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Market Conditions and Recommendations 2015 05 01

Updated on May 3, 2015

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Overall Market/Indexes:

The S&P (2,108) and the DOW (18,024) both are trading above their 20 and 50 Day Moving Averages. Both finished higher on FRI after being down most of the week. FRI’s move brought them both back above their 20 and 50 Day Moving Averages.

Both the S&P and the DOW have been range bound since February. Both could be forming a triple top (Upside down W formation that signals a reversal). We are still waiting for a break out (Above 2,120 or Below 2,039 on the S&P and Above 18,200 or Below 17,580 on the DOW). Volume has been light the past week, despite a plethora of large cap stocks reporting earnings last week.

Ratio of PUT premiums to CALL premiums (0.70 now vs. 0.83 last week) indicate option traders are pricing in slightly more risk to the upside (ie. expect prices to rise).

P/E Ratio for the DOW is at 16.8.

Price-to-Book Value of DOW is at 5.17.

P/E ratio and Price-to-Book Value of DOW are both near 12 month highs. Key would be whether earnings can continue to support these valuations. Any indication of a slowdown in earnings will have an outsized negative impact on the market.

News/Commodities:

Oil is at $59.25 and has been trending higher for since mid-March.

Consumer Confidence came in lower than expected at 95.2 vs. 102.5, signaling that consumers may pull back on spending.

GDP also came in lower than expected at an annualized rate for Q1 of 0.2% vs. 1.1%.

ISM Manufacturing PMI came is at 54.1, close to expected and still signaling an expanding economy.

Economic News/Events:

Factory Orders (MAR) gets reported MON and an increase of 2.4% is expected.

Nonfarm Payroll (APR) gets reported FRI and is expected to show growth of 220,000 jobs.

Unemployment Rate (APR) gets reported FRI and 5.4% is expected.

Earnings:

Earnings Last Week: (Of the 20 Companies I do Technical Analysis on)

AAPL - Mon Apr 27 – Fell 5% after announcement before rebounding.

CELG – THURS Apr 30 - Fell 5% after announcement before rebounding.

XOM – Thurs Apr 30 – Basically flat after reporting.

ABC – Thurs Apr 30 – Gained 2% after reporting.

V – Thurs Apr 30 – Fell 3% after reporting.

SWKS – Thurs Apr 30 – Gained 6% after reporting.

Earnings Next Week: (Of the 20 Companies I do Technical Analysis on)

None

Through last week, 360 of the S&P 500 had reported earnings. The combined results were: Profits declined 0.4%. If this continues, this will be the 1st decline in earnings since Q3 2012. So far 71% of companies beat estimates. This is an early indicator that earnings estimates have been lowered significantly, which may lessen downside risk for now. However, 41 companies have lowered their guidance vs. 22 companies that have raised their guidance.

More than half of the S&P 500 companies that have reported have reported Sales below estimates. This is likely a combination of 2 factors: slowdown in global economy and strengthening of the US Dollar.

Despite the above, indexes are marching higher. However, they have done so on light volume. However, this lowered guidance also points to concerns over a slowing economy. Continued econcomic data that signals a slow down could bring the markets lower (ie. GDP data, Factory Orders, Durable Goods Orders, Manufacturing Activity, etc…). Pay close attention to these data as they may give you a heads up of the direction for the markets.

Summary of earnings reports available from FactSet Earnings Insight:

http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_5.1.15

Money Flow – Sectors:

There are 197 Industry Sub-Groups tracked by Investor’s Business Daily (IBD). IBD tracks the price and volume actions of stocks in these Industry Sub-Groups to determine which Industry Sub-Groups institutional investors are putting money into or taking money out of. To look for short-term direction, I look at these rankings and highlight Industry Sub-Groups that have moved UP or DOWN by 20 positions in the rankings.

While I use this information to screen stocks, I am highlighting the Industry Sub-Groups here to give readers an illustration of what Industry Sub-Groups are HOT and which ones are NOT.


Industry Sub-Groups Moving UP:

Bldg-Cement/Concrt/Ag

Chemicals-Basic

Comml Svcs-Staffing

Computer Sftwr-Database

Consumer Svcs-Education

Containers/Packaging

Finance-Blank Check

Finance-Investment Mgmt

Finance-Savings & Loan

Leisure-Toys/Games/Hobby

Machinery-Farm

Media-Newspapers

Mining-Gold/Silver/Gems

Oil&Gas-Transprt/Pipelne

Security/Sfty

Transport-Air Freight

Transportation-Logistics

Transportation-Ship


Industry Sub-Groups Moving Down:

Auto/Truck-Replace Parts

Auto/Truck-Tires & Misc

Comml Svcs-Consulting

Comml Svcs-Healthcare

Comp Sftwr-Spec Enterprs

Computer Sftwr-Desktop

Computer Sftwr-Medical

Consumer Prod-Electronic

Elec-Contract Mfg

Elec-Misc Products

Energy-Alternative/Other

Energy-Solar

Hsehold-Appliances/Wares

Internet-Content

Media-Books

Medical-Long-term Care

Medical-Outpnt/Hm Care

Retail/Whlsle-Bldg Prds

Retail-Home Furnishings

Telecom Svcs- Foreign

Telecom-Cable/Satl Eqp

Telecom-Consumer Prods

Transportation-Truck

Stock Screening Results:

A/D Improving and Ind Sub Grp Improving – DE $91.39

A/D Improving and Ind Sub Grp Improving – LYB $104.50

Accelerating Leaders – LYB $104.50

Accelerating Leaders – VRX $223.02

Up on Increased Volume – SWKS $98.29

Down on Increased Volume – LNKD $205.21

Chart Info/Pattern Recognition on Screening Results:

DE – Broke out of a Cup w/handle base in FEB and has been range bound since, with resistance at $92.78.

LYB – Building the right side of a cup base, with breakout being $115.40.

VRX – Broke out of a cup w/handle base in DEC and has been trending higher since. Found support at 50 Day Moving Average in APR and bounced higher on increased volume (also reported earnings at this time).

SWKS – Currently trading in a range ($88.25 to $102.77) and has found support at it’s 50 Day Moving Average ($94.61).

LNKD – Was trading in a range ($245.35 to $276.18) and gapped lower on increased volume after earnings announcement.

Chart Info/Pattern Recognition alone (OptionsXpress – Lg Cap, Above $50, Short-Term Horizon):

RAX – Broke out of Symmetrical Continuation Triangle (BULLISH) in April.

SBUX – Currently in Flag pattern (BULLISH), about to break out and continue higher.

ABBV – Broke out of Flag pattern (BULLISH) in early April and is trending higher.

SCG – Broke out of Descending Continuation Triangle (BEARISH) in mid-April and is tending lower.

SNDK – Broke out of a Pennant (BEARISH) in mid-April and has been trending sideways since.

Technical Analysis: (Currently doing several technical evaluations for 20 Lg Cap Stocks)

The Technical Analysis is posted daily in a separate blog.

Recommendations (Looking for 50% gain on option value):

AAPL CALL JUN $130 – Stock at $128.95. Current Option Price $4.00 (AAPL reported earnings 4/27. Despite beating estimates, the stock dropped 7%, before finding support and gaining 3% on FRI. I expect continued momentum from here with the possibility of getting to $140 in May).

LYB CALL JUN $105 – Stock at $104.50. Current Option Price $3.20.

Previous Recommendations:

ALL recommendations (from Market Summary and Technical Triggers) are posted in a separate blog, so I will discontinue this portion.

Market Summary:

Slowing GDP growth (Durable Goods Orders, strengthening dollar, geopolitical tensions, etc…) could begin taking a toll on earnings (see Earnings Section above). Volume remains light – which shows that there is little conviction in the market. This could lead to fickle markets (ones that react to news and bounce around – increased volatility).

P/E Valuations don’t look too overvalued in light of earnings. However, any macroeconomic changes that could impact earnings could derail this uptrend and put tremendous downward pressure on the markets.

Earnings so far are showing that estimates may have been lowered too far. More companies are beating estimates. This may help the markets in the short-term, but continued concern about global economic conditions may have a greater impact on the markets. That estimates have been lowered significantly is seen in the fact that 71% of companies that have reported have beaten earnings estimates, yet only 46% of companies have beaten revenue estimates.

Conclusion:

Overall volume remains muted, which means that investors are waiting for a signal to either jump in or get out of stocks. Earnings is giving some momentum for individual companies, but not the broader market. Post earnings, I expect the usual seasonal pull back. Economic data has not been great, and despite companies beating earnings on the bottom line (Net Income), they are mostly missing estimates on the top line (Revenue). This signals that if Revenues don’t increase (increased economic activity) it will be harder for companies to maintain their earnings (bottom line).

So, I am not completely BULLISH on the market, but most of the technicals that are being triggered are CALLS and the stocks that appeared in my screening are mostly for CALLS. So, stick with the trend, but be cautious.

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