Tag: S&P 500

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It’s a funny kind of bear market

The US economy continues to show signs of robust good health.

Total hours worked are rising, signaling healthy real GDP growth.

Real GDP and Total Hours Worked

Growth in average hourly wage rates is rising, reflecting a tighter labor market. Underlying inflationary pressures may be rising but the Fed seems comfortable that this is containable.

Average Hourly Wage Rates

The Leading Index from the Philadelphia Fed maintains a healthy margin above 1.0% (below 1% is normally a signal that the economy is slowing).

Leading Index

But market volatility remains high, with S&P 500 Volatility (21-day) above 2.0%. A trough above 1% on the next multi-week rally would confirm a bear market — as would an index retracement that respects 2600.

S&P 500

The Nasdaq 100 is undergoing a similar retracement with resistance at 6500.

Nasdaq 100

The primary disturbance is the trade confrontation between the US and China. There is plenty of positive spin from both sides but I expect trade negotiations to drag out over several years — if they are successful. If not, even longer.

I keep a close watch on the big five tech stocks as a barometer of how the broader market will be affected. So far the results are mixed.

Apple is most vulnerable, with roughly 25% of projected sales to China. Recent downward revision of their sales outlook warns that Chinese retail sales are falling. AAPL is testing its primary support level at 150.

ASX 200

Facebook and Alphabet are largely unaffected by a Chinese slowdown, but have separate issues with user privacy. Facebook (FB) is in a primary down-trend.

ASX 200

While Alphabet (GOOGL) is testing primary support at 1000.

ASX 200

Amazon (AMZN) is similarly isolated from a Chinese slow-down although there may be a secondary impact on suppliers. Primary support at 1300 is likely to hold.

ASX 200

Microsoft (MSFT) is the strongest performer of the five. Their segment reporting does not provide details of exposure to China but it appears to be a small percentage of total sales.

ASX 200

The outlook for stocks is therefore mixed. Be cautious but try to avoid a bearish mindset, where you only see problems and not the opportunities. Even if China does suffer a serious slowdown we can expect massive stimulus similar to 2008 – 2009, so the impact on developing markets and resources markets may be cushioned.

Best wishes for the New Year.

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Risk averse rather than fearful

The S&P 500 is again testing the band of primary support between 2600 and 2550. Follow-through below this level would warn of a bear market. Volatility (21-day) is in the amber zone between 1% and 2%. A real test of market resilience will be the next sizable rally or advance. If declining volatility remains above 1%, that would warn of an imminent market sell-off.

S&P 500

The Nasdaq 100 is in a similar position, with declining Money Flow warning of medium-term selling pressure.

Nasdaq 100

Of the big five tech stocks, only Microsoft looks strong. Facebook is in a primary down-trend but Apple and Google are testing primary support. Apple’s exposure to China is obviously a concern. China accounts for roughly 25% of Apple’s global market but Apple estimates that it is responsible for 4.8 million jobs in China which gives them some negotiating clout.

Big Five tech stocks

If two more of the big five broke primary support, that would in my opinion signal a bear market.

Asia

The Shanghai Composite Index is consolidating in a narrow band below 2700. Downward breakout is likely and would signal another decline, with a target of 2300.

Shanghai Composite Index

India’s Nifty is testing resistance at 11,000. Respect would be bearish, warning of another test of primary support at 10,000. Declining peaks on the Trend Index warn of long-term selling pressure.

NSX Nifty

Europe

Dow Jones Euro Stoxx is in a primary down-trend. Follow-through below 350 confirms a bear market, warn of a decline to test 305/310.

DJ Euro Stoxx 600

The Footsie also broke primary support at 6900. Retracement is testing the new resistance level but respect of 7000 is likely and would confirm a bear market, with a target between 5600 and 6000.

FTSE 100

There is a high level of uncertainty in global markets at present. Europe has Brexit and Italy. The US has investigations into Donald Trump’s election campaign. China has the threat of a trade war with the US. But my sense is that the market has become risk averse rather than fearful. There is no sign of panic selling as yet. But investors are clearly on the defensive and prepared to sell off vulnerable stocks.

Adopt the pace of nature: her secret is patience.

~ Ralph Waldo Emerson

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Europe cracks but US steady

Dow Jones Euro Stoxx 600 followed through below 350, confirming a bear market in Europe. A Trend Index peak below zero warns of strong selling pressure. Expect a decline to test 305/310.

DJ Euro Stoxx 600

The Footsie broke support at 6900, signaling a primary down-trend, while a Trend Index peak at zero warns of selling pressure. Expect a decline, with a target of 6000.

FTSE 100

US markets are high on volatility but low on direction.

The S&P 500 continues to range between 2600 and 2800. Breach of 2600 would warn of a primary decline but rising volatility does not flag immediate danger. A large trough above 1% extending over at least six to eight weeks, however, would warn of elevated risk.

S&P 500

The Nasdaq 100 shows a W-shaped bottom above primary support at 6500. Declining Money Flow is still above the zero line suggesting that the sell-off is secondary in nature.

Nasdaq 100

Last week I mentioned that bellwether transport stock Fedex had breached primary support but quarterly Fedex Express package shipments were rising in August 2018. Statistics for Q2, to November 30, are due for release on December 18 and I expect will reflect a robust economy.

Fedex

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East to West

The S&P 500 put in a strong blue candle this week but one swallow doesn’t make a summer. Follow-through above 2800 would signal a test of 2950. Small bullish divergence on Twiggs Money Flow looks promising but is secondary in nature and may not alter the larger trend.

S&P 500

The Nasdaq 100 shows a similar W-shaped bottom but weaker divergence.

Nasdaq 100

Bellwether transport stock Fedex recovered above the former primary support level at 225 but still looks weak. Reversal below 220 would warn of another decline.

Fedex

Asia

The Shanghai Composite Index rally ran out of steam. Respect of 2700 warns of another decline, with a target of 2300.

Shanghai Composite Index

India’s Nifty is headed for a test of 11,000. Respect would be bearish, warning of another test of primary support at 10,000. Declining peaks on the Trend Index warn of long-term selling pressure.

NSX Nifty

Australia

The ASX 200 is testing primary support at 5650 following a down-turn on the mining index. Bullish divergence on Twiggs Money Flow has now rolled over, with penetration of the rising trendline. Breach of primary support would warn of a decline, with a target of 5000.

ASX 200

Europe

Dow Jones Euro Stoxx warns of a bear market. Breach of primary support at 365, and respect of the new resistance level on the subsequent retracement, warn of a decline to test 305/310.

DJ Euro Stoxx 600

The Footsie is testing support at 6900, while bearish divergence on the Trend Index warns of selling pressure. Breach would signal a decline, with a target between 5600 and 6000.

FTSE 100

Never cut a tree down in the wintertime. Never make a negative decision in the low time. Never make your most important decisions when you are in your worst moods. Wait. Be patient. The storm will pass. The spring will come.

~ Robert Schuller

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S&P 500 earnings rise while stocks fall

96% of S&P 500 component stocks have reported earnings for Q3 2018. Including estimates for stocks that have not yet reported points to a 29% increase over earnings for Q3 in the previous year. What is more interesting is that S&P are projecting a further 2% increase for the next quarter (Q4) and 12% by Q3 2019.

S&P 500 Quarterly Earnings

Now these forecasts could be wrong but what they show is that the market expects further increases in earnings in the year ahead. Compare that to the sharp fall in earnings in Q4 2000 and in Q3 2007, before the last two major market down-turns.

Earnings growth may be slowing — it is hard to top a 29% increase —  but why the sharp downgrade?

The perceived level of risk is rising. Primarily because of the threat of a trade war with China, but also problems in the EU with Brexit and Italy. Earnings multiples are being adjusted downwards to compensate for higher risk.

S&P 500 PE of Previous Maximum Earnings

Even after the recent sell-off (orange on the above chart) the earnings multiple for S&P 500 stocks remains elevated. I use maximum 12 month earnings to-date, rather than current earnings, to remove distortions caused by temporary setbacks. The current P/E is still above the peaks prior to the October 1987 and October 1929 crashes.

The difference is that here, earnings are rising. While we cannot rule out further falls, they are unlikely to be as severe as 1987 and our expected worst case scenario is a P/E of 15. While that is harsh, it is a worst case and not the most likely outcome.

If you are a long-term investor, the sell-off should present opportunities to accumulate quality growth stocks. But patience is required. Rather get in too late than too early.

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V- or M-shaped correction?

Last week I mentioned that there are few “V-shaped” corrections and plenty with a “W-shape”. There are also a few with an “M-shape”, leading to a major market sell-off. Here are some examples on Dow Jones Industrial Average.

2001 is the only good example I can find of a V-shaped correction.

Dow Jones Industrial Average

It rolled over later in 2002 into a more conventional W-shape bottom with several tests of support at 7500.

Dow Jones Industrial Average

This was followed by the banking crisis of 2008 which started with an M-shape in 2007. Successive false breaks above resistance (orange arrows) were followed by breach of support (red arrows)…before Lehman Bros filing for bankruptcy on September 15 led to a major capitulation.

Dow Jones Industrial Average

2011 is nowadays considered a secondary movement but at the time caused widespread alarm. Starting with an M-shaped top, it broke support in August before forming a W-shaped bottom with several tests of support at 11000.

Dow Jones Industrial Average

2015 was a more conventional W-shape precipitated by falling oil prices.

Dow Jones Industrial Average

Now, in 2018, we have the makings of either a W-shaped correction or an M-shaped reversal. The false break above resistance at 26500 is definitely bearish but was followed by a bullish higher low at 24000.

Dow Jones Industrial Average

There are three possible options:

  1. Completion of a W-shape correction, with breakout above 27000;
  2. An M-shaped reversal, with a fall below 23500; or
  3. A lengthy consolidation reflecting uncertainty, as in 1999 to 2001.

Dow Jones Industrial Average

At this stage, option 1 is most likely. Buybacks and strong Q3 earnings are likely to counter bearish sentiment.

That would change if we see:

A negative yield curve, where the 3-month T-bill rate crosses above 10-year Treasury yields;

Yield Differential

Rising troughs above 1% on the S&P 500 21-day Volatility Index; or

S&P 500

Bellwether transport stock Fedex follows-through below support at 210.

Fedex

Remember that there is nothing stable in human affairs; therefore avoid undue elation in prosperity, or undue depression in adversity.

~ Socrates

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Two years is a long time

An outcome where neither Republicans nor Democrats control both chambers provides markets with reassurance that nothing too radical will emerge, making the outlook for the next two years appear more predictable and the settings more stable……But the complacency might be premature. ~ Stephen Bartholomeusz

With Democrats in control, Donald Trump is unlikely to get further tax cuts through Congress. Even a large infrastructure spending program, which both major parties support, is unlikely to enjoy a smooth passage through the House because of a polarizing President and a federal budget deficit already close to 5.0% of GDP.

The Fed will continue to raise interest rates in order to contain inflationary pressures, fueled by low unemployment and the current budget deficit. Rising average hourly wage rates warn that the Fed will be forced to act.

Average Hourly Wage Rate

Earnings growth rates are likely to slow because of higher interest rates, higher wages and higher input costs from imports and trade tariffs (although a strong Dollar may soften the blow). But there is no sign of this in Q2 2018, with profits rising and employee compensation falling as a percentage of value added.

Corporate Profits and Employee Compensation as a Percentage of Value Added

Restraint from buybacks in October — the four weeks prior to earnings releases are known as the “blackout period” — may have contributed to the severity of the recent correction. But now most earnings have been reported and buybacks are likely to return with a vengeance, taking advantage of low prices. I expect support at October lows to hold, though there is likely to be another test in the next few weeks.

Declining Twiggs Money Flow peaks on the S&P 500 warn of selling pressure and it is likely to take several months for confidence to be restored. Recovery above 2850 would be bullish, suggesting another advance.

S&P 500

The Nasdaq 100 respected its long-term rising trendline at 6600. Again, recoveries take time: there are few “V-shaped” corrections and plenty with a “W-shape”.

Nasdaq 100

Buybacks and strong reported Q3 earnings are likely to counter bearish sentiment but there is one wild-card. Trade is one of the few areas where the President still has the reins and he is likely to make full use of them. I suspect that the Chinese will attempt to wait him out, making conciliatory noises but doing little that is concrete, which is likely to frustrate Trump further. He may try to force a deal through before the next election in two years. That could only end badly.

The two most powerful warriors are patience and time.

~ Leo Tolstoy

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Nasdaq and S&P 500 rally

The Nasdaq 100 rallied now that mid-term election results are emerging largely as expected. Faith in the primary up-trend is growing but it will take several weeks, if not months, for confidence to be restored and memory of the correction to fade. Hesitancy and a second test of new support at 6600/6700 are likely. There are few “V-shaped” corrections of this magnitude. Most are “W-shaped”, as in the first quarter.

Nasdaq 100

The S&P 500 displays a similar rally but it will take time for Twiggs Money Flow to break the descending trendline and signal that buying strength is restored. Expect another test of support at 2600/2650.

S&P 500

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Buckley’s chance that rate hikes will slow

Average hourly wage rates are rising, with Production & Non-Supervisory Employees growing at an annual rate of 3.20% and All Employees at 3.14%.

Average Hourly Wage Rate

This is a clear warning to the Fed that underlying inflationary pressures are rising. There is Buckley’s chance* that they will ease off on rate hikes.

The Fed adopts a restrictive stance whenever hourly wage rate growth exceeds 3%, illustrated below by a high or rising Fed Funds Rate.

Average Hourly Wage Rate

The market is adopting a wait-and-see attitude ahead of Tuesday’s mid-term elections. Stocks like Apple (AAPL) have been sold down on strong volume despite good earnings results: earnings per share of $2.91 and revenue of $62.9 billion for Q4-18, compared to consensus estimates of $2.79 and $61.5 billion.

Apple

Optimism over a possible trade deal with China may not last the week.

A harami-like candle on the S&P 500 reflects indecision, while bearish divergence on Twiggs Money Flow warns of long-term selling pressure. Breach of 2550 is still unlikely but would warn of a primary down-trend.

S&P 500

The Nasdaq 100 tells a similar story, with primary support at 6300.

Nasdaq 100

* William Buckley was an English convict transported to Australia. He escaped when the ships laid anchor in Port Phillip Bay in 1803. The nearest permanent settlement, Sydney, was more than 1000 km away and, considered to have no chance of survival, he was given up for dead. Thirty-two years later, having lived among the Wathaurung Aboriginal people, he emerged from the bush when a settlement was established at Port Phillip in 1835. “Buckley’s chance” is an Australian colloquialism meaning having no chance at all.

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Nasdaq warns of broad market correction

Tech stocks fell sharply, with the Nasdaq 100 closing below support at 7400, warning of a correction. Twiggs Money Flow (21-day) cross below zero indicates medium-term selling pressure. Follow-through of the index below 7300 would signal a correction to test 7000.

Nasdaq 100

The S&P 500 has so far respected support at 2870. Breach would confirm  a broad market correction and test the rising LT trendline at 2800.

S&P 500

Asia

In China, the Shanghai Composite Index is headed for another test of primary support at 2650. Trend Index peaks at/below zero indicate long-term selling pressure. Breach of 2650 would offer a long-term target of 2000, the 2014 low.

Shanghai Composite Index

India’s Nifty is undergoing a strong correction. Breach of support at 10,000 would warn of a primary down-trend.

Nifty Index

Europe

Dow Jones Euro Stoxx 50 is again testing primary support at 3300. A Trend Index peak at zero warns of mounting selling pressure. Breach of 3300 would warn of a primary decline, with a target of 3000.

DJ Euro Stoxx 600 Index

The Footsie is also testing primary support, at 7250, but a recovering Trend Index indicates buying pressure.

FTSE 100 Index

Rising US interest rates are already hurting developing economies like India and China, and a looming US-China trade war would threaten a global contraction.

Only when the tide goes out do you discover who’s been swimming naked.

~ Warren Buffett

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