Sunday, February 5, 2017

Weekly Market Outlook

U.S. stocks were stronger Friday after the government said employers stepped up their hiring last month, while not as fast as expected, it gave the market enough ammunition to rally after a few days of selling pressure. The biggest gains are going to small-company stocks, which stand to benefit from a pickup in the economy. Banks rose sharply after President Trump took a first step toward scaling back financial industry regulations. Major stock indexes remain slightly lower for the week.

U.S. Economy – Orders to U.S. factories rose a moderate amount in December, closing out a second rough year for American manufacturers who have been battered by a strong dollar and a plunge in capital investment. The Commerce Department says orders to factories rose 1.3 percent in December. A key category that tracks business investment was up 0.7 percent, a hopeful sign that 2017 may be a better year for manufacturers as investment in the energy sector rebounds.

For all of 2016, factory orders fell 1.4 percent following a 6.3 percent drop in 2015. It marked the first consecutive annual declines in 14 years, since orders fell 7 percent in 2001 and 1.2 percent in 2002.  Average hourly earnings were up only .12%, when an increase of .3% was expected, which will case FED to think twice about raising rates 3 times over the next 11 months. January nonfarm payrolls increased 227,000, which compares to expectations of a gain of 180,000 and private payrolls were up 237,000, when an increase of 175,000 were estimated. The labor participation rate showed an improvement, increasing to 62.9% from 62.7% that was reported last month.

Here is the weaker employment data. Average hourly earnings were up only .12%, when an increase of .3% was expected.  The unemployment rate increased .1% to 4.8%, when 4.7% was estimated.
January’s job gain was the best since September, and it exceeded last year’s average monthly gain of 187,000, the Labor Department said Friday.

Quarterly Earnings – We have seen Q4 results from 219 S&P 500 members or 58.8% of the index’s total market capitalization. Total earnings for these 219 index members are up +5.4% on +3.5% higher revenues, with 64.8% beating EPS estimates and 53.4% coming ahead of top-line expectations.  The proportion of companies beating both EPS and revenue estimates is 37.4%. The earnings and revenue growth for this group of 219 index members is notably above other recent periods.  The +5.4% Q4 earnings growth on +3.5% revenue growth compares to +2.7% earnings growth on +1.0% revenue growth for this same group of companies in 2016 Q3.  The Q4 growth relative to the 4-quarter and 12-quarter averages is even pronounced.

Looking at Q4 as a whole, combining the actual results from the 219 S&P 500 companies that have reported with estimates for the still-to-come 281 index members, total earnings are expected to be up +6.0% from the same period last year on +3.9% higher revenues.  The +6.0% earnings growth in Q4, the highest since 2014 Q4, would follow the +3.7% growth in Q3 earnings on +2.2% higher revenues, the first instance of positive earnings growth for the index after five quarters of back-to-back declines

U.S. Stock Market Analysis – Stocks are testing all time highs once again, but small caps are not participating in the rally, which tells me that stocks are overbought and have limited upside. Small caps are speculative stocks and speculative stocks typically lead the market higher during bullish market cycles.  If you look at the small caps, the highs are getting lower not higher, which tells me that the market is hitting resistance levels at the current price levels.

                   

Now take a look at the momentum levels for the small caps, this will really surprise you. While the trading range has been predominantly range bound, the number of stocks holding up the index or causing it to trade at the current price levels has been declining aggressively over the past few sessions.

                   feb5momentumsmall-caps

This means that the Russell 2000 is being driven by very few stocks that have higher market share. If the index was NOT capitalized weighted, we would have seen a decline in price by a large margin over the past few weeks. Either way, this is major narrowing of momentum, which creates increasingly more vulnerability to stocks at this time.

Expect momentum levels to catch up to price and stocks begin trading lower in the short term. Momentum levels and price can deviate for short periods of time, but eventually price ALWAYS catches up to momentum levels.

Courtesy of Market Geeks

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