Sunday, August 21, 2016

Weekly Market Outlook 8/22/16

Stock Market

We now have Q2 results from 480 S&P 500 members that combined account for 97.3% of the index’s total market capitalization. Total earnings for these 480 companies are down -3.2% from the same period last year on +0.1% higher revenues, with 72.1% beating EPS estimates and 54% coming ahead of top-line expectations.  Q2 earning season has been less negative compared to the last few reporting cycles. This reflects an ever-so-modest improvement in the growth picture, both for Q2 as well as the current period.

Estimates for the current period (2016 Q3) have started coming down as well, in-line with the trend that we have become used to seeing over the last few years.  Earnings growth for the index is now expected to be in negative territory in Q3 as well, with the last quarter of the year as the only period this year expected to have positive growth.

Shifting focus to overall stock market sentiment, the percentage of stocks in the SP 500 trading above the 50 day line continues to decline, even with the broad market making new highs over the past few sessions, which tells me the rally is getting a bit narrower and that the most likely scenario is more downside, especially with the energy sector beginning to cool off once again.

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Volatility levels are near historic lows and appear to be reacting less to global stimuli, which tells us that any corrective action coming from the stock market is expected at this time to be relatively mild, erasing the gains we’ve seen over the past month and taking us back to the 50 day moving average to the downside.

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The last swing high rally did not include major sectors such as utilities or transports, which have massive market share. The overall market must be relatively balanced with at least 80% of major sectors at or near new highs for momentum to continue, which is not the case at the present time.

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Expect to see corrective action taking the SP 500 back inline with the 50 day line to the downside, which will coincide with the percentage of stocks in the SP 500 trading above the 50 day line to move below 50th percentile and that should occur over the course of the next few weeks.


Bond Market

Jobless claims are low and point unmistakably to strength in the labor market. Initial claims fell 4,000 in the August 13 week which is a very important week as it is the sample period for the August employment report.  The 262,000 level is 10,000 higher than the sample week of the July employment report which isn’t very much at all especially since levels are at historic lows. And the 4-week average is a bit more favorable, at a 265,250 level that is only 7,750 above the month-ago comparison.

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Continuing claims are likewise only slightly above the month-ago trend.

In lagging data for the August 6 week, continuing claims rose a very slight 15,000 to 2.175 million with the 4-week average up 11,000 to 2.155 million. This time last month continuing claims were roughly 25,000 or so lower. The unemployment rate for insured workers is unchanged at a very low 1.6 percent.

The credit futures market complex is lower and appears to be performing worse than the news would suggest. This should be viewed a sign of weakness, especially for the 30 year Treasury bond futures.

The probability that the FOMC will increase the fed funds rate at the December 13-14 policy meeting is 54%, which is unchanged from yesterday and the probability that the FOMC will increase the fed funds rate at the June 14, 2017 meeting is 67%, when 67% was predicted yesterday.

The potential global inflation threat down the road is likely to become more of a bearish headwind, especially for the thirty year Treasury bonds.  Technically, the long bond continues to stay within the confines of the descending channel that’s been developing over the past several weeks and will likely continue till institutional volume comes into the market early to mid September, which is typically when overall volume picks up substantially following summer months.

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Expect more congestive trading range with a breakdown to the downside, which should trigger a downtrend in the long bond, since long bonds are inverse to interest rates and the odds are fairly high that the FED will begin raising rates in the next six to eight months, since the U.S. financial markets are recovering and by that the GDP data will more than likely be at the 2% target, which has been the growth rate the FED has been focused on over the past two years.


Commodity Markets 

Crude oil inventories fell 2.5 million barrels in the August 12 week to 521.1 million barrels, shrinking the year-on-year gain to 14.2 percent.  Petroleum product inventories were mixed, with gasoline down 2.7 million barrels from the prior week to 232.7 million, but still up 9.3 percent on the year, while distillates rose 1.9 million barrels to 153.1 million, 3.2 percent higher than the year ago level.
Including other products, total commercial inventories rose 1.3 million barrels last week to 1,393.6 million barrels, putting the year-on-year gain at 8.8 percent.

Domestic crude oil production averaged 152,000 barrels per day less than in the prior week at 8.6 million barrels, and crude oil imports also fell, averaging 211,000 barrels per day less at 8.2 million barrels.  Technically, crude oil has been moving against the main trend and finally appears to be losing momentum to the upside, which means the odds are strong that the market will revert back to the downtrend, which would put crude oil back inline with the long term trend.

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The current technical scenario points out the very familiar scenario of the short term trend beginning to fall in line with the long term trend, which presents the lowest risk and the highest probability trading opportunities for short term traders.  I expect crude to begin trading lower till the RSI oscillator is back down to neutral or below neutral territory, which will also push the overall stock market lower, due to high concentration of crude oil related stocks, which have been offering the stock market support in recent days.

Shifting focus to the Gold market, the U.S. dollar should begin gaining strength in coming months, due to probable rise in interest rates over the next several months, which will begin assimilating into the U.S. dollar market, which consequently will cause the Gold market to trade lower and fall back inline with the long term trend, similarly to what we will see with the energy market in the coming months.

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Technically, the gold market is congesting, which will continue till the interest rate market and the U.S. dollar begin gaining directional momentum, which will cause the gold market to break to the downside and revert back to the down trend that started over one year ago, before the U.S. dollar started falling down due to unexpected weakness out of China during last summer.

Courtesy of Market Geeks

Sunday, August 14, 2016

Weekly Market Outlook 8/15/2016

Stock Market

The Retail sector is the only one where a significant number of Q2 earnings reports are still awaited at this stage; the reporting cycle has effectively come to an end for most of the other sectors, particularly in the large-cap S&P 500 index (plenty of small-cap reports are still to come).  We have 124 companies coming out with quarterly results this week, including 21 S&P 500 members that include major retailers.

As of Friday August 12th, we have seen Q2 results from 25 retailers in the S&P 500 index (out of the 44 total) that combined account for 59.5% of the sector’s total market cap in the index.  Total earnings for these 25 retails are up +6.5% from the same period last year, on +7.8% higher revenues, with a relatively low 52% beating EPS estimates and a very low 24% coming ahead of top-line expectations.

We now have Q2 results from 459 S&P 500 members that combined account for 92.3% of the index’s total market capitalization. Total earnings for these 459 companies are down -3.6% from the same period last year on -0.6% lower revenues, with 71.5% beating EPS estimates and 52.9% coming ahead of top-line expectations.

Thursday, the value of the S&P 500 index closed at yet another all-time high at 2185.79. The trailing 12-month P/E ratio for the S&P 500 now stands at 19.5, based on yesterday’s closing price (2185.79) and trailing 12-month EPS ($111.89).  Based on the current ratio, the index is getting a bit ahead of itself and with a few sectors lagging behind the overall market, them most probable scenario is range bound trading action for a few more quarters, till the numbers finally begin to improve.

Shifting focus to overall market sentiment levels, the medium term time frame tells us that the rally we are seeing is narrow, since the indices are making new highs, while the percentage of stocks trading above the 50 day line continues to gradually decline.

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This tells us that the rally we are seeing in the indices is being driven up by retail traders, which focus on large caps the great majority of the time.

If you look at the mid caps, you can see that the index failed to rally to new highs and the index appears to be running out of momentum, which is typical during summer months, when institutional traders are largely out of the market and computerized buy programs are not being triggered.

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Volatility levels are at historic lows, which doesn’t typically last very long and the most probable scenario is a rise in volatility, which will coincide with bringing the broad indices back in line with the 50 day line to the downside.

The energy sector and the retail sector are going to be instrumental in helping the bears gain a bit o control towards the downside, which will more than likely cause volatility and selling pressure to increase over the next few weeks.

Bond Market

July retail sales were unchanged, which compares to expectations of a .4% increase and retail sales, excluding autos fell .3% when a gain of .1% was anticipated.

The July producer price index declined .4%, which compares to the estimate of a .1% advance and the producer price index, excluding food and energy, was down .3% when up .2% was estimated.

The number of Americans filing for unemployment benefits fell last week, pointing to sustained labor market strength in early August that could help spur faster economic growth.  Initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 266,000 for the week ended Aug. 6, the Labor Department said on Thursday. Claims for the prior week were revised to show 2,000 fewer applications received than previously reported.  Economists polled had forecast initial claims declining to 265,000 in the latest week. A Labor Department analyst said there were no special factors influencing last week’s claims data and no states had been estimated.

Based on values implied from financial futures markets, the probability that the FOMC will increase the fed funds rate at the December 13-14 policy meeting is 43%, which compares to 38% yesterday and the probability that the FOMC will increase the fed funds rate at the June 14, 2017 meeting is 54%, when 53% was predicted on Thursday.

Technically, the mixed FED data is giving the FED another reason to push back the inevitable till June of next year. We are seeing a descending triangle pattern developing, which will more than likely continue to cause selling pressure to come into the bond market, which will cause a breakdown in price.

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Rates are going to move higher and bonds will begin assimilating this into their price over the next month, especially if employment and job claims continue to stay near record low levels.  Interest rates and bonds trade inverse to each other and with rates near historic lows, the odds are rather high that we will be seeing more downside from the long bond in the medium term time frame.

Commodity Market

Crude oil inventories rose 1.1 million barrels in the August 5 week to 523.6 million, lifting the year-on-year gain to 15.4 percent.  Stocks of petroleum products declined, with gasoline down 2.8 million barrels to 235.4 million and distillates down 2.0 million to 151.2 million barrels. Year-on-year, gasoline inventories are now up 9.2 percent and distillates up 2.3 percent.

Technically, crude oil is bouncing back from a strong downtrend, which started back in the beginning of June and has increased pressure in recent weeks.

The pullback to the upside in price that we are seeing is expected, especially considering how much value the selling pressure erased over the past 2 months, so a bit more upside is expected, especially in light of the main trend.

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Expect the down trend to resume over the next few sessions, which will cause further pressure on the overall stock market and cause crude oil to resume it’s downtrend.

Gold should begin moving lower, since volatility or expected volatility due to global pressures has declined substantially in recent months. Asian markets troubles and England are both priced into the current global environment and unless we see unexpected stimuli, the odds of seeing a major spike in the price of Gold is minimal.

U.S. dollar is gaining resilience once again and that’s going to push the overall commodity complex lower, since a rising dollar causes interest rates to increase and higher interest rates are bearish for commodities.

The long term trend in the gold market made it back to neutral territory before pausing once again and over the next few months, we will begin seeing institutional money flow back into the U.S. stock market and out of defensive assets such as precious metals.

Courtesy of Market Geeks