Monday, May 23, 2016

Earnings … Risk of Low Rates … PMI Falls … Stock trading Alert … ISM/PMI Composite has Improved … Stock Market Analysis

EARNINGS (Factset)
“With 95% of the companies in the S&P 500 reporting actual results for Q1 to date, the percentage of companies reporting actual EPS above estimates (71%) is above the 5-year average, while the percentage of companies reporting sales above estimates (53%) is below the 5-year average…
..The blended earnings decline for Q1 2016 is -6.8%. The first quarter marked the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. It also marked the largest year-over-year decline in earnings since Q3 2009 (-15.7%).” Earnings Insight available at…
My cmt: Most of the earnings decline is due to declines in oil prices and resulting losses in the energy sector. While this is bad for Wall Street statistics, it might not be a recession indicator.
“U.S. interest rates being kept too low for too long could cause financial instability in future and stronger market expectations for a rate rise are "probably good", St. Louis Federal Reserve President James Bullard said on Monday. A relatively tight labor market in the United States may also exert upward pressure on inflation, raising the case for higher interest rates, Bullard added.” Story at…
My cmt: The FED is jawboning a rate hike for June or July.

“U.S. growth appears to have picked up in the second quarter, but the latest Markit survey of American manufacturers fell to a weak 50.5 in May and signaled little improvement in a key segment of the economy."  Story at…"
“In our opinion, no speculative positions are justified. Our intraday outlook is neutral, and our short-term outlook is neutral. Our medium-term outlook [1-3-months] remains bearish, as the S&P 500 index extends its lower highs, lower lows sequence…” - Paul Rejczak, Stock market strategist. Analysis and commentary at…

Chart from Federal Reserve Bank of St Louis at…
My cmt: Back on 11 Jan 2016, I presented a commentary from John Hussman that noted a high corollary of recession to ISM/PMI Composite Index.  See Paragraph: “This Data IS Suggesting Recession” at…
The Index has moved up since January so it is not clear now that it is still suggesting recession. If anything, there has been a slow continued improvement in the economy supported by improved Leading Economic Indicators (LEI) recently.  With  FED Officials making ever more hawkish statements, it would appear that the FED wants to raise rates in June or July as long as the trajectory of economic indicators continues up.  This will tend to keep a lid on the stock market, but will not necessarily cause a crash. Still, we have observed a number of indicators that have suggested 2131 on the S&P 500 in May of 2015 was a significant top.
-Monday, the S&P 500 finished down 0.2% to 2048 at the close.
-VIX rose about 4% to 15.82.
-The yield on the 10-year Treasury slipped to 1.84%.
Monday again saw very low volume on the NYSE; it was about 20% below the monthly average. Perhaps traders have decided to “go-away-in May”. On the whole, indicators declined today and remain mostly bearish.
The short-term Money Trend indicator flattened, Monday, and that’s a neutral signal.  I continue to hold short positions mostly in SH and some in QID.
The 10-day moving average of the percentage of stocks advancing (NYSE) improved to 49.9% Monday. It was 49.7% Friday. A number below 50% is usually BAD news for the markets.
On a longer term, the 150-day moving average of advancing stocks slipped 51.3%. A value above 50% generally indicates an up-trend.  The McClellan Oscillator (a Breadth measure) fell and remained negative – a bearish indicator in the short-term.
New-highs outpaced New-lows. The spread (new-highs minus new-lows) was +40 Monday. (It was +24 Friday).  
The 10-day moving average of the change in spread was minus-14. In other words, over the last 10-days, on average; the spread has decreased by 14 each day. Market Internals switched to negative on the markets.

Market Internals are a decent trend-following analysis of current market action, but should not be used alone for short term trading. They are usually right, but they are often late.  They are most useful when they diverge from the Index.  In 2014, using these internals alone would have made a 9% return vs. 13% for the S&P 500 (in on Positive, out on Negative – no shorting).  Of course, few trend-following systems will do well in an extreme low-volatility, nearly straight-up year like 2014.
Monday, the Volume, VIX, Sentiment & Price indicators were all neutral.  The long-term NTSM indicator remains HOLD.

On 30 Dec I reduced my invested position in my retirement account to 30% invested in stocks thru an S&P 500 Index fund (“C”-fund in the TSP) and on 15 Jan I reduced stock allocation to zero in long-term accounts. If the S&P 500 index closes above 2110, I plan to add to my stock allocation.
The S&P 500 peaked in Mid-May 2015 and has not been able to break higher in the past 12-months. That looks like a top to me. See “Why the Bull Market May be Dead” in my 14 December blog at…