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Thursday, May 26, 2016

Daily update 5/26 Earnings

Pause day.  Is it the pause that refreshes or reverses?

That was a very narrow range today.  I would say the market earned a rest.  Besides  nobody know what to do here anyway.  The breadth was slightly positive, but 56% of the volume was in down stocks.  That would indicate a touch of distribution.  The volume was light as most people were sitting around waiting to see what happens.  New highs dropped down considerably to 82.  Not exactly a sign of confidence by the bulls.

The resistance line held the market in check today.  The futures are still pretty extended from the 20 SMA.  Will the bulls be ready to push prices higher tomorrow?

The green count increased a tad today, but remains below overbought.

There is more room above for testing the April high.  However, at this time I don't see anything that suggests the market is getting ready to burst forth on the upside.  The FED is out shouting from the roof tops they might raise rates soon.  At the same time billionaire investors Gross, Gundlach, Soros, Icahn, and Druckenmiller are all shouting from the roof tops the &*^% may be about to hit the fan.  The economy is clearly struggling and could easily fall into a recession in the next few months without a rate hike.  Valuations are sky high and earnings are awful.  Who exactly is going to pile in here to push stock prices to new highs and beyond?

Interesting article on earnings. Mind The Gap: How The Bull Market Lost Sight Of Earnings

Since October 1, 2011, the S&P 500 has risen 82% on the heels of strong earnings growth.  Let’s start over. Since October 1, 2011, the S&P 500 has risen 82% on the heels of a 0.75% decline in earnings. The price to earnings ratio over that time period has risen 83%, with price gains contributing 99% to the increase.

So prices have risen substantially, while earnings have actually fallen. The chart below highlights the growing gap between earnings growth (or lack there of) and the S&P 500.
Growth of the S&P 500 P/E and its Components since 2011

That is not exactly the normal Wall Street line is it.  I have even seen some pundits proclaiming valuation is not high at all.  Yeah, and I have a great piece of land you might be interested in.

This one has some data on the latest quarter now that most earnings are in.  Earnings fall at fastest rate since the Great Recession

A full 98.4% of S&P 500 companies have now reported through early Thursday, and profit measured by earnings per share is down 7% from a year ago, according to FactSet. On the heels of a 3.2% decline in the fourth quarter, that marks the fourth straight quarter of year-over-year earnings declines, and it was the biggest drop since the third quarter of 2009.

Against a background of low oil prices, energy was the worst performer, with a staggering 108% decline for the quarter, according to FactSet. Many energy companies posted heavy losses for the quarter, several defaulted on their debt, and some were forced into bankruptcy. The materials subsector was second weakest with a 14.5 % decline, followed by the financial sector, which was down 12.2%.

There is a lot more information in that article.  That 12% drop in financial sector earnings is very important.  Credit standards have been tightening for a while now.  The drop in earnings suggest that will continue.  Tightening credit is usually the trigger for recessions.  The recession warning flag is still flying.  I see no data suggesting the need to take it down.  I will keep watching though.

An aggressive retest is a term I made up so maybe I should explain it a little.  After a big move there is a counter trend move that lasts long enough to call into question whether the prior trend is still in force.  Then there is a rapid move back to the prior support or resistance area.  A large part of the rapid move is caused by traders that were fading the prior trend getting stopped out.  Since traders are unsure whether the prior trend is still in force they are not all that excited about chasing price in the direction of the prior trend.   The indecision usually causes the market to stop and often reverse.  Simple psychology.


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