falls to, near or slightly below the lower trend line of the uptrend before rebounding higher again. The lower trend line in the major uptrend from November lows is nearly 3% lower at the current time.
Although the 1515.96 and 1520.27 drop resistances caused a pullback larger than most seen this near a rebound to new all-time highs, it does not seem likely the 1549.38 drop resistance will do the same.
Many of the constituents are trading below even value on TTM earnings based on historical P/E, while relatively few are trading to even value on twelve month forward earnings, which is where stocks normally trade during rebounds. Most fund managers consider stocks to be fairly valued, with few having a perception of overvalue. Many of the investment worries that have held stocks undervalue have subsided. These factors should continue to give lift to stock prices.
Earnings continue to be very good, and although there are some misses most of the misses are small, while most that are beating are doing so quite a bit higher than projections. Of course some companies are warning of lower earnings, at the same time many others are pointing to the initial signs of a rebound. Several of the other indexes have already moved to new all-time highs, and this tends to help push others that are near new all-time highs, up to these highs.
It seems fairly likely we will see the index move higher for two or more weeks, before we see a pullback on the index to the lower trend line. Of course this is not a certainty, only conjecture based on current conditions and what happens most of the time. If this pullback occurs, it will probably be a good time to add.
The +10E indicator will expire with the market close on Tuesday. This indicator shows when there is a high likelihood there will be a continuation rally after a +10D indicator expires. To this point the index has moved 2.19% higher during the time it has been active. The expiration of this indicator does not mean the run is spent, these ten days show the potential strength for the move to continue past the initial burst higher. Many times the run continues for months after this indicator expires.
Current Cautions
The S&P 500 has pushed steadily higher into the 1515.96 and 1520.27 drop resistances. 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. There continues to be very little chance they will cause another significant pullback (one of 3% or greater).
The index will move into the influence of the final drop resistance at 1549.38 as it pushes through the 1515.96 and 1520.27 drop resistances. Current timing patterns suggest a pullback could be seen near the upper levels of the 1549.38 resistance. It seems fairly likely this pullback could rebound off the lower trend line of the current uptrend. The lower trend line is currently about 3% lower than Friday’s closing price, and within normal levels seen at drop resistances this near to fully recovering from a crash. If this pullback develops, it will probably be a good time to add.
Comments
I think the fall in Apple (AAPL) was way over done. They had record sales, they posted near record profit, and even with lowered earnings projections they will likely continue to post record TTM earnings through the coming year. The stock was trading well below value before it tanked and they pay a reasonable dividend.
I think one reason the share price tanked as far as it did is perception. The $440 share price looks expensive even though it isn’t and the high share price makes the downside potential look huge. If AAPL had split ten for one I believe the perception would be quite different. If Apple had fallen from $70 to $44 instead of $700 to $440, the downside potential would be perceived as much smaller at $44.
The share price also limits those that will invest in the stock. I would be adding at $44, but I won’t touch it at $440. I would much rather own 10 stocks trading at $44 than one trading at $440. I only trade in stocks I already own over $100, and if the stock runs much over $100 without splitting, I divest.
Limiting potential shareholders through high share prices leaves fewer investors holding the stock, so relatively few closing positions could send shares considerably lower. It is difficult for many investors to wait a downturn out when a large portion of their investments are falling in one stock, and this tends to exaggerate downturns in stocks trading over $100.
Many of these sources of information were used in this article.
Have a great day trading,
ronz
Disclosure: I have no investments in TER or AAPL. I am about 92% 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 more than offset by the proceeds from the sale of five issues and dividend payments. I continue to plan to offset sales with purchases relatively quickly. I have taken several new issues in the past couple months, and although I may continue to add new issues I feel are a great value, for the time being I am not looking to expand my portfolio further. I will receive dividend payments from 8 issues in the coming week and 3 in the following week, if I make no further investment changes during this timeframe, these dividend payments will lower my investment level due to rounding.
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