Lots of Movement, Little Gained
The Dow Jones Industrial Average (Dow) added 0.37%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.41%, the Standard & Poor’s 500® Index (S&P 500) finished up 0.33%...
August 11, 2014
| By Mike Schwager
Performance for Week Ending 8/8/14:
The Dow Jones Industrial Average (Dow) added 0.37%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.41%, the Standard & Poor’s 500® Index (S&P 500) finished up 0.33% and the NASDAQ Composite Index (NASDAQ) tacked on 0.42%. Sector breadth was mixed with 6 of the S&P sector groups finishing higher while 4 finished lower. The Consumer Discretionary sector (+1.11%) was the best performer while Telecom (-2.10%) was the worst.
||Closing Price 8/8/2014
||Percentage Change for Week Ending 8/8/2014
||Year-to-Date Percentage Change Through 8/8/2014
*See below for Index Definitions
MARKET OBSERVATIONS: 8/4/14-8/8/14
The major market indices finished the week modestly higher as a rally on Friday helped erase losses posted earlier in the week. Stocks fluctuated between gains and losses for most of the week as positive U.S. economic news was offset by heightened geopolitical risk, concerns over the pace of growth in Europe, and technical considerations.
While the “headline-noise” has certainly created some near term uncertainty, it has also masked the building evidence that the U.S. economy is gaining traction. Despite the market’s recent choppiness, data continues to reinforce the view that macro fundamentals remain supportive of equities. Last week we saw initial jobless claims (4-week moving average) fall to the lowest level in over eight years, suggesting further improvement in the labor market in the months ahead. Second quarter earnings continued to trend at a higher than expected pace. The latest earnings tally shows Q2 earnings growth for the S&P 500 in the low double digits, well ahead of the sub-5% pace expected at the start of the reporting season. The Institute for Supply Management (ISM) reported that their nonmanufacturing (services) index rose to 58.7 in July, the highest reading since December 2005. This is important as service-oriented businesses make up almost 90% of the U.S. economy. The report followed data in the prior week showing the ISM Manufacturing Index rising to the highest level since April 2011. Combined, the two reports suggest the economy picked up momentum as it entered into the second half of the year. Valuation metrics have also been improving. The recent pullback in the market coupled with upward revisions to forward earnings estimates has left the S&P selling at just 14.5-times the 2015 consensus estimate of $132.80.
While stocks have been trending lower over the past couple weeks, things seem to feel a lot worse than they actually are. The S&P hit a new all-time high on July 24 and has since pulled back by approximately 2.8%, which is at the lower end of similar pullbacks experienced over the past 12 months. The largest of those setbacks came in January when the S&P retreated by 6.1%. To put that in perspective, if a similar pullback were to occur, the S&P could test the 1865 level. This level also happens to line up with the 200 day moving average, which historically has been a major area of support for the market.
When fundamentals are pushed to the backburner, many investors turn to “technicals” for direction. Technical analysis is the study of price trends and patterns in the market place. While many asset managers shrug off the use of technical analysis and consider the practice the equivalent of “market voodoo,” traders tend to use technical’s to help shape and define risk. Remember if enough eyeballs are focused on something then that event becomes important.
Last week all eyes were on the 100-day moving average (1914). The S&P 500 “tested” the 100-day several times during the week and managed to finish the week above that level. Over the past couple years the 100-day has been a pretty reliable area of support and has often been a launching ground for a market turnaround. Traders will continue to watch the 100-day closely as a near term proxy for downside risk, whereas, on the upside the 50-day moving average (1955) will be viewed as an area of resistance.
Sentiment becoming too negative?
Last week the American Association of Individual Investors (AAII) reported that BEARISH sentiment rose to 38.2% – the highest level in almost a year. Investment decisions, in their simplest form, tend to be driven by emotions – fear & greed. Sentiment also tends to be contrarian in nature as investors are typically the greediest (bullish) at market tops and the most fearful (bearish) at market bottoms. The current trend in bearish sentiment suggests that the recent selling pressure may be close to running its course -- stay tuned.
Second quarter earnings season is coming to a close and the overall trend has been very encouraging. Through Friday, 452 members of the S&P 500 have reported quarterly results with overall earnings up by 10.7%. Of the 452 companies, just 67.6% have beaten expectations while 20.8% have fallen short. The current “beat” is solidly above the long-term average of 63%. Revenues (+4.5%) have also been modestly better than forecasts and forward guidance from corporate management has also been encouraging. When all is said and done, profits are likely to rise 9.7% on a 4.3% gain in revenues, according to Bloomberg.
The Week Ahead:
The earnings calendar continues to wind down with only 15 members of the S&P 500 scheduled to report results. Included in this group will be Dow components Cisco Systems on Wednesday and Wal-Mart on Thursday. The focal points on this week’s economic calendar will be July retail sales on Wednesday followed by July Producer Prices (PPI), the August Empire State Manufacturing Survey, July industrial production and the preliminary August University of Michigan Consumer Sentiment survey (all out on Friday). The Federal Reserve (Fed) speaking calendar is relatively quiet this week with only three Fed heads on the docket.
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm’s headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.
Standard and Poor’s 500® Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.
American Association of Individual Investors (AAII) is a non-profit, membership-driven investor education organization. The American Association of Individual Investors (AAII) was founded in 1978 by James Cloonan. The AAII's mission is to teach individuals to manage their own portfolios and to beat average S&P 500 returns, while taking on lower-than-average levels of risk. AAII also publishes the results of its weekly investor confidence surveys that are based on its members' feelings about where the stock market is headed.
NY Empire State Index is an index based on the monthly survey of manufacturers in New York State – known as the Empire State Manufacturing Survey – conducted by the Federal Reserve Bank of New York. The headline number for the NY Empire State Index refers to the survey’s main index, which summarizes general business conditions in New York State.
Michigan Consumer Sentiment Index – MCSI is a survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.
Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.
Past performance is no guarantee of future results. Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.
The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.
The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.
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