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Market Conditions and Recommendations 2015 05 08

Updated on May 10, 2015

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Overall Market/Indexes:

The S&P (2,116) and the DOW (18,191) both are trading above their 20 and 50 Day Moving Averages, after testing them again this week. 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 (for the second week in a row). Volume for both for the week was at or below the 50 day moving average for volume.

Both the S&P and the DOW have been range bound since February, but are nearing their tops again. 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).

Ratio of PUT premiums to CALL premiums (0.79 now vs. 0.70 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 16.9.

Price-to-Book Value of DOW is at 5.12.

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 $59.48 and has been trending higher for since mid-March. Oil was above $60 for a couple days, before pulling back.

China announced another interest rate cut to help spur economic activity. Annual growth forecast for China’s GDP has been reduced to 7% from 7.4%.

See Related Article: http://thestockmarketwatch.com/news/read.aspx/china-cuts-interest-rates-for-third-time-in-six-months-as-economy-sputters/7ac96628ab1503e3ead2b585ee0a4ec0/

Factory Orders (MAR) came in at 2.1% vs. 2.0% Expected.

Nonfarm Payrolls (APR) came in at 223k vs. 224k Expected.

Unemployment Rate (APR) came in at 5.4% vs. 5.4% Expected.

Economic News/Events:

Retail Sales (APR) gets reported WED and an increase of 0.4% month over month expected.

Capacity Utilization (APR) gets reported FRI. Previous reported (MAR) was 78.4%.

See all economic reports due out and details about what they mean at: http://thestockmarketwatch.com/economic-calendar/

Earnings:

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

None reported last weed.

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

ADSK

Through last week, 447 of the S&P 500 had reported earnings (almost 90% have reported their earnings). The combined results were: Profits increased slightly by 0.1%. So far 71% of companies beat estimates. However, 57 companies have lowered their guidance vs. 25 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 slowdown 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. A slowing Chinese economy will also have an impact on our economy. Look for more issues to come out of China. Their current economy is heavily indebted to government spending, an existence that cannot be continued indefinitely, and will have disastrous consequences when it does finally come to an end. Likely scenario will be a devaluation of the Chinese Yuan.

Summary of earnings reports available from FactSet Earnings Insight:

http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_5.8.15

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:

Auto Manufacturers

Chemicals-Agricultural

Elec-Contract Mfg

Elec-Misc Products

Electrical-Power/Equipmt

Energy-Alternative/Other

Energy-Solar

Leisure-Travel Booking

Media-Books

Medical-Hospitals

Medical-Research Eqp/Svc

Retail/Whlsle-Bldg Prds


Industry Sub-Groups Moving Down:

Auto/Truck-Original Eqp

Auto/Truck-Tires & Misc

Comml Svcs-Consulting

Computer-Integrated Syst

Computer-Networking

Containers/Packaging

Elec-Semiconductor Equip

Food-Dairy Products

Machinery-Farm

Mining-Gold/Silver/Gems

Retail/Whlsle-Office Sup

Retail-Major Disc Chains

Retail-Super/Mini Mkts

Telecom Svcs-Integrated

Telecom-Cable/Satl Eqp

Telecom-Consumer Prods

Transportation-Ship

Stock Screening Results:

Accelerating Leaders – ABC $115.30

Accelerating Leaders – NCLH $54.10

Accelerating Leaders – RAI $76.57

Up on Increased Volume – NCLH $54.10

A/D Declining and Ind Sub Grp Declining – DE $89.89

Down on Increased Volume – CERN $68.02

Down on Increased Volume – LBTYA $50.41

Chart Info/Pattern Recognition on Screening Results:

NCLH - Nearing previous high of $55.38.

RAI – Broke out of Cup w/Handle pattern in April. Nearing previous high $77.62.

DE – Trading in a range between $86.91 and $92.78.

CERN – Strong down trend.

LBTYA – Trading in a range between $50.09 and $55.86.

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

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

PCAR – Broke out of Flag pattern (BULLISH).

DPZ – Broke out of Flag pattern (BULLISH).

CXO – Double Top (BEARISH).

WLK – Double Top (BEARISH).

UNP – Continuation Triangle (BEARISH)

NSC – Continuation Triangle (BEARISH)

SCG – Continuation Triangle (BEARISH)

SNDK – Pennant (BEARISH)

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):

CERN PUT JUN $65 - $0.70

LBTYA PUT JUN $50 - $0.95

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 season is nearing an end (almost 90% of S&P 500 companies have reported) and outlook for rest of year has been lowered. This helps set up easy beats, but continued economic growth looks stifled with strong US$, China’s slowing growth, issue with Euro Zone (ie. Greece, etc…). Indexes have been range bound and are nearing the top of the range on light volume. Look for a seasonal pull back that could lead to a deeper correction if poor economic news comes out.

Conclusion:

Overall volume remains muted, which means that investors are waiting for a signal to either jump in or get out of stocks. 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).

With indexes nearing the top of their ranges, I am more BEARISH on the market’s prospects. Since we are NOT in a down trend, it would be prudent to wait for the trend to develop.

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