Life’s Just One Darned Thing After Another

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When we arrived at the offices today futures were suggesting we would see a strong response to the debt solutions on the table and another crisis averted. Then we have to get back to work on analyzing the overall economy and individual stocks. Well that analysis so far today has shown the economy is not growing as fast as expected and people have to reevaluate their outlooks on the stocks they own. 

The market was rocked last week as the powers that be fumbled the debt ceiling issue.  No one should be surprised that that the Washington mob waited until the last minute to get things “taken care of”. Politicians love the spotlight. Even when that spotlight shows their weaknesses. I am not an overly political person so I will let you now vent your feelings on the government before you read the next paragraph.

….Hopefully you got some of your frustrations out. The focus on Washington and the debt ceiling distracted investors. With everyone’s attention on Washington, quarterly earnings reports were moved to the back burner. Earnings reports for the second quarter have been good on the surface but weaker as you go deeper. With more than 60% of companies in the S&P 500 reported, the vast majority have exceeded expectations. That is the good part. Reported earnings are roughly 5%-6% ahead of analyst projections. But, the roughly 80% of companies that are beating expectations is slightly behind the pace of the last two quarters.

Guidance is the real cause of concern. When you examine forward guidance given by companies on conference calls you can see things worsening. Fewer companies are raising guidance for the remainder of the year. Since analysts’ back-end load their annual earnings forecasts, this weakened guidance makes it less likely that companies will aggressively beat earnings estimates for the remainder of the year.

The July ISM Manufacturing Report on business data was released this morning and it was awful. The number was 50.9 versus a consensus estimate of 54.0. So, while still expanding, the manufacturing sector is growing slower than expectations. The market immediately sold off, aggressively.

Here are the levels of support for the major indexes. If these long term levels of support give way selling will accelerate; S&P 500 1258, Dow 11,860 NASDAQ 2599. I start with the long term levels because the intermediate term levels are giving way this morning.  Intermediate term support levels are 1282/12080/2724. If we close below those levels on all three indexes today then the intermediate outlook on the market becomes decidedly less positive. Those levels become resistance if we close below them any time in the next few sessions.

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About Thomas J Smith CFA