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Friday, January 23, 2015

Daily update 1/23 Bottoms up earnings estimates

Not exactly the day most bulls would have liked.  It looked like the sellers were hitting the bids all day long.  In the afternoon there weren't as many bids left. 

Volume dropped considerably from yesterday.  That would have been good if we had closed up a good ways from the low.  On a day when we closed near the lows it indicates it did not take much selling volume to push the market down.  That is not good if it persists.  The breadth was 53% negative.  That probably means selling was mostly concentrated in the bigger cap stocks.  Some companies mentioned the dollar as a problem for their earnings today.  Small caps have little to no issue with the dollar as their sales are primarily inside the U.S.  There were 326 new highs and 45 new lows.  New lows really need to get under 20 and stay there.  New highs are good, but they have been good before without us going higher.  Probably a lot of low interest rate related items.  Lets move on to the futures chart.

I thought it interesting how the last three bars look very similar to the three bars that made the last swing high (circled area).  I am sure it will work out differently, but you have to admit it is kind of odd.  We did not get any confirmation of the break of the 100 SMA today.  A drop back below that line (approximately 10 points below where SPX closed) would likely bring on some sellers.  It could indicate we have another short term top in place.  Last night I mentioned the top Keltner channel line might be resistance and it acted that way today.  A rejection there frequently means a trip to the 50 SMA and pretty often a trip to the other side.  I think it is important for the bulls to break out on the upside on Monday.  Another down day could be trouble.  I want to take a look at the weekly SPX chart tonight.

Despite being within spitting distance of the high we still have a red candle.  It would probably not be good if we turn down again next week.  The VIX closed below the weekly 200 SMA which should target new highs.  Should it close back above it next week that would constitute a rejection at the MA and is likely to be pretty bearish.  It has only done that twice in this bull market.  That was back in 2010 and 2011.  Each time saw a significant move down.  Interestingly the VIX did not make a new high in those moves and significant rallies ensued.  If we do get a rejection next week and we end up making a new high in the VIX it would be something different for this bull market. 

SPX turned back today from the same area as the last swing high.  However, we did not do enough damage to say the bulls fumbled the ball.  They still have a chance next week, but they need to come out with some vigor.  While the retail crowd is full of confidence in this market the money managers are not.  They need to see something to build their confidence up or they will probably lighten up some more.  For next week the SPX 50 DMA (2046) might provide support.  If that fails the bears are probably in control again and it could get ugly.  The market is in a precarious position at the moment.

This is an interesting chart.

The bottom up estimates seem to contradict the big increase in earnings for 2015 projected by the big picture strategists.  I happen to catch Adam Parker (Morgan Stanley) on TV today saying he expects 6% growth in operating earnings this year.  There are two major impacts going on.  The large drop in oil and the large rally in the dollar.  Both are impacting earnings negatively.  With no QE and the threat of rising rates investors might be less tempted to bid up stocks with declining earnings.  If there was ever a stock pickers year this is probably it.  The author of this chart points out the last three times estimates went this negative we ended up in a recession.  Will history repeat?  At the moment I can't say one way or the other.  I can say data is getting softer.  Layoff announcements have picked up and not just in the energy sector.  I saw announcements from AMEX and EBAY this week.  I will be paying much closer attention to the econ data now.  We may be on the way to a recession.

The market and sector status pages have been updated.  Have a great weekend.


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