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.
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.
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.
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.
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.
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.
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.
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