After slipping to the lowest close so far in the current retreat during a 1.67% drop on Wednesday, the S&P 500 got a pair of large opening gaps higher in the final two trading days. Although Thursday’s opening gap higher nearly vanished before the close, the index retained and added to early gains Friday, before slipped fairly steeply into the finish that was $0.26 lower than the previous week and a 0.008% loss for the week. Although the loss was small, it was the third straight weekly decline and fifth setback in the past seven weeks.
The S&P 500 saw Thursday start with an opening gap that was likely much higher than the “official” opening price. The S&P Dow Jones Indices no longer uses the opening stock prices in its calculations for the “official” opening price of the S&P 500 and Dow Jones Indices in an attempt to limit opening price gaps. For comparisons, the value of the highest price in the first minute is used as an opening price basis due to the manipulated “official” opening price.
The index reached 2064.81 in the first minute of trading, which was well below the over one percent higher futures value at the open. The NASDAQ and Russell also saw opening gaps higher, and their opening prices were very near their first minute highs. After the S&P 500 pushed higher for nearly the first seven minutes, the index saw most of the opening gap melt away through the remaining session and finished with only a small gain of 4.63 (0.23%).
Friday also opened with a large gap that was likely much larger than the “official” open as it reached a high of 2068.33 in the first minute of trading. This first minute value was also well below the over one percent higher futures value at the open and the NASDAQ and Russell again gapped to opening prices very near their first minute highs. This time the S&P 500 began to slip lower after nearly eight minutes of gains. That slide continued until it saw the first of two bursts higher. Each of these moves higher lasted a little over an hour and each broke long downtrends during the session. These pushes higher overshadowed the declines seen during the remainder of the session.
Aside from short runs after opening gaps and the two relatively short bursts pushing prices higher Friday, the overall price action during the two sessions gave the impression a selloff was in progress, not the resulting rebound in stock prices that took place. Thursday saw less than six minutes of gains finish above the first minute high and shed 13.50 points into the close, while Friday closed only 8.29 points above its first minute high and was again falling into the close.
Thursday’s unemployment numbers appear to show that recent increases in companies that are using layoffs as a means of cost reduction are taking a toll. Thursday’s report showed the seasonally adjusted initial claims increased over the recent four week average. It also shows the year over year change in the unadjusted Persons Claiming Unemployment Benefits in All Programs increased by over 318,000 from the year ago levels.
Several more companies announced plans to make layoffs recently including Microsoft (MSFT). They plan to shed 7,800 employees after dropping more than 10,000 jobs in the previous year. Although many of these jobs are outside the US, worldwide upticks in unemployment also affect earnings. If this trend in increased company layoffs continues, it likely means an employment peak has been reached. This also fits fairly closely to normal employment trends.
Although these layoffs are meant to produce cost savings, as they become more common they generally increase unemployment numbers, which prove to hurt earnings across a broader range of companies. This in turn generally tends to feed the cycle of cost savings by layoffs, which in turn reduces earnings further. To make matters worse, companies nearly always underestimate the costs associated with these layoffs, so savings are seldom what they expected to begin with. The increase in announced layoffs is an early indication that earnings expectations could be too high going forward.
Many of the World Indices broke below the lower trend channel in dips they took during the week. Others, like the Nikkei 225, broke the support that it had rebounded off to a 52 week high on June 24. That support break came during three volatile drops in the past ten days. Several did not see volatile daily retreats into breaks lower, but still broke support or fell through the lower trend line in recent retreats. Many of the rebounds after volatile retreats have failed at or near moving averages, trend lines or other resistances. This type of action seen across a broad range of indices could be a warning sign. It has often led to a steepening in drops in the past.
Controls aimed at preventing a continued fall in China’s markets were installed during the week. It included postponement of all IPO’s, caps on short selling, retirement funds being used to prop up the market, a six month moratorium on sales by investors with 5% or larger stakes, trimming interest rates, along with the central bank, banks, mutual funds and brokerages increasing stakes in stocks and vowing to hold these stakes for at least a year. The Shanghai Composite responded with a pair of volatile rebounds of 5.76% on Thursday and 4.54% on Friday. The rebound seems encouraging, but it has seen a couple volatile two day rebounds during the slide earlier too, that turned steeply lower again on the third day. This rebound has taken it to the upper trend line of its current downtrend.
Similar controls set in place in China’s markets intended to stem market falls elsewhere have proven ineffective on a historical basis. Similar tactics in the US during the 1929 crash proved to increase loses in those that likely could have provided a sustained market rebound at a higher market low, had they not tried to provide a floor so near the ceiling and then lost the capital needed to provide this rebound. The controls set in place in China could be setting up the same types of losses in those needed for a future rebound there.
If a bottom fails to hold due to these tactics, it is likely to produce a resistance that could provide a ceiling for many years to come. Resistance that established near the 1929 attempted support sent the Dow Jones lower in the 1930 rebound. The Dow Jones failed to retest this resistance again until it started to bump against it in 1951. It then traded flatly against it for three years before finally breaking above it in 1954, nearly fifteen years after the support attempt was made. Other markets have seen similar failed attempts to stem falls that resulted in capping resistances; including Japan’s Nikkei. Market crashes seldom stop until the market reaches undervalued conditions. Attempts to hold them in highly overvalued conditions seems dangerous; especially when it could increases losses in those needed to provide a rebound later. China’s markets therefore still look very risky.
The US markets began to seesaw in the past week. Daily price variances on the indexes increased dramatically during the week, indicating a higher potential for volatility. Rebounds have turned lower at or near moving averages and Wednesday’s dip reached lower closing prices. Daily price action into the gaps higher make it appear the opening gaps higher could again have been met with sellers, while breaks lower appeared to generate few buyers.
The New York Stock Exchange continued to fall deeper below its 200 EMA early in the week. Gaps higher latter in the week narrowed the distance below the 200 EMA, but it finished the week below it. The NYSE had seen rebounds retreat well short of the 13 EMA until Friday’s gap higher broke above it. It retreated off session highs into the close and a finish slightly above the 13 EMA. The 13 EMA made a bearish cross below the 200 EMA during the week.
Dow Jones Industrial Average slipped back below its 200 EMA and the S&P 500 broke below the 200 EMA during the week. Both the Dow and S&P 500 bounced above their 200 EMA in wide gaps at Thursday’s open, but fell steadily after bumping against their 13 EMA to finish below them. Each saw Friday gap higher to start above their 200 EMA and continued moves higher that broke above their 13 EMA. Each retreated off session highs into a close slightly above their 13 EMA.
The NASDAQ and Russell 2000 continued in falls that neared their 200 EMA early in the week. The two had seen rebounds fall short of their 13 EMA until Friday’s rebound was stuffed at their 13 EMA. Both retreated into the close and finished below their 13 EMA.
The numbers of S&P 500 constituents seeing failures at the 200 DMA continues to increase. Wednesday saw 274 of the then current S&P 500 constituents finish below their 200 DMA. This was a considerable increase over the 259 finishing below it during last week’s June 29 lowest finish.
Several constituents made the first breaks below their 200 DMA in six months or longer during the past week and many continued in declines after this break. Several of those that have made recent breaks below the 200 DMA were in the core stocks that had been pushing the index higher earlier. Many of these stocks are arguably highly overpriced; sporting a P/E that is much higher than the index average and a forward P/E above the index’s historical averages, so it seems possible they could see considerable downside in this retreat.
Although the index saw a fairly large rebound off Wednesday’s close into the end of the week, just over half, or 251 of the S&P 500 constituents remained below their 200 DMA at Friday’s close and an increase in the 246 finishes below the 200 DMA a week earlier when the index finished only $0.26 higher. The index saw 278 constituents finish Friday either below their 200 DMA or less than one dollar above it.
The S&P 400 also finished Wednesday with over half of its then current constituents below their 200 DMA. The close saw 203 of that index’s constituents finish the session below their 200 DMA. Eight more finished less than $0.20 above their 200 DMA. Many of the stocks that finished narrowly above their 200 DMA have a 200 DMA that is in decline.
The number of S&P 400 constituents finishing below the 200 DMA fell to 189 on Friday, but 201 either finished below or less than $0.25 above it. The index also finished Friday with 226 either below or less than one dollar above the 200 DMA.
The S&P 500 continued to evolve as two more changes were made in the past week due to mergers. After being taken private by 3G Capital and Berkshire Hathaway (BRK/B) in 2011, Heinz returned to the S&P 500 after completing its merger with S&P 500 constituent Kraft Food Group, Inc. (KRFT) last week. The combined company began trading publically Monday and changed its name and symbol to the Kraft Heinz Company (KHC).
S&P 500 constituent Dollar Tree Inc. (DLTR) completed its acquisition of S&P 500 constituent Family Dollar Stores Inc. (FDO). As a result former S&P 400 constituent Advance Auto Parts Inc. (AAP) took Family Dollar Stores place in the S&P 500 at the close of trading on Wednesday.
There is a lot of hype over M&A activity as a reason for stock prices to move higher. Both of the mergers above look like they could do well long term, but at the same time the prices paid for the companies in these mergers appears to have made the stocks look pricey at this time.
Care should be taken investing in M&A activity. Many of the deals being made now could turn sour in the future as many companies are being bought at high premiums. M&A activities near market lows usually produce deals at a discount and are usually better investment opportunities. Those near market highs often produce large write offs later as companies realize they paid too much for these purchases. A recent example of this can be found in Microsoft (MSFT) as they wrote off a $7.6 billion loss on the year ago $9.5 billion purchase of Nokia in the past week. That purchase price included $1.5 billion of Nokia’s cash, making the write off nearly a complete washout for shareholders.
The past week’s news likely left a couple of questions for investors. How did Nokia have $1.5 billion in cash, if they could not make money? Why did Microsoft lose money when Nokia was not? It seems likely Microsoft lacked the resources and expertise to manage them properly. They have swallowed up dozens of companies that they have done little or nothing with since. Why would any investor want them buying anything else?
Spinoffs, splits and sales of non-core assets near market highs make much more sense than mergers and acquisitions. Microsoft could spinoff three or four companies that would probably each eventually be worth much more separately, than the stock is as a whole now. Microsoft has become too large to grow earnings at a rate that will increase its stock price at a high rate, even if they continue to purchase expensive companies, but in smaller pieces this growth could be reignited.
The S&P 500 constituents saw a current year earnings increase of $7.22 during the past week. As expected, the increase was partly due to earnings projections becoming available for the three additions in the previous week that did not yet have projections at last week’s update, along with a large increase when Advance Auto Parts current year earnings replaced Family Dollar. Even though a fairly large earnings increase was seen week over week, the changes also resulted in a small increase in the TTM P/E and forward P/E, so the result of the changes actually made the index slightly more expensive. During the week there were 97 constituents that saw decreases in current year earnings projections and 66 saw increases. Five of those that have already reported earnings saw increases while two saw decreases.
The current quarter earnings expectations for those yet to report saw a decrease of $0.16 from the previous week’s estimates. The decrease seen in the current quarter projections continues to be smaller than those seen during the previous two quarters.
The featured and supporting indicators discussed below are not always correct, but they have been many times. Being so they are worth reading about and taking note of.
The 100 L, –/(+) 90 D, (-)/(+) 90 D, +2% H, -2% H and 90 E indicators are currently active. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The S&P 500 reached a new lowest close in the significant retreat during the past week. Although Wednesday’s retreat did not reach the 2% required for a volatile drop, the index saw a large retreat into a close of 2046.68. This lower close increased the depth of the current significant drop to 3.95% below the May 21 highest close of 2130.82.
Monday started the week with a gap lower to open at 2073.95, but rebounded to cover this gap at a high of 2078.61 and fell to a low of 2058.40 before finishing at 2068.76. Tuesday began the session higher at 2069.52, but fell to a low of 2044.02 before rebounding to a high of 2083.74 and finishing at 2081.34. Wednesday started with a gap lower at the session high of 2077.66 and continued to a low of 2044.66 before finishing at 2046.68. Thursday gapped higher to the session low of 2049.73 and continued to a high of 2074.28 before finishing at 2051.31. Friday gapped higher again to the session low of 2052.74 and reached a high of 2081.31 before slipping lower to finish at 2076.62.
The index left an open gap lower on Wednesday, although Friday’s high was only $0.01 from filling this gap. It also left two open gaps higher on Thursday and Friday although it seems likely these gaps were larger than the official open would indicate. Open gaps are likely to be filled at some point. Many of the constituents that had these opening gaps also left them open.
The Index continued to fail at the 13 EMA until Friday’s session pushed above it, but it fell into the close to finish only slightly above it. At this point this move is considered neutral. If the index can hold and continue to move above the 13 EMA, it would be bullish whereas a fall below it would be bearish. The index saw two rebounds from session lows during the week within the 2035 to 2055 MRL that were near but above previous support near 2040. This is a bullish indication. As long as previous support near 2040 is not breached, even briefly, it will likely continue to be support. Once broken, a fall below it is very likely to see the level turn into a daunting resistance. The late week gaps higher saw little upward movement afterwards and appeared to lack support, this is bearish. The open gaps left in the index and many constituents are also potentially bearish. The index saw a widening range of daily price variations, this shows the potential for volatility is increasing and is also bearish.
The S&P 500 is near oversold conditions, but a rebound from oversold conditions is not a given. Constituent charts show many are in potentially bearish failures and several that broke from long runs slipped below their 200 DMA during the past week. Stress in overvalued stocks that have pushed the index higher appears to be increasing as downward pressure builds.
The –/(+) 90 D indicator that became active on Feb 26, 2015 expired after Tuesday’s close. It finished its active period as follows in the standard format: highest close / lowest close / final close.
+0.95% / -3.34% / -1.39%
The 90 D that became active on Feb 26 did not perform as expected. Although two significant retreats were seen from resistance in the upper half of the 100 L during its presence, neither retreat reached the depths that seemed possible before this indicator expired. The index increased its highest close less than 20 points during its active period. Several of the projections made for this indicator appeared to hold some merit, however overall the projection was incorrect.
The (-)/(+) 90 D that became active on May 22, 2015 appears to have bearish potential. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
+0.80% / -2.88% / -1.46%
The -2% H and +2% H indicators failed to provide a correct indication in the past week. Volatility indicators increased in the past week and remain at levels that suggest the potential for volatile market moves are much higher than normal.
The average daily volume decreased 0.20% below the previous week. The highest volume was seen during Tuesday’s session and lowest on Friday. The five day volume variance dropped 22.24% to finish the week at 45.47%. The five day volume variance fell to more or less neutral levels. Wednesday’s large retreat again failed to reach levels that are normally seen during capitulatory sell offs making a further retreat seem possible.
The S&P 500 again saw well over half of the constituents fall below their 200 DMA after Wednesday’s close, with several of them breaking below the 200 DMA for the first time in more than six months. The S&P 400 also saw over half of its constituents slip back below the 200 DMA. As a result, 477 of the 900 largest publically traded companies finished below their 200 DMA at the Wednesday close. Even though the S&P 500 index price rebounded from those lows to just below the previous week’s finish, over half of the constituents remained below their 200 DMA. Large numbers of stocks have a 200 DMA that is trending lower, including some that finished Wednesday slightly above it.
The Greeks resoundingly defeated the referendum on terms for a continued bailout on Sunday. The election results gave Greek leaders the upper hand in negotiations; but they appeared to immediately cower and submitted terms much like those refused by voters. If a resolution is made without addressing the real problems, as news of the proposed bailout suggests, it is likely to resurface again later. It seems likely it could be much worse then. It also seems it could resurface during a time much less favorable to deal with it. Unlike now, it really could be a contagion then. Europe has a limited amount of time to take care of its problems, and despite the current conditions that make some of them seem solved; they did not fix any of them.
Several potentially bearish indicators are active. Volatility indicators edged higher and continue to suggest a much higher than normal chance of volatile market moves still exists.
Intraday action after the late week opening gaps in the major the US indices appeared to be met with sellers. All saw opening moves higher that failed within the first ten minutes and aside from these opening moves, the indices saw less than three hours of positive producing movement higher in two full sessions. Of course there were other rebounds, but they only recaptured a portion of the earlier session loses before turning lower again. These gaps higher appeared to lack support and this puts a continued move higher in doubt.
At the same time chart formations in world indices became very unnerving. Many of the indexes are showing traits that make further retreats seem likely. Rebounds seen in some of these indices were neither fundamental nor technically supported, but instead due to trading controls and influxes of capital that is not limitless to prevent further retreats. These rebounds appear to have reached upper trend channels.
China’s Shanghai Composite Index saw two days of volatile rebounds after falling over 30% lower in the previous three and a half weeks. The rebounds occurred after several control measures where installed to prop the still highly overpriced market up. They threw a lot of money at the problem, but compared to just one week’s loses in the downturn, it was a drop in the bucket. It looks like they may have fired all their guns and may have no dry powder left in reserve if things suddenly turn sour. It seems possible the measures taken could have locked many of those they needed to provide a rebound later into potential long term loses. If their markets should turn lower again, much of the capital needed for this rebound will evaporate. As a result a downturn could provide a capping resistance in these indexes that could last for very many years to come. Markets normally fall to undervalued conditions in market crashes. Many have tried to stop market crashes at highly overvalued levels in the past without success. History tends to repeat itself.
Despite claims otherwise, there are no underpriced markets left in the world. A very long period of near zero interest rates worldwide has sent investors in search of higher yields and as a result has sent world stock markets to prices well ahead of earnings potentials in all markets. The US markets are near historical P/E highs and most world markets are much further overpriced than the US, even after the very large downturns already seen in many of these markets.
Foreign markets generally fall much further than the US market in retreats; making investments abroad continue to look very risky. Many of the world markets have retreated to correction or crash proportions, yet are still very highly overvalued making continued retreats seem possible. Many of these markets appear stressed. Market failures often begin abroad, before spreading and eventually reaching the US. The US markets are showing signs that many of the stocks that had carried it higher could be beginning to fail and some already have. Although most foreign markets are further overpriced than the US, the US markets are at levels that make them appear overpriced on a historical basis.
Many chart formations from individual stocks to the world indices seemed to be flashing warning signals during the past week. These formations along with past timelines and worldwide stock overvaluations continue to make it seem possible the S&P 500 could see a large retreat before the end of the year, and possibly very soon.
The next likely resistance level above the 100 L at 2100 could be seen at the 2140 to 2160 MRL. Earlier highs on the S&P 500 could have seen the effects of this resistance level, but the index is still within the influence range of the 100 L since it has not yet reached this resistance level. Therefore this resistance is not yet considered active. This resistance appears to have the potential to cause a significant pullback.
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 always exact, and these resistances could react sooner or later than expected, it is also possible the resistance will not be seen at all.
Data provided for the S&P 500 was derived from the historical daily data tables, similar data can be found at AOL Finance. Earnings information was gathered from Yahoo Finance, CNBC, Edgar Filings, Scottrade Elite, AOL Finance and Morningstar, although other websites, including company websites, may have contributed small amounts of information. Stock and Treasury charts used for analysis and commentary were provided by StockCharts.com, Scottrade Elite or from those that Ron created from his data. Gold charts used for analysis and commentary were provided by Kitco.
Have a great day trading.
Disclosure: Ron currently has investments in MSFT. Ron has no investments in BRK/B, KRFT, KHC, DLTR, FDO or AAP. Ron is currently about 56% invested long in stocks in his trading accounts reflecting a decrease over the past week’s investment level. The decrease was the result of the sale of five issues and dividend payments. Several sales were in small positions in companies at 52 week highs and at levels Ron’s feels they were overvalued at. Current market conditions and chart formations seem frightening. Although he may laugh at himself later, it seems possible the market could turn very sour shortly. He will receive dividend payments from ten issues in the coming week and seven in the following week. If no further investment changes are made during this time frame, these dividend payments would not change his investment level.
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.