The stock market's reaction to a heavy week of earnings reports was not encouraging. It reinforces the view from last week that now was not time to jump back into the stock market despite the widespread bullishness. The drop this week is likely to reduce the bullishness but a tradable low for the overall market many be a number of weeks away.
The sharp gains on Monday were accompanied by signs that the rally was fueled by just a few stocks as I noted in Tuesday's Narrow Advance Warrants Caution. The technical weakness did not support the new highs in the Nasdaq 100 which ended the week down over 2%.
According to AAII 32.7% of individual investors are were bullish as of last Thursday with just 25.6% bearish. The largest group are neutral and overall there was little change in the sentiment last week. The CNN Fear & Greed Index dropped from 32 last week to just 12 this week. In August 2014 it did drop into single digit territory just a week before the market made its low.
So what can investors do to ride out the correction during earnings season?
The Markets
Last week's stock trading featured a few winners but there were more losers as declining stocks swamped the advancing ones by a 4-1 margin. Some of the losers like Caterpillar (CAT) are large multinational companies that have been hurt by the stronger dollar and the resulting weakness in their overseas business. The decline in orders from China dragged down the earnings from both industrial and tech companies.
Even Apple Inc. (AAPL) was hit last week but that was consistent with its weak volume analysis. United Technologies (UTX) reported a 10% drop in elevator orders from China and it's stock was down 10% for the week. IBM reported that revenues from China were down 15%. The lack of demand out of China was also a problem for Microsoft (MSFT) and VMware (VMW).
Even though biotech giant Biogen (BIIB) did beat on earnings their revenues were weak and the stock was down over 22%. This week we have 163 of the S&P 500 reporting profits so it is likely to be another volatile weak.
There were some winners as Amazon.com (AMZN) actually had a profit and Starbucks (SBUX) also moved higher late in the week while the overall market was declining. SBUX has been a market leader all year as has Netflix (NFLX) which reported earnings the previous week. The % change charts clearly illustrate the winners and losers as Caterpillar has been in negative territory all year and is now down over 17%.
In contrast Netflix (NFLX) was only negative for the first three weeks of 2015 but then accelerated to the upside as it is up over 119%. This dwarfs the meager gain of the Spyder Trust (SPY). It is always a good idea to concentrate in stocks or ETTs that are acting stronger than the S&P 500. This is especially true when the overall market is correcting as those stocks with strong relative performance generally hold up the best.
The relative performance or the ratio of a stock or ETF to the S&P 500 is the best way to pick the winners and avoid the losers. The weekly chart of Caterpillar (CAT) shows that the stock has been in a broad trading range, lines a and b, since 2012. The stock has made new lows for the year last week with next major support in the $71 area.
In contrast the relative performance (RS) line topped in early 2012 and has since been in a solid downtrend, line c. The lower lows in 2012 confirmed a new downtrend as the RS line has also made lower lows, line d.
Netflix Inc. (NFLX) stayed in a trading range for all of 2014 but then broke through resistance at line e, in April 2015. The RS line was acting much stronger as it dropped back to its rising WMA as prices were testing the 20 week EMA and still shows a strong uptrend.
The weekly chart of the NYSE Composite shows the drop below the uptrend, line b, that connected the December 2014 and the February lows just before the 4th of July long weekend. The two week rebound failed at the 20 week EMA which has now turned lower. Once below the recent low at 10,622 the next support is at the weekly starc- band at 10,509.
The weekly NYSE A/D line dropped below its WMA on June 5th which was a reason for concern. This week the A/D line will make a new correction low and this means the correction is likely to last longer. The next support is from the highs early in the year, line c. The daily A/D line has dropped below its WMA and is already close to the lows from three weeks ago.
The weekly on-balance-volume is still in a range, lines d and e, as it closed back below its WMA last week. The daily OBV (not shown) dropped below its WMA last Tuesday and is already close to the June lows.
The Spyder Trust (SPY) closed the week on its daily starc- band and just above the quarterly pivot at $207.38. A further decline to the July lows in the $204 area is looking more likely. There is additional support at $202.48 and the March lows, line a. The 20 day EMA is now at $209.74 with stronger resistance in the $211-$212 area.
The daily S&P 500 A/D line rallied back it resistance at line b, last week but has now dropped well below its WMA. The lower lows in the A/D line at the July lows, line c, made me question the recent rally. The A/D line needs to overcome the downtrend and last week's highs to turn positive.
The Economy
Last week's data on the housing market was mixed as Existing Home Sales were strong while New Home Sales plunged 6.8% in the past month as they were much weaker than most expected. The manufacturing sector is still a concern as while the Chicago Fed National Activity Index was better than expected the Kansas City Fed Manufacturing Index was weaker. The PMI Flash Manufacturing Index held firm which was encouraging.
The most positive sign was the 0.6% rise in the Leading Economic Indicators (LEI) as most economists were only looking for a 0.2% gain. This is a composite of ten economic indicators and as the chart reveals it has a good record of topping out well ahead of a recession. It is still in a sold uptrend.
In addition to a full week of earning there will be plenty of economic data for the stock market to absorb. On Monday we get the Durable Goods Orders as well as the Dallas Fed Manufacturing Survey. On Tuesday the FOMC meeting begins and we also get the S&P Case-Shiller HPI, PMI Flash Services report and Consumer Confidence.
Wednesday we get the latest report on Pending Home Sales followed in the afternoon by the FOMC announcement. The advance reading on 2nd quarter GDP is out on Thursday and then on Friday we have the Chicago PMI and Consumer Sentiment.
Interest Rates & Commodities
The yield on the 10 year T-Note declined for the second week in a row and is down significantly from the late June highs. The daily technical studies do suggest that rates will decline further over the near term but a drop back below 2.00% is needed to signal even lower yields.
The plunge in commodity prices continued last week as the CRB index dropped 4.4% and gold dropped another $46 dollars. This was consistent with the negative weekly OBV analysis that has been pointing to lower prices since June. Traders are very bearish on gold so a short covering rally is likely in the next week
The crude oil futures declined another $3 per barrel last week as the tight weekly ranges in June (see chart) warned of lower prices. The crude oil futures have lost over $11 per barrel since late June. Crude oil is oversold on a short term basis so a rebound is likely in the next week but there are no signs yet of a bottom.
Market Wrap
Since the July 4th column I have been pointing out that the small cap iShares Russell 2000 (IWM) was acting the weakest. The Russell 2000 was down 3.24% last week. This was worse than the 2.86% drop in the Dow Industrials and the S&P 500 decline of 2.21%.
All ten S&P sectors were lower for the week as the materials were down 5.66%, oil & gas stocks dropped 4.26% and the industrials lost 3.4%. The relative performance analysis has been negative on the materials and industrial sectors in 2015 as both triggered monthly low close doji sell signals in June (see chart)
This week Dupont (DD), Mondelez International (MDLZ) and Seagate Technology (STX) all report and they receive a large share of their earnings from China. This makes them quite vulnerable to an earnings downdraft.
For those who are looking to get involved in the stock market on this correction focusing on ETFs will help cushion you against an earnings shock from an individual stock. In terms of sectors the long term relative performance for health care and consumer discretionary continues to look the best. They will likely correct further with the overall market but should perform the best once the market bottoms out.
If you are already invested in individual stocks or ETFs another 2-4% drop in the S&P 500 would not be surprising. Owners of stocks that have not yet reported earnings could use options to protect their positions while those in strong ETFs should ride out the correction and could consider adding to positions at stronger support.
I feel confident that the technical studies will help correctly identify the next market low and you can follow my analysis during the week on both Twitter and StockTwits. For my regular weekly commentary see my columns at Trade Your Own Money.
