The Past Week:Correction Still In Progress!
The Stock Market: Experienced A Rough Week!
Poor Earnings Reflect Price Action!
by Ian Harvey
October 27, 2012
It was a very rough week in the stock market, as the S&P 500 cracked the widely watched support at 1,420 on Tuesday. Prices closed the past week just above the next key support in the 1,395 to 1,400 area. Friday's close was mixed, as the major averages moved in and out of positive territory for much of the day.
The action in the past week clearly did some technical damage, and it has now been six weeks since the September 14 highs. The decline from the early April highs lasted nine weeks and took the S&P 500 9.8% down from its highs. A similar decline would last until well after the election, and the same percentage decline could take the S&P as low as 1,322, but I do not think that is likely.
Futures were sharply lower Friday of the past week, ahead of the GDP report, but rallied in early trading before the sellers again took over. The short-term analysis suggests a near-term low is likely for the week ahead, if the futures did not make their lows early Friday.
The December S&P 500 E-Mini futures hit a low of 1,394.50 before the GDP report of the past week, which was still above the 38.2% support level at 1384.50. The Dow Industrials have just tested their 38.2% Fibonacci support level at 13,041, which makes it a pretty normal correction so far.
Still, the correction has gone further than many expected. Last Tuesday's drop indicated an expectation of another push to the upside before the election, but this was not to be. The earnings reports, and more importantly, the increasingly negative corporate outlook, have turned the mood on the Street quite negative.
While the price action in some stocks has been quite ugly, the stock market is not yet that oversold. It will likely take a more broad-based drop before it can form a short-term oversold low. Typically, such a low is needed before we can actively start looking for an end to the correction.
The U.S. stocks slumped this past week, with the Standard & Poor’s 500 Index heading toward its first monthly decline since May, due mainly to companies from 3M Co. to DuPont Co. reported disappointing quarterly results and forecasts. Of the 273 S&P 500 companies that have reported quarterly earnings results, about 59 percent missed analysts’ estimates for sales, according to data compiled by Bloomberg. Almost 72 percent topped projections for earnings, the data show. Concern about a worsening picture for corporate results has sent the S&P 500 down 3.7 percent from this year’s high on Sept. 14. The index is still up 12 percent in 2012.
Even with equities falling, the Federal Reserve said the economy is still growing modestly and unemployment remains elevated as the central bank maintains $40 billion in monthly purchases of mortgage-backed securities. Outside the U.S., a survey in the past week showed a contraction in China’s manufacturing is easing and investors speculated the Bank of Japan will expand monetary stimulus next week.
Investors are also watching the U.S. presidential race. The latest Washington Post/ABC News tracking poll showed Republican Mitt Romney with 49 percent support among likely voters and President Barack Obama with 48 percent support, a result within the survey’s three percentage point margin of error.
Investors sold shares of companies most tied to economic growth this past week. Raw-material producers fell the most out of 10 groups in the S&P 500, losing 2.8 percent. Energy stocks slumped 2.4 percent for the second-largest drop. The Morgan Stanley Cyclical Index, a gauge of 30 U.S. stocks, erased 1.1 percent.
An S&P index of 11 homebuilders slumped 3.7 percent after a disappointing report on pending home resales in the past week.
• The Dow Jones Industrial Average (DJI) ended the past week down 1.8%.
The Dow is down 2.5% for the month.
• The Standard & Poor's 500 Index (SPX) was down 1.5% to 1,411.94 for the past week. The benchmark gauge for U.S. equities has retreated 2 percent in October, indicating it will end four straight months of gains.
The SPX is down 2% for the month.
• The Nasdaq Composite Index (COMP) fell 0.6% in the past week.
The Nasdaq is down 4.1% for the month.
However, despite the declines, the Dow is up 7.3% for the year, while the S&P 500 has gained 12.3%. The Nasdaq is up 14.7%
DuPont (DD) was the biggest weekly laggard on the Dow, while Intel (INTC)was the best performer.
The CBOE Market Volatility Index (VIX – 17.06) ), widely considered the best gauge of fear in the stock market, lost 0.3 point, or 1.7% on Friday of the past week, and gave up its short-lived perch atop the 18 level, though its 200-day moving average continued to offer support. As the equities markets turned lower for the week, the VIX jumped 4.4%.
Summary of the Past Week
Thursday, October 25
Apple (AAPL) shares briefly fell below $600 after hours as the company's earnings of $8.67 a share missed Wall Street estimates of $8.75. The issue seems to be a shortfall of iPad production. Revenue was up 27% to $35.97 billion, slightly ahead of estimates.
The shares had fallen $7.29 to $609.54 in regular trading and fell to as low as $597 after hours -- trading was briefly halted -- before rebounding to $607.75, down $1.79, at 6:07 p.m. ET. Apple hasn't closed below $600 since July 30. Apple shipped 26.9 million iPhones in its fiscal fourth quarter, a bit more than expected, but iPad shipments were 14 million, lower than expected.
Amazon.com (AMZN) shares were down as much as $20 after hours before buying brought the stock back to $220, down from a regular close of $222.92. The company reported a revenue miss and a larger-than-expected earnings loss.
The results came after stocks moved modestly higher today, breaking a two-day losing streak as earnings from energy and health care companies gave the market a boost. But the Apple and Amazon results seem certain to weigh on stocks on Friday.
The Dow Jones industrials (DJI) closed up 26 points to 13,104; the blue chips had been up as many as 87 points early in the day. The Standard & Poor's 500 Index (SPX) gained 4 points to 1,413, while the Nasdaq Composite Index (COMP) was up 4 points to 2,986. The Nasdaq-100 Index (NDX) climbed 2 points to 2,658.
Market struggles to get past a rumor
The market opened strongly but spent most of the day around break-even on a rumor that Fitch Ratings would be downgrading U.S. debt. That took the Dow from a gain of about 30 points to a loss of 37 points in a matter of minutes. But a Fitch spokesman told Bloomberg News and CNBC that the agency doesn't expect to address the nation's debt rating until late 2013.
A second problem weighed on markets: Americans signed fewer contracts than forecast in August to buy previously owned homes. European stocks were lower, and the dollar was rising against the euro.
Friday, October 26
Stocks ended the day little changed, but the major averages finished lower for the second week in the last three.
The market gained strength from technology stocks, which rebounded from early-afternoon lows.
Apple (AAPL) was the poster child for the rebound, falling below $600 for the first time since July 30 and climbing from a $591 low to a close of $604, a loss of $5.54.The company's fiscal-fourth-quarter earnings missed Street estimates and its guidance was also lower than expected.
Investors also bid shares of Amazon.com (AMZN) up $15.32 to $238.24 despite the company's loss for its third quarter. Investors are buying into the company's assurances that huge investments now will pay off later.
Financial stocks slipped as investors worried about economic conditions in Europe --Spain's unemployment rate hit 25% -- and the fiscal-cliff impact in the United States. There was some decent news: a better-than-expected third-quarter gain in gross domestic product, the key indicator of economic growth. GDP growth was an annualized 2%, the Commerce Department said, fueled by gains in consumer spending and housing investment.
The Dow Jones industrials (DJI) closed up 4 points at 13,107. The blue chips had been down as many as 64 points. The Standard & Poor's 500 Index (SPX) ended down 1 point to 1,412, but the Nasdaq Composite Index (COMP) was up 2 points to 2,988.
The Nasdaq-100 Index (NDX) added 8 points to 2,666. The catalysts included Apple's recovery and Amazon's big gain as well as a big jump in earnings for online travel site Expedia (EXPE). The shares jumped $7.81 to $59.06.
Apple represents about 17% of the market capitalization of the index. Amazon also has a smaller but noticeable influence on the index.
Crude Oil in the Past Week
The December crude oil dropped below the key 61.8% support level at $87.40 that we have been watching. There is some support in the $83 to $84 area, but a test of the lows at $79 cannot be ruled out.
Precious Metals in the Past Week
The SPDR Gold Trust (GLD), iShares Gold Trust (IAU), iShares Silver Trust (SLV), and Global X Silver Miners (SIL) all bounced late in the past week after hitting new correction lows earlier.
The SPDR Gold Trust (GLD) is holding above the 38.2% 'Fibonacci support’ at $164.21, with the daily uptrend (line b) now at $163.30. The 50% retracement support is at $161.17.
The daily on-balance volume (OBV) is still below its WMA, but the bounce could be the start of the bottoming process. However, one more new correction low is likely.
Company News and Earnings in the Past Week
Company News and Earnings in the Past Week
Tuesday, October 23
After the close, Facebook (FB) shares jumped $1.98, or 10.2%, to $21.13 after reporting that earnings of 12 cents a share after one-time expenses beat the Street estimate by a penny. Revenue of $1.26 billion was up 32% from a year ago and beat the Street estimate by $30 million. Shares were up 18 cents to $19.50 in regular trading.
But Netflix (NFLX) shares were down $11.22, or 16.3%, to $57.12 after hours as results from its video streaming business weren't as strong as expected and the company starts to produce original programming. Earnings fell to 13 cents a share from $1.16 a year ago. The company may see a fourth-quarter loss.
Also after the close, Panera Bread (PNRA) shares jumped $8.91, or 5.6%, to $169.25.
The company's third-quarter revenue and earnings beat estimates, and the company raised its earnings guidance to $1.72 to $1.74 a share for the fourth quarter, up from 41.60 to $1.70.
DuPont reports a profit fall, will lay off 1,500
DuPont reported a lower-than-expected quarterly profit and announced 1,500 job cuts to offset falling sales around the world. The news was a shock to investors, and shares tumbled $4.51 to $45.25 and pulled the materials sector of the S&P 500 nearly 3% lower. It was the worst-performer among the 30 Dow stocks and second-worst among S&P 500 stocks.
United Technologies reported a 3.3% decline in third-quarter earnings and cut its sales forecast for the year, citing weak demand from airlines and an uncertain economy. The report sent shares 76 cents lower to $77.07.
3M lost $3.80 to $88.73 after the diversified U.S. manufacturer cut its profit forecast for the full year as acquisition costs and a strengthening dollar during the quarter hurt margins. 3M generates more than 60% of its revenue outside the United States.
The three companies accounted for nearly 70 points of the decline on the Dow industrials. Declines in Chevron (CVX) and Exxon Mobil (XOM) -- because of falling oil prices -- contributed an additional 41 points to the Dow's loss.
Whirlpool (WHR) jumped $7.50 to $93.81 after reporting a higher-than-expected quarterly profit, helped by price increases and tight cost controls. The world's largest appliance maker also raised its earnings outlook for the year.
Yahoo (YHOO) shares were up 90 cents to $16.67. Chief Executive Marissa Mayer’s first earnings call appearance reignited Street interest in the beleaguered Web portal’s future. The company got a lift from its sale of Alibaba shares, but, to the surprise of some analysts, Yahoo’s core business also performed better than expected.
Wednesday, October 24
Facebook's big gain
Facebook surged $3.73 to $23.23 -- and reached as high as $24.25 -- after the social networking company grew mobile advertising revenue several times in the third quarter, a much quicker pace than expected.
Besides posting quarterly results that inched past Wall Street's expectations, the company said it generated nearly $153 million in revenue from mobile advertising.
That cheered investors, who have wondered if anyone can make money from ads sent to smartphones.
Panera sees a decent 2013
Panera Bread shares were up $8.09 to $168.43. The restaurant company's third-quarter results beat Street estimates. It also guided higher for 2013.
Panera's report contrasted with other high-growth chains like Chipotle Mexican Grill (CMG) and Buffalo Wild Wings (BWLD), which disappointed investors with their recent results.
Chipotle fell 15% after it reported disappointing earnings last week. It was up $6.58 to $242.82 today. Buffalo Wild Wings was off $8.76 to $74.70 after it said higher costs will trim earnings.
Netflix struggles with streaming subscriptions
Netflix shares fell $8.10 to $60.12 after the DVD-rental and video-streaming company lowered its forecast for streaming subscribers for the year. It's the worst performer among S&P 500 and Nasdaq-100 stocks.
Along with its latest quarterly results, released late Tuesday, Netflix said it now expects to end the year with between 26.4 million and 27.1 million streaming subscribers. That would give the company a gain of 4.7 million to 5.4 million subscribers this year. Netflix had earlier forecast a gain of 7 million subscribers.
Countrywide rears its head again for Bank of America
The federal government filed a civil lawsuit against Bank of America (BAC), alleging the banking giant's Countrywide subsidiary saddled taxpayers with losses by misrepresenting the quality of home loans it sold to mortgage-finance companies Fannie Mae (FNMA) and Freddie Mac (FMCC). The suit says Countrywide engaged in "brazen fraud."
The action, filed today in New York City, seeks at least $1 billion in damages. The filing represents a novel effort by the government to defray costs tied to the 2008 bailout of Fannie and Freddie, and potentially opens a new front against a banking industry already dealing with hefty legal costs.
The government alleges Countrywide Financial, the mortgage company Bank of America acquired in 2008, dismembered quality control and checks on loan quality in 2007 through 2009, in a process called "the Hustle" that aimed to boost the speed at which it originated and sold loans to the companies. The mortgage unit falsely continued to claim the loans qualified for insurance from Fannie Mae and Freddie Mac, the complaint alleges.
Bank of America shares closed down 5 cents to $9.31. Bank officials have conceded that they wished they hadn't taken Countrywide over. The deal has resulted in endless litigation costs relating to the housing bust.
Boeing boosts its outlook
Boeing started the day strongly, but shares fell 11 cents to $72.71. The commercial jet and defense giant reported better-than-expected earnings and raised its full-year 2012 outlook. The shares had reached as high as $75. The outlook bucked a recent trend by companies with large global footprints cutting their full-year forecasts. These include DuPont (DD), United Technologies (UTX) and 3M (MMM).
AT&T (T) posted third-quarter revenue that was below analysts' expectations, but its earnings increased from a year earlier. Shares lost 29 cents to $34.71.
The Dow Jones Transportation Average (DJT) was down 103 points to 5,005 after Norfolk Southern (NSC) said quarterly profit fell on lower shipments of coal and merchandise. Its shares slumped $4.92 to $61.09. Shares of C.H. Robinson Worldwide (CHRW), another component in the transportation index, fell $3.43 to $57.55.
After the close, shares of game-maker Zynga (ZNGA) jumped sharply. The company reported break-even earnings but also announced a $200 million stock buyback. Software company Symantec (SYMC) also rallied strongly as earnings beat estimates.
Thursday, October 25
A lackluster report from Apple
Apple normally blasts past analyst estimates. But today's results were only good. The 26.9 million iPhone shipments were up 58% from a year ago and ahead of estimates. The iPad shipments, while up 26% from a year ago, were below the 15 million to 16 million units expected.
Macintosh computer shipments were up 1% to 4.9 million units. IPod shipments fell 19% to just 5.3 million units.
The company expects $52.6 billion in revenue for the all-important fiscal first quarter, which includes the holiday season.
With the regular close of $609.54, Apple is off 13.2% from its closing peak of $702.10 on Sept. 19.
Amazon: Trying to get as close to break-even as possible
Amazon shares were down only 94 cents before the earnings release came out.
The company continued to invest in new fulfillment centers and new operating technologies at the expense of profits.
"Our approach is to work hard to charge less. Sell devices near break-even, and you can pack a lot of sophisticated hardware into a very low price point," CEO Jeff Bezos said in a statement.
While the company did not cite the global economy, it projected $20.5 billion to $22.75 billion in revenue, lower than the Street estimate is $22.8 billion. Its operating loss could be as much as $490 million; the upper end of the range was a profit of $310 million. Operating income in the year-ago fourth quarter was $260 million.
Amazon lost $274 million, or 60 cents a share, in the third quarter, down from a profit of $63 million, or 14 cents a share. Stripping out a one-time charge for its LivingSocial business produced an adjusted loss of 23 cents. Wall Street had expected 8 cents.
Revenue was up 27% to $13.8 billion. Wall Street had expected $13.92 billion.
Separately, Bloomberg News reported this afternoon that Apple may launch an Internet radio service in the first quarter of 2013. Pandora Media (P) and Sirius XM Radio (SIRI) were both lower.
P&G's turnaround plan may be working
Procter & Gamble was up $1.99 to $70.07. The consumer-products giant said fiscal-first-quarter profits fell 7% on a stronger dollar and costs related to restructuring. The results, however, beat Street expectations in a sign that a turnaround plan that it started in the spring is beginning to work.
P&G announced a plan to focus on its 40 top businesses, 20 biggest new products and 10 most profitable emerging markets as it undergoes a cost-cutting plan aimed at saving $10 billion by fiscal 2016.
The maker of Tide detergent and Pampers diapers said today that it's ahead of schedule with its planned job cuts, and that it might consider going beyond its $10 billion cost-cutting plan.
P&G was the top performer among the 30 Dow stocks. Boeing, Travelers Companies (TRV) and Home Depot (HD) were the big weights on the index.
Friday, October 26
Citigroup shares slide on news hits
Citigroup (C) shares fell 81 cents to $36.60 after technology analyst Mark Mahaney was reportedly fired because he improperly disclosed revenue estimates on Google's (GOOG) YouTube business. At the same time, Citigroup agreed to a $2 million fine imposed by Massachusetts regulators after a junior analyst emailed two employees at a technology website seeking feedback on a Facebook (FB) document containing a senior analyst’s views and estimates.
At the same time, The New York Times reported that Vikram Pandit's departure as CEO on Oct. 15 was hardly his choice. Instead, he was offered the choice of resigning immediately or at the end of the year. Or being fired immediately.
The coup was orchestrated by Chairman Michael O'Neill, who became increasingly convinced Pandit, who wasn't a banker by training, was the wrong person for the job. Probably what tipped the issue was in March when the Federal Reserve denied Citigroup permission to raise its dividend.
Merck shares slip; Moody's jumps
Shares of pharmaceutical giant Merck (MRK -0.32%) were off 15 cents to $46.15. The company said its third-quarter profit rose 2% to $1.76 billion, or 56 cents a share, from $1.72 billion, or 55 cents a share, in the year-ago quarter. Adjusted profit edged up to 95 cents a share from 94 cents. Sales fell 4% to $11.5 billion from $12 billion. But the strong dollar depressed non-U.S.results. Excluding the currency effect, sales were comparable to year-ago levels.
Goodyear Tire & Rubber (GT) slumped by $1.28 to $11.02 after the company said weak demand in Europe held earnings back. Dealers on the continent are still working through excess winter tire inventory from last year.
Cable-and-broadcast operator Comcast (CMCSA) added $1.20 to $37.56. The majority owner of NBC said third-quarter profit more than doubled, boosted by advertising revenue, the sale of assets and a decrease in the loss of subscribers.
Moody's (MCO) added $2.17 to $47.89 after saying profit increased by 41% as companies took advantage of record investor demand and low borrowing costs by issuing debt.
Software developer CA (CA) fell $2.17 to $22.73. The company said it sees a 1% to 3% decline in full-year growth after it adjusted for currency fluctuations, down from a prior estimate of 1% to 2% growth. CA cited a 14% decline in second-quarter bookings due to lower sales in its enterprise solutions unit and lower mainframe capacity revenue.
Deckers Outdoor (DECK) tumbled $6.01 to $29.48 after cutting its forecast for annual sales growth by almost two-thirds amid declining demand for its UGG sheepskin boots.
Economic News in the Past Week
U.S. economic growth picked up in the third quarter as a late burst in consumer spending and a surprise turnaround in government outlays offset the first drop in business investment in more than a year.
The stronger pace of expansion, however, fell short of what is needed to make much of a dent in unemployment, and it offers little cheer for the White House ahead of the closely contested Nov. 6 election.
The 2% GDP gain was an improvement over the second quarter's 1.3% pace. A rate in excess of 2.5% is needed over several quarters to make substantial headway in cutting the jobless rate.
The report was a bit better than economists had expected, in part because of a surge in government defense spending that was not expected to last. That combined with the faster pace of household spending and a jump in homebuilding to strengthen domestic demand.
Overseas Influences in the Past Week
In the past week, the Eurozone crisis continued to fester. While the economic data showed more deterioration, as Spanish unemployment reached 25%, German consumer confidence hit a new five-year high.
It is interesting that despite the selling in the US stock market, the Euro STOXX 50 Index is still in its broad trading range. This suggests that the overseas markets may lead the US once the correction is over.
The Price to Earnings Ratio from 1900
The chart below illustrates the price to earnings ratio (PE ratio) from 1900 to present. Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive.
From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s).
Since the early 2000s, the PE ratio has been trending lower with the very significant but relatively brief exception that was the financial crisis.
More recently, the PE ratio has moved slightly higher. It is worth noting, however, that even with this recent uptick, the PE ratio still remains at a level not often seen since 1990.
The NYSE in the Past Week
The daily chart of the broad-based NYSE Composite NYSE> continues to act the best, as it is just testing its uptrend from the June lows (line a). The next key support is at 8,022, which is the 38.2% Fibonacci support. It is about 2% below Friday's close. The more important 50% retracement support is considerably lower at 7,869, and the longer-term uptrend follows that at 7,400.
The NYSE Advance/Decline (A/D) line has reversed after moving above the early October highs, and is now very close to breaking support at the lows from the last month. There is more important support now at line c. The A/D line is still well above the longer-term uptrend (line d), and did confirm the September highs.
Sentiment in the Past Week
The bearish sentiment did not show much increase in the past week, from either individual investors or financial newsletter writers. The put/call readings and VIX analysis also suggest that stocks can still drop further.
The first decent rally will tell us more about the downside targets, but it would take a close below 1,370 (the 50% support) in the S&P 500 to weaken the positive intermediate-term outlook.
The Major ETFs in the Past Week
1. The Economy and Earnings in the Week Ahead – October 29, 2012
2. The Week Ahead in the Stock Market – October 29, 2012
3. The Major ETFs in the Week Ahead – October 29, 2012
4. Companies Reporting Earnings in the Week Ahead - October 29, 2012
Past Week Information, Past Week Results, Past Week Earnings, Past Week Economy, Past Week Overseas Influences, Past Week Stock Market, Past Week Election Influences, Past Week Sentiment, Past Week DOW, Past Week SPX, Past Week Nasdaq, Past Week VIX, Past Week Sector Performance, Past Week Oil, Past Week Precious Metals, Past Week Company News, Past Week NYSE