Sunday, October 23, 2016

Market Outlook Week of 10/24/2016

Stock Market

Earnings and revenue growth is tracking better relative to what we have seen the last few quarters and a bigger proportion of companies are coming out with positives surprises for both earnings as well as revenues.  Improved results from the major banks are a big reason for the overall positive picture at this stage, but the aggregate picture is tracking below relative to other recent quarters even on an ex-Finance basis.  If this trend continues in the coming days, then aggregate Q3 earnings growth will move into positive territory, the first time after 5 back-to-back quarters of earnings declines for the S&P 500 index. Total Q3 earnings are currently expected to be down -1.0% from the same period last year on +1.5% higher revenues, a notable improvement from the -2.9% decline a few weeks back.
Importantly, estimates for the current period are holding up better relative to the comparable periods in other recent quarterly cycles.

Total Q4 earnings are currently expected to be up +5.2%, only modestly down from last week’s +5.3% growth pace. The expectation is for an even more notable ramp up in growth over the following quarters, with full-year 2017 growth expected to be in double digits.  Including all of today’s earnings reports, we now have Q3 results from 81 S&P 500 members that combined account for 19.9% of the index’s total market capitalization.  Total earnings for these 81 index members are up +3.8%% from the same period last year on +3.6% higher revenues, with 80.2% beating EPS estimates and 63% coming ahead of top-line expectations.  For Q3 as a whole, combining the actual results from the 81 index members with estimates from the still-to-come 419 companies, total earnings are expected to be down -1 % from the same period last year on +1.5% higher revenues.

Shifting focus to market sentiment – I explained over the past few weeks that the tech sector is becoming increasingly vulnerable and medium term momentum levels continue to decline – which creates an environment where less stocks push the overall market higher and that creates increased vulnerability in the overall market. The reason why I’m focused on the tech sector is because medium term momentum levels have been declining in the past few weeks, while the overall market has remained near all time highs.  Internals are pointing to extensive weakness and fewer large caps moving higher – telling us that the most likely scenario is further corrective trading action.

                          oct23momentum

While the QQQ [which tracks the top 100 NASDAQ stocks] is now near the 50 day line, if you look at the momentum levels, they have been steadily declining since middle of summer and that tells me that the upside is extremely limited, especially when we take the U.S. dollar’s recent strength into account.

                           oct23qqq

Shifting focus to the broader stock market – we are seeing major weakness from the retail sectors, which is now trading below the 200 day moving average.

                          oct20retail

The retail sector is a core sector and without a rally over the next few months, it’s going to be increasingly difficult for the overall stock market to rally towards the end of this year or the beginning of 2017, which sets the tone for the remainder of the year.  Based on my analysis – it’s going to be increasingly difficult for the overall market to rally, especially in light of higher dollar and potential for interest rates to move higher in the next few months.  This adds additional layer of pressure on the overall market, which is having a difficult time dealing with the current environment and lack of growth for over 6 quarter.

Bond Markets

Initial jobless claims moved higher in the October 15 week but the rise, up a tangible 13,000 to 260,000, is not due to the aftermath of Hurricane Matthew.

The October 15 week was also the sample week for the October employment report and a comparison with the September sample week is mixed.

The 260,000 level is up 9,000 from the September week but the 4-week average is 6,500 lower, at 251,750 vs 258,250. Results out of Florida, Georgia and South Carolina, the three states hit hardest by Matthew, show little change.

The tie breaker for the monthly employment report will have to be continuing claims but the results will have to wait until next week as this series is reported with a 1-week delay.  And continuing claims are looking favorable, at 2.057 million in data for the October 8 week which is slightly below the month-ago trend.  Last weeks results will not raise expectations for strength in October employment but the sample-week gap is far from monstrous and levels for initial claims remain near historic lows.

The probability that the Federal Open Market Committee will hike its fed funds rate at the November 2 meeting is 7%, which is unchanged from yesterday.  The probability that the FOMC will increase the fed funds rate at the December 13-14 policy meeting is 69%, which compares to 65% yesterday and the probability that the Fed will hike the fed funds rate at the June 14, 2017 meeting is 78%, when 75% was predicated yesterday.  Technically, the 10 year bond reverted back to the downtrend that was supposed to begin last December, when the idea of higher interest rates was assimilated into the overall market for a brief period of time.

                            oct21bonds

At the present time, economy can withstand mild interest rate increase, but the stock market may not agree, at least till earnings are slightly better and that’s one of the reasons we are seeing the majority of key / core sectors trading below the 50 day line, while others make their way below the 200 day line.  Expect minor rallies to the upside, to revert back lower, which will take the bond market further down, over the next 2 to 4 months. Especially, if in fact the FED begins taking action over the next few months.


Courtesy of Market Geeks