The S&P 500 pushed higher in three trading sessions but closed the week with a slight loss, slipping 0.14%. The index has increased in 13 of the past 19 sessions. The index continued in a ten week pattern of a gain followed by a loss followed by a gain, etc. resulting in five up weeks and five down weeks during the period.
Average daily volume levels decreased 12.04% compared to the average daily volumes of the previous week. Monday’s small increase finished with the week’s lowest volume, while the week’s highest volume was seen in the session with the largest price increase on Wednesday. The five day volume variance increased 5.20% over that seen in the previous week to 32.89%.
The S&P 500 continued to battle with the 1883 resistance during the week. The index turned lower after closing above it for the sixth time at 1884.66 on Monday. Tuesday’s high was seen at the open at 1883.69 with the ensuing drop resulting in the week’s largest loss. The index rebounded bullishly off the 50 EMA on Wednesday posting the week’s largest gain. Thursday continued higher in early trading to push above the 1883 resistance to intraday high of 1889.07 before slipping back below it to finish with a small loss. Friday finished with small gain, but failed to retest the 1883 resistance during the session.
Major Stock Market Indexes
The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 charts were somewhat mixed in the past week. Although the week was not particularly bullish in regards to price movement on the indexes, many continued to show bullish signs.
Both the NASDAQ and Russell 2000 failed to reach higher highs before turning lower again.
The Russell continues to show bearishness, as it fell to a lower low and back into its downtrend. Although much has been made of the sell off in small cap stocks associated with the Russell 2000 being a flee from higher P/E stocks, many of the Russell stocks have fallen to very low P/E valuations even based on the adjusted average P/E’s of the Large Cap indexes normally found. Others that still have higher P/E’s have shown tremendous earnings growth which makes them look low when considering forward earnings potentials.
Media hype pointing to the sell off in high P/E Small Caps is undoubtedly adding to the sell off in Small Cap funds, which often shed portions of all their investments in these sales. The resulting price drop is exposing some gems within the Small and Medium Cap stocks included in the Russell 2000.
Complete data is not kept on the Russell 2000 so the following is based on conjecture based on past occurrences. The Russell had a GAAP “as reported” earnings P/E of about 35 a year ago, and is only 14.58% higher than it was on May 9, 2013. If the companies within it had flat earnings over the past year, the P/E would be about 40. Based on earlier observations earnings calendars had indicated most companies were increasing earnings during the past year. Current investment exposure in components within the Russell 2000 also shows earnings growth in these companies.
It therefore seems possible the extremely high P/E the Russell currently sports of about 97 is probably unduly influenced by a relatively small number of components with large losses. This was also seen when the large losses by American International Group, Inc. (AIG) kept the S&P 500’s P/E exaggeratedly high and also kept the index from recording quarterly un-weighted operating earnings records for several quarters during the rebound from the crash.
Based on un-weighted operating earnings and the reverse split adjusted earnings of AIG which were being used at the time: AIG’s third largest quarterly loss wiped out one sixth of the total quarterly earnings of the other 499 companies, their second largest loss wiped out almost a fifth of the quarterly earnings and their largest loss wiped out all the other companies quarterly earnings sending the index to a quarterly loss, with the remainder of that loss nearly wiping out all the AIG loss reduced gains in the next quarter as well. This illustrates how one company with large losses in an index can have a profound effect on earnings and the P/E ratio.
If this is the case in the Russell as it appears it could be, the companies with these large losses are probably seeing their stock prices plummet and with it their market cap is also falling. This drop could possibly take their market cap below that needed to be included in the Russell 2000. If this were to happen, once they were excluded from the index the P/E of the Russell could drop dramatically overnight, suddenly becoming “undervalued”. This is conjecture based on generalities and not the actual data of the Russell, but had AIG been dropped from the S&P 500 when it was reporting huge losses, many would have seen the index was deeply undervalued with their exclusion, long before most investors considered it so.
Although the NASDAQ has not yet broken from its downtrend, it held its ground in a sideways move rebounding from a higher low than that seen previously on Wednesday. This sideways move is flattening the 13 EMA and the NASDAQ is breaking above and finishing above the 13 EMA much more frequently than that seen earlier in the trend lower. The NASDAQ chart is also pressuring the upper trend line of the recent downtrend as the move sideways is beginning to break above it.
The S&P 500, Dow Jones and New York Stock Exchange all rebounded bullishly from higher lows on Wednesday. The Dow and S&P rebounded off support found at their 50 EMA’s while the NYSE found support much higher, just below its 13 EMA. The Dow Jones and New York Stock Exchange followed with a higher intraday high on Thursday. The three also continued to push into resistance weakening it with these retests.
US Treasury Charts
After closing Friday at the lowest rates and highest prices of the year, the 20 year US Treasury Bond saw prices slip lower in four sessions during the past week, falling and closing below the 13 EMA on Friday. This chart continues to look very bullish. The pullback took Treasuries out of fully overbought conditions, yet they are far from oversold.
Long term Treasuries price charts continue to look bullish. This is a somewhat bearish indication for stocks.
The interest rate on the 10 year US Treasury Note pushed higher in three sessions finishing the week a little higher. Friday’s high pushed above the 13 EMA, but the rate slipped lower and the Ten Year finished the session below it. This chart is still fully oversold.
Sunday night gold held steady at about 1300 until rebounding to about 1307 shortly after the Hong Kong open. It traded near that high until slipping to finish the night at about 1305.
Monday gold trended higher to about 1315 by midsession in London, and then slipped to 1310 just before the New York open. It pushed higher again reaching 1316 in early trading but fell gradually back to 1310 late in the New York session. It traded tightly to 1310 for rest of the night finishing at about 1309.
Tuesday morning gold continued to trade flatly near 1309 in the early Hong Kong session before beginning a move higher near the London open that carried it to about 1313 in the early London session. It reversed shortly after the open falling back to about 1307, bumped up to 1311 and fell back to 1306 reaching the low just before the New York open. Gold then traded between the 1306 low and 1309 until a rebound near the Hong Kong open began, carrying it up to about 1313 before slipping to finish the night near 1311.
Wednesday morning saw gold trend slightly higher in the early Hong Kong session to about 1312. It slipped back to 1310 and held near this low until the London open, where it rebounded to about 1314 in early trading, but fell back to 1310 and held tightly to it until the New York Open. Gold turned abruptly lower in New York, first slipping to 1303 and leveling out for several hours that began to round lower before continuing lower to 1296. It leveled out again in another rounding pattern that also turned lower this time falling to about 1287. Gold rebounded slightly off this low to trade within a couple of points of 1290 until again slipping in early Hong Kong trading to about 1286. It rebounded off that low to again trade tightly to 1290, finishing the night at about 1289.
Thursday gold traded flatly within a few points of 1290 for most of the session, the exceptions being a push higher to 1295 just before the New York open, and a drop to 1286 shortly after the New York open. Gold finished the night at about 1291.
Gold continued to trade flatly within a few points of 1290 on early Friday, until a rebound just before the New York open to about 1294, but trended lower after the open in a retreat that found support at 1286 again. It began a bouncy trend higher off this low finishing the New York session at the height of this rebound and a Spot close of 1290.10, which was lower than the 1300.30 New York Spot close of the previous week.
Gold began the week with a small rally but spent most of the week trading rather flatly on either side of the declines seen during New York sessions. The late week flatness at 1290 almost makes it look like this level could be building into a resistance. Aside from a couple small short lived breaks higher above it, gold has spent the better part of last two and a half days bouncing lower near this level and all three days finished within about a point of it. If 1290 is actually showing resistance, as it appears it may, it appears to be strengthening. Pushes above it are turning shallower and rebounds in breaks below it appear to becoming progressively slower to regain this level.
The last four lows have turned higher near 1286, showing support near this level. It seems fairly likely either the potential resistance at 1290 or potential support at 1286 could give way in the week ahead.
S&P 500 Constituent Charts
The constituent charts were somewhat mixed in the past week.
While there were some constituents that established downtrends in the past week, several constituents broke downtrends in an apparent offset. Several others that broke downtrends in the preceding week have begun to establish uptrends and several others established uptrends in the past week. Most of the stocks that recently established uptrends have maintained trend.
Several stocks had substantial downturns in the past week, but many are at or near likely rebound points in these falls.
Many of the constituents that broke above resistance recently have continued in moves higher. While some have seen pullbacks after these breaks, many appear to be turning higher again from these pullbacks at or near bullish levels like the 13 EMA.
Most of the constituents in bullish moves continue to hold bullish trends.
Although the index saw a slight loss during the week, there were 43 constituents that finished the week trading less than 1% from 52 week highs, up from 26 in the previous week. Both of these time periods included two constituents that are in the midst of being acquired: Allergan, Inc. (AGN), which traded within 1% of its 52 week high last week but is not currently trading within 1% of that high and Pepco Holdings, Inc. (POM), which traded within 1% of its 52 week high in both time periods. This data does not include LSI Corp (LSI) that was dropped from the index Wednesday due to Avago Technologies Limited (AVGO) a tax evading company based in Singapore, completing its buyout of LSI and being added to the index to take LSI’s place. Although this change did not affect the data presented above this week’s data includes Avago Technologies. As stated early, only one class of stock will be used in data for the index, as a result only Google Class B shares (GOOGL) are used and not the non-voting Class C (GOOG) shares dumped on shareholders in its recent split. The index continues to use both.
Friday’s close saw 242 (48.40%) of the constituents finish the week with gains, one (0.20%) finished unchanged and 257 (51.40%) saw losses.
The constituents are in varying stages between overbought and oversold, leaving potential upside. There continues to be indications that more of the constituents could begin to move higher. It seems possible the index could make a move that breaks above resistance in the week ahead.
Although the indicators featured in these articles are not always correct, they have been many times and being so they are worth reading about and taking note of.
The +2% H, -2% L, +/(-) 90 D and 100 L indicators are currently active. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The +2% H indicator did not provide a correct indication during the past week.
The -2% L indicator did not provide a correct indication during the past week.
The +/(-) 90 D that became active on Feb 21, 2014 has performed as follows to this point in the format: highest close / lowest close / last close.
+2.98 / -1.12% / 2.30%
Although the week’s largest loss began from an open near this resistance at 1883.69 on Tuesday, the S&P 500 continued to chip away at resistance within the 100 L found at 1883 during the week. The index closed above the 1883 resistance for the sixth time with Monday’s 1884.66 finish. Early trading Thursday continued higher from Wednesday’s bullish rebound point to reach an intraday high of 1889.07, the fifth highest of 12 intraday highs that have broken above this resistance.
Tuesday’s push lower followed the third wedge break on this resistance, with all three wedges initially breaking above this resistance before retreating. These initial wedge breaks higher make it look likely the resistance will eventually succumb. The rebound points of these failures have also been progressively higher. The higher rebounds in essence shorten the playing field by shortening the distance stock prices need to move higher to reach the resistance and increasing the chances a rebound could have the fuel remaining needed to power above it.
The resistance has proven to be stout, but the continued pushes into and above it has weakened it.
The index saw a volatile daily decrease of 2% or greater and the resistance within the 100 L provided a significant pullback on the index, with the pullback reaching 3.98%.
Resistance near 1883 continues put up a fight, but the index has continued to push above it. Wednesday’s retreat rebounded at a bullish support level near the 50 EMA. Although this resistance has held steadfast since the index first bumped into it in March, it appears many of the constituents that slipped during its grip could be turning higher again.
As the index stalled at resistance, many of the higher P/E stocks have seen price decreases while many of the lower P/E stocks continued to climb. In the process, the overall un-weighted P/E of the index remained little changed, but the weighted P/E has fallen from about 19.5 to about 17.8, although part of this P/E drop was due to increased earnings. Some of the higher P/E stocks that fell were trading to earnings potential in the coming 12 months, and therefore were not really overvalued before this retreat began. Others have fallen to or below the unadjusted and un-weighted trailing twelve month P/E valuations normally seen on the SNP 500 since it became an index in 1957. This makes it look possible most constituents’ stock prices have fallen back to or below even valuation levels, and many of these charts appear to be beginning moves higher.
The 90 E indicator expired during a price direction change higher, so it seems fairly likely this move could continue higher.
Although the index retreated slightly for the week, average daily volume levels decreased 12.04% aided by a lack of sellers into retreats. The week’s highest volume coincided with the week’s largest price increase, indicating buyers are still entering. The five day volume variance increased 5.20% over that seen in the previous week to 32.89%, within levels normally seen during bullish conditions.
The next likely area resistance could be found once the index passes the 100 L at 1900 is in the Midrange Resistance Level (MRL) between 1940 and 1955. The MRL appears to have the potential to cause a significant pullback, but probably not a large pullback if one were to be seen there. It also seems possible the index could move past this level without incidence.
There is a slight chance that resistance could also be seen at 1970, but this resistance does not appear to have the potential to cause a significant pullback. If the resistance at 1970 is seen at all, it will probably do little more than slow the index’s ascent.
There continues to be many reasons to be bullish at the current time. Any pullbacks in stock prices seen along the way are probably a good opportunity to add.
If the index continues within the trend established off the crash lows, it seems possible it could reach the 2000 to 2100 level in seven to 16 months if it reaches this level near the upper trend line and within 34 to 40 months if it reaches this level near the lower trend line. The data suggests the Midrange Resistance Level (MRL) at 2035 to 2055 could hold the resistance level of concern within this range at 2040. More details of this potential resistance can be seen in past articles.
Please note there is no established resistance in the MRL levels before the index has reached these levels. Several instances have proven to hold resistance once reached; however MRL levels that the index has not yet reached are only the most likely levels that resistance will be seen based on research. Back tests of the data used to project these resistance levels work well, but they are not allows exact, and these resistances could react sooner or later than expected, it is also possible the resistance will not be seen at all.
Recent pullbacks have made many of the sectors worth looking over, one of them being the retail sector.
Several stocks within the retail sector have taken considerable price retreats over the past month or so. Many of these stocks have continued lower due to first quarter earnings reports that missed expectations.
Retail stocks often give their poorest earnings reports in the first quarter. A few of the reasons include:
Many consumers are still paying for Christmas during this timeframe and have less cash to spend. Due to the reduced level of consumer funds, the first quarter sees a heightened level of competition for these limited cash reserves, which tends to reduce profits. Retailers often have to discount overstocked items left over from Christmas, reducing profits or even causing losses in first quarter earnings. Weather conditions during this timeframe are more likely to limit store visits by consumers. The weather also limits the consumer’s ability to do certain things, for instance outdoor home repairs, thereby eliminating these purchases during the quarter. Many consumers in the northern climates vacation during this time of year, and are less likely to be shopping while on vacation. The quarter also falls between season changes, with many of the items needed for winter already purchased and many consumers not yet ready to buy the things needed for the warmer months.
The softer earnings in the first quarter often tend to make stocks in the sector slip to or near the lowest levels of the year. Several that were already trading at a discount to earnings have slipped further. As a result many of the stocks in this sector have very low P/E’s and are paying very good dividend yields.
Many of these sources of information were used in this article.
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Disclosure: Ron has been increasing investments in retail sector stocks over the past month or so and is interested in others in this sector he does not currently have open positions in. Ron is currently about 84% invested long in stocks in his trading accounts. His investment level decreased over the past week due to the purchase of two issues with the cost of these purchases more than fully offset by the sale of three issues and dividend payments. Ron feels comfortable with his investment level at the current time and plans to try to stay near this investment level for the time being. However he has and will continue to sell stocks that reach long or short term targets and also continue to add stocks he feels are at a great value through a variety of buy orders. Ron will receive dividend payments from 11 issues in the coming week and six in the following week. If no further investment changes are made during this time frame these dividend payments will not change his investment level.
Some of the trades made during the past week may have been due to repositioning investments as discussed in a previous article.
Disclaimer: The information provided in the Stock Market Preview is Ron’s perception of the current conditions and what he thinks is the most probable outcome based on the current conditions, the data collected and extensive research he has done into this data along with other variables. It is intended to provoke thought of the possible market direction in his readers, not foretell the future. 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 the stock market history to the current conditions correctly. His 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.