Two hundred forty one years ago, the “shot heard round the world” marked the first skirmish of the American Revolutionary War, when British soldiers were killed at the battles of Lexington & Concord. History loves defining events to mark important inflection points. Today, investors are looking for one of their own to mark the end of what has been a vicious correction for some and an all-out bear market for others.
Thrown into a raging sea of volatility, investors scrambled for life preservers desperate for any news the storm would soon subside. A week ago Thursday, February 11, in what I am hailing as the “tweet heard round the world,” investors rushed back into stocks after the S&P 500 (^GSPC) broke the all-important 1812 low. A single tweet from the WSJ that OPEC was considering a production cut started a stampede, forcing shorts to cover and investors to ask, “Has anything changed?"
Are we that desperate? I guess we are because in just three and a half trading days, the Dow Jones Industrial Average (^DJI) managed a nearly 1000 point gain, taking it back to the all-important 16,500 level.
The tweet was followed later with news that JPMorgan (JPM) chief Jamie Dimon had bought 500,000 shares in the open market. That's notable since the $26 million he spent just about equals his compensation for last year, and as Mike Mayo, banking analyst from CLSA points out, if there’s an accident waiting to happen, Jamie should know about it.
On its own, a tweet and an insider buy isn’t enough to hold our heads above water, but it’s a start. The sentiment is incredibly bearish and with good reason. The earnings season is a bust, the OPEC cut is a mirage, CAPEX hasn’t materialized, and according to Barron’s, dividend growth is slowing.
Yeah, yeah, yeah—in a recent research note, Goldman (GS) points out that, to date, Q4 2015 reports showed 69% with positive surprises. We’ve been playing this sucker’s game for too long. Management spends the quarter talking down numbers, lowering the bar just enough so they can trip over it.
S&P 500 Earnings 2015
Current consensus puts 2016 S&P 500 earnings at about $123. To give you a sense of just how deep the slide is, $123 was just about what analysts thought 2015 would look like when they made their estimates a year ago.
Nevertheless, last week gave investors something to cheer about, and at least for a few days, markets have found some stability.
Price performance almost always sets market bottoms, as improving fundamentals often don't confirm till months later. The financial media has been witness to a parade of market strategists lowering their targets for 2016, but few are actually calling for a recession.
The market is by no means out of the woods and has a lot of technical damage to repair. Nevertheless, there’s been some good news. The NYSE Bullish Percent Index, which measures the percentage of stocks on a point & figure buy signal, is on the rise and recently broke a double top. Without going into all the details of point & figure charting, a 6% move to the upside indicates a change in direction and is viewed by many old-time chartists as a positive.
The percentage of stocks above their 200-day moving average has also been on the rise since late January. Admittedly, we didn’t hit the capitulation lows of 2009 or even 2011, but a long-term chart shows it lining up with other market inflection points like 1998 and 2002.
It’s pretty clear, even to back-of-the-napkin chartists like me, if last week’s rally is going to morph into something more sustainable, the S&P 500 will have to decisively break above 1950 and start living on the top side of line.
The market correction started at least a year ago as, one-by-one, stocks rolled over, underperforming the index, which was being held by a small number of growth stocks. FANG stocks, Facebook (FB), Amazon (AMZN), Netflix (NFLX) & Google (GOOGL), were en fuego for all of 2015, but met their fate along with others soon after the new year started.
Facebook and Google are both living above the 200-day moving average, delivering outstanding quarters just a few weeks earlier. It’s not surprising Amazon and Netflix are bringing up the rear, as their earnings reports left investors cold.
For any sustained move higher, market breadth is going to have to improve. Maybe we are seeing the first signs in a sector that has been left for dead. In an industry with little to cheer about, Exxon (XOM) is attempting to stabilize--even crossing above its 200-day. Most others in the energy complex are slashing dividends, but XOM, with a payout ratio of 76%, will likely be able to hold on.
In “Cheap Oil is a Curse…,” I talked about the importance of oil, as sustained lower prices will spill over into other sectors of the economy. The good news is that it doesn’t have to go up. It just needs to stabilize.
It’s not surprising that the S&P 500 would stall just below the important 1950 level, especially on a day when JPMorgan head, Jamie Dimon, tells investors they have $44 billion in exposure to the energy complex and Saudi oil minister Ali bin Ibrahim Al-Naimi says, “Production cuts won’t happen.”
That last "sell the news" statement precipitated a sell-off in crude that's leading all risk markets down today.
Bulls need to see a series of higher lows leading up to a convincing breakout above 1950 on increasing volume. The intensity of the retreat, and whether lower prices attract buyers, will determine if the “tweet heard round the world” marks an inflection point or just another bear market rally.
None of these tools mentioned above is the Holy Grail, but together, are an incremental positive. If we’ve seen the bottom—and that’s a big “if”—better economic and corporate data should start to reveal itself in the next few months. Without it, the recent rally will soon fade into memory. Like it or not, we’ve entered the post-Fed world. With ammunition all but spent, there is little that Janet & Co. can or will do to bail us out.