ChartWatchers Newsletter

Are The Transports Falling Off The Rails?

The Transportation indexes look like they are struggling here. That's not usually a good thing.

There are three components: Railroads - $DJUSRR, Airlines - $DJUSAR, and Trucking - $DJUSTK. Starting with the railroads, this has all the making of a derailment. There is a double top on the price chart. The multi-month negative divergence on the MACD compared with price looks to match the 2015 top and the Relative Strength uptrend has been broken again.

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Market Is Very Overvalued

The market has been rising ahead of earnings for over two years, and it is very overvalued. Nevertheless, bullish investors seem unconcerned. The chart below shows the S&P 500 Index (black line) in relation to where it would be if it were undervalued (P/E 10 - green line), fair value (P/E 15 - blue line), or overvalued (P/E 20 - red line). The current price is far above the overvalue side of the range, because the S&P 500 has a P/E of 24.

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The Table has Been Set - The Earnings Smorgasboard

Everyone likes a good meal, especially an all you can eat buffet. And if you are a trader, you've just been served up an earnings smorgasboard.

So far,  per Thomson Reuters, over 400 companies in the S&P have reported for Q2, 2017, with almost 73% beating earnings expectations. This is good news for traders since there could be some great reward to risk opportunities, especially for those who are patient.

One stock that rose sharply after its recent report was Netflix when they released their numbers after the bell on July 17. In fact the stock rose almost 16% the day after the report, and a few percent higher over the next few days, not too shabby.

However, unless you owned the stock into its earnings report, you would have missed the bulk of the move higher, and it's awfully risky to chase a stock that has gapped up like NFLX did on July 18. That's where patience comes in because you can see from the chart below that NFLX has settled down, pulling back almost 6.5% from its peak, creating the possibility of a high reward to risk opportunity for those who missed out the first time around.

For example, in this case NFLX is closing in on both gap and technical support, a level that could be worth considering, with a very tight stop in case the stock continues to go lower. Perhaps an entry as close to the 20 day moving average as possible with a stop at the bottom of the gap on July 18, and a price target up near the recent high of $190. So very little downside to upside risk.

At EarningsBeats we scan for those companies that beat both top and bottom line expectations. Some of these become trading candidates where we provide entry, stop loss and price target levels to our members. I've decided to have a webinar this upcoming Monday to go over a number of companies that reported recently and beat earnings expectations. I will be joined by Tom Bowley, Senior Technical Analyst at StockCharts.com, who will give his thoughts on specific charts. If you would like to joins us for this FREE webinar, just click here.

Earnings Season brings with it winners and losers with traders particularly attracted to those stocks that beat earnings expectations and have strong charts.The key is to zero in on the "best of the best" to help increase the odds of making a successful trade.

At your service,

John Hopkins
EarningsBeats

Friday's Strong Job Report May Not Be As Strong As It Looks

IS THIS THE REAL UNEMPLOYMENT RATE? ... Friday's job report saw 209,000 new jobs added during July which was well above expectations. Hourly earnings also saw a July again of 0.3% which attracted the most attention. That, however, leaves the year over year rise in wages at a relatively flat 2.5%. That's higher than the inflation rate, but well below what we should be seeing at this point in the economic expansion. Chart 8 shows the unemployment rate falling below its 2007 low of 4.4% to the lowest level in sixteen years (2001). Economists at the Fed remain puzzled as to why wages aren't rising faster in the face of near full employment. That may result from looking at the wrong numbers. The unemployment rate shown below (U-3) doesn't include people who have stopped looking for work; and counts part-time workers as fully employed. A broader measure of unemployment (U-6) includes those unemployed or underemployed and currently sits at 8.6%. That's twice as high as the number everyone is looking at. The spread between the two is also much wider than it was in 2000 and 2007 when the unemployment rate was this low. That suggests that we're nowhere close to real full employment. So does the low percent of workers participating in the work force.

LABOR PARTICPATION RATE IS STILL TOO LOW... The labor force participation rate currently sits at 62.9% which is close to the lowest reading since 1977. That rate measures the percent of adult Americans who are no longer participating in the work force. Prior to 2000, the rate rose consistently for forty years. It peaked at 67% in 2000 and fell more sharply after the 2008 financial crisis. It bottomed in 2016 at 62.8% and has barely budged since then. That also seems to suggest that there's still a lot of slack in the work force. The current annual wage gain of 2.5% is also well below the 4% level seen in 2000 and just prior to the financial crisis in 2008 when the unemployment rate was this low. Something seems to have changed over the past two decades. I suspect it's the fact that deflationary forces took hold after 2000 (and again in 2008) and are just now starting to lift. That would account for why employers have been slow to higher and more stingy with wages. I can't help but wonder if the Fed is taking all of these factors into consideration. If it isn't, why not? And if it is, why does it remain so puzzled about the lack of wage inflation? One reason is that the Fed expects an economy nearing full employment to produce higher wages. But it may be looking at the wrong numbers to gauge full employment (or ignoring those that paint a weaker picture). It also believes that higher wages lead to higher inflation. I suspect it's the other way around. And that higher inflation leads to higher wages. It's harder for employers to raise wages when they can't raise prices enough to offset higher labor costs. That hurts their bottom line. Rising prices encourage more hiring and higher wages.

Searching For More Summertime Breakouts

A month ago, I posted an article looking at 3 NASDAQ 100 stocks that were looking to make technically significant breakouts.  Sirius XM Holdings (SIRI) had a cup in play that, if broken, would measure to 5.90, or nearly 8%.  It broke out on heavy volume and hit a high of 5.89, essentially hitting its measurement on the day of the breakout.  Automatic Data Processing (ADP) had been sideways consolidating and, with a breakout above 105, appeared poised for a trip to 117.  One day after breaking out, ADP surged to 120, reaching its nearly 12% profit target.  Finally, there was Verisk Analytics (VRSK), which had consolidated for months and I was awaiting a breakout above the 86 level.  VRSK did finally make the breakout in mid-July, topped near 88 and quickly fell back, closing just beneath 83 on Friday.

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An Ugly Price Relative, but a very Nice Uptrend

The price relative, or ratio chart, is handy for measuring relative performance, but it does not always reflect the trend for the underlying securities. For those unfamiliar, the RSP:SPY ratio measures the performance of the EW S&P 500 ETF (RSP) relative to the S&P 500 SPDR (SPY). RSP leads when this ratio rises because the numerator (RSP) is increasing faster than the denominator (SPY). RSP is lagging when the ratio declines. 

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Watching Support Fade

As the Dow Jones Industrial Average (DJIA) has been moving steadily to record highs, I have observed a persistent erosion of underlying support as expressed by 52-Week New Highs for the DJIA component stocks. The New High peak in March represents the highest level reached recently, and we can see a steady decline in the number of New Highs since then. Of particular concern is the contraction of New Highs in the last few weeks, which happened even as the DJIA squirted higher for nine days straight.

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Looking For Some New Direction In The Market

One of the hardest parts about investing, is staying with the constant rotation of sectors. Amazon is already down more than $100 since the high last week. Gulp! While it's only 10%, $100 a share is an ouch.

As the Nasdaq 100 has been a little soft of late, I thought I would look for oversold stocks that are starting to improve on the weekly. There are a lot of them in energy and Gold, but I thought there could be some in other areas. So this ChartWatchers is a little about looking for something to start moving up and avoiding some of the selling in the names that have been at new highs recently.

Dollar Tree (DLTR) broke support a few weeks ago and this week got back above. The Full Stochastic looks like it is turning up and the SCTR is moving back up above the 25 level. Interesting.

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Bond Yields Drop, Falling Rates Boost Technology Stocks

BOND YIELDS DROP ON LACK OF INFLATION ... June's CPI report showed no change from the previous month, reflecting the absence of inflation. Its annual gain of 1.6% was the smallest since last October. Excluding food and energy, the core CPI saw a modest monthly bounce of 0.1% (for an annual rate of 1.7%). The main reason why the core CPI is slightly higher than the headline number is the exclusion of food and energy. While food prices were flat, energy saw a June drop of -1.6% (more on that later). Given the Fed's growing concern with low inflation, those numbers are lowering market expectations for further rate hikes. As a result, bond yields are falling as bond prices rise. Chart 1 shows the 10-Year Treasury Yield dropping in Friday trading. Stock prices are rising along with bonds. Utilities, which usually rise with bond prices, are one of the day's strongest sectors. Bank stocks, which suffer from falling yields, are the weakest. Foreign stocks are also rising, especially in emerging markets. The dollar is falling along with bond yields (more on that shortly). The combination of a weak dollar and falling rates is boosting gold along with most other commodities.

FALLING RATES ARE BOOSTING TECHNOLOGY STOCKS ... One of the lesser known intermarket relationships is the inverse link between bond yields and technology stocks' relative performance. That make some sense. Growth stocks like technology don't need a stronger economy to thrive. In fact, they do better in a slower economy which is usually associated with low interest rates. Value stocks (like banks) do better in a stronger economy with rising bond yields. Let's take a look. The black line in Chart 2 is a relative strength ratio which divides the Technology SPDR (XLK) by the S&P 500. The green line plots the 10-Year Treasury Note yield. The two lines have tended to travel in opposite directions over the last fifteen years. The upturns in bond yields in 2003 and 2013 resulted in tech underperformance (red arrows). [The Fed's taper tantrum during 2013 pushed bond yields sharply higher and hurt tech performance]. Downturns in yields during 2008 and again in 2014 boosted tech performance (black arrows), which continued into the second half of 2016.