The S&P 500 replayed the previous week as the index started and ended the week with losses, but the three midweek sessions finished higher. The midweek rally pushed the index 0.76% higher for the week, mainly on the strength of a 0.99% increase on Thursday. The S&P 500 has finished higher in six of the past ten sessions, but has finished lower in 16 of the past 29.
The S&P 500 broke above the likely resistance from 2112 to 2125 in the upper half of the 100 L at 2100 late in the week. Thursday’s intraday high edged above the resistance to 2126.65, but it slipped to finish the session back within this resistance. Friday’s retreat slipped to a close beneath the resistance level.
The NASDAQ and Russell 2000 finished Thursday at a record closing prices. The NASDAQ also reached a record high with the intraday high of 5,143.316 eclipsing the March 10, 2000 record of 5,132.52. The run to new highs on the NASDAQ was largely due to a surge in Biotech stocks. Many still consider the Biotech Sector underpriced, as can be seen in this recent report by The Street. Let’s take a further look at this story.
The iShares NASDAQ Biotechnology ETF (IBB) was mentioned in this article, but the data for this fund was not used. According to its fact sheet; as of March 31, 2015 the NASDAQ biotech’s had a P/E ratio of 31.60. Due to the continued run since, the P/E calculated from Friday’s close was over 34. The ETF, which had traded relatively flatly prior to Jan 2, 2013, has run up over 166% since.
Eight of the top ten companies in this ETF are S&P 500 constituents and account for 48.48% of the index fund. These eight companies are: Alexion Pharmaceuticals (ALXN), Amgen Inc. (AMGN), Biogen IDEC Inc. (BIIB), Celgen Corp. (CELG), Gilead Sciences Inc. (GILD), Mylan Inc. (MYL), Regeneron Pharmaceuticals Inc. (REGN) and Vertex Pharmaceuticals Inc. (VRTX).
Based on historical earnings increases of the yearly earnings reported by these companies, it took about four years for the total yearly earnings of these eight companies to a little more than double. The current projections for 2016 are about double the reported yearly earnings of four years earlier too. If they could continue to match this performance, and if the other companies’ 51.52% share of the fund could also match this growth rate, and if the stock prices remain unchanged, in about four years this fund could reach a TTM P/E of about 17.
A two year forward P/E of 17 is near historical highs. Since historical earnings suggest it could take about four years to reach this P/E, it seems likely this fund is about twice the price it should be based on historical averages. The percentage of earnings increases the Biotech’s have seen in past five years will become very difficult to sustain at some point. Perhaps they can double earnings in four years again, but company’s earnings histories show that it more likely to take longer to double earnings again. It therefore seems possible this ETF could be nearer to 3 times overvalued.
All the information given about the S&P earnings projections for the S&P 500 and S&P 1500 composite in The Street’s article are based on information available in the S&P Dow Jones Indices S&P 500 EPS download except information on the S&P 1500 composite Biotech Sector. The S&P site was down for maintenance at the time this article was written, so information on the Biotech Sector was not retrieved. The S&P 500 EPS file had been downloaded earlier so it was available to confirm that the other P/E information provided in that article was accurate, although misleading.
The data provided in the S&P 500 EPS report is weighted to the corresponding S&P index. Being so, this data should not be used for comparisons outside of the specific S&P index as the indexes weighting can skew the perspective of this P/E ratio. Instead even weighting should always be used for comparisons outside of a weighted index. Based on even weighting, the current TTM earnings and Friday’s closing price, the eight S&P 500 constituents have a TTM P/E of 32.65, and very close to the P/E found in the iShares fact sheet.
Based on current projections for 2016 earnings for the eight that were updated after Friday’s close, which have also slipped since the S&P report came out, they have an even weighted 2016 forward P/E of 23.31. Since all of these companies have fiscal years that end in December these projections are currently only seven quarters forward, but still very high compared to historical two year forward averages.
This compares to the even weighted TTM P/E of the S&P 500 Health Care Sector of 23.43 and forward P/E of 19.25. Both of these even weighted comparisons are much higher than the weighted P/E provided by the S&P for the index. The even weighted data also shows that S&P 500 Biotech’s are more expensive than the Health Care Sector as a whole, exactly opposite of the data used to show the Biotech’s are less expensive than the overall Heath Care in that article.
Compared to the overall S&P 500 index even weighted TTM P/E of 20.04 and forward P/E of 17.95, it can be seen that the Health Care Sector is very high compared to the overall index. Excluding the Biotech’s, many in the Health Care sector that have seen large price increases are expecting lower earnings in the future. Yet many continue to point investors towards Health Care and Biotech investments. The percentages of earnings increases might be greater in these sectors, but they are already far further forward on these earnings than the index as a whole, making the sectors very expensive.
In addition, a great deal of the current 2016 P/E for the eight rests on Vertex providing positive earnings in 2016. They have recently seen increases in 2016 projections, similar to the earnings increases projected for 2015 at about this time last year. Yet Vertex has not finished a year with positive earnings since 2010 and they are expected to lose money in 2015 too.
The other seven are not expected to grow earnings as quickly as they did before. In fact many have seen projections slide considerably during the past 90 days. It also seems fairly likely Gilead Sciences, which has the lowest TTM P/E of the eight, could see earnings sliced in the coming four years, as their extremely overpriced and profitable Hepatitis C cure runs out of patients to treat. Gilead’s earnings decline is likely to begin in 2016, but snowball from there.
The article notes seven new “blockbuster” drugs in the pipeline, but does not mention them by name. This leaves some guess work involved, but probably the best seven pipeline drugs found are given about a 50% chance of being approved. A 50% chance of approval does not mean 50% of these drugs will be approved, all of them might, but based on past experience it is more likely that only one, two or maybe three of the seven will eventually reach the pharmacy shelves. This makes it appear many are betting heavily against the odds on future growth potentials. Even if all seven were to be approved, a great deal of this new income would be offsetting revenue lost in drugs that will lose market share to new treatments developed by others, loss of drug patent protection, or in the case of Gilead, a decline in the numbers of patients left to treat.
Despite the articles claim’s otherwise, Janet Yellen appears to have done her homework and has valid concerns over the price run ups seen in Biotech’s. It certainly looks like Biotech stocks are running very far ahead of their earnings potential. Being so it seems possible the Biotech’s could be in a bubble. Since the Biotech’s are carrying the NASDAQ higher, it seems possible it too could be in a bubble.
Many foreign markets appear highly overpriced. Many also appear to be in stalls or could be starting retreats from these highly overpriced peaks.
China’s stock market sank lower in the past week. The Shanghai index shed nearly 688 points as it saw four losses of 2% or greater during the week. The week’s largest loss came during a 6.42% setback on Friday. The Shanghai index finished the week 13.32% lower.
Germany’s DAX finished Friday lower and has fallen in 13 of the past 20 sessions. Although slightly higher than recent lows, the DAX finished the week 10.79% below its April 10 close. A fairly large two day rebound in the DAX last week appears to have failed, so it seems possible it could be continuing in the previously established trend lower.
Japan’s Nikkei index has entered an area that it has had difficulty pushing higher in since the 1990 crash. Although losses have been fairly small so far, the Nikkei has seen only four higher closes in the past 14 sessions. Current chart formations make it seem possible it could be rounding lower from recent highs.
US Treasury prices rebounded from recent lows during the past week. The 20 year bond has seen price increases in five of the past seven sessions. The interest rate on the 10 Year US Treasury Note, which moves opposite of the Treasury price, slipped from recent highs as it finished lower in five of the past seven sessions.
Gold bounced back during the past week. It spurted higher after reaching a low of about 1173 on Monday, sank a little lower on Tuesday then saw bursts higher on Wednesday and Thursday. Thursday’s high neared 1206 before slipping and flattening and gold then spent Friday relatively flat near 1200. Gold finished the week with a New York Spot close of 1200.30.
The major Index charts show that the indexes pushed higher in the past week. The NASDAQ and Russell 2000 continued higher after a gap higher at the open on Thursday. Both moved to an all-time high before settling lower to finish at a record closes. Each settled off these highs in retreats on Friday. Both indexes have reached fully overbought conditions.
The S&P 500, Dow Jones Industrial Average and New York Stock Exchange rebounded from retests of earlier lows on Monday. Each reached a high higher than the previous cycle Thursday before beginning to retreat again on Friday. All three are also near fully overbought conditions.
The run showed some bullishness on the indexes, but they are also reaching overbought conditions. The stocks left pushing the indexes higher are for the most part those with the best earnings potential, but also the most expensive stocks based on forward P/E’s.
Although the numbers of stocks that finished Friday below their 200 DMA had decreased to 41.2% from the prior week’s 43.8%, nearly half of the stocks in the S&P 500 have broken below their 200 DMA at least once during the past month. At Friday’s close 259 of the constituents either finished the session below their 200 DMA or less than three percent above it. There were also 291 that finished below the 200 DMA or less than five percent above it.
Netflix (NFLX) has a TTM P/E of over 206 and is 30.92% above its 200 DMA. Normally stocks with a P/E this high would be trading the same distance below their 200 DMA. They are second to only to the 31.39% above the 200 DMA that Allergan PLC (AGN) maintained with a TTM P/E of 20.41. Allergan was formally Actavis PLC (ACT) before taking Allergan’s name and symbol in the past week, two months after completing a merger with them.
The constituents saw a sixth straight weekly increase in projected current year earnings. The total of the constituents’ current year earnings projections edged $0.86 higher than the previous week’s total. Although there was a weekly increase, FedEx (FDX) reported their fiscal fourth quarter 2015 earnings on Wednesday and as a result swapped 2016 earnings with 2015 in the current year totals. Had this not been the case, the constituents would have seen a decline of $1.06 for the week. There were 41 constituents that saw increases (including FedEx) over the projections of the previous week and 64 constituents saw decreases.
As the current quarter’s earnings reports near, current quarter earnings sagged $0.90 lower than the previous week. To this point these earnings have not reflected the much larger decreases seen in the previous two quarters prior to earnings releases, but the prior decreases intensified as those earnings seasons progressed. The quarterly and yearly earnings results reflect adjustments made for spits in two constituents and a name and symbol change of one constituent.
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%, -2% 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 –/(+) 90 D indicator that became active on Feb 26, 2015 entered its expiration period on Wednesday activating a 90 E indicator. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
+0.95% / -3.34% / -0.04%
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.
+0.66% / -1.33% / +0.12%
The +2% and -2% indicators failed to provide a correct indication in the past week. Volatility indicators continued higher in the past week, making it seem likely a volatile move could still be seen.
The S&P 500 saw Monday open a cent higher at the session high of 2091.34 and fall to a session low of 2072.49 before rebounding into a finish of 2084.43. Tuesday started slightly lower at 2084.26 and retreated to a low of 2082.10 before pushing to a high of 2097.40 and to a finish a little lower at 2096.29. Wednesday opened higher at 2097.40 and slipped to a low of 2088.86 and pushed to a high of 2106.79 before falling to a finish of 2100.44. Thursday opened with a gap higher to the session low of 2101.58 and pushed to a high of 2126.65 before settling into a lower close of 2121.24. Friday opened a little lower at 2121.06 and moved to a high of 2121.64 before slipping to a low of 2109.45 and closing slightly higher at 2109.99.
Monday retreated from likely resistance between 2085 and 2100 in the lower half of the 100 L to a low near but above the previous low at 2072.14. Although this level is outside of a likely support area, the two rebounds very near this level make this support seem somewhat valid. Monday finished near but below the likely lower half resistance. Tuesday pushed back into and finished within the likely lower half resistance of the 100 L. Wednesday’s low found support in the likely lower half resistance before moving and finishing in the upper half of the 100 L. Thursday left a still unfilled gap in a run above the likely resistance from 2112 to 2125 in the upper half of the 100 L, but settled lower off that high to finish within this resistance. Friday failed to hold within the likely upper half resistance as the retreat from Thursday’s high continued, and fell to a finish below the likely resistance.
The past week’s retreat again finished with a rebound at an unlikely support level, but near the same support found earlier, giving this support a degree of validation. It is still outside of a likely support level, which tends to make support found in these areas weak, so another retest of this support level could break lower through it. Thursday’s push above the upper resistance boundaries of the 100 L probably weakened it slightly, but the index fell directly off this break showing this resistance still has some fight left in it.
The resistance in the 100 L continues to trouble the S&P 500 so it continues to seem possible the index could see a significant retreat from this resistance. The US markets so far have not succumbed to the increases seen in volatility indicators, but other markets have. The US could remain immune, but the potential for volatile market moves is currently very high.
The average daily volume increased 12.88% above the previous week. The highest volume was seen during Friday’s triple witching and lowest volume in Tuesday’s gain. The five day volume variance increased by 26.84% to finish the week at 52.39%. The increase in the weekly volume and five day volume variance was largely influenced by the stronger volumes seen during Friday’s triple witching.
Friday’s volume was quite a lot lower than that seen during the triple witching in March or December. The lower volumes could indicate investors rolled future contracts over instead of buying the underlying securities. If this was the case it is potentially bullish as traders of futures are showing confidence that stock prices could move higher. It also seems possible this lower volume could be misleading. Stock volumes were much higher early indicating a possible exit in futures occurred then, this possible exit coupled with the relatively flat market since may have limited entries since. Add the potentially bearish news remaining atop of the headlines and it seems possible the lower volume could just mean fewer contracts were held to begin with.
Several potentially bearish indicators are currently active. Volatility indicators continued higher in the past week and indicate much higher than normal chances of volatile market moves. Many of the indices and stocks have rebounded back into to overbought conditions.
China’s Tech bubble could have begun to deflate. The Shanghai index finished the week 13.32% lower. Many other highly overpriced world markets appear to be stalled or in declines from recent peaks.
Although some still claim there are under priced markets outside the US, there are no “cheap” stock markets left in the world. The long run of very low interest rates has run stock prices to overvalued levels in all markets. Most are further overpriced than the US. There may be reason to believe some foreign markets could run to even higher over valuations, but foreign markets generally fall much further than the US market in retreats, making investments abroad look very risky.
The S&P 500 constituents saw a sixth consecutive week of current year earnings projection increases, with the current increase due to a change in a constituent’s current year earnings. The total of these increases remains small.
Early season earnings reports were not very encouraging in the past week. FedEx (FDX) and Oracle (ORCL) both missed expectations. The FedEx miss shows potential weakness in mail orders, while Oracle reported that currency exchange losses accounted for an 8% decline in EPS, making currency exchange a possible issue with others. Both could be earlier indicators of continued earnings trouble ahead.
Many conditions continue to make a large drop on the index seem possible. Many chart formations and past occurrences of these formations make it seem possible the index could see this retreat before the end of the year.
The next likely resistance level above the 100 L at 2100 could be seen at the 2140 to 2160 MRL. Earlier highs on the index could have seen the effects of this resistance level, but the index is still within the influence range of the 100 L and has not yet reached this resistance level, being so 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 ORCL. Ron has no investments in IBB, ALXN, AMGN, BIIB, CELG, GILD, MYL, REGN, VRTX, NFLX, AGN, ACT or FDX. Ron is currently about 56% invested long in stocks in his trading accounts reflecting a decrease over the past week’s investment level. This decrease was the result of the sale of one issue and dividend payments. Ron feels he is overbought given the current market conditions; however since his investment level is below the levels originally planned for months ago, he may also reinvest a portion of these sales. Ron will receive dividend payments from five issues in the coming week and 26 in the following week. If no further investment changes are made during this time frame, these dividend payments would reduce his rounded 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.