U.S. Equity And Economic Review: Fundamental Analysis Beats Technical Analysis, Edition

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Includes: DIA, IWM, QQQ, RINF, SPY
by: Hale Stewart

The market needs two things to maintain its current upward momentum: stronger economic growth and solid top-line revenue increases. Unfortunately, this week's news provided neither. The Conference Board released the latest batch of LEIs:

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The top box shows the M/M change in LEIs and CEIs. The LEIs have fluctuated right around 0 for the last 7 months, while the CEIs have been declining, printing their first 0 last month. The bottom table shows the 6-month rolling change for both. The LEIs have declined from 1.6 7 months ago to .7 in the latest reading, while the CEIs have dropped from 1.2 to .6 over the same period of time. The Board offered the following analysis of the data:

The Conference Board LEI for the U.S. rebounded in March after three previous consecutive declines, and the six-month pace of growth, although still below levels from last year, has improved. Meanwhile, The Conference Board CEI for the U.S. remained unchanged, and its six-month growth rate has weakened. Taken together, the current behavior of the composite indexes and their components suggest that the expansion in economic activity should continue at a slow, but not slower pace in the near term.

In addition to the LEI report, we also have earnings releases. While only 71 S&P 500 companies have reported so far, the news isn't encouraging:

The blended growth picture for Q1, combining the actual results from the 71 that have reported with estimates for the still-to-come 429 index members, shows total earnings declining -9.7% from the same period last year on -0.8% lower revenues. This would be the 4th quarter in a row of earnings declines for the index.

FactSet's analysis is equally bearish:

The blended (combines actual results for companies that have reported and estimated results for companies yet to report) year-over-year earnings decline for Q1 2016 is -8.9%, which is below the expected earnings decline of -8.6% at the end of the quarter (March 31). Seven sectors are reporting a year-over-year decline in earnings, led by the Energy and Materials sectors. Three sectors are reporting year-over-year growth in earnings, led by the Telecom Services and Consumer Discretionary sectors.

The blended sales decline for Q1 2016 is -1.2%, which is below the estimated sales decline of -1.1% at the end of the quarter (March 31). Five sectors are reporting year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Five sectors are reporting a year-over-year decline in revenues, led by the Energy and Materials sectors.

With current and forward P/E ratios already high, the market is in desperate need of real growth to maintain current momentum. Unfortunately, the combination of LEIs and earnings reports offer absolutely no support for a stronger rally. That leaves only the "Fed Put" as the primary driver of the current rally. And that's just not enough to push the averages meaningfully about all-time highs.

Let's now turn to the charts, starting with the DIAs:

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This week there was a great deal of reporting on the DIA reaching new highs, which the above chart shows. And a technical analyst looking at the longer picture could argue the DIAs formed a double bottom but are now rallying to new highs.

While not at an all-time high, the IWMs would support this view:

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Within the last 2 weeks, prices broke through the 200-day EMA and the year-long downward sloping trend-line.

And the SPYs add to the bullish argument:

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Prices are (once again) near the 210-212 area. And the weekly chart's MACD has plenty of upside room to run.

But, once again, the fundamental analysis gets in the way. Domestic and international growth is slow, earnings are weak and the market is already expensive. Even if the market rallies, it's incredibly difficult to see a meaningful rally taking hold.

Hale Stewart, XE.com