Sunday, March 26, 2017

Stock Market Outlook Week of 3/26/2017

U.S. stocks flirted with sharp losses but managed a mixed finish after Republicans canceled a vote on their health care bill because it became clear the bill would fail. Hospital stocks soared in response, while companies that stand to benefit from other Trump proposals faltered.

Global Economy –  China’s Shanghai Composite climbed to a 3-1/2 month high and was buoyed by gains in banking and consumer stocks.  The Central Bank of Russia unexpectedly cut its 1-week auction rate by 25 bp to a 2-year low of 9.75% when expectations were for no change at 10.00% and said, “there’s the possibility of cutting the key rate gradually in Q2-Q3.”

U.S. Economy – Greater demand for commercial aircraft helped U.S. businesses increase their orders for long-lasting manufactured goods in February, but a key category that tracks business investment plans slipped slightly.  The Commerce Department said Friday that orders for durable goods rose 1.7 percent in February and an upwardly revised 2.3 percent in January. Orders so far this year are running 1.6 percent higher than in the first two months of 2016.  The growth indicates that manufacturers are steadily recovering from a rough patch that began in 2015 when lower energy prices and slower economic growth worldwide cut into demand for U.S. factory goods. The report contained some weakness in a few sectors such as motor vehicles, but it is among several indicators that point to an ongoing rebound.

Earnings Watch – We are still three weeks away from the Q1 earnings season ramping up, but the reporting cycle has gotten underway already with earnings reports from 12 S&P 500 members already out.  All of these initial Q1 earnings reports are from companies that have their fiscal quarters ending in February, which form part of our Q1 earnings tally.

Total Q1 earnings are expected to be up +6.4% from the same period last year on +6.4% higher revenues. This would follow +7.3% earnings growth in 2016 Q4 on +4.7%, the highest growth pace in all most two years.  Please note that the Q1 earnings season would follow the strong showing on the earnings front in the preceding reporting cycle. Not only did 2016 Q4 growth reach the highest in two years, but total earnings for the quarter also reached a new quarterly record.

Market Sentiment – The probability of a rate hike at the Fed’s May 3 policy meeting is 6%, which is unchanged from last week and the probability of a rate increase at the June 14 meeting is 53%, which compares to 54% late last week. With uncertainty increasing in Europe and FED becoming less aggressive with rate hikes, there’s a better chance of seeing upside in the near term, especially in light of increased vulnerability in U.S. stocks.

Stock Market Analysis – Looking at major sectors in the stock market, retail is now trading below the 200 day line. The retail sector is responsible for massive portion of the total GDP and has major influence on other major sectors. As a matter of fact, the retail sector alone has been known to trigger end of year rallies in the stock market over time.  At the present time, the retail sector is trading below the 200 day moving average and statistically, if you look at historic bull market runs, you will notice that 95% of all bull markets are being driven higher by retail.

                         march24retail

This tells me that stocks are increasingly being pressured and we can expect increased downside from other major sectors over the next few months.

Lastly, take a look at the transports, which are currently trading below the 90 day line and appear to be making their way to the 200 day line below.

                         

Statistically, U.S. stocks rarely see a strong bullish market cycle, without transports participating in the upside, which is not the scenario we are seeing at the present time. In a nutshell, taking into account current sentiment, market technicals and momentum levels, it appears that stocks are becoming weaker, mostly as a result of investors becoming increasingly nervous about Trumps plans to spruce up the economy, which was driving the market higher since November election.

The broad indices are approaching the 50 day line and over the past few days stocks have not bounced higher, which tells me that sentiment is changing.  Expect to see volatility slowly start rising and more sectors beginning to violate the 50 day moving average to the downside.



Complements of:  Roger Scott, Market Geeks

Sunday, March 19, 2017

Weekly Stock Market Outlook 3/19/2017

U.S. stocks limped into the weekend with mixed results on Friday, but the market nevertheless capped off yet another winning week. Gains for dividend-paying stocks offset drops for banks and health care stocks.

Global Economy –  The markets are paying attention to comments from the G-20 meeting that begins today in Baden-Baden, Germany. EUR/USD posted a 1-1/4 month high before falling back and European government bonds sold-off after hawkish comments from ECB Council member Nowotny who said the ECB can raise interest rates before its bond-purchase program has ended.

ECB Council member Nowotny said he sees no deflation risks for Europe anymore and he told Handelsblatt in an interview that the U.S. model to finish bond purchases first before raising interest rates might not transfer well to Europe and that the ECB can raise interest rates before its bond-purchase program is phased out.

U.S. Economy – U.S. factories cranked out more autos, steel and computers in February, the sixth straight monthly increase in manufacturing output.  Factory production rose a seasonally adjusted 0.5 percent last month from January, the Federal Reserve said Friday . That followed another 0.5 percent gain the previous month.  Factories are benefiting from greater consumer and business optimism since last fall’s presidential election. Companies are spending more on big-ticket items such as industrial machinery, and Americans are buying cars at near-record levels. Overseas growth has spurred more exports.

Mining output rose 2.7 percent in February, spurred partly by more oil and gas drilling. Utility production plunged 5.7 percent as unseasonably warm weather reduced the need for heating. Overall industrial production, which includes manufacturing, mining and utilities, was unchanged in February.  Factories are emerging from a rough patch that lasted from late 2015 through most of 2016. Sharply lower oil prices hammered demand for drilling equipment, such as steel pipe, and many businesses sold off excess stockpiles, reducing new orders for factory goods.

Unlike other confidence measures, the consumer sentiment index has edged off its post-election peak, to 95.7 in preliminary February and 96.3 in final February and compared against 98.5 in January. But forecasters, at a consensus 97.2 for preliminary March, see the index showing renewed strength.

This report has been noting extreme polarization in its sample, between Democrats whose index is near record lows and Republicans whose index is near record highs. The swing factor has been independents who are closer to Republicans in their optimism.

Earnings Outlook – Total Q1 earnings are expected to be up +6.5% from the same period last year on +6.4% higher revenues. This would follow +7.3% earnings growth in 2016 Q4 on +4.7%, the highest growth pace in all most two years.  Estimates for Q1 came down as the quarter unfolded, with the current +6.5% growth down from +10.4% at the end of December.   While Q1 estimates have followed well traversed path that we have been seeing consistently over the last few years, the magnitude of negative revisions compares favorably to other periods, particularly in the first half of last year and all of 2015. In other words, Q1 estimates have come down, but they haven’t come down by as much.

Market Sentiment – Treasury yields dipped, dropping once again after the Fed on Wednesday gave a more measured forecast for interest-rate increases than some investors expected.  The Fed raised short-term rates by a quarter of a percentage point on Wednesday, as many investors expected. It also said that it still plans to raise rates by a total of three times this year, when some investors had been expecting four hikes given the recent pickup in the economy and inflation.

Lastly, sentiment towards higher stock prices is fizzling out since Trumps economic plans to spruce up the economy may be several months away, something U.S. stocks anticipated would happen much quicker…and that will cause stocks to trade lower in the short term and cause bonds to rally.

Stock Market Analysis – Stocks continued to slump and the descending triangle continues to develop towards the downside. Tech stocks are losing momentum and that’s been holding the market up over the past few weeks.  Over the next few weeks I anticipate more weakness moving into the broader market as less and less sectors are moving directionally at this time.

                    

Tech momentum levels have not moved higher in recent weeks and at one point reached close to the 90% percentile. Historically, it’s very difficult for stocks to continue seeing upside momentum without a sharp pullback to the downside, taking the percentage of stocks trading above the 50 day line down to oversold price levels and creating balance through out various sectors.

                   

Below is the 10 year momentum chart on the NASDAQ. You can see that every time momentum levels rise above 80th percentile the odds are strong that downside is developing and I believe we are going to see mild corrective pressure ahead.


                 
Expect price to retrace back down to the 50 day line across most indices and volatlity to begin spiking on the VIX. The market is becoming overbought and volatility spikes sharply when price begins declining steadily. Volatility is near 10 year low level and the most likely scenario is spike in the VIX over the next few weeks.

Many traders are commenting that the market environment has changes with the low interest rate and Trump in the white house…but in response to that I will leave you with an interesting quote.

The 4 most dangerous words in investing

“It’s Different This Time”

by John Templeton



Courtesy of Roger Scott, Market Geeks

Sunday, March 5, 2017

Weekly Stock Market Outlook 3/6/2017

U.S. stock indexes were mixed Friday ahead of a speech by Federal Reserve Chair Janet Yellen later in the day. Investors will be listening for clues on whether the central bank will raise interest rates again later this month. Declines in makers of consumer goods outweighed gains in banks and health care stocks.  Federal Reserve Chair Janet Yellen signaled Friday that the Fed will likely resume raising interest rates later this month to reflect a strengthening job market and inflation edging toward the central bank’s 2 percent target.  Yellen also said in a speech in Chicago that the Fed expects steady economic improvement to justify additional rate increases. While not specifying how many rate hikes could occur this year, Yellen noted that Fed officials in December had estimated that there would be three in 2017.

U.S. Economy – Growth in the service-sector PMI slowed in February, to 53.8 from a mid-month flash of 53.9 and well down from January’s level of 55.6.  Though is the lowest reading in five months, the report’s sample remains upbeat citing new contracts and the launch of new products. But backlogs are also down and hiring, though still described as solid, has slowed.
The ISM non-manufacturing index held very consistently in the mid-50s range throughout the last year. Growth in new orders has also held steady, near a very strong 60 level with employment growth, however, lagging in the mid-50s.  Strength in this report’s employment index would raise expectations for strength in next week’s employment report for February.

Earnings – We are not totally done with Q4 earnings season yet, but growth has been the highest in two years with total earnings reaching an all-time quarterly record. Estimates for the current period have started coming down, but they aren’t falling as much as would typically be the case historically. All of this should add to confidence in consensus expectations for the current and following quarters when growth is expected to notably ramp up.

As of Wednesday, March 1st, we have seen Q4 results from 484 S&P 500 members or 98.7% of the index’s total membership. Total earnings for these 484 index members are up +7.4% on +4.9% higher revenues, with 68.4% beating EPS estimates and 54.1% coming ahead of top-line expectations. The proportion of companies beating both EPS and revenue estimates is 40.3%.  Estimates for the current period (2017 Q1) are holding up really well, which is reassuring since expectations for the period already reflected strong gains.  Total earnings for the S&P 500 index are currently expected to be up +7.1% from the same period last year on +6.8% higher revenues. This is down from expectations of +10.3% earnings growth in early January.  This magnitude of negative revisions is about in-line with what we saw in the comparable period for Q4, but better than the quarters prior to that.

Stock Market Analysis – U.S. stocks continue breaking short term price lows, which tells me that momentum is fizzling out. If you look at the sector that have been leading the overall market higher over the past few weeks, you will see that all three sectors recorded the weakest performance over the past week, which is not a bullish sign for the overall stock market.


Furthermore, speculative sectors failed to trade above last week’s price highs, which is significant because speculative stocks tend to lead ahead of large caps during strong bull markets…which makes logical sense since investors are very bullish during bull markets and tend to allocate more assets to speculative or small cap stocks.


If you take a look at the Russell 2000 – you will notice that the index failed to make new highs last week, while the Dow Jones and SPY rallied to record highs. Semiconductors are no longer leading, which in conjunction to small caps, tend to lead during critical market turning points.

                         
Expect price to trade down to the 50 day line and momentum levels to continue declining. The SPY and Dow are both increasingly vulnerable to downside pressure and I expect volatility to pick up in the near term.

VIX remains near decade low and typically volatility reverts back to fair value over short period of time.



Courtesy of Market Geeks