Are corporate profit margins sustainable?

Market capitalization as a percentage of (US) GNP is climbing and some commentators have been predicting a reversion to the mean — a substantial fall in market cap.

US Market Cap to GNP

But corporate profits have been climbing at a similar rate.

US Corporate Profits to GNP

Wages surged as a percentage of value added in the first quarter (2014) and profit margins fell sharply, adding fresh impetus to the bear outlook. But margins recovered to 10.6% in the second quarter.

Employee Compensation and Profits as Percentage of Gross Value Added

Further gains in the third quarter would suggest that profits are sustainable. Research by Morgan Stanley supports this view, revealing that improved profit margins are largely attributable to the top 50 mega-corporations in the US:

Mega cap companies (the largest 50 by size) have been able to pull their margins away from the smaller companies through globalization, productivity, scale, cost of capital, and taxes, among other reasons. We argue against frameworks that call for near-term mean reversion and base equity return algorithms off the concept of overearning. Why? The margins for the mega cap cohort in the last two downturns of 2001 and 2008 were well above the HIGHEST margins achieved during the 1974-1994 period. To us, this is a powerful indication that the mega cap cohort is unlikely to mean revert back to the 1970s to 1990s average level.

(From Sam Ro at Business Insider)

Also interesting is The Bank of England’s surprise at the lack of inflation in response to falling unemployment. One would expect wage rates to rise when slack is taken up in the labor market, but this has failed to materialize. It may be that unemployment is understated — and a rising participation rate will keep the lid on wages. If this happens in the US it would add further support for sustainable profit margins.

ASX breaks resistance

The Australian Dollar continues to test resistance at $0.8900. Tall shadows in the past few weeks suggest committed sellers. Breach of primary support at $0.8650 would warn of another decline. 13-Week Twiggs Momentum below zero also indicates a primary down-trend.

AUDUSD

* Target calculation: 0.87 – ( 0.94 – 0.87 ) = 0.80

ASX 200 broke resistance at 5440, suggesting another test of 5660. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Reversal below 5440, however, would warn of a test of support at 5250.

ASX 200

The ASX 200 VIX below 15 continues to indicate low risk typical of a bull market.

ASX 200

Europe: Selling pressure

Germany’s DAX is testing resistance at 9000. Reversal below 8900 would suggest another decline with a target of 8000*. 13-Week Twiggs Money Flow below zero warns of long-term selling pressure; a peak below zero would confirm a primary down-trend. Recovery above 9000 is unlikely, but would suggest a rally to 9800.

DAX

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

The Footsie has also run into resistance, at 6400/6500. Respect would signal a decline to 6100*. Declining 13-week Twiggs Money Flow indicates medium-term selling pressure, but nowhere near as weak as the DAX.

FTSE 100

* Target calculation: 6500 – ( 6900 – 6500 ) = 6100

Dow & Nasdaq buying pressure

Dow Jones Industrial Average penetrated its descending trendline, suggesting that the correction is over. Recovery above 17000 would signal an advance to 18000* — confirmed if follow-through above resistance at 17300. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Respect of resistance at 17000 is unlikely, but would warn of another test of 16350.

Dow Jones Industrial Average

* Target calculation: 17000 + ( 17000 – 16000 ) = 18000

The Nasdaq 100 recovered above its descending trendline and resistance at 4000, signaling an advance to 4500*. Follow-through above 4100 would confirm. Recovery of 13-week Twiggs Money Flow above 35% would flag buying pressure. Reversal below 4000 is unlikely, but would warn of a test of another test of the rising trendline.

Nasdaq 100

* Target calculation: 4100 + ( 4100 – 3700 ) = 4500

October correction nearing end

  • DAX and FTSE in a down-trend
  • China and Hong Kong retreat
  • US stocks remain in a bull market
  • ASX ends correction

The new reporting season is under way and fund managers are now looking for opportunities rather than selling off under-performers.

The S&P 500 broke resistance at 1900 and 1925. Penetration of the descending trendline suggests that the October correction is over. Recovery of 21-Day Twiggs Money Flow above zero indicates medium-term buying pressure. Expect a test of resistance at 2000 followed by consolidation or retracement to confirm support at 1925. Narrow consolidation below 2000 would be a bullish sign.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1850 ) = 2150

CBOE Volatility Index (VIX) at 16 again indicates low risk typical of a bull market.

S&P 500 VIX

The Nasdaq 100 recovered above resistance at 4000, indicating a fresh advance. Penetration of the descending trendline signals that the correction is over. Completion of a 13-week Twiggs Money Flow trough high above zero would indicate long-term buying pressure. Reversal below 4000 is unlikely, but would warn of another test of support.

Nasdaq 100

* Target calculation: 4100 + ( 4100 – 3800 ) = 4400

Dow Jones Euro Stoxx 50 recovered above its former primary support level at 3000, suggesting a bear trap. The primary trend remains downward, but recovery of 13-week Twiggs Money Flow above zero would suggest another test of 3300.

Dow Jones Euro Stoxx 50

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

China’s Shanghai Composite Index retreated below support at 2340/2350 and the rising trendline, warning of a correction. A 13-week Twiggs Money Flow trough above zero would confirm the primary up-trend, while reversal below zero would warn of a bear market.

Shanghai Composite Index

The ASX 200 recovered above resistance at 5250 and 5350 and the descending trendline, indicating that the correction is over. Breach of resistance at 5450 would signal another test of 5650. Bullish divergence and rising 21-day Twiggs Money Flow (above zero) indicate medium-term buying pressure. Reversal below 5350 is unlikely, but would indicate another test of 5120.

ASX 200

ASX 200 breaks resistance

The ASX 200 broke resistance at 5340/5350 in the first hour of trading this morning. Expect retracement to test the new support level on the hourly chart. Respect would confirm that the correction is over.

ASX 200

Hang Seng falters

Hong Kong’s Hang Seng Index is testing support at 23000. Reversal of 13-week Twiggs Money Flow below zero warns of a primary down-trend. Breach of support at 21000 would confirm.

Hang Seng Index

China’s Shanghai Composite Index continues to test its new support level at 2340. Respect would suggest an advance to 2500*. Breach would warn of a correction. I remain wary because of weakness in Hong Kong.

Shanghai Composite Index

* Target calculation: 2250 + ( 2250 – 2000 ) = 2500

India’s Sensex tests support

India’s Sensex penetrated its secondary rising trendline, warning of a correction. Bearish divergence on 13-week Twiggs Money Flow continues to warn of selling pressure. Breach of support at 26000 would offer a target of 25000 and the primary trendline. Respect of support and follow-through above the descending flag would indicate an advance to 28000*.

Sensex

* Target calculation: 27000 + ( 27000 – 26000 ) = 28000

Aussie Dollar and ASX find support

The Australian Dollar is testing resistance at $0.8900, but the primary trend is down. Breakout would suggest a bear rally, while respect would warn of another decline. 13-Week Twiggs Momentum below zero indicates a primary down-trend. Breach of primary support at $0.8650 would offer a target of $0.80*.

AUDUSD

* Target calculation: 0.87 – ( 0.94 – 0.87 ) = 0.80

ASX 200 penetrated its descending trendline, suggesting the correction is over. The index would be further buoyed by a rally of the Aussie Dollar. Bullish divergence and recovery of 21-day Twiggs Money Flow above zero indicates medium-term buying pressure. Breach of resistance at 5350 would strengthen the bull signal. Reversal below 5250, however, would warn of a test of primary support at 5000/5050.

ASX 200

* Target calculation: 5350 – ( 5650 – 5350 ) = 5050

The ASX 200 VIX at 15.5 continues to indicate low risk typical of a bull market. A significantly higher trough is unlikely, but would be a bearish sign.

ASX 200

Another bear trap?

Bellwether transport stock Fedex found support at $154, the long tail and rising 13-week Twiggs Money Flow indicating buying pressure. Expect a test of $165. Reversal below $150 is unlikely, but would warn of a test of primary support at $130. Continuation of the primary up-trend signals improvement for the broad economy.

Fedex

* Target calculation: 165 + ( 165 – 150 ) = 180

The S&P 500 is testing its new resistance level at 1900/1910. Last week’s long tail indicates short-term buying pressure but declining 13-week Twiggs Money Flow continues to warn of long-term selling pressure. Recovery above 1910 would suggest that the correction is over, while penetration of the descending trendline would strengthen the signal.

S&P 500

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

Someone asked why I felt the correction was over, when there are so many bearish signs on the charts. My answer in brief was:

  • Strong support on the Dow and S&P 500;
  • Breach of descending trendline on the ASX 200;
  • October sell-off nearing an end;
  • US reporting season has started and fund managers will revert to accumulation of stronger performing stocks.

I could have added that our market filters continue to indicate low to moderate risk.

I am also suspicious of breaks of support after the bear traps of 2010 and 2011.

S&P 500

Breaches are indicated by red arrows, recoveries by green.

S&P 500

Investors remain extremely skittish after the 2009 crash and likely to jump at shadows.

CBOE Volatility Index (VIX) has retreated below 20%, suggesting low risk typical of a bull market. Recovery above 20% is not likely, but a (significantly) higher trough would warn of rising risk.

VIX Index

The Nasdaq 100 rallied off support at 3700. Follow-through above 3900 would suggest another test of 4100. Recovery above 4000 and the descending trendline would strengthen the signal. Divergence on 13-week Twiggs Money Flow indicates mild selling pressure. Reversal below 3700 and the rising (secondary) trendline would warn of a test of primary support at 3400.

Nasdaq 100

* Target calculation: 3750 – ( 4100 – 3750 ) = 3400

October sell-off: Drawing to a close?

  • DAX and FTSE find support, but remain in a down-trend
  • China is bullish, but Japan bearish
  • US stocks find support and continue to indicate a bull market
  • ASX respects primary support

The S&P 500 found support at 1820 and is testing resistance at 1900. Breach of resistance would suggest that the correction is over. 21-Day Twiggs Money Flow below zero, however, continues to warn of medium-term selling pressure. Respect of resistance is more likely, indicating another test of support at 1800*.

S&P 500 Index

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

CBOE Volatility Index (VIX) retreated to 22, indicating moderate risk, but nowhere near the 30+ levels typical of a bear market.

S&P 500 VIX

Dow Jones Industrial Average recovered above resistance (the former support level) at 16300, the long tail indicating short-term buying pressure. Follow-through above the descending trendline would signal that the correction is over. Recovery above the recent highs at 25% on 13-week Twiggs Money Flow would suggest that buyers have regained control.

Dow Jones Industrial Average

Germany’s DAX is retracing to test resistance at 9000. Respect would confirm a primary down-trend. 13-Week Twiggs Momentum below zero strengthens the bear signal. Target for the decline is 8000*. Recovery above 9000 remains unlikely, but would warn of a bear trap.

Dow Jones Euro Stoxx 50

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

The Footsie displays a similar long tail, indicating buying pressure. Recovery above 6500 is unlikely, but would warn of a bear trap. Respect of resistance would offer a target of 6000*.

FTSE 100 Index

* Target calculation: 6400 – ( 6800 – 6400 ) = 6000

China’s Shanghai Composite Index is testing support at 2340/2350. Breach would warn of a correction. But the primary up-trend remains and rising 13-week Twiggs Money Flow signals medium-term buying pressure.

Shanghai Composite Index

Japan’s Nikkei 225 Index plunged through support at 14800, warning of a test of primary support at 13900/14000. Reversal of 13-week Twiggs Money Flow below zero indicates (long-term) selling pressure.

Nikkei 225 Index

The ASX 200 recovered above resistance at 5250 and the descending trendline, suggesting that the correction is over. Bullish divergence and a rising 21-day Twiggs Money Flow (above zero) indicates medium-term buying pressure. Recovery above 5350 would confirm that buyers are back in control, while reversal below 5250 would indicate another test of 5000/5050.

ASX 200

* Target calculation: 5350 – ( 5650 – 5350 ) = 5050

ASX 200 VIX remains below 20, indicating low risk typical of a bull market.

ASX 200 VIX

ASX and Aussie Dollar rally

The Australian Dollar found support at $0.8650/$0.8700. Respect of resistance at $0.8900, however, would suggest another decline. 13-Week Twiggs Momentum below zero warns of a primary down-trend. Breach of primary support at $0.8650 would offer a target of $0.80*.

AUDUSD

* Target calculation: 0.87 – ( 0.94 – 0.87 ) = 0.80

The ASX 200 rallied in line with short-term buoyancy on the Aussie Dollar. Bullish divergence on 21-day Twiggs Money Flow and recovery above zero indicates medium-term buying pressure. But the trend remains down and failure of (short-term) support at 5120 would warn of a test of primary support at 5000/5050. Breach of the declining trendline is unlikely, but would suggest that the correction is ending. Follow-through above 5350 would confirm.

ASX 200

* Target calculation: 5350 – ( 5650 – 5350 ) = 5050

The ASX 200 VIX continues to indicate low risk typical of a bull market.

ASX 200

US stocks: Broad selling pressure

The S&P 500 broke through support at 1900, offering a target of 1800*. Decline of 21-day Twiggs Money Flow below zero warns of medium-term selling pressure. Recovery above 1910 is unlikely at present, but would suggest a bear trap.

S&P 500

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

CBOE Volatility Index (VIX) broke above 20%, but still indicates moderate risk. A break above 30% would suggest elevated risk.

VIX Index

Dow Jones Industrial Average is testing support at 16300. Breach would indicate a test of the (primary) rising trendline. Bearish divergence on 13-week Twiggs Money Flow continues to warn of selling pressure. Recovery above 16500 is less likely, but would suggest another rally.

Dow Jones Industrial Average

The Nasdaq 100 broke support at 3850. Follow-through below 3750 would confirm a target of primary support at 3400*. Divergence on 13-week Twiggs Money Flow indicates selling pressure. Respect of support at 3750 is unlikely, but recovery above 3850 would suggest another rally.

Nasdaq 100

* Target calculation: 3750 – ( 4100 – 3750 ) = 3400

Robert Shiller maintains exposure to stocks | WSJ

Jason Zweig writes:

Many analysts have warned lately that Prof. Shiller’s long-term stock-pricing indicator [CAPE] is dangerously high by historical standards…..If only things were that simple, Prof. Shiller says. “The market is supposed to estimate the value of earnings,” he explains, “but the value of the earnings depends on people’s perception of what they can sell it again for” to other investors. So the long-term average is “highly psychological,” he says. “You can’t derive what it should be.” Even though the CAPE measure looks back to 1871, using data that predates the S&P 500, it is unstable. Over the 30 years ending in 1910, CAPE averaged 17; over the next three decades, 12.7; over the 30 years after that, 15.7. For the past three decades it has averaged 23.4. Today’s level “might be high relative to history,” Prof. Shiller says, “but how do we know that history hasn’t changed?” So, he says, CAPE “has more probability of predicting actual declines or dramatic increases” when the measure is at an “extreme high or extreme low.” …..Today’s level, Prof. Shiller argues, isn’t extreme enough to justify a strong conclusion. So, he says, he and his wife still have about 50% of their portfolio in stocks.

Read more at Robert Shiller on What to Watch in This Wild Market – MoneyBeat – WSJ.

October sell-off continues

  • DAX and FTSE break support, signaling a down-trend
  • China is bullish, but rest of Asia is bearish
  • US stocks are correcting, but continue to indicate a bull market
  • ASX testing primary support

The quarter-end sell-off has been exacerbated by weakness in Europe.

Germany’s DAX broke primary support at 8900/9000, signaling a (primary) down-trend. Reversal of 13-week Twiggs Money Flow below zero strengthens the bear signal. Target for the decline is 8000*. Recovery above 9000 is unlikely, but would warn of a bear trap.

Dow Jones Euro Stoxx 50

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

The Footsie displays similar weakness, breaching primary support at 6400/6500. Target for the decline is 6000*. Recovery above 6500 is unlikely, but would warn of a bear trap.

FTSE 100 Index

* Target calculation: 6400 – ( 6800 – 6400 ) = 6000

China’s Shanghai Composite Index is holding above its new support at 2340/2350, but expect retracement to at least 2250 in response to US/European weakness.

Shanghai Composite Index

Japan’s Nikkei 225 Index broke medium-term support at 15500 and the rising trendline to warn of a correction. Reversal of 13-week Twiggs Money Flow below zero would strengthen the signal. Breach of 14800 would indicate a test of primary support at 14000.

Nikkei 225 Index

The S&P 500 is testing primary support at 1900. Declining 13-week Twiggs Money Flow warns of selling pressure. Reversal below zero would indicate a down-trend, offering a target of 1800*.

S&P 500 Index

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

CBOE Volatility Index (VIX) rose to above 20, indicating moderate risk, but nowhere near the levels typical of a bear market.

S&P 500 VIX

The ASX 200 broke support at 5250/5300, suggesting a test of long-term support at 5000. Declining 13-week Twiggs Money Flow below zero indicates strong selling pressure. Recovery above 5350 is unlikely, but would suggest that the correction is over.

ASX 200

* Target calculation: 5350 – ( 5700 – 5350 ) = 5000

ASX 200 rallies

The ASX 200 rallied on the back of positive sentiment from the US. Follow-through above 5360 would indicate the correction is over. Rising 21-day Twiggs Money Flow reflects short-term buying pressure. Reversal below 5240 remains as likely, however, and would warn of a test of primary support at 5000/5050.

ASX 200

* Target calculation: 5350 – ( 5650 – 5350 ) = 5050

The ASX 200 VIX retreated below 15 — levels typical of a bull market.

ASX 200

Market lifts despite weak global economy

Minutes of the September FOMC meeting highlight growing unease with the strong US Dollar and a weak global economy. The market read this as “low interest rates” and commenced a buying spree. Last year the quarter-end sell-off ended on October 9th after a 4.2% fall. This year’s correction fell 4.7%, lasting 13 days (so far) compared to 15 days in 2013.

Roberto Dominguez at NY Daily News reports:

“The start of earnings season, with companies including Costco and Alcoa reporting quarterly profits that beat forecasts, also helped push the S&P 500 to its biggest rally in a year.”

While Cullen Roche writes that the US fiscal deficit is shrinking:

“…tax receipts have surged by 7.7% year over year and are up 48% over the last 5 years. And while some of this is due to tax increases the vast majority is due to a healing private sector.”

Bellwether transport stock Fedex continues its primary up-trend, signaling improved economic activity.

Fedex

No doubt boosted by a falling outlook for crude oil.

Nymex and Brent Crude

With positive news about, we should be careful not to forget the Fed’s concern with a weak global economy. While this may drive oil prices even lower, the impact on international sales of major exporters will be closely watched.

S&P 500 recovery above 2000 would indicate the correction is over, while follow-through above 2020 would signal another advance. A 21-day Twiggs Money Flow trough above zero would signal a healthy up-trend. Reversal below 1925 is unlikely, but would test primary support at 1900/1910.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) retreated to 15%, indicating low volatility typical of a bull market.

VIX Index

ASX finds support

After taking a beating in the morning session, the ASX 200 rallied to close almost unchanged. The long tail and rising 21-day Twiggs Money Flow indicate short-term buying pressure. Follow-through above 5360 and the declining trendline would suggest that the correction is over. But reversal below 5240 remains as likely and would warn of a test of primary support at 5000/5050.

ASX 200

* Target calculation: 5350 – ( 5650 – 5350 ) = 5050

The ASX 200 VIX is creeping upwards, but remains at levels typical of a bull market.

ASX 200