Sunday, July 24, 2016

Weekly Market Outlook 7/25

Stock Market

The picture emerging from the Q2 earnings results thus far is one of modest improvement from the extremely weak levels over the last couple of quarters.  Growth is still non-existent and Q2 is on track to be the 5th quarter in a row of earnings declines for the S&P 500 index. That said, the results thus far are indicating that the worst may be behind us.  If the coming results confirm this trend as well, then we can start having a little more confidence in earnings expectations for the second half and beyond.

We now have Q2 results from 126 S&P 500 members that combined account for 32.7% of the index’s total market capitalization. Total earnings for these 126 companies are down -1.1% from the same period last year on -2.6% lower revenues, with 70.6% beating EPS estimates and 55.6% coming ahead of top-line expectations.  Looking at Q2 as a whole, combining the actual results from 126 index members with estimates for the still-to-come 374 companies, total S&P 500 earnings are expected to be down -3.4% on -0.5% lower revenues.  The Q2 growth pace has ‘improved’ as companies have come out with improved results, but the quarter is still on track to be in the negative for the 5th quarter in a row.

Technically, both short and medium term momentum levels are in the 80th percentile, which tell us that stocks in the SP 500 are now getting a bit ahead of themselves once again.

july22momentum

The most likely scenario is congestive trading action, which should cause the short term and medium term momentum levels to revert back to neutral or oversold territory, which will create some degree of balance and cause the overall stock market to begin trading higher once again.

At the present time, large institutional volume is absent from the market and it wont’ take more than a few negative earnings reports to begin a bit of selling pressure, which is the most likely scenario ahead.

Technically, the overall stock market is overbought and the 10 day RSI moved to the 70 level over the past few sessions, which confirms my momentum analysis that stocks are in fact getting a bit ahead of themselves at the present time.

JULY22spy

Expect mild downside selling pressure to settle in over the next few sessions, which will take the overall market to the 50 day line and possibly a bit lower.

july22vix

The volatility levels as measured by the VIX Index, which measures the expected volatility (implied volatility) over the near term is near historic lows, and that means the most likely scenario is a slow congestive downside trading action or a few sharp day of selling pressure at the worst case scenario, either way we are not anticipating major corrective action at this time.

Bond Market

The number of Americans filing for unemployment benefits fell last week, hitting a three-month low as the labor market continues to gather momentum.

Initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 253,000 for the week ended July 16, the lowest reading since April, the Labor Department said on Thursday.

"Claims are near the 43-year low of 248,000 touched in mid-April. Economists polled had forecast initial claims rising to 265,000 in the latest week. Claims have now been below 300,000, a threshold associated with a healthy labor market, for 72 straight weeks, the longest stretch since 1973."

At the present time, the odds of the probability that the FED will increase the fed funds rate by 25 basis points at the July 26-27 policy meeting is 2%. And the probability that the FOMC will increase the fed funds rate at the December 13-14 policy meeting is 47%.

Technically, bonds are losing momentum and approaching the 50 day moving average, as we’ve anticipated over the past few weeks.

july22tlt

Rotation has been moving out of fixed income and back into the equity markets and unless we see major discord from China or Britain the odds are fairly strong that the long bond will revert back to the 50 day line to the downside and begin moving lower as we get closer to the end of the year, since the FED is likely begin raising rates and financial markets will begin assimilating this data ahead of time.

Currency Market

The U.S. dollar recently broke out to the upside from a one month congestion pattern. The rule of thumb is that prices break out of a congestion pattern in the same direction that they came into the pattern. Expect additional gains for the greenback.

The British pound is sharply lower after a purchasing manager’s index that combines estimates of services and manufacturing came in worse than anticipated, falling to 47.7 in July, which is the lowest since April 2009. The 50 level is the dividing line between expansion and contraction.

Financial futures markets are currently predicting there is an 89% probability that the Bank of England will lower its key lending rate by 25 basis points to 25 basis points at its August 4 policy meeting.

The Japanese yen is sharply lower due to reports that Japan’s government is currently discussing adding more stimulus to its economy. There are rumors that additional stimulus could total approximately 3 trillion yen, or $28.3 billion for this year. The Bank of Japan’s next policy meeting is scheduled for July 29.

Commodity Markets

The U.S. is going to begin raising rates over the next several months and the U.S. dollar will continue to strengthen, unless we see something unexpected from China or Britain in the coming weeks.

Crude oil inventories fell 2.3 million barrels in the July 15 week to 519.5 million. Though crude oil stocks have fallen by about 24 million barrels since the record highs set in late April, they are still 12 percent higher than a year ago and at historically high levels for this time of year.

Technically, both Gold and Crude oil are now trading below the 20 day line and over the next few months, the odds are high that we will see both commodities revert back below the 50 day line, which will cause most commodities to revert to being bearish over the next several years, since interest rates are not going any lower and the odds of the U.S. dollar moving higher is rather high, assuming GDP data continues confirming what we are seeing from the labor market.

Courtesy of Market Geeks

Sunday, July 17, 2016

Weekly Market Outlook 7/18

Stock Market 

We now have Q2 results from 36 S&P 500 members that combined account for 10.1% of the index’s total market capitalization.  Total earnings for these 36 companies are down -3.9% from the same period last year on -0.1% lower revenues, with 66.7% beating EPS estimates and 41.7% coming ahead of top-line expectations.  Looking at Q2 as a whole, combining the actual results from 36 index members with estimates for the still-to-come 464 companies, total S&P 500 earnings are expected to be down -5.4% on -0.5% lower revenues.  The Q2 growth pace has ‘improved’ as the banks have come out with improved results, but the quarter is still on track to be in the negative for the 5th quarter in a row.

As has been the pattern in other recent periods, the Energy sector remains the biggest drag on the aggregate growth picture, with total earnings for the sector expected to be down -77.1% on -25.7% lower revenues. Excluding the Energy sector, earnings for the rest of the index would be down -2.1%.

The only meaningful positive earnings growth this year is expected to come from the last quarter of the year, which is then expected to continue into 2017 when earnings for the S&P 500 index are expected to be up in double-digits.  We will see if those estimates will hold up as we reach the last quarter of the year. But given what we have seen over the last few quarters, the odds don’t look that favorable.

Shifting focus to market sentiment, the short term trend is getting ahead of itself. The short term trend is measured as the percentage of stocks in the SP 500 that are trading above the 20 day line.

july1520day

Last Thursday, the percentage went up to 95th percentile, before breaking lower once again and the expectation is for the overall market to cool off and begin pulling back to the 50 day line, which will cause the percentage of stocks in the SP 500 trading above the 20 day line to move into neutral or possibly oversold territory, before we see reasonable degree of balance once again.

The overall market structure as measured by the percentage of stocks in the SP 500 trading above the 200 day line remains near the 75th percentile, which tells me that stocks are slightly overbought but in light of the longer term time frame are still holding relatively steady and the overall market structure is very secure from Global uncertainty and turmoil.

I do want to add that once the percentage of stocks in the SP 500 trade above 80th percentile, I will be looking for beginning of selling pressure or once again extended range bound period, without much directional bias.

july15momentumb

The reason why U.S. markets brushed off Britain’s exit from Euro is because the overall structure is sound and much better off than we were last summer when volatility spiked near historic highs, when we first heard news of Chinese Economy slowing down.

Below you can see the VIX Index, which measures the overall stock market implied or expected volatility, based on the at the money SP 500 options, which are extremely sensitive to uncertainty int he overall market structure and currently the VIX is well below the threshold 20 level, which tells us that U.S. markets have effectively “assimilated” potential financial troubles from Europe.


july15vix
As you can see from the chart above, the VIX Index is currently at or below the levels that we’ve seen PRIOR to news of Britain leaving the Euro and global drama causes spikes in the VIX more than any other financial stimuli, even the FED.  Therefore, based on the current volatility level the only reason we will see a mild spike in volatility over the next few sessions, will be as a result of minor corrective action across most stocks as a result of the short term trend getting a big ahead of itself as measured by the percentage of stocks in the SP 500 trading above the 20 day line.

july15dia

Expect trading action on the major indices to revert back to the 50 day line over the next few weeks and possibly sooner, since institutional traders are largely absent from the current market environment and retail volume rarely leads to “sustainable momentum” over time.


Bond Market

Americans spent more money at retailers and factories revved up production in June, offering encouraging signs of the U.S. economy’s resilience in the face of global headwinds.  Industrial production shot up 0.6 percent, fueled by a big rebound in auto output. It was the best showing since last August. Meanwhile, retail sales also rose 0.6 percent last month, three times the gain in May, with demand strong in a number of areas.  Inflation pressures remained modest, with consumer prices climbing 0.2 percent in June. Prices are up just 1 percent from a year ago, still well below the Federal Reserve’s 2 percent target.

The new reports Friday came a week after the government’s blockbuster jobs report, which showed the economy created 287,000 jobs in June. It marked a major bounce back after a dismal gain of just 11,000 jobs the previous month. May’s result, coupled with a lackluster showing in April, had raised worries that the U.S. jobs machine was starting to sputter.  Analysts said the strong job growth in June and solid consumer spending should provide good momentum for the economy heading into the second half of the year.

The economy grew at an anemic 1.1 percent rate in the first quarter, as measured by the gross domestic product, held back by a slowdown in consumer spending and troubles in manufacturing. Analysts are hopeful that GDP growth strengthened to 2 percent or better in the second quarter, and many are looking for further acceleration in the current quarter.

Technically, over the past week, long bonds reached record highs as foreign investors rotated out of foreign bonds which have negative rates and into U.S. treasuries, which offer very little in the way of income at this time.

july15tlt

Every technical indicator and fundamental factor pointed to weakness in the long bond, but not till the U.S. stock market reached the highest price in 2016 did the confidence level increase sufficiently enough to begin rotating away from fixed income and back into the U.S. equity market, which should continue over the next few sessions as the drama surrounding Britain is being “assimilated” by Global markets.

Overall, I’m expecting the long bond to revert back to the 50 day line and begin congesting till we get a bit more data from the FED that will cause more certainty surrounding raising rates in December, which will cause the U.S. dollar to strengthen and in turn will cause long bonds to revert back to a downtrend, which should consistently lower over the next few years as the FED begins to gradually raise rates.

Crude Oil / Energy

Crude oil inventories fell 2.5 million barrels in the July 8 week to 521.8 million, but refined product inventories grew at a faster rate, with gasoline up 1.2 million barrels and distillates up 4.1 million.

Gasoline and distillate production increased in the week, averaging 10.2 million and 5.0 million barrels per day, respectively.  But demand for motor gasoline eased slightly to an average of 9.7 million barrels per day, and is now up 1.6 percent from last year in the same period, and distillate demand also slightly receded, averaging 3.8 million barrels per day, which is 1.8 percent higher than a year ago.

Technically, crude oil is moving lower and the closer we get to the end of the year the harder it will be for the crude oil market to move higher, since the prospect of higher rates towards the end of the year is a strong possibility and that means higher price for the U.S. dollar and overall stronger economic growth.

july16uso

All of factors that I described are negative for commodities, since commodities trade inverse to U.S. dollar and U.S. dollar moves higher as interest rates move higher or there’s an anticipation of higher rates and that’s the dynamic that we are dealing with at this time, which suggests that commodities, such as Crude Oil and Gold will move lower over the next several months, while U.S. dollar and stocks continue gaining strength.  The same analysis that applied to crude oil applies to the Gold market and the majority of commodities that rise when stocks move lower over time.

Courtesy of Market Geeks

Sunday, July 10, 2016

Weekly Market Outlook 7/11

Stock Market

This week will bring earnings results from 30 companies, including 13 S&P 500 members that include most of the money center banks. These wouldn’t be the first Q2 reports as companies with fiscal quarters ending in May have already been coming out with results and those reports get counted as part of the Q2 tally.  In total, 23 S&P 500 members with fiscal quarters ending in May have reported Q2 results already. Total earnings are expected to be down -6.2% on -0.6% lower revenues. This will be the 5th quarter in a row of negative earnings growth for the S&P 500 index.

As has been the pattern in other recent periods, the Energy sector remains the biggest drag on the aggregate growth picture, with total earnings for the sector expected to be down -76.8% on -27% lower revenues. Excluding the Energy sector, earnings for the rest of the index would be down -3.0%.
While Energy stands out for its very tough comparisons, there is not much positive growth coming from the other major sectors either. The Finance and Technology sectors, the two biggest earnings contributors in the S&P 500 index, are also expected to see earnings decline in Q2 from the year-earlier levels.

For the Finance sector, total Q2 earnings are expected to be down -6.6% on -0.5% lower revenues, which will follow -6.9% decline in the sector’s earnings in the preceding quarter.  It has been a tough period for the sector, with benchmark treasury yields going down the summary 2012 record lows on the back of the Brexit surprise and Fed expectations. This low interest rate environment is a big restraint on the group’s earnings power through continued pressures on net interest margins.

The Technology sector, total earnings are expected to be down -6.4% on +2.7% higher revenues, which would follow the sector’s -4.5% earnings decline on +0.4% higher revenues in Q1.  The big culprit for the Tech sector’s weak showing this quarter (as well as last one) is Apple, whose June quarter earnings are expected to be down -28.4% on -15.2% lower revenues from the same period last year. Excluding Apple, the Tech sector’s Q2 earnings would be down only -0.9%.

Shifting focus to momentum level, the short term trend as defined by the percentage of stocks in the SP 500 trading above the 20 day line is approaching overbought price levels and that means we can expect a few days of lower prices ahead or possibly extended range bound cycle that may end up lasting another few weeks, since there’s very little directional bias and the fall out from Britain has been assimilated fairly well by U.S. stocks at this point in time.

july10momentum

The most probable scenario is a pullback to the 50 day line, which would take the overall stock market back to range bound trading action, which will more than likely persist, till we get closer to the end of year, when the odds of the FED raising rates is above 50th percentile.

The current stock market volatility levels as measured by the VIX index is below the 20 threshold level, which tells us that implied volatility in U.S. stocks is declining rapidly and U.S. stock traders are not seeing major threat to U.S. equity markets as a result of Britain leaving the Euro.

july10vix

Lastly, the likelihood of U.S. stocks breaking out and moving substantially higher in light of both Global uncertainties and strong bond prices is not likely and the most probable scenario is a pullback to the 50 day line, where the overall market will consolidate till we see if earnings revisions are turning better, which won’t happen for another few weeks.

july10spy

Earnings have been revised lower over the past 5 quarters and based on FED data, we may be turning the corner, which means higher U.S. dollar prices and weakness in commodities. This should cause major sector rotation away from defensive stocks and back to growth and tech stocks.

Bond Market

A burst of hiring in June provided a reassuring sign that the U.S. economy will likely withstand global weakness that may be magnified by Britain’s decision to leave the European Union.

Last month’s gain — 287,000 jobs, the most since October 2015 — showed that employers shook off a hiring slump in April and May and suggested that the economy will continue to grow steadily.
May’s scant job gain of 11,000 and April’s modest 144,000 increase had raised fears that the job market was weakening after months of solid growth. The United Kingdom’s “Brexit” vote late last month to bolt the European Union escalated concerns that the global economy could slip into a recession and that the United States would be affected.  The June hiring figures, released Friday, were calculated before the Brexit vote. But the robust job growth served as a reminder that through much of the U.S. economy’s seven-year recovery from the Great Recession, it has repeatedly withstood crises and recessions overseas.

Technically, long bonds continue to trade higher, even though every technical as well as fundamental factor is pointing to a sharp break in price. The reason why we are seeing the influx of capital rotating into bonds is due to negative interest rates in Foreign countries.

july10tlt

Price is currently penetrating the Bollinger Band to the upside as well as giving us an RSI reading above the 70 level, both pointing to a price break. The anticipated target to the downside is mostly inline with the 50 day moving average or possibly lower.

Rotation is starting to move into growth and tech stocks as evident by the IWF (Russell 1000) making new highs on Friday, so it’s very possible that foreign money will begin rotating into U.S. stocks once again, especially in light of the positive employment data that was released on Friday.

july10iwf

The overall scenario for the long bond is higher yield and that means bond prices will begin trading lower and reverting back to the main trend, which will be lower over the next few years, since FED has no plans on implementing negative rates and based on Friday’s employment numbers, the prospect of raising rates in December is probable.  Therefore I anticipate a break in the long bond price over the next few sessions, unless we hear something unexpected from China or Britain.

Currency Market – The U.S. dollar advanced when the better than expected non-farm and private payrolls numbers came in stronger than estimated.  The British pound is higher even though a report showed U.K. consumer sentiment fell by the most in 21 years. The pound has recently overtaken the Argentine peso as the weakest currency in 2016. Even though the currency of the U.K. is a little higher on Friday, the pound is likely to drift lower longer term as declines in interest rates in the U.K are anticipated.

Crude Oil – Crude oil inventories fell 2.2 million barrels in the July 1 week to 524.4 million, the seventh weekly decline in a row. The year-on-year gain in inventories continues to shrink, with crude oil inventories now up 5.1 percent, motor gasoline up 9.6 percent and distillates up 8.4 percent.
Production of gasoline increased slightly, averaging about 10.0 million barrels per day, while distillate fuel production slightly decreased to a daily average of 5.0 million barrels. Total product demand averaged 20.5 million barrels per day over the last four weeks, up 3.0 percent from last year, of which 9.8 million barrels was gasoline, up 2.5 percent, and 3.9 million was distillates, up 1.5 percent from a year ago.  The largest year-on-year increase in demand was registered in jet fuel, which was up 11.7 percent from the year ago period to an average of 1.8 million barrels per day over the last four weeks. Technically, it appears that Crude oil has peaked out which is in line with our expectations of U.S. dollar beginning to rise once again in anticipation of higher interest rates later this year.

july11uso

The main reason why we saw higher commodity prices and that includes the entire commodity complex is due to the extreme weakness in the U.S. dollar as a result of extremely low interest rates.
The FED will more than likely begin raising rates later in the year, at least that’s what employment data is telling us and that will cause the U.S. dollar to begin gaining value, which will invariably cause the commodity complex to trade lower, till it reverts back to the long term trend.

Courtesy of Market Geeks

Monday, July 4, 2016

Weekly Market Outlook 7/5


Stock Market

U.S. stocks closed higher Friday for the fourth day in a row, staging a big comeback after a swoon following Britain’s historic vote to leave the European Union.  The U.S. market ended the week up 3 percent, its biggest weekly gain since November. British stocks have regained all the ground they lost since the vote last week, and U.S. stocks have come close.

The Q2 earnings season will get into the spotlight following Alcoa’s  July 11th report. But the earnings season has actually gotten underway already, with results from 21 S&P 500 members already out.  Total earnings for the 21 index members that have reported results are down -4.1% on +0.9% higher revenues, with 60% beating EPS estimates and equal proportion coming ahead of top-line expectations. Comparison of the Q2 results thus far with prior periods offers a mixed picture. But it’s likely too small a sample to draw any conclusions from in any case.  For Q2 as a whole, total earnings for the S&P 500 are expected to be down -6.2% on -0.7% lower revenues. This will be the 5th quarter in a row of negative earnings growth for the S&P 500 index.

The Energy sector remains the biggest drag on the aggregate growth picture, with total earnings for the sector expected to be down -78.9% on -27.1% lower revenues.Excluding the Energy sector, earnings for the rest of the index would be down -2.8%.

Shifting focus to market sentiment, as most of you know, I follow momentum levels very closely and since March, medium term momentum levels have been declining from a historic high, when over 90% of stocks in the SP 500 began trading above the 50 day moving average.

Finally, when the market reacted to Britain’s exit and lost close to 5% in value, the medium term momentum level finally moved into oversold territory, which was characterized by by roughly 20% of stocks in the SP 500 trading above the 50 day line, which is considered reasonably oversold.

july150
Based on the current sentiment, the odds are fairly strong that the market is going to stay near the 50 day line and congest over the next few sessions, till Global markets gain a bit more certainty and volatility levels continue to decline further.

july1spy

Don’t expect too much directional bias till bonds begin breaking lower and that’s the topic I’m going to jump into next.


Bond Market

Initial claims in the June 25 week did rise 10,000 to a slightly higher-than-expected 268,000 but follow a revised decline of 19,000 to 258,000 in the prior week. The 4-week average is unchanged in the latest week at a 266,750 level that is roughly 10,000 below a month-ago in what is a favorable indication for the June employment report.

claims

Continuing claims confirm the labor market’s strength, down 20,000 in lagging data for the June 18 week to 2.120 million.  In an important comparison, the June 18 week was also the sample week for the June employment report and a specific comparison with the sample week of the May employment report shows a very sizable 40,000 improvement.  The 4-week average, down 13,000 in the week at 2.134 million, is 17,000 below the May sample week. The good news continues with a 1 tenth down-tick in the unemployment rate for insured workers to a record low 1.5 percent.

The main driver of the long bond in the past week was Britain’s decision to leave the E.U. and both the 30 year and 10 year bond are near all time highs, since foreign money is rotating into U.S. bonds and out of foreign stocks, which is only driving bonds higher, even though most indicators are pointing to higher interest rates and lower bond prices over the next few months.

Technically, the long bond is oversold based on just about every technical factor imaginable, including penetration of upper Bollinger Band, excessively high RSI levels and divergence between the RSI and price action, which typically leads to a long term price reversal, which is what I’m expecting from the long bonds over the next few months, since the odds are fairly high that the FED will begin raising rates towards the end of the year and bonds will begin “pricing in” higher yield and begin trading lower, since they trade inverse to interest rates.

july1tlt

The most likely scenario is a pullback down to the 50 day line, which will congest till we begin getting a bit closer the end of the year. The U.S. dollar should begin rising in anticipation of higher rates and that should cause commodities and bond prices to move sharply lower in the coming months.


Crude Oil 

Crude oil inventories fell 4.1 million barrels in the June 24 week to 526.6 million, extending an uninterrupted series of weekly declines to its sixth week.

Gasoline inventories rose 1.4 million barrels while distillate fuel fell 1.8 million. Year-on-year, both crude oil and refined product stocks are still much higher than a year ago at this time, but the gain is quickly shrinking, with crude oil now up 13 percent while gasoline is up 10.3 percent and distillate fuel up 10.8 percent.

crudejuly

Refineries were operating at a very high 93.0% capacity last week, but production of gasoline decreased slightly to 10.0 million barrels per day while distillate fuel oil production rose marginally to average 5.0 million barrels.  Motor gasoline demand averaged 9.7 million barrels per day over the last four weeks, 1.8 percent higher than last year at this time, but distillate demand was 2.9 percent weaker, averaging 3.8 million barrels per day.  Technically, crude may have reached a price high for the current cycle and could well be on it’s way back down along with the rest of the commodities complex. The RSI reached above 70 in early June and price has stagnated since that time.

july1uso

The main trend or the long term trend remains neutral to bearish and fundamentally it’s hard to imagine that Crude oil could have moved so high over the past several months.  The main culprit is the weakness from the U.S. dollar, which moves inverse to commodities and has caused overall support for defensive stocks, commodities and the bond market. With FED targeting raising rates in December, it’s more than likely that we will start seeing a break in the commodity complex and that includes Crude Oil and Gold, in addition to Grains and Softs.


Gold Market

Gold continues to rally in light of weaker U.S. dollar and uncertainty surrounding Britain leaving the Euro. Technically, the entire Gold market is extremely overbought and has gained well over 100% over the past year.  Just about every oscillator is pointing to sharp pullback in price of Gold, which should happen as we get closer to the end of the year, when the markets will begin assimilating higher rates and that will translate into higher value for the U.S. dollar and lower overall price for Gold.

Furthermore, economy is picking up in the U.S., granted much slower than expected, but employment is once again on track, GDP is recovering and earnings revisions for the first time are not as negative as we’ve seen over the past 5 quarters.  Don’t expect too much additional upside, since markets begin discounting everything known, well ahead of time.

Have a great day!

Courtesy of Market Geeks