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Market Conditions and Recommendations 2015 05 15

Updated on May 17, 2015

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Overall Market/Indexes:

The S&P (2,123) and the DOW (18,272) 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 2,126 or Below 2,039 on the S&P and Above 18,289 or Below 17,580 on the DOW).

Ratio of PUT premiums to CALL premiums (0.74 now vs. 0.79 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 5.21.

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 $59.98 and has been trending higher for since mid-March. Oil was above $60 for a couple days, before pulling back for the second week in a row. Crude inventories reported last week showed a decline for the second straight week after 9 weeks of building.

Retail Sales (APR) was flat vs. expectations for 0.2% increase.

Capacity Utilization (APR) was 78.2% vs. 78.4% expected and 78.6% reported for MAR.

Economic News/Events:

Housing Starts (APR) gets reported TUE.

FOMC Meeting Minutes get released on WED.

Consumer Price Index (APR) gets reported FRI. Expected to show 0.0% change.

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 week.

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 economic 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:

Bldg-Hand Tools

Comml Svcs-Market Rsrch

Containers/Packaging

Elec-Semiconductor Equip

Electronic-Parts

Energy-Alternative/Other

Food-Grain & Related

Food-Meat Products

Food-Misc Preparation

Food-Packaged

Hsehold-Appliances/Wares

Leisure-Toys/Games/Hobby

Metal Proc & Fabrication

Office Supplies Mfg

Pollution Control

Retail-Consumer Elec

Steel-Specialty Alloys

Telecom Svcs-Wireless

Tobacco

Transportation-Logistics


Industry Sub-Groups Moving Down:

Computer Sftwr-Database

Computer Sftwr-Edu/Media

Computer-Networking

Leisure-Lodging

Leisure-Products

Leisure-Travel Booking

Media-Diversified

Media-Newspapers

Medical-Supplies

Retail-Department Stores

Retail-Discount&Variety

Retail-Home Furnishings

Retail-Mail Order&Direct

Transportation-Truck

Stock Screening Results:

A/D Increasing and Ind Sub Grp Increasing – PM $86.57

Accelerating Leaders – ABC $114.18

Accelerating Leaders – STZ $118.45

Up on Increased Volume – NFLX $613.25

Up on Increased Volume – YUM $93.96

A/D Declining and Ind Sub Grp Declining – CBS $59.95

A/D Declining and Ind Sub Grp Declining – HOG $55.69

Down on Increased Volume – DE $89.13

Down on Increased Volume – GMCR $94.26

New Lows on Increased Volume – GMCR $94.26

Chart Info/Pattern Recognition on Screening Results:

PM – Bouncing above 50 Day Moving Average, but on low volume.

ABC – In an up trend, but has been trading sideways since Mid-Narch.

STZ – Has been trading around it’s 20 Day Moving Average since Mid-April.

NFLX – Gapped up on FRI on increased volume, closed at new high.

YUM – Closed at new high on increased volume.

CBS – Trading in a range $59.09 to $63.71. Near bottom of the range.

HOG – Testing 52 week low. Bounced higher from low on increased volume.

DE – Trading in a range between $86.91 and $92.78. FRI closed below 50 Day Moving Average.

GMCR – Strong down trend, gapped lower on increased volume on FRI.

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

AZO – Broke out of Symmetrical Continuation Triangle (BULLISH) in MAY.

ORLY – Broke out of Symmetrical Continuation Triangle (BULLISH) in MAY.

YUM – Broke out of Pennant pattern (BULLISH) in MAY.

CXO – Double Top (BEARISH).

WLK – Double Top (BEARISH).

UNP – Continuation Triangle (BEARISH)

NSC – Continuation Triangle (BEARISH)

SCG – Continuation Triangle (BEARISH)

BIIB – Flag (BEARISH)

HOG – Flag (BEARISH)

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

CXO PUT JUN $115 - $4.30

UNP PUT JUN $105 - $3.40

HOG PUT JUN $55 - $1.13

GMCR PUT JUN $95 - $3.90

Market Summary:

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. Especially without earnings coming out to drive the markets higher.

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). Retail numbers released this past week paint a picture of slowing economic activity.

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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