Monday, January 13, 2014 Zeb’s Vue

General Information and Analysis

 

US

Comment for 1/13/2014	Measure	Indicator	Ranking
Weekly RSI	WeeklyRSI	73.2	OverB
Long Term MVA (200 day MVA)	200 MVA	9.88%	Bull
5 Day Slope of 55 day MVA	Slope55MA	0.48%	Bull
Intermediate Trend (Using ADX)	ADX(14)	18.86	Neutral/Chop
Short Term Trend (Daily RSI 3)	RSI(3)	79.69	OverB
Relative Volatility ATR vs. 1Stdev	ATR(90)	0.60%	Calm
VIX - MACD 10/30 (slope down)	MACD	0.010	Neutral/Bull

Comment:

Long Term price movement is bullish.  Short term, the market is calm.  Look for a storm (up or down) soon.  There is a high probability the calm will not last, and the increase in volatility could be violent (up or down). Friday the market chopped and closed relatively unchanged.    The market was down overnight, but as I write this, the first 40 minutes of trade shows upward pressure.  Price on S&P 500 emini is bouncing around Friday's Pivot.

 

 

 

The table above is a rating for intermediate and long term trend in the S&P500.  I used the S&P 500 as the indicator for the USA stock market.  For day traders: You may find it useful to trade in the direction of the trend.  However, looking at any daily chart over lots of years, the trading direction for the day is pretty random. 

S&P PIVOT ES Mini March Contract - Tuesday- Useful on Monday 1/13/2014

Yesterday			Day Before Yesterday
High	1842.50		High	1839.00
Low	1826.25		Low	1824.25
Close	1837.75		Close	1833.00
R2	1851.75		R2	1847.00
R1	1844.75		R1	1840.25
Pivot	1835.50		Pivot	1832.25
S1	1828.50		S1	1825.50
S2	1819.25		S2	1817.50

The numbers tell the story better than my words.  Yesterday was choppy with the Pivot providing support and resistance.  The Close even closed within 2 points of the pivot for that day. 

 

Stocks –

Zeb’s View:

Mondays have a tendency to be choppy with a small range.  This may be very true for today as there is no news reports to drive the market.  We are at the beginning of earnings season as well, and investors may await more news from large companies. 

Earnings Season:

Somewhat contrary to many analysts, I believe that stocks prices were not only driven higher by the Federal Reserve.  They were driven higher by company earnings in 2013.

In a few weeks, earning will be reported en masse.  Earnings Growth will be the driving force.  Why is that?  Because stock prices ultimately follow earnings.  What is apparent, however, is that investors are paying more and more for the same penny of earnings. 

For example, the P/E (Price to earnings) ratio on the S&P 500 expanded from 14.7 to 17.3 -- almost 20%.  That is not sustainable, I surmise.  The P/E ratio is indicating something must give.

What investors want to see in the forecasts (as the stock market is forward looking) is for earnings to increase.  At the end of September last year, analysts estimated the S&P would grow by 9.6% in the fourth quarter.  Analysts always revise these figures downward as more information becomes available.

However, before entering earnings season this year, they did not lower expectations as much as usual.  Currently, according to Bespoke, analysts are expecting fourth-quarter earnings to grow by 6.3%. 

Is the optimism warranted?  If analysts are too optimistic (this time), that will set the stage for expectations of growth to be disappointing.  Investors do not take kindly to companies reporting lower-than-expected profit growth.  If earning growth is down over the next few weeks, a substantial and violent correction will take place to the downside.

As investors wait for earnings, January 2014 is choppy the first part of the month with small ranges. 

Company guidance promises to be a critical factor as earning season starts en masse.  Now, for my young friend who follows my reports, let me discuss the relationship to guidance and economic reports.

The latest economic reports point to a USA economy (and global economy) that is accelerating.  Therefore, in the mind of investors economic growth should translate into more sales and profits for companies. 

Yet as of today, the overwhelming majority of S&P500 that have issued fourth-quarter earnings guidance have issued negative guidance.  Several analysts are reporting that 88% of companies reporting have issued negative guidance.

According to FactSet, however, companies (on the whole) underpromise hoping to overdeliver.  FactSet reports the average negative guidance is 64%.  Therefore the difference between 64% and 88% is abnormally high level of pessimism by companies right now. 

If we do not observe an immediate uptick in positive guidance, there could very well be trouble in the economic numbers that are not apparent yet. 

Note: The bull market is very old, and at this stage slowing growth and overly negative outlooks could lead to a violent sell off.  

The key is to hold excellent companies that one never sells.  Do you know the mantra in real estate? Location, Location, Location...

For retail investors investing for retirement, let us take this mantra for the part of our portfolio that is in stocks - earnings, earnings, earnings.  In the meantime, we invest in 900 lb gorillas that are not going out of business unless there is total collapse of governments around the world.  Those 900 lb gorillas historically earn irrespective of stock market prices, and they treat the investors well by giving back earnings to the stock holders - earnings which can be re-invested through DRIP (Dividend reinvestment plan). 

My dear young reader: if we take just a very small part of our earnings and invest in any world dominating corporation and we reinvest dividends, the past investment results have shown the return to be "very satisfactory". 

So we keep an eye on earnings season, but if we are invested correctly, the real thing we must prepare for is total chaos in the streets of Europe and the USA if we have a major economic downturn.  Let us for the moment, take the USA's Federal Reserve at its word, in that it won't taper anytime soon - keeping interest rates low.  Therefore, there may be unrest, but the economies, hopefully, will be minimally impacted negatively. In the meantime we ride out the stock market storm (if there is one) with 900 lb gorillas.