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Market Conditions and Recommendations 2015 05 22

Updated on May 25, 2015

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Overall Market/Indexes:

The S&P (2,126) and the DOW (18,232) both are trading above their 20 and 50 Day Moving Averages, after testing them again this week. The S&P had closed above it’s previous high 4 out of the 5 days. However, we need to see 3 straight days above this level for confirmation of a break out. If TUE closes higher, then we would have technical confirmation. However, volume remains light still.

The DOW closed above it’s previous high for 2 days, and then pulled back. So, it’s breakout failed. It has now closed below that level for 3 straight days – a technical confirmation. Again, volume is still light, so there is no conviction for market direction right now.

Ratio of PUT premiums to CALL premiums (0.76 now vs. 0.74 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 $59.95 and has been trending higher for since mid-March. Oil has been testing $60 for most of May, but has not been able to hold above that level.

Housing Starts (APR) was 1.135 Mil. This was 0.2 mil above expectations.

FOMC Meeting Minutes get released on WED.

Consumer Price Index (APR) dropped 0.2% vs. an expected drop of 0.1%.

Economic News/Events:

Durable Goods Orders (APR) gets reported TUE. Expected to show a 0.4% drop.

Consumer Confidence (MAY) gets reported TUE. Expected to report 95.0, slight drop from last month.

GDP (1st Qtr) Revised Number to be reported.

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)

ADSK reported last week and dropped 2% after announcement.

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

NONE.

Through last week, 488 of the S&P 500 had reported earnings. The combined results were: Profits increased slightly by 0.3%. So far 71% of companies beat estimates. However, 74 companies have lowered their guidance vs. 27 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_5.22.15

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/Truck-Original Eqp

Banks-Midwest

Banks-Super Regional

Banks-West/Southwest

Bldg-Resident/Comml

Comp Sftwr-Spec Enterprs

Computer Sftwr-Enterprse

Computer Sftwr-Medical

Computer-Networking

Consumer Prod-Specialty

Internet-Content

Leisure-Travel Booking

Media-Diversified

Office Supplies Mfg

Soap & Clng Preparatns

Telecom Svcs-Cable/Satl

Telecom Svcs-Wireless

Telecom-Infrastructure


Industry Sub-Groups Moving Down:

Banks-Foreign

Bldg-Cement/Concrt/Ag

Chemicals-Basic

Chemicals-Paints

Comml Svcs-Advertising

Energy-Alternative/Other

Financial Svcs-Specialty

Food-Dairy Products

Food-Packaged

Insurance-Prop/Cas/Titl

Leisure-Toys/Games/Hobby

Mining-Gold/Silver/Gems

Oil&Gas-Refining/Mktg

Retail/Whlsle-Bldg Prds

Retail-Apparel/Shoes/Acc

Retail-Department Stores

Retail-Discount&Variety

Retail-Mail Order&Direct

Retail-Super/Mini Mkts

Steel-Specialty Alloys

Telecom Svcs-Integrated

Transportation-Truck



Stock Screening Results:

A/D Increasing and Ind Sub Grp Increasing – EXPE $113.00

A/D Increasing and Ind Sub Grp Increasing – LBTYA $57.44

A/D Increasing and Ind Sub Grp Increasing – TWC $171.18

Accelerating Leaders – VRX $237.53

Up on Increased Volume – EXPE $113.00

Up on Increased Volume – TWC $171.18

Up on Increased Volume – CTRIP $84.63

New Highs on Increased Volume – TWC $ 171.18

Down on Increased Volume – ROST $97.03

Chart Info/Pattern Recognition on Screening Results:

EXPE – Gapped up on increased volume.

LBTYA – Up and making new highs in increased volume. Strong Up trend.

TWC – Gapped up for second time during the week on merger news. Was up 8% for the week.

VRX – Solid up trend in place on building volume. Volume is just beginning to cross above 50 day avg.

CTRIP – Gapped up FRI on huge volume. Gapped up previous week as well. Up almost 30% in 2 weeks.

ROST – Huge drop on FRI on increased Volume – Earnings Announcement released last week.

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

CAM – Broke out of Continuation Wedge (BULLISH) in MAY.

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

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

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

AXS – Broke out of Flag (BULLISH) in May.

SBUX – Broke out of Flag (BULLISH) in May.

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

CXO – Double Top (BEARISH).

WLK – Double Top (BEARISH).

GPC – Broke out of Symmetrical Continuation Triangle (BEARISH) in MAY.

NSC – Broke out of Symmetrical Continuation Triangle (BEARISH) in MAY.

UNP – Broke out of Symmetrical Continuation Triangle (BEARISH) in MAY.

SCG 0 Broke out of Descending Continuation Triangle (BEARISH) in May.

BIIB – Flag (BEARISH)

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

SPY PUT JUL $212 - $3.82

MSFT PUT JUL $47 - $1.37

NSC PUT JUL $95 - $2.60

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 with the outlook for rest of year having been lowered. First Qtr GDP was an annualized 0.2% growth. This level of economic activity can not support continued earnings growth at the levels needed to support current market valuations.

In addition, a strong US$ is hurting exports, China’s slowing growth will impact global GDP and issues with Euro Zone (ie. Greece, etc…) also continue to weigh on global activity.

Indexes have been testing their resistance levels. An up close for the S&P on TUE could signal a technical confirmation of a break out of it’s trading range. The DOW tested it’s resistance level, only to retreat. All of this is taking place on low volume, so there is little conviction to the market right now. 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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