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.
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.
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.
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.
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.
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.
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.
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.
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