Make Millions Trading Stocks: Weekly Market Update - Recent Earnings And Economic Data Are Positive As The Market Sells Off

Sunday, August 9, 2015

Weekly Market Update - Recent Earnings And Economic Data Are Positive As The Market Sells Off

Summary

Earnings season to date has been solid.
Housing and Autos lead the positive economic data recently reported.
Reports from the consumer arena are not as bad as they seem.
The market shrugs off the data as the the Fed and “rate normalization” comes back into focus.

"The key to making money in stocks is not to get scared out of them".

… Peter Lynch

July is in the books, the table was set as many were calling for a market correction. Stocks were dropping into the early part of last month and market breadth as discussed was deteriorating by the day. Falling commodities and recovering bonds added to list of "issues". The S&P tested and held a key technical level at 2040 and remained resilient. By the end of the month the S&P 500 gained 2.4%.

This up and down action pretty much sums up 2015. It's been a range bound market that many have said is on the brink of falling apart for most of this year.

This past week the S&P experienced the worst first trading day of August for the index since 2003. The remainder of the week did not fare much better as the S&P closed down approximately 1.2% for the week.

Another month has come and gone and the market is still in a trading range. From the first few days in February through Friday's close, nearly six months, the market has been in a 95 point or a 4+% trading range from 2040 to 2135. The market has had two declines into the 2040's in March and July. There have been four rallies that have failed at the upper end of the range during April, May, June, and July.

Unless you have been on vacation, you have no doubt probably heard by now that August has not been the best of months for the equity market. Since the start of this rally in 2009, there have only been two years out of six where the S&P 500 was up during this period. Last year was one of those positive years.

With the divergences that I pointed out last week, combined with the weak seasonality I commented that,

"If the markets are going to have their annual swoon, now is a near-perfect set-up, with price, breadth, sentiment and seasonality all in support."

The first week of trading in August followed that script. It now remains to be seen how the remainder of the month will play out.

During the prior month, we witnessed the energy sector fall 8%. The only other sectors that finished July in the red were Materials (-5.15%) and Telecom (-0.96%). For the year, returns have been varied between sectors, with Consumer Discretionary and Healthcare up over 10%, while Energy is down more than 12% YTD.

I do see some signs of rotation taking place which in the long run would be a good sign for the overall market. More on that thought later.

THE FED

It seems we won't get much of a respite from the "rate normalization" story. More importantly, it is all about how market participants are reacting to what they believe will take place in the equity market. The market reaction to theDennis Lockhart comments on Tuesday indicates that the obsession with this topic continues. His commentary was taken to be that the Fed has a rate hike in September on their agenda. The Bloomberg USD Index rose 51 basis points in less than two hours, while stocks hit their lows on the day.

So, it is back to more talk as to when rates may rise, more talk from the skeptics who promote their ideas that this event is one of their "keys" to a market decline.

A graphic view of the last three times the Fed began the rate normalization process.

(click to enlarge)

Investors, Pundits, Skeptics can believe what they wish on this topic.

The evidence and history continue to show how those advocating their myths on this event are misleading investors.

NO Bull market has ever come to an end when the Fed started to "normalize" interest rates.

THE ECONOMY

Since the Great Recession ended in June 2009, first-quarter GDP growth over the past six years had averaged only 0.5%, while the second, third and fourth quarters had collectively averaged a much more robust 2.9%. Given what I have seen with the latest economic reports, I expect the same result for the remainder of 2015.

Yardeni Research is yet another firm in the camp that does not see a recession just around the corner, and notes this data point,

"Consumers still consuming. Consumer spending in real GDP rose 3.1% y/y during Q2. That's among the highest growth rates during the current economic expansion!"

EARNINGS

The latest headlines on earnings for the Week ending August 8th and all of the prior results for this earnings season are HERE. Take a hard look at the 25 companies that raised their guidance from last week's total of 68 earnings reports.

From Thomson Reuters:

Q2 '15 earnings data reveals that the SP 500 Ex-Energy and Ex Apple are up 7.6%

Forward 4-quarter estimate: $124.90, versus last week's $125.10.

Data gleaned from Factset Research:

Of the 436 companies that have reported earnings to date for Q2 2015, 73% have reported earnings above the mean estimate and 51% have reported sales above the mean estimate.

The current 12-month forward P/E ratio is 16.6. This P/E ratio is based on Friday's closing price of 2077 and forward 12-month EPS estimate of $125.

As far as individual sector performance, there really are no surprises from what myself and most analysts thought might take place.

At the sector level, the Energy sector is reporting the largest year over-year decrease in earnings of all ten sectors, while the Healthcare sector is reporting the highest year-over-year increase in earnings of all ten sectors.

Health Care growth continues as it shows the largest percentage of companies reporting actual EPS above estimates (94%) and actual sales above estimates (69%) of all ten sectors.

Companies in the Consumer Discretionary sector are reporting the largest upside aggregate differences between actual earnings and estimated earnings, coming in a with an 8.8% increase.

The Healthcare sector is reporting the highest earnings growth rate at 15.4%. At the industry level, all six industries in the sector are reporting or are predicted to report earnings growth. Five of these industries have double-digit earnings growth rates, led by the Health Care Technology (30%) and Biotechnology (23%) industries.

On the other hand, companies in the Energy sector are reporting the largest downside (-6.8%) aggregate differences between actual earnings and estimated earnings.

On the revenue side, at the sector level, the Health Care (70%) and Financials (67%) sectors have the highest percentages of companies reporting revenue above estimates, while the Telecom Service (0%) and Utilities (24%) sectors have the lowest percentages of companies reporting revenue above estimates.I do not see that trend abating overnight.

Some still question and are in disbelief that the equity market has risen to the present levels.

(click to enlarge)

Corporate profits/GDP still up near 10%. Highest level in the past 70 years. Enough said as to why the equity market has risen to these levels.

For those that still want to compare the present market backdrop to 2000. TheS&P 500 earnings yield is 5.94%, down from last week's 6.02%. To put this into perspective, in the 1st quarter of 2000, the earnings yield was 2% and the 10-year Treasury stood at 5.5%.

For those that want to question the present market valuation, a look back at history for a comparison reveals that in 1987, the S&P 500 PE peaked near 25x forward earnings. In March of 2000, the S&P 500 PE was at 28.

In the first quarter of this year, the S&P 500 earnings growth was 11%, ex-Energy, against a 17x multiple at the end of June. The 2nd quarter will come in lower than 11%, but if we see 7 to 9% y/y earnings growth for the S&P 500, a 17-18x multiple is not outlandish.

SENTIMENT

Here's a chart from the latest Merrill Lynch Fund Managers Survey showing the number of asset managers who have taken out protection against their portfolio. The Chinese situation, the Greek "crisis" appears to have put the fear of Lehman into asset managers because we're now seeing higher levels of protection than there was during 2008. Of course, this is a bit of a recurring theme in recent years. The so-called "wall of worry" has been high throughout the bull market thanks in large part to the scars of the financial crisis. Everyone is looking for the next crisis and negative market reaction right around the corner. Now it's Puerto Rico. It will come at some point, but probably not when asset managers are all expecting it. I might add, it certainly will NOT be due to the Puerto Rico Situation.

Source Merrill Lynch

CRUDE OIL

The overall weakness in the price of WTI persisted this week and the March trading lows of $42- 43 a barrel, are now in sight.

While inventories are still above average, there has been quite a draw down in stockpiles in the last ten weeks. As shown in the chart below, inventories have dropped by 22.5 million barrels. That's a solid decline, but since it follows what was a record build in stockpiles earlier this year, it is going to take some time before inventories revert to anywhere near average levels.

Source: Bespoke

While it will take some time, it is a step in the right direction.

Let's take a look at one story making the rounds on the "supply issue":

The Iran Nuclear Agreement and the lifting of sanctions will flood the oil market. From what I have gleaned from different sources, that doesn't seem factual.

So that assertion is in one word, FALSE. OPEC has stated that the natural 1.0 to 1.5 million barrels per day rise in demand in 2016 will more than offset any production rises in Iran. This new "output" is likely to take a while as Iran would need to invest heavily in its infrastructure and the details of any deal still need to be put into place. Which, contrary to earlier reports, won't come online until early 2016. In addition, China will open up refining to third party, non-state-owned refineries which will reportedly add another 600,000 B/D in demand in 2016. Bottom line, the Iran story is one that will not change the fundamental story on crude oil anytime soon, if at all.

At the moment it doesn't matter if one wants to make a bullish or bearish case for the price of crude oil. Understand one thing, the crude oil market is trading on emotion. President Obama came out on Wednesday and spoke on the Iran Nuclear deal and the crude oil market reversed in a heartbeat, going from a positive on the day to a negative in a matter of a couple of hours. A different "headline" next week, may just do the opposite.

THE TECHNICAL PICTURE

The onslaught of data being put forth on the market "breadth" issue continues to garner the attention of market participants lately.

Facts and charts the bears don't want anyone to see.

Here's a chart that shows the advance/decline line for common stocks only on the NYSE. In other words, this removes closed-bond funds which can skew things. Well, this just broke to its lowest level this year. Given the S&P 500 has not broken down yet, this could say there is trouble lurking under the surface.

(click to enlarge)

Source See It Market

What stands out to me, is that we saw a similar situation last October. The market pulled back, then recovered to new highs. It is not a wild observation to believe that the same market scenario can play out once again.

When stocks are breaking out to new highs, you want to see the Advance-Decline line confirming this by also making new highs. If stocks made new highs with the A/D line falling, this might give people reason to question the sustainability of the rally. If this bearish divergence were to persist, it's reasonable to think it's only a matter of time before the weakness infects the rest of the market.

I then looked at what sort of warning, if any, was provided by the advance-decline line prior to previous market tops.

The average number of days between the peak of the advance-decline line and the peak in stocks was 287 days (the market trades ~250 days a year), and the average change is 12%.

As an example, the advance-decline line peaked in April 1998 and the S&P 500 didn't stop going higher for another 500 days, during which time it advanced 36%.

Therefore, it tells you nothing about how long stocks can advance as participation narrows.

The advance-decline line is just one of many tools that professional money managers and technicians use to measure market participation. The issue that's getting lost in all the talk about breadth is that what we're currently experiencing is not a bearish divergence. It's not as if stocks are screaming higher while the advance-decline line is making a series of lower highs. The Russell 3000, which represents 98% of the investable U.S. stock market, is up approximately .01% YTD.

A look now at one of the strongest areas of the market recently, the Nasdaq.

When we start to see headlines like "A deeper dive by Apple could crush this market" it's apparent the self-ordained experts are running the media show.

Let's examine what has taken place to date and what has actually transpired, rather than jump to the conclusion that Apple (NASDAQ:AAPL) will sink the markets.

AAPL is down 13% from its high recorded on 7/20.

In the same time period;

the S&P is off 2.3%
the Nasdaq is down 3.3%
the Dow is down 4.0%

Perhaps it is more rotation to other sectors and names that we are witnessing now, keeping the major averages somewhat stable at the moment. A far as the Nasdaq is concerned the stock I mentioned last week, GOOG is now alive and well. We can now add PCLN as a factor going forward as it seems consumers are traveling more than analysts thought as the shares just broke out after their blowout earnings report. I might as well add NFLX here, as it too just made another new high.

I am not so sure it is a ONE-stock market. More on the AAPL situation later.

Transports have been a big disappointment this year, but have held the lows of early July. For the moment, the downtrend seems to have been broken as the recent leg higher bodes well for the sector. Another example of how rotation may be coming into play within the markets, as the sector has rallied 5.7% off of the lows. While the DJIA is flat in the same time period.

The horizontal line on the chart below represents overhead resistance. In the past that was a support area for the transports. What was once support, now becomes resistance.

The recent strength rallied the average right up to that resistance level, before falling back. That is not surprising given the fact that this has been one of the weakest segments of the market. The "test" now will be to see as the DJ20 pulls back, where the next low might be. If it can hold around the 8,000 level, that would represent a "lower" low for the index. A positive development. However, a break below the July lows brings into play the lows that were recorded last October, some 3.5% from present levels.

SHORT TERM OUTLOOK

My two pivot points are the same as they have been for quite some time. Moving above the 2131 pivot range is a positive, and a breakdown below S&P 2044 would be a negative. An area of support between 2075 and 2085, that was on my radar, was briefly violated to the downside this week. One positive note is that the S&P did manage to close (2077) above the 200 day MA (2073), with a late day rally on Friday.

For the moment, the short term scenario that I outlined last week is still in play.

"If we do get more downside probing, I think that 2050 - 2065 zone might give way to a more formidable pullback to the 2040 level, and maybe as low as last December's lows of 1990 - 2000."

That appears to be taking place as the S&P now sits at 2077, while the indicators that I use to monitor extremes are not flashing an excessive oversold level, just yet. That is a signal to me that there could be more weakness in the near term.

MARKET SKEPTICS

Many analysts and media types like to point out that this business cycle is "long in the tooth". With that comes the forecasts that this bull market is ready to be pushed to the side, ushering in a new bear market.

The fact is, the last few business cycles have been extremely long relative to historical cycles. Going back to the 1800's the average cycle has lasted 39 months. Here we are in month 72 of the current cycle. So are the skeptics right? The data suggests differently.

The last three recoveries lasted an average of 94 months. There will be plenty of push back on that as many will highlight Fed intervention, government policy, etc. The fact is longer recoveries in the modern era are not unusual. Perhaps the naysayers are living in the past as they ignore slower growth cycles in a more diverse global economy, etc.
The "great recession" that we have emerged from was very deep. In general, a deeper recession means more slack in the economy, which means a much longer recovery period as that slack gets pulled tight.

We should think of each cycle as its own unique environment and its growth will depend on the economic trends that develop during that economic expansion. Economic expansions generally don't die of old age, but die of excess. That is, we tend to see a boom before the bust. And considering how weak this "boom" has been so far it might not be entirely irrational to wonder if we still have quite a bit of room to run here in this cycle.

In other words, is our boom still in front of us before the next big bust? It's looking like that just might be the case. Therefore, while we're very likely entering the middle stages of this recovery, the current 72 months relative to historical averages does not necessarily mean we're at the end of the cycle.

INDIVIDUAL STOCKS

I recently added WCI Communities (WCIC), (July 17th at $23.02) to my portfolio in an attempt to take advantage of the strong numbers being displayed for the housing sector. Earlier this year I turned a nice, quick profit on TOL. While I still like that name, I believe WCIC offers more upside from present levels. Shares are slightly above my July entry point, and I think they will trade back down at some point which would be another opportunity for me to add. Scaling into a position over time.

Staying with home builders, a quick look at the chart of D.H. Horton (DHI) shows that the stock has broken out to new highs. The shares have pulled back from that new high and are worthy of a look.

Last week I mentioned investors should take a look at the airline stocks,

"At some point the airlines will receive some respect, they are not overvalued and I believe we have already witnessed most of the downside we are going to see in the sector."

They started to finally get a bid this past week. Don't expect a rocket ship to the moon with these names, but over time, the sector can produce some nice returns. Full disclosure, I own (NYSE:DAL).

A 'double bottom" pattern looks to have formed and that is bullish long term. The fundamentals also seem to be trending in the right direction with this latest, "load factor" report:

Apple - The recent news "spin' is surely negative at the moment and it appears the shares are trading with a "China" bias. Right now many believe that China is poison and anything related is also tainted. A very myopic view in my opinion, as I showed with the CTRP example.

Here is a dose of reality to rebut some of the 'spin' and media gibberish that is going around now. It might be worth noting at this time that AAPL sales in China grew 112% in the last quarter. That is not a typo.

Since last October, AAPL rallied some 38% to a new high at $132 in a FLAT market. I ask now that those in the media spinning this story as a negative please step up and give us the definition of out performance.

Newsflash, stocks don't go up every day, stocks don't make new highs every week. The recent weakness and correction is nothing more than consolidation of that huge gain. The stock should now move up to #1 on any investor'swatch list.

Shares are down 13% from the highs, another 5 % or so and the shares are teetering on entering a 'bear" market.

With a bull market as a backdrop, I will take the risk/reward of that NOT happening with a stock like AAPL, every time. Remember, this is not a "high flying", "bubble" stock selling at 50 times sales. Instead, it is the poster child of growth at a reasonable price.

SUMMARY AND CONCLUSION

The earnings reports and economic data were skewed to the positive side this past week, but the S&P yawned, and then got weaker as the days went by. A negative tone persists now, and in my view, this isn't surprising.

The S&P is still in the digestion phase of back-to-back years of outsized gains, meeting up with a pause in the earnings growth picture due to the energy issue. Investors need to bide their time, patience is what is needed now.

This past week saw some of the momentum and growth sectors (Biotech, Healthcare, Consumer Discretionary), taking it on the chin. If you are a long term bull and wish to see this market go higher, that is exactly the scenario needed to propel the market higher down the road.

No euphoric, "this is easy money", attitude exists. But a more realistic, "back to earth and reality", feel to the market is instead in place. Market tops are not formed in this environment.

After I presented last week's update, I was asked, in the face of some of the weak technical issues facing the market, how I could remain bullish and optimistic. If you put things in perspective, the answer is pretty simple. No long term trend lines have been broken and the S&P sits just 2.5% from an all-time high. Marry that to the opening quote from Peter Lynch and it is easy to see how I can come to that conclusion.

After all, if one "got out" of the market on every pullback like this, one would have left this bull market in 2012 at S&P 1325. Not to mention the dozens of other times that "headlines" and "issues" were supposed to foil the equity market, in the last 3 plus years.

By Fear & Greed Trader

Source:www.seekingalpha.com

Make Millions Trading Stocks

Sunday, August 9, 2015

Weekly Market Update - Recent Earnings And Economic Data Are Positive As The Market Sells Off

Summary

THE FED

NO Bull market has ever come to an end when the Fed started to "normalize" interest rates.

THE ECONOMY

EARNINGS

SENTIMENT

CRUDE OIL

THE TECHNICAL PICTURE

Therefore, it tells you nothing about how long stocks can advance as participation narrows.

SHORT TERM OUTLOOK

MARKET SKEPTICS

INDIVIDUAL STOCKS

SUMMARY AND CONCLUSION

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